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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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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, 2003.



OR



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



For the transition period from  to
.



Commission File No. 000-31003



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CORIO, INC.

(Exact name of the Registrant as specified in its charter)



|Delaware                                                      |  | 77-0492528                             
|------------------------------------------------------------- |  | ---------------------------------------
|(state or other jurisdiction of Incorporation or organization |  | (I.R.S. Employer Identification Number)
|                                                              | 
|959 Skyway Road, Suite 100 San Carlos, California             |  | 94070                                  
|(Address of principal executive offices)                      |  | (Zip Code)                             



650-232-3000

(The Registrants telephone number, including area code)



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



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



As of July 31, 2003, there were 58,047,172 shares of the Registrants common stock outstanding.



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##### Table of Contents

CORIO, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2003



INDEX



|        |  |                                                                                                   |  | Page No.
|------- |  | ------------------------------------------------------------------------------------------------- |  | --------
|        |  | PART I. FINANCIAL INFORMATION                                                                     |  |         
|        |  |                                                                                                  
|Item 1. |  | Condensed Consolidated Financial Statements (Unaudited):                                          |  | 3       
|        |  |                                                                                                  
|        |  | Condensed Consolidated Balance Sheets June 30, 2003 and December 31, 2002                         |  | 3       
|        |  |                                                                                                  
|        |  | Condensed Consolidated Statements of Operations Three and Six Months Ended June 30, 2003 and 2002 |  | 4       
|        |  |                                                                                                  
|        |  | Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2003 and 2002           |  | 5       
|        |  |                                                                                                  
|        |  | Notes to Condensed Consolidated Financial Statements                                              |  | 6       
|        |  |                                                                                                  
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations             |  | 11      
|        |  |                                                                                                  
|Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk                                        |  | 27      
|        |  |                                                                                                  
|Item 4. |  | Controls and Procedures                                                                           |  | 28      
|        |  |                                                                                                  
|        |  | PART II. OTHER INFORMATION                                                                        |  |         
|        |  |                                                                                                  
|Item 1. |  | Legal Proceedings                                                                                 |  | 28      
|        |  |                                                                                                  
|Item 2. |  | Change in Securities and Use of Proceeds                                                          |  | 28      
|        |  |                                                                                                  
|Item 3. |  | Defaults upon Senior Securities                                                                   |  | 29      
|        |  |                                                                                                  
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                               |  | 29      
|        |  |                                                                                                  
|Item 5. |  | Other Information                                                                                 |  | 29      
|        |  |                                                                                                  
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                  |  | 29      
|        |  |                                                                                                  
|        |  | Signatures                                                                                        |  | 30      
|        |  |                                                                                                  
|        |  | Certifications                                                                                    |  |         



2



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##### Table of Contents

|PART I. |  | FINANCIAL INFORMATION
|------- |  | ---------------------



|ITEM 1. |  | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|------- |  | -------------------------------------------



CORIO, INC.



CONDENSED
CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(UNAUDITED)



|                                                                                                                                                                            |  | JUNE 30, 2003 |          |   | DECEMBER 31, 2002 |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ----------------- | -
|ASSETS                                                                                                                                                                      |  |               |          |   |                   |  
|Current assets:                                                                                                                                                             |  |               |          |   |                   |  
|Cash and cash equivalents                                                                                                                                                   |  | $             | 16,028   |   |                   | $
|Short-term investments                                                                                                                                                      |  |               | 23,333   |   |                   |  
|Accounts receivable, net of allowance of $310 and $403 at June 30, 2003 and December 31, 2002, respectively                                                                 |  |               | 2,996    |   |                   |  
|Prepaid expenses and other current assets                                                                                                                                   |  |               | 2,700    |   |                   |  
|                                                                                                                                                                            |  |               |          |   |                   |  
|Total current assets                                                                                                                                                        |  |               | 45,057   |   |                   |  
|Restricted cash                                                                                                                                                             |  |               | 7,717    |   |                   |  
|Property and equipment, net                                                                                                                                                 |  |               | 12,553   |   |                   |  
|Other assets                                                                                                                                                                |  |               | 1,771    |   |                   |  
|                                                                                                                                                                            |  |               |          |   |                   |  
|Total assets                                                                                                                                                                |  | $             | 67,098   |   |                   | $
|                                                                                                                                                                            |  |               |          |   |                   |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                        |  |               |          |   |                   |  
|Current liabilities:                                                                                                                                                        |  |               |          |   |                   |  
|Accounts payable                                                                                                                                                            |  | $             | 7,540    |   |                   | $
|Accrued liabilities                                                                                                                                                         |  |               | 6,637    |   |                   |  
|Accrued restructuring                                                                                                                                                       |  |               | 748      |   |                   |  
|Deferred revenue                                                                                                                                                            |  |               | 2,008    |   |                   |  
|Current portion of notes payable                                                                                                                                            |  |               | 47       |   |                   |  
|Current portion of capital lease obligations                                                                                                                                |  |               | 1,619    |   |                   |  
|                                                                                                                                                                            |  |               |          |   |                   |  
|Total current liabilities                                                                                                                                                   |  |               | 18,599   |   |                   |  
|Capital lease obligations less current portion                                                                                                                              |  |               | 154      |   |                   |  
|Accrued restructuring                                                                                                                                                       |  |               | 4,470    |   |                   |  
|Other liabilities                                                                                                                                                           |  |               | 1,244    |   |                   |  
|                                                                                                                                                                            |  |               |          |   |                   |  
|Total liabilities                                                                                                                                                           |  |               | 24,467   |   |                   |  
|                                                                                                                                                                            |  |               |          |   |                   |  
|Commitments and contingencies                                                                                                                                               |  |               |          |   |                   |  
|Stockholders equity:                                                                                                                                                       |  |               |          |   |                   |  
|Preferred stock: $0.001 par value; 10,000,000 shares authorized, none issued and outstanding                                                                                |  |               |         |   |                   |  
|Common stock: $0.001 par value; 200,000,000 shares authorized; 57,439,840 and 56,516,435 shares issued and outstanding at June 30,
2003 and December 31, 2002, respectively |  |               | 57       |   |                   |  
|Additional paid-in capital                                                                                                                                                  |  |               | 297,443  |   |                   |  
|Accumulated other comprehensive income                                                                                                                                      |  |               | 45       |   |                   |  
|Deferred stock-based compensation                                                                                                                                           |  |               | (106     | ) |                   |  
|Accumulated deficit                                                                                                                                                         |  |               | (254,808 | ) |                   |  
|                                                                                                                                                                            |  |               |          |   |                   |  
|Total stockholders equity                                                                                                                                                  |  |               | 42,631   |   |                   |  
|                                                                                                                                                                            |  |               |          |   |                   |  
|Total liabilities and stockholders equity                                                                                                                                  |  | $             | 67,098   |   |                   | $
|                                                                                                                                                                            |  |               |          |   |                   |  



See accompanying notes
to condensed consolidated financial statements.



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CORIO, INC.



CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(UNAUDITED)



|                                                                             |  | THREE MONTHS ENDED JUNE 30, |        |   | SIX MONTHS ENDED JUNE 30, |  
|---------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | -
|                                                                             |  | 2003                        |        |   | 2002                      |  
|REVENUES:                                                                    |  |                             |        |   |                           |  
|Application management services                                              |  | $                           | 14,838 |   |                           | $
|Professional services and other                                              |  |                             | 2,213  |   |                           |  
|                                                                             |  |                             |        |   |                           |  
|Total revenues                                                               |  |                             | 17,051 |   |                           |  
|COSTS AND EXPENSES:                                                          |  |                             |        |   |                           |  
|Application management services *                                            |  |                             | 11,909 |   |                           |  
|Professional services and other *                                            |  |                             | 1,712  |   |                           |  
|Research and development *                                                   |  |                             | 1,346  |   |                           |  
|Sales and marketing *                                                        |  |                             | 2,301  |   |                           |  
|General and administrative *                                                 |  |                             | 2,188  |   |                           |  
|Restructuring charges                                                        |  |                             |       |   |                           |  
|Amortization of stock based compensation                                     |  |                             | 208    |   |                           |  
|Amortization of intangible assets                                            |  |                             | 437    |   |                           |  
|                                                                             |  |                             |        |   |                           |  
|Total operating expenses                                                     |  |                             | 20,101 |   |                           |  
|                                                                             |  |                             |        |   |                           |  
|Loss from operations                                                         |  |                             | (3,050 | ) |                           |  
|Interest and other income                                                    |  |                             | 181    |   |                           |  
|Interest and other expense                                                   |  |                             | (84    | ) |                           |  
|                                                                             |  |                             |        |   |                           |  
|Net loss                                                                     |  | $                           | (2,953 | ) |                           | $
|                                                                             |  |                             |        |   |                           |  
|Basic and diluted net loss per share .                                       |  | $                           | (0.05  | ) |                           | $
|                                                                             |  |                             |        |   |                           |  
|Shares used in computationbasic and diluted                                 |  |                             | 56,178 |   |                           |  
|                                                                             |  |                             |        |   |                           |  
|*  Amortization of stock-based compensation not included inexpense line item |  |                             |        |   |                           |  
|Application management services                                              |  | $                           | 23     |   |                           | $
|Research and development                                                     |  |                             | 5      |   |                           |  
|Sales and marketing                                                          |  |                             | 62     |   |                           |  
|General and administrative                                                   |  |                             | 118    |   |                           |  
|                                                                             |  |                             |        |   |                           |  
|Total amortization of stock-based compensation                               |  | $                           | 208    |   |                           | $
|                                                                             |  |                             |        |   |                           |  



See accompanying notes
to condensed consolidated financial statements.



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CORIO, INC.



CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)



|                                                                                |  | SIX MONTHS ENDED JUNE 30, |        
|------------------------------------------------------------------------------- |  | ------------------------- | -------
|                                                                                |  | 2003                      |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                           |  |                           |        
|Net loss                                                                        |  | $                         | (8,108 
|Adjustments to reconcile net loss to net cash used in operating activities:     |  |                           |        
|Depreciation                                                                    |  |                           | 6,087  
|Amortization of intangible assets                                               |  |                           | 890    
|Amortization of stock-based compensation                                        |  |                           | 480    
|Amortization of warrants                                                        |  |                           | 423    
|Compensation for grants of stock, options and warrants in exchange for services |  |                           | 18     
|Loss on retirement of assets                                                    |  |                           |       
|Changes in assets and liabilities:                                              |  |                           |        
|Accounts receivable                                                             |  |                           | 3,078  
|Prepaid expenses and other current assets                                       |  |                           | 721    
|Accounts payable                                                                |  |                           | (1,632 
|Accrued liabilities                                                             |  |                           | (2,590 
|Deferred revenue                                                                |  |                           | (628   
|Other liabilities                                                               |  |                           | 2,088  
|                                                                                |  |                           |        
|Net cash provided by (used in) operating activities                             |  |                           | 827    
|                                                                                |  |                          
|CASH FLOWS FROM INVESTING ACTIVITIES:                                           |  |                           |        
|Purchases of short-term investments                                             |  |                           | (28,178
|Sales of short-term investments                                                 |  |                           | 21,822 
|Purchase of property and equipment                                              |  |                           | (1,913 
|Other assets                                                                    |  |                           | 157    
|Additional cash paid for acquisition                                            |  |                           | (716   
|                                                                                |  |                           |        
|Net cash (used in) provided by investing activities                             |  |                           | (8,828 
|                                                                                |  |                          
|CASH FLOWS FROM FINANCING ACTIVITIES:                                           |  |                           |        
|Proceeds from sale of common stock and exercise of stock options                |  |                           | 477    
|Payments on debt obligations                                                    |  |                           | (225   
|Payments on capital lease obligations                                           |  |                           | (3,131 
|                                                                                |  |                           |        
|Net cash used in financing activities                                           |  |                           | (2,879 
|                                                                                |  |                           |        
|Net (decrease) increase in cash and cash equivalents                            |  |                           | (10,880
|Cash and cash equivalents, beginning of period                                  |  |                           | 26,908 
|                                                                                |  |                           |        
|Cash and cash equivalents, end of period                                        |  | $                         | 16,028 
|                                                                                |  |                           |        
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                               |  |                           |        
|Cash paid for interest                                                          |  | $                         | 198    
|                                                                                |  |                           |        
|SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:                       |  |                           |        
|Acquisition of property and equipment under capital leases                      |  | $                         |       
|                                                                                |  |                           |        
|Deferred stock-based compensation/forfeitures, net                              |  | $                         | 274    
|                                                                                |  |                           |        
|Unrealized loss on investments                                                  |  | $                         | (53    
|                                                                                |  |                           |        



See accompanying notes
to condensed consolidated financial statements.



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CORIO, INC.



NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES



BASIS OF PRESENTATION



The accompanying unaudited condensed consolidated financial statements have
been prepared by Corio, Inc. (Corio or the Company) and reflect all adjustments that 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 consolidated financial statements and notes included herein should be read in conjunction with the audited financial statements and accompanying notes included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2002.



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 except weighted average exercise price):



|                                   |  | JUNE 30, 2003                  |      | JUNE 30, 2002
|---------------------------------- |  | ------------------------------ | ---- | -------------
|                                   |  | WEIGHTED AVERAGE EXERCISEPRICE |      | SHARES       
|Preferred stock warrants           |  | $                              | 1.70 |              
|Common stock subject to repurchase |  | $                              | 0.01 |              
|Common stock options and warrants  |  | $                              | 1.81 |              



STOCK-BASED COMPENSATION



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



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



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



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|                                                                                                                             |  | THREE MONTHS ENDED JUNE 30, |        |   | SIX MONTHS ENDED JUNE 30, |  
|---------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | -
|                                                                                                                             |  | 2003                        |        |   | 2002                      |  
|Net loss as reported                                                                                                         |  | $                           | (2,953 | ) |                           | $
|Add stock-based employee compensation expense included in reported net loss, net of tax of $0                                |  |                             | 208    |   |                           |  
|Deduct total stock-based employee compensation determined under the fair-value-based method for all awards, net of tax of
$0 |  |                             | (1,678 | ) |                           |  
|                                                                                                                             |  |                             |        |   |                           |  
|Pro forma net loss                                                                                                           |  | $                           | (4,423 | ) |                           | $
|Basic and diluted net loss per share:                                                                                        |  |                             |        |   |                           |  
|As reported                                                                                                                  |  | $                           | (0.05  | ) |                           | $
|Pro forma                                                                                                                    |  | $                           | (0.08  | ) |                           | $



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



|                         |  | THREE MONTHS ENDED JUNE 30, |   |  | SIX MONTHS ENDED JUNE 30, |  
|------------------------ |  | --------------------------- | - |  | ------------------------- | -
|                         |  | 2003                        |   |  | 2002                      |  
|Expected life (in years) |  | 4.0                         |   |  | 4.0                       |  
|Risk free interest rate  |  | 2.07                        | % |  | 4.09                      | %
|Volatility               |  | 107                         | % |  | 105                       | %
|Dividend yield           |  | 0                           | % |  | 0                         | %



Weighted-average fair
values per share for options granted under the Companys stock option plans during the three and six months ended June 30, 2003 and 2002 were:



|                                                                                                  |  | THREE MONTHS ENDED JUNE 30, |      | SIX MONTHS ENDED JUNE 30,
|------------------------------------------------------------------------------------------------- |  | --------------------------- | ---- | -------------------------
|                                                                                                  |  | 2003                        |      | 2002                     
|Weighted-average fair values per share for options granted under the Companys stock option plans |  | $                           | 0.77 |                          



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



|                         |  | THREE AND SIX MONTHS ENDED JUNE 30, |  
|------------------------ |  | ----------------------------------- | -
|                         |  | 2003                                |  
|Expected life (in years) |  | 0.5 to 2.0                          |  
|Risk free interest rate  |  | 1.71                                | %
|Volatility               |  | 105                                 | %
|Dividend yield           |  | 0                                   | %



There were no common
stock purchase rights granted under the Companys employee stock purchase plan during the three months ended June 30, 2003 and 2002.



