SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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FORM 10-Q

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(Mark One)


[X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2004

OR

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 000-31003



Corio, Inc.



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

959 Skyway Road, Suite 100
San Carlos, California    94070

650-232-3000







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 reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes

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

As of November 8, 2004, there were 64,408,526 shares of the Registrant's common stock outstanding.




Corio, Inc.

      QUARTERLY REPORT ON FORM 10-Q  FOR THE QUARTER ENDED SEPTEMBER 30, 2004
                                INDEX



|PART I.   FINANCIAL INFORMATION                                                                                                   | Page No.
|--------------------------------------------------------------------------------------------------------------------------------- | --------
|                                                                                                                                  |         
|Item 1.   Condensed Consolidated Financial Statements (Unaudited):                                                                |         
|                                                                                                                                  |         
|Condensed Consolidated  Balance Sheets 
            
 as of September 30, 2004 and December 31, 2003                              | 3       
|                                                                                                                                  |         
|Condensed Consolidated  Statements of Operations
            
    for the Three and Nine Months ended September 30, 2004 and 2003 | 4       
|                                                                                                                                  |         
|Condensed Consolidated  Statements of Cash Flows 
            
    for the Nine Months ended September 30, 2004 and 2003          | 5       
|                                                                                                                                  |         
|Notes to Condensed Consolidated  Financial Statements                                                                             | 6       
|                                                                                                                                  |         
|Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations             | 13      
|                                                                                                                                  |         
|Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                              | 34      
|                                                                                                                                  |         
|Item 4.   Controls and Procedures                                                                                                 | 35      
|                                                                                                                                  |         
|PART II.  OTHER INFORMATION                                                                                                       |         
|                                                                                                                                  |         
|Item 1.   Legal Proceedings                                                                                                       | 36      
|                                                                                                                                  |         
|Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds                                                             | 37      
|                                                                                                                                  |         
|Item 3: Defaults Upon Senior Securities                                                                                           | 37      
|                                                                                                                                  |         
|Item 4: Submission of Matters to a Vote of Security Holders                                                                       | 37      
|                                                                                                                                  |         
|Item 5: Other Information                                                                                                         | 37      
|                                                                                                                                  |         
|Item 6.   Exhibits                                                                                                                | 38      
|                                                                                                                                  |         
|Signatures                                                                                                                        | 39      

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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CORIO, INC.

                            CONDENSED CONSOLIDATED BALANCE SHEETS

                                (In thousands, except share amounts)

                                               (unaudited)

`September 30,   December 31,
                                                                          2004          2003
                                                                      ------------  ------------
ASSETS                                                                                          
Current assets:
    Cash and cash equivalents....................................... $      7,431  $     15,440
    Short-term investments..........................................       20,843        19,591
    Accounts receivable, net of allowance of $654 and $591
        at September 30, 2004 and December 31, 2003, respectively...        8,517         6,484
    Prepaid expenses and other current assets.......................        1,688         2,502
                                                                      ------------  ------------
        Total current assets........................................       38,479        44,017
Restricted cash.....................................................        7,853         7,680
Property and equipment, net.........................................       14,105        10,907
Other assets........................................................        8,574         9,539
                                                                      ------------  ------------
        Total assets................................................       69,011  $     72,143
                                                                      ============  ============
LIABILITIES AND STOCKHOLDERS' EQUITY                                                            
Current liabilities:
    Accounts payable................................................ $      7,080  $      6,759
    Accrued liabilities.............................................        6,577         7,216
    Accrued restructuring...........................................          718           701
    Deferred revenue................................................        3,049         4,017
    Current portion of bank term commitment payable.................        7,000            --
    Current portion of capital lease obligations....................          301           476
                                                                      ------------  ------------
        Total current liabilities...................................       24,725        19,169
Capital lease obligations less current portion......................          174           387
Accrued restructuring less current portion..........................        3,520         4,068
Other liabilities...................................................        1,406         1,283
                                                                      ------------  ------------
        Total liabilities...........................................       29,825        24,907
                                                                      ------------  ------------
Commitments and contingencies (Note 8)
Stockholders' equity:
    Preferred stock: $0.001 par value; 10,000,000
        shares authorized, none issued and outstanding..............           --            --
    Common stock: $0.001 par value; 200,000,000 shares authorized;
       63,883,437 and 61,767,102 shares issued and outstanding
        at September 30, 2004 and December 31, 2003, respectively...           63            61
    Additional paid-in capital......................................      309,097       306,735
    Accumulated other comprehensive income (loss)...................          (39)           12
    Deferred stock-based compensation...............................           --            (3)
    Accumulated deficit.............................................     (269,935)     (259,569)
                                                                      ------------  ------------
        Total stockholders' equity..................................       39,186        47,236
                                                                      ------------  ------------
        Total liabilities and stockholders' equity.................. $     69,011  $     72,143
                                                                      ============  ============`

See accompanying notes to condensed consolidated financial statements.

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CORIO, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                      (In thousands, except per share amounts)

                                   (Unaudited)

`Three Months Ended       Nine Months Ended
                                                           September 30,           September 30,
                                                      ----------------------  ----------------------
                                                         2004        2003        2004        2003
                                                      ----------  ----------  ----------  ----------
REVENUES:                                                                                           
    Application management services................. $   14,379  $   14,295  $   43,069  $   45,762
    Professional services and other.................      3,445       1,245      10,025       5,833
                                                      ----------  ----------  ----------  ----------
    Total revenues..................................     17,824      15,540      53,094      51,595
                                                      ----------  ----------  ----------  ----------
COSTS AND EXPENSES:                                                                                 
    Application management services *...............     11,800      11,210      34,692      36,333
    Professional services and other ................      2,855         730       8,568       4,455
    Research and development *......................        562       1,123       1,747       3,819
    Sales and marketing *...........................      2,417       2,125       7,848       6,632
    General and administrative *....................      3,274       2,339       8,508       6,917
    Restructuring charges...........................        714          --         714       2,334
    Amortization of stock-based compensation........         --         (34)          3         445
    Amortization of intangible assets...............        273         367       1,191       1,257
                                                      ----------  ----------  ----------  ----------
    Total operating expenses........................     21,895      17,860      63,271      62,192
                                                      ----------  ----------  ----------  ----------
Loss from operations................................     (4,071)     (2,320)    (10,177)    (10,597)
Interest and other income...........................        161         136         384         518
Interest and other expense..........................       (394)        (73)       (458)       (285)
                                                      ----------  ----------  ----------  ----------
Net loss before income tax expense..................     (4,304)     (2,257)    (10,251)    (10,364)
Income tax expense..................................         --          --        (115)         --
                                                      ----------  ----------  ----------  ----------
Net loss............................................ $   (4,304) $   (2,257) $  (10,366) $  (10,364)
                                                      ==========  ==========  ==========  ==========

Basic and diluted net loss per share ............... $    (0.07) $    (0.04) $    (0.16) $    (0.18)
                                                      ==========  ==========  ==========  ==========

Shares used in computation-basic and diluted........     63,515      57,684      63,124      56,098
                                                      ==========  ==========  ==========  ==========
                                                                                                    
*  Amortization (reversal) of stock-based                                                           
   compensation not included in expense line item:
    Application management services................. $       --  $        7  $       --  $       65
    Research and development........................         --          11           1           2
    Sales and marketing.............................         --          27           1         187
    General and administrative......................         --         (79)          1         191
                                                      ----------  ----------  ----------  ----------
    Total amortization of stock-based compensation.. $       --  $      (34) $        3  $      445
                                                      ==========  ==========  ==========  ==========`

See accompanying notes to condensed consolidated financial statements.

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CORIO, INC.

                  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                  (In thousands)

                                   (unaudited)

`Nine Months Ended
                                                                            September 30,
                                                                        --------------------
                                                                           2004       2003
                                                                        ---------  ---------
CASH FLOWS FROM OPERATING ACTIVITIES:                                                       
    Net loss.......................................................... $ (10,366) $ (10,364)
    Adjustments to reconcile net loss to net
    cash provided by (used in) operating activities:
        Depreciation..................................................     6,011      8,788
        Amortization of intangible assets.............................     1,191      1,257
        Amortization of stock-based compensation......................         3        445
        Amortization of warrants......................................        10        426
        Amortization of investments...................................       199        515
        Compensation for grants of stock, options and warrants
          in exchange for services....................................        --         22
        Gain on sale and disposal of property and equipment...........       (61)        --
        Loss on sale and disposal of property and equipment...........     1,059         --
        Changes in assets and liabilities:
            Accounts receivable, net..................................    (2,033)     2,735
            Prepaid expenses and other current assets.................       814        978
            Accounts payable..........................................       321     (3,345)
            Accrued liabilities.......................................    (1,213)    (3,674)
            Deferred revenue..........................................      (968)      (546)
            Other liabilities.........................................       165      1,893
                                                                        ---------  ---------
    Net cash used in operating activities.............................    (4,868)      (870)
                                                                        ---------  ---------
CASH FLOWS FROM INVESTING ACTIVITIES:                                                       
    Purchases of short-term investments...............................   (21,697)   (37,318)
    Sales of short-term investments...................................    20,195     29,626
    Increase in restricted cash.......................................      (173)        --
    Purchase of property and equipment................................   (10,268)    (3,183)
    Proceeds from sale of property and equipment......................        61         --
    Other assets......................................................      (235)       266
    Cash paid for acquisition.........................................        --       (361)
                                                                        ---------  ---------
    Net cash used in investing activities.............................   (12,117)   (10,970)
                                                                        ---------  ---------
CASH FLOWS FROM FINANCING ACTIVITIES:                                                       
    Proceeds from sale of common stock and exercise of stock options..     2,364      1,058
    Borrowings (repayments) on debt obligations.......................     7,000       (272)
    Payments on capital lease obligations.............................      (388)    (4,269)
                                                                        ---------  ---------
    Net cash provided by (used in) financing activities...............     8,976     (3,483)
                                                                        ---------  ---------
Net decrease in cash and cash equivalents.............................    (8,009)   (15,323)
Cash and cash equivalents, beginning of period........................    15,440     26,908
                                                                        ---------  ---------
Cash and cash equivalents, end of period.............................. $   7,431  $  11,585
                                                                        =========  =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                           
    Cash paid for interest and taxes.................................. $    (211) $     268
                                                                        =========  =========
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:                                   
    Deferred stock-based compensation/forfeitures, net................ $      --  $     389
                                                                        =========  =========

    Net unrealized gain (loss) on investments......................... $     (55) $     (80)
                                                                        =========  =========`

See accompanying notes to condensed consolidated financial statements.

