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UNITED STATES

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 OCTOBER 31, 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 NO.: 000-30326



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VSOURCE, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 77-0557617                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|7855 Ivanhoe Avenue Suite 200, La Jolla, California            |  | 92037-4508                          
|(Address of principal executive offices)                       |  | (Zip Code)                          



Registrants
telephone number, including area code: (858) 551-2920



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



|                                                                                               |  |          
|---------------------------------------------------------------------------------------------- |  | ---------
|Number of shares of common stock outstanding as of November 30, 2004                           |  | 2,074,236
|Number of shares of Series 1-A Convertible Preferred Stock outstanding as of November 30, 2004 |  | 67,600   
|Number of shares of Series 2-A Convertible Preferred Stock outstanding as of November 30, 2004 |  | 3,900    
|Number of shares of Series 4-A Convertible Preferred Stock outstanding as of November 30, 2004 |  | 0        



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##### Table of Contents

TABLE OF CONTENTS



|              |  |                                                                                                                           |  |     
|------------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | ----
|              |  |                                                                                                                           |  | Page
|              |  | PART I - FINANCIAL INFORMATION                                                                                            |  |     
|              |  |                                                                                                                          
|Item 1.       |  | Financial Statements                                                                                                      |  | 3   
|              |  |                                                                                                                          
|              |  | Condensed Consolidated Balance Sheets October 31, 2004 (Unaudited) and January 31, 2004                                   |  | 3   
|              |  |                                                                                                                          
|              |  | Condensed Consolidated Statements of Operations for the three and nine months ended October 31, 2004 and 2003 (Unaudited) |  | 5   
|              |  |                                                                                                                          
|              |  | Condensed Consolidated Statements of Cash Flows for the nine months ended October 31, 2004 and 2003 (Unaudited)           |  | 6   
|              |  |                                                                                                                          
|              |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                          |  | 7   
|              |  |                                                                                                                          
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                     |  | 21  
|              |  |                                                                                                                          
|Item 3.       |  | Quantitative and Qualitative Disclosures about Market Risk                                                                |  | 31  
|              |  |                                                                                                                          
|Item 4.       |  | Controls and Procedures                                                                                                   |  | 31  
|              |  |                                                                                                                          
|              |  | PART II - OTHER INFORMATION                                                                                               |  |     
|              |  |                                                                                                                          
|Item 1.       |  | Legal Proceedings                                                                                                         |  | 32  
|              |  |                                                                                                                          
|Item 2.       |  | Changes in Securities and Use of Proceeds                                                                                 |  | 32  
|              |  |                                                                                                                          
|Item 3.       |  | Defaults upon Senior Securities                                                                                           |  | 32  
|              |  |                                                                                                                          
|Item 4.       |  | Submission of Matters to a Vote of Security Holders                                                                       |  | 32  
|              |  |                                                                                                                          
|Item 5.       |  | Other Information                                                                                                         |  | 32  
|              |  |                                                                                                                          
|Item 6.       |  | Exhibits and Reports on Form 8-K                                                                                          |  | 32  
|              | 
|Signatures    |  | 33                                                                                                                       
|              | 
|Exhibit Index |  | 34                                                                                                                       



2



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##### Table of Contents

PART I - FINANCIAL INFORMATION



Item 1. Financial Statements



VSOURCE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except shares and per share data)



|                                                       |  |                  |        |                  |   |       
|------------------------------------------------------ |  | ---------------- | ------ | ---------------- | - | ------
|                                                       |  | October 31, 2004 |        | January 31, 2004
|                                                       |  | (Unaudited)      |        |                 
|ASSETS                                                 |  |                  |        |                  |   |       
|Current assets:                                        |  |                  |        |                  |   |       
|Cash and cash equivalents                              |  | $                | 2,814  |                  | $ | 1,322 
|Restricted cash                                        |  |                  | 205    |                  |   | 473   
|Accounts receivable, net                               |  |                  | 2,272  |                  |   | 1,062 
|Inventory                                              |  |                  | 150    |                  |   | 207   
|Prepaid expenses                                       |  |                  | 286    |                  |   | 475   
|Other current assets                                   |  |                  | 2,028  |                  |   | 2,129 
|Promissory note receivable                             |  |                  | 35     |                  |   |      
|Current assets - discontinued operations               |  |                  |       |                  |   | 149   
|                                                       |  |                  |        |                  |   |       
|Total current assets                                   |  |                  | 7,790  |                  |   | 5,817 
|                                                       |  |                 
|Property and equipment, net                            |  |                  | 2,965  |                  |   | 4,348 
|Restricted cash, non-current                           |  |                  | 599    |                  |   | 599   
|Non current assets - discontinued operations           |  |                  |       |                  |   | 70    
|                                                       |  |                  |        |                  |   |       
|Total assets                                           |  | $                | 11,354 |                  | $ | 10,834
|                                                       |  |                  |        |                  |   |       
|LIABILITIES, PREFERRED STOCK AND SHAREHOLDERS DEFICIT |  |                  |        |                  |   |       
|Current liabilities:                                   |  |                  |        |                  |   |       
|Accounts payable                                       |  | $                | 1,991  |                  | $ | 2,256 
|Accrued expenses                                       |  |                  | 2,145  |                  |   | 3,366 
|Staff accruals                                         |  |                  | 961    |                  |   | 1,702 
|Advances from customers, current                       |  |                  | 14     |                  |   | 906   
|Tax payable                                            |  |                  | 134    |                  |   | 22    
|Current liabilities - discontinued operations          |  |                  |       |                  |   | 298   
|                                                       |  |                  |        |                  |   |       
|Total current liabilities                              |  |                  | 5,245  |                  |   | 8,550 
|                                                       |  |                  |        |                  |   |       



The accompanying notes
are an integral part of these condensed consolidated financial statements.



3



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##### Table of Contents

VSOURCE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except shares and per share data)



|                                                                                                                                                                         |  |                  |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                         |  | October 31, 2004 |          |   | January 31, 2004 |  
|                                                                                                                                                                         |  | (Unaudited)      |          |   |                  |  
|Commitments and contingencies (note 9)                                                                                                                                   |  |                  |          |   |                  |   |          |  
|                                                                                                                                                                         |  |                 
|Minority Interest                                                                                                                                                        |  | $                | 1,079    |   |                  | $ |         |  
|                                                                                                                                                                         |  |                  |          |   |                  |   |          |  
|Non-redeemable Preferred Stock                                                                                                                                           |  |                  |          |   |                  |   |          |  
|Preferred stock Series 1-A ($0.01 par value, 2,802,000 shares authorized; 945,008 shares issued and outstanding as of October 31 and January
31, 2004)                   |  |                  |          |   |                  |   |          |  
|(Aggregate liquidation value is $2,363 as of October 31 and January 31, 2004)                                                                                            |  |                  | 2,326    |   |                  |   | 2,326    |  
|                                                                                                                                                                         |  |                 
|Preferred stock Series 2-A ($0.01 par value, 1,672,328 shares authorized; 334,244 shares issued and outstanding as of October 31 and January
31, 2004)                   |  |                  |          |   |                  |   |          |  
|(Aggregate liquidation value is $2,143 as of October 31 and January 31, 2004)                                                                                            |  |                  | 2,028    |   |                  |   | 2,028    |  
|                                                                                                                                                                         |  |                  |          |   |                  |   |          |  
|                                                                                                                                                                         |  |                  | 4,354    |   |                  |   | 4,354    |  
|                                                                                                                                                                         |  |                 
|Redeemable Preferred Stock                                                                                                                                               |  |                  |          |   |                  |   |          |  
|Preferred stock Series 4-A ($0.01 par value, 25,000 shares authorized; 17,364 shares issued and outstanding as of October 31 and January 31,
2004)                       |  |                  |          |   |                  |   |          |  
|(Aggregate liquidation value is $34,728 as of October 31 and January 31, 2004)                                                                                           |  |                  |          |   |                  |   |          |  
|(Aggregate redemption value is $52,092 as of October 31 and January 31, 2004)                                                                                            |  |                  | 25,404   |   |                  |   | 14,521   |  
|                                                                                                                                                                         |  |                  |          |   |                  |   |          |  
|Total preferred stock                                                                                                                                                    |  |                  | 29,758   |   |                  |   | 18,875   |  
|                                                                                                                                                                         |  |                  |          |   |                  |   |          |  
|Shareholders deficit:                                                                                                                                                   |  |                  |          |   |                  |   |          |  
|Common stock ($0.01 par value, 500,000,000 shares authorized; 2,026,011 and 2,026,041 shares issued and outstanding as of October 31 and
January 31, 2004, respectively) |  |                  | 20       |   |                  |   | 20       |  
|Additional paid-in capital                                                                                                                                               |  |                  | 86,554   |   |                  |   | 86,554   |  
|Accumulated deficit                                                                                                                                                      |  |                  | (111,134 | ) |                  |   | (102,986 | )
|Other comprehensive loss                                                                                                                                                 |  |                  | (168     | ) |                  |   | (179     | )
|                                                                                                                                                                         |  |                  |          |   |                  |   |          |  
|Total shareholders deficit                                                                                                                                              |  |                  | (24,728  | ) |                  |   | (16,591  | )
|                                                                                                                                                                         |  |                  |          |   |                  |   |          |  
|Total liabilities, preferred stock and shareholders deficit                                                                                                             |  | $                | 11,354   |   |                  | $ | 10,834   |  
|                                                                                                                                                                         |  |                  |          |   |                  |   |          |  



The accompanying notes
are an integral part of these condensed consolidated financial statements.



4



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##### Table of Contents

VSOURCE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except share and per share data)

(Unaudited)



|                                                                           |  |                               |           |   |                               |   |           |      |  |   |           |   |  |   |           |  
|-------------------------------------------------------------------------- |  | ----------------------------- | --------- | - | ----------------------------- | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                           |  | Three months endedOctober 31, |           |   | Nine months ended October 31, |  
|                                                                           |  | 2004                          |           |   | 2003                          |   |           | 2004 |  |   | 2003      |  
|Revenues from                                                              |  |                               |           |   |                               |   |           |      |  |   |           |   |  |   |           |  
|                                                                           |  |                               |           |  
|Services                                                                   |  | $                             | 3,792     |   |                               | $ | 4,069     |      |  | $ | 11,801    |   |  | $ | 12,998    |  
|Products                                                                   |  |                               | 448       |   |                               |   | 661       |      |  |   | 1,172     |   |  |   | 1,266     |  
|                                                                           |  |                               |           |   |                               |   |           |      |  |   |           |   |  |   |           |  
|                                                                           |  |                               | 4,240     |   |                               |   | 4,730     |      |  |   | 12,973    |   |  |   | 14,264    |  
|                                                                           |  |                               |           |   |                               |   |           |      |  |   |           |   |  |   |           |  
|Costs and expenses:                                                        |  |                               |           |   |                               |   |           |      |  |   |           |   |  |   |           |  
|Cost of revenues from                                                      |  |                               |           |   |                               |   |           |      |  |   |           |   |  |   |           |  
|                                                                           |  |                               |           |  
|Services                                                                   |  |                               | 2,727     |   |                               |   | 2,800     |      |  |   | 7,864     |   |  |   | 7,586     |  
|Products                                                                   |  |                               | 386       |   |                               |   | 534       |      |  |   | 977       |   |  |   | 985       |  
|                                                                           |  |                               |           |   |                               |   |           |      |  |   |           |   |  |   |           |  
|                                                                           |  |                               | 3,113     |   |                               |   | 3,334     |      |  |   | 8,841     |   |  |   | 8,571     |  
|Selling, general and administrative expenses                               |  |                               | 2,937     |   |                               |   | 4,700     |      |  |   | 8,304     |   |  |   | 12,051    |  
|Amortization of stock-based compensation                                   |  |                               |          |   |                               |   |          |      |  |   |          |   |  |   | 94        |  
|Expenses related to terminated merger with TEAM America                    |  |                               |          |   |                               |   | 1,467     |      |  |   |          |   |  |   | 1,467     |  
|                                                                           |  |                               |           |   |                               |   |           |      |  |   |           |   |  |   |           |  
|Total costs and expenses, net                                              |  |                               | 6,050     |   |                               |   | 9,501     |      |  |   | 17,145    |   |  |   | 22,183    |  
|                                                                           |  |                               |           |   |                               |   |           |      |  |   |           |   |  |   |           |  
|Operating loss                                                             |  |                               | (1,810    | ) |                               |   | (4,771    | )    |  |   | (4,172    | ) |  |   | (7,919    | )
|                                                                           |  |                               |           |  
|Interest income                                                            |  |                               | 2         |   |                               |   | 5         |      |  |   | 6         |   |  |   | 31        |  
|Interest expense                                                           |  |                               | (8        | ) |                               |   |          |      |  |   | (10       | ) |  |   |          |  
|Gain on disposal of partial interest in a subsidiary                       |  |                               |          |   |                               |   |          |      |  |   | 7,611     |   |  |   |          |  
|                                                                           |  |                               |           |   |                               |   |           |      |  |   |           |   |  |   |           |  
|                                                                           |  | $                             | (1,816    | ) |                               | $ | (4,766    | )    |  | $ | 3,435     |   |  | $ | (7,888    | )
|Minority interest in loss of a subsidiary                                  |  |                               | 313       |   |                               |   |          |      |  |   | 566       |   |  |   |          |  
|                                                                           |  |                               |           |   |                               |   |           |      |  |   |           |   |  |   |           |  
|Net profit/(loss) from continuing operations before taxation               |  | $                             | (1,503    | ) |                               | $ | (4,766    | )    |  | $ | 4,001     |   |  | $ | (7,888    | )
|Taxation                                                                   |  |                               |          |   |                               |   |          |      |  |   | (118      | ) |  |   |          |  
|                                                                           |  |                               |           |   |                               |   |           |      |  |   |           |   |  |   |           |  
|Net profit/(loss) from continuing operations after taxation                |  | $                             | (1,503    | ) |                               | $ | (4,766    | )    |  | $ | 3,883     |   |  | $ | (7,888    | )
|                                                                           |  |                               |           |  
|Discontinued operations                                                    |  |                               |           |   |                               |   |           |      |  |   |           |   |  |   |           |  
|                                                                           |  |                               |           |  
|Loss from discontinued operations (including loss on disposal of $162,000) |  |                               |          |   |                               |   |          |      |  |   | (1,148    | ) |  |   |          |  
|                                                                           |  |                               |           |   |                               |   |           |      |  |   |           |   |  |   |           |  
|Net profit/(loss)                                                          |  | $                             | (1,503    | ) |                               | $ | (4,766    | )    |  | $ | 2,735     |   |  | $ | (7,888    | )
|                                                                           |  |                               |           |   |                               |   |           |      |  |   |           |   |  |   |           |  
|Net loss available to common shareholders                                  |  | $                             | (5,352    | ) |                               | $ | (7,795    | )    |  | $ | (8,148    | ) |  | $ | (16,552   | )
|                                                                           |  |                               |           |   |                               |   |           |      |  |   |           |   |  |   |           |  
|Basic and diluted weighted average number of common shares outstanding     |  |                               | 2,026,026 |   |                               |   | 1,963,984 |      |  |   | 2,026,034 |   |  |   | 1,891,790 |  
|                                                                           |  |                               |           |   |                               |   |           |      |  |   |           |   |  |   |           |  
|Loss per share available to common shareholders                            |  |                               |           |   |                               |   |           |      |  |   |           |   |  |   |           |  
|Basic and diluted loss per share from continuing operations                |  | $                             | (2.64     | ) |                               | $ | (3.97     | )    |  | $ | (3.45     | ) |  | $ | (8.75     | )
|Basic and diluted loss per share from discontinued operations              |  |                               |          |   |                               |   |          |      |  |   | (0.57     | ) |  |   |          |  
|                                                                           |  |                               |           |   |                               |   |           |      |  |   |           |   |  |   |           |  
|Net basic and diluted loss per share                                       |  | $                             | (2.64     | ) |                               | $ | (3.97     | )    |  | $ | (4.02     | ) |  | $ | (8.75     | )
|                                                                           |  |                               |           |   |                               |   |           |      |  |   |           |   |  |   |           |  