Weighted-average fair values per share for options granted under the Companys employee stock purchase plan during the six months ended June 30, 2003
and 2002 were:



|                                                                                                            |  | SIX MONTHS ENDED JUNE 30,
|----------------------------------------------------------------------------------------------------------- |  | -------------------------
|                                                                                                            |  | 2003                     
|Weighted-average fair values per share for options granted under the Companys employee stock purchase plan |  | $                        



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RESTRICTED CASH



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



PRINCIPLES OF CONSOLIDATION



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



RECLASSIFICATIONS



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



RECENT ACCOUNTING PRONOUNCEMENTS



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



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



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



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



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



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



NOTE 2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. At June 30, 2003 and December 31, 2002, the Company
had outstanding invoices of $2,217,000 and $3,844,000, respectively, related to customers which the Company deemed as credit risks. Since the revenue related to the collection of these invoices is recognized on a cash basis, these amounts have not
been included in the accounts receivable balances. Included in accounts receivable at June 30, 2003 and December 31, 2002 were $282,000 and $1,443,000, respectively, of unbilled receivables under various professional services contracts.



NOTE 3WARRANTS



On September 27, 2000, Cap Gemini Ernst & Young U.S., L.L.C exercised its right to convert a portion of its initial
warrant representing 2,333,333 shares into 960,810 shares of common stock through a cashless exercise. As these shares outstanding were repurchaseable under certain circumstances, the fair value of these shares subject to repurchase were remeasured
each period until May 2003, when the repurchase rights lapsed. Amortization expense (credit) of $337,000 and $(103,000) was recorded in sales and marketing expense for the three months ended June 30, 2003 and 2002, respectively, related to these
shares. Amortization expense of $416,000 and $126,000 was recorded in sales and marketing expense for the six months ended June 30, 2003 and 2002, respectively, related to these shares.



NOTE 4STOCK-BASED COMPENSATION



In connection with stock options granted to employees to purchase common stock, the Company recorded reductions in deferred stock-based compensation of
$19,000 and $98,000 for the three months ended June 30, 2003 and 2002, respectively, and $274,000 and $2.2 million for the six months ended June 30, 2003 and 2002, respectively. Such amounts represent unamortized deferred stock compensation for
unvested options that were forfeited upon severance. The deferred charges for employee options are being amortized to expense using the graded vesting approach, prescribed by FASB Interpretation No. 28, through 2004. Amortization of deferred
stock-based compensation expense was $208,000 and $960,000 for the three months ended June 30, 2003 and 2002, respectively and $480,000 and $1.1 million for the six months ended June 30, 2003 and 2002, respectively, net of stock options forfeited.



NOTE 5SIGNIFICANT CUSTOMER INFORMATION AND SEGMENT REPORTING
INFORMATION



The Companys operations have been
classified into two reportable 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
reportable segments.



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##### Table of Contents

Disaggregated information is as follows (in thousands):



|                                         |  | APPLICATION MANAGEMENT SERVICES |        | PROFESSIONAL SERVICES |   |       | UNALLOCATED |  |   | TOTAL   |  
|---------------------------------------- |  | ------------------------------- | ------ | --------------------- | - | ----- | ----------- |  | - | ------- | -
|For the Three Months Ended June 30, 2003 |  |                                 |        |                       |   |       |             |  |   |         |  
|Revenues                                 |  | $                               | 14,838 |                       | $ | 2,213 |             |  | $ |        |  
|Depreciation                             |  | $                               | 2,503  |                       | $ | 3     |             |  | $ | 372     |  
|Segment profit (loss)                    |  | $                               | 2,929  |                       | $ | 501   |             |  | $ | (6,383  | )
|                                         |  |                                 |        |                      
|For the Three Months Ended June 30, 2002 |  |                                 |        |                       |   |       |             |  |   |         |  
|Revenues                                 |  | $                               | 8,992  |                       | $ | 2,910 |             |  | $ |        |  
|Depreciation                             |  | $                               | 2,151  |                       | $ | 15    |             |  | $ | 468     |  
|Segment profit (loss)                    |  | $                               | 712    |                       | $ | (242  | )           |  | $ | (8,200  | )
|                                         |  |                                 |        |                      
|For the Six Months Ended June 30, 2003   |  |                                 |        |                       |   |       |             |  |   |         |  
|Revenues                                 |  | $                               | 31,467 |                       | $ | 4,588 |             |  | $ |        |  
|Depreciation                             |  | $                               | 5,189  |                       | $ | 12    |             |  | $ | 886     |  
|Segment profit (loss)                    |  | $                               | 6,344  |                       | $ | 863   |             |  | $ | (15,315 | )
|                                         |  |                                 |        |                      
|For the Six Months Ended June 30, 2002   |  |                                 |        |                       |   |       |             |  |   |         |  
|Revenues                                 |  | $                               | 19,018 |                       | $ | 5,976 |             |  | $ |        |  
|Depreciation                             |  | $                               | 4,298  |                       | $ | 30    |             |  | $ | 1,144   |  
|Segment profit (loss)                    |  | $                               | 1,697  |                       | $ | (898  | )           |  | $ | (16,539 | )



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



Significant customer information is as follows:



|           |  | PERCENT OF TOTAL REVENUE    |   |  | PERCENT OF TOTALACCOUNTS RECEIVABLE |  
|---------- |  | --------------------------- | - |  | ----------------------------------- | -
|           |  | THREE MONTHS ENDED JUNE 30, |   |  | SIX MONTHS ENDED JUNE 30,           |  
|           |  | 2003                        |   |  | 2002                                |  
|Customer A |  | 16                          | % |  |                                    |  
|Customer B |  |                            |   |  | 13                                  | %
|Customer C |  |                            |   |  |                                    |  
|Customer D |  |                            |   |  |                                    |  
|Customer E |  |                            |   |  |                                    |  



Percentages are listed
in the table above only when the result is 10% or greater. Customer A is a cash basis customer and therefore its outstanding invoices have not been included in the Companys accounts receivable balances.



