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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended January 31, 2003

OR

For the transition period from                      to                     

Commission file number: 000-30326

VSOURCE, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

(858) 618-5884

SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:

NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:

COMMON STOCK, PAR VALUE $0.01 PER SHARE

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

The aggregate market value of all classes of voting stock of the registrant held by non-affiliates of the registrant on March 31, 2003 was $[6,723,970] computed upon the basis of the average bid and asked prices of the common stock on that date.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant’s definitive proxy statement filed or to be filed with the Securities and Exchange Commission pursuant to Regulation 14A involving the election of directors at the annual meeting of the shareholders of the registrant scheduled to be held on June 12, 2003 is incorporated by reference in Part III of this Form 10-K.

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VSOURCE, INC.

FORM 10-K ANNUAL REPORT

FOR THE YEAR ENDED

JANUARY 31, 2003

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FORWARD LOOKING STATEMENTS

The discussion in this Form 10-K 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, the risk that our recent private placement described below will not improve our ability to attract and execute major new outsourcing contracts or accelerate our growth, reliance on one client and the expectation that revenues from this client will decline significantly, a potential requirement to redeem our Series 4-A convertible preferred stock if we fail to meet certain conditions by March 31, 2006, our limited experience in the business process outsourcing business, the new and unproven market for business process outsourcing services in the Asia-Pacific region, long cycles for sales of our solutions, complexities involved in implementing and integrating our services, fluctuations in revenues and operating results, economic and infrastructure disruptions, dependence on a small number of vendors and service providers, management of acquisitions, inability to repay the debt that we have incurred, litigation, competition and other risks discussed in this Form 10-K under the heading “Risk Factors” and the risks discussed in our other Securities and Exchange Commission filings. Readers should carefully review the risk factors described in this document as well as in our other documents that we file from time to time with the Securities and Exchange Commission, including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

PART I

Item 1.    BUSINESS

Overview

Our mission is to be the market leader in providing Fortune 500 and Global 500 companies with seamless, customizable and comprehensive business process outsourcing solutions into and across the Asia-Pacific region. Business process outsourcing is the outsourcing by a company of certain business and operational functions by hiring third-party vendors such as Vsource to perform those functions on their behalf. If such functions are not outsourced, then a company would need to perform those functions internally, using its own personnel, infrastructure and resources.

We offer sophisticated business process outsourcing solutions to our clients. Our solutions and our operating systems are designed so that Fortune 500 and Global 500 companies can confidently rely on us to operate important technical, administrative and sales functions on their behalf in multiple countries across Asia. Our business process outsourcing services help clients in reducing the complexities involved with operating in Asia and lowering their costs of operating in the region.

We offer a range of business process outsourcing solutions to our clients including:

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Our business process outsourcing solutions are designed to bundle key operating know-how and processes together in a single package. For instance, our warranty solutions enable us to provide warranty and other after-sales support to our clients through the integration of our customer relationship management, supply chain management and financial administration functions into one package. The key components of our business process outsourcing solutions are:

We support our clients’ operations in most major countries across the Asia-Pacific region from shared service centers located in Kuala Lumpur, Malaysia and Osaka, Japan. We also provide business process outsourcing solutions to one of our client’s operations in Europe. We also have sales and administrative offices in California, Australia, Hong Kong and Singapore. Our largest customer is Gateway Japan Inc. (“Gateway”), and our other clients include ABN Amro, Agilent Technologies, EMC and Network Appliance.

We were originally incorporated in Nevada in 1980 and re-incorporated in Delaware in November 2000. On June 22, 2001, we purchased substantially all of the assets of NetCel360 Holdings Limited, a provider of business process outsourcing solutions, in exchange for 185,489 shares of our common stock, which represented approximately 19.8% of our total common stock outstanding at the time of the acquisition. We generated revenues of more than $12.7 million in the financial year ended January 31, 2002, of which approximately $9.2 million was recorded in the final quarter as we began to acquire clients for business process outsourcing services developed after the acquisition of NetCel360. All revenues generated since completion of the acquisition have been derived from lines of business developed after the acquisition or from lines of business developed by NetCel360.

On October 25, 2002, we significantly improved our liquidity and capital resources with the completion of a private placement of 3,750 shares of new Series 4-A convertible preferred stock, referred to herein as the Series 4-A Preferred, and warrants to purchase 1,250,000 shares of common stock to Capital International Asia CDPQ Inc., referred to herein as CDPQ, and an affiliate of CDPQ, Quilvest Asian Equity Ltd., referred to herein as Quilvest, for a total purchase price of $7.5 million. The warrants have an initial exercise price of US$0.01 per share. The warrants are only exercisable between April 1, 2005 and March 30, 2006 but only if neither of the following has occurred (i) a Liquidity Date (as such term is defined in the private placement agreement) has occurred before January 31, 2005, or (ii) we have achieved specific consolidated EBITDA thresholds. The holders of the warrants will not be entitled to any voting rights or any other rights as a stockholder until they are duly exercised for shares of common stock.

In connection with and as a condition to the private placement, certain holders of our preferred securities (including notes, in the principal amount of approximately $7.4 million that were scheduled to mature on June 30, 2003, exchangeable into preferred securities) and warrants were required to contemporaneously exchange all of their preferred securities and warrants for shares of our Series 4-A Preferred. This exchange offer closed contemporaneously with the private placement and resulted in the issuance of 13,223 shares of our Series 4-A Preferred. We were also obligated to, and subsequently commenced, a similar exchange offer to all remaining holders of our preferred securities (including notes exchangeable into preferred securities) and warrants. This subsequent exchange offer commenced on November 21, 2002 and concluded on January 6, 2003, resulting in the exchange of $117,106 in principal amount of exchangeable notes for shares of Series 4-A Preferred.

References to “we”, “us”, “our”, “Vsource” or the “Company” refers to Vsource, Inc. and its subsidiaries. We maintain our executive offices at 16875 West Bernardo Drive, Suite 250, San Diego, California 92127. Our telephone number is (858) 618-5884 and our website is at www.vsource.com.

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INDUSTRY BACKGROUND

Managing a global business today is highly complex. Multinational companies are faced with many challenges in the execution of their business strategies across the world. A key challenge is attracting, maintaining and managing the human talent required to deliver professional and operating skills reliably and seamlessly across multi-national borders. In particular, these companies frequently face the need for support services in areas which are important, but not core competencies, for their particular business model. Globally, managers face a combination of challenges including (i) increasing regulatory complexity; (ii) a need to maintain best-practices; and (iii) a lack of scale in their operations. For managers of Fortune 500 and Global 500 companies operating across multiple countries in the Asia-Pacific region, these challenges are exacerbated by the complexities of operating in and across countries with different languages, regulations, currencies, business practices and cultural nuances. These complexities make it even more difficult and costly to deliver internal corporate functions than in a homogeneous market such as the United States.

In the United States, and to a lesser extent, in Europe, many companies have looked to outsource specialized business processes. Until recently, this phenomenon has been far less evident in the Asia-Pacific region. However, globalization and the development of new enabling technologies such as the internet have resulted in an emerging demand for business process outsourcing services in the Asia-Pacific region in much the same way that these services are being used in other major markets.

According to the Gartner Group, the total worldwide business process outsource market will grow from $119 billion in 2000 to $234 billion in 2005, representing a compound annual growth rate of 14.4%. According to International Data Corporation (“IDC”), $5 billion was spent on outsourcing services (including information systems outsourcing and processing services) in Asia-Pacific excluding Japan in 1999 and is expected to exceed $10 billion by 2004.

OUR STRATEGY

Our strategy is to focus on Fortune 500 and Global 500 companies with substantial operations across multiple countries in the Asia-Pacific region. Many of these companies utilize business process outsourcing services in the United States and/or Europe, but we believe that few have initiated the use of these services in the Asia-Pacific region because, until recently, a regional solution has not been available. We believe that our approach, which requires substantial investment in sales and marketing to acquire clients because our target clients are the world’s largest companies, allows us to establish highly integrated, tailored and long-term solutions, generating both initial and recurring revenue streams.

We deliver our business process outsourcing solutions to multiple clients on a regional basis from shared services centers, rather than on a country-by-country basis using separate, duplicative facilities in each country. Our shared service centers utilize a sophisticated technology-based infrastructure integrating transaction processing and customer support functions to deliver our solutions on a regional basis, which allows us to achieve economies of scale which, in turn, help us to save costs for ourselves and our clients. Each of our business process outsourcing solutions integrates multiple functions together with our people, processes and technology for the delivery of a complete and integrated solution to our client. The goal is to provide our clients with a seamless, centralized integrated solution and a single point of accountability through Vsource.

