<PAGE>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                               ----------------

                                   Form 10-Q

[Mark One]

[X]Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
   1934 for the quarterly period ended June 30, 2001.

                                       OR

[_]Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
   Act of 1934 for the transition period from                to               .

                         Commission File No. 333-35402

                               ----------------

                                  CORIO, INC.
           (Exact name of the Registrant as specified in its charter)

<TABLE>
<CAPTION>
<S>                                         <C>
                  DELAWARE                                77-0492528
       (State or other jurisdiction of      (I.R.S. Employer Identification Number)
       incorporation or organization)

         959 Skyway Road, Suite 100
           San Carlos, California                            94070
  (Address of principal executive offices)                (Zip Code)
</TABLE>

                                  650-232-3000
            (The Registrant's telephone number, including area code)

                               ----------------

   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 [_]

   As of July 31, 2001, there were 54,352,233 shares of the Registrant's common
stock outstanding.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                                  CORIO, INC.

                               ----------------

       QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2001

                                     Index

<TABLE>
<CAPTION>
                                                                       Page No.
                                                                       --------
 <C>     <S>                                                           <C>
                    PART I. FINANCIAL INFORMATION

 Item 1. Condensed Financial Statements (Unaudited):

         Condensed Balance Sheets
          June 30, 2001 and December 31, 2000.......................       3

         Condensed Statements of Operations
          Three Months Ended June 30, 2001 and 2000 and the Six
          Months Ended
          June 30, 2001 and 2000....................................       4

         Condensed Statements of Cash Flows
          Six Months Ended June 30, 2001 and 2000...................       5

         Notes to Condensed Financial Statements....................       6

 Item 2. Management's Discussion and Analysis of Financial Condition
         and Results of Operations..................................      10

 Item 3. Quantitative and Qualitative Disclosures about Market
         Risk.......................................................      26

                      PART II OTHER INFORMATION

 Item 1. Legal Proceedings..........................................      27

 Item 2. Change in Securities and Use of Proceeds...................      27

 Item 3. Defaults upon Senior Securities............................      27

 Item 4. Submission of Matters to a Vote of Security Holders........      27

 Item 5. Other Information..........................................      28

 Item 6. Exhibits...................................................      28

         Signatures.................................................      29
</TABLE>

                                       2
<PAGE>

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS

                                  CORIO, INC.

                            CONDENSED BALANCE SHEETS
                      (In Thousands, Except Share Amounts)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                          June 30,  December 31,
                                                            2001      2000(1)
                                                          --------  ------------
<S>                                                       <C>       <C>
                         Assets
--------------------------------------------------------
Current assets:
  Cash and cash equivalents.............................  $ 39,449    $ 58,455
  Short-term investments................................    58,646      80,326
  Restricted cash.......................................     7,000         --
  Accounts receivable, net of allowance of $708 and $911
   at June 30, 2001 and
   December 31, 2000, respectively......................     4,476       7,780
  Prepaid expenses and other current assets.............     2,669       2,293
                                                          --------    --------
   Total current assets.................................   112,240     148,854
Property and equipment, net.............................    27,673      28,221
Intangibles, net........................................       141         564
Other assets............................................     1,943       3,645
                                                          --------    --------
   Total assets.........................................  $141,997    $181,284
                                                          ========    ========

          Liabilities and Stockholders' Equity
--------------------------------------------------------

Current liabilities:
  Accounts payable......................................  $  7,023    $  8,910
  Accrued liabilities...................................    11,904      12,616
  Deferred revenue......................................     3,248       3,196
  Current portion of notes payable......................       354       1,565
  Current portion of capital lease obligations..........     6,966       6,051
                                                          --------    --------
   Total current liabilities............................    29,495      32,338
Notes payable less current portion......................       347       1,336
Capital lease obligations less current portion..........     7,841       9,073
Other liabilities.......................................       748         694
                                                          --------    --------
   Total liabilities....................................    38,431      43,441

Commitments

Stockholders' equity:
  Preferred stock: $0.001 par value; 10,000,000 shares
   authorized;..........................................       --          --
  Common stock: $0.001 par value; 200,000,000 shares
   authorized;
   50,271,582 and 49,288,222 shares issued and
   outstanding at June 30, 2001 and December 31, 2000,
   respectively.........................................        50          49
  Additional paid-in capital............................   305,249     299,052
  Unrealized gain on investments........................       257         --
  Deferred stock-based compensation.....................   (16,302)    (13,234)
  Accumulated deficit...................................  (185,688)   (148,024)
                                                          --------    --------
   Total stockholders' equity...........................   103,566     137,843
                                                          --------    --------
   Total liabilities and stockholders' equity...........  $141,997    $181,284
                                                          ========    ========
</TABLE>
--------
(1) Derived from audited financial statements.

           See accompanying notes to condensed financial statements.

                                       3
<PAGE>

                                  CORIO, INC.