NOTE 6RESTRUCTURING AND IMPAIRMENT ACCRUAL



The following table sets forth the charges taken against the restructuring
and impairment accrual in the six months ended June 30, 2003 and the remaining restructuring and impairment accrual balance at June 30, 2003 (in thousands):



|                         |  | DECEMBER 31, 2002 |       | ADDITIONS/ADJUSTMENTS |   |       | CASH PAID |  |   | JUNE 30, 2003
|------------------------ |  | ----------------- | ----- | --------------------- | - | ----- | --------- |  | - | -------------
|Office lease obligations |  | $                 | 3,355 |                       | $ | 2,473 |           |  | $ | (670         
|Employee severance       |  |                   | 440   |                       |   |      |           |  |   | (440         
|Asset abandonments       |  |                   | 434   |                       |   | (139  | )         |  |   | (235         
|                         |  |                   |       |                       |   |       |           |  |   |              
|                         |  | $                 | 4,229 |                       | $ | 2,334 |           |  | $ | (1,345       
|                         |  |                   |       |                       |   |       |           |  |   |              



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



NOTE 7INCOME TAXES



Since inception, the Company has incurred net losses for federal and state tax purposes, and anticipates losses for the
foreseeable future. The Company has therefore not recognized any tax provision or benefit for income taxes for the three-month and six-month periods ended June 30, 2003 and 2002.



NOTE 8COMMITMENTS AND CONTINGENCIES



Litigation/Arbitration



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



In November 2001, Corio filed a demand for
arbitration against LivePerson, Inc. with the American Arbitration Association in San Francisco County. The arbitration related to a dispute around a services contract between the parties. On July 23, 2003, the arbitrator in this dispute issued a
judgment relating to the arbitration, awarding Corio damages of $1,115,440 plus pre-judgment interest from September 21, 2001 (the interest is likely to total approximately $210,000). LivePerson, Inc. has indicated that it is evaluating its options
in connection with this judgment, including a motion to vacate the award. Corio intends to dispute any motion to vacate and believes it has a good claim, but receipt of the funds pursuant to the arbitrators judgment is uncertain at this point.



Service Level Agreements



The Companys application management
services contracts contain service level agreements that obligate the Company to provide its applications at certain levels of performance. If the Company fails to meet these service levels, the Company may be contractually obligated to provide its
customers a partial credit for its services rendered. If the Company were to continue to fail to meet these service levels, certain of its customers may then have the right to cancel their contracts with the Company. The Companys contracts
generally limit the scope and circumstances in which the Company would provide credits to its customers. The Company believes its policies and practices limit its exposure related to these service level obligations. Numerous factors can affect the
service level provided by the Company. The Company cannot determine the maximum amount of future credits, if any, related to such service level obligations.



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##### Table of Contents

|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 consolidated 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 2002 Annual Financial Report to Stockholders.



THIS REPORT ON FORM 10-Q 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, AND THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995, 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 implement, integrate and manage a suite of enterprise software applications from
leading vendors offered to our customers over a secure network. This suite of applications is designed to accommodate the requirements of medium to large, public, private, non-profit and public sector companies. We enable our customers to avoid many
of the significant and unpredictable ongoing application management challenges and costs. Following the implementation of software applications by our partners or us, our customers pay a monthly service fee based largely on the number of
applications used, total users, the level of service required and other factors. By providing application implementation, integration, management and various upgrade services and related hardware and network infrastructure, we reduce the information
technology, or IT, burdens of our customers, enabling them to focus on their core businesses and react quickly to dynamic market conditions.



CRITICAL ACCOUNTING POLICIES



Managements Discussion and Analysis of Financial Condition and Results of Operations are based on our condensed consolidated financial statements.
The preparation of our condensed consolidated financial statements and related disclosures requires management to make judgments, assumptions and estimates that affect the amounts reported in the condensed consolidated financial statements and
accompanying notes.



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



| |  |  | Cash basis customers
| | - |  | --------------------



| |  |  | Allowance for doubtful accounts
| | - |  | -------------------------------



| |  |  | Loss contingencies
| | - |  | ------------------



| |  |  | Valuation allowance
| | - |  | -------------------



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##### Table of Contents

Cash Basis Customers



We recognize revenue as the services are provided to our customers, provided that collection of the receivable is probable.
We regularly monitor the payment activity and credit worthiness of our customers. If we determine that collection of revenue from a particular customer or contract is no longer probable, we revert to recognizing revenue as payment for services is
received and we designate those customers as cash basis customers. Revenues recognized from cash basis customers were $5.0 million and $4.4 million for the three months ended June 30, 2003 and 2002, respectively. Revenues recognized from
cash basis customers were $11.3 million and $9.3 million for the six months ended June 30, 2003 and 2002, respectively. At June 30, 2003 and December 31, 2002, we had outstanding invoices of $2.2 million and $3.8 million, respectively, related to
services provided to cash basis customers. Since revenue related to these invoices is recognized on a cash basis, these amounts have not been included in our accounts receivable balances. Our revenue in the future could fluctuate significantly due
to the timing and amount of payments received from cash basis customers as well as the change in composition of these customers.



Allowance For Doubtful Accounts



The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts and the aging of the accounts
receivable. If there is a deterioration of a major customers credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due us could be adversely affected. We regularly review
the adequacy of our allowance for doubtful accounts through the identification of specific receivables where we expect that payment will not be received, in addition to establishing an unallocated reserve that is applied to all amounts that are not
specifically identified. In determining specific receivables where collection may not be received, we review past due receivables and give consideration to prior collection history, changes in the customers overall business condition and the
potential risk associated with the customers industry among other factors. An unallocated reserve is established for all amounts which have not been specifically identified, based on applying a graduated percentage to each invoices
relative aging category. The allowance for doubtful accounts reflects our best estimate as of the reporting dates. Changes may occur in the future, which may make us reassess the collectibility of amounts and at which time we may need to provide
additional allowances in excess of that currently provided. At June 30, 2003 and December 31, 2002, our allowance for doubtful accounts was $310,000 and $403,000, respectively. The decrease was mainly due to a corresponding decrease in accounts
receivable.



Loss Contingencies



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



For our restructuring liability, we estimate the amounts for employee
severances, impaired assets and vacated office space. We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of any asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. For our office lease restructuring liability, our
estimate is based on our assessment of our predicted sublease income over the remaining lease term. We increased our office lease restructuring liability in the first quarter of 2003 as a result of the sublease agreement signed in May 2003.



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



Valuation Allowance



We provided a valuation allowance against our entire net deferred tax asset, primarily consisting of net operating loss carryforwards as of December 31,
2002. The valuation allowance was recorded given the losses we incurred through December 31, 2002, and our uncertainties regarding future operating profitability and taxable income. If we do not achieve profitability, we will not fully realize the
deferred tax benefits.



