<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   Form 10-Q

[Mark One]

     [X]  Quarterly report under Section 13 or 15(d) of the Securities Exchange
          Act of 1934 for the quarterly period ended March 31, 2001.

                                      OR

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

                         Commission File No. 333-35402

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


                   DELAWARE                                77-0492528
          (State or other jurisdiction of       (I.R.S. Employer Identification
          incorporation or organization                       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)
                                _______________

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

As of April 30, 2001, there were 50,247,457 shares of the Registrant's common
stock outstanding.
<PAGE>

                                  CORIO, INC.

      QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001

                                     Index

                         PART I. FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                                                                PAGE NO.
                                                                                                                -------
          <S>                                                                                                   <C>
          Item 1.                      Condensed Financial Statements (Unaudited):

                                       Condensed Balance Sheets
                                       March 31, 2001 and December 31, 2000                                         3

                                       Condensed Statements of Operations
                                       Three Months Ended March 31, 2001 and 2000                                   4

                                       Condensed Statements of Cash Flows
                                       Three Months Ended March 31, 2001 and 2000                                   5

                                       Notes to Condensed Financial Statements                                      6

          Item 2.                      Management's Discussion and Analysis of Financial Condition and Results
                                       of Operations                                                                8

          Item 3.                      Quantitative and Qualitative Disclosures About Market Risk                  22

                                       PART II OTHER INFORMATION

          Item 1.                      Legal Proceedings                                                           23

          Item 2.                      Change in Securities and Use of Proceeds                                    23

          Item 3.                      Defaults Upon Senior Securities                                             23

          Item 4.                      Submission of Matters to a Vote of Security Holders                         23

          Item 5.                      Other Information                                                           23

          Item 6.                      Exhibits                                                                    23

                                       Signatures                                                                  24
</TABLE>

                                       2
<PAGE>

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS

                                  CORIO, INC.

                           CONDENSED BALANCE SHEETS
                     (IN THOUSANDS, EXCEPT SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                                               MARCH 31,    DECEMBER 31,
                                                                                                 2001         2000 (1)
                                                                                               ---------    ---------
                                                                                                     (UNAUDITED)
<S>                                                                                            <C>            <C>
          ASSETS
          Current assets:
            Cash and cash equivalents.....................................................     $  34,272      $  58,455
            Short-term investments........................................................        75,872         80,326
            Accounts receivable, net of allowance of $717 and $911 at
              March 31, 2001 and December 31, 2000, respectively..........................         7,615          7,780
            Prepaid expenses and other current assets.....................................         2,685          2,293
                                                                                               ---------      ---------
              Total current assets........................................................       120,444        148,854
          Property and equipment, net.....................................................        30,248         28,221
          Restricted cash.................................................................         7,000              -
          Intangibles, net................................................................           352            564
          Other assets....................................................................         2,424          3,645
                                                                                               ---------      ---------
              Total assets................................................................     $ 160,468      $ 181,284
                                                                                               =========      =========
          LIABILITIES AND STOCKHOLDERS' EQUITY
          Current liabilities:
            Accounts payable..............................................................     $   8,562      $   8,910
            Accrued liabilities...........................................................        11,134         12,616
            Deferred revenue..............................................................         3,615          3,196
            Current portion of notes payable..............................................             -          1,565
            Current portion of capital lease obligations..................................         6,668          6,051
                                                                                               ---------      ---------
              Total current liabilities...................................................        29,979         32,338
          Notes payable, less current portion.............................................             -          1,336
          Capital lease obligations, less current portion.................................         8,923          9,073
          Other liabilities...............................................................           694            694
                                                                                               ---------      ---------
              Total liabilities...........................................................        39,596         43,441
                                                                                               ---------      ---------
          Commitments
          Stockholders' equity:
            Preferred stock:  $0.001 par value; 10,000,000  shares
              authorized..................................................................             -              -
            Common stock:  $0.001 par value; 200,000,000 shares
              authorized; 50,203,691 and 49,288,222 shares issued and
              outstanding at March 31, 2001 and December 31, 2000,
              respectively................................................................            50             49
            Additional paid-in capital....................................................       300,520        299,052
            Unrealized gain on investments................................................           226              -
            Deferred stock-based compensation.............................................       (12,357)       (13,234)
            Accumulated deficit...........................................................      (167,567)      (148,024)
                                                                                               ---------      ---------
          Total stockholders' equity......................................................       120,872        137,843
                                                                                               ---------      ---------
             Total liabilities and stockholders' equity...................................     $ 160,468      $ 181,284
                                                                                               =========      =========
</TABLE>

(1) Derived from audited financial statements.


See accompanying notes to condensed financial statements.