                       CONDENSED STATEMENTS OF OPERATIONS

                    (In Thousands, Except Per Share Amounts)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                         Three months      Six months ended
                                        ended June 30,         June 30,
                                       ------------------  ------------------
                                         2001      2000      2001      2000
                                       --------  --------  --------  --------
<S>                                    <C>       <C>       <C>       <C>
REVENUES:
  Application management services..... $  8,073  $  2,780  $ 16,916  $  3,917
  Professional services and other.....    3,393     7,613     8,119    11,756
                                       --------  --------  --------  --------
    Total revenues....................   11,466    10,393    25,035    15,673

COSTS AND EXPENSES:
  Application management services.....   10,207     8,192    20,899    14,093
  Professional services and other.....    3,411     7,211     9,663    12,682
  Research and development............    2,553     3,037     5,246     5,270
  Sales and marketing.................    6,450    10,817    13,320    20,410
  General and administrative..........    5,604     6,033    12,013    10,783
  Restructuring charges...............    1,413       --      1,413       --
  Amortization of stock based
   compensation.......................      851     3,977     1,728     9,234
  Amortization of intangible assets...      212       531       423     1,172
                                       --------  --------  --------  --------
    Total operating expenses..........   30,701    39,798    64,705    73,644
Loss from operations..................  (19,235)  (29,405)  (39,670)  (57,971)
Interest and other income.............    1,621       633     3,631     1,000
Interest and other expense............     (507)     (366)   (1,625)     (686)
                                       --------  --------  --------  --------
Net loss.............................. $(18,121) $(29,138) $(37,664) $(57,657)
                                       ========  ========  ========  ========
Basic and diluted net loss per share
 ..................................... $  (0.36) $ (14.52) $  (0.75) $ (31.08)
                                       ========  ========  ========  ========
Shares used in computation--basic and
 diluted..............................   50,204     2,007    50,059     1,855
                                       ========  ========  ========  ========
</TABLE>


           See accompanying notes to condensed financial statements.

                                       4
<PAGE>

                                  CORIO, INC.

                       CONDENSED STATEMENTS OF CASH FLOWS

                                 (In Thousands)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                            Six months ended
                                                                June 30,
                                                            ------------------
                                                              2001      2000
                                                            --------  --------
<S>                                                         <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss................................................. $(37,664) $(57,657)
  Adjustments to reconcile net loss to net cash used in
   operating activities:
    Depreciation and amortization..........................    7,411     3,776
    Amortization of intangibles............................      423     1,172
    Amortization of deferred stock-based compensation......    1,728     9,234
    Compensation for grants of stock, options and warrants
     in exchange for services..............................      742     2,648
    Changes in assets and liabilities:
      Accounts receivable..................................    3,303    (5,209)
      Prepaid expenses and other current assets............     (243)     (573)
      Accounts payable.....................................   (1,887)   11,412
      Accrued liabilities..................................     (659)    4,731
      Deferred revenue.....................................       52     1,288
      Other liabilities....................................      --        241
                                                            --------  --------
        Net cash used in operating activities..............  (26,794)  (28,937)
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of marketable securities.......................  (26,174)      --
  Sales of marketable securities...........................   48,111       --
  Increase in restricted cash..............................   (7,000)      --
  Purchase of property and equipment.......................   (3,325)  (13,154)
  Other assets.............................................      838    (3,117)
                                                            --------  --------
        Net cash provided by (used in) investing
         activities........................................   12,450   (16,271)
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of preferred stock, net...........      --     54,460
  Proceeds from sale of common stock and exercise of stock
   options                                                     1,392       975
  Proceeds from note receivable from stockholder...........      --         15
  Payments on notes payable and capital lease obligations..   (6,054)   (1,092)
                                                            --------  --------
        Net cash (used in) provided by financing
         activities........................................   (4,662)   54,358
                                                            --------  --------
Net decrease (increase) in cash and cash equivalents.......  (19,006)    9,150
Cash and cash equivalents, beginning of period.............   58,455    37,177
                                                            --------  --------
Cash and cash equivalents, end of period................... $ 39,449  $ 46,327
                                                            ========  ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid for interest................................... $    851  $    488
                                                            ========  ========

SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
  Acquisition of property and equipment under capital
   leases.................................................. $  3,538  $  2,942
                                                            ========  ========
  Issuance of preferred stock and common stock warrants.... $    --   $ 36,928
                                                            ========  ========
  Issuance of stock and options in exchange for services... $     29  $    --
                                                            ========  ========
  Deferred stock-based compensation........................ $  4,796  $ 13,910
                                                            ========  ========
  Unrealized gain on investments........................... $    257  $    --
                                                            ========  ========
</TABLE>

           See accompanying notes to condensed financial statements.

                                       5
<PAGE>

                                  CORIO, INC.

                    NOTES TO CONDENSED FINANCIAL STATEMENTS

Note 1--Summary of Significant Accounting Policies

Basis of Presentation

   The accompanying unaudited condensed financial statements have been prepared
by Corio, Inc. ("Corio" or the "Company") and reflect all adjustments which
are, in the opinion of management, necessary for a fair presentation of the
interim periods presented. Such adjustments are of a normal recurring nature.
The results of operations for the interim periods presented are not necessarily
indicative of the results for any future interim period or for the entire
fiscal year. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted, although the Company believes that the
disclosures included are adequate to make the information presented not
misleading. The unaudited condensed financial statements and notes included
herein should be read in conjunction with the audited financial statements and
notes for the fiscal year ended December 31, 2000.

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 calculation as their effect would
have been antidilutive for the periods indicated (in thousands):

<TABLE>
<CAPTION>
                                                                     June 30,
                                                                   -------------
                                                                    2001   2000
                                                                   ------ ------
     <S>                                                           <C>    <C>
     Preferred stock..............................................    --  35,298
     Preferred stock warrants.....................................    372  1,054
     Common stock subject to repurchase...........................     49    798
     Common stock options and warrants............................ 20,244 14,567
</TABLE>

Recent Accounting Pronouncements

   In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established new standards of
accounting and reporting for derivative instruments and hedging activities. In
July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement No.
133." SFAS No. 133 as amended by SFAS No. 137 and 138, is effective for fiscal
years beginning after June 15, 2000. To date, the Company has not engaged in
any derivative or hedging activities. Accordingly, the adoption of the new
standard had no effect on its financial statements.