OUR SOLUTIONS

We offer our clients four solutions, which we call Vsource Versatile Solutions^™, to handle their technical, administrative and sales functions:

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Warranty solutions

We manage after-sales service for clients on a regional basis to reduce our clients’ cost of providing support for service or warranty obligations and to provide a single point of accountability. Our warranty solutions are comprised of:

Human resource solutions

We manage clients’ payroll and expense claims activities on a regional basis to reduce the cost of operations, improve controls and data management under a regional umbrella and provide a single point of accountability. Our payroll and claims solution uses an online self-service approach, and includes the following service elements:

Sales solutions

In addition to “back-end” services such as warranty solutions and human resource solutions, we assist clients with “front-end” services to support their sales activities including sales administration, marketing and sales support to help generate demand and the creation of new direct distribution channels across the Asia-Pacific region, to augment our clients’ traditional country-based distribution strategies. Our sales solution includes the following:

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Vsource Foundation Solutions

For clients that do not require a comprehensive business process outsourcing solution encompassing multiple functions in a single solutions package, but only need one component of that solution, we offer the following general business process outsourcing services, which we call Vsource Foundation Solutions, which can be delivered on a stand-alone basis rather than as a part of a bundled solution. Vsource Foundations Solutions include the following service elements:

OUR VALUE PROPOSITION

We believe that our business process outsourcing solutions add immediate and long-term value to our clients by reducing the costs, personnel and overheads associated with delivering these functions. We simplify client operations by providing a single point of accountability for each of these solutions. As a result, our clients can focus on their core competencies and related activities that drive their businesses, including brand development, product development, marketing, pricing, manufacturing and public relations. Our business process outsourcing solutions have the following key distinctive attributes:

Single Point of Accountability; Elimination of Duplication.    Our business process outsourcing solutions provide our clients with centralized functions that are essential to the regional operation of their business in the Asia-Pacific region. Typically, our clients would be required to build, own and operate these activities internally, or seek separate vendors in each country in which they operate to deliver services for only that specific country. Most companies do not operate shared service centers across the Asia-Pacific region and instead build duplicative facilities in each country in which they operate. As such, their cost of providing functions from potentially duplicative facilities in multiple countries tends to be higher than would be the case in home markets where these functions are outsourced or centralized. Where vendor support is required, target clients are typically forced to select different vendors from each country rather than working through a single vendor because few vendors in the Asia-Pacific region currently provide a proven regional solution. Our solutions give our clients a single point of accountability for the regional delivery of services and uniform service standards across the multiple and varied countries of the Asia-Pacific region.

Shared Service Multi-User Platform.    All of our solutions are delivered from our shared service centers in Malaysia and Japan. The markets in many individual countries in the Asia-Pacific region may be too small to justify the investment required by a client to build the necessary operations to handle after-sales service or payroll and claims operations in just that country. Typically, the costs of providing these essential external and internal services are high due to the high cost of doing business in major cities in the Asia-Pacific region such as Hong Kong, Singapore, Sydney and Tokyo, as well as the need for duplicative facilities and personnel in each country. Our business process outsourcing solutions utilize our shared service centers in Malaysia and Japan, which are configured to be leveraged across multiple client users. This multi-user platform permits us to deliver equal or better standards of service at lower fully-loaded costs.

Scalable Technology Infrastructure.    Our advanced technology platform can be expanded to accommodate greater volumes of transactions, and has been designed to permit combination of multiple service solutions into a single platform that readily integrates with our clients’ information systems. This technology infrastructure improves reliability and processing time and cost, while insuring transparency of operating performance and results to our clients.

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Internet Delivery.    Technology utilizing the Internet has significantly improved the flow of information across borders globally, and in the Asia-Pacific region in particular. The Internet has enabled us to build our business process outsourcing solutions and to deliver a service that is cost competitive and transparent to our clients. Each of our business process outsourcing solutions employs robust on-line functionality to facilitate customer service and transparent operating performance to our clients.

Experienced, Highly Motivated Workforce and Management Team.    We believe that our highly skilled, diverse and well-trained workforce is one of our greatest assets. Our management has extensive and distinguished operating experience in the Asia-Pacific region generally, and in the operation of shared service operating models, in particular. We strive to develop leadership and client service excellence at all levels of our organization. We seek to hire individuals with significant industry experience, exposure to best practices demanded by Fortune 500 and Global 500 clients, and an extensive understanding of operating within and across geographic borders within the Asia-Pacific region. Our executive officers maintain a significant ownership stake in our company that, as of January 31, 2003, represented over 22% of our total issued and outstanding common stock on a fully-diluted basis, including convertible securities but excluding stock options issued under our stock option plan. In addition, all of our full-time employees have an ownership interest in Vsource via option grants and participation in our employee stock purchase plan. We believe that these equity stakes significantly help in motivating our team to provide what we believe to be world class levels of client service.

SERVICE DELIVERY

We deliver our business process outsourcing solutions through an infrastructure of shared service centers based in Malaysia and Japan utilizing online, web-enabled technology systems, best in class enterprise-grade software applications, and third party service providers. Our business is based on leveraging shared resources to provide best practices while achieving economies of scale, which we believe permits us to provide our clients with business process outsourcing solutions of equal or better quality at significantly lower costs.

Shared Service Centers.    We operate two shared service centers: one in Kuala Lumpur, Malaysia and one in Osaka, Japan. The personnel, systems and technology we use to manage our clients’ transactions or customer support functions are based in these locales. From these two locations, we are able to provide language support in all of the major languages and dialects in the Asia-Pacific region, including all key Chinese dialects, Japanese, Korean, Bahasa Malaysia, Bahasa Indonesia, Thai and English.

Technology.    Our technology and network infrastructure uses a multi-level, modular architecture, which emphasizes scalability, flexibility, adaptability, security, reliability and availability. Our systems and applications utilize industry standard programming languages, protocols and components, such as XML, CORBA, Java, JSP, C++ and VB. We connect to our clients’ and vendors’ systems through standard interfaces using a middleware product from Vitria. Our core engines are based on widely used platforms such as Oracle8i, MSQL 7, Oracle9i, IIS, and IPlanet. The applications and software are powered by IBM AIX, Sun Solaris, Linux, Windows NT and Windows 2000 based systems, and in addition, we utilize EMC’s Symmetrix System for storage and Cisco products for networking. Our customer relationship management facilities in Malaysia and Japan use Avaya Definity and Nortel Meridian computer telephony integration call center technologies, respectively; which are further integrated with customer relationship management software applications such as Siebel and Oracle 11i enterprise resource planning system.

Customer Relationship Management.    Our comprehensive business process outsourcing solutions, including warranty solutions and sales solutions, utilize our comprehensive online customer relationship management capabilities for customer support and contact. Customer relationship management is also provided as a stand-alone service as one of our Vsource Foundation Solutions. Customer relationship management services are delivered from shared service centers in Malaysia and Japan and include:

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Financial Administration.    We provide financial administration functions to support the delivery of our comprehensive business process outsourcing solutions, including human resource solutions and sales solutions. We also provide financial administration as a stand-alone service as one of our Vsource Foundation Solutions. These functions can be delivered in multiple countries and multiple currencies across most major countries in the Asia-Pacific region. Certain payments functions are provided with support from internationally recognized financial institutions and accounting firms. The functions include:

Supply Chain Management.    Our comprehensive business process outsourcing solutions, including warranty solutions and sales solutions, utilize our supply chain management capabilities to support the logistics, fulfillment and supply chain management needs of our clients and coordinate their logistics activities across the Asia-Pacific region. We also provide supply chain management as a stand-alone service as one of our Vsource Foundation Solutions.

Sales Management.    We provide sales management functions to support the delivery of our sales solutions. These functions include:

CLIENTS AND CONTRACTS

Clients generally sign a master services contract that governs the basic terms and conditions applicable to all of our offered solutions, pursuant to which a client can then purchase specific solutions from time to time under separate statements of work. These statements of work may contain additional terms and conditions applicable to that particular solution. Our contracts with Gateway and Agilent Technologies, however, are specific to the solution being purchased.

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Most of our contracts, and statements of work, have minimum terms of two years. Most contracts automatically renew for subsequent one-year terms, while other contracts will be renewed only upon mutual agreement of the parties. Generally, our clients may terminate their contracts for convenience upon specified periods of notice, but they will usually be required to pay us a termination fee that helps us to recover our upfront investment costs and a certain portion of our expected profit. Gateway may not terminate its contract for convenience. Consistent with industry practice, many of our client contracts contain specified performance standards applicable to key elements of our services. If our performance falls below the applicable standards, the client is entitled to terminate the contract, and in some cases a client may deduct amounts from our fees. As is also consistent with industry practice, our client contracts are terminable for our excessive performance failure, material uncured breach or insolvency.