                                       3
<PAGE>

                                  CORIO, INC.

                      CONDENSED STATEMENTS OF OPERATIONS
                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED
                                                                MARCH 31,
                                                           ---------------------
                                                             2001         2000
                                                           --------    ---------
<S>                                                        <C>         <C>
    REVENUES:
      Application management services.................        8,843    $  1,137
      Professional services and other.................        4,726       4,143
                                                            -------    --------
        Total revenues................................       13,569       5,280
    COSTS AND EXPENSES:
      Application management services.................       10,692       5,901
      Professional services and other.................        6,252       5,471
      Research and development........................        2,693       2,233
      Sales and marketing.............................        6,870       9,593
      General and administrative......................        6,409       4,750
      Amortization of stock based compensation........          876       5,257
      Amortization of intangible assets...............          212         641
                                                            -------    --------
        Total operating expenses......................       34,004      33,846
                                                            -------    --------
    Loss from operations..............................      (20,435)    (28,566)
    Interest and other income.........................        2,010         367
    Interest and other expense........................       (1,118)       (320)
                                                            -------    --------
    Net loss..........................................      (19,543)   $(28,519)
                                                            =======    ========
    Basic and diluted net loss per share..............        (0.39)   $ (16,75)
                                                            =======    ========
    Shares used in computation - basic and diluted....       49,650       1,703
                                                           ========    ========

</TABLE>

See accompanying notes to condensed financial statements.

                                       4
<PAGE>

                                  CORIO, INC.

                      CONDENSED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                                                                           THREE MONTHS ENDED
                                                                                                               MARCH 31,
                                                                                                         ----------------------
                                                                                                            2001        2000
                                                                                                         ---------    --------
<S>                                                                                                      <C>          <C>
          CASH FLOWS FROM OPERATING ACTIVITIES:
            Net loss...........................................................................          $ (19,543)   $(28,519)
            Adjustments to reconcile net loss to net cash used in
              operating activities:
              Depreciation and amortization....................................................              3,615       1,679
              Amortization of intangibles......................................................                212         641
              Amortization of deferred stock-based compensation................................                876       5,257
              Amortization of equity based charges.............................................                796         916
              Changes in operating assets and liabilities:
                Accounts receivable............................................................                165      (2,906)
                Prepaid expenses and other current assets......................................               (259)        (54)
                Accounts payable...............................................................               (348)      4,125
                Accrued liabilities............................................................             (1,482)      3,544
                Deferred revenue...............................................................                419       1,130
                                                                                                         ---------    --------
                  Net cash used in operating activities........................................            (15,549)    (13,377)
          CASH FLOWS FROM INVESTING ACTIVITIES:
            Purchase of short-term investments.................................................             (8,075)          -
            Sale of short-term investments.....................................................             12,755           -
            Increase in restricted cash........................................................             (7,000)          -
            Purchase of property and equipment.................................................             (3,673)     (8,134)
            Other assets.......................................................................                420           -
                                                                                                         ---------    --------
                  Net cash used in investing activities........................................             (5,573)     (8,134)
          CASH FLOWS FROM FINANCING ACTIVITIES:
            Proceeds from sale of common stock and exercise of stock options, net                            1,342         904

            Proceeds from note receivable from stockholder.....................................                  -          15
            Payments on debt obligations.......................................................             (2,902)        (87)
            Payments on capital lease obligations..............................................             (1,501)       (264)
                                                                                                         ---------    --------
                  Net cash provided by (used in) financing activities..........................             (3,061)        568
                                                                                                         ---------    --------
          Net decrease in cash and cash equivalents............................................            (24,183)    (20,943)
          Cash and cash equivalents, beginning of period.......................................             58,455      37,177
                                                                                                         ---------    --------
          Cash and cash equivalents, end of period.............................................          $  34,272    $ 16,234
                                                                                                         =========    ========

          SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
            Cash paid for interest.............................................................          $     349    $    205
                                                                                                         =========    ========

          SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
            Acquisition of property and equipment under capital leases.........................          $   1,969    $  1,286
                                                                                                         =========    ========
            Issuance of preferred stock and common stock warrants..............................          $       -    $    781
                                                                                                         =========    ========
            Deferred stock-based compensation..................................................          $       -    $ 11,752
                                                                                                         =========    ========
            Issuance of note receivable to related party.......................................          $       -    $    270
                                                                                                         =========    ========
            Unrealized gain on investments.....................................................          $     226    $      -
                                                                                                         =========    ========
</TABLE>


See accompanying notes to condensed financial statements.

                                       5
<PAGE>

                                  CORIO, INC.