   In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" and Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."

   SFAS No. 141 addresses the accounting for and reporting of business
combinations. SFAS No. 141 requires that all business combinations be accounted
for using the purchase method of accounting for

                                       6
<PAGE>

                                  CORIO, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

acquisitions and eliminates the use of the pooling-of-interests method. SFAS
No. 141 is effective for all business combinations initiated after June 30,
2001. The Company believes SFAS No. 141 will not have a material effect on its
financial statements.

   SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. SFAS No. 142 changes the accounting for
goodwill from amortization method to an impairment-only method. The
amortization of goodwill, including goodwill recorded in past business
combinations will cease upon adoption of the SFAS No. 142. For goodwill
acquired by June 30, 2001, SFAS No. 142 is effective for all fiscal years
beginning after December 15, 2001. Goodwill and intangible assets acquired
after June 30, 2001 will be subject to immediate adoption of SFAS No. 142. The
Company believes SFAS No. 142 will not have a material effect on its financial
statements.

Note 2--Restricted Cash

   In connection with a facility lease, the Company is required to provide a $7
million letter of credit as security for the lease. As of June 30, 2001, a $7
million certificate of deposit, which matures April 2002, is held as collateral
by a financial institution for guarantee of the letter of credit. The
certificate of deposit is recorded as restricted cash on the condensed balance
sheet.

Note 3--Accounts Receivable

   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. Included in accounts receivable
at June 30, 2001 and December 31, 2000 were $991,000 and $555,000,
respectively, of unbilled receivables under various application management and
professional services contracts.

Note 4--Debt

   In December 1998, the Company entered into a loan and security agreement to
borrow up to $4 million. Borrowing under the agreement incurred interest at
11.5% per annum and was repayable in 42 monthly installments. Borrowing under
the agreement was collateralized by substantially all of the Company's assets.
As of December 31, 2000, $2,901,000 was outstanding. The outstanding amount was
repaid in January 2001. In connection with the loan and security agreement, the
Company granted the lender warrants to purchase 469,523 shares of series A
preferred stock at an exercise price $1.24 per share. Upon the repayment of the
note in January 2001, the unamortized fair value of the warrant was charged to
interest expense.

   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 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. Upon replacement of the letter of credit, the unamortized fair
value of the warrant was charged to interest expense.

Warrants

   In April 2000, the Company agreed to issue to Ernst & Young L.L.P. ("EY"),
on behalf of its consulting division, EY Consulting, four warrants to purchase
an aggregate of up to 7,000,000 shares of the Company's common stock at an
exercise price of $6.50 per share under the terms of a strategic alliance
arrangement. In May 2000, EY completed a sale of substantially all of the
business of E&Y Consulting to Cap Gemini, S.A.

                                       7
<PAGE>

                                  CORIO, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Upon the completion of this sale, E&Y Consulting assigned to Cap Gemini, S.A.
all of its rights and obligations pursuant to its strategic alliance with the
Company, including the right to execute the warrants the Company issued to EY
on behalf of E&Y Consulting. The consulting business previously conducted by
E&Y Consulting is now being carried on by Cap Gemini Ernst & Young U.S., L.L.C.
("CGEY"). Under the April 2000 agreement, CGEY was permitted to exercise the
first of these warrants to acquire 4,666,666 shares of common stock during the
90 day period following the Company's July 20, 2000 IPO. The third and fourth
warrants become exercisable based upon the achievement of target volume
revenues resulting from referrals from CGEY in each of the Company's 2001 and
2002 fiscal years. The Company has determined that CGEY did not achieve the
minimum target volume revenues for its 2000 fiscal year and as a result, the
second warrant for 933,333 shares expired. The third and fourth warrants may be
exercised to acquire up to 933,333 and 466,667 shares of common stock,
respectively. The warrants are subject to cancellation or repurchase in whole
or part under certain circumstances, such as if CGEY breaches a material
provision of the agreement. The agreement itself may be terminated prior to the
end of the seven-year term by mutual consent of the parties or unilaterally by
a party in the event the other party defaults in the performance of a material
provision of the mutual agreement subject to a cure period.

   On September 27, 2000 CGEY exercised its right to convert 2,333,333 warrants
into 960,810 shares of common stock through a cashless exercise.

   At June 30, 2001, 2,333,333 of the initial warrant remained issued and
outstanding. The exercise period has been extended to December 31, 2001. The
fair value of this warrant was calculated using the Black-Scholes option
pricing model, using $1.25 as the fair value of the underlying common stock and
the following weighted-average assumptions: no dividends; contractual life of
1.5 years; risk-free interest rate of 7%; and expected volatility of 100%. The
fair value of the remaining unexercised initial warrant was $336,000 at
June 30, 2001. A reduction of $138,000 to amortization expense was recorded in
sales and marketing expense in the quarter ended June 30, 2001.

Stock-Based Compensation

   In connection with stock options granted to employees to purchase common
stock, the Company recorded deferred charges for stock-based compensation of
$4.8 million and $13.4 million for the six months ended June 30, 2001 and 2000,
respectively. Such amounts represent, for employee stock options, the
difference at the grant date between the exercise price of each stock option
granted and the fair value of the underlying common stock. The deferred charges
for employee options are being amortized to expenses using the graded vesting
approach through fiscal year 2005. Amortization of deferred stock-based
compensation expense was $1.7 million and $9.2 million for the six months ended
June 30, 2001 and 2000, respectively.