---





NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

BASIS OF PRESENTATION

The accompanying unaudited condensed
consolidated financial statements have been prepared by Corio, Inc.
("Corio" or the "Company") and reflect all adjustments that
are, in the opinion of management, necessary for a fair presentation of the
interim periods presented. Such adjustments are of a normal recurring nature.
The results of operations for the interim periods presented are not necessarily
indicative of the results for any future interim period or for the entire fiscal
year. Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted, although the Company believes that the disclosures
included are adequate to make the information presented not misleading. The
unaudited condensed consolidated financial statements and notes included herein
should be read in conjunction with the audited consolidated financial statements
and accompanying notes included in the Company's Annual Report on Form 10-K/A
for the year ended December 31, 2003.

PRINCIPLES OF CONSOLIDATION

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

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 shares of common stock are excluded from the diluted net
loss per share computation in loss periods, as their effect would be
antidilutive.

The following table sets forth
potentially dilutive shares of common stock that are not included in the diluted
net loss per share calculation as their effect would have been antidilutive for
the periods indicated (in thousands, except weighted-average exercise
price).

`Nine Months Ended September 30
                                        ---------------------------------------
                                                2004                 2003
                                        -------------------  ------------------
                                        Weighted             Weighted
                                         Average              Average
                                        Exercise             Exercise
                                          Price    Shares      Price    Shares
                                        --------- ---------  --------- -------- 
Common stock subject to repurchase.... $      --        --  $    0.01      200
Common stock options and warrants..... $    1.97    18,420  $    1.85   17,779`

STOCK-BASED COMPENSATION

The Company accounts for stock-based
employee compensation arrangements in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees and related interpretations and complies with the
disclosure provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation,as
amended by SFAS 148, Accounting for Stock-Based Compensation-Transition and
Disclosure-an amendment of FASB Statement No. 123.Under APB No. 25,
compensation expense is based on the difference, if any, on the date of the
grant between the fair value of the Company's stock and the exercise price of
the underlying option. Deferred compensation is amortized and expensed in
accordance with the graded vesting approach provided for in Financial Accounting
Standards Board ("FASB") Interpretation No. 28.

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

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

`Three Months Ended     Nine Months Ended
                                                           September 30,         September 30,
                                                       --------------------  --------------------
                                                          2004       2003       2004       2003
                                                       ---------  ---------  ---------  --------- 
Net loss as reported................................. $  (4,304) $  (2,257) $ (10,366) $ (10,364)
Add stock-based employee compensation expense
   included in reported net loss, net of tax of $0...        --        (34)         3        445
Deduct total stock-based employee compensation
   determined under the fair-value-based method
   for all awards, net of tax of $0..................    (1,170)    (1,093)    (3,670)    (4,502)
                                                       ---------  ---------  ---------  ---------
Pro forma net loss................................... $  (5,474) $  (3,384) $ (14,033) $ (14,421)
                                                       =========  =========  =========  =========
Basic and diluted net loss per share:
   As reported....................................... $   (0.07) $   (0.04) $   (0.16) $   (0.18)
   Pro forma......................................... $   (0.09) $   (0.06) $   (0.22) $   (0.26)`

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

`Three Months Ended     Nine Months Ended
                                                           September 30,         September 30,
                                                       --------------------  --------------------
                                                          2004       2003       2004       2003
                                                       ---------  ---------  ---------  --------- 
Expected life (in years).............................       4.0        4.0        4.0        4.0
Risk free interest rate..............................      3.30%      2.99%      2.97%      2.47%
Volatility...........................................       109%       102%       111%       105%
Dividend yield.......................................         0%         0%         0%         0%`

Weighted-average fair values per share for options granted
under the Company's stock option plans during the three and nine months ended
September 30, 2004 and 2003 were:

`Three Months Ended     Nine Months Ended
                                                           September 30,         September 30,
                                                       --------------------  --------------------
                                                          2004       2003       2004       2003
                                                       ---------  ---------  ---------  --------- 
Weighted-average fair value per share for options
   granted under the Company's stock option plans.... $    1.08  $    1.99  $    1.70  $    0.80`

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

`Three Months Ended     Nine Months Ended
                                                           September 30,         September 30,
                                                       --------------------  --------------------
                                                          2004       2003       2004       2003
                                                       ---------  ---------  ---------  --------- 
Expected life (in years).............................       0.5        0.5        0.5        0.5
Risk free interest rate..............................      1.65%      1.00%      1.33%      1.06%
Volatility...........................................        79%       102%        81%       104%
Dividend yield.......................................         0%         0%         0%         0%`

Weighted-average fair values per share for options granted under the
Company's employee stock purchase plan during the three and nine months ended
September 30, 2004 and 2003 were:

`Three Months Ended     Nine Months Ended
                                                           September 30,         September 30,
                                                       --------------------  --------------------
                                                          2004       2003       2004       2003
                                                       ---------  ---------  ---------  --------- 
Weighted-average fair value per share for
   options granted under the Company's
   employee stock purchase plan...................... $    0.61  $    0.83  $    0.83  $    0.45`

There were no common stock purchase rights granted under the
Company's employee stock purchase plan during the three months ended September
30, 2004 and 2003.

RESTRICTED CASH



In connection with two facility leases, the Company issued letters
of credit to the facility lessors as security for the leases. The letters of
credit may initially be drawn upon for a period of one year and each letter
provides for automatic one-year renewal periods. The letters of credit are
collateralized by a $7.9 million cash deposit, which is recorded as restricted
cash on the accompanying condensed consolidated balance sheet.  For the three
and nine month periods ended September 30, 2004, the amount of restricted cash
increased by $0 and $173,000, respectively. The amount of restricted cash the
Company recorded increased by $173,000 in March 2004 due to the required
additional collateral requirements related to a standby letter of credit we
issued in connection with a move to our new leased operations office in Phoenix,
Arizona.

RECLASSIFICATION

Certain reclassifications have been made to prior period
amounts to be consistent with current period presentation in the condensed
consolidated statements of cash flows.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2003, the SEC issued Staff Accounting Bulletin
("SAB") No. 104, Revenue Recognition, which supersedes SAB No.
101, Revenue Recognition in Financial Statements. SAB No. 104 rescinds
accounting guidance in SAB No. 101 related to multiple-element arrangements as
this guidance has been superseded as a result of the issuance of EITF 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables. The
adoption of SAB No. 104 did not have a material effect on our financial position
or results of operations.

In March 2004, the EITF reached consensus on Issue 03-01 ("EITF 03-
01"), The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments. EITF 03-01 includes new guidance for evaluating and
recording impairment losses on debt and equity investments, as well as new
disclosure requirements for investments that are deemed to be temporarily
impaired. The accounting guidance of EITF 03-01 is effective for reporting
periods beginning after June 15, 2004, while the disclosure requirements for
debt and equity securities accounted for under FASB Statement No. 115,
*Accounting for Certain Investments in Debt and Equity Securities,* are
effective for annual periods ending after December 15, 2003. The Company does
not believe that the adoption of EITF 03-01 will have a material effect on its
financial position or results of operations.

NOTE 2-ACCOUNTS RECEIVABLE

The Company records accounts receivable
when amounts are invoiced in accordance with the contract terms or as services
are performed under non-cancelable contractual services arrangements. At
September 30, 2004 and December 31, 2003, the Company's accounts receivable
balance excluded outstanding invoices of $1,732,000 and $1,444,000,
respectively, related to customers that the Company determined to be cash basis
customers due to credit risks associated with these customers. Since the revenue
related to the collection of these invoices is recognized on a cash basis, these
amounts have not been included in the accounts receivable or deferred revenue
balances.

Included in accounts receivable at September 30, 2004 and
December 31, 2003 were $848,000 and $332,000, respectively, of unbilled
receivables under various application management and professional services
contracts.

NOTE 3-WARRANTS

On September 27, 2000, Cap Gemini Ernst & Young U.S.,
L.L.C exercised its right to convert a portion of its initial warrant
representing 2,333,333 shares into 960,810 shares of common stock through a
cashless exercise. Because the exercised shares outstanding were repurchaseable
under certain circumstances, the fair value of the shares was remeasured each
reporting period from exercise until May 2003, when the Company's repurchase
right lapsed. With respect to these shares, the Company did not record an
amortization expense in sales and marketing for the three months ended September
30, 2004 and 2003, respectively.  Amortization of expense for the nine months
ended September 30, 2004 and 2003 was $0 and $416,000, respectively.  There will
be no further amortization expense related to these warrants.