                    NOTES TO CONDENSED FINANCIAL STATEMENTS


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

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

NET LOSS PER SHARE

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

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

<TABLE>
<CAPTION>
                                                                        MARCH 31,
                                                                  -----------------------
                                                                     2001         2000
                                                                  ---------    ----------
                <S>                                               <C>          <C>
                Preferred stock.................................          -        29,965
                Preferred stock warrants........................        372           989
                Common stock subject to repurchase..............         68            89
                Common stock options and warrants...............     15,619        10,022
</TABLE>

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established new standards of
accounting and reporting for derivative instruments and hedging activities. In
July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133." SFAS No. 137 deferred the effective date of SFAS No. 133 until fiscal
years beginning after June 15, 2000. The Company will adopt SFAS No. 133 during
its year ending December 31, 2001. To date, the Company has not engaged in any
derivative or hedging activities.

NOTE 2 - RESTRICTED CASH

     In connection with a facility lease, the Company is required to provide a
$7 million letter of credit as security for the lease. As of March 31, 2001, a
$7 million certificate of deposit, which matures April 2002, is held as
collateral by a financial institution for guarantee of the letter of credit. The
certificate of deposit is recorded as restricted cash on the condensed balance
sheet .

NOTE 3 - ACCOUNTS RECEIVABLE

     The Company records accounts receivable when amounts are billed in
accordance with the contract terms or as services are performed under non-
cancelable contractual services arrangements. Included in accounts receivable at
March 31, 2001 and December 31, 2000 were $1.1 million and $555,000,
respectively, of unbilled receivables under various professional services and
application management contracts.

                                       6
<PAGE>

NOTE 4 - DEBT

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

     In December 1999, the Company entered into a guarantee with a lender for a
maximum $7 million letter of credit as security on a facility lease. The
guarantee was collateralized by certain assets of the Company. In connection
with the guarantee, the Company granted the lender a right to purchase shares of
series C preferred stock at an exercise price of $6.50 per share. In January
2001, this letter of credit was replaced with a new $7 million letter of credit
from another lender. The new letter of credit is collateralized by a $7 million
cash deposit. Upon replacement of the letter of credit, the unamortized fair
value of the warrant was charged to interest expense.

NOTE 5 - STOCKHOLDERS' EQUITY

INITIAL PUBLIC OFFERING

     In July 2000, the Company completed its initial public offering ("IPO") of
10 million shares of its common stock, for net proceeds to the Company after
deducting underwriters' discount and other offering expenses of approximately
$128 million. Upon the completion of the IPO, all outstanding shares of
preferred stock of the Company converted into approximately 35.3 million shares
of common stock.

WARRANTS

     In April 2000, the Company agreed to issue to Ernst & Young L.L.P. ("EY"),
on behalf of its consulting division, EY Consulting, four warrants to purchase
an aggregate of up to 7,000,000 shares of the Company's common stock at an
exercise price of $6.50 per share under the terms of a strategic alliance
arrangement. In May 2000, EY completed a sale of substantially all of the
business of E&Y Consulting to Cap Gemini, S.A. Upon the completion of this sale,
E&Y Consulting assigned to Cap Gemini, S.A. all of its rights and obligations
pursuant to its strategic alliance with the Company, including the right to
execute the warrants the Company issued to EY on behalf of E&Y Consulting. The
consulting business previously conducted by E&Y Consulting is now being carried
on by Cap Gemini Ernst & Young U.S., L.L.C. ("CGEY"). Under the April 2000
agreement, CGEY was permitted to exercise the first of these warrants to acquire
4,666,666 shares of common stock during the 90 day period following the
Company's July 20, 2000 IPO. The second, third and fourth warrants become
exercisable based upon the achievement of target volume revenues resulting from
referrals of CGEY in each of the Company's 2000, 2001 and 2002 fiscal years. The
Company has determined that CGEY did not achieve the minimum target volume
revenues for its 2000 fiscal year and as a result, the second warrant for
933,333 shares expired. The third and fourth warrants may be exercised to
acquire up to 933,333 and 466,667 shares of common stock, respectively. The
value of such performance based warrants is not recorded until earned by CGEY.
The warrants are subject to cancellation or repurchase in whole or part under
certain circumstances, such as if CGEY breaches a material provision of the
agreement. The agreement itself may be terminated prior to the end of the seven-
year term by consent of the parties or unilaterally by a party in the event the
other party defaults in the performance of a material provision of the
agreement, subject to a cure period.