REVENUES AND OPERATING LOSSES

Our revenues are generated from fees paid pursuant to client contracts. We typically receive two types of fees under our contracts: set-up fees, which are charged during the implementation period when we perform set-up and implementation procedures to facilitate delivery of our services, and subsequent recurring charges for delivery of these services. The set-up fees are generally fixed, although in some cases they may be charged on a time and materials basis. The recurring fees are variable, being based on the numbers of transactions, customer representatives provided or products sold. Most of our contracts provide for guaranteed minimum recurring fees with a variable component based on number of transactions exceeding agreed-upon minimum thresholds.

We have sustained operating losses since inception and we had an accumulated deficit of approximately $79.7 million as of January 31, 2003 that has been funded primarily through issuances of debt and equity securities. In the year ended January 31, 2003, we generated net cash from operating activities of $0.4 million, net cash used in investing activities of $0.7 million and we obtained net cash from financing activities of $6.7 million, giving rise to an increase in cash of $6.4 million. We had positive cash flows for the year ended January 31, 2003. Our management believes that we have adequate funding to continue in operation through January 31, 2004.

SALES AND MARKETING

Our sales cycle begins with a disciplined client screening process. A key consideration in our client screening process is to focus on Fortune 500 and Global 500 companies who (i) have sizable operations across multiple countries in the Asia-Pacific region, (ii) will generate significant volumes of transactions through our system and (iii) are committed to outsourcing for their own business reasons to focus on core competencies, cost reductions, and quality improvement.

Due to the need for our clients to have a high degree of trust in our ability to execute reliably for them on a long-term basis, a large percentage of our sales efforts are driven by relationships built by our executive management. We also have a small staff of dedicated sales professionals whose primary role is to identify potential clients, assess our compatibility with those clients and negotiate and document our contracts. We are also considering adding to the sales team in order to focus greater resources on expanding our client pipeline. Members of the sales team are located in San Diego, San Jose, Chicago, Australia, Hong Kong, Japan, Malaysia and Singapore.

We have focused our marketing efforts on promoting the benefits of outsourcing technical, administrative and sales functions, and on creating awareness that there is now a regional outsourcing solution available to Fortune 500 and Global 500 companies operating in the Asia-Pacific region. We are positioning Vsource as being uniquely qualified to deliver regional business process outsourcing services throughout the Asia-Pacific region and establishing ourselves as the leader in this new market primarily through market research, public relations activities, seminars, speaking engagements and direct sales contacts.

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INTELLECTUAL PROPERTY

We currently have trademark registrations in the United States and the European Community for the mark “VSOURCE”. We also use our logo, “Vsource Versatile Solutions” and “Vsource Foundation Solutions” as trademarks. We have not secured registrations for any of these trademarks in the United States or in any other country. We cannot guarantee that we will be able to secure registrations of our marks domestically or in any foreign country. Our inability to register and protect marks could require us to stop using them or to share them with others, which could cause confusion in the marketplace and harm our business.

We currently hold various Internet domain names, including www.Vsource.com and www.Vsource2U.com. In addition, we have been authorized by Gateway Japan Inc. to use the domain name Gateway2U.com during the term of our support services agreement with Gateway in connection with providing technical support to Gateway’s customers in the Asia-Pacific region. The acquisition and maintenance of domain names generally is regulated by Internet regulatory bodies. The regulation of domain names in the United States and in foreign countries is subject to change. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire or maintain relevant domain names in all countries in which we conduct business or into which we choose to expand. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights continues to evolve. Therefore, we may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our intellectual property and other proprietary rights.

We do not hold any patents. Although we own some proprietary software and have developed proprietary processes and methodologies for delivering our solutions, we also rely significantly upon technologies licensed from third parties such as Comex, Concur, Oracle, Ramco, Siebel and Vitria to deliver our outsourcing solutions. Some of these licenses are perpetual licenses absent material breach on our part, while others require payment of recurring fees based on number of user licenses or number of transactions performed. We expect to need new licenses in the future as our business grows, the existing products we license become obsolete, and as technology evolves. We cannot be sure that we will be able to obtain necessary licenses on commercially reasonable terms, or at all, which could result in a material adverse effect on our business, financial condition and results of operations.

Third parties may claim that our technology or services, including those which we have licensed from a third-party supplier, infringe their proprietary rights. Although in most cases we are indemnified by our licensor in the event of a claim of intellectual property infringement by a third-party, any infringement claims, even if without merit, can be time-consuming and expensive to defend. They may divert our management’s attention and resource and could cause service implementation delays. In the event of a successful claim of infringement and the failure or inability of either us or our licensor to develop non-infringing technology or license the infringed or similar technology on a timely or commercially favorable basis, our business, financial condition and results of operations could be materially adversely affected.

COMPETITION

We believe that we compete primarily with the in-house operations of our current and potential clients and our greatest competitive risk is that prospective clients will choose not to outsource their technical, administrative and sales functions and instead elect to continue performing these functions internally, including consolidating their operations in one or more regional shared service centers. Although, we are not aware of any other company that provides a similar, comprehensive range of business process outsourcing services to our targeted clients across multiple countries in the Asia-Pacific region, we do compete with companies that fall into two basic categories:

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EMPLOYEES

We consider our relations with employees to be very good. None of our employees are represented by a labor union or under any collective bargaining agreement. As of March 31, 2003, we had approximately 274 full time employees, 215 of whom were located in Kuala Lumpur.

RISK FACTORS

The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. If any of the following risks actually occur, our business, operating results and financial condition could be materially negatively affected.

To date, we have realized revenues that are significantly less than our expenses, have had losses since inception and there can be no assurance that we will achieve profitability.

We had shareholders’ equity of approximately $5.4 million as of January 31, 2003 that has been funded primarily through issuances of debt and equity securities. We have sustained operating losses since inception. We have never been profitable, and we may not be able to become profitable or sustain profitability. As of January 31, 2003, we had cash totaling $11.2 million, up $6.4 million from $4.8 million at January 31, 2002, mainly reflecting net cash from operations totaling approximately $0.4 million, net cash used in investing activities of $0.7 million and net cash of $6.7 million received after expenses, purchaser holdings from the private placement and repayment of debt and preferred stock. In the year ended January 31, 2002, we used net cash of $5.8 million in operating activities and $0.8 million in investing activities and obtained net cash from financing activities of $5.9 million, giving rise to a decrease in cash of $0.6 million. While we had positive cash flows for the year ended January 31, 2003, there is no assurance that this will continue.

We are heavily reliant on one customer, and the revenues from this customer are expected to decline significantly.

We are heavily reliant on one customer, Gateway Japan Inc. which generated approximately 81% and 67% of our total revenues in the years ended January 31, 2003 and 2002, respectively. We have a three year contract with Gateway to provide support services, beginning on November 1, 2001, for Gateway’s warranty obligations to its installed base of end users. Revenues from this customer are set to decline significantly over the remaining term of the contract, as the installed base of end users who will be covered by Gateway’s warranties declines over time. This decline could have a material impact on our revenues and operating results, even if we are successful in reducing costs in line with the decrease in the corresponding revenues. In addition, Gateway has the right on each anniversary of the contract, with our agreement, to revise the minimum volumes of transactions specified in the contract, although it cannot revise our fees per transaction performed unless actual transaction volumes exceed 110% of the minimum volumes specified in the contract. If the actual transaction volumes exceed 110%, then we must negotiate in good faith with Gateway to adjust fees per transaction, hours of operation and performance standards for the following year. Since actual transaction volumes did not exceed 110% of the specified minimum volumes, no changes were required following the first anniversary of the contract. Although Gateway cannot terminate the agreement for convenience during its initial term, Gateway could terminate the agreement for, among other things, material breach, failure to meet specified service levels or if we are unable to reasonably agree on revisions to minimum volumes of transactions for subsequent years of the contract.