NOTE 4-STOCK-BASED COMPENSATION

In connection with stock options granted
to employees to purchase common stock, the Company recorded reductions in
deferred stock-based compensation of $0 and $116,000 for the three months ended
September 30, 2004 and 2003, respectively, and $0 and $389,000 for the nine
months ended September 30, 2004 and 2003, respectively. Such amounts represent
unamortized deferred stock compensation for unvested options that were forfeited
upon severance. The deferred charges for employee options are being amortized to
expense using the graded vesting approach, prescribed by FASB Interpretation No.
28, through 2004. Amortization of deferred stock-based compensation expense
(credit) was $0 and ($34,000) for the three months ended September 30, 2004 and
2003, respectively and $3,000 and $445,000 for the nine months ended September
30, 2004 and 2003, respectively, net of stock options forfeited.

NOTE 5-SIGNIFICANT CUSTOMER INFORMATION AND SEGMENT REPORTING INFORMATION

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

Disaggregated information is as follows (in thousands):

`Application
                                               Management  Professional
                                                Services    Services    Unallocated    Total
                                               ----------  -----------  -----------  ---------
For the Three Months Ended September 30, 2004                                                  
Revenues..................................... $   14,379  $     3,445  $        --  $  17,824
Depreciation.................................      1,801            1          213      2,015
Amortization of warrants.....................         --           --            3          3
Amortization of intangible assets............        234           39           --        273
                                               ----------  -----------  -----------  ---------
Segment profit (loss) from operations........ $    1,912  $       548  $    (6,531) $  (4,071) 
                                               ==========  ===========  ===========  =========

For the Three Months Ended September 30, 2003                                                  
Revenues..................................... $   14,295  $     1,245  $        --  $  15,540
Depreciation.................................      2,436            2          263      2,701
Amortization of stock-based compensation.....          7           --          (41)       (34)
Amortization of warrants.....................         --           --            3          3
Amortization of intangible assets............        367           --           --        367
                                               ----------  -----------  -----------  ---------
Segment profit (loss) from operations........ $    2,711  $       515  $    (5,546) $  (2,320)
                                               ==========  ===========  ===========  ========= 

For the Nine Months Ended September 30, 2004                                                   
Revenues..................................... $   43,069  $    10,025  $        --  $  53,094
Depreciation................................. $    5,369            2          640  $   6,011
Amortization of stock-based compensation..... $       --           --            3  $       3
Amortization of warrants..................... $       --           --            9  $       9
Amortization of intangible assets............ $      990  $       200  $        --  $   1,190
                                               ----------  -----------  -----------  ---------
Segment profit (loss) from operations........ $    6,953  $     1,253  $   (18,383) $ (10,177)
                                               ==========  ===========  ===========  ========= 

For the Nine Months Ended September 30, 2003                                                   
Revenues..................................... $   45,762  $     5,833  $        --  $  51,595
Depreciation................................. $    7,625  $        14  $     1,149  $   8,788
Amortization of stock-based compensation..... $       65  $        --  $       380  $     445
Amortization of warrants..................... $       --  $        --  $       427  $     427
Amortization of intangible assets............ $    1,257  $        --  $        --  $   1,257
                                               ----------  -----------  -----------  ---------
Segment profit (loss) from operations........ $    8,107  $     1,378  $   (20,082) $ (10,597)
                                               ==========  ===========  ===========  =========`

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

Significant customer information is as follows:

`Percentage of Total  Percentage of Total
                        Revenue              Revenue             Percent of Total
                   -------------------  -------------------     Accounts Receivable
                   Three Months Ended   Nine Months Ended    ---------------------------
                      September 30,        September 30,
                                                             September 30, December 31,
                     2004      2003       2004      2003         2004          2003
                   --------- ---------  --------- ---------  ------------- ------------- 
Customer A........       11%       17%        11%       12%            --            --
Customer B........       --        --         --        --             --            34%`

Percentages are listed in the table above only when the
result is 10% or greater. Customer A is a cash basis customer and therefore its
outstanding invoices have not been included in the Company's accounts receivable
balances. Customer A terminated its customer contract effective July 29,
2004.

NOTE 6-RESTRUCTURING AND IMPAIRMENT ACCRUAL

The following table (in thousands) sets
forth the charges taken against the restructuring and impairment accrual in the
nine-month period ended September 30, 2004 and the three-month period ended
September 30, 2004.

`Year to Date
                              December 31,      Cash      September 30,
                                  2003        Payments        2004
                              ------------  ------------  ------------  
Office lease obligations.... $      4,769  $       (532) $      4,237
                              ============  ============  ============


                                             Quarterly
                                June 30,        Cash      September 30,
                                  2004        Payments        2004
                              ------------  ------------  ------------  
Office lease obligations.... $      4,414  $       (177) $      4,237
                              ============  ============  ============`

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

NOTE 7-INCOME TAXES

Since inception, the Company has incurred net losses
for federal and state income tax purposes and anticipates losses for the
foreseeable future. The Company did not record any tax expense for the three
months ended September 30, 2004 and 2003, respectively. Tax expense was $115,000
and $0 for the nine months ended September 30, 2004 and 2003, respectively. The
tax expense is primarily for state and local purposes, which is determined based
on gross receipts or capital.

NOTE 8-COMMITMENTS AND CONTINGENCIES

Equipment and Software Financing Agreement

On March 17, 2004, the Company entered
into a $7 million term commitment payable with Wells Fargo Bank. The proceeds
from this financing have been used to finance the purchase of new equipment and
software. In connection with the term commitment payable the Company issued a
promissory note dated March 17, 2004 for a loan up to $7 million. Under the term
commitment payable the Company could draw against the note through September
2004. Outstanding balances under the note will accrue interest at a rate of
LIBOR plus 1.75%, however, the interest rate can be changed, at the option of
the Company, to a floating rate of prime minus 0.25%. Additionally, the Company
is obligated to pay interest on outstanding balances until October 1, 2004, at
which time, the term commitment payable converts into a term loan with principal
and interest payments due monthly. The outstanding principal balance under the
term loan and interest payments will be payable over 30 months. The term loan
interest rate can either be LIBOR or fixed. Principal is due in full February
2007. As of September 30, 2004, the outstanding balance was $7.0 million and the
interest rate was 4.5%. This agreement contains various financial covenants
regarding liquidity, net worth and results from operations.

Covenants associated with this loan require that the
Company's results from operations generate certain levels of EBITDA (earnings
before interest, taxes, depreciation and amortization) on a quarterly basis. The
Company did not meet the EBITDA covenant for the quarters ended June 30, 2004
and September 30, 2004 and obtained waivers from Wells Fargo Bank related to
each covenant violation. The Company has classified this obligation as current
as the Company has future quarterly EBITDA covenants that it does not believe it
will be able to comply with due to increased operating expenses and the loss of
revenue associated with the customer contract with Expanets/Avaya, Inc., which
terminated on July 29, 2004. The Company is in discussions with Wells Fargo Bank
regarding how to address anticipated future EBITDA covenant violations. We have
$28.3 million of unrestricted cash, cash equivalents and short-term investments
as of September 30, 2004.

Service Level Agreements

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

Lease Guarantees

In connection with a San Carlos facility
lease, the Company issued a $7 million letter of credit for the lease. As of
September 30, 2004, a $7 million cash deposit is held as collateral by a
financial institution for guarantee of the letter of credit. The cash deposit is
recorded as restricted cash on the balance sheet.

In connection with a Phoenix facility lease, the Company
issued an $853,430 letter of credit as security for the lease. As of September
30, 2004, an $853,430 cash deposit is held as collateral by a financial
institution for guarantee of the letter of credit. The cash deposit is recorded
as restricted cash on the balance sheet.

Legal Proceedings

In November 2001, a securities class action lawsuit was filed
in the U.S. District Court for the Southern District of New York against Corio,
certain of its officers and certain of the underwriters involved in Corio's
initial public offering. This is one of approximately 300 similar lawsuits in a
coordinated proceeding sometimes referred to as "IPO allocation
lawsuits" or "laddering lawsuits." The plaintiffs generally
allege that the underwriters engaged in undisclosed improper practices by giving
favorable allocations of IPO shares to certain investors in exchange for
excessive brokerage commissions and/or agreements for those investors to
purchase additional shares in the aftermarket at predetermined higher prices.
The plaintiffs seek an unspecified amount of damages. In June 2003, the
plaintiffs in these cases presented a settlement proposal to all of the issuer
defendants. Under the proposed settlement, the plaintiffs proposed to dismiss
and release all claims against participating defendants in exchange for a
contingent payment guaranty by the insurance companies collectively responsible
for insuring the issuers in all the related cases, and the assignment or
surrender to the plaintiffs of certain claims the issuer defendants may have
against the underwriters. Under the guaranty, the insurers or companies will be
required to pay the amount, if any, by which $1 billion exceeds the aggregate
amount ultimately collected by the plaintiffs from the underwriter defendants in
all the cases. If the plaintiffs fail to recover $1 billion and payment is
required under the guaranty, Corio would be responsible to pay its pro rata
portion of the shortfall, up to the amount of the self-insured retention under
its insurance policy, which is $1 million. In July 2003, Corio tentatively
agreed to accept this settlement proposal. The settlement is subject to
acceptance by a substantial majority of the issuer defendants and execution of a
definitive settlement agreement. The settlement is also subject to approval by
the Court, which cannot be assured, and the underwriters recently objected to
the settlement. If the settlement is not accepted by the requisite number of
defendants or if it is not approved by the Court or if it otherwise is not
consummated, Corio intends to defend the lawsuit vigorously. However, the
litigation is in the preliminary stage, and we cannot predict its outcome. The
litigation process is inherently uncertain. If the outcome of the litigation
were adverse to us and if we are required to pay significant monetary damages,
our business would be significantly harmed. This lawsuit may be time consuming
and expensive to defend and may divert management's attention and may be costly
to Corio even if the plaintiff's settlement proposal is consummated. As of
September 30, 2004, no amount is accrued, as management does not believe that a
loss is probable.