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

     At March 31, 2001, 2,333,333 of the initial warrant remained issued and
outstanding. The exercise period has been extended to December 31, 2001. The
fair value of this warrant was calculated using the Black-Scholes option pricing
model, using $1.88 as the fair value of the underlying common stock and the
following weighted-average assumptions: no dividends; contractual life of 1.5
years; risk-free interest rate of 7%; and expected volatility of 100%. The fair
value of the remaining unexercised initial warrant was $801,000 at March 31,
2001. Amortization expense of $171,000 was recorded as a sales and marketing
expense in the quarter ended March 31, 2001.

                                       7
<PAGE>

STOCK-BASED COMPENSATION

     In connection with stock options granted to employees to purchase common
stock, the Company recorded deferred charges for stock-based compensation of
zero and $11.8 million for the three months ended March 31, 2001 and 2000,
respectively. Such amounts represent, for employee stock options, the difference
at the grant date between the exercise price of each stock option granted and
the fair value of the underlying common stock. The deferred charges for employee
options are being amortized to expenses using the graded vesting approach
through fiscal year 2005. Amortization of deferred stock-based compensation
expense was $876,000 and $5.3 million for the three months ended March 31, 2001
and 2000, respectively.

NOTE 6 - SIGNIFICANT CUSTOMER INFORMATION AND SEGMENT REPORTING INFORMATION

     The Company's operations have been classified into two operating segments
(i) application management services and (ii) professional services. Corporate
expenses, including those for sales and marketing, general and administrative
and research and development, are not allocated to operating segments.

Disaggregated information is as follows (in thousands):

<TABLE>
<CAPTION>
                                                              APPLICATION
                                                              MANAGEMENT    PROFESSIONAL
                                                               SERVICES       SERVICES     UNALLOCATED     TOTAL
                                                             ------------   ------------   -----------    -------
             FOR THE THREE MONTHS ENDED
             MARCH 31, 2001
             <S>                                              <C>           <C>            <C>            <C>
             Revenues                                         $     8,843   $      4,726   $         -    $ 13,569
             Depreciation and amortization                    $     2,243   $         61   $     1,311    $  3,615
             Segment loss                                     $    (1,850)  $     (1,526)  $   (16,167)   $(19,543)

             FOR THE THREE MONTHS ENDED
             MARCH 31, 2000
             Revenues                                         $     1,137   $      4,143   $         -    $  5,280
             Depreciation and amortization                    $       558   $         49   $     1,072    $  1,679
             Segment loss                                     $    (4,764)  $     (1,328)  $   (22,427)   $(28,519)
</TABLE>

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

     For the three months ended March 31, 2001, one customer accounted for 12%
of total revenues. For the three months ended March 31, 2000, no single customer
accounted for 10% or more of total revenues.

     At March 31, 2001, one customer represented 19% of total accounts
receivable. As of December 31, 2000, two customers represented 31% of total
accounts receivable.


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

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

THIS REPORT 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

                                       8
<PAGE>

FORWARD-LOOKING STATEMENTS AFTER THE DATE HEREOF. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
MANY FACTORS, INCLUDING BUT NOT LIMITED TO THOSE SET FORTH UNDER "ADDITIONAL
FACTORS THAT MAY AFFECT FUTURE RESULTS" HEREIN. IN EVALUATING THE COMPANY'S
BUSINESS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET
FORTH BELOW UNDER THE CAPTION "ADDITIONAL FACTORS THAT MAY AFFECT FUTURE
RESULTS" IN ADDITION TO THE OTHER INFORMATION SET FORTH HEREIN. THE COMPANY
CAUTIONS INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE ARE SUBJECT TO
SUBSTANTIAL RISKS AND UNCERTAINTIES.

OVERVIEW

     We are a leading enterprise application service provider, or ASP. We
provide to our customers application implementation, integration, management and
various upgrade services and related hardware and network infrastructure. We
implement, integrate and manage the Corio Intelligent Enterprise, a suite of
enterprise software applications from leading vendors. Following the rapid
implementation of software applications, performed for a fixed fee or on a time
and material basis, our customers pay a monthly service fee based largely on the
number of applications used and total users.

RECENT EVENTS

INITIAL PUBLIC OFFERING

     In July 2000, the Company completed its initial public offering ("IPO") of
10 million shares of its common stock, for net proceeds to the Company after
deducting underwriters' discount and other offering expenses of approximately
$128 million. Upon the completion of the IPO, all outstanding shares of
preferred stock of the Company converted into approximately 35.3 million shares
of common stock.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2001 and 2000

     REVENUES

     Total revenues increased to $13.6 million for the three months ended March
31, 2001 from $5.3 million for the three months ended March 31, 2000. For the
three months ended March 31, 2001, one customer accounted for 12% of total
revenues. For the three months ended March 31, 2000, no single customer
accounted for 10% or more of total revenues.