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We may be required to redeem our Series 4-A Preferred and may not have sufficient funds to pay the redemption price by March 2006

If we do not meet one or more certain conditions by March 31, 2006, then each holder of our Series 4-A Preferred shall have the right, at any time after March 31, 2006 and on or before September 30, 2006, to require us to purchase all but not less than all of the Series 4-A Preferred held by such holder at a price per share equal to the original issue price, which is currently $2,000, plus an amount equal to 50% of that per share price. As a result of the initial sale of Series 4-A Preferred and the exchange offer concluded on January 6, 2003 and certain conversions to common stock since then, there are 17,364 shares of our Series 4-A Preferred outstanding, which if redeemed on or after March 31, 2006 would require us to pay $52.1 million based on the current original issue price of the Series 4-A Preferred. Furthermore, if we complete an additional sale of our Series 4-A Preferred to CDPQ and Quilvest, there would be an additional 1,250 shares of our Series 4-A Preferred outstanding, which would have a redemption value of $3.8 million. In order for the Series 4-A Preferred not to be redeemable, we must satisfy one or more of the following conditions by March 31, 2006:

There is no assurance that we will be able to satisfy any of these conditions on or before March 31, 2006, or that if we are unable to satisfy these conditions, that we will have sufficient funds to pay the redemption amounts.

The market for business process outsourcing services in the Asia-Pacific region, particularly on a regional basis, is new and unproven.

We cannot be certain that there will be a sustainable market for our services. If companies operating in the Asia-Pacific region are not willing to outsource the services that we provide, on a large scale or at all, then we will not be able to generate adequate revenues or achieve necessary economies of scale. This could have a material and adverse effect on our business, financial condition and results of operations.

We have limited experience in our business.

Our current business operations consist solely of operations developed in the second half of fiscal year 2002 or acquired in June of 2001 from NetCel360. Our limited experience in this business could negatively impact our ability to succeed.

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Long sale cycles for our services could cause delays in revenue growth.

Because we target large contracts and large multinational companies as our principal customers, our sales cycles for our services often take many months to complete and may vary from contract to contract. Lengthy sales cycles could cause delays in revenue growth, and result in significant fluctuations in our quarterly operating results. The length of the sales cycle may vary depending on a number of factors over which we may have little or no control, including the internal decision making process of the potential customer and the level of competition that we encounter in our selling activities. Additionally, since the market for outsourcing services in the Asia-Pacific region is relatively new, we believe that we will have to educate many potential customers about the use and benefits of our products and services, which can in turn prolong the sales process.

Complex implementation and integration of our services and products may impede market penetration.

The installation and implementation of some of our services and products, including set-up across multiple countries in the Asia-Pacific region and integration with a client’s systems currently in use, can be a complex, time consuming and expensive process. We anticipate that many of our clients will be large multinational corporations that will require that our products undergo substantial customization to meet their needs. These clients will also likely require that our products be integrated with existing internal legacy systems. We estimate that the installation and integration process may take three to six months, or longer in some cases, depending on the size of the client, the number of countries in which it operates, complexity of a client’s operations and the configurations of its current information technology systems. The time and expense of installation and implementation may deter potential clients from purchasing our services.

Our revenues and operating results are difficult to predict and may be subject to significant fluctuations.

We receive revenues from our outsourcing services in large part from recurring transaction-based fees. The use of each outsourcing service and the number of transactions we actually perform will vary in volume, scope and duration. In addition, some of our client contracts can be terminated by our clients on relatively short notice without cause. As a result, it is possible that expected recurring revenues may be terminated more quickly than anticipated, making them more difficult to predict.

We believe that quarterly revenues, expenses and operating results may vary significantly in the future, that period-to-period comparisons of results of operations may not necessarily be meaningful and that, as a result, these comparisons should not be relied upon as indications of future performance. Due to these and other factors, it is possible that our operating results will be below market analysts’ expectations in some future quarters, which would cause the market price of our stock to decline.

Risks Related to Economic and Infrastructural Disruptions.

As a provider of business process outsourcing services, our business is dependent upon the underlying businesses of our clients. Events such as the military action in Iraq or terrorist attacks similar to those conducted in the United States on September 11, 2001 and in Bali, Indonesia on October 12, 2002 could significantly slow economic growth in the Asia-Pacific region and adversely affect the businesses of our clients, thereby reducing their need or desire for our services. A significant disruption of telecommunications, transportation, mail and other infrastructure could make it difficult and more expensive for us to service our customers in a timely fashion or at all, and for our vendors and service providers to render goods and services to us. As a provider of services that focuses on providing regional solutions, we are particularly vulnerable to disruptions that inhibit travel, communication and commerce between countries. Such a disruption might also result in delays in receiving payments from clients. Volatility and uncertainty in the world’s stock markets brought about by terrorist and other disruptive events could also impair our ability to raise capital.

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We are dependent on a number of vendors and service providers.

We are dependent on a small number of vendors and service providers in delivering our services. In particular, our warranty support services for Gateway rely on arrangements with independent field service providers, parts manufacturers, warehouse providers and shipping companies. Because we currently purchase replacement parts for Gateway products in relatively small quantities, our purchasing power is minimized, which may result in higher parts prices and slower delivery times from the parts manufacturers. Although we believe that we could find alternative vendors and service providers, the transition to alternative vendors and service providers would take a significant amount of time and resources which could materially affect the delivery of our warranty support services and put us in material breach of our agreement with Gateway. In addition, the costs of purchasing parts and services from alternative vendors and service providers could be significantly higher.

We face risks associated with acquisitions, investments, strategic partnerships or other ventures.

As part of our overall business strategy, we may pursue strategic acquisitions or investments as appropriate opportunities arise. These acquisitions or investments would be in businesses, products or technologies that would be expected to provide, supplement or complement our services, and/or provide additional industry expertise, a broader client base or an expanded geographic presence. We may not be successful in identifying suitable acquisition, investment or strategic partnership candidates. Even if we do identify suitable candidates, we may not complete those transactions on commercially acceptable terms or on a timely basis, or at all. We may incur indebtedness or issue equity securities to pay for any acquisition or investment, which could have a dilutive effect on existing shareholders. Any acquisitions and investments involve other risks, such as:

If any of these risks are realized, our business, financial condition and results of operations could be materially adversely affected.

We may not be able to compete effectively against our competitors.

We operate in a highly competitive environment. We believe that we compete primarily with the in-house operations of our current and potential clients and our greatest competitive risk is that prospective clients will choose not to outsource their technical, administrative and sales functions and instead elect to continue performing these functions internally, including consolidating their operations in one or more regional shared service centers. In addition, increasing numbers of companies are entering the business process outsourcing industry in the Asia-Pacific region. This industry is relatively new in the region and, as it develops, our competitors may better position themselves to compete in our lines of business and markets. Although, we are not aware of any other company that provides a similar, comprehensive range of business process outsourcing services to our targeted clients across multiple countries in the Asia-Pacific region, we do compete with companies that fall into two basic categories:

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These competitors may have greater resources or more advanced technology than we do. Other competitors may emerge in the future with significantly greater financial, technical and marketing resources than we have. These competitors may be in a better position than us to develop current and future services, expand market share and offer services and products that provide significant performance, price, creative or other advantages over those offered by us.

The barriers to enter our business are low.

There are relatively low barriers to entry into our line of business. We do not own any technologies that preclude or inhibit competitors from entering our markets. Our competitors may independently develop and patent or copyright proprietary technologies that are superior or substantially similar to our technologies. The costs to develop and provide outsourcing services can be relatively low.

We depend on our key senior management and executive officers to execute our business strategy and could be harmed by the loss of their services.

We believe that successful management and the ability to execute our services will be critical in the success of our business. Therefore, our success depends in large part upon the continued efforts, service and performance of our senior management team and executive officers, and in particular of the following key management executives:

We depend on their services because each one of these executives has experience and in-depth knowledge regarding the development, needs, special opportunities, and challenges of our business, and the environment and business activities in our targeted markets. We have employment agreements with these key executives as well as with all of our other officers and employees. The loss of the services of any of these executive officers or any of our key management, sales or technical personnel could have a material adverse effect on our business, financial condition and results of operations.

We have incurred debt to finance our operations.

We have incurred debt to finance our operations. We received a $3.0 million advance from Gateway in November 2001 in connection with our provision of support services to Gateway, which is being used by Gateway to offset outstanding accounts receivable from Gateway at a monthly rate through October 2004. The balance of this advance is $1.9 million as of March 31, 2003. There is no assurance that we will have sufficient funds to completely repay this advance.

Our major shareholders are party to a stockholders agreement giving them a significant degree of control over us.

In connection with and as a precondition to the private placement and exchange, we entered into a Stockholders Agreement dated as of October 25, 2002 with Phillip Kelly, Dennis Smith, John Cantillon, CDPQ,

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Quilvest, BAPEF Investments XII Ltd. (“BAPEF”), Mercantile Capital Partners I, L.P. (“MCP”) and Asia Internet Investment Group I, LLC (“AIIG”). As of the date of this document, these parties in aggregate hold common stock and Series 4-A Preferred on a fully converted basis representing approximately 86% of our issued and outstanding common stock, on a fully diluted basis.