In November 2001, Corio filed a demand for arbitration
against LivePerson, Inc. with the American Arbitration Association in San
Francisco County. The arbitration related to a dispute around a services
contract between the parties. On July 23, 2003, the arbitrator in this dispute
issued a judgment awarding Corio damages of $1,115,440 plus interest.
LivePerson, Inc. filed a motion to vacate the award in the Superior Court of
California. On November 18, 2003, the Superior Court of California issued a
judgment, relating to the arbitration, awarding Corio damages of $1,346,605 plus
interest from October 17, 2003 until the date of payment. LivePerson, Inc. paid
Corio $1,369,479 on December 18, 2003 and subsequently appealed the judgment.
On October 8, 2004, the Appellate Court of California affirmed the judgment of
the Superior Court of California in favor of Corio.  For any portion of the cash
paid that is determined by the Company as revenue that should be recorded under
the Company's revenue recognition policy, such cash received pursuant to this
award will be recorded as termination fee revenue at that time.  The Company
recorded the cash received as an accrued liability.

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

Contingent Earn-out Payment

On October 22, 2003, the Company completed the purchase of
the assets and the assumption of certain liabilities of Nexus. The Company paid
Nexus approximately $10.2 million, consisting of $1.9 million in cash and
2,921,390 shares of Corio common stock, including $177,000 related to legal
expenses. In addition, Nexus is entitled to receive an earn-out payment of up to
$2.0 million payable in shares of Corio common stock contingent upon specified
revenue milestones for the three-month period ending December 31, 2004 from
identified existing and prospective customers of Nexus. In accordance with the
terms of the asset purchase agreement, $500,000 of the purchase price was also
deposited into an escrow account, all of which has been distributed.

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

The following Management's Discussion and
Analysis of our Financial Condition and Results of Operations should be read in
conjunction with the unaudited condensed consolidated financial statements and
notes thereto included in Part I-Item 1 of this Quarterly Report and the audited
financial statements and notes thereto and Management's Discussion and Analysis
in our 2003 Annual Report on Form 10K/A.



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

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

All statements included in this document are based on
information available to us as of the date of this Quarterly Report on Form 10-
Q, and we assume no obligation to update such statements, or to update the
reasons why actual results could differ from those projected in forward-looking
statements.

OVERVIEW

Corio was established in September 1998 and is an enterprise
application service provider, or ASP. Our services include the implementation
and management of business software for companies. Corio Applications on Demand
2005TM is an operational platform that delivers enterprise applications
from leading software vendors as a service.  Corio Applications on Demand
2005Ô
 reduces the cost and complexity of enterprise systems and delivers compliance
to new control objectives dictated by Sarbanes-Oxley Act of 2002.  We provide
infrastructure, applications management, professional services and Corio
iSRVCEÔ
 technology resource management (TRM) software.  By offering software solutions
as a monthly service, we enable customers to `pay-as-you-go,' minimizing upfront
project costs, improving return on investment (ROI) and reducing IT cost
overall.



Backed by industry leading service level guarantees,
Applications on Demand 2005Ô
 simplifies enterprise application management through automation.  The key
features of our Applications on Demand 2005Ô
 platform are:

- Productized Offerings:
- Processes:
- Automations
- Technologies
- Corio iSRVCEÔ

We operate through two lines of business:

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

Our business continues to experience a net loss due to the
on-going investment into our business.  We continue to add customers to our
existing customer base, however, the model of our business requires a
significant amount of initial investment in capital equipment which may have a
negative impact on our net working capital and cash position.   We believe this
negative impact on our net working capital and cash position will continue as we
continue to add new customers.

To drive sales growth and extend our market share, we are
making investments in our sales and marketing and professional services areas in
fiscal 2004. Our research and development team will continue to focus on further
automation and enhancement of our customer interaction processes.

Expanets/Avaya, Inc., a customer that accounted for 12% of
revenue for fiscal 2003 and 11% of revenue for the nine months ended September
30, 2004, terminated its customer contract with us effective July 29, 2004.  We
expect that the loss of this customer will put downward pressure on our revenue
in 2004 and beyond, even though Expanets/Avaya recently paid us $2.6 million as
part the contract termination, and, based on these payments, we recognized
revenue of $1.3 million on this contract in the quarter ended September 30, 2004
and will recognize $1.3 million in the quarter ending December 31, 2004.

During the third quarter of 2004, we entered into an arrangement with AT&T that established a
non-exclusive sales and marketing relationship whereby AT&T agreed to work cooperatively with us to sell and
support a combined solution around ongoing managed enterprise application services.  To date, Corio and
AT&T have entered into agreements to provide this joint solution with three new customers.  Although we
are hopeful that this strategic alliance will continue to result in new customers, there is no certainty that this
alliance will achieve any more of its intended benefits.

CRITICAL ACCOUNTING POLICIES

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

Estimates are used for, without
limitation, the accounting for revenue recognition, allowance for doubtful
accounts, certain loss contingencies, valuation allowances and other special
charges. Actual results could differ from these estimates. We review these
accounting policies we use in reporting our financial results on a regular
basis. In addition, our senior management has reviewed these critical accounting
policies and related disclosures with our Audit Committee. We have identified
the policies below as critical to our business operations and the understanding
of our financial condition and results of operations:

- Revenue recognition policy;
- Cash basis revenue recognition customers;
- Allowance for doubtful accounts;
- Loss contingencies; and
- Valuation allowance.

Revenue recognition

We generate revenue from application management services,
professional services and other revenues.

Application management services revenue consists of monthly
recurring fees for ongoing services, which are recognized as the services are
performed in accordance with Security and Exchange Commission's Staff Accounting
Bulletin 104 (SAB 104), Revenue Recognition and related interpretations and
start-up fees, which are recognized ratably over the term of the customer
applications management contract, generally three years upon the commencement of
hosting. We also recognize customer prepayments for application management
services revenues as the services are performed. In addition, fees for support
services, which are also recognized as revenue as the services are performed,
are included in application management services revenue.
Our application management services may consist of ongoing hardware and software management services
for business software application systems, which often includes providing the computers, data center
facilities and networks necessary to support the software applications as well as the proactive monitoring,
maintenance, security and issue resolution necessary to manage these highly complex business systems.
We analyze
various customer metrics, such as number of users and amount of data storage,
and compare them to the customer's contractual limits. Should the contractual
limits be exceeded, we invoice the customer for the overage and recognize the
revenue, assuming all other revenue recognition criteria have been met, during
the month that the services were performed. Application management services
customers are typically billed monthly with net 30 day payment terms.

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

Cash Basis Revenue Recognition
Customers

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

If we believe that there is a reasonable chance that we will
receive payment from a customer, even if payment is not reasonably assured and
the customer is cash basis, we will typically not terminate the customer and
will continue to provide services to that customer. We have set forth below the
amount of revenue recognized from cash basis customers for the three and nine
months ended September 30, 2004 and 2003 and the period in which the underlying
services were performed:

`Three Months Ended    Nine Months Ended
                                                                                    September 30,         September 30,
                                                                                   (In thousands)        (In thousands)
                                                                                --------------------  --------------------
                                                                                   2004       2003       2004       2003
                                                                                ---------  ---------  ---------  ---------  
Cash Basis Revenue Recorded Related to Services Performed in Current Period... $   3,169  $   4,661  $   9,024  $  10,786
Cash Basis Revenue Recorded Related to Services Performed in Prior Period.....       478      1,279      2,000      6,451
                                                                                ---------  ---------  ---------  ---------
      Total Cash Basis Revenue Recorded....................................... $   3,647  $   5,940  $  11,024  $  17,237
                                                                                =========  =========  =========  =========`

Revenue earned from cash basis customers but not recognized due to the cash
basis designation was $432,000 and $2.1 million as of September 30, 2004 and
2003, respectively. Since revenue related to these invoices is recognized on a
cash basis, these amounts have not been included in our accounts receivable
balances. In addition, only one of our cash basis customers is obligated to pay
recurring application management services fees in advance.

Allowance For Doubtful Accounts

The allowance for doubtful accounts is
based on our assessment of the collectibility of specific customer accounts and
the aging of the accounts receivable. If there is a deterioration of a major
customer's credit worthiness or actual defaults are higher than our historical
experience, our estimates of the recoverability of amounts due to us could be
adversely affected. We regularly review the adequacy of our allowance for
doubtful accounts through the identification of specific receivables where we
expect that payment will not be received, in addition to establishing an
unallocated reserve that is applied to all amounts that are not specifically
identified. In determining specific receivables where collection may not be
received, we review past due receivables and give consideration to prior
collection history, changes in the customer's overall business condition and the
potential risk associated with the customer's industry, among other factors. An
unallocated reserve is established for all amounts, which have not been
specifically identified, based on applying a graduated percentage to each
invoice's relative aging category. The allowance for doubtful accounts reflects
our best estimate as of the reporting dates. Changes may occur in the future,
which may make us reassess the collectibility of amounts and at which time we
may need to provide additional allowances in excess of that currently provided.
At September 30, 2004 and December 31, 2003, our allowance for doubtful accounts
was $654,000 and $591,000, respectively.

