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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the Fiscal Year Ended December 31, 2002

Commission File No. 000-31003



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Corio, Inc.

(Exact name of registrant as specified in its charter)



Delaware

(State or other jurisdiction of incorporation or organization)



77-0492528

(I.R.S. Employer Identification
No.)



959 Skyway Road, Suite 100

San Carlos, CA 94070

(Address of principal executive offices)



(650) 232-3000

(Registrants telephone number, including area
code)



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Securities registered pursuant to Section 12(b) of the Act:



None



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



Common Stock



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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  x    No ̈



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.    x



Indicate by check
mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ̈No  x



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, 2002, as reported by the Nasdaq National Market,
was approximately $61,063,000. 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 28, 2003, there were 57,219,926 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 8, 2003, are incorporated by reference in Parts III of this Form 10-K.



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CORIO, INC.



Form 10-K



Table of Contents



PART I



|         |  |                                                                                                |  | Page
|-------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|Item 1   |  | Business                                                                                       |  | 3   
|        
|Item 2   |  | Properties                                                                                     |  | 8   
|        
|Item 3   |  | Legal Proceeding                                                                               |  | 8   
|        
|Item 4   |  | Submission of Matters to a Vote of Security Holders                                            |  | 8   
|        
|PART II 
|        
|Item 5   |  | Market for Registrants Common Equity and Related Stockholder Matters                          |  | 9   
|        
|Item 6   |  | Selected Financial Data                                                                        |  | 9   
|        
|Item 7   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 11  
|        
|Item 7A  |  | Quantitative and Qualitative Disclosures About Financial Market Risk                           |  | 37  
|        
|Item 8   |  | Financial Statements and Supplementary Data                                                    |  | 37  
|        
|Item 9   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures. .       |  | 37  
|        
|PART III
|        
|Item 10  |  | Directors and Executive Officers of the Registrant                                             |  | 38  
|        
|Item 11  |  | Executive Compensation                                                                         |  | 39  
|        
|Item 12  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 39  
|        
|Item 13  |  | Certain Relationships and Related Transactions                                                 |  | 39  
|        
|Item 14  |  | Controls and Procedures                                                                        |  | 40  
|        
|PART IV 
|        
|Item 15  |  | Exhibits, Financial Statement Schedule, and Reports on Form 8-K                                |  | 41  
|        
|         |  | Signatures                                                                                     |  | 70  
|        
|         |  | Certifications                                                                                 |  | 72  



Documents Incorporated By Reference



Certain portions of the registrants Proxy Statement for its 2003 Annual Meeting of Stockholders are incorporated by reference in Part III hereof.



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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 24 to 37.
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 a leading enterprise application service provider, or ASP. We implement, integrate
and manage a suite of enterprise software applications from leading vendors offered to our customers over a secure network. This suite of applications is designed to accommodate the requirements of medium to large, public, private, non-profit and
public sector companies. We enable our customers to avoid many of the significant and unpredictable ongoing application management challenges and costs. Following the implementation of software applications by our partners or us, our customers pay a
monthly service fee based largely on the number of applications used, total users, the level of service required and other factors. By providing application implementation, integration, management and various upgrade services and related hardware
and network infrastructure, we reduce the information technology, or IT, burdens of our customers, enabling them to focus on their core businesses and react quickly to dynamic market conditions.



We manage software applications from Oracle, PeopleSoft and
SAP for enterprise resource planningthe management of various functions within a company, including human resources, finance, management, manufacturing, supply chain, and sales; Siebel Systems for customer relationship managementthe
management of a companys relationship with its customers; and SAP Markets for e-commerce. We leverage the capabilities of companies such as (i) Structure, XO Communications and Qwest to provide our customers leading data center and network
infrastructure technologies.



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



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be delivered over internet protocol networks are transforming 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.



New e-commerce business models have increased demand for e-commerce software applications. E-commerce applications range from electronic
procurement systems to business-to-business exchanges connecting communities of buyers and sellers across entire supply chains. These applications are designed to be Internet-hosted and may be deployed quickly. The appeal of these e-commerce
applications has extended beyond emerging high-growth and middle-market companies to larger enterprises, as enterprises of all sizes recognize the need to adopt and rapidly deploy e-commerce applications for their businesses.



The Corio Solution



We manage tier one enterprise software applications over a
secure network for a monthly fee. Our services provide customers the following business benefits:



Lower and More Predictable Costs.    Our customers gain access to services related to tier one applications
hosted over a secure network often without many of the significant and unpredictable follow-on software support costs associated with internally-operated IT systems. Following rapid implementation of our applications, for a fixed fee or on a time
and materials basis, our customers pay a monthly fee.



Tier One Applications.    We host sophisticated enterprise applications for our customers. We offer hosted and managed solutions for software from leading vendors such as Oracle, PeopleSoft, SAP and Siebel
Systems.



Accelerated Time to
Benefit.    We can typically complete a standard implementation of our services in 8 to 20 weeks. This allows our customers to avoid the longer implementation times frequently experienced with installing and integrating
customized, sophisticated 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 industry-leading customer service and support. Our highly talented IT professionals manage our services and provide support to our customers. We assign to each customer
a support team composed of software application experts, network engineers, hardware engineers and customer support specialists.



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 tier one applications. As of December 31, 2002, our application management services operations team consisted of



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179 employees. We price our application management services based on various factors, such as the 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 two to three year terms.



The application suite that we host and manage is designed to provide our customers enterprise resource
planning, customer relationship management and e-business capabilities as well as industry-specific applications. We host and manage each of the services that we offer and 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. We have recently started offering on-demand services which consists of a pay-as-you-go service to deliver an end-to-end enterprise application development solution to customers.



Our hosting services include the following:



Customer Support.    Our client
services organization is the first point of contact for our customers. Within client services, our customer support specialists work with our experts in software applications, hardware and data center management to respond to customer inquiries. We
also assign a member of our senior management team to each customer to ensure high levels of customer satisfaction.



Application Management.    The vendors of software applications periodically release minor modifications, or
patches, and upgrades for their software applications. Our application management experts use our automated tools and test scripts to review, test and assess each modification or upgrade released by our vendors to determine the compatibility and
stability of each modification or upgrade, and then they incorporate appropriate changes and make them available to our customers.



Security Management.    The secure transmission of information over telecommunication networks is a key
requirement for our business. We have implemented an effective information security protection program to minimize risk to the confidentiality, integrity and availability of our customers mission critical applications and data. Our data
protection program is built around a pervasive, multi-layer security model that includes: strong network perimeter defenses, aggressive real-time monitoring, detection and response capability, security enabled at the host and application levels,
continuous vulnerability management, physical and operational security and the use of proven security policy management practices.



Infrastructure Management.    Our customers data resides on servers that we typically own, located in
secure cages in the data centers we use. Our infrastructure management personnel are responsible for all aspects of our infrastructure requirements, including hardware procurement, installation and configuration. To maintain the integrity and
confidentiality of data in our shared hosting environments, we ensure rigid partitioning of each customers information.



Data Center and Network Management.    We engage (i)Structure, XO Communications and Qwest to offer our
customers state-of-the-art data centers and network management. To maximize network availability, our application management personnel have, with (i)Structure and others, designed our network architecture to ensure a redundancy of network hardware,
facilities infrastructure and telecommunications circuits. Our



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application management center personnel also ensure that our services support multiple network models and offer our customers a number of
connectivity options, including dedicated T1 lines and virtual private networks.



Professional Services



Our professional services, which include initial implementation and ongoing support services, are provided both by our professional services personnel and by third-party systems integrators. We have
established a professional services team to implement the hosted applications quickly and efficiently. As of December 31, 2002, our professional services team consisted of 67 employees located throughout the United States. We organize our
professional services team by geographic location and application expertise.



We perform professional services pursuant to fixed fee or time and materials contracts for consulting, training and implementation of applications.



FastLane is one of our implementation methodologies in which a
multi-disciplined team of our IT professionals works with a group of customers. By coordinating the simultaneous implementation of our services for multiple customers, FastLane captures customer requirements early in the sales cycle and leverages
our industry-specific implementation and configuration templates.



Technology



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



IT Command and Control.    Corio provides an interface to its hosted environments enabling customers to have
increased visibility and control over customer resources managed at Corio data centers.



Automation.    Corio automation provides an automation infrastructure and processes designed to enable us to efficiently implement software upgrades and patches and perform
testing. Enhanced automation enables us to scale the number of hosted applications we can support.



Hosted Deployment.    We have developed, and continue to refine, technology that allows us to deliver software
applications to our customers effectively in an efficient environment over the Internet.



Customers



As of
December 31, 2002, we had approximately 86 application management services customers, consisting of small to medium-sized technology companies and Fortune 1000 companies.



For the year ended December 31, 2002, one customer, Quadrem, accounted for 11% of total revenue and this
customer is expected to not renew its contract when it expires in May 2003. For the year ended December 31, 2001 no one customer accounted for more than 10% of total revenue. For the year ended December 31, 2000, one customer accounted for 12%
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 $840,000 in 2002, $309,000 in 2001, and $4.2 million in 2000, were $10.5
million for the year ended December 31, 2002, $21.8 million for the year ended December 31, 2001, and $34.1 million for the year ended December 31, 2000. As of December 31, 2002, we had 41 sales and marketing employees. Our sales organization is
segmented by geographical location.



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We focus our marketing efforts on
achieving brand recognition, market awareness and lead generation. We market our services through magazine advertising, 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. When appropriate, we also use third-party development firms to expand capacity and to provide additional technical
expertise. Research and development expenses, excluding non-cash stock based compensation charges (credits) of $148,000 in 2002, ($253,000) in 2001, and $1.6 million in 2000, were $6.3 million for the year ended December 31, 2002, $9.1 million
for the year ended December 31, 2001, and $11.9 million for the year ended December 31, 2000. As of December 31, 2002, we had 20 employees on our research and development team.



Competition



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



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



| | · |  | systems integrators, such as Accenture, Bearing Point;
| | - |  | ------------------------------------------------------



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



| | · |  | software vendors, including Oracle, PeopleSoft, Commerce One, SAP, and Siebel Systems; and
| | - |  | ------------------------------------------------------------------------------------------



| | · |  | 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. The license agreements with our customers limit their rights to the technologies that we offer and develop for our



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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 currently have no patents issued.



Employees



As of December 31, 2002, we had 331
employees, including 41 in sales and marketing, 20 in research and development, 179 in application management services, 67 in professional services and 24 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.



We also lease approximately 20,000 square feet in Phoenix,
Arizona pursuant to a lease that expires in November 2006 and 9,000 square feet in Dallas, Texas pursuant to a lease that expires in December 2003. 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.



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, 2002.



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PART II



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



Our Common Stock has been traded in the over-the-counter market under the symbol CRIO since our initial public offering on July 21, 2000.
The following table sets forth the high and low closing prices as reported on the Nasdaq National Market since our initial public offering:



|                             |  | First Quarter |      | Second Quarter |   | Third Quarter |  | Fourth Quarter
|---------------------------- |  | ------------- | ---- | -------------- | - | ------------- |  | --------------
|Year Ended December 31, 2000 |  |               |      |                |   |               |  |               
|High                         |  |               |     |                |   |              |  | $             
|Low                          |  |               |     |                |   |              |  | $             
|Year Ended December 31, 2001 |  |               |      |                |   |               |  |               
|High                         |  | $             | 4.44 |                | $ | 2.01          |  | $             
|Low                          |  | $             | 1.75 |                | $ | 1.05          |  | $             
|Year Ended December 31, 2002 |  |               |      |                |   |               |  |               
|High                         |  | $             | 1.62 |                | $ | 1.78          |  | $             
|Low                          |  | $             | 1.05 |                | $ | 1.04          |  | $             



As of
March 4, 2003, we had approximately 7,000 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. The information required by this item regarding equity compensation plans is incorporated by reference to the information set forth in Item 12 of this Annual Report on Form 10-K.



Use of Proceeds



On July 20, 2000, the Company effected an initial public
offering (the IPO), of 10,000,000 shares of its common stock at $14.00 per share, pursuant to a registration statement (No. 333-35402) declared effective by the Securities and Exchange Commission on July 20, 2000. The IPO has been
completed, and all shares have been sold. The managing underwriters for the IPO were Goldman, Sachs & Co., Merrill Lynch & Co., Robertson Stephens and Epoch Partners. Aggregate proceeds from the IPO were $140,000,000.



The Company incurred the following expenses in connection with
the IPO: underwriters discounts and commissions of $9,800,000 and approximately $2,000,000 in other expenses, for a total expense of $11,800,000. No payments constituted direct or indirect payments to directors, officers or general partners of
the Company or their associates, to persons owning 10% or more of any class of equity securities of the Company, or to any affiliates of the Company.



After deducting expenses of the IPO, the net offering proceeds to the Company were approximately $128,200,000. From July 20, 2000, the
effective date of the Registration Statement, to December 31, 2002, the ending date of the reporting period, the approximate amount of net offering proceeds used were $18.8 million to repay outstanding debt, $69.5 million to fund operations and $14
million to purchase substantially all of the assets of Qwest Cyber.Solutions (QCS). The remaining net proceeds were invested in short-term financial instruments.



Item 6.    Selected Financial Data



The selected financial data set forth below should be read together with the financial statements and related notes, Managements Discussion and Analysis of Financial Condition and Results
of Operations and the other information contained in this annual report. The statements of operations data set forth below with respect to the year ended December 31, 2000, December 31, 2001 and December 31, 2002, and the balance sheet data as
of



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December 31, 2001 and 2002 are derived from our financial statements that have been audited by KPMG LLP, independent auditors, included
elsewhere in this annual report. The statements of operations data in respect of Data Systems Connectors, Inc. (DSCI) for the eleven months ended September 4, 1998 and in respect of Corio for the four months ended September 30, 1998 and fiscal 1999,
and the balance sheet data as of September 4, 1998 and December 31, 1998, 1999 and 2000 are derived from financial statements that are not included in this annual financial report.