Under the terms of the Stockholders Agreement, CDPQ, BAPEF and MCP each have a right to nominate a candidate to our Board of Directors, and we are obligated to nominate Phillip Kelly and Dennis Smith to our Board. Each of the parties to the Stockholders Agreement is obligated to use its reasonable efforts to cause these nominees to be elected or appointed, including, without limitation, voting all of their shares in favor of their election. A quorum of the board must include at least two directors that were nominated by CDPQ, BAPEF or MCP. In addition, CDPQ is entitled to nominate a member for each committee of our Board, so long as such membership would not contravene applicable securities laws, and CDPQ, BAPEF and MCP are each entitled to nominate a member of the compensation committee of our Board, so long as such membership would not contravene applicable securities laws.

Under the Stockholders Agreement, these shareholders also have veto rights over certain corporate actions. For example, without the approval of CDPQ and at least a majority in interest of all the other shareholders that are party to the Stockholders Agreement, we may not:

Furthermore, without obtaining the approval of at least a majority vote of our Board of Directors, which must include the affirmative vote of the director nominated by CDPQ, we may not:

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Our failure to maintain our rights to use third party intellectual property could adversely affect business.

Portions of our business are substantially dependent upon technology that we license from third parties. In particular, we rely upon third-party technologies and software for our outsourcing services, such as payroll services, customer relationship management and supply chain management. Some of these licenses require us to make recurring payments based on numbers of users or transactions. Other licenses are perpetual licenses absent material breach on our part. We also expect to need new licenses in the future as our business grows, the existing products we license become obsolete, and as technology evolves. We cannot be sure that we will be able to obtain necessary licenses on commercially reasonable terms, or at all, which could result in a material adverse effect on our business, financial condition and results of operations.

Third parties may claim that our technology or services, including those which we have licensed from a third-party supplier, infringe their proprietary rights. Although in most cases we are indemnified by our licensor in the event of a claim of intellectual property infringement by a third-party, any infringement claims, even if without merit, can be time-consuming and expensive to defend. They may divert our management’s attention and resources and could cause service implementation delays. In the event of a successful claim of infringement and the failure or inability of either we or our licensor to develop non-infringing technology or license the infringed or similar technology on a timely or commercially favorable basis, our business, financial condition and results of operations could be materially adversely affected.

System failures and capacity constraints could result in a reduction of demand for our services.

Our ability to provide acceptable levels of customer service largely depends on the efficient and uninterrupted operation of our hardware, software and network infrastructure. Inadequacies in the performance and reliability of our information systems, or in the external power or communications infrastructure, could result in interruptions in the availability of some or all of our services, lower the volume of transactions or increase response times for effecting a transaction. As the majority of our operations are located in regions of Asia-Pacific where the infrastructure may not be as extensive or reliable as in the United States, we are particularly vulnerable to such disruptions. This could lead to client dissatisfaction, loss of clients and damage to our reputation, which could materially adversely affect our business, financial condition and results of operations.

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Although we have not experienced these problems in the past to a material extent, our systems and operations may be vulnerable to damage or interruption from:

Breaches of our security systems could have a materially adverse impact on our business and operations.

A significant barrier to electronic commerce and communications is the secure transmission of confidential information over public networks. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments could result in compromises or breaches of our security systems and client data stored in our information systems. If any well-publicized compromises of security were to occur, it could have the effect of substantially reducing the willingness of clients to entrust their data to a third party outsourced service provider. Anyone who circumvents our security measures could misappropriate our or our clients’ exclusive information or cause interruptions in services or operations. The Internet is a public network, and data is sent over this network from many sources. In the past, computer viruses, software programs that disable or impair computers, have been distributed and have rapidly spread over the Internet. Computer viruses could theoretically be introduced into our systems, or those of our clients or vendors, which could disrupt our products or services, or make our systems inaccessible to clients or vendors. We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by breaches. To the extent that our activities may involve the storage and transmission of exclusive information, such as personal data and credit card numbers, security breaches could expose us to a risk of loss or litigation and possible liability. Our security measures may be inadequate to prevent security breaches, and our business could be seriously impacted if they are not prevented.

We have an incomplete disaster recovery plan.

A significant portion of our information systems is located in our shared services center in Kuala Lumpur, Malaysia. We maintain a small back-up site, but it currently would not support our entire operations if our primary facilities became unusable, and it could take a significant amount of time to get it fully operational. We are currently assessing a more extensive disaster recovery plan. Until the plan is completed, there are risks of localized telecommunications, Internet and systems failure.

Volatility in social, political and economic conditions in the Asia-Pacific region may adversely affect our business.

We derive and expect to continue to derive substantially all of our revenues from services conducted in or relating to the Asia-Pacific region. Volatility in social, political and economic conditions in the region may interrupt, limit or otherwise affect our operations and services by affecting our physical operations, creating uncertainty regarding our operating climate and adversely affecting our ability to provide services.

A downturn in general economic conditions in the Asia-Pacific region could materially adversely affect our business, financial condition and results of operations. Beginning in mid-1997, many countries in the region experienced significant economic problems. Following varying degrees of recovery in the region in 1999 and 2000, the economies in many of those countries have recently experienced declining or negative growth rates. We cannot assure you that the current economic conditions in any of these countries will improve or not deteriorate further.

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We may become subject to burdensome government regulations and legal uncertainties and to claims involving foreign laws and regulations.

We currently have employees, facilities and business operations established in Australia, Hong Kong, Japan, Malaysia, Singapore and the United States. We also anticipate having employees, facilities and operations in other countries and territories in the Asia-Pacific region and offering services in numerous countries in the region regardless of whether we have a physical presence in such countries. As a result, we are subject to the laws and the court systems of many jurisdictions. We may become subject to claims from private parties or foreign government agencies based in foreign jurisdictions for violations of their laws. International litigation is often expensive, time consuming and distracting. These claims could be particularly disruptive to our business.

In addition, laws in these jurisdictions may be changed or new laws may be enacted in the future. Uncertainty and new laws and regulations in these jurisdictions could prevent or limit our ability to operate in certain countries, increase our costs of doing business and prevent us from providing our e-business services. Any restrictions could have a material adverse effect on our business, financial condition and results of operations.

Furthermore, there are risks inherent in conducting business in multiple jurisdictions and internationally. These include:

Currency fluctuations could decrease our revenue or increase costs relative to our revenue.

Historically, most of our revenue has been earned in U.S. dollars and significant portions of our expenses and liabilities have been denominated in local currencies, primarily Japanese Yen, Malaysian Ringgit, Australian Dollars, Hong Kong Dollars and Singapore Dollars. As a result, we will be subject to the effects of exchange rate fluctuations with respect to any of these currencies. We do not currently engage in currency hedging activities. Some of the countries or territories in which we currently operate or may operate in the future impose exchange controls. As a result, we may not be able to freely convert the relevant local currencies in the countries and territories in the Asia-Pacific region into U.S. dollars or freely convert U.S. dollars into the relevant local currencies. Any substantial currency fluctuation could adversely affect our business, financial condition and results of operations.

The market for our common stock may be illiquid.

The average daily trading volume of our registered common stock on the OTC Bulletin Board is currently less than 2,300 shares, and we have had some days with no trading. There can be no assurance that trading volumes will increase to a consistently higher level or that holders of the shares will be able to sell their shares in a timely manner or at all.

Our stock is not listed on a major stock market

Our common stock was delisted from the Nasdaq National Market System on December 21, 2001 following Nasdaq’s determination that our acquisition of substantially all of the assets of NetCel360 constituted a reverse merger under Nasdaq’s Marketplace Rules. In order to regain our Nasdaq listing, we will be required to submit a new listing application and meet all initial Nasdaq national market listing criteria, subject to Nasdaq’s approval. We do not currently meet all of these listing requirements. Our common stock currently trades only on Nasdaq’s

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OTC Bulletin Board. While the listing of our stock does not have a direct effect on our operations, it has an effect on the perception of our company among potential investors, may adversely affect the liquidity of our shares and can have an effect on our ability to raise additional funds.

Substantial costs of any securities litigation could divert our limited resources.

We could become a target of securities litigation based upon the volatility of our stock in the marketplace. Litigation of this type could result in substantial costs and divert management’s attention and resources. Over the past three years, our stock has declined steeply from as high as $1,700.00 per share to as low as $0.50 per share (in each case as adjusted to reflect our 20-to-1 reverse stock split which was effected on November 20, 2002), and as of March 31, 2003 the closing price of our common stock was $0.53 per share. Public companies suffering this much stock price volatility are often sued by their shareholders.