Loss Contingencies

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

For our office lease restructuring liability, our
estimate is based on our contracted lease obligation offset by estimated
sublease income over the lease term. We increased our office lease restructuring
liability in the first quarter of 2003 as a result of the sublease agreement
signed in May 2003 because the total sublease income for the restructuring
period was less than initially estimated.

In addition, since we perform some of our professional
services on a fixed fee basis, if we incur more costs than estimated, our
profitability will suffer. We track our progress to completion on such
arrangements by detailing individual project plans for each arrangement and then
regularly comparing the labor hours actually spent on a project against the
number of hours we estimate to complete the project. We believe this process
results in a reasonable estimate of our progress to completion. When estimates
of costs to complete the project indicate that a loss will be incurred, these
losses are estimated and recognized immediately. Additionally, we regularly
evaluate current information available to us to determine whether such recorded
losses should be adjusted. In the first quarter of 2004, based on our evaluation
of the open professional services contracts, we reduced our accruals for
contract losses by $153,000, which resulted in a corresponding reduction to
professional services expenses for the three months ended March 31, 2004. As of
September 30, 2004, no accrual for contract losses was required.

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

Valuation Allowance

We provided a valuation allowance against
our entire net deferred tax asset, primarily consisting of net operating loss
carryforwards. The valuation allowance was recorded given the losses we incurred
through the current quarter, and our uncertainties regarding future operating
profitability and taxable income. If we do not achieve profitability or if we
were to consummate certain types of mergers, we will not fully realize the
deferred tax benefits.

Selected Financial Data

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

`Three Months Ended
                                                Three Months Ended     Three Months Ended     September 30, 2004
                                                September 30, 2004     September 30, 2003             versus
                                               -------------------    -------------------     September 30, 2003
                                                         Percentage             Percentage   -------------------
                                                         of Total               of Total      Dollar   Percentage
                                                Amount   Revenues      Amount   Revenues      Change    Change
                                               --------- ---------    --------- ---------    --------- ---------
REVENUES:                                                                                                       
    Application management services.......... $  14,379        81 %  $  14,295        92 %  $      84         1 %
    Professional services and other..........     3,445        19 %      1,245         8 %      2,200       177 %
                                               --------- ---------    --------- ---------    ---------
    Total revenues...........................    17,824       100       15,540       100        2,284        15 %
                                                                                                                
COSTS AND EXPENSES:                                                                                             
    Application management services .........    11,800        66 %     11,210        72 %        590         5 %
    Professional services and other .........     2,855        16 %        730         5 %      2,125       291 %
    Research and development ................       562         3 %      1,123         7 %       (561)      (50)%
    Sales and marketing .....................     2,417        14 %      2,125        14 %        292        14 %
    General and administrative ..............     3,274        18 %      2,339        15 %        935        40 %
    Restructuring charges....................       714         4 %         --        --          714       100 %
    Amortization of stock-based compensation.        --        -- %        (34)       -- %         34      (100)%
    Amortization of intangible assets........       273         2 %        367         2 %        (94)      (26)%
                                               --------- ---------    --------- ---------    ---------
    Total operating expenses.................    21,895       123 %     17,860       115 %      4,035        23 %
                                               --------- ---------    --------- ---------    ---------          %
Loss from operations.........................    (4,071)      (23)%     (2,320)      (15)%     (1,751)       75 %
Interest and other income....................       161         1 %        136        -- %         25        18 %
Interest and other expense...................      (394)       (2)%        (73)        0 %       (321)      440 %
Income tax expense...........................        --        -- %         --         0 %         --          0%
                                               --------- ---------    --------- ---------    ---------
Net loss..................................... $  (4,304)      (24)%  $  (2,257)      (15)%  $  (2,047)       91 %
                                               ========= =========    ========= =========    =========


                                                                                              Nine Months Ended
                                                Nine Months Ended      Nine Months Ended      September 30, 2004
                                                September 30, 2004     September 30, 2003           versus
                                               -------------------    -------------------     September 30, 2003
                                                         Percentage             Percentage   -------------------
                                                         of Total               of Total      Dollar   Percentage
                                                Amount   Revenues      Amount   Revenues      Change    Change
                                               --------- ---------    --------- ---------    --------- ---------
REVENUES:                                                                                                       
    Application management services.......... $  43,069        81 %  $  45,762        89 %  $  (2,693)       (6)%
    Professional services and other..........    10,025        19 %      5,833        11 %      4,192        72 %
                                               --------- ---------    --------- ---------    ---------
    Total revenues...........................    53,094       100       51,595       100        1,499         3 %
                                                                                                                
COSTS AND EXPENSES:                                                                                             
    Application management services .........    34,692        65 %     36,333        70 %     (1,641)       (5)%
    Professional services and other .........     8,568        16 %      4,455         9 %      4,113        92 %
    Research and development ................     1,747         3 %      3,819         7 %     (2,072)      (54)%
    Sales and marketing .....................     7,848        15 %      6,632        13 %      1,216        18 %
    General and administrative ..............     8,508        16 %      6,917        13 %      1,591        23 %
    Restructuring charges....................       714         1 %      2,334         5 %     (1,620)      (69)%
    Amortization of stock-based compensation.         3        -- %        445         1 %       (442)      (99)%
    Amortization of intangible assets........     1,191         2 %      1,257         2 %        (66)       (5)%
                                               --------- ---------    --------- ---------    ---------
    Total operating expenses.................    63,271       118 %     62,192       120 %      1,079         2 %
                                               --------- ---------    --------- ---------    ---------
Loss from operations.........................   (10,177)      (18)%    (10,597)      (20)%        420        (4)%
Interest and other income....................       384         1 %        518         1 %       (134)      (26)%
Interest and other expense...................      (458)       (1)%       (285)       (1)%       (173)       61 %
Income tax expense...........................      (115)       -- %         --         0 %       (115)      100 %
                                               --------- ---------    --------- ---------    ---------
Net loss..................................... $ (10,366)      (20)%  $ (10,364)      (20)%  $      (2)        0 %
                                               ========= =========    ========= =========    =========`

RESULTS OF OPERATIONS

Revenues

Total revenue was $17.8 million and $15.5
million for the three months ended September 30, 2004 and 2003, respectively, an
increase of $2.3 million. Total revenue was $53.1 million and $51.6 million for
the nine months ended September 30, 2004 and 2003, respectively, an increase of
$1.5 million.  One of our customers Expanets/Avaya, Inc., which accounted for
11% of our total revenues for the three and nine month periods ended September
30, 2004, terminated its contract effective July 29, 2004.

Application Management Services
Revenues.

Revenues from our application management services, or AMS,
were $43.1 million for the nine months ended September 30, 2004, including $11.0
million recognized as a result of payments from cash basis customers.  The $11.0
million recognized from cash basis customers includes $3.2 million in non-
recurring revenues from customer contract terminations. For the nine months
ended September 30, 2003, our AMS revenues of $45.8 million included $16.8
million recognized as a result of payments from cash basis customers.  Included
in the $16.8 million recognized from cash basis customers was $2.5 million in
non-recurring revenues from customer contract terminations.  The $2.7 million
decrease in application management services revenues for the nine months ended
September 30, 2004 was due in part to a decrease of $2.5 million in the hosting
fees for Quadrem. In addition, we recognized $1.1 million in the nine months
ended September 30, 2003 from a former Qwest Cyber Solutions, or QCS, customer.
This customer was in the process of terminating its AMS contract with QCS at the
time we acquired the contract as part of the September 2002 QCS acquisition. As
a result, we recognized $1.1 million in monthly hosting fees for the contract
through the February 28, 2003 termination date. The offset to these two revenue
decrease items was the increase in new business

Professional Services and Other Revenues. Ourprofessional services and other revenues were $3.4 million for the three
months ended September 30, 2004, including $37,000 recognized as a result of
payments from cash basis customers, compared to $1.2 million for the three
months ended September 30, 2003, including $51,000 recognized as a result of
payments from cash basis customers. The $2.2 million increase in professional
services revenues was primarily due to additional customers obtained through our
acquisition of Nexus Technology, Inc. as well as the addition of other new
customers and projects.  Ourprofessional services and other revenues
were $10.0 million for the nine months ended September 30, 2004, including
$92,000 recognized as a result of payments from cash basis customers, compared
to $5.8 million for the nine months ended September 30, 2003, including $486,000
recognized as a result of payments from cash basis customers.  The $4.2 million
increase in professional services revenues was primarily due to additional
customers we obtained through our acquisition of Nexus Technology, Inc. as well
as the addition of new customers and projects.  At September 30, 2004 and
December 31, 2003, we had balances of $533,000 and $76,000, respectively, for
deferred professional services revenues resulting from customer payments that we
required in advance of providing our professional services work.  We anticipate
that professional services revenue and the associated margins will fluctuate
significantly from period to period depending on the timing and size of
projects, the amount of such work completed by independent third parties and
other factors.

Costs and Expenses

Total operating expenses were approximately $21.9 million and
$17.9 million for the three months ended September 30, 2004 and 2003,
respectively, and approximately $63.3 million and $62.2 million for the nine
months ended September 30, 2004 and 2003, respectively.