In the tables below:



| | · |  | we have determined that, due to the application of purchase accounting, the statement of operations and balance sheet data of DSCI prior to our acquisition of DSCI
effective September 4, 1998, are not comparable to ours;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | the statement of operations data for DSCI in 1998 represents the period from October 1, 1997 to the date of our acquisition of DSCI, or September 4, 1998;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | our statement of operations data in 1998 represents the period from our inception, or September 1, 1998, to December 31, 1998; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| | · |  | the balance sheet data for DSCI in 1998 is as of September 4.
| | - |  | -------------------------------------------------------------



|                                              |  | DSCI                                     |        |   | Corio                   |  
|--------------------------------------------- |  | ---------------------------------------- | ------ | - | ----------------------- | -
|                                              |  | Year Ended September 4,                  |        |   | Year Ended December 31, |  
|                                              |  | 1998                                     |        |   | 1998                    |  
|                                              |  | (in thousands, except per share amounts) |       
|Statement of Operations Data                  |  |                                          |        |   |                         |  
|Revenues:                                     |  |                                          |        |   |                         |  
|Application management services               |  | $                                        |       |   |                         | $
|Professional services and other               |  |                                          | 4,280  |   |                         |  
|                                              |  |                                          |        |   |                         |  
|Total revenues                                |  |                                          | 4,280  |   |                         |  
|Costs and Expenses:                           |  |                                          |        |   |                         |  
|Application management services               |  |                                          |       |   |                         |  
|Professional services and other               |  |                                          | 2,185  |   |                         |  
|Research and development                      |  |                                          |       |   |                         |  
|Sales and marketing                           |  |                                          |       |   |                         |  
|General and administrative                    |  |                                          | 3,437  |   |                         |  
|Restructuring charges                         |  |                                          |       |   |                         |  
|Amortization of stock-based compensation      |  |                                          |       |   |                         |  
|Amortization of goodwill                      |  |                                          |       |   |                         |  
|Amortization of other intangibles             |  |                                          |       |   |                         |  
|                                              |  |                                          |        |   |                         |  
|Total operating expenses                      |  |                                          | 5,622  |   |                         |  
|                                              |  |                                          |        |   |                         |  
|Loss from operations                          |  |                                          | (1,342 | ) |                         |  
|Interest and other income                     |  |                                          | 76     |   |                         |  
|Interest and other expense                    |  |                                          | (189   | ) |                         |  
|Tax benefit                                   |  |                                          |       |   |                         |  
|                                              |  |                                          |        |   |                         |  
|Net loss                                      |  |                                          | (1,455 | ) |                         |  
|Series E beneficial conversion charge         |  |                                          |       |   |                         |  
|                                              |  |                                          |        |   |                         |  
|Net loss attributable to common stockholders  |  | $                                        | (1,455 | ) |                         | $
|                                              |  |                                          |        |   |                         |  
|Basic and diluted net loss per share          |  |                                          |        |   |                         | $
|                                              |  |                                          |        |   |                         |  
|Shares used in computation, basic and diluted |  |                                          |        |   |                         |  
|                                              |  |                                          |        |   |                         |  



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.



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|                                                                   |  | DSCI              |        |   | Corio       
|------------------------------------------------------------------ |  | ----------------- | ------ | - | ------------
|                                                                   |  | September 4, 1998 |        |   | December 31,
|                                                                   |  |                   | 1998   |   | 1999        
|                                                                   |  | (in thousands)   
|Balance Sheet Data                                                 |  |                   |        |   |             
|Cash, cash equivalents, restricted cash and short term investments |  | $                 | 501    |   |             
|Total assets                                                       |  |                   | 986    |   |             
|Notes payable and capital lease obligations, less current portion  |  |                   |       |   |             
|Total stockholders (deficit) equity                               |  |                   | (1,200 | ) |             



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 24 to 37. 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



We are a leading enterprise application service provider, or ASP. We provide to our customers application implementation, integration,
management and various upgrade services and related hardware and network infrastructure. We implement, integrate and manage a suite of enterprise software applications from leading vendors. Following the implementation of software applications by
our partners or us, our customers pay a monthly service fee based largely on the number of applications used and total users. Our application management services agreements typically range in duration from two to three years and typically guarantee
service levels for customers of at least 99% availability, excluding scheduled downtime.



Critical Accounting Policies



Managements Discussion and Analysis of Financial Condition and Results of Operations are based on our consolidated financial statements, which 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 in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in the financial
statements and accompanying notes.



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Estimates are used for, but not
limited to, the accounting for revenue recognition, the allowance for doubtful accounts, contingencies, restructuring costs and other special charges. Actual results could differ from these estimates. We review these 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
| | - |  | ----------------------------------------



| | · |  | Allowance for doubtful accounts
| | - |  | -------------------------------



| | · |  | Loss contingencies
| | - |  | ------------------



| | · |  | Valuation allowance
| | - |  | -------------------



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 probable. 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 probable, we revert to recognizing revenue as
payment for services is received and we designate those customers as cash basis customers. At December 31, 2002 and 2001, we had outstanding invoices of $3.8 million and $2.5 million, respectively related to services provided to
cash basis customers. Since revenue related to these invoices is recognized on a cash basis, these amounts have not been included in our accounts receivable balances. Our revenue in the future could fluctuate significantly due to the timing and
amount of payments received from cash basis customers as well as the change in composition of these customers.



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 a general reserve policy 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, 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 make us 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, 2002 and 2001, our allowance for doubtful accounts was $403,000 and $376,000, respectively.



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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.
For our office lease restructuring liability, our estimate is based on our assessment of our predicted sublease income over the remaining lease term. Included in our accrual at December 31, 2002 is estimated sublease income of $1,269,000. If our
actual sublease income is less than projected, our estimated office lease obligation could be adversely affected.



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, 2002. The valuation allowance was recorded given the losses we incurred through December 31, 2002, and our uncertainties regarding future operating profitability and taxable income. If we do not achieve profitability, we will not
fully realize the deferred tax benefits.



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.



In the ordinary course of business, we have recorded revenue
in the year ended December 31, 2002, $2.3 million 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. In the year
ended December 31, 2000, we recorded revenue of $2 million arising from



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transactions with six companies with which we have common directors. At December 31, 2000, accounts receivable included approximately
$602,000 arising from such transactions.



Application Management Services Revenues.    Revenues from application management services consist of monthly fees from ongoing services as well as start-up fees which are recognized ratably over the
contract term, which is typically two to three years. We also recognize revenues in respect of customer prepayments for application management services over the contract term. In addition, fees for support services are recognized as revenue as the
services are performed. We price our application management services based on various factors, such as the number and type of applications being licensed, the amount of hardware and software required, 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. Application management services revenues comprised 34%, 71% and 78% of our total revenues for the years ended December 31, 2000, 2001 and 2002, respectively.



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 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. There were no customer settlement fees included in fiscal
year 2000 revenue. These termination and settlement fees were primarily the result of emerging high-growth companies experiencing financial difficulties or discontinuing operations. As we move up market and away from high-growth companies, revenue
from termination and settlement fees may diminish.



Professional Services and Other Revenues.    Revenues from professional services consist of fees derived from providing implementation, consulting, training and related services for our customers. We
perform these professional services pursuant to fixed-fee or time and materials contracts. We generally recognize revenues from the delivery of professional services as we perform the services under time and materials contracts or under the
percentage-of-completion method of contract accounting. We record losses resulting from fixed-fee contracts at the time the losses become known. Professional services and other revenues comprised 66%, 29% and 22% of our total revenues for the years
ended December 31, 2000, 2001 and 2002, respectively.



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. At December 31, 2002, we had an accrual of $821,000 for identified losses on contracts in progress at December 31, 2002. The corresponding accrual at December 31, 2001 was $503,000. 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 the 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 $2.6 million at December 31, 2002 and $2.0 million at December 31, 2001. Deferred revenues at December 31, 2002 and December 31, 2001 included $647,000 and $706,000 respectively of professional



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services revenues that will be recognized under the percentage-of-completion method of contract accounting and $2.0 million and $1.3 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 the fiscal years ended December 31, 2001 and 2002, we incurred impairment
charges of $2.2 million and $109,000, respectively. The impairment charges were determined following completion of a fixed asset inventory during the fourth quarters of fiscal years 2001 and 2002 and relate primarily to abandoned or excess fixed
assets, following our restructuring activities undertaken during the last two years.



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 are repurchasable by Corio under certain circumstances, the fair value of these shares subject to repurchase will be remeasured each reporting period until May 2003, when the repurchase rights lapse. We recorded amortization
expense of $544,000, $164,000 and $11,000 as sales and marketing expense for fiscal 2000, 2001 and 2002, respectively, related to these shares.



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



Years ended December 31, 2002, 2001 and 2000.



Revenues



Total revenues increased to $56.1 million for the year ended December 31, 2002 from $51.6 million for the year ended December 31, 2001 and
$44.9 million for the year end December 31, 2000. For the year ended December 31, 2002, one customer, Quadrem, accounted for 11% of our total revenues and this customer is expected to not renew its contract when it expires in May 2003. For the
quarter ended December 31, 2002, a different customer accounted for 11% of total revenues. For the year ended December 31, 2001 no one customer accounted for more than 10% of our total revenues. For the year ended December 31, 2000, one customer
accounted for 12% of total revenues.



Application Management Services Revenues.    For fiscal 2002, revenues from our application management services were $43.6 million, including $4.5 million in revenues from customer contract terminations.
Included in



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the fiscal 2002 revenues of $43.6 million is $16.7 million recognized as a result of payments from cash basis customers. In addition,
included in fiscal 2002 revenues is $9.2 million from customer contracts acquired as part of our September 2002 acquisition of Qwest Cyber.Solutions (QCS) application management services. For fiscal 2001, revenues were $36.7 million, including
$3.4 million in revenues from customer contract terminations and the recognition of prepaid revenue of $712,000 from a customer that had filed for bankruptcy. Included in the fiscal 2001 revenues of $36.7 million is $14.4 million recognized as a
result of payments from cash basis customers. For fiscal 2000, revenues were $15.3 million, including $2.2 million from payments from cash basis customers. There were no revenues from customer contract terminations in fiscal 2000. The increase in
revenue from 2001 to 2002 was mainly attributable to the $9.2 million related to the acquired QCS contracts and a $2.3 million increase in payments from cash basis customers offset by a loss of certain customers. We anticipate fiscal 2003 revenue
compared to fiscal 2002 revenue may increase as we recognize a full year of revenues associated with the contracts acquired from QCS instead of the approximate three months of related revenues in 2002. This revenue increase from QCS customers will
be offset by the revenue loss from any customers that terminate. The increase in revenue from 2000 to 2001 was mainly attributable to a $3.4 million increase in non-recurring revenues from customer contract terminations, $12.2 million
increase in payments from cash basis customers and an increase in the average monthly revenue per customer. We anticipate that non-recurring revenue from customer contract terminations will continue to vary over the next few periods. As we move away
from high-growth companies, revenue from termination fees may decrease.



At December 31, 2002, our total number of application management customers was 86, 50 at December 31, 2001, and 75 at December 31, 2000. At December 31, 2002, we had approximately 103 application management contracts,
compared with approximately 70 at December 31, 2001 and with approximately 120 at December 31, 2000. The increase in the number of customers from 2001 to 2002 is mainly attributable to the 51 customers acquired through our QCS acquisition offset by
customers who have terminated. The decrease in the number of customers from 2000 to 2001 while revenue had increased, was the result of our focus on obtaining new business from larger, established enterprises. At December 31, 2002, December 31,
2001, and December 31, 2000, we had a balance of $2.0 million, $1.3 million and $1.2 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.



Professional Services and Other Revenues.    Our professional services and other revenues were $12.6 million for the year ended December 31, 2002, $14.8 million for the
year ended December 31, 2001 and $29.6 million for the year ended December 31, 2000. The decease in professional services revenues was primarily due to the decreased number of customer implementations and size of customer contracts. We had
49 implementations in 2002, 74 implementations in 2001 and 163 implementations in 2000. Revenues for the years ended December 31, 2002, 2001 and 2000 included $532,000, $2.2 million and $4.3 million, respectively, of payments from cash basis
customers. At December 31, 2002 and 2001, we had a balance of $647,000 and $706,000, respectively, for deferred professional services revenues. These deferred revenues, resulting from customer payments in advance of commencing 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 management services expense consists primarily of
personnel costs, depreciation and amortization expense, application fees, data center and data communication fees, facilities expense, and outside professional services. Application management services expenses, excluding stock based compensation of
$261,000 in 2002, $178,000 in 2001 and $579,000 in 2000, were $43.1 million for the year ended December 31, 2002, $40.6 million for the year ended December 31, 2001 and $32.6 million for the year ended December 31, 2000. Amortization of
deferred costs for warrants issued in 1999 to a service provider was zero in fiscal 2002, $157,000 in fiscal 2001 and $210,000 in fiscal 2000. From 2001 to 2002, the



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increase in expenses was mainly attributable to a $3.3 million increase in data center fees, $755,000 increase in outside professional
services fees, $758,000 increase in software maintenance expense, $662,000 increase in software license expense, $445,000 increase in equipment repairs and maintenance expense, $190,000 increase in rent expense, and a $790,000 increase in equipment
rental expense offset by a $2.2 million reduction in payroll expense due to lower headcount and a $2.4 million reduction in application fees. The increase in certain application management services expenses was mainly attributable to the costs
associated with integrating and administering the customers acquired from QCS in September 2002. We anticipate fiscal 2003 expenses compared to 2002 expenses may increase next year as we recognize a full year of expenses to support the customers
acquired from QCS instead of the approximate three months of related expenses in 2002. From 2000 to 2001, the increase in expenses was mainly attributable to a $6.3 million increase in depreciation due to equipment purchases and new capital leases
and a $1.3 million increase in payroll costs due to higher average headcount.



Professional Services and Other Expenses.    Professional services and other expenses consist primarily of personnel costs, outside professional services, facilities, and
travel and related expenses. Professional services and other expenses were $13.8 million for the year ended December 31, 2002, $16.5 million for the year ended December 31, 2001, and $27.1 million for the year ended December 31, 2000. There were no
professional services stock based compensation charges in 2002, 2001 or 2000. Of the total professional services expensed, personnel costs were approximately $7.5 million in 2002, $11.4 million in 2001 and $19.1 million in 2000. Fees to
subcontractors to perform services under professional services engagements were approximately $3.4 million in 2002, $2.2 million in 2001, and $3.4 million in 2000. From 2001 to 2002, the decrease in expenses was mainly 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. From 2000 to 2001, the decrease in expenses was mainly attributable to a $7.7 million decrease in payroll costs due to lower
headcount and a $1.2 million decrease in subcontractor fees. For the year ended December 31, 2000, we achieved a service margin for our professional services organization of approximately 9%. For the years ended December 31, 2001 and December 31,
2002, professional service costs exceeded the related revenue. We anticipate that professional services revenue and the associated margins will fluctuate significantly from period to period depending on the timing and size of projects, the amount of
such work completed by independent third party integrators and other factors. In addition, 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.