                                       8
<PAGE>

                                  CORIO, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 5--Significant Customer Information and Segment Reporting Information

   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):

<TABLE>
<CAPTION>
                                 Application
                                 Management  Professional
                                  Services     Services   Unallocated  Total
                                 ----------- ------------ ----------- --------
<S>                              <C>         <C>          <C>         <C>
For the Three Months Ended
 June 30, 2001
Revenues.......................   $  8,073     $ 3,393     $    --    $ 11,466
Depreciation and amortization..   $  2,397     $    60     $  1,339   $  3,796
Segment loss...................   $ (2,308)    $  (156)    $(15,657)  $(18,121)

For the Three Months Ended
 June 30, 2000
Revenues.......................   $  2,780     $ 7,613     $    --    $ 10,393
Depreciation and amortization..   $     86     $    59     $  1,372   $  1,517
Segment profit (loss)..........   $ (5,412)    $   402     $(24,128)  $(29,138)

For the Six Months Ended
 June 30, 2001
Revenues.......................   $ 16,916     $ 8,119     $    --    $ 25,035
Depreciation and amortization..   $  4,640     $   121     $  2,650   $  7,411
Segment loss...................   $ (4,158)    $(1,682)    $(31,824)  $(37,664)

For the Six Months Ended June
 30, 2000
Revenues.......................   $  3,917     $11,756     $    --    $ 15,673
Depreciation and amortization..   $  1,226     $   108     $  2,442   $  3,776
Segment loss...................   $(10,175)    $  (926)    $(46,556)  $(57,657)
</TABLE>

   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.

   For the six months ended June 30, 2001, one customer accounted for 10% of
total revenues. For the six month period ended June 30, 2000, one customer
accounted for 10% of total revenues.

   At June 30, 2001, one customer represented 10% of total accounts receivable.
No single customer accounted for more than 10% of total accounts receivable at
June 30, 2000.

Note 6--Restructuring Charges

   During the quarter ended June 30, 2001, we initiated cost-saving actions
resulting in restructuring charges of $1.4 million. These charges included
$435,000 for estimated payments for the cancellation of a facility lease
contract and $821,000 for severance benefits paid or to be paid to employees
involuntarily terminated, and a $157,000 impairment charge to dispose of
certain operating assets. We anticipate paying substantially all of the accrued
restructuring-related costs at June 30, 2001 of approximately $590,000 during
the quarter ending September 30, 2001.

Note 7--Subsequent Events

   We have executed a five year build-to-suit lease for a facility in Phoenix,
Arizona that will require minimum payments of approximately $156,000 in 2001
and $535,000 in 2002. Total minimum payments under the lease term are $2.7
million.

                                       9
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

   The following Management's Discussion and Analysis of our Financial
Condition and Results of Operations should be read in conjunction with the
unaudited condensed financial statements and notes thereto included in Part I-
Item 1 of this Quarterly Report and the audited financial statements and notes
thereto and Management's Discussion and Analysis in the Company's 2000 Annual
Financial Report to Stockholders attached as an appendix to Corio's 2001 Proxy
Statement.

   THIS REPORT CONTAINS 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, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE
COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE
SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES", "INTENDS", "BELIEVES", OR
SIMILAR LANGUAGE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE
BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS
AFTER THE DATE HEREOF. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY FACTORS,
INCLUDING BUT NOT LIMITED TO THOSE SET FORTH UNDER "ADDITIONAL FACTORS THAT MAY
AFFECT FUTURE RESULTS" HEREIN. IN EVALUATING THE COMPANY'S BUSINESS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH BELOW
UNDER THE CAPTION "ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS" IN
ADDITION TO THE OTHER INFORMATION SET FORTH HEREIN. THE COMPANY CAUTIONS
INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE ARE SUBJECT TO
SUBSTANTIAL RISKS AND UNCERTAINTIES.

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 the Corio Intelligent Enterprise, a suite of
enterprise software applications from leading vendors. Following the rapid
implementation of software applications, performed for a fixed fee or on a time
and materials basis, our customers pay a monthly service fee based largely on
the number of applications used and total users.

Results of Operations

Three and Six Months Ended June 30, 2001 and 2000

 Revenues

   Total revenues increased to $11.5 million for the three months ended June
30, 2001 from $10.4 million for the three months ended June 30, 2000. For the
three months ended June 30, 2001, no single customer accounted for more than
10% of total revenues. For the six months ended June 30, 2000, one customer
accounted for 10% total revenues. Total revenues increased to $25.0 million for
the six months ended June 30, 2001 from $15.7 million for the six months ended
June 30, 2000.

   Application Management Services Revenues. Revenues from our application
management services were $8.1 million for the three months ended June 30, 2001
and $2.8 million for the three months ended June 30, 2000. Revenues from our
application management services were $16.9 million for the six months ended
June 30, 2001 and $4.0 million for the six months ended June 30, 2000. The
increase in application management services revenues was primarily due to the
increased number of customers, increased number of users, revenues associated
with e-commerce trading exchanges and approximately $850,000 non recurring
revenues from

                                       10
<PAGE>

customer contract terminations. At June 30, 2001, the Company had a balance of
$2.5 million for deferred application management services revenues from several
customers who prepaid a portion of their contracts. 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 $3.4 million for the three months ended June 30, 2001 and
$7.6 million for the three months ended June 30, 2000. Our professional
services and other revenues were $8.1 million for the six months ended June 30,
2001 and $11.8 million for the six months ended June 30, 2000. The decrease in
professional services revenues from 2000 to 2001 was primarily due to the
decreased number of new customer implementations as well as customer use of
third party integrators for project implementations. At June 30, 2001, we had a
balance of $720,000 for deferred professional services revenues resulting from
customer payments that we required in advance of commencing our professional
services work.