Application Management Services. Application
management services expenses, excluding stock-based compensation of $0 and
$7,000 for the three months ended September 30, 2004 and 2003, respectively,
were $11.8 million for the three months ended September 30, 2004 and $11.2
million for the three months ended September 30, 2003. The $0.6 million increase
in expenses for the three months ended September 30, 2004 compared to the three
months ended September 30, 2003 was primarily attributable to a $0.3 million
increase in internal staff cost and an $0.6 million increase in cost of
operating our datacenters which were offset by a $0.6 million reduction in
depreciation. A number of our assets were purchased in 2000 and had a three-year
useful life.  The reduction in depreciation was partially offset by an increase
in staff costs due to higher headcount and a company-wide 4% salary increase
effective April 1, 2004. Application management services expenses, excluding
stock-based compensation of $1,000 and $65,000 for the nine months ended
September 30, 2004 and 2003, respectively, were $34.7 million for the nine
months ended September 30, 2004 and $36.3 million for the nine months ended
September 30, 2003.  The $1.6 million decrease is due primarily to a $2.3
million reduction in depreciation expense and a $0.6 million decrease in
equipment rental and maintenance cost offset by a $0.8 million increase in
datacenter cost and an increase of $0.5 million in staff costs.

Professional Services and
Other

Research and Development.

Sales and Marketing Expenses.

General and Administrative
Expenses

Restructuring Charges

In May 2003, we signed an agreement to sublease the
vacated portion of our headquarters facility through the end of our lease, which
is March 2010. During the quarter ended June 30, 2003, we adjusted our estimated
loss related to the vacated space and recorded an additional restructuring
charge of $2.5 million to reflect the terms of this new sublease agreement. The
impact of this charge was partially offset by the favorable resolution of our
liability with respect to various capital leases, which resulted in a reduction
of $139,000 to reduce the previously established restructuring reserve. There
were no additional restructuring charges recorded during the three or nine
months ended September 30, 2004. The cash payments were approximately $177,000
for the three months ended September 30, 2004 and approximately $532,000 for the
nine months ended September 30, 2004.

Amortization of Stock-Based
Compensation

Amortization of Other Intangibles.Amortization
of intangible assets was $273,000 for the three months ended September 30, 2004
and $367,000 for the three months ended September 30, 2003. Amortization of
intangible assets was $1.2 million for the nine months ended September 30, 2004
and $1.3 million for the nine months ended September 30, 2003.  In November
2003, we recorded an intangible asset of $2.6 million for application management
services and professional services contracts acquired in connection with our
acquisition of Nexus. This intangible asset is being amortized over estimated
lives ranging from four months to five years.  In September 2002, we recorded an
intangible asset of $2.7 million for contracts acquired in connection with our
acquisition of QCS, which is included in other assets in the accompanying,
condensed consolidated balance sheet. This intangible asset was amortized over
an 18 month period that ended February 2004.

Interest and Other Income and Expenses.Net interest and other income and (expense) were ($233,000) for the three
months ended September 30, 2004 and $63,000 for the three months ended September
30, 2003.  The $296,000 decrease was primarily due to a $292,000 loss incurred
on the disposal of obsolete capital assets during the three months ended
September 30, 2004.  Net interest and other income and expense were ($74,000)
for the nine months ended September 30, 2004 and $233,000 for the nine months
ended September 30, 2003.  The $307,000 decrease was primarily due to a $292,000
loss incurred on the disposal of obsolete capital assets and to a lesser extent,
a lower average cash and short term investment balance.

Income Taxes

Related Party. In the ordinary course of business, we
recorded revenue of $0 and $16,000 for the three months ended September 30, 2004
and 2003, respectively, arising from transactions with one company with which we
have directors in common. We recorded revenue of $55,000 and $32,000 for the
nine months ended September 30, 2004 and 2003, respectively, arising from
transactions with such companies. We paid $134,000 and $0 for the three months
ended September 30, 2004 and 2003, respectively, to a company with which we have
directors in common. For the nine months ended September 30, 2004 and 2003, we
paid $189,000 and $177,000, respectively, to companies with which we have
directors in common. At September 30, 2004, we had $0 in accounts receivable and
$0 in accounts payable from such related parties.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2004, we had cash and cash equivalents,
short-term investments, and restricted cash of $36.1 million, a decrease of $6.6
million from $42.7 million as of December 31, 2003. The $6.6 million decrease
was primarily the result of $9.0 million in cash provided by financing
activities offset by $12.1 million of cash used in investing activities and $4.9
million of cash used by operating activities.



We lease office facilities and fixed assets under non-
cancelable operating and capital leases. Rental expense under operating lease
agreements was $1.0 million and $0.9 million for the three months ended
September 30, 2004 and 2003, respectively. Rental expense for the nine month
period ended September 30, 2004 and 2003 was $2.6 million and $3.0 million,
respectively.

The following summarizes our principal
facilities and equipment contractual commitments, excluding open orders for
purchases to support normal operations, as of September 30, 2004 (in
thousands):

`Payments due by Period
                                     -------------------------------------------------------------------------------
                                                Three Months
                                                   Ending
                                                December 31,
                                       Total        2004         2005       2006       2007       2008    Thereafter
                                     ---------  -------------  ---------  ---------  ---------  --------  ----------
Capital lease obligations.......... $     492  $          93  $     283  $     116  $        0 $     --  $       --
Operating lease obligations........    24,167          1,069      4,335      4,320      4,426     4,332       5,685
Equipment Operating leases.........        47             18         28          1         --        --          --
                                     ---------  -------------  ---------  ---------  ---------  --------  ----------
                                    $  24,706  $       1,180  $   4,646  $   4,437  $   4,426  $  4,332       5,685
                                     =========  =============  =========  =========  =========  ========  ==========`

The following summarizes our principal vendor contractual commitments as of
September 30, 2004 (in thousands):

`Payments due by Period
                                     -------------------------------------------------------------------------------
                                                Three Months
                                                   Ending
                                                December 31,
                                       Total        2004         2005       2006       2007       2008    Thereafter
                                     ---------  -------------  ---------  ---------  ---------  --------  ----------
Vendor Commitments................. $   9,829  $       1,308  $   5,834  $   1,406  $   1,007  $    274  $       --
                                     =========  =============  =========  =========  =========  ========  ==========`

Net cash used in investing activities was $12.1 million for
the nine months ended September 30, 2004 compared to $11.0 million used in
investing activities for the nine months ended September 30, 2003. The $1.1
million increase was primarily related to equipment purchases of $10.2 million
in the nine months ended September 30, 2004 compared to equipment purchases of
$3.2 million in the nine months ended September 30, 3003.  The increase in
equipment purchases in the nine months ended September 30, 2004 relate primarily
to increased customer contracts booking related to first nine months of fiscal
2004 and internal use purposes.  Offsetting the increased investment in
equipment purchases in the nine months ended September 30, 2004 compared to nine
months ended September 30, 2003 were a net reduction in the sale and purchase of
short-term investments of $6.2 million in the nine months ended September 30,
2004 compared to the nine months ended September 30, 2003.

Net cash provided by financing activities
was $9.0 million for the nine months ended September 30, 2004 compared to $3.5
million used for the nine months ended September 30, 2003. The $12.5 million
change in cash provided by financing activities consisted primarily of the
proceeds from the issuance of common stock under our employee stock purchase
plan and exercise of stock options by our employees, reduced payments on capital
leases as buy-outs increased, and $7.0 million in borrowings from a bank term
commitment payable entered into in the first quarter of fiscal 2004 for
equipment purchases.

On March 17, 2004, we entered into a $7
million term commitment payable with Wells Fargo Bank. The proceeds from this
financing have been used to finance the purchase of new equipment and software.
In connection with the term commitment payable, we issued a promissory note
dated March 17, 2004 for a loan up to $7 million. Under the term commitment
payable we could draw against the note through September 2004. Outstanding
balances under the note will accrue interest at a rate of LIBOR plus 1.75%,
however, the interest rate can be changed, at our option, to a floating rate of
prime minus 0.25%. Additionally, we are obligated to pay interest on outstanding
balances until October 1, 2004, at which time, the term commitment payable
converts into a term loan with principal and interest payments due monthly. The
outstanding principal balance under the term loan and interest payments will be
payable over 30 months. The term loan interest rate can either be LIBOR or
fixed. Principal is due in full February 2007. As of September 30, 2004, the
outstanding balance was $7.0 million and the interest rate was 4.5%. This
agreement contains various financial covenants regarding liquidity, net worth
and results from operations.

Covenants associated with this loan require that our results
from operations generate certain levels of EBITDA (earnings before interest,
taxes, depreciation and amortization) on a quarterly basis. We did not meet the
EBITDA covenant for the quarters ended June 30, 2004 and September 30, 2004 and
obtained waivers from Wells Fargo Bank related to each covenant violation. We
have classified this obligation as current as we have future quarterly EBITDA
covenants that we do not believe we will be able to comply with due to increased
operating expenses and the loss of revenue associated with the customer contract
with Expanets/Avaya, Inc., which terminated on July 29, 2004. We are in
discussions with Wells Fargo Bank regarding how to address anticipated future
EBITDA or liquidity covenant violations. We have $28.3 million of unrestricted
cash, cash equivalents and short-term investments as of September 30, 2004.

Except for equipment operating leases, we have no off balance
sheet financing arrangements (see Note 8 in this Quarterly Report).

On October 22, 2003, we completed the purchase of the assets
and the assumption of certain liabilities of Nexus. We paid Nexus approximately
$10.2 million, consisting of $1.9 million in cash and 2,921,390 shares of our
common stock, including $177,000 related to legal expenses. In addition, Nexus
is entitled to receive an earn-out payment of up to $2.0 million payable in
shares of our common stock contingent upon specified revenue milestones for the
three-month period ending December 31, 2004 from identified existing and
prospective customers of Nexus. In accordance with the terms of the asset
purchase agreement, $500,000 of the purchase price was also deposited into an
escrow account, all of which has been distributed.