Outstanding convertible preferred stock, warrants and options could result in potential dilution and an adverse impact on additional financing.

As of March 31, 2003, if all of our outstanding warrants and options were converted into common stock, and if all currently outstanding convertible preferred stock were converted in accordance with the anti-dilution features of those securities, we estimate that over 21.6 million shares of common stock would be outstanding. In addition, our stock option/stock issuance plan permits us to issue a number of shares of common stock equal to 20% of the total shares of common stock outstanding at the time the calculation is made (including, on an as-converted basis, all convertible preferred stock, warrants, options and other convertible securities that are exercisable).

To the extent that such convertible preferred stock, warrants and options are exercised, substantial dilution of the interests of our shareholders could result and the market price of our common stock could be adversely affected. For the life of the convertible preferred stock, warrants and options, the holders will have the opportunity to profit from a rise in the price of the common stock. The existence of the convertible preferred stock, warrants and options is likely to affect materially and adversely the terms on which we can obtain additional financing and the holders of the convertible preferred stock, warrants and options can be expected to exercise them at a time when we would otherwise, in all likelihood, be able to obtain additional capital by an offering of our unissued capital stock on terms more favorable to us than those provided by the convertible preferred stock, warrants and options.

Item 2.    PROPERTIES

Our principal sales office is located in 1,735 square feet of space in San Diego, California and is leased through November 30, 2004. Our principal shared customer service centers are located in Kuala Lumpur, Malaysia and Osaka, Japan. The Malaysia facility occupies 39,015 square feet of office space and the lease expired on March 9, 2003. We have an agreement in principle with the landlord to renew the lease for 28,814 square feet to March 9, 2004, although until a definitive lease is entered into we will be on a month-to-month lease. The Japan facility occupies 8,680 square feet of office space and the lease expires on January 31, 2005. We also have offices in Hong Kong, occupying 3,934 square feet with the lease expiring on August 31, 2005 and in Singapore, which is on a six-month renewable lease term. During the year our leases in Los Angeles and Ventura, California and Bothell, Washington expired on March 6, 2002, March 31, 2002 and October 31, 2002, respectively and were not renewed.

Item 3.    LEGAL PROCEEDINGS

In October 2001, two lawsuits were filed against Vsource by holders of Series 2-A convertible preferred stock before the United States District Court for the Northern District of Illinois entitled Crestview Capital Fund,

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LLP v. Vsource, Inc., Case No. 01 C 7833, and Abrahams v. Vsource, Inc., Case No. 01 C 7831. On January 3, 2002, our motion to transfer these cases to the Central District of California was granted. Both lawsuits allege that we failed to register the underlying common stock under the Securities Act of 1933, an obligation allegedly undertaken in connection with the original sale of those securities. Plaintiffs seek to recover at least $850,000 and $200,000, plus interest, respectively, plus attorney’s fees and costs. We are responding to discovery motions at this stage of the proceedings and it is difficult to determine the outcome of this litigation or the range of a potential loss with any degree of certainty; however, we deny any and all liability and intend to vigorously defend against these charges.

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

Our annual meeting of stockholders was held on August 16, 2002 in San Diego, California. The results of this meeting were reported in Item 4 to our Form 10-Q for the quarterly period ended July 31, 2002, which report is incorporated herein by reference.

In our proxy statement sent to our stockholders on July 16, 2002, we stated that we intended to hold our 2003 annual meeting of stockholders in June 2003 and to mail proxy statements relating to the 2003 annual meeting in May 2003. We presently intend to keep to this schedule. As noted in our last proxy statement, the deadline for receipt of stockholder proposals for the 2003 annual meeting was January 28, 2003, and this date passed without receipt of any proposals. A stockholder, however, may present a proposal at the 2003 annual meeting if it is submitted to the Company’s Secretary no later than April 25, 2003. If timely submitted, the stockholder may present the proposal at the 2003 meeting, but we are not obligated to present the matter in our proxy materials.

PART II

Item 5.    MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

MARKET INFORMATION

Our common stock was quoted on the Nasdaq National Market until December 21, 2001, and is now quoted on the OTC Bulletin Board under the symbol “VSCE”. The following table presents, for the periods indicated, the high and low bid prices per share of our common stock. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions. All prices have been adjusted to reflect our 20-to-1 reverse stock split which was effected on November 20, 2002.

SHAREHOLDERS

As of March 31, 2003, there were 907 stockholders of record of our common stock, 34 holders of our Series 1-A convertible preferred stock, referred to herein as Series 1-A Preferred, 11 holders of our Series 2-A

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convertible preferred stock, referred to herein as Series 2-A Preferred, 0 holders of our Series 3-A convertible preferred stock and 13 holders of our Series 4-A Preferred.

DIVIDENDS

We have never declared or paid cash dividends on our common stock or preferred stock. Holders of our Series 1-A Preferred are entitled to noncumulative dividends, if declared by the Board of Directors, of $0.20 per share annually. Holders of our Series 2-A Preferred are entitled to noncumulative dividends, if declared by the Board of Directors, in an amount equal to 8% of the price originally paid to Vsource for each share of Series 2-A Preferred ($0.51 per share as of March 31, 2003 based on the original purchase price of $6.41 per share, as may be adjusted for stock splits, stock dividends, combinations and the like). Holders of our Series 3-A Preferred are entitled to cumulative dividends, if declared by the Board of Directors, in an amount equal to 10% of the price originally paid to Vsource for each share of Series 3-A Preferred ($6.00 per share as of March 31, 2003 based on the original purchase price of $60 per share, as may be adjusted for stock splits, stock dividends, combinations and the like). Holders of the Series 4-A Preferred are entitled to noncumulative dividends, if declared by the Board of Directors, in an amount equal to any dividend, whether in cash or other assets (other than solely in additional shares of common stock) to the same extent as if such holders’ shares of Series 4-A Preferred had been converted into common stock. No dividend may be declared and paid upon shares of our common stock in any fiscal year unless dividends on all such preferred stock have been paid or declared and set aside for payment to holders of our preferred stock for such fiscal year. The Company currently intends to retain all future earnings to finance future growth and, therefore, does not anticipate declaring or paying any cash dividends in the foreseeable future.

EQUITY COMPENSATION PLAN INFORMATION

Incorporated by reference from the information under the caption “Executive Officer Compensation—Equity Compensation Plan Information” in our Proxy Statement for our 2003 annual meeting, which will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year pursuant to Regulation 14A.

RECENT SALE OF UNREGISTERED SECURITIES

The following are all securities sold by the Company or issued as warrants within the year ended January 31, 2003 which were not registered under the Securities Act:

On February 18, 2002, we issued Series B-1 Notes in the principal amount of $50,000 and warrants (the “Series B-1 Warrants”) to purchase 12,500 shares of common stock to purchasers under an exchangeable note purchase agreement. The following persons were the purchasers of the Series B-1 Notes: James Hildebrandt and Elias Farhat.

On October 25, 2002, we completed a private placement, pursuant to which we issued 3,750 shares of Series 4-A Preferred and warrants to purchase 1,250,000 shares of common stock to CDPQ for a total purchase price of $7.5 million. These warrants have an initial exercise price of US$0.01 per share. These warrants are only exercisable between April 1, 2005 and March 30, 2006 but only if neither of the following has occurred (i) a Liquidity Date (as such term is defined in the warrants) has occurred before January 31, 2005, or (ii) we have achieved specific consolidated net income thresholds. The holders of these warrants will not be entitled to any voting rights or any other rights as a stockholder until they are duly exercised for shares of common stock.

In connection with the private placement, and as required by CDPQ as a precondition to its purchase, we caused holders of certain preferred securities (including notes, in the principal amount of approximately $7.4 million that were scheduled to mature on June 30, 2003, exchangeable into preferred securities) and warrants to participate in the exchange, whereby their preferred securities and warrants were exchanged for an aggregate of 13,223 shares of Series 4-A Preferred.

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The following table sets forth the identity of the holder and number of shares of Series 4-A Preferred sold or issued to such holder in connection with the private placement and exchange consummated on October 25, 2002:

A more comprehensive description of the private placement and exchange may be found in our Current Report on Form 8-K, which was filed with the SEC on October 28, 2002, which is incorporated herein by reference.