The accompanying notes
are an integral part of these condensed consolidated financial statements.



5



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##### Table of Contents

VSOURCE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)



|                                                                            |  |                               |        |   |      |   |        |  
|--------------------------------------------------------------------------- |  | ----------------------------- | ------ | - | ---- | - | ------ | -
|                                                                            |  | Nine months ended October 31, |       
|                                                                            |  | 2004                          |        |   | 2003 |  
|Cash flows from operating activities:                                       |  |                               |        |   |      |   |        |  
|Net profit/(loss)                                                           |  | $                             | 2,735  |   |      | $ | (7,888 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                               |        |   |      |   |        |  
|Depreciation and amortization                                               |  |                               | 1,689  |   |      |   | 1,670  |  
|Bad debt expense / (writeback)                                              |  |                               | (20    | ) |      |   | 679    |  
|Loss / (gain) on disposal of property and equipment                         |  |                               | (4     | ) |      |   | 2      |  
|Amortization of stock-based compensation                                    |  |                               |       |   |      |   | 94     |  
|Minority interest in loss of a subsidiary                                   |  |                               | (566   | ) |      |   |       |  
|Gain on disposal of partial interest in a subsidiary                        |  |                               | (7,611 | ) |      |   |       |  
|Loss on disposal of discontinued operations                                 |  |                               | 162    |   |      |   |       |  
|Write-off of expenses related to terminated merger with TEAM America        |  |                               |       |   |      |   | 600    |  
|Changes in working capital components                                       |  |                               | (3,958 | ) |      |   | 620    |  
|                                                                            |  |                               |        |   |      |   |        |  
|Net cash used in operating activities                                       |  |                               | (7,573 | ) |      |   | (4,223 | )
|                                                                            |  |                               |        |   |      |   |        |  
|Cash flows from investing activities:                                       |  |                               |        |   |      |   |        |  
|Purchase of property and equipment                                          |  |                               | (299   | ) |      |   | (1,045 | )
|Proceeds from sale of property and equipment                                |  |                               | 4      |   |      |   |       |  
|Expenses related to terminated merger with TEAM America                     |  |                               |       |   |      |   | (278   | )
|Advance to TEAM America                                                     |  |                               |       |   |      |   | (500   | )
|Deposit for purchase of loan and securities of TEAM America                 |  |                               |       |   |      |   | (100   | )
|Proceeds from disposal of partial interest in a subsidiary                  |  |                               | 9,490  |   |      |   |       |  
|Cash disposed of in conjunction with the disposal of Vsource Texas          |  |                               | (125   | ) |      |   |       |  
|                                                                            |  |                               |        |   |      |   |        |  
|Net cash provided by / (used in) investing activities                       |  |                               | 9,070  |   |      |   | (1,923 | )
|                                                                            |  |                               |        |   |      |   |        |  
|Cash flows from financing activities:                                       |  |                               |        |   |      |   |        |  
|Proceeds from issuance of common stock                                      |  |                               |       |   |      |   | 34     |  
|                                                                            |  |                               |        |   |      |   |        |  
|Net cash provided by financing activities                                   |  |                               |       |   |      |   | 34     |  
|                                                                            |  |                              
|Effect of exchange rates on cash                                            |  |                               | (5     | ) |      |   | 78     |  
|                                                                            |  |                               |        |   |      |   |        |  
|Net increase / (decrease) in cash and cash equivalents                      |  |                               | 1,492  |   |      |   | (6,034 | )
|Cash and cash equivalents at beginning of period                            |  |                               | 1,322  |   |      |   | 11,152 |  
|                                                                            |  |                               |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                  |  | $                             | 2,814  |   |      | $ | 5,118  |  
|                                                                            |  |                               |        |   |      |   |        |  



The accompanying notes
are an integral part of these condensed consolidated financial statements.



6



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##### Table of Contents

VSOURCE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



1. Summary of Significant Accounting Policies



Basis of Presentation



The accompanying
unaudited condensed consolidated financial statements of Vsource, Inc. (Vsource or the Company) as of October 31, 2004 and January 31, 2004 and for the three and nine month periods ended October 31, 2004 and 2003,
respectively, have been prepared on substantially the same basis as the Companys annual consolidated financial statements and should be read in conjunction with the Companys Annual Report on Form 10-K for the year ended January 31, 2004.
In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to present fairly the financial information included herein. Certain prior period
information has been reclassified to conform to the current period presentation. The year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles
generally accepted in the United States of America.



The
unaudited consolidated results for interim periods are not necessarily indicative of expected results for the full fiscal year.



Future Funding



As of October 31, 2004, the Company had a cash balance of $2.8 million. During the period, it has implemented cash conservation measures to reduce its
operating losses and discontinued the non-profitable human capital management solutions segment by sale of Vsource (Texas) Inc. (Vsource Texas), a wholly owned subsidiary which was primarily engaged in this segment, for $46,000 (see Note
11 for details). Subsequent to period end, the Company completed an exchange offer with its preferred stockholders, and has accepted a purchase offer from Symphony House Berhad (Symphony), a 30.3% shareholder of Vsource Asia Berhad
(Vsource Asia) (see Note 12 for details). As a result of the exchange offer, the Company has disposed of its entire investment in Vsource Asia, its principal operating subsidiary. Following the completion of these transactions, the
Companys staff will be reduced to less than ten (10) employees. Managements immediate focus is on managing the remaining liabilities and continuing to provide certain consulting services to third parties, including Vsource Asia, under
the existing contractual agreements. In addition, management intends to turn its attention to decisions relating to future activities of the Company which had been deferred pending completion of these transactions. Management believes that the
Company has adequate funding following completion of these transactions for it to continue in operation for at least 12 months. Therefore, the Company has prepared its financial statements on a going concern basis.



Use of Estimates



The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from these estimates and assumptions made.



Concentration of Revenue/Credit Risk



For the three months ended October 31, 2004, one customer, Gateway Japan Inc. (Gateway), accounted for 33% of total revenue as compared to 51%
for the same period last year. For the nine months ended October 31, 2004, the same customer, Gateway, accounted for 37% of total revenue as compared to 60% for the same period last year. No other customer accounted for more than 10% of revenue
during the quarter and the first nine months ended October 31, 2004. The revenue from Gateway has been declining as the installed base of Gateways customers in the Asia-Pacific region under warranty declines.



The Company believes that the resulting concentration of credit risk in
accounts receivable is substantially mitigated by its ongoing credit evaluation process and the high level of creditworthiness of its customers. The Company performs ongoing credit evaluations of its customers and sets conditions and limits the
amount of credit extended when deemed necessary. The Company generally does not require collateral from its customers. As of October 31, 2004, Gateway, accounted for 21% of accounts receivable. As of January 31, 2004, the same customer, Gateway,
accounted for 48% of accounts receivable.



7



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VSOURCE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



2. Restricted Cash



Restricted cash, current portion relates to cash held in trust for certain
customers. Restricted cash, non current represents deposits with a bank to secure standby letters of credit established for the benefit of a customer and a vendor.



3. Other Current Assets



|                      |  |                  |       |                  |   |      
|--------------------- |  | ---------------- | ----- | ---------------- | - | -----
|                      |  | October 31, 2004 |       | January 31, 2004
|                      |  | (in thousands)  
|Other current assets: |  |                  |       |                  |   |      
|Deferred costs        |  | $                | 1,241 |                  | $ | 1,031
|Deposits              |  |                  | 560   |                  |   | 675  
|Other receivables     |  |                  | 227   |                  |   | 423  
|                      |  |                  |       |                  |   |      
|                      |  | $                | 2,028 |                  | $ | 2,129
|                      |  |                  |       |                  |   |      



4.
Net Loss Available to Common Shareholders



The
following table is a calculation of net loss available to common shareholders:



|                                                         |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------- |  | ----------------------------- | ------ | - | ---------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                         |  | Three months endedOctober 31, |        |   | Nine months endedOctober 31, |  
|                                                         |  | 2004                          |        |   | 2003                         |   |        | 2004 |  |   | 2003    |  
|                                                         |  | (in thousands)                |        |   | (in thousands)               |  
|Net profit/(loss)                                        |  | $                             | (1,503 | ) |                              | $ | (4,766 | )    |  | $ | 2,735   |   |  | $ | (7,888  | )
|Less: Deemed non-cash dividend to preferred shareholders |  |                               | (3,849 | ) |                              |   | (3,029 | )    |  |   | (10,883 | ) |  |   | (8,664  | )
|                                                         |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  
|Net loss available to common shareholders                |  | $                             | (5,352 | ) |                              | $ | (7,795 | )    |  | $ | (8,148  | ) |  | $ | (16,552 | )
|                                                         |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  



$3.8 million was
recorded as deemed dividend to preferred shareholders as a result of the amortization of beneficial conversion feature and the accretion of the redemption value on the Series 4-A convertible preferred stock in issue during the quarter ended October
31, 2004.



5. Net Loss Per Share



Basic net loss per share is computed by dividing net loss by
the weighted average shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average shares of common stock and potential common shares outstanding during the period.
Potential common shares outstanding consist of dilutive shares issuable upon the exercise of outstanding options and warrants to purchase common stock as computed using the treasury stock method. Because the Company had a net loss available to
common shareholders for the three and nine-month periods ended October 31, 2004 and 2003, potential common shares outstanding are excluded from the computation of diluted net loss per share as their effect is anti-dilutive.



8



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VSOURCE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



6. Comprehensive Loss



The difference between net loss and comprehensive loss for the Company
arising from foreign currency translation adjustments is as follows:



|                                                              |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |         |  
|------------------------------------------------------------- |  | ----------------------------- | ------ | - | ---------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                              |  | Three months endedOctober 31, |        |   | Nine months endedOctober 31, |  
|                                                              |  | 2004                          |        |   | 2003                         |   |        | 2004 |  |   | 2003   |  
|                                                              |  | (in thousands)                |        |   | (in thousands)               |  
|Net loss available to common shareholders                     |  | $                             | (5,352 | ) |                              | $ | (7,795 | )    |  | $ | (8,148 | ) |  | $ | (16,552 | )
|Other comprehensive gain/(loss) foreign currency translations |  |                               | 3      |   |                              |   | (144   | )    |  |   | 11     |   |  |   | (40     | )
|                                                              |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |         |  
|Comprehensive loss                                            |  | $                             | (5,349 | ) |                              | $ | (7,939 | )    |  | $ | (8,137 | ) |  | $ | (16,592 | )
|                                                              |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |         |  



7.
Stock-Based Compensation



The Company applies
Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees and related interpretations in accounting for its stock-based compensation plans. Accordingly, the Company records expense for
employee stock compensation plans equal to the excess of the market price of the underlying Vsource shares at the date of grant over the exercise price of the stock-related award, if any (known as the intrinsic value). The intrinsic value of the
stock-based compensation issued to employees as of the date of grant is amortized on a straight-line basis to compensation expense over the vesting period. In addition, no compensation expense is recorded for purchases under the Employee Stock
Purchase Plan (the Purchase Plan) in accordance with APB Opinion No. 25 since the options were issued at market value at their respective dates of grants.