Research and Development
Expenses.    Research and development expenses consist primarily of personnel costs, depreciation and amortization, facilities and outside professional services. Research and development expenses, excluding stock based
compensation charges (credits) of $148,000 in 2002, ($253,000) in 2001, and $1.6 million in 2000, were $6.3 million for the year ended December 31, 2002, $9.1 million for the year ended December 31, 2001, and $11.9 million for the year ended
December 31, 2000. Research and development expenses as a percentage of total revenues were 11% for 2002, 18% for 2001 and 26% for 2000. Headcount at December 31, 2002 was 20 employees, compared to 45 at December 31, 2001 and 53 at December 31,
2000. From 2001 to 2002, the decrease in expenses was mainly attributable to a $2.2 million decrease in payroll related costs due to lower headcount and a decreased use of labor from other Company departments as well as a $367,000 decrease in
depreciation. From 2000 to 2001, the decrease was mainly attributable to a $2.7 million decrease in payroll related expenses due to lower headcount.



Sales and Marketing Expenses.    Sales and marketing expenses consist primarily of personnel costs, incentive
compensation, marketing programs, and facilities. Sales and marketing expenses, excluding stock based compensation of $840,000 in 2002, $309,000 in 2001, and $4.2 million in 2000, were $10.5 million for the year ended December 31, 2002, $21.8
million for the year ended December 31, 2001, and $34.1 million for the year ended December 31, 2000. Sales and marketing expenses as a percentage of total revenues were 19% for the year ended December 31, 2002, 42% for the year ended December 31,
2001, and 76% for the year ended



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December 31, 2000. Headcount at December 31, 2002 was 41 employees, compared to 53 at December 31, 2001 and 87 at December 31, 2000.
From 2001 to 2002, the decrease in expenses was mainly attributable to a $4.6 million decrease in payroll costs due to lower headcount, a $1.7 million decrease in travel related expenses, $614,000 decrease in rent expenses, $1.3 million
decrease in marketing program expenses and a $1.9 million decrease in the amortization expense associated with a marketing alliance cost that was fully amortized in April 2002. In addition, sales and marketing expenses included amortization of costs
associated with warrants issued to Cap Gemini Ernst & Young of $11,000, $164,000 and $544,000 for the years ended December 31, 2002, 2001 and 2000, respectively.



General and Administrative Expenses.    General and administrative expenses
consist primarily of personnel costs, outside professional services, depreciation and amortization, facilities, and equipment rental. General and administrative expenses include costs related to our internal information technology and systems
architecture, accounting and finance, executive management, human resources and legal activities. General and administrative expenses, excluding stock based compensation of $1.1 million in 2002, $4.9 million in 2001, and $9.3 million in 2000,
were $11.7 million for the year ended December 31, 2002, $21.1 million for the year ended December 31, 2001, and $24.6 million for the year ended December 31, 2000. General and administrative expenses as a percentage of total revenues were 22% for
the year ended December 31, 2002, 41% for the year ended December 31, 2001, and 55% for the year ended December 31, 2000. In addition, the years ended December 31, 2002, 2001 and 2000 include approximately $90,000, $1.8 million, and $2.6 million,
respectively, of expenses related to amortization of fees paid to a software vendor for a non-competition agreement and preferred partner status. There were 23 general and administrative personnel at December 31, 2002, 56 at December 31, 2001 and 86
at December 31, 2000. From 2001 to 2002, the decrease was mainly attributable to a $4.9 million decrease in payroll costs, $500,000 decrease in subcontractor fees, $602,000 decrease in rent expenses, $824,000 decrease in office expenses, $450,000
decrease in travel expenses and a $1.7 million decrease in amortization of fees paid to a software vendor as noted above. From 2000 to 2001, the decrease in expenses was mainly attributable to a $1.2 million decrease in payroll related
expenses, $737,000 decrease in subcontractor fees and a $1.1 million decrease in office expenses.



Restructuring charges.    During fiscal 2002 and 2001, we initiated cost-saving actions resulting in
restructuring and impairment charges of $4.0 million and $3.8 million, respectively. In 2002, the restructuring and impairment charges included $3,764,000 to record the estimated loss associated with a portion of the remaining lease stream related
to the vacated portion of our headquarters and $272,000 for severance benefits paid to 30 employees involuntarily terminated. In 2001, the restructuring and impairment charges included $435,000 for estimated payments for the cancellation of a
facility lease contract, $1.2 million for severance benefits paid or to be paid to 179 employees involuntarily terminated, and $2.2 million to write off certain abandoned and excess assets, of which $1.5 million were capital assets.



Amortization of Stock-Based
Compensation.    Amortization of deferred stock-based compensation was $2.3 million for the year ended December 31, 2002, $5.1 million for the year ended December 31, 2001 and $15.7 million for the year ended December
31, 2000. The deferred charges for employee options are being amortized to expense using the graded vesting approach prescribed by FASB Interpretation No. 28. The decrease for all periods presented was mainly attributed to the impact of the
accelerated vesting for options granted prior to our IPO with an exercise price less than the deemed fair value of our common stock.



Amortization of Other Intangibles.     Related to our Qwest Cyber.Solutions (QCS) acquisition, we
recorded an intangible asset for our 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. Amortization of the
intangible asset was $497,000 in 2002. No amortization expense related to the QCS acquired customer contracts was recognized in 2000 and 2001 as the acquisition occurred in September 2002.



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Interest and Other Income and
(Expense).    Net interest and other income was $1.3 million for the year ended December 31, 2002, $3.1 million for the year ended December 31, 2001 and 3.3 million for the year ended December 31, 2000. The decrease in net
interest income from 2001 to 2002 was mainly attributable to lower average cash and investment balances as well as lower interest rates and was offset, in part, by a decrease in interest expense due to lower average debt balances. The decrease in
net interest income from 2000 to 2001 was due to increased interest expense related to equipment financing.



Income Taxes.    Since inception, we have incurred net losses for federal and state tax purposes, and
anticipate losses for the foreseeable future. We have therefore not recognized any material tax provision or benefit for income taxes for the years ended December 31, 2001 and 2000. We recognized a $400,000 tax benefit in fiscal 2002 after
determining that a deferred tax liability recorded in connection with our acquisition of Data Systems Connectors, Inc. in 1998 was no longer needed due to the completion of a tax examination. As the goodwill related to this acquisition has been
fully amortized, the reversal of this exposure item was treated as an income tax benefit.



Liquidity and Capital Resources



As of December 31, 2002, we had cash and cash equivalents, short-term investments and restricted cash totaling $51.7 million, a decrease of $34.3 million from the $86.0 million on hand at December 31,
2001. The decrease was primarily the result of cash used in operations and cash paid for the acquisition of certain assets and assumption of certain liabilities of QCS. Included in the cash balance is restricted cash of $7.7 million and
$7.8 million at December 31, 2002 and 2001, respectively.



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



|                                                 |  | Years Ended December 31, |      
|------------------------------------------------ |  | ------------------------ | -----
|                                                 |  | 2000                     |      
|                                                 |  | (In millions)            |      
|Net cash provided by (used in):                  |  |                          |      
|Operating activities                             |  | $                        | (64.4
|Investing activities                             |  |                          | (94.0
|Financing activities                             |  |                          | 179.7
|                                                 |  |                          |      
|Increase (decrease) in cash and cash equivalents |  | $                        | 21.3 
|                                                 |  |                          |      



For
fiscal 2002, net cash used in operating activities of $12.6 million was comprised of a net loss of $34.8 million, reduced primarily by $12.0 million of depreciation and amortization, $2.3 million of amortization of deferred stock based
compensation, a $4.2 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
$42.2 million was comprised of a net loss of $63.9 million, reduced primarily by $15.5 million of depreciation and amortization, $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 2000, net cash used in operating activities of $64.4 million was comprised of a net loss of $99.8 million, reduced
primarily by $11.0 million of depreciation and amortization, $15.7 million of amortization



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of deferred stock based compensation, and a $9.2 million increase in accounts payable and accrued liabilities and increased by a $4.8 million
increase in accounts receivable.



For fiscal
2002, net cash generated by investing activities was $10.1 million. Investing activities consisted primarily of the sale of short-term investments of $85.3 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 generated by investing activities was $28.1 million. Investing activities consisted primarily of the sale of
short-term investments of $114.5 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 2000, net cash used in investing activities was
$94.0 million. Investing activities consisted primarily of purchases of short-term investments of $80.3 million, computer equipment of $6.3 million, furniture and fixtures of $1.5 million and leasehold improvements of $1.6 million for the completion
of our new headquarters facility in San Carlos, California. In addition, net cash used in investing activities included an increase in other assets of $3.2 million for advisory fees related to the CGEY relationship.



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 $800,000.



For fiscal 2001, net cash used by financing activities was $8.0 million. Financing activities consisted of $9.80 million repayments of
equipment lease financing offset by sale of common stock of $1.7 million.



For fiscal 2000, net cash provided by financing activities was $179.7 million. Financing activities consisted primarily of the proceeds from the issuance of common and preferred stock, loans and exercise of stock options and
capital lease additions offset by repayments of loans and capital leases. In 2000, we raised $54.5 million in gross proceeds through the private sale of our senior series E mandatorily redeemable preferred stock, and raised approximately $128
million in our initial public offering, which was offset by $4.2 million repayments of loans and capital leases.



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 are currently integrating the acquired business into our existing
business and will support the QCS customer relationships acquired as part of the acquisition.



The following table summarizes our allocation of the total purchase price of $16.3 million to the assets acquired and liabilities assumed from QCS at the date of acquisition. We paid $15 million in
cash for the acquisition and accrued direct acquisition costs of approximately $1.3 million. As the total purchase price exceeded the estimated fair values of the assets acquired and liabilities assumed, 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 |  
|                                          |  |   |        |  



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We 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.



The following table summarizes our contractual cash
obligations at December 31, 2002:



|                                   |  | Payments due by Period
|---------------------------------- |  | ----------------------
|Contractual obligations            |  | Total                 
|Notes payable                      |  | $                     
|Capital lease obligations          |  |                       
|Operating leases                   |  |                       
|                                   |  |                       
|Total contractual cash obligations |  | $                     
|                                   |  |                       



Effective August 2002, senior management of the Company agreed to reduce their base compensation by percentages ranging from 10% to 33% which will result in an approximate aggregate reduction of $700,000 per year. Affected employees
received stock option grants equivalent to two options for every dollar reduced from their annual base salary which resulted in the Company granting approximately an additional 1.4 million stock options. These grants were priced at fair market value
on the date of grant and vest over a two year period. The salary reductions were implemented as part of the Companys cost and cash management initiatives, with the intent of further enabling the Company to improve its operating margins.



Effective January 2003, for all employees not
affected by the August 2002 salary reduction, the Company implemented additional cost savings measures by reducing the base compensation of these employees by 10%. This is expected to result in a cost savings of approximately $2.6 million per year.
Affected employees received stock option grants equivalent to one option for every two dollars reduced from their annual base salary which resulted in the Company granting approximately an additional 1.3 million stock options. These grants were
priced at fair market value on the date of grant and vest over a one year period.



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 August 2001, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, 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 presently required. The
provisions of this standard did not have a significant effect on our financial position or operating results.





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In April 2002, the FASB issued SFAS No. 145 Recision of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections Under Statement 4, pursuant to which all gains and losses from extinguishments of debt were required to be aggregated and, if material, classified as an extraordinary item, net of related
income tax effect. This statement eliminates Statement 4 and, thus, the exception to applying Opinion 30 to all gains and losses related to extinguishments of debt. The provisions of this standard are not expected to have a significant effect on our
financial position or operating results.



In June
2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal Activities (SFAS 146). SFAS 146 addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal
activities, including restructuring activities that are currently accounted for pursuant to the guidance of Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 will be effective in 2003. The adoption of SFAS 146 is not expected to have a material impact on our financial results.



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 standalone 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 will be applicable to agreements entered into in fiscal periods beginning after June 15,
2003 with early adoption permitted. The provisions of this Consensus are not expected to have a significant effect on our financial position or operating results.



In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. This Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement provisions of the interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on our financial
statements. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. This
statement amends SFAS No. 123, Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement
amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported
results. The disclosure provisions of this standard are effective for fiscal years ending after December 15, 2002 and have been incorporated into these financial statements and accompanying footnotes.



In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. The interpretation applies
immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities



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obtained after January 31, 2003. For public enterprises with a variable interest in a variable interest entity created before February 1,
2003, the interpretation applies to that enterprise no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The application of this interpretation is not expected to have a material effect on our
financial statements, The interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that we will consolidate or disclose information about variable interest entities when the
interpretation becomes effective.



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ADDITIONAL FACTORS THAT MAY AFFECT FUTURE
RESULTS



RISK FACTORS



Risks Related to Our Business



We have a history of losses and expect that we will continue to incur
operating losses and negative cash flow and 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, 2002, we had an accumulated deficit of $246.7 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 grow our sales force and spend significant funds to promote our company and our services. We may hire additional people in other areas of our
company in order to support our business. 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 for customers. As a
result of all of these factors, to achieve operating profitability at all or on a consistent basis, excluding non-cash charges, we will need to increase our customer base, to decrease our overall costs of providing services, including the costs of
our licensed technology, our operations and the costs of customer acquisitions, and to increase our number of customers. We cannot assure you that we will be able to increase our revenues or increase our operating efficiencies in this manner. Also,
because we may continue to invest in our business faster than we anticipate growth in our revenues, we may continue to incur significant losses and negative cash flow for the foreseeable future and we may never be profitable.



The emerging high-growth and middle-market companies that currently
comprise a significant portion of our revenue base may be volatile, which could continue to result in greater than expected customer loss and continued difficulty in collecting fees from some customers, and uncertainty regarding the stability of the
economy in general could continue to adversely affect demand for our services.



A significant portion of our current revenue consists of revenue from middle-market companies, e-commerce trading exchanges and other technology companies. These companies will be more likely to be
acquired, experience financial difficulties or cease operations than other companies that are larger and better established or are in more stable industries. In particular, these companies may experience difficulties in raising capital needed to
fund their operations when required or at all. In the past we have terminated our agreements with a substantial number of customers who were unable or unwilling to continue to meet their financial obligations to us and we expect to terminate
additional customers in the future. As a result, our client base will likely be more volatile than those companies whose customers consist of more mature and established entities. 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. In addition, uncertainty regarding the stability of the economy in general could continue to diminish and
delay demand for our services. Also, as we move up market and away from high-growth and middle market companies, revenue from termination fees resulting from high-growth and middle market companies may diminish. Moreover, one of our customers
represented 11% of total revenues in fiscal 2002 and its contract expires in May 2003. We do not expect this customer to renew its contract and so we expect to lose the revenue from this customer starting in June 2003. For the quarter ended December
31, 2002, a different customer accounted for 11% of total revenues. The loss of this and any other significant customers would adversely affect our business.