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

Risks Related to Our Business

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

We have spent significant funds to date to develop and refine
our current services, to create and run our operations organization, to build
and run a professional services organization and to develop and run our sales
and marketing resources. We have incurred significant operating and net losses
and negative cash flow and have not achieved profitability. As of September 30,
2004, we had an accumulated deficit of $270 million.

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

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

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

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

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

For example, one of our customers, Quadrem, who represented
11% of total revenues in fiscal 2002, had its contract expire in May 2003.
Although Quadrem renewed for a short-term contract, the new contract was for
significantly less recurring monthly revenue. In addition, another customer,
Expanets, a customer that accounted for 12% of total revenues for fiscal 2003,
was acquired by Avaya, Inc. in November 2003. Subsequently, Expanets/Avaya, Inc.
terminated its customer contract as of July 29, 2004. The loss of
Expanets/Avaya, Inc. as a customer, or the future loss of any other significant
customer, or any significant reduction in fees paid to us by a significant
customer, will have a significant adverse effect on our ability to achieve
profitability and positive cash flow.

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

In the event we decide payment by a customer is no longer
reasonably assured then we designate that customer as a "cash basis"
customer. Historically we have generated a significant portion of our revenue
from payments by cash basis customers. The percentage of our customers
designated as cash basis customers as of the end of September 30, 2004 was 12%
and for the years ended December 31, 2003, 2002 and 2001 was 12%, 29% and 42%,
respectively. For the quarter ended September 30, 2004 we recorded revenue of
$3.6 million (20% of revenues) related to services provided to cash basis
customers. For the nine months ended September 30, 2004 we recorded revenue of
$11.0 million (21% of revenues) related to services provided to cash basis
customers. For the years ended December 31, 2003, 2002 and 2001, we recorded
revenue of $22.2 million (32% of total revenue), $17.0 million (31% of total
revenue) and $16.6 million (32% of total revenue), respectively, related to
services provided to cash basis customers.

For the quarter ended September 30, 2004, we determined not
to recognize approximately $432,000 in revenue related to services provided
during this period, based on our policies regarding customers designated as cash
basis customers for which we did not receive payment. For the 2003 fiscal year
we determined not to recognize approximately $1.4 million in revenue related to
services provided during this period to cash basis customers. For fiscal 2002,
this amount was $3.0 million and for fiscal 2001 it was $2.3 million. A
significant portion of our customer base remains on a cash basis and we expect
to continue to have a significant number of customers on a cash basis going
forward. For these customers we are at risk of not receiving payment for
services we have already performed. Failure by these customers to pay could
decrease revenue and result in our having incurred costs to provide services
without being compensated for those services, which could adversely affect our
ability to become profitable.

We may experience issues with our financial controls that could harm our
financial condition and results of operations and have a negative effect on the
trading price of our stock.

Our former auditors have noted certain matters
involving internal controls and operations that they consider to be reportable
conditions under standards established by the American Institute of Certified
Public Accountants.  Reportable conditions involve matters coming to auditors'
attention relating to significant deficiencies in the design or operation of
internal controls that, in the auditor's judgment, could adversely affect the
company's ability to initiate, record, process, and report financial data
accurately, on a timely basis and consistent with regulatory requirements.  For
example, our former auditors had identified as a significant deficiency our lack
of adequate staffing within our finance department during their review of our
financial statements for the three and six months ended June 30, 2004.  Please
see the disclosure we have provided in Item 4 "Controls and
Procedures" of this quarterly report for more information on these
significant deficiencies.

We are continuing to work to improve our internal
controls and to address the significant deficiencies identified by our former
auditors.  We have taken measures to improve our financial reporting and
management capabilities and we are in the process of instituting changes to our
internal controls in order to try to satisfy our obligations as a public
company, including the requirements associated with the Sarbanes-Oxley Act of
2002 such as compliance with Section 404 of the Sarbanes-Oxley Act by the end of
this year.  For example, we are in the process of expanding the documentation of
our internal processes, and we are actively recruiting additional financial and
accounting personnel to support our finance team.  To sufficiently address the
issues with our internal controls, we will need to continue to improve our
financial and managerial controls, reporting systems and procedures, and
documentation thereof, and will need to continue to expand, train and manage our
finance team effectively.

We cannot be certain that the measures we are taking
and will take in the future will ensure that we implement and continue to
maintain adequate controls over our financial processes and reporting.  If we
fail to implement and continue to maintain adequate internal controls, this
could have a material adverse effect on our business, results of operations and
financial conditions and could prevent us from releasing our financial
information and SEC reports in a timely and accurate manner and in compliance
with regulatory requirements. This could also adversely affect our ability to
sell our services and implement our business plan successfully and in a manner
that achieves profitability, and could impair our ability to detect and prevent
fraud.

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

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

- acquire and retain customers, particularly larger, more
established companies desirable to create a stable revenue and customer
base;
- acquire new customers at a rate sufficient to create
growth taking into account loss of customers;
- reduce costs associated with the delivery of services to
our customers;
- expand and maintain our pipeline of sales prospects in
order to promote greater predictability in our period-to-period sales
levels;
- acquire or license third party software applications,
hardware, and networking and data center services at a reasonable cost or at a
structure beneficial to us;
- complete successful implementations of software
applications in a manner that is repeatable and scalable;
- integrate successfully software applications we manage
with each other and with our customers' existing systems;
- continue to offer new services that complement our
existing offerings;
- increase awareness of our brand; and
- maintain our current, and develop new, strategic
relationships.

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

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

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

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

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

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

- the timing of obtaining, implementing and establishing
connectivity with individual customers;
- the loss of or change in our relationship with important
customers and our ability or inability to collect termination fees from
terminating customers;
- any increase or decrease in termination fees, settlement
fees or judgments paid in a quarter versus other quarters;
- the timing and magnitude of expanding our operations and
of other capital expenditures;
- the timing and amount of payments received from cash
basis customers as well as the change in composition of these customers;
- costs, including license fees, relating to the software
applications we use;
- changes in our pricing policies or those of our
competitors;
- potential changes in the accounting standards associated
with accounting for stock options, stock or warrant issuances and for revenue
recognition; and
- accounting charges we may incur in the future relating
to stock options, stock or warrant issuances.

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

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

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

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

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

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

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

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

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

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

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

A failure to maintain and expand relationships with third
party systems integrators that we use to implement our services could harm our
ability to service our customers effectively. As we seek to provide applications
management services for larger, more established customers, they may frequently
utilize the systems integration and consulting services of independent, third
party systems integrators rather than our services. In such cases, we may
receive only modest revenue for implementation and integration services if any.
For this reason and others, it may be difficult for us to maintain and increase
our professional services revenues.  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 than is optimal. If we do not offer the desired
customization, there may be less demand for our services. Conversely, providing
customization of our services increases our costs and reduces our flexibility to
provide similar services to many customers. Accordingly, increased demand for
customization of our services could reduce the scalability and profitability of
our business and increase risks associated with completing software
upgrades.

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

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

- expand our management team, financial and information
systems and controls and operations team;
- maintain a high level of customer service and
support;
- expand our implementation and consulting resources
internally and with third parties;
- expand, train, manage and retain our employee base
effectively; and
- manage costs for employees, hardware, software, data
centers and networks in a manner that will permit our business to scale.

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

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

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

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

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

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

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

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

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

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

Downward pricing pressure may decrease our revenue.

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

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

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

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

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

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

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

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

Part of our strategy may be to expand our services by
offering our customers services related to additional software applications that
address their evolving business needs. Certain challenges may arise related to
this potential strategy.  For example, we cannot be sure that we will be able to
license these applications at commercially viable rates or at all or otherwise
be permitted access to the applications to provide our services, or, in the
alternative, that we will be able to cost-effectively develop the applications
in-house. If we cannot obtain these applications on a cost-effective basis or
otherwise cannot effectively expand our service offering and, as a result,
cannot expand the range of our service offerings, the market for our services
may not grow and may decline, and sales of our services may suffer.
Furthermore, we may not focus on the strategy of expanding by providing our
services in relation to additional enterprise software applications, and this
may be a strategic mistake.

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 Affiliated Computer Systems, CSC, Electronic Data Systems,
Hewlett-Packard, IBM Global Services, NaviSite and USinternetworking;
- systems integrators, such as Accenture and Bearing
Point;
- offshore providers such as Wipro, Tata and Infosys;
- software vendors, such as Oracle, PeopleSoft, SAP, Ariba
and Siebel Systems; and
- major technology providers, such as Microsoft.

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

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

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

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

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

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

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

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

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

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

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

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

Additionally, currently a substantial number of our employees are located in Balgalore, India at our
subsidiary.  Competition for employees in Bangalore is severe, and we may have difficulty retaining and
recruiting qualified employees in Bangalore.  Any such inability to retain and recruit such employees may
result in a need for additional qualified employees and may result in increased costs to replace such
employees.

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

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

- possible impairment of relationships with employees and
customers as a result of the acquisition of Nexus;
- inability to retain key employees of Nexus;
- inability to retain the SAP customers of Nexus;
- diversion of management's attention from other business
concerns; and
- difficulties in assimilation of acquired personnel,
operations, technologies or products.