The following table summarizes the pro forma operating results of the Company had compensation cost for stock options
granted under its stock option plans and for employee stock purchases under the Purchase Plan been determined in accordance with the fair value based method prescribed by Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation.



9



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VSOURCE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|                                                                                                        |  |                                       |        |   |                                       |   |        |      |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ------------------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                                                        |  | Three months endedOctober 31,         |        |   | Nine months endedOctober 31,          |  
|                                                                                                        |  | 2004                                  |        |   | 2003                                  |   |        | 2004 |  |   | 2003   |  
|                                                                                                        |  | (in thousands, except per share data) |        |   | (in thousands, except per share data) |  
|Net loss available to common shareholders                                                               |  | $                                     | (5,352 | ) |                                       | $ | (7,795 | )    |  | $ | (8,148 | ) |  | $ | (16,552 | )
|Add: Stock-based employee compensation expense included in reported net income                          |  |                                       |       |   |                                       |   |       |      |  |   |       |   |  |   | 94      |  
|Less: Total stock-based employee compensation expense determined under fair value method for all awards |  |                                       | (341   | ) |                                       |   | (437   | )    |  |   | (1,089 | ) |  |   | (1,619  | )
|                                                                                                        |  |                                       |        |   |                                       |   |        |      |  |   |        |   |  |   |         |  
|Net loss                                                                                                |  | $                                     | (5,693 | ) |                                       | $ | (8,232 | )    |  | $ | (9,237 | ) |  | $ | (18,077 | )
|                                                                                                        |  |                                       |        |   |                                       |   |        |      |  |   |        |   |  |   |         |  
|Basic and diluted net loss available to common shareholders per share                                   |  |                                       |        |   |                                       |   |        |      |  |   |        |   |  |   |         |  
|As reported                                                                                             |  | $                                     | (2.64  | ) |                                       | $ | (3.97  | )    |  | $ | (4.02  | ) |  | $ | (8.75   | )
|Pro forma                                                                                               |  | $                                     | (2.81  | ) |                                       | $ | (4.19  | )    |  | $ | (4.56  | ) |  | $ | (9.56   | )



8.
Gain on disposal of partial interest in Vsource Asia



The gain on disposal of partial interest of $7.6 million recorded during the three months ended April 30, 2004 was the result of the Companys sale of 39% of its interest in a former wholly owned subsidiary, Vsource Asia. The sale was
completed in March 2004, for which the Company received proceeds of approximately $9.5 million for the net assets of Vsource Asia of $1.6 million and incurred incidental costs of $0.3 million.



9. Commitments and Contingencies



Commitments



Operating Leases



The Company leases its operating facilities under non-cancelable operating leases that expire at various dates through 2007. Certain of these leases
contain renewal options. As of October 31, 2004, future minimum lease commitments were as follows (in thousands):



|                                 |  |   |      
|-------------------------------- |  | - | -----
|For the Years Ending January 31, |  |  
|2005 (remainder)                 |  | $ | 357  
|2006                             |  |   | 1,078
|2007                             |  |   | 685  
|                                 |  |   |      
|                                 |  | $ | 2,120
|                                 |  |   |      



10



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VSOURCE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Other Commitments



As of October 31, 2004, the Company had standby letters of credit with a maximum potential future payment of $0.6 million.
These standby letters of credit are secured by way of a cash deposit, of an equivalent value, with the issuing banks.



10. Segment Data



Currently, the Companys business segments are organized into four solutions: (i) warranty solutions, including comprehensive warranty and
after-sales service and support; (ii) human resource solutions, including payroll and expense claims processing; (iii) sales solutions; and (iv) Vsource Foundation Solutions, which are general business process outsourcing solutions, including
customer relationship management, supply chain management and financial administration, delivered on a stand-alone basis rather than as components in an integrated solution.



The Company evaluates the performance of its segments based on revenues generated by each of its solutions and gross margin.
Gross margin is calculated after cost of revenue charges directly attributable to the segment. Costs excluded from the segments primarily consist of selling, general and administrative expenses and other special charges including loss on impairment
of long-lived assets, interest charges and amortization of beneficial conversion feature expense.



In July 2004, the Company discontinued its human capital management solutions through the disposal of its 100% interest in Vsource Texas, a former wholly
owned subsidiary which was primarily engaged in providing such services. Prior periods comparatives for this segment were excluded in the presentation below and included as discontinued operations (see Note 11).



Subsequent to period end, most of the Companys operations were
discontinued as a result of a series of transactions (see Note 12 for details). However, the Company will continue to provide certain consulting services to third parties, including Vsource Asia, under the existing contractual agreements.



The following table sets forth summary information by segment
for the three- and nine- month periods ended October 31, 2004 and 2003 (in thousands):



|                             |  |                                     |       |                             |                                    |       |                |  |                             |        |  |   |       |  
|---------------------------- |  | ----------------------------------- | ----- | --------------------------- | ---------------------------------- | ----- | -------------- |  | --------------------------- | ------ |  | - | ----- | -
|                             |  | Three months ended October 31, 2004 |       |                             | Nine months ended October 31, 2004 |      
|                             |  | SegmentRevenue                      |       | Segment Gross Margin/(Loss) |                                    |       | SegmentRevenue |  | Segment Gross Margin/(Loss) |       
|Warranty solutions           |  | $                                   | 1,663 |                             | $                                  | 1,062 |                |  | $                           | 5,453  |  | $ | 3,306 |  
|Human resource solutions     |  |                                     | 592   |                             |                                    | (102  | )              |  |                             | 1,996  |  |   | (245  | )
|Vsource Foundation Solutions |  |                                     | 1,412 |                             |                                    | 158   |                |  |                             | 3,853  |  |   | 916   |  
|Sales solutions              |  |                                     | 573   |                             |                                    | 9     |                |  |                             | 1,671  |  |   | 155   |  
|                             |  |                                     |       |                             |                                    |       |                |  |                             |        |  |   |       |  
|Total                        |  | $                                   | 4,240 |                             | $                                  | 1,127 |                |  | $                           | 12,973 |  | $ | 4,132 |  
|                             |  |                                     |       |                             |                                    |       |                |  |                             |        |  |   |       |  



11



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##### Table of Contents

VSOURCE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|                             |  |                                     |       |                             |                                    |       |                |  |                             |        |  |   |       |  
|---------------------------- |  | ----------------------------------- | ----- | --------------------------- | ---------------------------------- | ----- | -------------- |  | --------------------------- | ------ |  | - | ----- | -
|                             |  | Three months ended October 31, 2003 |       |                             | Nine months ended October 31, 2003 |      
|                             |  | SegmentRevenue                      |       | Segment Gross Margin/(Loss) |                                    |       | SegmentRevenue |  | Segment Gross Margin/(Loss) |       
|Warranty solutions           |  | $                                   | 2,502 |                             | $                                  | 1,460 |                |  | $                           | 8,812  |  | $ | 5,100 |  
|Human resource solutions     |  |                                     | 762   |                             |                                    | (455  | )              |  |                             | 1,471  |  |   | (668  | )
|Vsource Foundation Solutions |  |                                     | 490   |                             |                                    | 141   |                |  |                             | 1,387  |  |   | 458   |  
|Sales solutions              |  |                                     | 976   |                             |                                    | 250   |                |  |                             | 2,594  |  |   | 803   |  
|                             |  |                                     |       |                             |                                    |       |                |  |                             |        |  |   |       |  
|Total                        |  | $                                   | 4,730 |                             | $                                  | 1,396 |                |  | $                           | 14,264 |  | $ | 5,693 |  
|                             |  |                                     |       |                             |                                    |       |                |  |                             |        |  |   |       |  



A reconciliation of
consolidated segment gross margin to consolidated loss for the three- and nine- month periods ended October 31, 2004 and 2003 is as follows (in thousands):



|                                                             |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |         |  
|------------------------------------------------------------ |  | ----------------------------- | ------ | - | ---------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                             |  | Three months endedOctober 31, |        |   | Nine months endedOctober 31, |  
|                                                             |  | 2004                          |        |   | 2003                         |   |        | 2004 |  |   | 2003   |  
|Consolidated segment gross margin                            |  | $                             | 1,127  |   |                              | $ | 1,396  |      |  | $ | 4,132  |   |  | $ | 5,693   |  
|Consolidated selling, general and administrative expenses    |  |                               | (2,937 | ) |                              |   | (4,700 | )    |  |   | (8,304 | ) |  |   | (12,051 | )
|Amortization of stock-based compensation                     |  |                               |       |   |                              |   |       |      |  |   |       |   |  |   | (94     | )
|Interest expense and interest income                         |  |                               | (6     | ) |                              |   | 5      |      |  |   | (4     | ) |  |   | 31      |  
|Gain on disposal of subsidiaries                             |  |                               |       |   |                              |   |       |      |  |   | 7,611  |   |  |   |        |  
|Minority interest in loss of a subsidiary                    |  |                               | 313    |   |                              |   |       |      |  |   | 566    |   |  |   |        |  
|Expenses related to the terminated merger with TEAM America  |  |                               |       |   |                              |   | (1,467 | )    |  |   |       |   |  |   | (1,467  | )
|                                                             |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |         |  
|Net profit/(loss) from continuing operations before taxation |  | $                             | (1,503 | ) |                              | $ | (4,766 | )    |  | $ | 4,001  |   |  | $ | (7,888  | )
|                                                             |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |         |  



11.
Discontinued operations



On July 1, 2004, the Company
discontinued its non-profitable human capital management solutions through the disposal of 100% of its interest in Vsource Texas, a wholly owned subsidiary which was primarily engaged in providing such services. The human capital management
solutions were launched in October 2003.



12



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##### Table of Contents

VSOURCE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Loss from discontinued operation consisted of losses incurred by the
discontinued operation prior to the disposal and the loss on disposal of interest in Vsource Texas, the details of which are as follows (in thousands):



|                                              |  |                                |   |                               |   |      |   |       |      |  |  
|--------------------------------------------- |  | ------------------------------ | - | ----------------------------- | - | ---- | - | ----- | ---- |  | -
|                                              |  | Three months ended October 31, |   | Nine months ended October 31,
|                                              |  | 2004                           |   | 2003                          |   | 2004 |   |       | 2003
|Revenue                                       |  | $                              |  |                               |  |      | $ | 254   |      |  | 
|Cost of revenue                               |  |                                |  |                               |  |      |   | (893  | )    |  | 
|                                              |  |                                |   |                               |   |      |   |       |      |  |  
|                                              |  |                                |  |                               |  |      |   | 639   |      |  | 
|Selling, general and administrative expenses  |  |                                |  |                               |  |      |   | 347   |      |  | 
|                                              |  |                                |   |                               |   |      |   |       |      |  |  
|Operating loss                                |  |                                |  |                               |  |      |   | 986   |      |  | 
|Loss on disposal of interest in Vsource Texas |  |                                |  |                               |  |      |   | 162   |      |  | 
|                                              |  |                                |   |                               |   |      |   |       |      |  |  
|Loss from discontinued operations             |  |                                |  |                               |  |      |   | 1,148 |      |  | 
|                                              |  |                                |   |                               |   |      |   |       |      |  |  



The loss on disposal
was calculated based on the difference of the purchase price to the net assets of the subsidiary at the date of disposal. The $46,000 purchase price is receivable in the form of a promissory note and was based on the excess of assets over
liabilities, including certain long term lease and other contractual commitments totaling approximately $87,000, as measured at June 1, 2004. The note is due in twelve equal monthly installments starting on August 15, 2004, bearing interest at 3%
per annum. No incidental costs were incurred.