 Costs and Expenses

   Application Management Services Expenses. Application management services
expenses were $10.2 million for the three months ended June 30, 2001 and $8.2
million for the three months ended June 30, 2000. Application management
services expenses were $20.9 million for the six months ended June 30, 2001 and
$14.1 million for the six months ended June 30, 2000. The largest component of
the increase was the growth in personnel costs. Other significant components of
the increase included costs for third-party license and support fees, costs of
our data center and network providers, facilities expenses and depreciation and
lease costs for equipment.

   Professional Services and Other Expenses. Professional services and other
expenses were $3.4 million for the three months ended June 30, 2001 and $7.2
million for the three months ended June 30, 2000. Professional services and
other expenses were $9.7 million for the six months ended June 30, 2001 and
$12.7 million for the six months ended June 30, 2000. The largest component of
the decrease was attributable to the reduction in personnel costs. Another
significant component of the decrease included reduced costs for subcontractors
to perform services under professional services engagements.

   Research and Development. Research and development expenses were $2.6
million for the three months ended June 30, 2001 and $3.0 million for the three
months ended June 30, 2000. Research and development expenses as a percentage
of total revenues were 22% for the three months ended June 30, 2001 and 29% for
the three months ended June 30, 2000. Research and development expenses were
$5.2 million for the six months ended June 30, 2001 and $5.3 million for the
six months ended June 30, 2000. Research and development expenses as a
percentage of total revenues were 21% for the six months ended June 30, 2001
and 34% for the six months ended June 30, 2000. The largest component of the
decrease was attributable to a decrease in personnel costs and facilities
expense.

   Sales and Marketing Expenses. Sales and marketing expenses were $6.5 million
for the three months ended June 30, 2001 and $10.8 million for the three months
ended June 30, 2000. Sales and marketing expenses as a percentage of total
revenues were 56% for the three months ended June 30, 2001 and 104% for the
three months ended June 30, 2000. Sales and marketing expenses were $13.3
million for the six months ended June 30, 2001 and $20.4 million for the six
months ended June 30, 2000. Sales and marketing expenses as a percentage of
total revenues were 53% for the six months ended June 30, 2001 and 130% for the
six months ended June 30, 2000. The decrease in sales and marketing expense
reflects a decline in incentive compensation as well as lower spending on
advertising and tradeshows. Sales and marketing expenses also include
amortization costs associated with warrants issued to a software vendor and Cap
Gemini Ernst & Young of $(138,000) and $(148,000) for the three and six months
ended June 30, 2001, respectively. For the three and six months ended June 30,
2000 Sales and Marketing expense included $1.8 million, and $2.8 million
respectively of amortization costs associated with these warrants.

   General and Administrative Expenses. General and administrative expenses
were $5.6 million for the three months ended June 30, 2001 and $6.0 million for
the three months ended June 30, 2000. General and

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administrative expenses as a percentage of total revenues were 49% for the
three months ended June 30, 2001 and 58% for the three months ended June 30,
2000. General and administrative expenses were $12.0 million for the six months
ended June 30, 2001 and $10.8 million for the six months ended June 30, 2000.
General and administrative expenses as a percentage of total revenues were 48%
for the six months ended June 30, 2001 and 69% for the six months ended June
30, 2000. For the three months ended June 30, 2001 the largest component of the
decrease was attributable to the decrease in personnel costs and facility
related costs. For the six months ended June 30, 2001 the largest component of
the increase was attributable to the growth in personnel costs.

   Restructuring Charges. During the quarter ended June 30, 2001, we initiated
cost-saving actions resulting in restructuring charges of $1.4 million. These
charges included $435,000 for estimated payments for the cancellation of a
facility lease contract and $821,000 for severance benefits paid or to be paid
to employees involuntarily terminated, and a $157,000 impairment charge to
dispose of certain operating assets. We anticipate paying substantially all of
the accrued restructuring-related costs at June 30, 2001 of approximately
$590,000 during the quarter ending September 30, 2001.

   Amortization of Stock-Based Compensation. Amortization of deferred stock-
based compensation was $851,000 for the three months ended June 30, 2001 and
$4.0 million for the three months ended June 30, 2000. Amortization of deferred
stock-based compensation was $1.7 million for the six months ended June 30,
2001 and $9.2 million for the six months ended June 30, 2000.

   Interest and Other Income and Expense. Net interest and other income was
$1.1 million for the three months ended June 30, 2001 and was $267,000 for the
three months ended June 30, 2000. Net interest and other income was $2.0
million for the six months ended June 30, 2001 and was $314,000 for the
six months ended June 30, 2000. The increase in net interest income was due
primarily to higher average cash and investment balances at June 30, 2001.
Included in interest expense in the six months ended June 30, 2001 is a charge
of $740,000 reflecting the unamortized fair value of the warrants that were
issued in connection with a loan and security agreement that was paid in full
in January 2001.

   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 of income taxes
for the three and six months ended June 30, 2001 and 2000.

Liquidity and Capital Resources

   As of June 30, 2001, we had cash and cash equivalents, short term
investments, and restricted cash of $105.1 million, a decrease of $33.7 million
from December 31, 2000. The decrease was primarily a result of cash used by
operating activities as well as repayment of debt.

   Net cash used in operating activities was $26.8 million and $28.9 million
for the six months ended June 30, 2001 and 2000, respectively. The net decrease
was primarily due to significant changes in amortization of deferred stock
compensation, accounts payable, accounts receivables and accrued liabilities
offset by a decrease in the net loss.