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Pursuant to the terms of the private placement and exchange, on November 21, 2002 we offered all of the remaining holders of our preferred securities (including notes, in the principal amount of $170,790 that are scheduled to mature on June 30, 2003, exchangeable into preferred securities) and Series B and Series B-1 Warrants the right to exchange such preferred securities and warrants for Series 4-A Preferred at the same exchange ratios offered to the holders participating in the exchange that was completed on October 25, 2002, and in the case of holders of our Series 1-A Preferred, the right to exchange such preferred stock for cash.

The offer expired on January 6, 2003, and an aggregate of 469 new shares of Series 4-A Preferred were issued in the exchange as follows:

Exemption from the registration requirements of the Securities Act for the sales of the securities described above was claimed under (i) Section 4(2) of the Securities Act, among others, on the basis that such transactions did not involve any public offering and the purchasers were sophisticated with access to the kind of information registration would provide, or (ii) Regulation S under the Securities Act, on the basis that such transactions were offshore transactions made to persons that are not U.S. persons and not for the account or benefit of U.S. persons, and otherwise in accordance with the terms of Regulation S. No underwriting or broker’s commissions were paid in connection with the foregoing transactions.

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Item 6.    SELECTED CONSOLIDATED FINANCIAL DATA

Five-Year Summary

Basic and diluted net loss per share available to common shareholders has been adjusted to reflect retroactively the effect of the 20-to-1 reverse stock split on November 20, 2002.

Item 7.    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 our financial statements and the related notes thereto appearing elsewhere in this Form 10-K.

FORWARD LOOKING STATEMENTS

The following Management’s Discussion and Analysis of Financial Conditions and Results of Operations, as well elsewhere in this report, 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, the risk that our recent private placement described below will not improve our ability to attract and execute major new outsourcing contracts or accelerate our growth, reliance on one client and the expectation that revenues from this client will decline significantly, a potential requirement to redeem our Series 4-A Preferred if we fail to meet certain conditions by March 31, 2006, our limited experience in the business process outsourcing business, the new and unproven market for business process outsourcing services in the Asia-Pacific region, long cycles for sales of our solutions, complexities involved in implementing and integrating our services, fluctuations in revenues and operating results, economic and infrastructure disruptions, dependence on a small number of vendors and service providers, management of acquisitions, inability to repay the debt that we have incurred, litigation, competition and other risks discussed in this Form 10-K under the heading “Risk Factors” and the risks discussed in our other Securities and Exchange Commission filings. Readers should carefully review the risk factors described in this document as well as in our other documents that we file from time to time with the Securities and Exchange Commission, including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

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OVERVIEW

OUR FISCAL YEAR ENDS ON JANUARY 31 OF THE FOLLOWING CALENDAR YEAR. UNLESS OTHERWISE INDICATED, REFERENCES TO “2001”, “2002” AND “2003” RELATE TO THE FISCAL YEARS ENDED JANUARY 31, 2001, 2002 AND 2003, RESPECTIVELY, RATHER THAN CALENDAR YEARS.

Our revenues in 2003 increased to $26.5 million from $12.7 million in 2002, representing an increase of 109%. Our primary source of revenues is fees earned from delivering business process outsourcing solutions such as warranty solutions, human resource solutions and Vsource Foundation Solutions. The main source of our revenue (approximately 81% in 2003) is the provision of warranty solutions to Gateway under a three-year support services agreement (the “Support Services Agreement”) to support Gateway’s warranty obligations with respect to its installed base of end users in the Asia-Pacific region. We also derive revenues from the sales of products through our sales solutions.

Our operating loss decreased to $2.8 million in 2003 from $16.7 million in 2002, primarily as the result of the doubling of our revenue to $26.5 million while maintaining operating costs at approximately the same level as 2002. The cost reduction was achieved through the elimination of research and development expenses to $0 in 2003 from $2.3 million in 2002, the reduction in impairment of long-lived assets to $0 in 2003 from $4.1 million in 2002, and a decrease in non-cash stock-based compensation, from $3.1 million in 2002 to $1.0 million in 2003. The decline in research and development expenses reflects the change in our business following the acquisition of NetCel360 from a developer of software products to a business process outsourcing service provider that relies primarily on technology licensed from third-parties. These decreases were offset in part by a 51% increase in our cost of revenues, from $8.8 million in 2002 to $13.2 million in 2003, and a 39% increase in our selling, general and administrative expenses, from $11.2 million in 2002 to $15.6 million in 2003. These increases in costs reflect the change in our business from a developer of software products to a business process outsourcing service provider and the increase in revenues arising from this change, although in each case the rate of increase was less than the rate of increase in our revenues. During 2003, we received $0.5 million from an insurance claim for a burglary in our warehouse in Malaysia. This further reduced our operating loss in 2003.

FUNDING

Private Placement

On October 25, 2002, we completed a private placement of preferred stock and warrants for $7.5 million in cash and caused certain holders of our other preferred securities and warrants (including notes, in the principal amount of approximately $7.4 million that were scheduled to mature on June 30, 2003, exchangeable into preferred securities), to exchange their preferred securities and warrants for a new class of preferred stock. In connection with and as a precondition to the private placement, we were obligated to offer all of the eligible remaining holders of our preferred securities and warrants an opportunity to exchange their preferred securities and warrants for a new class of Series 4-A convertible and redeemable preferred stock. This exchange offer commenced on November 21, 2002 and concluded on January 6, 2003, with $117,106 in principal amount of exchangeable notes and preferred stock and warrants being exchanged for the new class of Series 4-A convertible and redeemable preferred stock.

In connection with and as required by the private placement and pursuant to stockholder approval which was given at our last annual meeting of stockholders on August 16, 2002, our Board of Directors approved on October 21, 2002 a 20-to-1 reverse stock split of all of our issued and outstanding common stock, par value $0.01 per share. The reverse stock split became effective on November 20, 2002. The reverse stock split did not cause a reduction in the authorized number of shares of common stock available under our certificate of incorporation. All share and per share data in this Form 10-K give retroactive effect to such reverse stock split. $250,000 of the private placement purchase price that was withheld by the purchasers pending the completion of the reverse stock split was paid to us following completion of the reverse stock split.

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Future Funding

We had an accumulated deficit of approximately $79.7 million as of January 31, 2003 that has been funded primarily through issuances of debt and equity securities. We have sustained operating losses since inception. In 2003, we generated net cash of $0.4 million from operating activities, used $0.7 million in investing activities and obtained $6.7 million from financing activities (mainly from the private placement, see above) that resulted in an increase in cash of $6.4 million.

We expect revenues from our main customer Gateway to decline significantly over the remaining term of the Support Services Agreement, as the installed base of end users who will be covered by Gateway’s warranties declines. We believe, however, that we can successfully reduce costs related to the services provided to Gateway in line with the decline in the corresponding revenues over the remaining term of the contract. Management is actively soliciting new business for the Company but negotiation periods of 12 to 18 months are common with the complexity of implementation of our services across multiple Asian countries. As a result of the abovementioned recent financing and exchange of debt for preferred equity, our management believes that we have adequate funding to continue in operation for at least the next 12 months.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

Revenue and costs recognition

Gateway Support Services Agreement

Revenue

Under the Support Services Agreement, there are variable and fixed component to our fee based upon predetermined monthly transaction volumes. If the predetermined monthly transaction volume is exceeded, incremental transactions are charged on a monthly basis at the agreed rates per transaction specified in the Support Services Agreement. Fees are payable by Gateway on a monthly basis with fixed revenues recognized on an accrual basis while variable revenues are recognized when incremental transactions are performed.

Costs

Major costs incurred in relation to the Support Services Agreement are payroll, third-party vendor and facility rental costs, which are recognized as incurred in order to match the related effort in serving the Support Services Agreement. In addition, we incur inventory costs in repairing or replacing components in Gateway’s customers’ computers. We obtained a significant amount of inventory from Gateway at nominal value in order to support our obligations under the Support Services Agreement but such inventory was insufficient to meet all our repair and replacement needs and so we also purchase additional inventory as required. We recognize such additional inventory costs on a LIFO basis in each accounting period.

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Impairment of long-lived assets

We assess the impairment of long-lived assets, identifiable intangibles and related goodwill and enterprise level goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include the following:

When we determine that the carrying value of an asset may not be recoverable based upon the existence of one or more of the above or other indicators, we assess recoverability of its carrying value by comparison to the future undiscounted cash flows it is expected to generate. If an asset is impaired, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to commensurate with the risk inherent in our current business model.

We have significant amounts of computer equipment and software assets, which are more prone to impairment due to technical obsolescence or business changes. However, our management is of the opinion that there are no indicators that these assets are impaired.