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Selected Financial Data



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



|                                         |  | THREE MONTHS ENDED JUNE 30, 2003 |        |   | THREE MONTHS ENDED JUNE 30, 2002 |     |   | THREE MONTHS ENDEDJUNE 30, 2003 VERSUSJUNE 30, 2002 |  
|---------------------------------------- |  | -------------------------------- | ------ | - | -------------------------------- | --- | - | --------------------------------------------------- | -
|                                         |  | AMOUNT                           |        |   | PERCENTAGE OF TOTAL REVENUES     |     |   | AMOUNT                                              |  
|REVENUES:                                |  |                                  |        |   |                                  |     |   |                                                     |  
|Application management services          |  | $                                | 14,838 |   |                                  | 87  | % |                                                     | $
|Professional services and other          |  |                                  | 2,213  |   |                                  | 13  | % |                                                     |  
|                                         |  |                                  |        |   |                                  |     |   |                                                     |  
|Total revenues                           |  |                                  | 17,051 |   |                                  | 100 | % |                                                     |  
|                                         |  |                                  |        |   |                                  |    
|COSTS AND EXPENSES:                      |  |                                  |        |   |                                  |     |   |                                                     |  
|Application management services          |  |                                  | 11,909 |   |                                  | 70  | % |                                                     |  
|Professional services and other          |  |                                  | 1,712  |   |                                  | 10  | % |                                                     |  
|Research and development                 |  |                                  | 1,346  |   |                                  | 8   | % |                                                     |  
|Sales and marketing                      |  |                                  | 2,301  |   |                                  | 13  | % |                                                     |  
|General and administrative               |  |                                  | 2,188  |   |                                  | 13  | % |                                                     |  
|Restructuring charges                    |  |                                  |       |   |                                  | 0   | % |                                                     |  
|Amortization of stock based compensation |  |                                  | 208    |   |                                  | 1   | % |                                                     |  
|Amortization of intangible assets        |  |                                  | 437    |   |                                  | 3   | % |                                                     |  
|                                         |  |                                  |        |   |                                  |     |   |                                                     |  
|Total operating expenses                 |  |                                  | 20,101 |   |                                  | 118 | % |                                                     |  
|                                         |  |                                  |        |   |                                  |     |   |                                                     |  
|Loss from operations                     |  |                                  | (3,050 | ) |                                  | -18 | % |                                                     |  
|Interest and other income                |  |                                  | 181    |   |                                  | 1   | % |                                                     |  
|Interest and other expense               |  |                                  | (84    | ) |                                  | 0   | % |                                                     |  
|                                         |  |                                  |        |   |                                  |     |   |                                                     |  
|Net loss                                 |  | $                                | (2,953 | ) |                                  | -17 | % |                                                     | $
|                                         |  |                                  |        |   |                                  |     |   |                                                     |  
|                                         |  |                                  |       
|                                         |  | SIX MONTHS ENDED JUNE 30, 2003   |        |   | SIX MONTHS ENDED JUNE, 2002      |     |   | SIX MONTHS ENDEDJUNE 30, 2003 VERSUSJUNE 30, 2002   |  
|                                         |  | AMOUNT                           |        |   | PERCENTAGE OF TOTAL REVENUES     |     |   | AMOUNT                                              |  
|REVENUES:                                |  |                                  |        |   |                                  |     |   |                                                     |  
|Application management services          |  | $                                | 31,467 |   |                                  | 87  | % |                                                     | $
|Professional services and other          |  |                                  | 4,588  |   |                                  | 13  | % |                                                     |  
|                                         |  |                                  |        |   |                                  |     |   |                                                     |  
|Total revenues                           |  |                                  | 36,055 |   |                                  | 100 | % |                                                     |  
|                                         |  |                                  |        |   |                                  |    
|COSTS AND EXPENSES:                      |  |                                  |        |   |                                  |     |   |                                                     |  
|Application management services          |  |                                  | 25,123 |   |                                  | 70  | % |                                                     |  
|Professional services and other          |  |                                  | 3,725  |   |                                  | 10  | % |                                                     |  
|Research and development                 |  |                                  | 2,696  |   |                                  | 7   | % |                                                     |  
|Sales and marketing                      |  |                                  | 4,507  |   |                                  | 13  | % |                                                     |  
|General and administrative               |  |                                  | 4,578  |   |                                  | 13  | % |                                                     |  
|Restructuring charges                    |  |                                  | 2,334  |   |                                  | 6   | % |                                                     |  
|Amortization of stock based compensation |  |                                  | 480    |   |                                  | 1   | % |                                                     |  
|Amortization of intangible assets        |  |                                  | 890    |   |                                  | 3   | % |                                                     |  
|                                         |  |                                  |        |   |                                  |     |   |                                                     |  
|Total operating expenses                 |  |                                  | 44,333 |   |                                  | 123 | % |                                                     |  
|                                         |  |                                  |        |   |                                  |     |   |                                                     |  
|Loss from operations                     |  |                                  | (8,278 | ) |                                  | -23 | % |                                                     |  
|Interest and other income                |  |                                  | 381    |   |                                  | 1   | % |                                                     |  
|Interest and other expense               |  |                                  | (211   | ) |                                  | -1  | % |                                                     |  
|                                         |  |                                  |        |   |                                  |     |   |                                                     |  
|Net loss                                 |  | $                                | (8,108 | ) |                                  | -23 | % |                                                     | $
|                                         |  |                                  |        |   |                                  |     |   |                                                     |  



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RESULTS OF OPERATIONS



THREE AND SIX MONTHS ENDED JUNE 30, 2003 and 2002



REVENUES



Total revenue was $17.1 million and $11.9 million for the three months ended June 30, 2003 and June 30, 2002, respectively. For the three months ended
June 30, 2003, one customer accounted for 16% of total revenues. For the three months ended June 30, 2002, a different customer accounted for 13% of total revenues. For the six months ended June 30, 2003, no one single customer accounted for 10% or
more of total revenues. For the six months ended June 30, 2002, one customer accounted for 12% of total revenues.



In the ordinary course of business, we recorded revenue of $16,000 for the three and six months ended June 30, 2003 arising from transactions with one
company with which we have directors in common. At June 30, 2003, we had no accounts receivable arising from such transactions. We recorded revenue of $795,000 and $2.1 million for the three and six months ended June 30, 2002, respectively, arising
from transactions with four companies with which we had directors in common. At June 30, 2002, accounts receivable included $253,000 arising from such transactions.



One of our customers represented 11% of total revenues in fiscal 2002 and its contract expired in May 2003. In June 2003,
the customer signed a new 10 month contract, effective June 1, 2003, for a monthly recurring revenue amount which was significantly less than its previous contract amount. The loss of revenue from this customer will adversely affect total revenues
in the third quarter compared to the second quarter of 2003. If we lose additional, significant customers and are not able to replace the revenue from these customers with new customers or additions or extensions for current customers, our recurring
revenue will not increase and may decline.



APPLICATION
MANAGEMENT SERVICES REVENUES.Revenues from our application management services were $14.8 million for the three months ended June 30, 2003, including $507,000 in non-recurring revenues from customer contract terminations. Included in the three
months ended June 30, 2003 revenues of $14.8 million is $5.0 million recognized as a result of payments from cash basis customers. For the three months ended June 30, 2002, our revenues of $9.0 million included approximately $1.1 million in
non-recurring revenues from customer contract terminations. Included in the three months ended June 30, 2002 revenues of $9.0 million was $4.2 million recognized as a result of payments from cash basis customers. For the six months ended June 30,
2003, revenues from our application management services were $31.5 million, including approximately $1.0 million in non-recurring revenues from customer contract terminations. Included in the six months ended June 30, 2003 revenues of $31.5 million
was $10.9 million recognized as a result of payments from cash basis customers. For the six months ended June 30, 2002, revenues from our application management services were $19.0 million, including $ 2.2 million in non-recurring revenues from
customer contract terminations. Included in the six months ended June 30, 2002 revenues of $19.0 million was $8.9 million recognized as a result of payments from cash basis customers. The increase in application management services revenues for the
three and six months ended June 30, 2003 was primarily due to the additional customer revenue acquired as a result of our September 2002 acquisition of Qwest Cyber.Solutions (QCS). At June 30, 2003 and December 31, 2002, we had balances of $1.9
million and 2.0 million, respectively, for deferred application management services revenues primarily from several customers who prepaid a portion of their contract. These deferred revenues are recognized in our statement of operations as the
related services are provided over the life of the contract.



PROFESSIONAL SERVICES AND OTHER REVENUES.Our professional services and other revenues were $2.2 million for the three months ended June 30, 2003, including $13,000 recognized as a result of payments from cash basis customers, and
$2.9 million for the three months ended June 30, 2002, including $207,000 recognized as a result of payments from cash basis customers. Our professional services and other revenues were $4.6 million for the six months ended June 30, 2003, including
$435,000 recognized as a result of payments from cash basis customers and $6.0 million for the six months ended June 30, 2002, including $419,000 recognized as a result of payments from cash basis customers. The decrease in professional services
revenues for the three and six months ended June 30, 2003 was primarily due to the decreased number of new customer implementations. At June 30, 2003 and December 31, 2002, we had balances of $156,000 and $647,000, respectively, for deferred
professional services revenues resulting from customer payments that we required in advance of providing our professional services work. We anticipate that professional services revenue and the associated margins will fluctuate significantly from
period to period depending on the timing and size of projects, the amount of such work completed by independent third party integrators and other factors.