The detailed calculation of the
loss was as follows (in thousands) :



|                                                     |  |   |     |  
|---------------------------------------------------- |  | - | --- | -
|Cash and cash equivalents                            |  | $ | 125 |  
|Prepaid expenses                                     |  |   | 17  |  
|Other current assets                                 |  |   | 22  |  
|                                                     |  |   |     |  
|Current assets                                       |  |   | 164 |  
|Property and equipment, net                          |  |   | 48  |  
|                                                     | 
|Accrued payroll, insurance And workers compensation |  |   | (4  | )
|                                                     |  |   |     |  
|Net assets of Vsource Texas at date of disposal      |  |   | 208 |  
|                                                     |  |   |     |  
|Consideration :-                                     |  |   |     |  
|Promissory note receivable                           |  |   | (46 | )
|                                                     |  |   |     |  
|Loss on disposal of interest in Vsource Texas        |  |   | 162 |  
|                                                     |  |   |     |  



13



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VSOURCE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Summarized net assets of the discontinued operations of human capital management solutions
were as follows:-



|                                                     |  |                  |  |                  |    
|---------------------------------------------------- |  | ---------------- |  | ---------------- | ---
|                                                     |  | October 31, 2004 |  | January 31, 2004
|                                                     |  | (Unaudited)      |  |                 
|                                                     |  | (in thousands)  
|ASSETS                                               |  |                  |  |                  |    
|Current assets:                                      |  |                  |  |                  |    
|Cash and cash equivalents                            |  |                 |  | $                | 130
|Prepaid expenses                                     |  |                 |  |                  | 19 
|                                                     |  |                  |  |                  |    
|                                                     |  |                 |  |                  | 149
|Property and equipment, net                          |  |                 |  |                  | 70 
|                                                     |  |                  |  |                  |    
|Total assets                                         |  |                 |  |                  | 219
|                                                     |  |                  |  |                  |    
|CURRENT LIABILITIES                                  |  |                  |  |                  |    
|Accounts payable                                     |  |                 |  |                  | 40 
|Accrued expenses and staff accruals                  |  |                 |  |                  | 85 
|Accrued payroll, insurance and workers compensation |  |                 |  |                  | 173
|                                                     |  |                  |  |                  |    
|                                                     |  |                 |  |                  | 298
|                                                     |  |                  |  |                  |    
|NET LIABILITIES                                      |  |                 |  |                  | 79 
|                                                     |  |                  |  |                  |    



12.
Subsequent events



On November 22 ̧ 2004, the
Company contributed its 61.2% ownership interest in Vsource Asia to a new wholly owned subsidiary of the Company incorporated in the British Virgin Islands (Asia Holding Co.). Immediately thereafter, the Company completed an exchange
offer pursuant to which the holders of its Series 1-A, Series 2-A and Series 4-A Preferred Stock (the Preferred Stock) could exchange their Preferred Stock for common shares of Asia Holding Co. at certain exchange ratios (the
Exchange Offer). Up to November 22, 2004, 92.8% of the Series 1-A Preferred Stock, 98.8% of the Series 2-A Preferred Stock and 100% of the Series 4-A Preferred Stock were tendered to the Company and subsequently cancelled. The Company
then tendered its remaining 0.5% interest to Symphony, at a price of $0.158 per share, pursuant to a tender offer conducted by Symphony for shares of Asia Holding Co. The Company received $81,938 in cash proceeds as a result of the sale of its
remaining shares in Asia Holding Co. to Symphony.



As a result
of the Exchange Offer, the Company no longer has an ownership interest in Vsource Asia or in Asia Holding Co. In fiscal 2004, Vsource Asia generated approximately 99% of the Companys combined revenues.



Symphony also entered into an agreement (the Symphony Purchase
Agreement) pursuant to which it agreed to purchase Vsource common stock and warrants from certain preferred stockholders. As a result of the Symphony Purchase Agreement, which was completed on November 24, 2004, Symphony acquired approximately
32% of the common stock of the Company and warrants which, if exercised, would result in Symphony owning approximately 54.5% of the outstanding common stock of the Company.



14



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VSOURCE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The following table shows the unaudited pro forma condensed balance sheet as at October 31,
2004 as if the transactions described above (the Transactions) had taken place on October 31, 2004:



|                                                                      |  |                |          |   |                      |   |         |          |  |   |         |  
|--------------------------------------------------------------------- |  | -------------- | -------- | - | -------------------- | - | ------- | -------- |  | - | ------- | -
|                                                                      |  | Historical (1) |          |   | Proforma adjustments |   |         | Proforma | 
|ASSETS                                                                |  |                |          |   |                      |   |         |          |  |   |         |  
|Current assets:                                                       |  |                |          |   |                      |   |         |          |  |   |         |  
|Cash and cash equivalents                                             |  | $              | 2,814    |   |                      | $ | (397    | )(2)     |  | $ | 2,499   |  
|                                                                      |  |                |          |   |                      |   | 82      | (3)      |  |   |         |  
|Restricted cash                                                       |  |                | 205      |   |                      |   | (97     | )(2)     |  |   | 108     |  
|Accounts receivable, net                                              |  |                | 2,272    |   |                      |   | (2,272  | )(2)     |  |   |        |  
|Prepaid expenses                                                      |  |                | 286      |   |                      |   | (126    | )(2)     |  |   | 160     |  
|Inventories                                                           |  |                | 150      |   |                      |   | (150    | )(2)     |  |   |        |  
|Other current assets*                                                 |  |                | 2,028    |   |                      |   | (234    | )(2)     |  |   | 1,444   |  
|                                                                      |  |                |          |   |                      |   | (350    | )(2)     |  |   |         |  
|Promissory note                                                       |  |                | 35       |   |                      |   |        |          |  |   | 35      |  
|                                                                      |  |                |          |   |                      |   |         |          |  |   |         |  
|Total current assets                                                  |  |                | 7,790    |   |                      |   | (3,544  | )        |  |   | 4,246   |  
|                                                                      |  |                |         
|Property and equipment, net                                           |  |                | 2,965    |   |                      |   | (2,914  | )(2)     |  |   | 51      |  
|Restricted cash, non-current                                          |  |                | 599      |   |                      |   | (349    | )(2)     |  |   | 250     |  
|                                                                      |  |                |          |   |                      |   |         |          |  |   |         |  
|Total assets                                                          |  | $              | 11,354   |   |                      | $ | (6,807  | )        |  | $ | 4,547   |  
|                                                                      |  |                |          |   |                      |   |         |          |  |   |         |  
|LIABILITIES, PREFERRED STOCK AND SHAREHOLDERS EQUITY/(DEFICIT)       |  |                |          |   |                      |   |         |          |  |   |         |  
|Current liabilities:                                                  |  |                |          |   |                      |   |         |          |  |   |         |  
|Accounts payable                                                      |  | $              | 1,991    |   |                      | $ | (1,724  | )(2)     |  | $ | 267     |  
|Accrued expenses                                                      |  |                | 2,145    |   |                      |   | (1,146  | )(2)     |  |   | 999     |  
|Staff accruals                                                        |  |                | 961      |   |                      |   | (761    | )(2)     |  |   | 200     |  
|Advances from customers  current                                     |  |                | 14       |   |                      |   | (14     | )(2)     |  |   |        |  
|Tax Payable                                                           |  |                | 134      |   |                      |   | (19     | )(2)     |  |   | 115     |  
|                                                                      |  |                |          |   |                      |   |         |          |  |   |         |  
|Total current liabilities                                             |  |                | 5,245    |   |                      |   | (3,664  | )        |  |   | 1,581   |  
|                                                                      |  |                |          |   |                      |   |         |          |  |   |         |  
|Minority interest                                                     |  |                | 1,079    |   |                      |   | (1,079  | )(2)     |  |   |        |  
|                                                                      |  |                |          |   |                      |   |         |          |  |   |         |  
|Non-redeemable preferred stock:                                       |  |                |          |   |                      |   |         |          |  |   |         |  
|Preferred stock Series 1-A                                            |  |                | 2,326    |   |                      |   | (2,160  | )(3)     |  |   | 166     |  
|Preferred stock Series 2-A                                            |  |                | 2,028    |   |                      |   | (2,004  | )(3)     |  |   | 24      |  
|                                                                      |  |                |          |   |                      |   |         |          |  |   |         |  
|                                                                      |  |                | 4,354    |   |                      |   | (4,164  | )        |  |   | 190     |  
|Redeemable preferred stock:                                           |  |                |          |   |                      |   |         |          |  |   |         |  
|Preferred stock Series 4-A                                            |  |                | 25,404   |   |                      |   | (25,404 | )(3)     |  |   |        |  
|                                                                      |  |                |          |   |                      |   |         |          |  |   |         |  
|Total preferred stock                                                 |  |                | 29,758   |   |                      |   | (29,568 | )        |  |   | 190     |  
|                                                                      |  |                |          |   |                      |   |         |          |  |   |         |  
|Shareholders equity/(deficit):                                       |  |                |          |   |                      |   |         |          |  |   |         |  
|Common stock                                                          |  |                | 20       |   |                      |   |        |          |  |   | 20      |  
|Additional paid-in-capital                                            |  |                | 86,554   |   |                      |   | (19,190 | )(3)     |  |   | 67,364  |  
|Accumulated deficit                                                   |  |                | (111,134 | ) |                      |   | 13,557  | (2)      |  |   | (64,550 | )
|                                                                      |  |                |          |   |                      |   | 33,027  | (3)      |  |   |         |  
|Other comprehensive income                                            |  |                | (168     | ) |                      |   | 110     | (2)      |  |   | (58     | )
|                                                                      |  |                |          |   |                      |   |         |          |  |   |         |  
|Total shareholders equity/(deficit)                                  |  |                | (24,728  | ) |                      |   | 27,504  |          |  |   | 2,776   |  
|                                                                      |  |                |          |   |                      |   |         |          |  |   |         |  
|Total liabilities, preferred stock and shareholders equity/(deficit) |  | $              | 11,354   |   |                      | $ | (6,807  | )        |  | $ | 4,547   |  
|                                                                      |  |                |          |   |                      |   |         |          |  |   |         |  

---

|* | including a receivable from Vsource Asia of $1.4 million.
|- | ---------------------------------------------------------



15



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##### Table of Contents

VSOURCE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The following table shows the unaudited pro forma condensed consolidated results of
operations for the three months ended October 31, 2004, as if the Transactions had taken place:



|                                                        |  |                |        |   |                       |   |        |           |  |   |      |  
|------------------------------------------------------- |  | -------------- | ------ | - | --------------------- | - | ------ | --------- |  | - | ---- | -
|                                                        |  | Historical (1) |        |   | Pro forma adjustments |   |        | Pro forma | 
|Revenues from                                           |  |                |        |   |                       |   |        |           |  |   |      |  
|Services                                                |  | $              | 3,792  |   |                       | $ | (3,792 | )(4)      |  | $ |     |  
|Products                                                |  |                | 448    |   |                       |   | (448   | )(4)      |  |   |     |  
|                                                        |  |                |        |   |                       |   |        |           |  |   |      |  
|                                                        |  |                | 4,240  |   |                       |   | (4,240 | )         |  |   |     |  
|Cost and expenses:                                      |  |                |        |   |                       |   |        |           |  |   |      |  
|Cost of revenues from                                   |  |                |        |   |                       |   |        |           |  |   |      |  
|Services                                                |  |                | 2,727  |   |                       |   | (2,729 | )(4)      |  |   | (2   | )
|Products                                                |  |                | 386    |   |                       |   | (386   | )(4)      |  |   |     |  
|                                                        |  |                |        |   |                       |   |        |           |  |   |      |  
|                                                        |  |                | 3,113  |   |                       |   | (3,115 | )         |  |   | (2   | )
|                                                        |  |                |       
|Selling, general and administrative expenses            |  |                | 2,937  |   |                       |   | (2,455 | )(4)      |  |   | 482  |  
|Expenses related to terminated merger with TEAM America |  |                |       |   |                       |   |       |           |  |   |     |  
|Amortization of stock-based compensation                |  |                |       |   |                       |   |       |           |  |   |     |  
|                                                        |  |                |        |   |                       |   |        |           |  |   |      |  
|Total costs and expenses                                |  |                | 6,050  |   |                       |   | (5,570 | )         |  |   | 480  |  
|                                                        |  |                |        |   |                       |   |        |           |  |   |      |  
|Operating loss                                          |  |                | (1,810 | ) |                       |   | 1,330  | (4)       |  |   | (480 | )
|Interest income                                         |  |                | 2      |   |                       |   |       |           |  |   | 2    |  
|Interest expense                                        |  |                | (8     | ) |                       |   |       |           |  |   | (8   | )
|Gain on disposal of partial interest in a subsidiary    |  |                |       |   |                       |   |       |           |  |   |     |  
|                                                        |  |                |        |   |                       |   |        |           |  |   |      |  
|                                                        |  |                | (1,816 | ) |                       |   | 1,330  |           |  |   | (486 | )
|Minority interest in loss of a subsidiary               |  |                | 313    |   |                       |   | (313   | )(4)      |  |   |     |  
|                                                        |  |                |        |   |                       |   |        |           |  |   |      |  
|Net loss from continuing operations before taxation     |  |                | (1,503 | ) |                       |   | 1,017  |           |  |   | (486 | )
|Taxation                                                |  |                |       |   |                       |   |       |           |  |   |     |  
|                                                        |  |                |        |   |                       |   |        |           |  |   |      |  
|Net loss from continuing operations after taxation      |  |                | (1,503 | ) |                       |   | 1,017  |           |  |   | (486 | )
|                                                        |  |                |        |   |                       |   |        |           |  |   |      |  