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

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

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

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

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

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

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

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

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

Risks Related to our Industry

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

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

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

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

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

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

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

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

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

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

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

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

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

Our executive officers, directors and entities affiliated
with them, in the aggregate, beneficially own approximately 40% of our common
stock as of September 30, 2004. If they were to act together, these stockholders
would be able to exercise control over most matters requiring approval by our
stockholders, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may also have the effect
of delaying or preventing a change in control of our company, which could cause
our stock price to drop. These actions may be taken even if they are opposed by
the other investors, including those who purchased shares in the initial public
offering.

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

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

- Our bylaws limit the ability of our stockholders to call
a special meeting and do not permit stockholders to act by written consent.
- We are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which prohibits us from
engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction
in which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner.
- Several members of our senior management have contracts
with us that provide for the acceleration of the vesting of their stock options
upon termination following a change of control, and members of our board of
directors have contracts with us that provide for the acceleration of vesting of
their stock options upon a change of control.
- Our certificate of incorporation permits our board to
issue shares of preferred stock without stockholder approval. In addition to
delaying or preventing an acquisition, the issuance of a substantial number of
shares of preferred stock could adversely affect the price of the common
stock.

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

ITEM 3.   Quantitative
and Qualitative Disclosures About Market Risk

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

Interest Rate Risk

The primary objective of our investment activities is to
preserve principal while at the same time maximize the income we receive from
our investments without significantly increasing risk. Some of the securities
that we have invested in may be subject to market risk. This means that a change
in prevailing interest rates may cause the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed
interest rate at the then-prevailing interest rate and the prevailing interest
rate later rises, the fair value amount of our investment will probably decline.
To minimize this risk, we maintain our portfolio of cash equivalents and short-
term investments in a variety of securities, including Government Securities,
Commercial Paper, Corporate Bonds and money market funds. In general, money
market funds are not subject to market risk because the interest paid on such
funds fluctuates with the prevailing interest rate. The following table presents
the amounts of our cash equivalents and short-term investments that are subject
to market risk by range of expected maturity and weighted-average interest rates
as of September 30, 2004.

ITEM 4.   Controls
and Procedures

(a)     Evaluation of disclosure
controls and procedures.

Our management evaluated, with the participation of our Chief
Executive Officer and our Chief Financial Officer, the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report.  Based on this evaluation, our Chief Executive Officer and our Chief
Financial Officer have concluded that, except as discussed below with respect to
absence of appropriate levels of accounting personnel, our disclosure controls
and procedures are effective to ensure that information we are required to
disclose in reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.

(b) Changes in internal controls.

As discussed in our Current Report on
Form 8-K filed with the Securities and Exchange Commission on August 4, 2004,
KPMG noted deficiencies related to our internal controls around monitoring of
debt covenant compliance, the absence of appropriate levels of accounting
personnel, the absence of appropriate review and approval of manual journal
entries, and evidence of failure to reconcile bank statements in a timely
manner.  We believe that we have remedied all of these deficiencies except the
absence of the appropriate levels of accounting personnel, which we expect to
remedy soon, as discussed below.









In late 2003, we started preliminary efforts to analyze our system of
internal controls over financial reporting, and in response to the requirements
of Section 404 of the Sarbanes-Oxley Act of 2002, beginning in mid-2004, we have
invested significant resources in documenting and improving these controls.  In
the course of our compliance activities, we have identified areas of our
internal controls for specific improvement, including management of our
inventory of fixed assets, our billing processes and systems, internal access
policies to certain data systems, and coordination across our different business
functions.  We continue to design and implement enhanced processes and controls
to address these and other of our internal controls in preparation for our first
management report on internal controls over financial reporting, as required by
Section 404, as of December 31, 2004.  In connection with our continuing
compliance efforts, we have made and expect to continue to make changes in our
internal controls.

Except as stated above, there was no
change in our internal controls over financial reporting during the period
covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

In November 2001, Corio filed a demand for arbitration
against LivePerson, Inc. with the American Arbitration Association in San
Francisco County. The arbitration related to a dispute around a services
contract between the parties. On July 23, 2003, the arbitrator in this dispute
issued a judgment awarding Corio damages of $1,115,440 plus interest.
LivePerson, Inc. filed a motion to vacate the award in the Superior Court of
California. On November 18, 2003, the Superior Court of California issued a
judgment, relating to the arbitration, awarding Corio damages of $1,346,605 plus
interest from October 17, 2003 until the date of payment. LivePerson, Inc. paid
Corio $1,369,479 on December 18, 2003 and subsequently appealed the judgment.
On October 8, 2004, the Appellate Court of California affirmed the judgment of
the Superior Court of California in favor of Corio.  For any portion of the cash
paid that is determined by the Company as revenue that should be recorded under
the Company's revenue recognition policy, such cash received pursuant to this
award will be recorded as termination fee revenue at that time.  The Company
recorded the amount received as an accrued liability.

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



ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS

Not applicable

ITEM 3.  DEFAULTS UPON SENIOR
SECURITIES

Not applicable

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

Not applicable

ITEM 5.	OTHER
INFORMATION

Not applicable

ITEM
6.	EXHIBITS



|ExhibitNumber | Description                                                                                                                                                                                     
|------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.19         | The Second Amendment to Credit Agreement entered into as of
September 30, 2004, by and between Corio, Inc., a Delaware Corporation and Wells
Fargo Bank, National Association                   
|10.20         | Termination Settlement Agreement entered into as of September 29, 2004, by
and between Corio, Inc., a Delaware Corporation and Avaya, Inc.                                                      
|10.21         | Amendment of Change in Control Agreement entered into as of October 4, 2004
by and between the Registrant and Arthur Chiang, Senior Vice President,
Corporate Development and Investor Relations
|10.22         | Amendment of Change in Control Agreement entered into as of October 4, 2004
by and between the Registrant and Brett White, Executive Vice President, Chief
Financial Officer                    
|10.23         | Amendment of Change in Control Agreement entered into as of October 4, 2004
by and between the Registrant and Sal Jamil, Executive Vice President, Chief
Operating Officer                      
|10.24         | Amendment of Change in Control Agreement entered into as of October 4, 2004
by and between the Registrant and John Ottman, Executive Vice President,
Worldwide Markets                          
|10.25         | Employment Agreement entered into as of June 11, 1999 by and between the
Registrant and George Kadifa, Chairman of the Board and Chief Executive Officer                                        
|10.26         | Amendment to Employment Agreement entered into as of July 15, 2004  by and
between the Registrant and George Kadifa, Chairman of the Board and Chief
Executive Officer                          
|10.27         | Amendment of Change in Control Agreement entered into as of April 15, 2001 by
and between the Registrant and George Kadifa, Chairman of the Board and Chief
Executive Officer                   
|10.28         | Amendment of Change in Control Agreement entered into as of October 4, 2004
by and between the Registrant and George Kadifa, Chairman of the Board and Chief
Executive Officer                  
|10.29         | Corio Inc.'s Stock Option Agreement Form                                                                                                                                                        
|31.1          | Section 302 Certification of Chief Executive Officer                                                                                                                                            
|31.2          | Section 302 Certification of Chief Financial Officer                                                                                                                                            
|32.1          | Section 906 Certification of Chief Executive Officer                                                                                                                                            
|32.2          | Section 906 Certification of Chief Financial Officer                                                                                                                                            

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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: November 12, 2004



|CORIO, INC.
|-----------
|           
|By:        
|           
|           
|By:        
|           

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EXHIBIT INDEX



|ExhibitNumber | Description                                                                                                                                                                                             
|------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.19         | The Second Amendment to Credit Agreement entered into as of
September 30, 2004, by and between Corio, Inc., a Delaware Corporation and Wells
Fargo Bank, National Association     PDF                   
|10.20         | Termination Settlement Agreement entered into as of September 29, 2004, by
and between Corio, Inc., a Delaware Corporation and Avaya, Inc.     PDF                                                      
|10.21         | Amendment of Change in Control Agreement entered into as of October 4, 2004
by and between the Registrant and Arthur Chiang, Senior Vice President,
Corporate Development and Investor Relations     PDF
|10.22         | Amendment of Change in Control Agreement entered into as of October 4, 2004
by and between the Registrant and Brett White, Executive Vice President, Chief
Financial Officer     PDF                    
|10.23         | Amendment of Change in Control Agreement entered into as of October 4, 2004
by and between the Registrant and Sal Jamil, Executive Vice President, Chief
Operating Officer     PDF                      
|10.24         | Amendment of Change in Control Agreement entered into as of October 4, 2004
by and between the Registrant and John Ottman, Executive Vice President,
Worldwide Markets     PDF                          
|10.25         | Employment Agreement entered into as of June 11, 1999 by and between the
Registrant and George Kadifa, Chairman of the Board and Chief Executive Officer     PDF                                        
|10.26         | Amendment to Employment Agreement entered into as of July 15, 2004  by and
between the Registrant and George Kadifa, Chairman of the Board and Chief
Executive Officer     PDF                          
|10.27         | Amendment of Change in Control Agreement entered into as of April 15, 2001 by
and between the Registrant and George Kadifa, Chairman of the Board and Chief
Executive Officer     PDF                   
|10.28         | Amendment of Change in Control Agreement entered into as of October 4, 2004
by and between the Registrant and George Kadifa, Chairman of the Board and Chief
Executive Officer     PDF                  
|10.29         | Corio Inc.'s Stock Option Agreement Form     PDF                                                                                                                                                        
|31.1          | Section 302 Certification of Chief Executive Officer                                                                                                                                                    
|31.2          | Section 302 Certification of Chief Financial Officer                                                                                                                                                    
|32.1          | Section 906 Certification of Chief Executive Officer                                                                                                                                                    
|32.2          | Section 906 Certification of Chief Financial Officer                                                                                                                                                    

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