   Net cash provided by investing activities was $12.5 million for the six
months ended June 30, 2001 compared to $16.3 million used in investing
activities in the six months ended June 30, 2000. Investing activities
consisted primarily of purchases of computer equipment of $1.5 million and
computer software of $1.8 million, purchase and sale of short term investments
as well as $7 million of restricted cash held as security for the Company's
leased facility.

   Net cash used by financing activities for the six months ended June 30, 2001
was $4.7 million. Net cash provided by financing activities was $54.4 million
for the six months ended June 30, 2000. Financing activities consisted
primarily of the proceeds from the issuance of preferred stock, loans and
exercise of stock options offset by repayments of loans and capital leases.

                                       12
<PAGE>

   We expect that our current cash balances and existing debt arrangements will
be sufficient to meet our cash requirements for the next 12 months. We expect
that we will need or desire to raise additional funds in order to support
expansion, develop new or enhanced services or technologies, respond to
competitive pressures, acquire complementary businesses or respond to
unanticipated requirements. We cannot be sure that additional funding, if
needed, will be available on acceptable terms or at all. If adequate funds are
not available, we may be required to curtail significantly or defer one or more
of our operating goals or programs. If we succeed in raising additional funds
through the issuance of equity securities, the issuance could result in
substantial dilution to existing stockholders. If we raise additional funds
through the issuance of debt securities or preferred stock, these new
securities would have rights, preferences and privileges senior to those of the
holders of our common stock. The terms of these securities could also impose
restrictions on our operations.

                                       13
<PAGE>

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

                                  RISK FACTORS

                         Risks Related to Our Business

We have a history of losses and, because for the foreseeable future we expect
to increase our investment in our business faster than we anticipate growth in
our revenues, we expect that we will continue to incur significant 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 an operations organization, consisting of
application management and customer support services personnel, to build and
run a professional services organization and to develop our sales and marketing
resources. We have incurred significant operating and net losses and negative
cash flow and have not achieved profitability. As of June 30, 2001, we had an
accumulated deficit of $186 million.

   We expect to continue to invest significantly in our operations organization
and in research and development to enhance current services and expand our
service offerings. We also plan to continue to grow our sales force and to
spend significant funds to promote our company and our services. We expect to
continue to 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, 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 users and revenues per customer. We cannot assure you
that we will be able to increase our revenues or increase our operating
efficiencies in this manner. Moreover, because we expect to continue to
increase our investment in our business faster than we anticipate growth in our
revenues, we expect that we will continue to incur significant operating 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
substantial majority of our customer 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 adversely affect demand for our services.

   A substantial majority of our current revenue base consists of emerging
high-growth and middle-market companies and is comprised primarily of internet,
e-commerce trading exchanges and "dot-com" 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 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 diminish
and delay demand for our services.

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

                                       14
<PAGE>

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 try to move up-market to larger, more
established customers, the demand for our services is uncertain and the sales
process may 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;

  .  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 cost 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 plan to expend significant sums 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.

   In order to promote future growth, we expect to continue to expend
significant sums in our business, particularly 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.

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
each individual customer, we typically 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
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

                                       15
<PAGE>

implementation. We expect that our financial results will 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;

  .  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 requiring our customers to obtain licenses to
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 for future customers of
our Siebel services, our customers must obtain licenses for Siebel software
directly from Siebel, and we are currently in discussions with another major
third-party software vendor that would require our customers to obtain licenses
for software directly from that vendor, rather than through us. 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.

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 applications from third parties, such as
BroadVision, Commerce One, PeopleSoft, SAP and Siebel Systems, that we in turn
incorporate into the services we provide to customers. Our agreements with
third-party software vendors are non-exclusive, are for limited terms ranging
from two to five years 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 license

                                       16
<PAGE>

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 we use to deliver our
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 between $250
million and $1 billion, and several of our licenses 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. For example, our contract with BroadVision restricts our ability to
sell our BroadVision offerings to specified banking institutions. Moreover, as
we negotiate with some of our major third-party software vendors to modify
terms of existing agreements, we may agree to additional restrictions on our
ability to sell our services to customers as part of an agreement that we
believe is more beneficial to us overall. 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, e-commerce and business intelligence. 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 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 integrated enterprise software applications can be
complicated and we have limited experience to date completing implementations
of integrated software applications for our customers. We cannot assure you
that we will develop the requisite expertise or that we can convince customers
that we have the expertise required to implement, host or manage these
applications. In addition, because PeopleSoft and Siebel software applications
were among our first application offerings, our customers to date have
primarily implemented these application offerings and we have limited
experience installing many of the other applications we offer. Our reputation
will be harmed and sales of our services would decline significantly if we

                                       17
<PAGE>

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.

We have only implemented our Orion technology platform for a small number of
customers, and it may not achieve market acceptance, provide the performance we
anticipate or generate significant revenue for us.

   We have only implemented Orion, our technology platform, for a small number
of customers and it may not be an effective means to integrate applications. In
addition, we are investing resources to continue to develop and improve this
platform. We cannot assure you that our Orion platform will achieve market
acceptance or will work in the manner we expect or that we will be able to
achieve a return on our investment.

If our strategic alliance with Cap Gemini Ernst & Young does not generate the
benefits we expect, we may not be able to grow our business as effectively as
we anticipate and may have difficulty providing systems integration services to
our customers.