16



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##### Table of Contents

VSOURCE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The following table shows the unaudited pro forma condensed consolidated results of
operations for the nine months ended October 31, 2004, as if the Transactions had taken place :



|                                                              |  |                |        |   |                       |   |         |           |  |   |       |  
|------------------------------------------------------------- |  | -------------- | ------ | - | --------------------- | - | ------- | --------- |  | - | ----- | -
|                                                              |  | Historical (1) |        |   | Pro forma adjustments |   |         | Pro forma | 
|Revenues from                                                 |  |                |        |   |                       |   |         |           |  |   |       |  
|Services                                                      |  | $              | 11,801 |   |                       | $ | (11,639 | )(4)      |  | $ | 162   |  
|Products                                                      |  |                | 1,172  |   |                       |   | (1,172  | )(4)      |  |   |      |  
|                                                              |  |                |        |   |                       |   |         |           |  |   |       |  
|                                                              |  |                | 12,973 |   |                       |   | (12,811 | )         |  |   | 162   |  
|Cost and expenses:                                            |  |                |        |   |                       |   |         |           |  |   |       |  
|Cost of revenues from                                         |  |                |        |   |                       |   |         |           |  |   |       |  
|Services                                                      |  |                | 7,864  |   |                       |   | (7,862  | )(4)      |  |   | 2     |  
|Products                                                      |  |                | 977    |   |                       |   | (977    | )(4)      |  |   |      |  
|                                                              |  |                |        |   |                       |   |         |           |  |   |       |  
|                                                              |  |                | 8,841  |   |                       |   | (8,839  | )         |  |   | 2     |  
|                                                              |  |                |       
|Selling, general and administrative expenses                  |  |                | 8,304  |   |                       |   | (7,238  | )(4)      |  |   | 1,066 |  
|Expenses related to terminated merger with TEAM America       |  |                |       |   |                       |   |        |           |  |   |      |  
|Amortization of stock-based compensation                      |  |                |       |   |                       |   |        |           |  |   |      |  
|                                                              |  |                |        |   |                       |   |         |           |  |   |       |  
|Total costs and expenses                                      |  |                | 17,145 |   |                       |   | (16,077 | )         |  |   | 1,068 |  
|                                                              |  |                |        |   |                       |   |         |           |  |   |       |  
|Operating loss                                                |  |                | (4,172 | ) |                       |   | 3,266   |           |  |   | (906  | )
|Interest income                                               |  |                | 6      |   |                       |   |        |           |  |   | 6     |  
|Interest expense                                              |  |                | (10    | ) |                       |   |        |           |  |   | (10   | )
|Gain on disposal of partial interest in a subsidiary          |  |                | 7,611  |   |                       |   | (7,611  | )         |  |   |      |  
|                                                              |  |                |        |   |                       |   |         |           |  |   |       |  
|                                                              |  |                | 3,435  |   |                       |   | (4,345  | )         |  |   | (910  | )
|Minority interest in loss of a subsidiary                     |  |                | 566    |   |                       |   | (566    | )(4)      |  |   |      |  
|                                                              |  |                |        |   |                       |   |         |           |  |   |       |  
|Net profit /(loss) from continuing operations before taxation |  |                | 4,001  |   |                       |   | (4,911  | )         |  |   | (910  | )
|Taxation                                                      |  |                | (118   | ) |                       |   | 118     | (4)       |  |   |      |  
|                                                              |  |                |        |   |                       |   |         |           |  |   |       |  
|Net profit / (loss) from continuing operations after taxation |  |                | 3,883  |   |                       |   | (4,793  | )         |  |   | (910  | )
|                                                              |  |                |        |   |                       |   |         |           |  |   |       |  



17



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##### Table of Contents

VSOURCE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The following table shows the unaudited pro forma condensed consolidated results of
operations for the three months ended October 31, 2003, as if the Transactions had taken place :



|                                                        |  |                |        |   |                       |   |        |           |  |   |        |  
|------------------------------------------------------- |  | -------------- | ------ | - | --------------------- | - | ------ | --------- |  | - | ------ | -
|                                                        |  | Historical (1) |        |   | Pro forma adjustments |   |        | Pro forma | 
|Revenues from                                           |  |                |        |   |                       |   |        |           |  |   |        |  
|Services                                                |  | $              | 4,069  |   |                       | $ | (4,069 | )(4)      |  | $ |       |  
|Products                                                |  |                | 661    |   |                       |   | (661   | )(4)      |  |   |       |  
|                                                        |  |                |        |   |                       |   |        |           |  |   |        |  
|                                                        |  |                | 4,730  |   |                       |   | (4,730 | )         |  |   |       |  
|Cost and expenses:                                      |  |                |        |   |                       |   |        |           |  |   |        |  
|Cost of revenues from                                   |  |                |        |   |                       |   |        |           |  |   |        |  
|Services                                                |  |                | 2,800  |   |                       |   | (2,739 | )(4)      |  |   | 61     |  
|Products                                                |  |                | 534    |   |                       |   | (534   | )(4)      |  |   |       |  
|                                                        |  |                |        |   |                       |   |        |           |  |   |        |  
|                                                        |  |                | 3,334  |   |                       |   | (3,273 | )         |  |   | 61     |  
|                                                        |  |                |       
|Selling, general and administrative expenses            |  |                | 4,700  |   |                       |   | (4,259 | )(4)      |  |   | 441    |  
|Expenses related to terminated merger with TEAM America |  |                | 1,467  |   |                       |   |       |           |  |   | 1,467  |  
|Amortization of stock-based compensation                |  |                |       |   |                       |   |       |           |  |   |       |  
|                                                        |  |                |        |   |                       |   |        |           |  |   |        |  
|Total costs and expenses                                |  |                | 9,501  |   |                       |   | (7,532 | )         |  |   | 1,969  |  
|                                                        |  |                |        |   |                       |   |        |           |  |   |        |  
|Operating loss                                          |  |                | (4,771 | ) |                       |   | 2,802  |           |  |   | (1,969 | )
|Interest income                                         |  |                | 5      |   |                       |   |       |           |  |   | 5      |  
|Interest expense                                        |  |                |       |   |                       |   |       |           |  |   |       |  
|Gain on disposal of partial interest in a subsidiary    |  |                |       |   |                       |   |       |           |  |   |       |  
|                                                        |  |                |        |   |                       |   |        |           |  |   |        |  
|                                                        |  |                | (4,766 | ) |                       |   | 2,802  |           |  |   | (1,964 | )
|Minority interest in loss of a subsidiary               |  |                |       |   |                       |   |       |           |  |   |       |  
|                                                        |  |                |        |   |                       |   |        |           |  |   |        |  
|Net loss from continuing operations before taxation     |  |                | (4,766 | ) |                       |   | 2,802  |           |  |   | (1,964 | )
|Taxation                                                |  |                |       |   |                       |   |       |           |  |   |       |  
|                                                        |  |                |        |   |                       |   |        |           |  |   |        |  
|Net loss from continuing operations after taxation      |  |                | (4,766 | ) |                       |   | 2,802  |           |  |   | (1,964 | )
|                                                        |  |                |        |   |                       |   |        |           |  |   |        |  



18



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##### Table of Contents

VSOURCE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The following table shows the unaudited pro forma condensed consolidated results of
operations for the nine months ended October 31, 2003, as if the Transactions had taken place:



|                                                        |  |                |        |   |                       |   |         |           |  |   |        |  
|------------------------------------------------------- |  | -------------- | ------ | - | --------------------- | - | ------- | --------- |  | - | ------ | -
|                                                        |  | Historical (1) |        |   | Pro forma adjustments |   |         | Pro forma | 
|Revenues from                                           |  |                |        |   |                       |   |         |           |  |   |        |  
|Services                                                |  | $              | 12,998 |   |                       | $ | (12,968 | )(4)      |  | $ | 30     |  
|Products                                                |  |                | 1,266  |   |                       |   | (1,266  | )(4)      |  |   |       |  
|                                                        |  |                |        |   |                       |   |         |           |  |   |        |  
|                                                        |  |                | 14,264 |   |                       |   | (14,234 | )         |  |   | 30     |  
|Cost and expenses:                                      |  |                |        |   |                       |   |         |           |  |   |        |  
|Cost of revenues from                                   |  |                |        |   |                       |   |         |           |  |   |        |  
|Services                                                |  |                | 7,586  |   |                       |   | (7,494  | )(4)      |  |   | 92     |  
|Products                                                |  |                | 985    |   |                       |   | (985    | )(4)      |  |   |       |  
|                                                        |  |                |        |   |                       |   |         |           |  |   |        |  
|                                                        |  |                | 8,571  |   |                       |   | (8,479  | )         |  |   | 92     |  
|                                                        |  |                |       
|Selling, general and administrative expenses            |  |                | 12,051 |   |                       |   | (9,699  | )(4)      |  |   | 2,352  |  
|Expenses related to terminated merger with TEAM America |  |                | 1,467  |   |                       |   |        |           |  |   | 1,467  |  
|Amortization of stock-based compensation                |  |                | 94     |   |                       |   | (39     | )         |  |   | 55     |  
|                                                        |  |                |        |   |                       |   |         |           |  |   |        |  
|Total costs and expenses                                |  |                | 22,183 |   |                       |   | (18,217 | )         |  |   | 3,966  |  
|                                                        |  |                |        |   |                       |   |         |           |  |   |        |  
|Operating loss                                          |  |                | (7,919 | ) |                       |   | 3,983   |           |  |   | (3,936 | )
|Interest income                                         |  |                | 31     |   |                       |   |        |           |  |   | 31     |  
|Interest expense                                        |  |                |       |   |                       |   |        |           |  |   |       |  
|Gain on disposal of partial interest in a subsidiary    |  |                |       |   |                       |   |        |           |  |   |       |  
|                                                        |  |                |        |   |                       |   |         |           |  |   |        |  
|                                                        |  |                | (7,888 | ) |                       |   | 3,983   |           |  |   | (3,905 | )
|Minority interest in loss of a subsidiary               |  |                |       |   |                       |   |        |           |  |   |       |  
|                                                        |  |                |        |   |                       |   |         |           |  |   |        |  
|Net loss from continuing operations before taxation     |  |                | (7,888 | ) |                       |   | 3,983   |           |  |   | (3,905 | )
|Taxation                                                |  |                |       |   |                       |   |        |           |  |   |       |  
|                                                        |  |                |        |   |                       |   |         |           |  |   |        |  
|Net loss from continuing operations after taxation      |  |                | (7,888 | ) |                       |   | 3,983   |           |  |   | (3,905 | )
|                                                        |  |                |        |   |                       |   |         |           |  |   |        |  



19



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##### Table of Contents

VSOURCE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Notes to the pro forma condensed consolidated financial information:



| | (1) | Reflects historical amounts derived from the Companys unaudited condensed consolidated financial statements for the three and nine months ended October 31, 2004 and 2003.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Reflects the transfer of the Companys 61.2% interest in Vsource Asia to Asia Holding Co., and the exchange of the common shares of Asia Holding Co. for the redemption of the
Series 1-A, 2-A and 4-A preferred shares based on the respective percentage of acceptance. The gain realized by the Company associated with the Exchange, net of transaction expense of $350,000, results in a reduction to the accumulated deficit.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Based on the actual redemption of the Series 1-A, 2-A and 4-A preferred stock for Vsources interest in Asia Holding Co. For pro forma purposes, the carrying value of the
preferred stock as of October 31, 2004, plus the amount previously recognized in the additional paid-in capital for the beneficial conversion feature associated with the preferred stock, was eliminated. A deemed dividend was recognized based on the
difference between these carrying values and the value of the Companys interest in Asia Holding Co. The deemed dividend of $33,027,000 was directly credited to the accumulated deficit.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | Reflects the removal of the results of operations of Vsource Asia for the periods presented, including an allocation of costs incurred by Vsource pertaining to Vsource Asias
operations.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



20



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##### Table of Contents

Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated
financial statements and the related notes appearing elsewhere herein.



FORWARD LOOKING STATEMENTS



The discussion in
this Form 10-Q contains forward-looking statements. All forward-looking statements included in this document are based on information available to us on the date hereof. We assume no obligation to update any such forward-looking statements. Our
actual results in future periods could differ materially from those indicated in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, risks discussed in our Annual Report on
Form 10-K for the fiscal year ended January 31, 2004, under the heading Risk Factors and the risks discussed in our other Securities and Exchange Commission filings.



RECENT DEVELOPMENTS



On November 22 ̧ 2004, Vsource contributed its 61.2% ownership interest in Vsource Asia Berhad (Vsource Asia), its principal operating
subsidiary, to a new wholly owned subsidiary of the Company incorporated in the British Virgin Islands (Asia Holding Co.). Immediately thereafter, Vsource completed an exchange offer pursuant to which the holders of its Series 1-A,
Series 2-A and Series 4-A Preferred Stock (the Preferred Stock) could exchange their Preferred Stock for common shares of Asia Holding Co. at certain exchange ratios (the Exchange Offer). Effective upon the completion of the
Exchange Offer on November 22, 2004, 92.8% of the Series 1-A Preferred Stock, 98.8% of the Series 2-A Preferred Stock and 100% of the Series 4-A Preferred Stock were tendered to the Company and subsequently cancelled. Vsource then tendered its
remaining 0.5% interest in Asia Holding Co. to Symphony House Berhad (Symphony), a 30.3% shareholder of Vsource Asia, at a price of $0.158 per share pursuant to a tender offer being conducted by Symphony for shares of Asia Holding Co.
Vsource received $81,938 in cash proceeds as a result of the sale of its remaining shares in Asia Holding Co. to Symphony.



As a result of the Exchange Offer, Vsource no longer has an ownership interest in Vsource Asia or in Asia Holding Co. In fiscal 2004, Vsource Asia
generated approximately 99% of the Companys combined revenues.