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Our limited history of offering ASP services
to customers and the fact that we operate in a new industry for application services expose us to risks that affect our ability to execute our business model.



We have offered our services for a relatively short period of time, and our industry is relatively new. Prior
to September 1998, our predecessor company, DSCI, carried on a different business. Accordingly, we have a limited operating history as a provider of ASP services. We have a limited number of customers and have implemented our services a limited
number of times. Because our business model is 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 is evolving. Changes in our anticipated business and financial model could materially impact our ability to become profitable in the future. Additionally, especially as we move up-market to larger, more established customers,
the demand for our services is uncertain and the sales process will take longer than with smaller potential customers. 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 new 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.



Because we may spend significant sums to run our business and to try to grow our business, we may be unable to adjust spending to offset any future revenue shortfall, which could cause our quarterly
operating results to fluctuate and our stock price to fall.



Although we are monitoring our spending, in order to promote future growth, we expect we may continue to expend significant sums in our business, in our operations, professional services, research and development, and sales and
marketing organizations. 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 quarterly 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.



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Our quarterly operating results may fluctuate
due to the nature of our ASP business and other factors affecting our revenues and costs, which could cause our stock price to fall.



Our financial results will vary over time as our ASP business matures. 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 the customer, 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. 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 decrease in termination fees paid in a quarter versus other quarters;
| | - |  | -------------------------------------------------------------------------



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



| | · |  | 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 or warrant issuances and for revenue recognition; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| | · |  | accounting charges associated with the warrants currently held by third parties, as well as potential accounting charges we may incur in the future relating to stock
or warrant issuances to future parties.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our
financial results could vary over time as our business model evolves, which could cause our stock price to fall.



Our financial results could vary over time as our business and financial model evolves. 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 from our fixed monthly fee the cost of
software licenses and currently require 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 new pricing structures or business models may not in fact be more beneficial to us and may ultimately hinder our ability to become profitable.



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We depend on software vendors to supply us
with the software necessary to provide our services, and the loss of access to this software or any decline or obsolescence in its functionality could cause our customers businesses to suffer, which, in turn, could harm our revenues and
increase our costs.



We offer our customers
software application services for applications from third parties such as PeopleSoft, Oracle, SAP 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 and Siebel, we 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 use the software that we host from third-parties,
if the cost of licensing the software applications becomes prohibitive, or if we change the vendors from whom we currently license software, 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 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.



Our licenses for the third-party software we use to
deliver our services contain limits on our ability to use them that could 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, some of our licenses restrict us from selling our services to customers with annual revenues greater than various
levels such as $1 billion, and some restrict 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 and our
limited experience in providing these services, which would harm our reputation and sales.



Implementations of enterprise software applications can be complicated and we have limited experience to date completing implementations of software applications for our customers. We cannot assure you
that we will



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develop the requisite expertise or that we can convince customers that we have the 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, including those applications with which
we have limited or no implementation, hosting or management experience to date.



Any inability to expand sufficiently 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.



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; and
| | - |  | -----------------------------------------------------------------------------------------



| | · |  | expand, train, manage and retain our employee base effectively.
| | - |  | ---------------------------------------------------------------



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.



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We will need to perform software upgrades for
our customers, and any inability to successfully perform these upgrades could cause interruptions or errors in our customers software 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, and we have not performed many software upgrades to date. 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



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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.



We may incur substantial
accounting charges as a result of repurchasable common stock held by Cap Gemini Ernst & Young which may result in significant operating losses over the next several years.



On September 27, 2000, Cap Gemini Ernst & Young U.S., L.L.C (CGEY), 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. Even if we are able to generate revenues that exceed our operating costs, we may incur substantial accounting charges
through May 2003 associated with these shares held by CGEY. These shares and other expenses related to our strategic alliance with CGEY may result in expenses and operating losses for us over the term of our agreement with them. Because of the
accounting policies applicable to these shares, any charges associated with these shares will be measured and recorded each fiscal quarter in part using the trading price of our common stock. Significant increases in our stock price could result in
significant non-cash accounting charges.



Our application
management agreements are typically long-term, fixed-price contracts, which may hinder our ability to become profitable.



We enter into agreements with our customers to provide application management services for long periods, typically two to 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, 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 long-term, fixed-price application management contracts may hinder our
ability to evolve our business and to ultimately become profitable.



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 result in our inability to
become profitable as rapidly as we would like or at all.



If
we do not meet the service levels provided for in our contracts with customers, we may be required to give our customers credit for free service, and our customers may be entitled to cancel their service contracts, which could adversely affect our
reputation and hinder our ability to grow our revenues.



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 additional software applications that address their evolving business needs. We cannot be sure, however, that we will be able to



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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 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 Bluestar Solutions, CSC, Electronic Data Systems, Hewlett-Packard, IBM Global Services,
Surebridge and USinternetworking;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | systems integrators, such as Accenture, Bearing Point;
| | - |  | ------------------------------------------------------



| | · |  | software vendors, such as Oracle, PeopleSoft, Commerce One, SAP 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 be unable to deliver effectively our services if our data center
management services providers, computer hardware suppliers or software providers do not provide us with key components of our technology infrastructure in a timely, consistent and cost-effective manner.



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



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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 to us. 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 effectively our services
to customers. 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.



System
failures caused by us or factors outside of our control could 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 three data centers to house our hardware and to provide network services, but each of our customers is 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 similar 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.



If we are unable to retain our executive
officers and key personnel, or to integrate new members of our senior management that are critical to our business, we may not be able to successfully manage our business or achieve our 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 the 10% salary decrease which we implemented in
January 2003. 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.



If we are
unable to hire and retain sufficient sales, marketing, technical and operations personnel, we may be unable to grow our business or to service our customers effectively.



In the future, we may expand our sales operations and marketing efforts, both domestically and
internationally, 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, recent reductions in our workforce, although designed to not affect service levels and demand generation, may adversely affect these areas of our business.



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



We recently acquired the ASP assets of Qwest Cyber.Solutions LLC, or QCS, and 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, 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, 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. The integration of the ASP assets of QCS into
our business is ongoing, and we may experience disruption and distraction related thereto and unexpected costs associated therewith.



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. Also, a securities class action lawsuit against Corio is currently pending in the U.S. District Court for the Southern District of New York. This lawsuit may be time consuming and expensive to defend and may divert
managements attention and may be costly to Corio.



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We may not be able to continue to meet the
continued listing criteria for The Nasdaq National Market, which would materially adversely affect our business and financial condition.



Continued listing on The Nasdaq National Market requires that the minimum bid price of our common stock not fall below $1.00 for a period
of time prescribed by Nasdaq rules. If the closing bid price of our stock fails to increase to $1.00 or more and sustain at that level for 10 trading days by early April of this year, our stock could be subject to delisting from the Nasdaq National
Market. Our stockholders, however, have approved a reverse stock split and, if necessary to come into compliance with Nasdaqs requirements, we intend to effect the reverse stock split. Although we believe a reverse stock split would bring us
into compliance, we may not be able to effect measures to come into compliance with this minimum bid price requirement within this period of time, in which case our stock may no longer be eligible to trade on The Nasdaq National Market.



If we are unable to continue to list our common
stock for trading on The Nasdaq National Market, this would materially adversely affect business, including, among other things:



| | · |  | Our ability to raise additional financing to fund our operations;
| | - |  | -----------------------------------------------------------------



| | · |  | Our ability to attract and retain customers and distributors; and
| | - |  | -----------------------------------------------------------------



| | · |  | Our ability to attract and retain personnel, including management personnel.
| | - |  | ----------------------------------------------------------------------------



In addition, if we were unable to list our common stock for trading on The Nasdaq National Market, many
institutional investors would no longer be able to retain their interests in and/or make further investments in our common stock because of their internal rules and protocols. If institutional shareholders liquidated their holdings in our common
stock and/or did not continue to make investments in our common stock, this would decrease the trading volume of our shares and would likely result in a lower price for our common stock. Also, as mentioned above, to come into compliance with
Nasdaqs minimum bid price requirement, we may effect a reverse stock split which could adversely affect our stock price.



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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 current uncertain macroeconomic environment. Companies
in the ASP industry, such as Pandesic and Red Gorilla, have ceased operations. Other companies in the ASP industry, such as USinternetworking, have filed for bankruptcy. We cannot assure you that this market will become 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 ASPs 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 will be subject to unfavorable international conditions and regulations that could cause our international business to fail.



We have customers with international operations 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



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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 business.



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 extremely 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 41% of our common stock at December 31, 2002. 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



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| | · |  | 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | 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, 2002. This table does not include money market funds because those funds are not
subject to market risk.



|                                                      |  | Maturing in          |       
|----------------------------------------------------- |  | -------------------- | ------
|                                                      |  | Three months or less |       
|December 31, 2002 (in thousands, except percentages): |  |                      |       
|Included in cash and cash equivalents                 |  | $                    | 19,811
|Weighted average interest rate                        |  |                      | 1.46  
|Included in short-term investments                    |  | $                    | 1,005 
|Weighted average interest rate                        |  |                      | 1.63  



Item 8.    Financial Statements and Supplementary Data



The Companys 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 14.



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



Not Applicable.



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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 8, 2003 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 2003 Proxy Statements.



Executive Officers of the Company



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



|Name            |  | Age |  | Position                                         
|--------------- |  | --- |  | -------------------------------------------------
|George Kadifa   |  | 43  |  | Chairman, President and Chief Executive Officer  
|Parmeet Chaddha |  | 38  |  | Senior Vice President, Corio Technologies        
|Arthur Chiang   |  | 45  |  | Senior Vice President, Corporate Development     
|Sal Jamil       |  | 39  |  | Executive Vice President, Chief Operating Officer
|John B. Ottman  |  | 45  |  | Executive Vice President, Worldwide Markets      
|Brett White     |  | 40  |  | Executive Vice President, Chief Financial Officer



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.



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.



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.



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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.



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.



Relationships Among Directors or
Executive Officers



There are no family
relationships among any of our directors or executive officers.



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
2003 Proxy Statement.



Information with respect
to directors of the Registrant is incorporated by reference to the information under the caption Election of Directors in the Registrants 2003 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 2003 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 2003 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 2003 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 2003 Proxy Statement.



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Item 14.    Controls and Procedures



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



Within 90 days prior to the filing of this Annual Report on Form 10-K (the Evaluation Date), we carried out an evaluation,
under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that
evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that material information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. It should be noted, however, that the design of any system of controls is based in
part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.



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



Subsequent to the Evaluation Date, there have been no significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of their last evaluation.



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|CORIO, INC. | FORM 10-K
|----------- | ---------





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
|--------------------------------------------------------- |  | ----
|Independent Auditors Report                              |  | 43  
|Financial Statements:                                     |  |     
|Balance Sheets                                            |  | 44  
|Statements of Operations                                  |  | 45  
|Statements of Stockholders Equity and Comprehensive Loss |  | 46  
|Statements of Cash Flows                                  |  | 47  
|Notes to Financial Statements                             |  | 48  



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



The following financial statement schedule of Corio, Inc. for the years ended December 31, 2002, 2001 and 2000 is filed as
part of this report and should be read in conjunction with the financial statements.



|Schedule IIValuation and Qualifying Accounts |  | 69
|--------------------------------------------- |  | --



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                                                                                                                         
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------
|1.1*           |  | Form of Underwriting Agreement                                                                                                      
|3.1*           |  | Amended and Restated Certificate of Incorporation of the Registrant                                                                 
|3.2*           |  | Bylaws of the Registrant                                                                                                            
|4.1*           |  | Form of Registrants Common Stock Certificate                                                                                       
|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.                                   



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|----------- | ---------



|Exhibit Number |  | Description                                                                                                  
|-------------- |  | -------------------------------------------------------------------------------------------------------------
|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   
|16.1*          |  | Letter regarding change in independent auditors                                                              
|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 71)                                                                              
|99.1           |  | Certification of Chief Executive Officer                                                                     
|99.2           |  | Certification of Chief Financial Officer                                                                     

---

| |  | 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.
|-- |  | -----------------------------------------------------------------------------------------



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



On August 6, 2002, the Company filed a Current Report on Form 8-K in connection with the agreement to acquire
substantially all of the assets related to Qwest Cyber.Solutions LLC.



On September 27, 2002, the Company filed a Current Report on 8-K in connection with the completion of the asset purchase of Qwest Cyber.Solutions LLC. On December 4, 2002, the Company filed a Current
Report on 8-K/A to amend the 8-K to include the financial statements and pro forma financial information related to the asset purchase of Qwest Cyber.Solutions LLC.



On October 23, 2002, the Company filed a Current Report on 8-K in connection with the
appointment of the Companys new chief financial officer.



42



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|CORIO, INC. | FORM 10-K
|----------- | ---------





REPORT OF INDEPENDENT AUDITORS



To the Board of Directors and Stockholders

of Corio, Inc.:



We have audited the accompanying balance sheets of Corio, Inc. (the Company) as of December 31, 2001 and 2002, and the related
statements of operations, stockholders equity and comprehensive loss and cash flows for each of the years in the three-year period ended December 31, 2002. In connection with our audits of the financial statements, we have also audited the
financial statement schedule, as listed in Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial
statements and the related 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 financial statements referred to above
present fairly, in all material respects, the financial position of the Company as of December 31, 2001 and 2002, and the results of its operations and cash flows for each of the years in the three-year period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.



As
discussed in Note 1 to the 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 27, 2003



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|CORIO, INC. | FORM 10-K
|----------- | ---------





CORIO, INC.