   Our agreement with Cap Gemini Ernst & Young U.S. LLC, or CGEY, provides for
exclusive client referrals from CGEY for emerging high-growth and middle-market
clients in the Americas. These limitations on exclusivity may limit our ability
to benefit from the marketing alliance. This strategic alliance will not be
considered a success if it does not generate more customers for us and does not
grow our business. Moreover, this alliance may adversely affect our ability to
generate new customers through relationships with other systems integration and
consulting firms. Finally, it is possible that we may become dependent on CGEY
for implementation of our services and, if our relationship with CGEY
terminates, we may not be able to find systems integrators to replace the
services CGEY is expected to provide us.

Our relationship with CGEY may change in a manner adverse to our business
through circumstances beyond our control.

   In April 2000, we entered into a strategic alliance with Ernst & Young on
behalf of its consulting division, E&Y Consulting. In May 2000, Ernst & Young
completed a sale of substantially all of E&Y Consulting to Cap Gemini. At the
time of completion of this sale, E&Y Consulting assigned to Cap Gemini all of
its rights and obligations pursuant to its strategic alliance with us. We
cannot assure you that the incentives we negotiated with E&Y Consulting will be
appropriate for CGEY, and, in fact, it appears that it may be difficult for
CGEY to achieve the incentive targets set in the warrants. It is possible that
CGEY will fail to devote substantial resources towards generating referrals to
us and engaging in joint marketing and sales activities. If CGEY fails to do
so, we may be forced to terminate our agreement and cancel some of the warrants
held by CGEY. Additionally, as the personal relationships between the
professional staff at E&Y Consulting and the auditing group of Ernst & Young
LLP change over time as a result of E&Y Consulting's acquisition by Cap Gemini,
we may lose some benefit from referrals from Ernst & Young LLP. As a result of
all of the foregoing, E&Y Consulting's acquisition by Cap Gemini could result
in our relationship with CGEY providing fewer benefits to us than we initially
anticipated, and the benefits as a whole may not be substantial.

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. Because of our relationship with CGEY, we
may have difficulty retaining the services of other systems integrators, which
we may need if our alliance with CGEY terminates or if CGEY performs services
in a manner below our customers' expectations. In addition, as we seek to
provide applications management services for larger, more established
customers, they frequently will 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

                                       18
<PAGE>

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.

Continued growth would 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 our growth successfully, we
must:

  .  improve our management, financial and information systems and controls;

  .  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.

   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. The strains
imposed by these demands are magnified by our limited operating history. 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. For example, we are
currently implementing a new billing system and such implementation has been
and may continue to be more complex than expected, resulting in inefficiency in
the customer billing process. Moreover, any inability to expand our service
offerings and employee base commensurate with the demand for our services could
cause our revenues to decline.

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. For example, PeopleSoft, from whom we
license a substantial amount of software applications and represented more than
half of our applications management services revenue in fiscal 2000, has
recently released a new version of its software. Implementing software upgrades
can be a complicated and costly process, particularly implementation of an
upgrade simultaneously across multiple customers, and we have not performed a
major software upgrade 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

                                       19
<PAGE>

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 have licenses 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 and SAP.
The architecture of the software we currently use for ERP applications is not
designed to be hosted. We believe that future software will be written to be
hosted. Our existing software application providers may face competition from
new vendors who have written hostable software. It may be difficult for us to
acquire hostable ERP software from these new vendors and for our software
application providers to develop this software quickly or successfully. In
either event, the services we offer would likely become less attractive to our
customers, which could cause us to lose revenue and market share. Performing
upgrades may also require substantial time and expense and even then we cannot
be sure that we will succeed in adapting our business to these technological
developments. Prolonged delays resulting from our efforts to adapt to rapid
technological change, even if ultimately successful, could harm our reputation
within our industry and our ability to grow our revenues.

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

   Even if we are able to generate revenues that exceed our operating costs, we
may incur substantial accounting charges over the next two years associated
with warrants held by Cap Gemini Ernst & Young U.S. LLC, or CGEY. Under the
terms of a strategic alliance agreement with CGEY, CGEY holds warrants to
purchase up to approximately 2.3 million shares of our common stock at an
exercise price of $6.50 per share, exercisable through December 31, 2001, and
up to 1,400,000 million shares based on specific performance metrics achieved
by CGEY through year 2002. These warrants and other expenses related to our
strategic alliance with CGEY may result in substantial expenses and operating
losses for us over the term of our

                                       20
<PAGE>

agreement with them. Because of the accounting policies applicable to these
warrants, any charges associated with these warrants 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 three to five 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 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 will not grow and
may decline, and sales of our services will suffer.

   Part of our strategy is 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 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 will not grow and
may decline, and sales of our services will 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.

                                       21
<PAGE>

   Our current and potential competitors primarily include:

  .  application service providers and business process outsourcers, such as
     Agilera, AppShop, AristaSoft, Blue Star Solutions, Breakaway Solutions,
     NaviSite, Qwest Cyber.Solutions, Surebridge and USinternetworking;

  .  systems integrators, such as Accenture, Electronic Data Systems and
     PricewaterhouseCoopers;

  .  internet service providers and web hosting providers, such as XO
     Communications, DIGEX, Exodus Communications, Frontier Corporation,
     Genuity, Worldcom and PSINet;

  .  software vendors, such as Commerce One, J.D. Edwards, Microsoft, Oracle,
     PeopleSoft, SAP and Siebel Systems;

  .  major technology providers, such as Cisco Systems, IBM, Intel and Nortel
     Networks;

  .  internet portals, such as AOL Time Warner, Excite@Home and Yahoo; and

  .  telecommunications companies.