     APPLICATION MANAGEMENT SERVICES REVENUES. Revenues from our application
management services were $8.8 million for the three months ended March 31, 2001
and $1.1 million for the three months ended March 31, 2000. The increase in
application management services revenues was primarily due to the increased
number of customers, increased number of users, and revenues associated with e-
commerce trading exchanges. At March 31, 2001, the Company had a balance of $2.5
million for deferred application management services revenues primarily from
several customers who prepaid a portion of their contract. These deferred
revenues will be recognized as the related services are provided over the life
of the contract.

     PROFESSIONAL SERVICES AND OTHER REVENUES. Our professional services and
other revenues were $4.7 million for the three months ended March 31, 2001 and
$4.1 million for the three months ended March 31, 2000. The increase in
professional services revenues was primarily due to the increased number of
customers and customer contracts. At March 31, 2001, we had a balance of $1.1
million for deferred professional services revenues resulting from customer
payments that we required in advance of providing our professional services
work.

COSTS AND EXPENSES

     APPLICATION MANAGEMENT SERVICES EXPENSES. Application management services
expenses were $10.7 million for the three months ended March 31, 2001 and $5.9
million for the three months ended March 31, 2000. The largest component of the
increase was the growth in personnel costs. Other significant components of the
increase included costs for third-party license and support fees, costs of our
data center and network providers, facilities expenses and depreciation and
lease costs for equipment.

                                       9
<PAGE>

     PROFESSIONAL SERVICES AND OTHER EXPENSES. Professional services and other
expenses were $6.3 million for the three months ended March 31, 2001 and $5.5
million for the three months ended March 31, 2000. The largest component of the
increase was attributable to costs for subcontractors to perform services under
professional services engagements. 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.

RESEARCH AND DEVELOPMENT. Research and development expenses were $2.7 million
for the three months ended March 31, 2001 and $2.2 million for the three months
ended March 31, 2000. Research and development expenses as a percentage of total
revenues were 20% for the three months ended March 31, 2001 and 42% for the
three months ended March 31, 2000. The largest components of the increase were
attributable to the growth in personnel costs and facilities expense.

  SALES AND MARKETING EXPENSES. Sales and marketing expenses were $6.9 million
for the three months ended March 31, 2001 and $9.6 million for the three months
ended March 31, 2000. Sales and marketing expenses as a percentage of total
revenues were 51% for the three months ended March 31, 2001 and 182% for the
three months ended March 31, 2000. The decrease in sales and marketing expenses
reflects a decline in incentive compensation as well as lower spending on
advertising and tradeshows. Sales and marketing expenses also include
amortization of costs associated with warrants issued to a software vendor and
Cap Gemini Ernst & Young of none and $171,000 and zero for the three months
ended March 31, 2001 and 2000, respectively.

     GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $6.4 million for the three months ended March 31, 2001 and $4.8 million for
the three months ended March 31, 2000. General and administrative expenses as a
percentage of total revenues were 47% for the three months ended March 31, 2001
and 90% for the three months ended March 31, 2000. The largest component of the
increase was attributable to the growth in personnel costs and facility related
costs .

     AMORTIZATION OF STOCK-BASED COMPENSATION. Amortization of deferred stock-
based compensation was $876,000 for the three months ended March 31, 2001 and
$5.3 million for the three months ended March 31, 2000. For the three months
ended March 31, 2001, all options granted were granted at fair value;
consequently there was no deferred stock-based compensation for the quarter
compared to the three months ended March 31, 2000, when $11.8 million in
deferred compensation was recorded.

     INTEREST AND OTHER INCOME AND EXPENSE. Net interest and other income was
$892,000 for the three months ended March 31, 2001 and was $47,000 for the three
months ended March 31, 2000. The increase in net interest income was due
primarily to higher average cash and investment balances at March 31, 2001, as a
result of our IPO. Included in interest expense in the quarter ended March 31,
2001 is a charge of $740,000 reflecting the unamortized fair value of the
warrants that were issued in connection with a loan and security agreement that
was paid in full January 2001.

     INCOME TAXES. Since inception, we have incurred net losses for federal and
state tax purposes, and anticipate losses for the foreseeable future. We have
therefore not recognized any material tax provision or benefit of income taxes
for the three and nine months ended March 31, 2001 and 2000.

LIQUIDITY AND CAPITAL RESOURCES

     As of March 31, 2001, we had cash and cash equivalents, short term
investments, and restricted cash of $117.1 million, a decrease of $21.6 million
from December 31, 2000. The decrease was primarily a result of cash used by
operating activities.