Symphony also entered into an agreement (the Symphony Purchase Agreement) pursuant to which it agreed to purchase Vsource common stock and warrants from certain preferred stockholders. As a result of the Symphony Purchase
Agreement, which was completed on November 24, 2004, Symphony acquired approximately 32% of the common stock of Vsource and warrants which, if exercised, would result in Symphony owning approximately 54.5% of the outstanding common stock of Vsource.



Prior to the Exchange Offer discussed above, Vsource and the
holders of Vsources Series 4-A Preferred Stock were parties to a Stockholders Agreement and a Registration Rights Agreement, each dated as of October 25, 2000, which gave the Series 4-A Stockholders significant control over Vsources
operations and actions and provided certain registration rights to such holders. In connection with the Exchange Offer, the Stockholders Agreement and Registration Rights Agreement have both been terminated. The terms and conditions of the
Stockholders Agreement and the Registration Rights Agreement are described in more detail under the heading Termination of Registration Rights Agreement and Stockholders Agreement in the Companys Exchange Offer and Consent
Solicitation Circular (the Circular), which was filed as an exhibit to the Companys Schedule TO, which Vsource filed with the SEC on October 18, 2004. In addition, in connection with the Exchange Offer a majority of the outstanding
shares of Series 1-A Preferred Stock, Series 2-A Preferred Stock and Series 4-A Preferred Stock, each voting as a separate class, agreed that the transactions completed in connection with the Exchange Offer would not be a deemed liquidation,
dissolution or winding up of the Company. This waiver is described in greater detail in the Circular under the heading Request for Waiver of Liquidation Rights of the Preferred Stock, which information is incorporated herein by
reference.



On December 6, 2004, Vsource announced the
resignation of Phillip E. Kelly as Chairman of the Board and Chief Executive Officer of Vsource. In addition, Vsource announced that Dennis M. Smith, Vice Chairman and Chief Financial Officer, replaced Mr. Kelly as Chairman of the Board and Chief
Executive Officer of Vsource. Information regarding Mr. Smiths biography and compensation arrangements with the Company can be found in Vsources most recent proxy statement, which is herein incorporated by reference.



Vsource also announced that Luc Villette and I. Steven Edelson resigned as
members of the Board of Directors of the Company with effect from November 30, 2004.



21



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##### Table of Contents

OVERVIEW



OUR FISCAL YEAR ENDS ON JANUARY 31 OF THE FOLLOWING CALENDAR YEAR. UNLESS OTHERWISE INDICATED, REFERENCES TO 2005 AND 2004
RELATE TO THE FISCAL YEARS ENDED JANUARY 31, 2005 AND 2004, RESPECTIVELY, RATHER THAN CALENDAR YEARS.



For the quarter ended October 31, 2004, our revenues decreased by 10% to $4.24 million from $4.73 million for the same period in the last fiscal year. For
the nine months ended October 31, 2004, our revenues decreased by 9% to $12.97 million from $14.26 million during the same period a year ago. However, excluding revenue of $0.33 million and $0.68 million from TEAM America, Inc. (TEAM
America) from the same periods a year ago, which we subsequently wrote off as bad debt following TEAM Americas Chapter 11 proceedings, the decline in our revenues would have been less pronounced, amounting to 4% and 5%, respectively, for
the third quarter and the first nine months of 2005 compared to the same periods in 2004. Our primary source of revenues was fees earned from delivering business process outsourcing solutions such as warranty solutions, human resource solutions and
Vsource Foundation Solutions. We also derived revenues from the sales of products through our sales solutions.



The principal cause of the decrease in revenue was a 34% and 38% decline, respectively, in warranty solutions revenues during the third quarter and first
nine months of 2005 compared to the same periods in 2004. Warranty solutions, which continued to constitute our largest line of business, declined from $2.50 million in the third quarter of 2004 to $1.67 million in the third quarter of 2005. Our
warranty solutions revenue was primarily derived from a three-year support services agreement (the Support Services Agreement) to support the warranty obligations of Gateway Japan Inc. (Gateway) with respect to its installed
base of end users in the Asia-Pacific region. Because Gateway terminated its operations in the region in 2001 and therefore is not selling any new products in Asia, revenues from the Support Services Agreement have been declining and are expected to
continue to decline as the installed base of end users who will be covered by Gateways warranties declines over time. We also experienced declines of 41% and 36%, respectively, in sales solution revenue during the third quarter and first nine
months of 2005 compared to the same periods a year ago. The decrease was primarily attributable to the expected decline in sales of extended warranties and out-of-warranty repairs for Gateway products, as more of Gateways products reached an
age where it became increasingly more cost-effective for most end users to simply purchase new computers rather than to incur costs to maintain their existing computers.



The declines in revenues from our warranty solutions and sales solutions were partially offset by increases in revenues from
our human resource solutions and Vsource Foundation Solutions, which collectively increased by 60% and 105% respectively, during the third quarter and first nine months of 2005 compared to the same periods a year earlier. Excluding $0.68 million of
human resource solutions revenue attributable to TEAM America in 2004, which we subsequently wrote off, the collective increase would have been 118% and 168%, respectively, during the third quarter and first nine months of 2005 compared to the same
periods a year ago. These increases reflected several factors:



| |  | the completion or near completion of the build-out of these services for several major clients;
| | - | -----------------------------------------------------------------------------------------------



| |  | the resulting transition to full-scale delivery of recurring services and the expansion of our scope of services to those clients; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------



| |  | the acquisition of several new clients during the fourth quarter of 2004 and the first nine months of 2005, including clients serviced by our new shared services center in Taiwan,
which we opened in November 2003.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our operating
loss decreased by 62% from $4.77 million during the third quarter of 2004 to $1.81 million in the third quarter of 2005, and by 47% from $7.92 million during the first nine months of 2004 to $4.17 million during the first nine months of 2005. This
decrease was primarily attributable to a 38% and 31% reduction, respectively, in selling, general and administrative related costs during the third quarter and first nine months of 2005 compared to the same periods a year ago. However, this was
offset in part by a 10% and 9% drops in revenue during the third quarter and first nine months of 2005, respectively, compared to the same periods a year earlier. Excluding $1.47 million of expenses associated with the merger with TEAM America,
however, we would have reduced our operating loss by 45% during the third quarter of 2005 and by 35% during the first nine months of 2005, compared to the same periods a year ago.



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##### Table of Contents

RESULTS OF OPERATIONS (All amounts in thousands)



|                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|-------------------------------------------------------------------------- |  | ----------------------------- | ------ | - | ---------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                           |  | Three months endedOctober 31, |        |   | Nine months endedOctober 31, |  
|                                                                           |  | 2004                          |        |   | 2003                         |   |        | 2004 |  |   | 2003   |  
|Revenues from                                                              |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Services                                                                   |  | $                             | 3,792  |   |                              | $ | 4,069  |      |  | $ | 11,801 |   |  | $ | 12,998 |  
|Products                                                                   |  |                               | 448    |   |                              |   | 661    |      |  |   | 1,172  |   |  |   | 1,266  |  
|                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|                                                                           |  |                               | 4,240  |   |                              |   | 4,730  |      |  |   | 12,973 |   |  |   | 14,264 |  
|                                                                           |  |                               |        |  
|Revenue from                                                               |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|                                                                           |  |                               |        |  
|Warranty solutions                                                         |  |                               | 1,663  |   |                              |   | 2,502  |      |  |   | 5,453  |   |  |   | 8,812  |  
|Human resource solutions                                                   |  |                               | 592    |   |                              |   | 762    |      |  |   | 1,996  |   |  |   | 1,471  |  
|Vsource Foundation Solutions                                               |  |                               | 1,412  |   |                              |   | 490    |      |  |   | 3,853  |   |  |   | 1,387  |  
|Sales solutions                                                            |  |                               | 573    |   |                              |   | 976    |      |  |   | 1,671  |   |  |   | 2,594  |  
|                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|                                                                           |  |                               | 4,240  |   |                              |   | 4,730  |      |  |   | 12,973 |   |  |   | 14,264 |  
|                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Cost and expenses:                                                         |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Cost of revenue from                                                       |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|                                                                           |  |                               |        |  
|Services                                                                   |  |                               | 2,727  |   |                              |   | 2,800  |      |  |   | 7,864  |   |  |   | 7,586  |  
|Products                                                                   |  |                               | 386    |   |                              |   | 534    |      |  |   | 977    |   |  |   | 985    |  
|                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|                                                                           |  |                               | 3,113  |   |                              |   | 3,334  |      |  |   | 8,841  |   |  |   | 8,571  |  
|Cost of revenues from                                                      |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Warranty solutions                                                         |  |                               | 601    |   |                              |   | 1,042  |      |  |   | 2,147  |   |  |   | 3,712  |  
|Human resource solutions                                                   |  |                               | 694    |   |                              |   | 1,217  |      |  |   | 2,241  |   |  |   | 2,139  |  
|Vsource Foundation Solutions                                               |  |                               | 1,254  |   |                              |   | 349    |      |  |   | 2,937  |   |  |   | 929    |  
|Sales solutions                                                            |  |                               | 564    |   |                              |   | 726    |      |  |   | 1,516  |   |  |   | 1,791  |  
|                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|                                                                           |  | $                             | 3,113  |   |                              | $ | 3,334  |      |  | $ | 8,841  |   |  | $ | 8,571  |  
|                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Selling, general and administrative expenses                               |  | $                             | 2,937  |   |                              | $ | 4,700  |      |  | $ | 8,304  |   |  | $ | 12,051 |  
|Amortization of stock-based compensation                                   |  |                               |       |   |                              |   |       |      |  |   |       |   |  |   | 94     |  
|Expenses related to the terminated merger with TEAM America                |  |                               |       |   |                              |   | 1,467  |      |  |   |       |   |  |   | 1,467  |  
|                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Total costs and expenses, net                                              |  |                               | 6,050  |   |                              |   | 9,501  |      |  |   | 17,145 |   |  |   | 22,183 |  
|                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Operating loss                                                             |  |                               | (1,810 | ) |                              |   | (4,771 | )    |  |   | (4,172 | ) |  |   | (7,919 | )
|                                                                           |  |                               |        |  
|Interest income                                                            |  |                               | 2      |   |                              |   | 5      |      |  |   | 6      |   |  |   | 31     |  
|Interest expense                                                           |  |                               | (8     | ) |                              |   |       |      |  |   | (10    | ) |  |   |       |  
|                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|                                                                           |  |                               | (1,816 | ) |                              |   | (4,766 | )    |  |   | (4,176 | ) |  |   | (7,888 | )
|                                                                           |  |                               |        |  
|Gain on disposal of partial interest in a subsidiary                       |  |                               |       |   |                              |   |       |      |  |   | 7,611  |   |  |   |       |  
|Minority interest in loss of a subsidiary                                  |  |                               | 313    |   |                              |   |       |      |  |   | 566    |   |  |   |       |  
|                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Net profit/(loss) from continuing operations before taxation               |  | $                             | (1,503 | ) |                              | $ | (4,766 | )    |  | $ | 4,001  |   |  | $ | (7,888 | )
|Taxation                                                                   |  |                               | 0      |   |                              |   |       |      |  |   | (118   | ) |  |   |       |  
|                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Net profit/(loss) from continuing operations after taxation                |  | $                             | (1,503 | ) |                              | $ | (4,766 | )    |  | $ | 3,883  |   |  | $ | (7,888 | )
|Discontinued operations :                                                  |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|                                                                           |  |                               |        |  
|Loss from discontinued operations (including loss on disposal of $162,000) |  |                               |       |   |                              |   |       |      |  |   | (1,148 | ) |  |   |       |  
|                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Net profit/(loss) after taxation                                           |  | $                             | (1,503 | ) |                              | $ | (4,766 | )    |  | $ | 2,735  |   |  | $ | (7,888 | )
|                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|                                                                           |  |                               |        |  
|Earnings / (loss) per share available to common shareholders               |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Basic and diluted loss per share from continuing operations                |  | $                             | (2.64  | ) |                              | $ | (3.97  | )    |  | $ | (3.45  | ) |  | $ | (8.75  | )
|Basic and diluted loss per share from discontinued operations              |  | $                             |       |   |                              |   |       |      |  | $ | (0.57  | ) |  |   |       |  
|                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Net basic and diluted loss per share                                       |  | $                             | (2.64  | ) |                              | $ | (3.97  | )    |  | $ | (4.02  | ) |  | $ | (8.75  | )
|                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  



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MANAGEMENTS DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS  THREE AND NINE MONTHS ENDED OCTOBER 31,
2004, COMPARED TO THE THREE AND NINE MONTHS ENDED OCTOBER 31, 2003



REVENUE



During the third quarter and first nine
months of 2005, revenue was derived from business process outsourcing solutions: warranty solutions, human resource solutions, Vsource Foundation Solutions and sales solutions. Revenue from sales solutions included revenue from sales of products and
services.