   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 licensing 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 and (i)Structure, for
our data center management services and for key components of our network
infrastructure. Our contracts with these data center and network infrastructure
providers are for a fixed term and for a specified amount of services, which
may be insufficient to meet our needs. We depend on suppliers such as Sun
Microsystems for our computer hardware and WebMethods and Netegrity 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

                                       22
<PAGE>

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 two 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, 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.
Most 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 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. 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.

   We may expand substantially 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. Competition
for qualified sales, marketing, technical and operations personnel is intense
as these personnel are in limited supply and in high demand, particularly in
Northern California, 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.

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

   We expect that consolidation in our industry may occur. We may acquire or
make investments in 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.

                                       23
<PAGE>

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.

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 Orion
technology platform, 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, 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
could cost a significant amount of money and could divert management's
attention away from our business.

   As the number of software applications used by 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 we offer infringes their proprietary rights. 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 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.

                         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. Companies in the ASP industry, such
as Pandesic and Red Gorilla, have ceased operations. 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 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.


                                       24
<PAGE>

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 subjects 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.

As 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 may expand our business outside of the United States in the foreseeable
future and are presently exploring international expansion opportunities.
Conducting our business in international markets is subject to complexities
associated with foreign operations and to additional risks related to our
business, including the possibility that the scarcity of cost-effective, high-
speed Internet access and the slow pace of future improvements in access to the
Internet will limit the market for hosting software applications over the
Internet or adversely affect the delivery of our services to customers.
Additionally, some countries outside of the United States do not permit hosting
applications on behalf of companies. The European Union has adopted a privacy
directive that regulates the collection and use of information. This directive
may inhibit or prohibit the collection and sharing of personal information in
ways that could harm us. The globalization of Internet commerce may be harmed
by these and similar regulations since the European Union privacy directive
prohibits transmission of personal information outside the European Union
unless the receiving country has enacted individual privacy protection laws at
least as strong as those enacted by the European Union privacy directive. For
information transmitted from the European Union to the United States, we may
need to qualify for the safe harbor to the European Union privacy directive or
for another exemption, and there is no guarantee that we will be able to so
qualify.

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.


                                       25
<PAGE>

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 44% of our common stock. 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 offering.

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

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

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

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

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

  .  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.

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

   Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. We do not use derivative financial
instruments in our investment portfolio. We manage our interest rate risk by
maintaining an investment portfolio primarily consisting of debt instruments
with high credit quality and relatively short average maturities in accordance
with the Company's investment policy. The policy also limits the amount of
credit exposure to any one issuer. Notwithstanding our efforts to manage
interest rate risks, there can be no assurances that we will be adequately
protected against the risks associated with interest rate fluctuations.

                                       26
<PAGE>

                          PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

   In March 2001, a customer began arbitration proceedings against the Company
in the American Arbitration Association, claiming $7 million in damages. The
Company settled the arbitration on June 28, 2001. The Company is not obligated
to make any payments pursuant to the settlement.

ITEM 2. CHANGE IN SECURITIES AND 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
terminated, 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 June 30, 2001, the ending date of the
reporting period, the approximate amount of net offering proceeds used were $7
million to repay outstanding debt and approximately $41 million to fund
operations. The remaining net proceeds were invested in short-term financial
instruments.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

   None

ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

   (a) The Company held its Annual Meeting of Stockholders (the "Annual
Meeting") on April 25, 2001.

   (b) At the Annual Meeting, the stockholders elected Aneel Bhursi, Glenn W.
Marschel, Jr. and Ernest von Simson as Class I directors to serve for terms of
three years. In addition, the term of office as a director continued after the
meeting for the following directors: George Kadifa, James T. Barrett, Ted E.
Schlein, Roger S. Siboni, and George J. Still, Jr.

   (c) The stockholders of the Company voted on the following matters at the
Annual Meeting:

    1. the election of Class I directors to serve for terms of three years;
       and

    2. ratification of the appointment of KPMG LLP as independent auditors
       of the Company for the fiscal year ending December 31, 2001.

   Votes were cast for the election of Aneel Bhursi, Glenn W. Marschel, Jr.
and Ernest von Simson as Class I directors as follows:

<TABLE>
<CAPTION>
                                                       VOTES FOR  VOTES WITHHELD
                                                       ---------- --------------
      <S>                                              <C>        <C>
      Aneel Bhursi.................................... 30,495,959    203,664
      Glenn W. Marschel, Jr. ......................... 30,479,301    220,322
      Ernest von Simson............................... 30,483,518    216,105
</TABLE>

                                      27
<PAGE>

   The ratification of the appointment of KPMG LLP as independent auditors for
fiscal year ending December 31, 2001 was approved as follows:

       30,667,587 votes for approval;
           22,615 votes against; and
            9,421 abstentions.

ITEM 5. OTHER INFORMATION

   None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
   <C>                <S>
   (a) Exhibit Number Description of Document

        10.17         Letter agreement between the Company and Eric J. Keller,
                      dated May 9, 2001
</TABLE>

   (b) The registrant did not file any reports on Form 8-K during the quarter
ended June 30, 2001.

                                       28
<PAGE>

                                   SIGNATURES

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

Dated: August 13, 2001

                                          CORIO, INC.
                                          (Registrant)

                                          By /s/ George Kadifa
                                            -----------------------------------
                                          George Kadifa
                                          President and Chief Executive
                                           Officer

                                          By  /s/ Barbara J. Posch
                                            -----------------------------------
                                          Barbara J. Posch
                                          Senior Vice President, Finance and
                                          Chief Financial Officer

                                       29