COSTS AND EXPENSES



APPLICATION MANAGEMENT SERVICES EXPENSES. Application management services expenses, excluding non-cash stock based compensation of $23,000 and
$83,000 for the three months ended June 30, 2003 and 2002, respectively, were $11.9 million for the three months ended June 30, 2003 and $8.3 million for the three months ended June 30, 2002.



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Application management services expenses, excluding non-cash stock based compensation of $59,000 and $177,000 for the six months ended June 30, 2003 and
2002, respectively, were $25.1 million for the six months ended June 30, 2003 and $17.3 million for the six months ended June 30, 2002. The increase in application management services expenses for the three and six months ended June 30, 2003 and
2002 was mainly attributable to the additional costs associated with integrating, administering, and supporting the customers acquired from QCS in September 2002. The $3.6 million increase in expenses for the three months ended June 30, 2003
compared to the three months ended June 30, 2002 was attributable to a $1.9 million increase in data center fees, a $634,000 increase in payroll expenses, a $228,000 increase in outside contractor expenses, a $293,000 increase in telecommunications
cost, a $228,000 increase in software maintenance expenses and a $351,000 increase in depreciation expense. The $7.8 million increase for the six months ended June 30, 2003 compared to the six months ended June 30, 2002 was attributable to a $3.7
million increase in data center fees, a $1.6 million increase in payroll expenses, a $891,000 increase in depreciation expense, a $590,000 increase in outside contractor expenses, a $532,000 increase in software maintenance expense and a $485,000
increase in equipment repairs and maintenance expense.



PROFESSIONAL SERVICES AND OTHER EXPENSES. Professional services and other expenses were $1.7 million for the three months ended June 30, 2003 and $3.2 million for the three months ended June 30, 2002. The $1.5 million decrease was
due primarily to a reduction in the number of active contracts, which resulted in a reduction of $964,000 in personnel costs, a $236,000 decrease in travel related expenses and a $128,000 decrease in allocated facilities expenses. Professional
services expenses and other were $3.7 million for the six months ended June 30, 2003 and $6.9 million for the six months ended June 30, 2002. The $3.2 million decrease in expenses was primarily attributable to the reduction in the number of
contracts in process which resulted in a reduction of $1.8 million in personnel costs, a $389,000 decrease in outside contractor expenses, a $300,000 decrease in travel related expenses and a $251,000 reduction in facilities expenses. The remaining
difference was primarily attributable to an expense recorded in the six months ended June 30, 2002 to increase our provision for contract losses related to our professional services fixed fee implementations. No adjustment to our provision for
contract losses was recorded in the six months ended June 30, 2003. There were no professional services stock based compensation charges for the three and six months ended June 30, 2003 or 2002.



RESEARCH AND DEVELOPMENT. Research and development expenses, excluding
non-cash stock based compensation of $5,000 and $35,000 for the three months ended June 30, 2003 and 2002, respectively, were $1.3 million for the three months ended June 30, 2003 and $1.7 million for the three months ended June 30, 2002. Research
and development expenses as a percentage of total revenues were 8% for the three months ended June 30, 2003 and 15% for the three months ended June 30, 2002. The $400,000 expense decrease was due to a $480,000 reduction in personnel costs and a
$76,000 reduction in depreciation expenses, which were partially offset by a $111,000 increase in outside contractor expenses.



Research and development expenses, excluding non-cash stock based compensation of ($9,000) and $64,000 for the six months ended June 30, 2003 and 2002,
respectively, were $2.7 million for the six months ended June 30, 2003 and $3.8 million for the six months ended June 30, 2002. Research and development expenses as a percentage of total revenues were 7% for the six months ended June 30, 2003 and
15% for the six months ended June 30, 2002. The $1.1 million decrease in expense was mainly attributable to a $978,000 reduction in personnel costs and a $100,000 reduction in depreciation expense mainly due to certain assets being fully depreciated
in 2003.



SALES AND MARKETING EXPENSES.Sales and
marketing expenses, excluding non-cash stock based compensation of $62,000 and $201,000 for the three months ended June 30, 2003 and 2002, respectively, were $2.3 million for the three months ended June 30, 2003 and $2.8 million for the three months
ended June 30, 2002. Sales and marketing expenses as a percentage of total revenues were 13% for the three months ended June 30, 2003 and 24% for the three months ended June 30, 2002. The $500,000 expense decrease was attributable to a $560,000
reduction in personnel costs, a $200,000 reduction in advertising expenses and a $141,000 decrease in amortization expense associated with a marketing alliance that was fully amortized in April 2002. The decreases in expenses were offset by a
$441,000 increase in amortization expenses for non-cash costs associated with repurchasable shares issued to Cap Gemini Ernst & Young.



Sales and marketing expenses, excluding non-cash stock based compensation of $160,000 and $558,000 for the six months ended June 30, 2003 and 2002,
respectively, were $4.5 million for the six months ended June 30, 2003 and $6.2 million for the six months ended June 30, 2002. Sales and marketing expenses as a percentage of total revenues were 13% for the six months ended June 30, 2003 and 25%
for the six months ended June 30, 2002. The $1.7 million expense decrease was attributable to a $903,000 decline in payroll expenses, a $134,000 reduction in travel related expenses, a $292,000 decrease in advertising and marketing programs, and a
$580,000 reduction in amortization expense associated with a marketing alliance that was fully amortized in April 2002.



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GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses, excluding non-cash stock
based compensation of $118,000 and $641,000 for the three months ended June 30, 2003 and 2002, respectively, were $2.2 million for the three months ended June 30, 2003 and $3.0 million for the three months ended June 30, 2002, respectively. General
and administrative expenses as a percentage of total revenues were 13% for the three months ended June 30, 2003 and 25% for the three months ended June 30, 2002. The $800,000 decrease in general and administrative expenses was due to a $150,000
decline in payroll costs, a $189,000 decrease in telecommunications costs due to lower negotiated rates, a $114,000 decrease in equipment rental expense, a $95,000 decrease in professional services fees and a $172,000 decrease in rent expense due to
vacating a portion of our headquarters facility related to restructuring activities initiated in the third quarter of 2002.



General and administrative expenses, excluding non-cash stock based compensation of $270,000 and $301,000 for the six months ended June 30, 2003 and 2002,
respectively, were $4.6 million for the six months ended June 30, 2003, and were $6.0 million for the six months ended June 30, 2002. General and administrative expenses as a percentage of total revenues were 13% for the six months ended June 30,
2003 and 24% for the six months ended June 30, 2002. The $1.4 million decrease in general and administrative expenses is attributable to a $450,000 decline in payroll expenses, a $253,000 decrease in telecommunications costs, a $343,000 decrease in
office expenses and a $358,000 decrease in rent expense due to the rent related to the vacated portion of our headquarters facility being already charged to restructuring expense in the third quarter of 2002.



RESTRUCTURING CHARGES.In May 2003, we signed an agreement to sublease
the vacated portion of our headquarters facility through the end of our lease, which is March 2010. During the quarter ended March 31, 2003, we adjusted our estimated loss related to the vacated space and recorded an additional restructuring charge
of $2.5 million to reflect the terms of this new sublease agreement. The impact of this charge was partially offset by the favorable resolution of our liability with respect to various capital leases which resulted in a reduction of $139,000 to
reduce the previously established restructuring reserve. We incurred no restructuring charges during the three months ended June 30, 2003.