     Net cash used in operating activities was $15.5 million for the three
months ended March 31, 2001, and $13.4 million used in the three months ended
March 31, 2000. The net increase was primarily due to significant changes in
amortization of deferred stock compensation, accounts payable, and accrued
liabilities offset by a decrease in net loss.

     Net cash used in investing activities was $5.6 million for the three months
ended March 31, 2001. Investing activities consisted primarily of purchases of
computer equipment of $1.7 million and computer software of $1.8 million,
purchase and sale of short term investments as well as $7 million of restricted
cash held as security for the Company's leased facility.

     Net cash used by financing activities was $3.1 million and net cash
provided by financing activities was $568,000 for the three months ended March
31, 2001 and 2000, respectively. Financing activities consisted primarily of the
proceeds from the issuance of common stock under the Company's stock plans,
offset by repayments of loans and capital leases.

     We have executed a ten-year build-to-suit lease for a facility in San
Carlos, California that will require minimum payments $3.5

                                       10
<PAGE>

million in 2001. Total minimum payments under the lease term are $28.8 million.

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

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

                                 RISK FACTORS

                         Risks Related to Our Business

We have a history of losses and, because for the foreseeable future we expect to
increase our investment in our business faster than we anticipate growth in our
revenues, we expect that we will continue to incur significant operating losses
and negative cash flow and may never be profitable.

     We have spent significant funds to date to develop and refine our current
services, to create and run an operations organization, consisting of
application management and customer support services personnel, to build and run
a professional services organization and to develop our sales and marketing
resources. We have incurred significant operating and net losses and negative
cash flow and have not achieved profitability. As of March 31, 2001, we had an
accumulated deficit of $168 million.

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


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

     A substantial majority of our current revenue base consists of emerging
high-growth and middle-market companies and is comprised primarily of internet,
e-commerce trading exchanges and "dot-com" companies. These companies will be
more likely to be acquired, experience financial difficulties or cease
operations than other companies that are larger and better established or are in
more stable industries. In particular, these companies may experience
difficulties in raising capital needed to fund their operations when required or
at all. In the past we have terminated our agreements with a substantial number
of customers who were unable or unwilling to continue their financial
obligations to us and we expect to terminate additional customers in the future.
As a result, our client base will likely be more volatile than those companies
whose customers consist of more mature and established entities. If we continue
to experience greater than expected customer loss or an inability to collect
fees from our customers in a timely manner because of this volatility, our
operating results could be seriously harmed. In addition, uncertainty regarding
the stability of the economy in general could diminish and delay demand for our
services.

                                       11
<PAGE>

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

     We have offered our services for a relatively short period of time, and our
industry is relatively new. Prior to September 1998, our predecessor company,
DSCI, carried on a different business. Accordingly, we have a limited operating
history as a provider of ASP services. We have a limited number of customers and
have implemented our services a limited number of times. Because our business
model is new, it continues to evolve. In the future, we may revise our pricing
model for different services, and our model for our customers to gain access to
third-party software applications and other third-party services is evolving.
Changes in our anticipated business and financial model could materially impact
our ability to become profitable in the future. Additionally, especially as we
try to move up-market to larger, more established customers, the demand for our
services is uncertain and the sales process may take longer than with smaller
potential customers. An investor in our common stock must consider these facts
as well as the risks, uncertainties, expenses and difficulties frequently
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving markets such as the market for Internet-
based software application services. Some of the risks and difficulties relate
to our potential inability to:

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

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

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

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

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

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

     .  continue to offer new services that complement our existing offerings;

     .  increase awareness of our brand; and

     .  maintain our current, and develop new, strategic relationships.

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


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

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


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

     Our financial results will vary over time as our ASP business matures. For
each individual customer, in the early months of our engagement we typically
recognize professional services revenues associated with implementation of our
applications. We then recognize monthly fees from the customer, consisting of
application management services revenues, over the balance of the contractual
relationship. As a result, for some customers we have a high proportion of up-
front professional services revenues associated with implementation. We expect
that our financial results will continue to vary over time as monthly fees
increase as a proportion of total revenue. Third parties also provide
professional services for some of our application

                                       12
<PAGE>

management services customers, and whether professional services will be
provided by us or by third parties may be difficult to predict. Changes in our
revenue mix from professional services revenues to application management
services revenues could be difficult to predict and could cause our quarterly
results and stock price to fluctuate.

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

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

     .  the loss of or change in our relationship with important customers;

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

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

     .  changes in our pricing policies or those of our competitors;

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

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


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

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

     In this regard, from time to time we negotiate with some of our major
third-party software vendors to modify the pricing and other terms currently in
place with these vendors. We may agree to restructure our current arrangements
with some of our third-party software providers. For example we are currently in
discussions with major third-party software vendors that would require our
customers to obtain licenses for software directly from the independent software
vendors, rather than through us. Any such new pricing structures or business
models may not in fact be more beneficial to us and may ultimately hinder our
ability to become profitable.