BALANCE SHEETS

(in thousands, except share amounts)



|                                                                                                                                                                   |  | December 31, |         
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | --------
|                                                                                                                                                                   |  | 2001         |         
|ASSETS                                                                                                                                                             |  |              |         
|Current assets:                                                                                                                                                    |  |              |         
|Cash and cash equivalents                                                                                                                                          |  | $            | 36,317  
|Short-term investments                                                                                                                                             |  |              | 41,831  
|Accounts receivable, net of allowance of $376 and $403 at December 31, 2001 and 2002,
respectively                                                                 |  |              | 3,818   
|Prepaid expenses and other current assets                                                                                                                          |  |              | 1,875   
|                                                                                                                                                                   |  |              |         
|Total current assets                                                                                                                                               |  |              | 83,841  
|Restricted cash                                                                                                                                                    |  |              | 7,849   
|Property and equipment, net                                                                                                                                        |  |              | 20,618  
|Other assets                                                                                                                                                       |  |              | 982     
|                                                                                                                                                                   |  |              |         
|Total assets                                                                                                                                                       |  | $            | 113,290 
|                                                                                                                                                                   |  |              |         
|                                                                                                                                                                  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                               |  |              |         
|Current liabilities:                                                                                                                                               |  |              |         
|Accounts payable                                                                                                                                                   |  | $            | 6,336   
|Accrued liabilities                                                                                                                                                |  |              | 9,695   
|Accrued restructuring                                                                                                                                              |  |              | 586     
|Deferred revenue                                                                                                                                                   |  |              | 1,969   
|Current portion of notes payable                                                                                                                                   |  |              | 486     
|Current portion of capital lease obligations                                                                                                                       |  |              | 7,020   
|                                                                                                                                                                   |  |              |         
|Total current liabilities                                                                                                                                          |  |              | 26,092  
|Notes payable, less current portion                                                                                                                                |  |              | 274     
|Capital lease obligations, less current portion                                                                                                                    |  |              | 4,668   
|Accrued restructuring                                                                                                                                              |  |              |        
|Other liabilities                                                                                                                                                  |  |              | 917     
|                                                                                                                                                                   |  |              |         
|Total liabilities                                                                                                                                                  |  |              | 31,951  
|                                                                                                                                                                   |  |              |         
|                                                                                                                                                                  
|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; 55,065,460 and 56,516,435
shares issued and outstanding at December 31, 2001 and 2002, respectively |  |              | 55      
|Additional paid-in capital                                                                                                                                         |  |              | 298,272 
|Accumulated other comprehensive income                                                                                                                             |  |              | 372     
|Deferred stock-based compensation                                                                                                                                  |  |              | (5,461  
|Accumulated deficit                                                                                                                                                |  |              | (211,899
|                                                                                                                                                                   |  |              |         
|Total stockholders equity                                                                                                                                         |  |              | 81,339  
|                                                                                                                                                                   |  |              |         
|Total liabilities and stockholders equity                                                                                                                         |  | $            | 113,290 
|                                                                                                                                                                   |  |              |         



See
accompanying notes to financial statements.



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|CORIO, INC. | FORM 10-K
|----------- | ---------





CORIO, INC.

STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)



|                                                                             |  | Year Ended December 31, |         
|---------------------------------------------------------------------------- |  | ----------------------- | --------
|                                                                             |  | 2000                    |         
|Revenues:                                                                    |  |                         |         
|Application management services                                              |  | $                       | 15,326  
|Professional services and other                                              |  |                         | 29,620  
|                                                                             |  |                         |         
|Total revenues                                                               |  |                         | 44,946  
|Costs and Expenses:                                                          |  |                         |         
|Application management services *                                            |  |                         | 32,564  
|Professional services and other *                                            |  |                         | 27,095  
|Research and development *                                                   |  |                         | 11,882  
|Sales and marketing *                                                        |  |                         | 34,090  
|General and administrative *                                                 |  |                         | 24,586  
|Restructuring charges                                                        |  |                         |        
|Amortization of stock based compensation                                     |  |                         | 15,657  
|Amortization of goodwill                                                     |  |                         | 2,236   
|Amortization of other intangibles                                            |  |                         |        
|                                                                             |  |                         |         
|Total operating expenses                                                     |  |                         | 148,110 
|                                                                             |  |                         |         
|Loss from operations                                                         |  |                         | (103,164
|Interest and other income                                                    |  |                         | 5,414   
|Interest and other expense                                                   |  |                         | (2,073  
|Tax benefit                                                                  |  |                         |        
|                                                                             |  |                         |         
|Net loss                                                                     |  |                         | (99,823 
|Series E beneficial conversion charge                                        |  |                         | (20,158 
|                                                                             |  |                         |         
|Net loss attributable to common stockholders                                 |  | $                       | (119,981
|                                                                             |  |                         |         
|Basic and diluted net loss per share                                         |  | $                       | (5.15   
|                                                                             |  |                         |         
|Shares used in computationbasic and diluted                                 |  |                         | 23,290  
|                                                                             |  |                         |         
|                                                                            
|*
Amortization of stock-based compensation not included in expense line item
|Application management services                                              |  | $                       | 579     
|Professional services and other                                              |  |                         |        
|Research and development                                                     |  |                         | 1,591   
|Sales and marketing                                                          |  |                         | 4,204   
|General and administrative                                                   |  |                         | 9,283   
|                                                                             |  |                         |         
|Total amortization of stock-based compensation                               |  | $                       | 15,657  
|                                                                             |  |                         |         



See
accompanying notes to financial statements.



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CORIO, INC.

STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS

(in thousands)



|                                                                                     |  | Preferred Stock |   |  | Common Stock |     | Additional Paid-in Capital |        |        | Note Receivable from Stockholder |        |   | Deferred Stock-Based Compensation |  |   | Accumulated Other Comprehensive Income |   |  | Retained Earnings (Deficit) |     |   | Total Stockholders Equity |   |         | Comprehensive Loss | 
|------------------------------------------------------------------------------------ |  | --------------- | - |  | ------------ | --- | -------------------------- | ------ | ------ | -------------------------------- | ------ | - | --------------------------------- |  | - | -------------------------------------- | - |  | --------------------------- | --- | - | -------------------------- | - | ------- | ------------------ | 
|                                                                                     |  | Shares          |   |  | Amount       |     |                            | Shares |        |                                  | Amount |   |                                   |  |   |                                        |   | 
|Balance at December 31, 1999                                                         |  | 29,965          |   |  | $            | 30  |                            |        | 1,575  |                                  |        | $ | 2                                 |  | $ | 99,649                                 |   |  | $                           | (15 | ) |                            | $ | (14,981 | )                  | 
|Issuance of common stock warrants                                                    |  |                |   |  |              |    |                            |        |       |                                  |        |   |                                  |  |   | 766                                    |   |  |                             |    |   |                            |   |        |                    | 
|Conversion of warrants to common stock                                               |  |                |   |  |              |    |                            |        | 961    |                                  |        |   | 1                                 |  |   | (1                                     | ) |  |                             |    |   |                            |   |        |                    | 
|Issuance of common stock in initial public offering, net of issuance costs of
$2,035 |  |                |   |  |              |    |                            |        | 10,000 |                                  |        |   | 10                                |  |   | 128,155                                |   |  |                             |    |   |                            |   |        |                    | 
|Conversion of series A preferred stock to common stock                               |  | (12,220         | ) |  |              | (12 | )                          |        | 12,220 |                                  |        |   | 12                                |  |   |                                       |   |  |                             |    |   |                            |   |        |                    | 
|Conversion of series B preferred stock to common stock                               |  | (10,640         | ) |  |              | (11 | )                          |        | 10,640 |                                  |        |   | 11                                |  |   |                                       |   |  |                             |    |   |                            |   |        |                    | 
|Conversion of series C preferred stock to common stock                               |  | (7,105          | ) |  |              | (7  | )                          |        | 7,105  |                                  |        |   | 7                                 |  |   |                                       |   |  |                             |    |   |                            |   |        |                    | 
|Conversion of series E preferred stock to common stock                               |  |                |   |  |              |    |                            |        | 5,333  |                                  |        |   | 5                                 |  |   | 54,455                                 |   |  |                             |    |   |                            |   |        |                    | 
|Remeasurement and amortization of performance-based stock warrants                   |  |                |   |  |              |    |                            |        |       |                                  |        |   |                                  |  |   | 248                                    |   |  |                             |    |   |                            |   |        |                    | 
|Issuance of common stock                                                             |  |                |   |  |              |    |                            |        | 9      |                                  |        |   |                                  |  |   | 56                                     |   |  |                             |    |   |                            |   |        |                    | 
|Issuance of common stock upon exercise of stock options                              |  |                |   |  |              |    |                            |        | 1,445  |                                  |        |   | 1                                 |  |   | 1,466                                  |   |  |                             |    |   |                            |   |        |                    | 
|Issuance of stock options to non-employees                                           |  |                |   |  |              |    |                            |        |       |                                  |        |   |                                  |  |   | 348                                    |   |  |                             |    |   |                            |   |        |                    | 
|Deferred stock-based compensation                                                    |  |                |   |  |              |    |                            |        |       |                                  |        |   |                                  |  |   | 13,910                                 |   |  |                             |    |   |                            |   | (13,910 | )                  | 
|Amortization of deferred stock-based compensation                                    |  |                |   |  |              |    |                            |        |       |                                  |        |   |                                  |  |   |                                       |   |  |                             |    |   |                            |   | 15,657  |                    | 
|Proceeds from note receivable from stockholder                                       |  |                |   |  |              |    |                            |        |       |                                  |        |   |                                  |  |   |                                       |   |  |                             | 15  |   |                            |   |        |                    | 
|Net loss                                                                             |  |                |   |  |              |    |                            |        |       |                                  |        |   |                                  |  |   |                                       |   |  |                             |    |   |                            |   |        |                    | 
|                                                                                     |  |                 |   |  |              |     |                            |        |        |                                  |        |   |                                   |  |   |                                        |   |  |                             |     |   |                            |   |         |                    | 
|Balance at December 31, 2000                                                         |  |                |   |  |              |    |                            |        | 49,288 |                                  |        |   | 49                                |  |   | 299,052                                |   |  |                             |    |   |                            |   | (13,234 | )                  | 
|Repurchase of common stock                                                           |  |                |   |  |              |    |                            |        | (100   | )                                |        |   |                                  |  |   | (1                                     | ) |  |                             |    |   |                            |   |        |                    | 
|Conversion of warrants to common stock                                               |  |                |   |  |              |    |                            |        | 420    |                                  |        |   |                                  |  |   |                                       |   |  |                             |    |   |                            |   |        |                    | 
|Remeasurement and amortization of performance-based stock warrants                   |  |                |   |  |              |    |                            |        |       |                                  |        |   |                                  |  |   | 164                                    |   |  |                             |    |   |                            |   |        |                    | 
|Issuance of common stock upon exercise of stock options                              |  |                |   |  |              |    |                            |        | 4,747  |                                  |        |   | 5                                 |  |   | 211                                    |   |  |                             |    |   |                            |   |        |                    | 
|Issuance of common stock under employee stock purchase plan                          |  |                |   |  |              |    |                            |        | 710    |                                  |        |   | 1                                 |  |   | 1,520                                  |   |  |                             |    |   |                            |   |        |                    | 
|Deferred stock-based compensation                                                    |  |                |   |  |              |    |                            |        |       |                                  |        |   |                                  |  |   | 5,332                                  |   |  |                             |    |   |                            |   | (5,332  | )                  | 
|Amortization of deferred stock-based compensation                                    |  |                |   |  |              |    |                            |        |       |                                  |        |   |                                  |  |   | (8,006                                 | ) |  |                             |    |   |                            |   | 13,105  |                    | 
|Change in unrealized gain on investments                                             |  |                |   |  |              |    |                            |        |       |                                  |        |   |                                  |  |   |                                       |   |  |                             |    |   |                            |   |        |                    | 
|Net loss                                                                             |  |                |   |  |              |    |                            |        |       |                                  |        |   |                                  |  |   |                                       |   |  |                             |    |   |                            |   |        |                    | 
|                                                                                     |  |                 |   |  |              |     |                            |        |        |                                  |        |   |                                   |  |   |                                        |   |  |                             |     |   |                            |   |         |                    | 
|Balance at December 31, 2001                                                         |  |                |   |  |              |    |                            |        | 55,065 |                                  |        |   | 55                                |  |   | 298,272                                |   |  |                             |    |   |                            |   | (5,461  | )                  | 
|Remeasurement and amortization of performance-based stock warrants                   |  |                |   |  |              |    |                            |        |       |                                  |        |   |                                  |  |   | 11                                     |   |  |                             |    |   |                            |   |        |                    | 
|Issuance of common stock upon exercise of stock options                              |  |                |   |  |              |    |                            |        | 305    |                                  |        |   |                                  |  |   | 104                                    |   |  |                             |    |   |                            |   |        |                    | 
|Issuance of common stock under employee stock purchase plan                          |  |                |   |  |              |    |                            |        | 1,146  |                                  |        |   | 1                                 |  |   | 688                                    |   |  |                             |    |   |                            |   |        |                    | 
|Deferred stock-based compensation                                                    |  |                |   |  |              |    |                            |        |       |                                  |        |   |                                  |  |   | (2,255                                 | ) |  |                             |    |   |                            |   | 2,255   |                    | 
|Amortization of deferred stock-based compensation                                    |  |                |   |  |              |    |                            |        |       |                                  |        |   |                                  |  |   |                                       |   |  |                             |    |   |                            |   | 2,347   |                    | 
|Change in unrealized gain (loss) on investments                                      |  |                |   |  |              |    |                            |        |       |                                  |        |   |                                  |  |   |                                       |   |  |                             |    |   |                            |   |        |                    | 
|Net loss                                                                             |  |                |   |  |              |    |                            |        |       |                                  |        |   |                                  |  |   |                                       |   |  |                             |    |   |                            |   |        |                    | 
|                                                                                     |  |                 |   |  |              |     |                            |        |        |                                  |        |   |                                   |  |   |                                        |   |  |                             |     |   |                            |   |         |                    | 
|Balance at December 31, 2002                                                         |  |                |   |  | $            |    |                            |        | 56,516 |                                  |        | $ | 56                                |  | $ | 296,820                                |   |  | $                           |    |   |                            | $ | (859    | )                  | 
|                                                                                     |  |                 |   |  |              |     |                            |        |        |                                  |        |   |                                   |  |   |                                        |   |  |                             |     |   |                            |   |         |                    | 



See
accompanying notes to financial statements.



46



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|CORIO, INC. | FORM 10-K
|----------- | ---------





CORIO, INC.

STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                |  | Year Ended December 31, |        
|------------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                                |  | 2000                    |        
|Cash flows from operating activities:                                           |  |                         |        
|Net loss                                                                        |  | $                       | (99,823
|Adjustments to reconcile net loss to net cash used in operating
activities:     |  |                         |        
|Depreciation and amortization                                                   |  |                         | 8,761  
|Asset impairment charge                                                         |  |                         |       
|Amortization of goodwill and other intangibles                                  |  |                         | 2,233  
|Amortization of deferred stock-based compensation                               |  |                         | 15,657 
|Compensation for grants of stock, options and warrants in exchange for
services |  |                         | 2,212  
|Loss on retirement of assets                                                    |  |                         |       
|Changes in operating assets and liabilities:                                    |  |                         |        
|Accounts receivable                                                             |  |                         | (4,839 
|Prepaid expenses and other current assets                                       |  |                         | 209    
|Accounts payable and accrued expenses                                           |  |                         | 9,197  
|Deferred revenue                                                                |  |                         | 1,308  
|Other liabilities                                                               |  |                         | 694    
|                                                                                |  |                         |        
|Net cash used in operating activities                                           |  |                         | (64,391
|Cash flows from investing activities:                                           |  |                         |        
|Purchase of short-term investments                                              |  |                         | (80,326
|Sales of short-term investments                                                 |  |                         |       
|(Increase) decrease in restricted cash                                          |  |                         |       
|Purchase of property and equipment                                              |  |                         | (10,471
|Other assets                                                                    |  |                         | (3,223 
|Cash received from termination fee netted against acquisition                   |  |                         |       
|Cash paid for acquisition                                                       |  |                         |       
|                                                                                |  |                         |        
|Net cash (used in) provided by investing activities                             |  |                         | (94,020
|Cash flows from financing activities:                                           |  |                         |        
|Proceeds from issuance of preferred stock, net                                  |  |                         | 54,450 
|Proceeds from sale of common stock and exercise of stock options                |  |                         | 129,374
|Proceeds from note receivable from stockholder                                  |  |                         | 15     
|Payments on debt obligations                                                    |  |                         | (4,150 
|                                                                                |  |                         |        
|Net cash provided by (used in) financing activities                             |  |                         | 179,689
|                                                                                |  |                         |        
|Net increase (decrease) in cash and cash equivalents                            |  |                         | 21,278 
|Cash and cash equivalents, beginning of period                                  |  |                         | 37,177 
|                                                                                |  |                         |        
|Cash and cash equivalents, end of period                                        |  | $                       | 58,455 
|                                                                                |  |                         |        
|Supplemental disclosure of cash flow information:                               |  |                         |        
|Cash paid for interest                                                          |  | $                       | 1,321  
|                                                                                |  |                         |        
|Supplemental non-cash investing and financing activities:                       |  |                         |        
|Acquisition of property and equipment under capital leases                      |  | $                       | 12,131 
|                                                                                |  |                         |        
|Issuance of preferred stock and common stock warrants                           |  | $                       | 766    
|                                                                                |  |                         |        
|Deferred stock-based compensation                                               |  | $                       | 13,910 
|                                                                                |  |                         |        
|Issuance of stock and options for services                                      |  | $                       | 404    
|                                                                                |  |                         |        
|Unrealized gain (loss) on investments                                           |  | $                       |       
|                                                                                |  |                         |        



See
accompanying notes to financial statements.



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|CORIO, INC. | FORM 10-K
|----------- | ---------





CORIO, INC.

NOTES TO 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.



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, 2002 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, 2001 and 2002, all of the Companys
investments had contractual maturities within 18 months. As of December 31, 2001 and 2002, all investments were considered available-for-sale securities and consisted of the following (in thousands):



|December 31, 2002:    |  | Cost |        | Unrealized Gain (Loss) |   | Estimated Fair Value
|--------------------- |  | ---- | ------ | ---------------------- | - | --------------------
|Government securities |  | $    | 7,470  |                        | $ | 29                  
|Corporate bonds       |  |      | 9,463  |                        |   | 69                  
|                      |  |      |        |                        |   |                     
|                      |  | $    | 16,933 |                        | $ | 98                  
|                      |  |      |        |                        |   |                     



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|CORIO, INC. | FORM 10-K
|----------- | ---------



CORIO, INC.

NOTES TO FINANCIAL STATEMENTS(Continued)



|December 31, 2001:      |  | Cost |        | Unrealized Gain (Loss) |   | Estimated Fair Value
|----------------------- |  | ---- | ------ | ---------------------- | - | --------------------
|Government securities   |  | $    | 11,410 |                        | $ | 23                  
|U.S. Treasury notes     |  |      | 3,092  |                        |   | 6                   
|Auction rate securities |  |      | 5,000  |                        |   |                    
|Corporate bonds         |  |      | 21,957 |                        |   | 343                 
|                        |  |      |        |                        |   |                     
|                        |  | $    | 41,459 |                        | $ | 372                 
|                        |  |      |        |                        |   |                     



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, 2002, the Company held 84% of its cash
and cash equivalents and short-term investments with one financial institution. For customer concentrations, see Note 14.



Fair value of financial instruments



The carrying amount of the Companys financial instruments, which includes accounts receivable, accounts payable, accrued liabilities
and debt obligations approximate their fair values at December 31, 2001 and 2002 due to their short maturity.



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, |         
|--------------------------------------------- |  | ----------------------- | --------
|                                              |  | 2000                    |         
|Net loss as reported                          |  | $                       | (119,981
|Goodwill amortization                         |  |                         | 2,236   
|                                              |  |                         |         
|Adjusted net loss                             |  | $                       | (117,745
|                                              |  |                         |         
|Reported net loss per sharebasic and diluted |  | $                       | (5.15   
|Goodwill amortization                         |  |                         | 0.09    
|Adjusted net loss per sharebasic and diluted |  |                         | (5.06   



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|CORIO, INC. | FORM 10-K
|----------- | ---------



CORIO, INC.

NOTES TO FINANCIAL STATEMENTS(Continued)





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. Valuation allowances are established for any tax benefits for which future realization is uncertain.



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.



Effective July 1, 2000, the Company has adopted Financial Accounting Standards Board Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensationan Interpretation of APB No. 25 (FIN No. 44). The Companys adoption of FIN No. 44 has not had a material impact on its financial statements, cashflows or results of operations. 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, 2000 |          |   | Year Ended December 31, 2001 |   |         | Year Ended December 31, 2002 | 
|---------------------------------------------------------------------------------------------------------- |  | ---------------------------- | -------- | - | ---------------------------- | - | ------- | ---------------------------- | 
|Net loss as reported                                                                                       |  | $                            | (99,823  | ) |                              | $ | (63,875 | )                            | 
|Add stock-based employee compensation expense included in reported net
loss                                |  |                              | 15,657   |   |                              |   | 5,099   |                              | 
|Deduct total stock-based employee compensation determined under the fair-value-based
method for all awards |  |                              | (22,008  | ) |                              |   | (18,512 | )                            | 
|                                                                                                           |  |                              |          |   |                              |   |         |                              | 
|Pro forma net loss                                                                                         |  | $                            | (106,174 | ) |                              | $ | (77,288 | )                            | 
|                                                                                                           |  |                              |          |   |                              |   |         |                              | 
|Basic and diluted net loss per share:                                                                      |  |                              |          |   |                              |   |         |                              | 
|As reported                                                                                                |  | $                            | (5.15    | ) |                              | $ | (1.27   | )                            | 
|Pro forma                                                                                                  |  |                              | (5.42    | ) |                              |   | (1.54   | )                            | 



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|CORIO, INC. | FORM 10-K
|----------- | ---------



CORIO, INC.

NOTES TO FINANCIAL STATEMENTS(Continued)





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: no dividends; expected option term of four years; risk free interest rates of 6.03% for the year ended December 31, 2000, 4.71% for the year ended December 31, 2001 and 3.37% for the year ended December 31, 2002, and
expected volatility of 67% for the year ended December 31, 2000, 90% for the year ended December 31, 2001 and 105% for the year ended December 31, 2002.



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



|2000 |  | $4.97
|---- |  | -----
|2001 |  | $1.06
|2002 |  | $0.66



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: no dividends; expected
option term of 0.5 to 2 years; risk free interest rates of 5.61% for the year ended December 31, 2000, 3.17% for the year ended December 31, 2001 and 1.58% for the year ended December 31, 2002; and expected volatility of 90% for the year ended
December 31, 2000, 90% for the year ended December 31, 2001 and 105% for the year ended December 31, 2002.



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



|2000 |  | $7.30
|---- |  | -----
|2001 |  | $0.31
|2002 |  | $0.29



Impairment of long-lived assets



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 presently 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.



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CORIO, INC.

NOTES TO FINANCIAL STATEMENTS(Continued)





Application management services revenue consists of monthly recurring fees for ongoing services as well as start-up fees which are recognized as the services are performed. We also recognize customer prepayments for application
management services revenues over the contract term. In addition, fees for support services, which are 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. Our customers generally do not
have the right to take possession of the software at any time during the application management services agreement. Contracts for application management services include monthly or quarterly minimum volume commitments by the Companys customers
and fees for actual volume usage. Minimum volume customer commitments are recognized as they become due and payable. Actual volume usage that exceeds designated minimums are recognized as revenues when amounts due are earned by the Company.



Professional services and other revenues include
revenues from consulting services, implementation services and training. 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 known. Revenue from customer training and education are recognized at the date the services are performed.



The Company regularly monitors the credit worthiness of its
customers and designate certain customers, who we anticipate as credit risks, as cash basis customers. The Company uses such criteria as the customers payment history, accounts receivable status and financial health to determine the
customers credit worthiness. For customers deemed as credit risks, revenue is recognized on the date when the payment for services is received. Revenue could be affected based on the timing of payments by cash basis customers as well as the
change in composition of the cash basis customers. The Company recognized revenue of $17.2 million, $16.6 million and $6.4 million for payments from cash basis customers in fiscal 2002, 2001 and 2000, respectively.



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 2000,
$336,000 and $1,049,000, respectively, in reimbursed application and professional services expenses have been reclassified 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. For fiscal 2002, the Company recorded $859,000 and $1.1 million of reimbursed application and professional services expenses, respectively, as revenues.



Advertising costs



Advertising costs are expensed as incurred and totaled
$2,872,000, $472,000 and $153,000 for the years ended December 31, 2000, 2001 and 2002 respectively.



Comprehensive loss



Comprehensive loss, as defined, includes all changes in equity during a period from non-owner sources. During 2001 and 2002, the
Companys comprehensive loss included net loss and unrealized gain (loss) on



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CORIO, INC.

NOTES TO FINANCIAL STATEMENTS(Continued)



investments. The tax effect of the unrealized gain (loss) was insignificant. The Companys comprehensive loss in 2001 and 2002 was $63.5
million and $35.1 million, respectively. For fiscal year 2000, the Companys comprehensive loss was equal to its net loss.



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):



|                                   |  | Year ended December 31,        
|---------------------------------- |  | -------------------------------
|                                   |  | 2000                           
|                                   |  | Weighted Average Exercise Price
|Preferred stock warrants           |  | $                              
|Common stock subject to repurchase |  | $                              
|Common stock options and warrants  |  | $                              



Reclassifications



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



Recent accounting pronouncements



In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the Company to record
the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or
normal use of the assets. The Company also records a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each
period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not expected to have a material effect
on the Companys financial statements.



In
August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, 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



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|CORIO, INC. | FORM 10-K
|----------- | ---------



CORIO, INC.

NOTES TO FINANCIAL STATEMENTS(Continued)



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 presently required. The provisions of this standard did not have a significant effect on the Companys financial position or operating
results.



In April 2002, the FASB issued SFAS No.
145, Recision of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections Under Statement 4, pursuant to which all gains and losses from extinguishments of debt were required to be aggregated and, if
material, classified as an extraordinary item, net of related income tax effect. This statement eliminates Statement 4 and, thus, the exception to applying Opinion 30 to all gains and losses related to extinguishments of debt. The provisions of this
standard are not expected to have a significant effect on the Companys financial position or operating results.



In June 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal Activities (SFAS 146). SFAS 146 addresses significant
issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance of Emerging Issues Task Force
(EITF) Issue No. 94-3,Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 will be effective in 2003. The adoption of
SFAS 146 is not expected to have a material impact on the Companys financial results.



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 standalone 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 will be applicable to agreements entered into in fiscal periods beginning after June 15, 2003 with early adoption permitted. The provisions of this Consensus are not expected to have a significant effect on the
Companys financial position or operating results.



In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5,
57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. This
Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the interpretation are
applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on our financial statements. The disclosure requirements are effective for financial statements of interim or annual periods ending
after December 15, 2002.



In December 2002, the
FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. This statement amends SFAS No. 123, Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the
method of accounting for



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|----------- | ---------



CORIO, INC.

NOTES TO FINANCIAL STATEMENTS(Continued)



stock-based employee compensation and the effect of the method used on reported results. The disclosure provisions of this standard are
effective for fiscal years ending after December 15, 2002 and have been incorporated into these financial statements and accompanying footnotes.



In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No.
51. This interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. The interpretation applies immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. For public enterprises with a variable interest in a variable interest entity created before February 1, 2003, the interpretation applies to
that enterprise no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The application of this interpretation is not expected to have a material effect on the Companys financial statements,
The interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that we will consolidate or disclose information about variable interest entities when the interpretation becomes
effective.



Note 2Business Combination



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 total purchase price exceeded the estimated fair values of the assets acquired and
liabilities assumed, 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 |  
|                                          |  |   |        |  



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|----------- | ---------



CORIO, INC.

NOTES TO FINANCIAL STATEMENTS(Continued)





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, 2002 was $497,000.



The Companys statement of operations includes the operations of QCS from September 20, 2002 to December 31, 2002. The unaudited pro forma financial information in the following table illustrates the combined results of the
Companys operations and the operations of QCS for the years ended December 31, 2001 and 2002. The unaudited pro forma financial information is based upon a number of assumptions and estimates, and is presented for informational purposes. The
unaudited 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, 2001 nor is it necessarily indicative of the future results of
the operations of the combined entity.



Unaudited Pro Forma
Combined Condensed Statement of Operations



|                                             |  | Year Ended December 31,                 |         
|-------------------------------------------- |  | --------------------------------------- | --------
|                                             |  | 2001                                    |         
|                                             |  | (Unaudited)                             |         
|                                             |  | (in thousands except per share amounts) |         
|Total revenues                               |  | $                                       | 102,060 
|Total operating expenses                     |  |                                         | 228,422 
|                                             |  |                                         |         
|Loss from operations                         |  |                                         | (126,362
|Impairment loss                              |  |                                         | (8,535  
|Loss on disposal of assets                   |  |                                         | (280    
|Interest and other income                    |  |                                         | 5,173   
|Interest and other expense                   |  |                                         | (2,567  
|                                             |  |                                         |         
|Net loss                                     |  | $                                       | (132,571
|                                             |  |                                         |         
|Basic and diluted net loss per share         |  | $                                       | (2.64   
|Shares used in computationbasic and diluted |  |                                         | 50,296  



The pro
forma financial information includes the recording of an identifiable intangible asset of approximately $2.7 million for acquired customer contracts. This asset will be amortized over an estimated useful life of 18 months. The pro forma financial
information includes adjustments to reflect the amortization expense of the identifiable intangible assets as if QCS had been acquired on the first day of the earliest period presented. As the total purchase price exceeded the estimated fair values
of the assets acquired and liabilities assumed, no goodwill was recorded as a result of this transaction.