Total revenue decreased to $4.24 million for the
third quarter of 2005, from $4.73 million for the same period a year ago, representing a decrease of $0.49 million or 10%. Services revenue for the third quarter of 2005 decreased 7% to $3.79 million from $4.07 million in the same period a year ago,
and product revenue experienced a 32% drop to $0.45 million in the third quarter of 2005 from $0.66 million in the same period a year ago. Excluding $0.33 million of human resource solutions revenues attributable to TEAM America in 2004, which we
subsequently wrote off, total revenue decreased by only 4% and services revenue increased by 1%. These decreases were the result of decreases in revenue of $0.84 million and $0.40 million, respectively, from our warranty solutions and sales
solutions. However, we experienced growth in revenue from our human resource solutions and Vsource Foundation Solutions, which collectively increased by 60% or $0.75 million (118%, or $1.08 million, if TEAM America-related revenues are excluded from
our 2004 revenues), reflecting continuing growth in these two lines of business, as we expanded our services to existing clients and acquired new clients.



For the first nine months of 2005, total revenue declined to $12.97 million from $14.26 million for the same period a year ago, representing a decrease of
9%. Services revenue decreased 9% in the first nine months of 2005 to $11.80 million from $13.00 million in the first nine months of 2004. Product revenue also decreased by 7% from $1.27 million in the first nine months of 2004 to $1.17 million in
the same period of 2005. Excluding $0.68 million of human resource solutions revenues attributable to TEAM America in 2004, total revenue and services revenue decreased by only 5% and 4% respectively. These decreases were the result of declines of
$3.36 million in warranty solutions revenues. However, this decline in revenue was partially offset by the higher revenue achieved in our human resource solutions and Vsource Foundation Solutions lines of business, which collectively increased by
105% or $2.99 million (168%, or $3.67 million, if TEAM America-related revenues are excluded from our 2004 revenues).



During the quarter ended October 31, 2004, warranty solutions, which constituted 44% of our services revenue and 39% of our total revenue, declined by 34%
or $0.84 million. A similar decline of $3.36 million, or 38%, occurred in the first nine months of 2005, with revenue dropping to $5.45 million from $8.81 million during the same period a year ago. These decreases were mainly attributable to the
decrease in revenue from Gateway, as more of Gateways products reached an age where it became increasingly more cost-effective for most end users to simply purchase new computers rather than to obtain warranty support. The decline in
Gateway-related warranty solutions revenue was offset in part by an increase of 147% or $0.42 million in warranty solutions revenue from other clients.



Human resource solutions revenue decreased by 22% or $0.17 million in the third quarter of 2005 as compared to the same period a year ago. The first nine
months of 2005 saw an increase of $0.53 million with revenue of $2.00 million as compared to $1.47 million in the same period of 2004. These increases do not reflect the true rate of growth in this business during these periods, however, due to the
inclusion of $0.33 million and $0.68 million respectively, of TEAM America-related human resource solutions revenue in the third quarter and first nine months of 2004, which subsequently was written off as bad debt following TEAM Americas
Chapter 11 proceedings. Excluding the TEAM America-related revenues, human resource solutions revenue increased by 38% and 152% during the third quarter and first nine months of 2005, respectively, compared to revenue during the same periods a year
ago. These increases were mainly attributable to the completion of implementation for two of our existing clients, as well as expansion of our relationship with existing clients and acquisition of new clients.



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Vsource Foundation Solutions revenue increased 188% from $0.49 million to $1.41 million in the third
quarter of 2005. Revenue for the first nine months of 2005 was $3.85 million, representing an increase of $2.47 million or 178%, as compared to $1.39 million recorded for same period in 2004. These increases were mainly due to the expansion of our
new operations center in Taipei to support telemarketing services in Taiwan. In addition, we continued to expand services with existing clients and successfully acquired new clients during these periods.



Sales solutions revenue declined by 41% or $0.40 million for the quarter ended October 31,
2004 as compared to the same period a year ago, and declined by 36% or $0.92 million for the first nine months of 2005 compared to the same period a year ago. The decrease was primarily attributable to the expected decline in sales of extended
warranties and out-of-warranty repairs for Gateway products, as more of Gateways products reached an age where it became increasingly more cost-effective for most end users to simply purchase new computers rather than to incur costs to
maintain their existing computers. The decrease was also attributable to the termination of our sale solutions arrangements with Palm Inc. in December 2003. The decline of Gateway-related sales solutions revenues was slightly offset by the increase
of $0.30 million of sales of computers and computer products attributable to a client in Japan for the first nine months of 2005. Similar revenue for the quarter only increased marginally.



COST OF REVENUE



During the third quarter of 2005, cost of revenues consisted primarily of employee-related costs, subcontracting costs, and
parts and repair costs associated with providing customers with goods and services. Other cost of revenue included freight, duties, telecommunications and onsite support.



Cost of revenues decreased by 7% in the third quarter of 2005 from $3.33 million to $3.11 million, while the drop in revenue
was 10%. Excluding cost of revenues of $0.19 million attributable to TEAM America during the third quarter of 2004, cost of revenue would have decreased by 1%. Total cost of revenues for the third quarter of 2005 represented 73% of total revenues as
compared to 70% for the same period a year ago. However, if TEAM America-related revenue and cost of revenue are excluded from our 2004 results, then total cost of revenues for the third quarter of 2004 would have represented 72% of total revenues.
Cost of revenue from services for the third quarter of 2005 decreased by 3% from $2.80 million to $2.73 million. The decline was mainly attributable to lower costs incurred for our Gateway warranty solutions which was in line with the decrease in
Gateway warranty solutions revenue. For the third quarter ended October 31, 2004, cost of revenues for products decreased by 28% from $0.53 million to $0.39 million. The decline in cost of revenues for products was in line with the decrease in our
product revenues.



Total cost of revenues for the first nine
months of 2005 increased to $8.84 million from $8.57 million, a marginal increase of $0.27 million or 3%, although we recorded a decline in our revenues of 9% for the same period. Excluding cost of revenues of $0.27 million attributable to TEAM
America during the first nine months of 2004, total cost of revenue would have increased by 6%. For the first nine months of 2005, total cost of revenues represented 68% of total revenues as compared to 60% for the same period a year ago (61% if
TEAM America-related revenue and cost of revenue are excluded from our 2004 results). This increase was mainly attributable to the increase in our cost of revenues from services, which grew from $7.59 million to $7.86 million, representing an
increase of 4% or $0.28 million. Cost of revenues for products for the first nine months of 2005 did not change significantly as compared to the same period a year ago. The higher cost of revenues recorded for the first nine months of 2005 was
mainly attributable to our expansion of Vsource Foundation Solutions that caused an increase of 216% in cost to $2.94 million from $0.93 million for the same period a year ago. Cost of revenues for human resource solutions increased marginally by
$0.10 million for the first nine months of 2005. These increases were offset in part by the decrease of cost of revenues in warranty solutions and sales solutions of $1.57 million and $0.28 million respectively.



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The decline of 42% in cost of revenues for warranty solutions to $0.60 million from $1.04 million for the
third quarter ended October 31, 2004 was mainly attributable to the lower costs incurred for our Gateway warranty solutions. The first nine months of 2005 saw a decline of $1.57 million in warranty solutions cost of revenue to record costs of
$2.15 million as compared to $3.71 million for the same period a year ago. We were able to effectively reduce warranty solution costs in line with declines in the same segment revenues by running our warranty solutions business more efficiently and
reducing costs, particularly sub-contractor costs, in line with lower revenues.



Our human resource solutions cost of revenues decreased 43% for the third quarter of 2005 to $0.69 million. However, for the first nine months of 2005, cost of revenue increased marginally by 5% to $2.24
million. Cost of revenues from our human resource solutions constituted 117% of same segment revenues and 16% of total revenues in the third quarter of 2005, compared to 160% and 26%, respectively, in the same period in 2004 (which would have been
239% and 23%, respectively, if TEAM America-related revenue and cost of revenue were excluded from our third quarter 2004 results). For the nine months ended October 31, 2004, cost of revenues from human resource solutions constituted 112% of the
same segment revenues and 17% of total revenues compared to 145% and 15% respectively, in the same period in 2004 (which would have been 236% and 14%, respectively, if TEAM America-related revenue and cost of revenue were excluded from our third
quarter 2004 results). The decrease in cost as a percentage of same segment revenues for the quarter and the nine months period ended October 31, 2004 reflected the completion of the build-out of infrastructure and operations to support this line of
business and our ability to generate more recurring transactional fees using this infrastructure as we began to realize economies of scale for our major existing customers.



The decline in cost of revenues for warranty solutions and human resource solutions were partially offset by the significant
increases recorded in our Vsource Foundation Solutions. In the third quarter of 2005, costs of revenues from Vsource Foundation Solutions represented 89% of same segment revenues and 30% of total revenues, compared to 71% and 7%, respectively, in
the same period in 2004. The increase in cost as a percentage of same segment revenues was the result of our efforts in building out our infrastructure in our new center in Taiwan. Apart from the cost incurred for Taiwan, higher costs were also
incurred in our shared service center in Malaysia for new clients acquired. In the first nine months of 2005, cost of revenue from Vsource Foundation Solutions constituted 76% of same segment revenues and 23% of total revenues.



Cost of revenues from sales solutions constituted 98% of same segment revenue
and 13% of total revenues in the third quarter of 2005, compared to 74% and 15%, respectively, in the same period a year ago. In the first nine months of 2005, cost of revenue from sales solutions constituted 91% of same segment revenues and 12% of
total revenues, compared to 69% and 13%, respectively, in the same period a year ago. The increase in cost as a percentage of same-segment revenues was the result of the higher product costs incurred in connection with the sale of computers and
computer parts and the significant decline in Gateway related sales.



SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES



During the third quarter
and first nine months of 2005, selling, general and administrative expenses consisted primarily of employee-related costs, such as salaries of administrative and support personnel, benefits and commissions; travel expenses, recruitment expenses,
promotional and advertising expenses, insurance premiums, rentals and costs relating to certain other third-party professional services. Our selling, general and administrative expenses in the third quarter of 2005 were mainly comprised of
employee-related expenses of $1.42 million, depreciation of $0.38 million, rental of $0.35 million, traveling expenses of $0.10 million and insurance expenses of $0.20 million. Selling, general and administrative expenses in the first nine months of
2005 were mainly comprised of employee-related expenses of $3.99 million, depreciation of $1.14 million, rental of $1.01 million, traveling expenses of $0.42 million and insurance expenses of $0.60 million.



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##### Table of Contents

Selling, general and administrative expenses declined $1.76 million from $4.70 million during the third
quarter of 2004 to $2.94 million during the same period in 2005. For the third quarter of 2005, selling, general and administrative expenses represented 69% of total revenue. A decrease of $3.75 million was recorded for the first nine months of 2005
from $12.05 million in the first nine months of 2004 to $8.30 million in same period of 2005. Selling, general and administrative expenses represented 64% of total revenue compared to 84% in the same period a year ago. We were able to reduce
expenses by 38% and 31% for the third quarter and first nine months of 2005, respectively, by implementing cost reduction initiatives and streamlining our administrative structure.



GAIN ON DISPOSAL OF PARTIAL INTEREST IN A SUBSIDIARY



We recorded a one-time gain of $7.6 million from the disposal of 39% of our equity interest in Vsource Asia, our former
wholly owned subsidiary, to Symphony House Berhad and other investors. The sale was completed in March 2004, for which we received proceeds of approximately $9.5 million for the net assets of $1.6 million, incurred incidental costs of $0.3 million
and taxation of $0.1 million.



TAXATION



Tax expense of $0.1 million was accrued for the first nine months of 2005.
This was for federal and state taxes payable resulting from gains on the disposal of partial interest in a subsidiary.



MINORITY INTEREST IN GAIN/ (LOSS) OF A SUBSIDIARY



Minority interest of $313,000 was recorded for the third quarter of 2005 as a result of the share of the loss recorded by Vsource Asia for the same
period. Minority interest for the first nine months of 2005 was at $566,000 as a result of the loss recorded for the same period. This is the share of the loss that is attributable to Symphony House Berhad and the other investors minority
ownership in Vsource Asia.



DISCONTINUED OPERATIONS



Human capital management solutions was discontinued in July 2004. The
segment was originally launched in October 2003. Revenue was $0.1 million and $0.3 million in the second quarter and first half of 2005, respectively. In the second quarter and first half of 2005, this segment had operating losses of $0.3 million
and $1.0 million, respectively.



In conjunction with the
decision to discontinue this segment of business, we disposed of our interest in a former wholly owned subsidiary, Vsource (Texas), Inc, which was primarily engaged in providing human capital management solutions.



We recorded a loss on disposal of $0.2 million from the disposal of Vsource
Texas. The loss was calculated based on the difference of the purchase price to the net assets of the subsidiary at the date of disposal. The $46,000 purchase price is receivable in the form of a promissory note and was based on the excess of assets
over liabilities, including certain long term lease and other contractual commitments totaling approximately $87,000, as measured at June 1, 2004. The note is due in twelve equal monthly installments starting on August 15, 2004, bearing interest at
3% per annum. No incidental costs were incurred.



BASIC WEIGHTED AVERAGE NUMBER
OF COMMON STOCK OUTSTANDING



The weighted average number of
shares of 2,026,026 for the third quarter of 2005 increased from 1,963,984 for the third quarter of 2004, representing an increase of 62,042 shares. These increases mainly resulted from the conversion of Series 1-A convertible preferred stock into
43,527 shares of common stock and conversion of Series 2-A convertible preferred stock into 14,071 shares of common stock during 2004. The weighted average number of shares of common stock of 2,026,034 for the first nine months of 2005 increased
from 1,891,790 for the first nine months of 2004, an increase of 134,244.