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

     We offer our customers software applications from third parties, such as
BroadVision, Commerce One, PeopleSoft, SAP and Siebel Systems, that we in turn
incorporate into the services we provide to customers. Our agreements with
third-party software vendors are non-exclusive, are for limited terms ranging
from two to five years and typically permit termination in the event of our
breach of the agreements. If we lose the right to use the software that we
license 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.

                                       13
<PAGE>

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

     The licenses we have for the third-party software we use to deliver our
services typically restrict our ability to sell our services in specified
countries and to customers with revenue above or below specified revenue levels.
For example, some of our licenses restrict us from selling our services to
customers with annual revenues greater than various levels between $250 million
and $1 billion, and several of our licenses restrict our ability to sell to
customers outside of North America. In addition, some of these licenses contain
limits on our ability to sell our services to certain types of customers. For
example, our contract with BroadVision restricts our ability to sell our
BroadVision offerings to specified banking institutions. Moreover, as we
negotiate with some of our major third-party software vendors to modify terms of
existing agreements, we may agree to additional restrictions on our ability to
sell our services to customers as part of an agreement that we believe is more
beneficial to us overall. Our operating results and ability to grow could be
harmed to the extent these licenses prohibit us from selling our services to
customers to which we would otherwise sell our services, or in countries in
which we would otherwise sell our services.


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

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


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

     Implementations of integrated enterprise software applications can be
complicated and we have limited experience to date completing implementations of
integrated software applications for our customers. We cannot assure you that we
will develop the requisite expertise or that we can convince customers that we
have the expertise required to implement, host or manage these applications. In
addition, because PeopleSoft and Siebel software applications were among our
first application offerings, our customers to date have primarily implemented
these application offerings and we have limited experience installing many of
the other applications we offer. Our reputation will be harmed and sales of our
services would decline significantly if we are not able to complete successfully
repeated implementations of our enterprise software applications, including
those applications with which we have limited or no implementation, hosting or
management experience to date.


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

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

                                       14
<PAGE>

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


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


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

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


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

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


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

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


Continued growth would strain our operations and require us to incur costs to
upgrade our infrastructure and expand our personnel.

                                       15
<PAGE>

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

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

  .  maintain a high level of customer service and support;

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

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

  There will be additional demands on our customer service support, research and
development, sales and marketing and administrative resources as we try to
increase our service offerings and expand our target markets. The strains
imposed by these demands are magnified by our limited operating history. Any
delay in the implementation of, or disruption in the transition to, new or
enhanced systems and controls could harm our ability to accurately forecast
demand for our services, manage our billing of customers, manage our sales cycle
and implementation services and record and report management and financial
information on a timely and accurate basis. For example, we are currently
implementing a new billing system and such implementation has been and may
continue to be more complex than expected, resulting in inefficiency in the
customer billing process. Moreover, any inability to expand our service
offerings and employee base commensurate with the demand for our services could
cause our revenues to decline.


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

  Our software vendors from time to time will upgrade their software
applications, and at such time we will be required to implement these software
upgrades for our customers. For example, PeopleSoft, from whom we license a
substantial amount of software applications and represented more than half of
our applications management services revenue in fiscal 2000, has recently
released a new version of its software. Implementing software upgrades can be a
complicated and costly process, particularly implementation of an upgrade
simultaneously across multiple customers, and we have not performed a major
software upgrade to date. Accordingly, we cannot assure you that we will be able
to perform these upgrades successfully or at a reasonable cost. We may also
experience difficulty implementing software upgrades to a large number of
customers, particularly if different software vendors release upgrades
simultaneously. If we are unable to 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.

                                       16
<PAGE>

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


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

  Even if we are able to generate revenues that exceed our operating costs, we
may incur substantial accounting charges over the next two years associated with
warrants held by Cap Gemini Ernst & Young U.S. LLC, or CGEY. Under the terms of
a strategic alliance agreement with CGEY, CGEY holds warrants to purchase up to
approximately 2.3 million shares of our common stock at an exercise price of
$6.50 per share, exercisable through December 31, 2001, and up to 1,400,000
million shares based on specific performance metrics achieved by CGEY over the
next two years. These warrants and other expenses related to our strategic
alliance with CGEY may result in substantial expenses and operating losses for
us over the term of our agreement with them. Because of the accounting policies
applicable to these warrants, any charges associated with these warrants will be
measured and recorded each fiscal quarter in part using the trading price of our
common stock. Significant increases in our stock price could result in
significant non-cash accounting charges.