AMORTIZATION OF STOCK-BASED COMPENSATION. Amortization of deferred stock-based compensation was $208,000 and $960,000 for the three months ended
June 30, 2003 and 2002, respectively. The amortization of deferred stock-based compensation was $480,000 and $1.1 million for the six months ended June 30, 2003 and 2002, respectively. The deferred charges for employee options are being amortized to
expense using the graded vesting approach prescribed by FASB Interpretation No. 28. We anticipate amortization expense for the third quarter of 2003 to decrease from the second quarter of 2003 due to the impact of the accelerated vesting for options
granted prior to our IPO with an exercise price less than the deemed fair value of our common stock.



AMORTIZATION OF OTHER INTANGIBLES.Related to our Qwest Cyber.Solutions (QCS) acquisition, we recorded an intangible asset for our acquired
customer contracts of $2.7 million, which is included in other assets in the accompanying condensed consolidated balance sheet. This intangible asset is being amortized over an estimated life of 18 months. Amortization of the intangible asset was
$437,000 for the three months ended June 30, 2003 and $890,000 for the six months ended June 30, 2003. No amortization expense related to the QCS acquired customer contracts was recognized for the three and six months ended June 30, 2002 as the
acquisition occurred in September 2002.



INTEREST AND OTHER
INCOME AND EXPENSE.Net interest and other income and expense was $97,000 for the three months ended June 30, 2003 and $295,000 for the three months ended June 30, 2002. Net interest and other income and expense was $170,000 for the six months
ended June 30, 2003 and $565,000 for the six months ended June 30, 2002. The three and six month decreases in net interest income were due primarily to lower average cash and investment balances as well as lower interest rates at June 30, 2003 and
were offset, in part, by a decrease in interest expense due to lower average debt balances.



INCOME TAXES. Since inception, we have incurred net losses for federal and state tax purposes, and anticipate losses for the foreseeable future. We have therefore not recognized any material tax provision or
benefit for income taxes for the three and six months ended June 30, 2003 and 2002.



LIQUIDITY AND CAPITAL RESOURCES



As of June
30, 2003, we had cash and cash equivalents, short-term investments, and restricted cash of $47.1 million, a decrease of $4.6 million from December 31, 2002. At June 30, 2003, we had cash and cash equivalents of $16.0 million compared to $26.9
million at December 31, 2002. The $10.9 million decrease was primarily the result of $8.8 million of cash used in investing activities and $2.9 million repayment of debt, offset by $827,000 provided by operating activities.



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Net cash provided by operating activities was $827,000 for the six months ended June 30, 2003 compared to
$10.7 million used in operating activities for the six months ended June 30, 2002. The $11.6 million net change was primarily due to a significant decrease in our net loss .



Net cash used in investing activities was $8.8 million for the six months ended June 30, 2003 compared to $14.9 million
provided by investing activities in the six months ended June 30, 2002. For the six months ended June 30, 2003, investing activities consisted primarily of $1.9 million in equipment purchases and $6.4 million of net purchases of short-term
investments. For the six months ended June 30, 2002, cash provided by investing activities was $14.9 million which was mainly attributable to the $14.8 million net sale of short-term investments.



Net cash used by financing activities was $2.9 million and $3.2 million for
the six months ended June 30, 2003 and 2002, respectively. Financing activities consisted primarily of the proceeds from the issuance of common stock and exercise of stock options, offset by repayments of notes and capital leases.



Except for equipment operating leases, we have no off balance sheet financing
arrangements (see Note 7 in the Companys Annual Report on Form 10-K for the year ended December 31, 2002).



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



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ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS



RISK FACTORS



Risks Related to Our Business



We have a history of losses and expect that we will continue to incur losses and negative cash flow and may never be profitable.



We have spent significant funds to date to develop and refine our current
services, to create and run our operations organization, to build and run a professional services organization and to develop and run our sales and marketing resources. We have incurred significant operating and net losses and negative cash flow and
have not achieved profitability. As of June 30, 2003, we had an accumulated deficit of $255 million.



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



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



A significant portion of our current revenue consists of revenue from technology and middle-market companies. These companies are 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. In the past we have terminated our agreements with a substantial number of customers who were unable or unwilling to continue to meet their financial obligations to us and we expect to terminate additional customers in the
future. As a result, our client base will likely be more volatile than those companies whose customers consist of more mature and established entities. If we continue to experience greater than expected customer loss or an inability to collect fees
from our customers in a timely manner because of this volatility, our operating results could be seriously harmed. In addition, uncertainty regarding the stability of the economy in general could continue to diminish and delay demand for our
services. Also, as we move up market and away from high-growth and middle market companies, revenue from termination fees resulting from high-growth and middle market companies may diminish. Moreover, one of our customers represented 11% of total
revenues in fiscal 2002 and its contract expired in May 2003. Although this customer renewed for a short term contract, the new contract is for significantly less recurring revenue and the loss of revenue from this customer and of any other
significant customers will adversely affect our business. If we lose customers representing greater or equal recurring revenue than we replace with new customers or additions or extensions for current customers, our recurring revenue will not
increase and may decline.



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



We have offered our services for a relatively short period of time, and our industry is relatively new. Prior to September 1998, our predecessor
company, DSCI, carried on a different business. Accordingly, we have a limited operating history as a provider of ASP services. Because our business model is relatively new, it continues to evolve. In the future, we may revise our pricing model for
different services, and our model for our customers to gain access to third-party software applications and other third-party services has evolved. Changes in our anticipated business and financial model could materially impact our ability to become
profitable in the future. Additionally, especially as we move up-market to larger, more established customers, the demand for our services is uncertain and the sales process takes 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:



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



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



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



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



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



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



| |  |  | integrate successfully software applications we manage with each other and with our customers existing systems;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | continue to offer new services that complement our existing offerings;
| | - |  | ----------------------------------------------------------------------



| |  |  | increase awareness of our brand; and
| | - |  | ------------------------------------



| |  |  | maintain our current, and develop new, strategic relationships.
| | - |  | ---------------------------------------------------------------



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



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



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



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



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



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



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



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



| |  |  | any decrease in termination fees paid in a quarter versus other quarters;
| | - |  | -------------------------------------------------------------------------



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



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



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



| |  |  | changes in our pricing policies or those of our competitors;
| | - |  | ------------------------------------------------------------



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



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



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



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



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



Our licenses for the third-party software we
use to deliver our services contain limits on our ability to use them that could impair our growth and operating results.



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



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



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



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



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



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



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



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



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



Growth could strain our operations and require us to incur costs to upgrade our infrastructure and expand our personnel.



If our customer base grows significantly, we cannot be sure that we will successfully manage our growth. In order to manage any such growth
successfully, we must:



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



| |  |  | maintain a high level of customer service and support;
| | - |  | ------------------------------------------------------



| |  |  | expand our implementation and consulting resources internally and with third-parties; and
| | - |  | -----------------------------------------------------------------------------------------



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



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



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We will need to perform software upgrades for our customers, and any inability to successfully perform these upgrades
could cause interruptions or errors in our customers software applications, which could increase our costs and delay market acceptance of our services.



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



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



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



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



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



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



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



Our long-term, fixed-price application management contracts may hinder our ability to evolve our business and to ultimately become profitable.