The pro forma financial information reflects a reduction to interest income related to the $16.3 million in cash paid to acquire QCS. The
interest rate earned on the Companys cash and cash equivalents is assumed to be 3%.



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CORIO, INC.

NOTES TO FINANCIAL STATEMENTS(Continued)





Note 3Property
and Equipment



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



|                                          |  | December 31, 2001 |         |   | December 31, 2002 |  
|----------------------------------------- |  | ----------------- | ------- | - | ----------------- | -
|Computer equipment                        |  | $                 | 25,256  |   |                   | $
|Computer software                         |  |                   | 11,936  |   |                   |  
|Furniture and fixtures                    |  |                   | 2,104   |   |                   |  
|Leasehold improvements                    |  |                   | 2,441   |   |                   |  
|                                          |  |                   |         |   |                   |  
|Total                                     |  |                   | 41,737  |   |                   |  
|Accumulated depreciation and amortization |  |                   | (21,119 | ) |                   |  
|                                          |  |                   |         |   |                   |  
|Property and equipment, net               |  | $                 | 20,618  |   |                   | $
|                                          |  |                   |         |   |                   |  



Property
and equipment includes assets under capital leases of $16,894,000 at December 31, 2001, and $17,302,000 at December 31, 2002. Accumulated depreciation of assets under capital leases totaled $7,627,000 at December 31, 2001 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, 2001 and 2002, the Company had outstanding invoices of $2,451,000 and
$3,844,000 related to customers for which the Company deemed as credit risks. 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, 2001 and 2002 was $999,000, and $1,443,000, respectively, of unbilled receivables under various professional services contracts.



Accrued liabilities consist of the following (in thousands):



|                                                      |  | December 31, 2001 |       | December 31, 2002
|----------------------------------------------------- |  | ----------------- | ----- | -----------------
|Accrued license fees                                  |  | $                 | 1,895 |                  
|Accrued compensation and related benefits             |  |                   | 3,468 |                  
|Assumed liability in connection with DSCI acquisition |  |                   | 400   |                  
|Contributions to employee stock purchase plan         |  |                   | 559   |                  
|Other                                                 |  |                   | 3,373 |                  
|                                                      |  |                   |       |                  
|Total                                                 |  | $                 | 9,695 |                  
|                                                      |  |                   |       |                  



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CORIO, INC.

NOTES TO FINANCIAL STATEMENTS(Continued)





Note
5Restructuring Charge



The following
table sets forth the Companys accruals in fiscal 2001 for the restructuring expense and charges taken against the accrual in fiscal 2001 and the remaining restructuring accrual balance at December 31, 2001 (in thousands):



|                         |  | Balance December 31, 2000 |   | Additions |   | Cash Paid |  | Balance December 31, 2001
|------------------------ |  | ------------------------- | - | --------- | - | --------- |  | -------------------------
|Office lease obligations |  | $                         |  |           | $ | 435       |  | $                        
|Employee severance       |  |                           |  |           |   | 1,248     |  |                          
|Asset abandonments       |  |                           |  |           |   | 2,154     |  |                          
|                         |  |                           |   |           |   |           |  |                          
|                         |  | $                         |  |           | $ | 3,837     |  | $                        
|                         |  |                           |   |           |   |           |  |                          



The net
asset abandonment liability at December 31, 2001 related to assets under equipment leases. The employee severance liability at December 31, 2001 was paid in the first quarter of fiscal 2002.



The following table sets forth the charges added and taken
against the restructuring accrual during fiscal 2002 and the remaining restructuring accrual balance at December 31, 2002 (in thousands):



|                         |  | Balance December 31, 2001 |     | Additions |   | Cash Paid |  | Balance December 31, 2002
|------------------------ |  | ------------------------- | --- | --------- | - | --------- |  | -------------------------
|Office lease obligations |  | $                         |    |           | $ | 3,796     |  | $                        
|Employee severance       |  |                           | 106 |           |   | 712       |  |                          
|Asset abandonments       |  |                           | 480 |           |   | 109       |  |                          
|                         |  |                           |     |           |   |           |  |                          
|                         |  | $                         | 586 |           | $ | 4,617     |  | $                        
|                         |  |                           |     |           |   |           |  |                          



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, net of future
estimated sublease income of $1,269,000, associated with a portion of the remaining lease stream of the unoccupied space. The amount will be paid over the remaining term of the lease which expires in 2010.



Approximately $430,000 of the employee severance liability at
December 31, 2002 is estimated to be paid in the first quarter of fiscal 2003. The asset abandonments liability at December 31, 2002 relates to assets under equipment leases and financing agreements and will be paid as part of the buyouts at the end
of the leases in 2003 through 2004.



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CORIO, INC.

NOTES TO FINANCIAL STATEMENTS(Continued)





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, |        
|---------------------------------------------- |  | ----------------------- | -------
|                                               |  | 2000                    |        
|Federal tax at statutory rate                  |  | $                       | (33,939
|Excess of amount provided over amount required |  |                         |       
|State taxes                                    |  |                         | 15     
|Amortization of intangibles                    |  |                         | 760    
|Net operating loss not benefited               |  |                         | 27,799 
|Nondeductible expenses                         |  |                         | 134    
|Nondeductible stock compensation               |  |                         | 5,231  
|                                               |  |                         |        
|Total income tax expense                       |  | $                       |       
|                                               |  |                         |        



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, 2001 |         |   | December 31, 2002 |  
|------------------------------------------- |  | ----------------- | ------- | - | ----------------- | -
|Deferred tax assets:                        |  |                   |         |   |                   |  
|Accruals and reserves                       |  | $                 | 750     |   |                   | $
|State income taxes                          |  |                   | 5       |   |                   |  
|Plant and equipment                         |  |                   |        |   |                   |  
|Net operating loss and credit carryforwards |  |                   | 70,048  |   |                   |  
|                                            |  |                   |         |   |                   |  
|Gross deferred tax assets                   |  |                   | 70,803  |   |                   |  
|Valuation allowance                         |  |                   | (68,071 | ) |                   |  
|                                            |  |                   |         |   |                   |  
|Total deferred tax assets                   |  |                   | 2,732   |   |                   |  
|Deferred tax liability:                     |  |                   |         |   |                   |  
|Property and equipment                      |  |                   | (2,732  | ) |                   |  
|                                            |  |                   |         |   |                   |  
|Net 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
net change in the total valuation allowance for the years ended December 31, 2000, 2001 and 2002 was an increase of $32,483,000, $21,897,000 and $11,284,000 respectively.



The Company has net operating loss carryforwards for federal and state income tax purposes of approximately
$204,063,000 and $135,038,000 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 2022. State net operating loss carryforwards expire beginning in 2009.



Included in gross deferred tax assets above is approximately $1,028,000 related to stock option compensation for which the benefit, when
realized, will be recorded directly to stockholders equity.





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CORIO, INC.

NOTES TO FINANCIAL STATEMENTS(Continued)



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 $5,476,000, $5,540,000 and $4,462,000 for the years ended December 31, 2000, 2001 and 2002 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, 2001 and 2002 is $917,000, 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):



|Years Ending December 31,                       |  | Capital Leases |        |   | Operating Leases
|----------------------------------------------- |  | -------------- | ------ | - | ----------------
|2003                                            |  | $              | 4,704  |   |                 
|2004                                            |  |                | 363    |   |                 
|2005                                            |  |                | 43     |   |                 
|2006                                            |  |                |       |   |                 
|2007                                            |  |                |       |   |                 
|2008 and thereafter                             |  |                |       |   |                 
|                                                |  |                |        |   |                 
|Total minimum lease payments                    |  |                | 5,110  |   |                 
|                                                |  |                |        |   |                 
|Less amount representing interest               |  |                | (251   | ) |                 
|                                                |  |                |        |   |                 
|Present value of minimum lease payments         |  |                | 4,859  |   |                 
|Less current portion                            |  |                | (4,460 | ) |                 
|                                                |  |                |        |   |                 
|Capital lease obligations, less current portion |  | $              | 399    |   |                 
|                                                |  |                |        |   |                 



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, 2002, $272,000
is outstanding under these notes and is classified as a current liability in the accompanying balance sheet.



Lease guarantees



In December 1999, the Company entered into a guarantee with a lender for a maximum $7 million letter of credit as security on a facility
lease. The guarantee was collateralized by certain assets of the Company. In connection with the guarantee, the Company granted the lender a right to purchase shares of series C preferred



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CORIO, INC.

NOTES TO FINANCIAL STATEMENTS(Continued)



stock at an exercise price of $6.50 per share. In January 2001, this letter of credit was replaced with a new $7 million letter of
credit from another lender. The new letter of credit is collateralized by a $7 million cash deposit. The cash deposit is recorded as restricted cash on the balance sheet. Upon replacement of the letter of credit, the unamortized fair value of the
warrant was charged to interest expense.



In
connection with a facility lease, the Company is required to provide a $717,000 letter of credit as security for the lease as of December 31, 2002. A $717,000 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 recognized immediately. At
December 31, 2002, the Company has an $821,000 provision for identified losses on contracts in progress. The corresponding provision at December 31, 2001 was $503,000.



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.



The Company intends to vigorously defend against this action.
Any legal proceeding is subject to inherent uncertainty, and it is not possible to predict the ultimate outcome. Therefore, it is the position of the Companys management based on a review, including a review by outside counsel, that it is not
possible to estimate the amount of the probable loss, if any, to the Company that might result from some adverse aspects of a judgment in this complaint. Accordingly, no loss accrual for this matter has been made in the Companys financial
statements.



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, 2002, no shares of preferred stock are issued or outstanding.



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CORIO, INC.

NOTES TO FINANCIAL STATEMENTS(Continued)





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.



Warrants for preferred stock



In December 1998 and in connection with (i) the master lease agreement to purchase equipment, (ii) a $350,000 guarantee for security on a facility lease which expired November 2001, and (iii) a loan
and security agreement for $4,000,000, the Company granted warrants to purchase 186,190 shares, 25,500 shares, and 469,523 shares, respectively, of series A preferred stock at the average of the price of the series A and series B preferred stock.
Series A preferred stock price was $0.47 and was known at December 31, 1998. The series B preferred stock was issued at $2.00 per share in April 1999 and the price was not known at December 31, 1998. The estimated value of the warrant of $539,000
was recorded in the year ended December 31, 1998. Upon issuance of series B preferred stock, the actual fair value was determined and the amount was adjusted to a total adjusted fair value of $1,016,000. As of December 31, 2002, the warrants were
outstanding and exercisable and will expire three years from the closing of the Companys initial public offering of common stock (July 2003). The following assumptions were used in the Black-Scholes fair value calculation: no dividends;
contractual life of seven years; risk-free interest rate of 6.0%; and expected volatility of 60%. The fair value of the warrants is amortized over a period of 42 months to interest expense. Upon the repayment of the $4,000,000 loan and security
agreement in January 2001, the unamortized fair value of the warrant was charged to interest expense.



In December 1999, the Company granted a lender a warrant to purchase 64,615 shares of series C preferred stock at $6.50 per share. The
warrant is exercisable through July 20, 2003. The number of shares into which the warrant was convertible was contingent on the date of the Companys initial public offering. Accordingly, the warrants were valued in July 2000 using the Black
Scholes option pricing model using $14.00 as a fair value of the underlying preferred stock and the following weighted average assumption: no dividends; contractual life of 3 years; risk free interest rate of 7%; and expected volatility of 90%. The
fair value of the warrant of $682,000 is being amortized over forty two months to interest expense.



Upon exercise, all warrants for preferred stock immediately convert to common stock.



Note 9Common Stock



The Companys certificate of incorporation authorized
the Company to issue 50,000,000 shares of $0.001 par value common stock. In April 2000, the Company amended its certificate of incorporation to provide for total authorized capital of 138,000,000 shares of common stock and 44,127,000 shares of
preferred stock. In July 2000, the Company amended its certificate of incorporation to provide for total authorized capital of 200,000,000 shares of common stock and 10,000,000 shares of preferred stock.



In July 2000, the Company completed an initial public offering
of 10 million shares of common stock (Note 10). As of December 31, 2001, an aggregate of 55,065,460 shares were issued and outstanding, including an aggregate of 4,183,857 shares subject to repurchase at a weighted average price of $0.01 per
share. 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.



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CORIO, INC.

NOTES TO FINANCIAL STATEMENTS(Continued)





Common
stock reserved



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



|                                                                                         |  | December 31, 2001 |  | December 31, 2002
|---------------------------------------------------------------------------------------- |  | ----------------- |  | -----------------
|Exercise of outstanding options and warrants                                             |  | 12,186,366        |  | 16,127,139       
|Exercise of preferred stock warrants                                                     |  | 899,674           |  | 745,828          
|Shares available for issuance under employee stock purchase plan                         |  | 1,522,604         |  | 1,752,897        
|Additional shares available for grant under the 1998 and nonstatutory stock option
plans |  | 5,651,210         |  | 4,759,732        
|                                                                                         |  |                   |  |                  
|Total                                                                                    |  | 20,259,854        |  | 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
are repurchaseable under certain circumstances, the fair value of these shares subject to repurchase will be remeasured each reporting period until May 2003, when the repurchase rights lapse. Amortization expense of $544,000, $164,000 and $11,000
was recorded in sales and marketing expense for 2000, 2001 and 2002, 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, 2001 and December 31, 2002 to issue up to 21,457,293 and 24,761,220 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, 2001 and December 31, 2002, 4,183,855 and 2,102,604 shares, respectively, are subject to
repurchase at a weighted average price of $0.01 and $0.01 per share, respectively.



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



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CORIO, INC.