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BASIC AND DILUTED LOSS PER SHARE AVAILABLE TO COMMON SHAREHOLDERS



Basic net loss per share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average number of shares of common stock and potential common shares outstanding during the
period. Potential common shares outstanding consist of dilutive shares issuable upon the exercise of outstanding options and warrants to purchase common stock as computed using the treasury stock method. Because we had a net loss for the three and
nine-month periods ended October 31, 2004 and 2003, potential common shares outstanding are excluded from the computation of diluted net loss per share as their effect is anti-dilutive.



In the third quarter of 2005, the basic and diluted loss per share available to common shareholders from continuing
operations was $2.64 compared to $3.97 of the same period in 2004. This was mainly attributable to the larger number of common shares outstanding and smaller net loss available to common shareholders in the third quarter of 2005 compared to the same
period of 2004. For the first nine months of 2005, the basic and diluted loss per share available to common shareholders from continuing operations of $3.45 was much lower as compared to the same period of 2004 of $8.75 due to the gain from the
disposal of the partial interest in Vsource Asia during the first quarter of 2005.



Basic and diluted loss per share available to common shareholders from discontinued operations was nil for the third quarter of 2005 and $0.57 for the first nine months of 2005.



CRITICAL ACCOUNTING POLICIES



For critical accounting policies affecting us, see Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended January 31, 2004. Critical accounting policies affecting us have not changed materially since
January 31, 2004.



MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION - AT OCTOBER 31, 2004, COMPARED TO JANUARY 31, 2004:



CASH AND
CASH EQUIVALENTS



As of October 31, 2004, cash and cash
equivalents totaled $2.8 million, representing an increase of $1.5 million from $1.3 million at January 31, 2004. This increase in cash and cash equivalents was mainly due to net cash generated from the sale of a 39% interest in Vsource Asia for
$9.2 million, offset by cash used in operations of 7.6 million for the first nine months ended October 31, 2004.



ACCOUNTS RECEIVABLE



As of October 31, 2004, accounts receivable totaled $2.3 million, an increase of $1.2 million from $1.1 million at January 31, 2004. This increase was due
primarily to a higher unbilled receivables amount of $0.8 million. This higher unbilled receivables amount was primarily due to the rapid acquisition of new clients for our telemarketing business in Taiwan.



INVENTORIES



As of October 31, 2004, inventories amounted to $0.2 million, representing a downward movement of only $57,000 from January
31, 2004s position. Inventories consisted mainly of parts purchased for use in providing warranty solutions in connection with the Support Services Agreement and for sale in connection with our sales solutions business. Inventories are
generally determined using the last-in, first-out (LIFO) method.



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PREPAID EXPENSES



As of October 31, 2004, prepaid expenses totaled $0.3 million, down from $0.5 million at January 31, 2004, a decrease of 40%. This decrease in prepaid
expenses primarily reflected the recognition of the incidental cost relating to the sale of Vsource Asia, which was capitalized in January 2004 and expensed during the current period and the recognition of prepaid insurance to expense over the
period of insurance coverage.



OTHER CURRENT ASSETS



As of October 31, 2004, other current assets amounted to $2.0 million,
comprised of deferred costs of $1.2 million, deposits of $0.6 million and other receivables of $0.2 million.



PROMISSORY NOTE RECEIVABLE



The promissory note relates to the consideration from the disposal of Vsource Texas. It is receivable in twelve equal monthly installments starting on August 15, 2004, bearing interest at a rate of 3% per annum.



CURRENT ASSETS - DISCONTINUED OPERATIONS



These assets related to the discontinued operations of our human capital
management solutions line of business. As at January 31, 2004, they consisted of cash and cash equivalents of $130,000 and prepaid expenses of $19,000.



PROPERTY AND EQUIPMENT, NET



As of October 31, 2004, net book value of property and equipment totaled $3.0 million, a decrease of $1.3 million from $4.3 million at January 31, 2004.
The decrease was due principally to depreciation charge during the first nine months ended October 31, 2004, but was offset by spending on property and equipment of $0.3 million in the first nine months of 2005 as compared to $1.1 million in the
same period a year ago, as we built out infrastructure in our shared service centers in Taiwan and Malaysia to support new clients.



NON CURRENT ASSETS - DISCONTINUED OPERATIONS



These assets related to the discontinued operations of our human capital management solutions business. As at January 31, 2004, they consisted of property
and equipment.



ACCOUNTS PAYABLE



As of October 31, 2004, accounts payable were $2.0 million, a decrease of
$0.3 million from $2.3 million at January 31, 2004. The decrease was due to our more timely payments made to suppliers in the first nine months of 2005.



ACCRUED EXPENSES AND STAFF ACCRUALS



As of October 31, 2004, accrued expenses, and staff accruals were recorded at $3.1 million, a decrease of $2.0 million from $5.1 million at January 31,
2004. The decrease was mainly due to the reduction in staff accruals of $0.7 million and accrued expenses of $1.3 million. Staff accruals declined due to the reduced percentage of accruals in the current year in addition to the actual bonus payout
in April 2004, and the forfeiture on unused leave carried forward from year 2004 that took effect in July 2004. The decline in accrued expenses was primarily due to the lower cost of revenues accrued for our warranty and sales solutions business, in
line with the lower revenue recorded, and lower third party professional fees.



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TAXATION



Tax expense of $0.1 million for the first nine months of 2005 was the result of the gain on the disposal of 39% of our equity interest in Vsource Asia,
our former wholly owned subsidiary.



ADVANCE FROM CUSTOMERS  CURRENT



As of October 31, 2004, advance from customers reduced to
$14,000, from $0.9 million recorded as at January 31, 2004 due to realization of such advances upon rendering of the related services.



CURRENT LIABILITIES - DISCONTINUED OPERATIONS



These liabilities related to the discontinued operations of our human capital management solutions business. As at January 31, they consisted of accounts
payable of $40,000, accrued payroll, insurance and workers compensation of $173,000 and accrued expenses and staff accruals of $85,000.



SERIES 4-A CONVERTIBLE PREFERRED STOCK



As of October 31, 2004, the carrying value of our outstanding Series 4-A convertible preferred stock was $25.4 million, up from $14.5 million as at
January 31, 2004. This was due to the amortization of deemed discount on the beneficial conversion feature and accretion of redemption value of the Series 4-A convertible preferred stock.



OTHER COMPREHENSIVE LOSS



As of October 31, 2004, other comprehensive loss was $0.2 million, which was substantially unchanged from the amount as at January 31, 2004. Comprehensive
loss was comprised of unrealized gains and losses on foreign currency translation.



LIQUIDITY AND CAPITAL RESOURCES



Our cash totaled
$2.8 million as of October 31, 2004, as compared to $1.3 million at January 31, 2004, an increase of $1.5 million or 113%. As of October 31, 2004, we had working capital of $2.5 million. To date, we have financed our operations primarily through
preferred stock financing and cash generated from the disposal of 39% interest in Vsource Asia. For the nine months ended October 31, 2004, we did not generate positive cash flow from operating activities.



During the nine months ended October 31, 2004, we used net cash of $7.6
million from operating activities and generated $9.1 million in investing activities that resulted in an increase in cash of $1.5 million. The $9.1 million generated from investing activities was mainly as a result of the proceeds of $9.5 million
from our sale of 39% of our interest in a former wholly owned subsidiary, Vsource Asia.



As of October 31, 2004, we had a cash balance of $2.8 million. We have implemented cash conservation measures to reduce our operating losses, most recently discontinuing the non-profitable human capital management
solutions line of business through our sale of Vsource Texas, a wholly owned subsidiary which was primarily engaged in this segment, for $46,000. On November 22, 2004, we completed the Exchange Offer and consequently disposed of our entire interest
in Vsource Asia. Following the completion of the Exchange Offer and related transactions, the Companys staff will be reduced to less than ten (10) employees. Managements immediate focus is on managing the remaining liabilities and
continuing to provide certain consulting services to third parties, including Vsource Asia, under the existing contractual agreements. Our management believes that we have adequate funding from our recent financings for Vsource to continue in
operation for at least 12 months. Therefore, we have prepared our financial statements on a going concern basis.



We have no off-balance sheet arrangements that could significantly reduce our liquidity. As a result, our management believes that we have adequate
funding for existing operations for at least the next 12 months.



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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



For quantitative and qualitative disclosures about market risks affecting Vsource, see Item 7A Quantitative and Qualitative Disclosure About Market Risk of our Annual Report on Form 10-K for the year ended
January 31, 2004. Our exposure to market risk has not changed materially since January 31, 2004.



Item 4. CONTROLS AND PROCEDURES



(a)
Evaluation of Disclosure Controls and Procedures: Based on their evaluation, as of a date within 90 days of the filing of this quarterly report, our Chief Executive Officer, who is also our principal financial officer, has concluded that they
are unaware of any reason to believe that our disclosure controls and procedures (as defined in Rule 13a-14 promulgated under the Securities Exchange Act of 1934) are not effective.



(b) Changes in Internal Controls: There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of the evaluation referred to above, including any corrective actions with regard to significant deficiencies and material weaknesses.



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##### Table of Contents

PART II - OTHER INFORMATION



Item 1. LEGAL PROCEEDINGS



None.



Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



In connection with this Exchange Offer described above under Recent Developments, 92.8% of the Companys Series 1-A Preferred Stock, 98.8% of the Series 2-A Preferred Stock and 100% of the Series 4-A
Preferred Stock were tendered to Vsource and were subsequently cancelled and, therefore, 67,600 shares of Series 1-A Preferred Stock and 3,900 shares of Series 2-A Preferred Stock remain outstanding. There are no shares of Series 4-A Preferred Stock
outstanding.



Prior to the Exchange Offer, the Company and
holders of the Companys Series 4-A Preferred Stock were parties to a Stockholders Agreement and a Registration Rights Agreement, each dated as of October 25, 2000, which gave the Companys Series 4-A Stockholders significant control over
the Companys operations and actions. In connection with the Exchange Offer, each of the Stockholders Agreement and Registration Rights Agreement have been terminated.



In addition, in connection with the Exchange Offer a majority of the outstanding shares of Series 1-A Preferred Stock,
Series 2-A Preferred Stock and Series 4-A Preferred Stock, each voting as a separate class, agreed that the transactions completed in connection with the Exchange Offer would not be a deemed liquidation, dissolution or winding up of the Company.



Item 3. DEFAULTS UPON SENIOR SECURITIES



None.



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



In connection with the Exchange Offer a majority of the outstanding shares of Series 1-A Preferred Stock, Series 2-A Preferred Stock and Series 4-A Preferred Stock, each voting as a separate class, agreed that the
transactions completed in connection with the Exchange Offer would not be a deemed liquidation, dissolution or winding up of the Company. This waiver is described in greater detail in the Circular under the heading Request for Waiver of
Liquidation Rights of the Preferred Stock, which information is incorporated herein by reference.



Item 5. OTHER INFORMATION



None.



Item 6. EXHIBIT AND REPORTS ON FORM 8-K



|    |  |                     |  |                                                                                                                                                                                                                                                                                                                                            
|--- |  | ------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | EXHIBITS:          
|    |  |                    
|    |  | 31.1                |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                    
|    |  |                    
|    |  | 32.1                |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                     
|    | 
|(b) |  | REPORTS ON FORM 8-K
|    |  |                    
|    |  | 1.                  |  | On September 1, 2004, we filed a Current Report on Form 8-K reporting the issuance of a press release announcing the commencement of an exchange offer for our preferred stock                                                                                                                                                             
|    |  |                    
|    |  | 2.                  |  | On September 10, 2004, we filed a Current Report on Form 8-K reporting the issuance of a press release announcing our financial results for the quarter ended July 31, 2004.                                                                                                                                                               
|    |  |                    
|    |  | 3.                  |  | On October 15, 2004, we filed a Current Report on Form 8-K reporting the mailing of a letter to stockholders regarding revisions to information contained in a previously distributed
Information Statement.                                                                                                                               
|    |  |                    
|    |  | 4.                  |  | On November 29, 2004, we filed a Current Report on Form 8-K reporting the termination of a Series 4-A Stockholders Agreement and Registration Rights Agreement; completion of an exchange offer
and related transactions; material modification to the rights of Series 4-A preferred stockholders; and a change of control of the Company.
|    |  |                    
|    |  | 5.                  |  | On December 6, 2004, we filed a Current Report on Form 8-K reporting the resignation of our Chief Executive Officer and the appointment of his replacement, and the resignation of two members
of our board of directors.                                                                                                                  



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SIGNATURES



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



|              |  |                                                    
|------------- |  | ---------------------------------------------------
|VSOURCE, INC.
|              | 
|By:           |  | /s/ Dennis M. Smith                                
|              |  | Dennis M. Smith                                    
|              |  | Chief Executive Officer                            
|              |  | (Principal Executive Officer and Financial Officer)



Date: December 14, 2004



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EXHIBIT INDEX



|            |  |                                                                                                                                   
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                       
|31.1        |  | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|            | 
|32.1        |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002            



34