Our business is relatively new and, accordingly, our business and financial models may evolve as the understanding of our
business evolves. We may be unable to adjust our pricing or cost structure with respect to our current customers in response to



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changes we make in our business or financial model due to the long-term, fixed price nature of the application management agreements we have with our
customers. This potential inflexibility may result in our inability to become profitable as rapidly as we would like or at all.



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



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



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



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



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



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



Our current and potential competitors primarily include:



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



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



| |  |  | offshore providers such as Wipro, Tata and Infosys;
| | - |  | ---------------------------------------------------



| |  |  | software vendors, such as Oracle, PeopleSoft, SAP and Siebel Systems; and
| | - |  | -------------------------------------------------------------------------



| |  |  | major technology providers, such as Microsoft.
| | - |  | ----------------------------------------------



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



| |  |  | develop and expand their network infrastructures and service offerings more quickly;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | adapt to new or emerging technologies and changing customer needs faster;
| | - |  | -------------------------------------------------------------------------



| |  |  | take advantage of acquisitions and other opportunities more readily;
| | - |  | --------------------------------------------------------------------



| |  |  | negotiate more favorable agreements with software application vendors;
| | - |  | ----------------------------------------------------------------------



| |  |  | devote greater resources to the marketing and sale of their products; and
| | - |  | -------------------------------------------------------------------------



| |  |  | address customers service-related issues more effectively.
| | - |  | -----------------------------------------------------------



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



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



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We may be unable to deliver effectively our services if our data center management services providers, computer
hardware suppliers or software providers do not provide us with key components of our technology infrastructure in a timely, consistent and cost-effective manner.



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



System failures caused by us or factors outside of our control could cause us to lose our customers and subject us to liability and increased expenses.



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



If we
are unable to retain our executive officers and key personnel, or to integrate new members of our senior management that are critical to our business, we may not be able to successfully manage our business or achieve our objectives.



Our future success depends upon the continued service of our executive
officers and other key personnel. None of our executive officers or key employees is bound by an employment agreement for any specific term. Key personnel may voluntarily terminate due to various reasons such as the 10% salary decrease which we
implemented in January 2003. If we lose the services of one or more of our executive officers or key employees, or if one or more of them decides to join a competitor or otherwise compete directly or indirectly with us, we may not be able to
successfully manage our business or achieve our business objectives.



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



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



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



In September 2002, we consummated the acquisition of the
ASP assets of Qwest Cyber.Solutions LLC, or QCS, and we expect that further consolidation in our industry may occur. We may acquire or make investments in additional complementary businesses, technologies or services if appropriate opportunities
arise. From time to time we may engage in discussions and negotiations with companies regarding acquiring or investing in their businesses, technologies or services. We cannot make assurances that we will be able to identify suitable acquisition or
investment candidates, or that if we do identify suitable candidates, we will be able to make the acquisitions or investments on commercially acceptable terms or at all. If we acquire or



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invest in another company, we could have difficulty assimilating that companys personnel, customers, operations, technology or products and service
offerings. In addition, the key personnel of the acquired company may decide not to work for us. These difficulties could disrupt our ongoing business, distract our management and employees, cause customer loss, increase our expenses and adversely
affect our results of operations. Furthermore, we may incur indebtedness or issue equity securities to pay for any future acquisitions. The issuance of equity or convertible debt securities could be dilutive to our existing stockholders. We may
experience disruption, distraction and unanticipated costs related to the integration of the ASP assets of QCS into our business and may continue to lose customers acquired from QCS.



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



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



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



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



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



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Risks Related to our Industry



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



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



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



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



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



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



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



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



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



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



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



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



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



Our executive officers, directors and entities affiliated with them, in the aggregate, beneficially own approximately 41% of our common stock at June 30,
2003. If they were to act together, these stockholders would be able to exercise control over most matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions. This
concentration of ownership may also have the effect of delaying or preventing a change in control of our company, which could cause our stock price to drop. These actions may be taken even if they are opposed by the other investors, including those
who purchased shares in the initial public offering.



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



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



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



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



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



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



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



|ITEM 3. |  | 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 of one to eighteen months in accordance with the Companys investment policy. The policy also limits the amount of credit exposure to



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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.



|ITEM 4. |  | CONTROLS AND PROCEDURES
|------- |  | -----------------------



Evaluation of disclosure controls and procedures.Our management evaluated, with the participation of our Chief Executive Officer and our Chief
Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have
concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules and forms. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under all potential future conditions.



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



|PART II. |  | OTHER INFORMATION
|-------- |  | -----------------



|ITEM 1. |  | LEGAL PROCEEDINGS
|------- |  | -----------------



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



In November 2001, Corio filed a demand for arbitration against LivePerson, Inc. with the American Arbitration Association in San Francisco County. The
arbitration related to a dispute around a services contract between the parties. On July 23, 2003, the arbitrator in this dispute issued a judgment relating to the arbitration, awarding Corio damages of $1,115,440 plus pre-judgment interest from
September 21, 2001 (the interest is likely to total approximately $210,000). LivePerson, Inc. has indicated that it is evaluating its options in connection with this judgment, including a motion to vacate the award. Corio intends to dispute any
motion to vacate and believes it has a good claim, but receipt of the funds pursuant to the arbitrators judgment is uncertain at this point.



|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.



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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, 2003, the ending date of the reporting period, the approximate amount of net offering proceeds used were $22.1 million to repay outstanding debt and approximately $68.7 million to fund operations. The
remaining net proceeds are 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 May 8, 2003.



(b) At the Annual Meeting, the stockholders elected George J. Still, Jr. as a
Class 3 director to serve for a term of three years. In addition, the term of office as a director continued after the meeting for the following directors: Aneel Bhusri, Glenn W. Marschel, Jr., Ted E. Schlein, George Kadifa, Sharon Garrett and
Ernest M. von Simson.



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



| | 1. |  | the election of George J. Still, Jr. as a Class 3 director to serve for a term 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, 2003.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------



Votes were cast for the election of George J. Still, Jr. as a Class 3
director as follows:



|                     |  | VOTES FOR  |  | VOTES WITHHELD
|-------------------- |  | ---------- |  | --------------
|George J. Still, Jr. |  | 46,625,959 |  | 86,440        



On July 7, 2003,
Sharon Garrett and Ernest M. von Simson tendered their resignations as members of the board of directors.



The ratification of the appointment of KPMG LLP as independent auditors for fiscal year ending December 31, 2003 was approved as follows:



|46,617,044 |  | votes for approval;
|---------- |  | -------------------
|76,505     |  | votes against; and 
|18,850     |  | abstentions.       



|ITEM 5. |  | OTHER INFORMATION
|------- |  | -----------------



None



|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K
|------- |  | --------------------------------



| | (a) |  | Exhibits
| | --- |  | --------



|     | 
|---- | 
|31.1 | 
|     | 
|31.2 | 
|     | 
|32.1 | 
|     | 
|32.2 | 



| | (b) |  | On April 22, 2003, the Company filed a Current Report on Form 8-K in connection with the press release of the Companys financial results for the quarter ended March 31, 2003.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 12, 2003



CORIO, INC.By:

/s/    GEORGE
KADIFAGeorge KadifaPresident and Chief Executive OfficerBy:

/s/    BRETT
WHITEBrett WhiteExecutive Vice President and Chief Financial Officer




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EXHIBIT INDEX



|Exhibit Number |  | Description                                         
|-------------- |  | ----------------------------------------------------
|               | 
|31.1           |  | Section 302 Certification of Chief Executive Officer
|               | 
|31.2           |  | Section 302 Certification of Chief Financial Officer
|               | 
|32.1           |  | Section 906 Certification of Chief Executive Officer
|               | 
|32.2           |  | Section 906 Certification of Chief Financial Officer



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