NOTES TO FINANCIAL STATEMENTS(Continued)



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. Options issued under this plan during the year ended December 31, 2001 were 2,718,267 with an average exercise price of $0.01 per share. No options were
issued under this plan in fiscal 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:



|                           |  | Shares Available for Grant |                  |  | Options Outstanding
|-------------------------- |  | -------------------------- | ---------------- |  | -------------------
|                           |  |                            | Number of Shares |  |                    
|Balance, December 31, 1999 |  | 618,467                    |                  |  | 8,754,951          
|Shares reserved for grant  |  | 8,600,000                  |                  |  |                   
|Granted                    |  | (9,220,171                 | )                |  | 9,220,171          
|Exercised                  |  |                           |                  |  | (1,503,968         
|Cancelled                  |  | 3,348,839                  |                  |  | (3,348,839         
|Repurchases                |  | 58,332                     |                  |  |                   
|                           |  |                            |                  |  |                    
|Balance, December 31, 2000 |  | 3,405,467                  |                  |  | 13,122,315         
|Shares reserved for grant  |  | 5,957,293                  |                  |  |                   
|Granted                    |  | (9,154,755                 | )                |  | 9,154,755          
|Exercised                  |  |                           |                  |  | (4,747,499         
|Cancelled                  |  | 5,344,872                  |                  |  | (5,344,872         
|Repurchases                |  | 100,000                    |                  |  |                   
|                           |  |                            |                  |  |                    
|Balance, December 31, 2001 |  | 5,652,877                  |                  |  | 12,184,699         
|Shares reserved for grant  |  | 3,303,927                  |                  |  |                   
|Granted                    |  | (6,502,530                 | )                |  | 6,502,530          
|Exercised                  |  |                           |                  |  | (304,632           
|Cancelled                  |  | 2,305,458                  |                  |  | (2,305,458         
|                           |  |                            |                  |  |                    
|Balance, December 31, 2002 |  | 4,759,732                  |                  |  | 16,077,139         
|                           |  |                            |                  |  |                    



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CORIO, INC.

NOTES TO FINANCIAL STATEMENTS(Continued)





The
following table summarizes information concerning options outstanding as of December 31, 2002:



|                         |  | Options Outstanding |  | Options Exercisable                                
|------------------------ |  | ------------------- |  | ---------------------------------------------------
|Range of Exercise Prices |  | Number of Shares    |  | Weighted Average Remaining Contractual Life (Years)
|$0.05$  0.35            |  | 188,153             |  | 6.27                                               
|$0.40$  0.90            |  | 6,134,459           |  | 9.16                                               
|$1.10$  1.34            |  | 3,942,997           |  | 8.80                                               
|$1.50$  2.50            |  | 2,069,899           |  | 7.68                                               
|$3.50$  3.78            |  | 752,873             |  | 7.74                                               
|$4.00$  4.75            |  | 2,261,435           |  | 7.84                                               
|$6.50$14.25             |  | 727,323             |  | 7.45                                               
|                         |  |                     |  |                                                    
|                         |  | 16,077,139          |  | 8.22                                               
|                         |  |                     |  |                                                    



As of
December 31, 2000, 1,666,661 shares were exercisable at a weighted-average exercise price of $1.18 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, net of forfeitures, the Company recorded a deferred charge for stock-based compensation of $13,910,000 for the year ended December 31, 2000, $5,332,000 for the year ended December 31, 2001 and ($2,255,000) for the year
ended December 31, 2002. Such amounts represent unamortized deferred stock compensation for unvested options that are forfeited upon severance. The deferred charges for employee options are being amortized to expenses using the graded vesting
approach prescribed by FASB Interpretation No. 28, through fiscal year 2004. Amortization of deferred stock-based compensation expense, net of stock options forfeited, was $15,657,000, $5,099,000 and $2,347,000 for the years ended December 31, 2000,
2001 and 2002, respectively.



In connection with
stock options granted to non-employees to purchase common stock, the Company recorded compensation expense of $348,000, $1,600 and none in the years ended December 31, 2000, 2001 and 2002, respectively. Such amounts represent, for non-employee
options, the deemed fair value of the option at the date of vesting.



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 1stand August 1st. Participation in the offering is limited to the lesser of 10% of an employees compensation or $25,000 per year, may be terminated at any time by the
employee and automatically ends upon termination of employment with the Company. A total of 3,608,841 shares of common stock have been reserved for issuance under this plan of which 1,752,897 shares were available for issuance as of December 31,
2002. Shares issued under this plan were 709,601 in 2001 and



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CORIO, INC.

NOTES TO FINANCIAL STATEMENTS(Continued)



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 operating 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 operating segments.



Disaggregated information is as follows (in thousands):



|                                     |  | Application Management Services |         |   | Professional Services |   |        | Unallocated |  |   | Total   |  
|------------------------------------ |  | ------------------------------- | ------- | - | --------------------- | - | ------ | ----------- |  | - | ------- | -
|For the Year Ended December 31, 2000 |  |                                 |         |   |                       |   |        |             |  |   |         |  
|Revenues                             |  | $                               | 15,326  |   |                       | $ | 29,620 |             |  | $ |        |  
|Depreciation and amortization        |  | $                               | 3,271   |   |                       | $ | 239    |             |  | $ | 5,251   |  
|Segment profit (loss)                |  | $                               | (17,238 | ) |                       | $ | 2,525  |             |  | $ | (85,110 | )
|For the Year Ended December 31, 2001 |  |                                 |         |   |                       |   |        |             |  |   |         |  
|Revenues                             |  | $                               | 36,731  |   |                       | $ | 14,840 |             |  | $ |        |  
|Depreciation and amortization        |  | $                               | 9,536   |   |                       | $ | 238    |             |  | $ | 5,145   |  
|Segment loss                         |  | $                               | (3,841  | ) |                       | $ | (1,656 | )           |  | $ | (58,378 | )
|For the Year Ended December 31, 2002 |  |                                 |         |   |                       |   |        |             |  |   |         |  
|Revenues                             |  | $                               | 43,559  |   |                       | $ | 12,585 |             |  | $ |        |  
|Depreciation and amortization        |  | $                               | 9,211   |   |                       | $ | 52     |             |  | $ | 2,249   |  
|Segment profit (loss)                |  | $                               | 506     |   |                       | $ | (1,209 | )           |  | $ | (34,098 | )



The
Company does not allocate all assets to its operating segments, nor does it allocate interest income or interest expense. In addition, the Company has no foreign operations.



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|CORIO, INC. | FORM 10-K
|----------- | ---------



CORIO, INC.

NOTES TO FINANCIAL STATEMENTS(Continued)





Significant customer information is as follows:



|           |  | Percent of Total Revenue     |   |  | Percent of Total Accounts Receivable | 
|---------- |  | ---------------------------- | - |  | ------------------------------------ | 
|           |  | Year Ended December 31, 2000 |   |  | Year Ended December 31, 2001         | 
|Customer A |  | 12                           | % |  |                                     | 
|Customer B |  |                             |   |  |                                     | 
|Customer C |  |                             |   |  |                                     | 
|Customer D |  |                             |   |  |                                     | 
|Customer E |  |                             |   |  |                                     | 



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 connection with the acquisition of DSCI in September 1998, the Company issued a secured subordinated promissory note for $2,328,000 to a stockholder of the Company. The note was not convertible at
the issuance date. The note earned interest at 9.5% per annum and was payable in two equal payments occurring on each of the first two anniversaries of the date of issuance. During 1999, the Company made the first cash payment of $1,336,000
(including principal of $1,110,000 and interest of $226,000) and converted $1,000,000 (including principal of $968,000 and interest of $32,000) into 153,846 shares of series C preferred stock. As of December 31, 1999, the outstanding balance
was $250,000. The outstanding balance of the note and all accrued interest was repaid in fiscal 2000.



In addition, 3,492,000 shares of the Companys series A preferred stock, valued at $1,643,000, was issued to the same stockholder of
the Company as a result of the acquisition of DSCI. Such shares were issued under a restricted stock agreement, whereby the Company has the right to repurchase any unvested shares at a price per share of $0.01. The vesting terms are as follows:
1,746,000 shares vest immediately, 582,000 shares vest within one year, and the remaining 1,164,000 shares vest monthly over 36 months. In February 2000, the Company released 422,400 shares of its series A preferred stock held by the stockholder
from its rights of repurchase which resulted in additional expense of $93,000 for the year ended December 31, 2000.



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. Two directors of the Company are
also directors of PeopleSoft. Pursuant to the agreements, the Company paid a total of approximately $1.7 million, $1.7 million and $614,000 to PeopleSoft in 2000, 2001 and 2002, respectively, and the Company had an accrued liability to PeopleSoft
pursuant to these agreements of approximately $1.8 million as of December 31, 1999. In September 2000, the Company entered into an agreement with PeopleSoft reducing the amount owed at December 31, 1999 under the outsourcer alliance agreement from
$1.8 million to $332,000. This amount was paid in September 2000.



In February 2002, the Company provided a $250,000, 5 year, 4.63% interest bearing loan to the Companys chief operating officer to assist in securing a primary residence. The loan is secured by shares of the
Companys stock owned by the officer. The officer executed a promissory note committing to repay the loan in full at the end of the five year term. In the event the officer terminates his employment with the Company within two years, the



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|CORIO, INC. | FORM 10-K
|----------- | ---------



CORIO, INC.

NOTES TO FINANCIAL STATEMENTS(Continued)



loan and accrued interest become due and payable. During the term of the loan, the Company also agreed to pay the officer up to $45,000 per
year in mortgage assistance related to the officers primary residence. In the event the officer terminates his employment with the Company within two years, the mortgage subsidy payments are to be repaid in full to the Company.



In the ordinary course of business, the Company has recorded
revenue in the year ended December 31, 2000 of $2 million arising from transactions with six companies with which it has common directors. At December 31, 2000 accounts receivable included approximately $602,000 arising from such transactions. In
the year ended December 31, 2001, the Company recorded revenue of $4.4 million arising from transactions with five companies with which it has directors in common. At December 31, 2001, accounts receivable included $70,000 arising from such
transactions. In the year ended December 31, 2002, the Company recorded revenue of $2.3 million arising from transactions with four companies with which it has directors in common. At December 31, 2002, accounts receivable included
$659,000 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) |        
|2002 Quarter Ended:                  |  |                                       |         |   |         |   |         |              |  |   |             |  
|Net revenues                         |  | $                                     | 13,092  |   |         | $ | 11,903  |              |  | $ | 13,381      |  
|Net loss                             |  | $                                     | (8,010  | ) |         | $ | (7,730  | )            |  | $ | (10,228     | )
|Basic and diluted net loss per share |  | $                                     | (0.16   | ) |         | $ | (0.15   | )            |  | $ | (0.19       | )
|Quarterly stock prices:              |  |                                       |         |   |         |   |         |              |  |   |             |  
|High                                 |  | $                                     | 1.62    |   |         | $ | 1.78    |              |  | $ | 1.10        |  
|Low                                  |  | $                                     | 1.05    |   |         | $ | 1.04    |              |  | $ | 0.49        |  
|2001 Quarter Ended:                  |  |                                       |         |   |         |   |         |              |  |   |             |  
|Net revenues                         |  | $                                     | 13,986  |   |         | $ | 11,883  |              |  | $ | 12,679      |  
|Net loss                             |  | $                                     | (19,543 | ) |         | $ | (18,121 | )            |  | $ | (12,385     | )
|Basic and diluted net loss per share |  | $                                     | (0.39   | ) |         | $ | (0.36   | )            |  | $ | (0.25       | )
|Quarterly stock prices:              |  |                                       |         |   |         |   |         |              |  |   |             |  
|High                                 |  | $                                     | 4.44    |   |         | $ | 2.01    |              |  | $ | 1.37        |  
|Low                                  |  | $                                     | 1.75    |   |         | $ | 1.05    |              |  | $ | 0.41        |  

---

|(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.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|CORIO, INC. | FORM 10-K
|----------- | ---------





SCHEDULE II



VALUATION AND QUALIFYING ACCOUNTS

(in thousands)



|                                 |  | Balance at Beginning Of Period |     | Additions Charged to Expense |   | Deductions(1) |  |   | Balance at End of Period
|-------------------------------- |  | ------------------------------ | --- | ---------------------------- | - | ------------- |  | - | ------------------------
|Allowance for Doubtful Accounts: |  |                                |     |                              |   |               |  |   |                         
|Year Ended December 31, 2000     |  | $                              | 233 |                              | $ | 1,706         |  | $ | (1,028                  
|Year Ended December 31, 2001     |  |                                | 911 |                              |   |              |  |   | (535                    
|Year Ended December 31, 2002     |  |                                | 376 |                              |   | 100           |  |   | (73                     

---

|(1) |  | Accounts written off
|--- |  | --------------------



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|CORIO, INC. | FORM 10-K
|----------- | ---------





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.



|      |  |                |  |  |  | CORIO INC.
|----- |  | -------------- |  |  |  | ----------
|     
|Date: |  | March 28, 2003 |  |  |  | By:       
|      |  |                |  |  |  |           
|     
|      |  |                |  |  |  | By:       
|      |  |                |  |  |  |           



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|CORIO, INC. | FORM 10-K
|----------- | ---------





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/    GEORGE
KADIFAGeorge Kadifa                   |  | Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) |  | March 28, 2003
|                                                   
|/s/    BRETT
WHITEBrett White                       |  | Executive Vice President and Chief Financial Officer (Principal Financial Officer)         |  | March 28, 2003
|                                                   
|/s/    GARY
WONGGary Wong                           |  | Controller (Principal Accounting Officer)                                                  |  | March 28, 2003
|                                                   
|/s/    TED E.
SCHLEINTed
E. Schlein                 |  | Director                                                                                   |  | March 28, 2003
|                                                   
|/s/    SHARON D.
GARRETTSharon D. Garrett           |  | Director                                                                                   |  | March 28, 2003
|                                                   
|/s/    GEORGE J. STILL,
JR.George
J. Still, Jr.     |  | Director                                                                                   |  | March 28, 2003
|                                                   
|/s/    ERNEST M. VON
SIMSONErnest M. von Simson     |  | Director                                                                                   |  | March 28, 2003
|                                                   
|/s/    GLENN W. MARSCHEL,
JR.Glenn W.
Marschel, Jr. |  | Director                                                                                   |  | March 28, 2003
|                                                   
|/s/    ANEEL
BHUSRIAneel
Bhusri                     |  | Director                                                                                   |  | March 28, 2003



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|CORIO, INC. | FORM 10-K
|----------- | ---------





CERTIFICATIONS



I, George Kadifa,
certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Corio, Inc.
|-- |  | --------------------------------------------------------------



|2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent functions):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: March 28, 2003



/s/    GEORGE
KADIFAGeorge Kadifa President and Chief Executive Officer




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|CORIO, INC. | FORM 10-K
|----------- | ---------





CERTIFICATIONS



I, Brett White, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Corio, Inc.
|-- |  | --------------------------------------------------------------



|2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent functions):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: March 28, 2003



/s/    BRETT
WHITEBrett White Executive Vice President and Chief Financial
Officer






73