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

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


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

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


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

  Our application management services contracts contain service level guarantees
that obligate us to provide our applications at a guaranteed level of
performance. If we fail to meet those service levels, we may be contractually
obligated to provide our customers

                                       17
<PAGE>

credit for free service. If we were to continue to fail to meet these service
levels, our customers would then have the right to cancel their contracts with
us. These credits or cancellations could harm our reputation and hinder our
ability to grow our revenues.


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

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


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

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

  Our current and potential competitors primarily include:

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

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

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

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

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

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

  .  telecommunications companies.

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

  .  develop and expand their network infrastructures and service offerings more
     quickly;

  .  adapt to new or emerging technologies and changing customer needs faster;

  .  take advantage of acquisitions and other opportunities more readily;

  .  negotiate more favorable licensing agreements with software application
     vendors;

  .  devote greater resources to the marketing and sale of their products; and

  .  address customers' service-related issues more effectively.


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

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<PAGE>

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


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

  We depend on third-parties, such as XO Communications and (i)Structure, for
our data center management services and for key components of our network
infrastructure. Our contracts with these data center and network infrastructure
providers are for a fixed term and for a specified amount of services, which may
be insufficient to meet our needs as our business grows. We depend on suppliers
such as Sun Microsystems for our computer hardware and WebMethods and Netegrity
for our software technology platform. If any of these relationships fail to
provide needed products or services in a timely and consistent manner or at an
acceptable cost, we may be unable to deliver effectively our services to
customers. Some of the key components of our infrastructure are 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.


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

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


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

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


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

  We need to expand substantially our sales operations and marketing efforts,
both domestically and internationally, in order to try to increase market
awareness and sales of our services. We will also need to increase our technical
staff in order to service customers and perform research and development.
Competition for qualified sales, marketing, technical and operations personnel
is intense as these personnel are in limited supply and in high demand,
particularly in Northern California, and we might not be able to hire and retain
sufficient numbers of these personnel to grow our business or to service our
customers effectively. For example, voluntary turnover in the second half of
2001 was well above the level of the first half of the year and such a trend, if
continued, could result in additional costs and impair our ability to grow our
business.

                                       19
<PAGE>

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

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


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

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


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

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

                                       20
<PAGE>

                         Risks Related to our Industry

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

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


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

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

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


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

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

                                       21
<PAGE>

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

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


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

  Our executive officers, directors and entities affiliated with them, in the
aggregate, beneficially own approximately 53% of our common stock. If they were
to act together, these stockholders would be able to exercise control over most
matters requiring approval by our stockholders, including the election of
directors and approval of significant corporate transactions. This concentration
of ownership may also have the effect of delaying or preventing a change in
control of our company, which could cause our stock price to drop. These actions
may be taken even if they are opposed by the other investors, including those
who purchased shares in the offering.


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

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

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

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

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

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

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


Quantitative and Qualitative Disclosures About Financial Market Risk

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

                                       22
<PAGE>

Interest Rate Risk

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

  In March 2001, a customer of Corio began arbitration proceedings with Corio in
the American Arbitration Association, claiming $7 million in damages. Corio
believes that the case is without merit, and intends to defend the case
vigorously, but would settle the dispute on reasonable business terms. Corio
expects the damages or settlement amount, if any, to be significantly less than
the amount claimed. However, we cannot determine the outcome with any certainty
at this time, as we are in the very early stages of arbitration.

ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS

  (c) With the closing of the initial public offering, all outstanding shares of
Company's preferred stock automatically converted into 35,297,476 shares of
common stock. The issuance of common stock upon automatic conversion of the
Company's previously outstanding preferred stock upon consummation of the
initial public offer was made in reliance on Section 3(a)(9) of the Securities
Act.

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

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

  After deducting expenses of the IPO, the net offering proceeds to the Company
were approximately $128,200,000. From July 20, 2000, the effective date of the
Registration Statement, to March 31, 2001, the ending date of the reporting
period, the approximate amount of net offering proceeds used were $1.0 million
to repay outstanding debt and approximately $25 million to fund operations. The
remaining net proceeds were invested in short-term financial instruments.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

  None.

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

  No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, for the quarter ended March 31, 2001.

ITEM 5. OTHER INFORMATION

  None.

ITEM 6. EXHIBITS

  None.

                                       23
<PAGE>

                                  SIGNATURES

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

  Dated: May 7, 2001


                                 CORIO, INC.
                                 (Registrant)

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

                                 By /s/ Eric J. Keller
                                    --------------------------------------------
                                    Eric J. Keller
                                    Executive Vice President, Finance and
                                    Chief Financial Officer

                                       24