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RESULTS OF OPERATIONS (All amounts in thousands)

Years Ended January 31, 2003 and 2002

Revenue

Revenue in 2003 was derived primarily from two sources: (i) services revenue, derived primarily from our warranty solutions for Gateway, human resource solutions and Vsource Foundation Solutions, and (ii) product

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revenue, derived from our sales solutions. Revenues are recognized in accordance with the policies set forth in “Critical Accounting Policies and Estimates” above.

In 2003, total revenues increased to $26.5 million from $12.7 million in 2002, an increase of $13.8 million, or 109%, primarily due to our provision of warranty solutions to support Gateway’s warranty obligations with respect to its installed base of end users in the Asia-Pacific region, which commenced on November 1, 2001. Services revenue increased 156% in 2003 to $25.5 million compared to $9.9 million in 2002, reflecting our first full year of providing warranty solutions to Gateway and the growth of our human resource solutions, including the first full year of delivery of such solutions to Agilent. The increase in services revenue was partially off-set by a decline in products revenue, which declined 61% to $1.1 million in 2003 compared to $2.8 million in 2002 due to the termination in November 2001 of our arrangement with Gateway Manufacturing to resell personal computers (the “Reseller Agreement”). In 2003, product revenue was derived principally from the sale of computer parts to end customers, as compared to 2002 when product revenue was comprised of the sale of personal computers.

In 2003, revenues from warranty solutions represented 81% of our total revenues, compared to 67% in 2002. Warranty solutions revenues increased by 153% to $21.4 million in 2003 from $8.5 million in 2002, reflecting our first full year of delivering warranty solutions to Gateway. We did not start delivering these solutions until November 2001.

Revenues from human resource solutions constituted 3% of our total revenues in 2003, compared to 1% in 2002. Human resource revenues increased by 540% to $0.8 million in 2003 from $0.1 million in 2002, reflecting our first full year of delivering human resource solutions to Agilent, which we began delivering in November 2001, and the acquisition of new clients.

In 2003, revenues from Vsource Foundation Solutions represented 6% of our total revenues, compared to 10% in 2002. Vsource Foundation Solutions revenues increased by 25% to $1.7 million in 2003 from $1.3 million in 2002, reflecting the continued delivery of customer relationship management services to clients such as Network Appliance and the acquisition of new clients such as ABN AMRO.

Revenues from sales solutions constituted 10% of our total revenues in 2003, compared to 22% in 2002. Sales solutions revenues, which in 2003 were comprised of sales of products, such as computer parts and Palm personal digital assistants, and the sales of services, such as extended warranties and one-time fixes, decreased by 4% to $2.7 million in 2003 from $2.8 million in 2002. In 2002, sales solution revenues were principally comprised of sales of Gateway personal computers.

Cost of Revenue

Cost of revenue consisted primarily of costs related to employees, sub-contractors, replacement parts, depreciation, freight, duties, telecommunications and other expenses that were associated with providing clients with goods and services. In accordance with our deferred revenue treatment on set-up revenues generated from implementation of our solutions, we also defer the costs relating to such set-ups and amortize those costs for a period identical to the period for which revenue is deferred. Therefore, there can be a timing difference from when the costs are actually incurred, to when they are recognized.

Cost of revenue increased to $13.2 million by 51% for 2003 from $8.8 million in 2002, reflecting the growth in our business and revenues. The rate of increase in our cost of revenue was significantly exceeded by the rate of increase in our revenues, which increased by 109% from 2002 to 2003. In addition, 2003 represented our first full year of providing business process outsourcing services, because in 2002, we were only active in the business process outsourcing business for seven months following our acquisition of NetCel360.

Total cost of revenues in 2003 represented 50% of total revenues, compared to 69% in 2002, as we benefited from improved economies of scale resulting from the growth of our business. Cost of services revenues

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in 2003 represented 47% of our total revenues and 49% of service revenues, representing declines from 48% and 62%, respectively, in 2002, even though services revenues as a percentage of total revenues increased significantly to 96% in 2003 from 78% in 2002, further evidencing the benefits of economies of scale. Cost of products revenues in 2003 represented 3% of our total revenues, compared to 21% in 2002, which was consistent with the decline in products revenues as a percentage of total revenue to 4% in 2003 from 22% during 2002.

In 2003, cost of revenues from warranty solutions represented 43% of same-segment revenues and 35% of our total revenues, compared to 42% and 28%, respectively, in 2002. The slight increases in cost as a percentage of same-segment revenue and total revenue reflected the significant growth in our infrastructure and operations required to support Gateway’s warranty obligations.

Cost of revenues from human resource solutions constituted 127% of same segment revenues and 4% of total revenues in 2003, compared to 169% and 2%, respectively, in 2002. The fact that cost of revenues exceeded same-segment revenues was the result of our continued build-out of infrastructure and operations to support this line of business. The decrease in cost as a percentage of same-segment revenue, however, demonstrated that we were able to benefit from economies of scale resulting from providing our solutions to a larger base of clients, while the increase in cost as a percentage of total revenue reflected the growth in human resource revenues as a percentage of total revenues.

In 2003, cost of revenues from Vsource Foundation Solutions represented 65% of same-segment revenues and 4% of our total revenues, compared to 179% and 19%, respectively, in 2002. The decrease in cost as a percentage of same segment revenues was the result of the economies of scale realized from continuation of several client contracts and acquisition of several new clients. The decrease in cost as a percentage of total revenues, which exceeded the decrease in same-segment revenues as a percentage of total revenues, reflected the improved economies of scale arising from providing our solutions to a larger base of clients.

Cost of revenues from sales solutions constituted 72% of same-segment revenues and 7% of total revenues in 2003, compared to 94% and 21%, respectively, in 2002. The decrease in cost as a percentage of same-segment revenues and total revenues was the result of the reduced infrastructure required to sell the types of products and services sold by us in 2003 compared to the personal computers resold by us in 2002.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consisted primarily of employee-related costs that are not directly related to providing goods or services, such as salaries of administrative and support personnel, benefits and commissions, rental, insurance premiums and costs relating to certain other outside services.

The increase in selling, general and administrative expenses to $15.6 million for 2003 from $11.2 million in 2002 was due primarily to a significant increase in headcount to support the significant growth of our business and revenues. As a percentage of revenues, however, selling, general and administrative expenses declined from 88% of total revenues in 2002 to 59% in 2003, reflecting the improved economies of scale realized from the growth of our business and revenues.

Research and Development Expenses

Research and development expenses declined to $0 in 2003 from $2.3 million in 2002, reflecting the change in our business following the acquisition of NetCel360, from a developer of software products to a business process outsourcing service provider that relies primarily on technology licensed from third-parties. A significant majority of the research and development expenses incurred in 2002 were incurred in the first half of 2002, before we decided to discontinue several software development projects due to the slow rate of customer acceptance, the need for additional functionalities, uncertainty as to whether we would be able to develop a commercially viable product and uncertainty as to whether there would be market acceptance of such product.

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Amortization of Stock-based Compensation

Amortization of stock-based compensation is related to the issuance of stock options to employees with an exercise price below the fair market value of the underlying stock at the date of measurement. The decrease to $1.0 million in 2003 from $3.1 million in 2002, a difference of $2.2 million (69%), was due to less options were granted at below fair market value and the narrower gap between fair market value and exercise price of the options.

Insurance proceeds in respect of loss of inventory

Insurance proceeds of $0.5 million were received in April 2002 in respect of inventory stolen from our warehouse in Malaysia in January 2002. This amount was after deducting costs associated with the purchase of inventory stolen and incidental costs.

Impairment of Long-lived Assets

No impairment of goodwill was incurred in 2003. We incurred an impairment charge on goodwill of $4.1 million pertaining to the acquisition of Online Transaction Technologies, Inc. (“OTT”) in 2002. After our management elected in 2002 to slow down the development of technologies acquired from OTT, we evaluated the long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with these assets. We determined that goodwill did not continue to represent the value originally attributed to these assets. As a result, the assets were reduced to their net recoverable amount of $0.

Operating Loss

As a result of the foregoing, we had an operating loss in 2003 of $2.8 million, which was significantly less than our operating loss of $16.7 million in 2002.

Interest Expense

Interest expense decreased to $0.6 million in 2003 from $0.7 million in 2002. This was primarily due to the early extinguishment of $7.4 million in principal amount of convertible debt instruments in October 2002 and an additional $0.2 million in principal amount of convertible debt instruments in January 2003.

Non-cash Beneficial Conversion Feature Expense

In 2003, we recognized a $1.7 million non-cash expense relating to our Series A convertible notes (the “Series A Notes”), Series B-1 Notes and Series B-1 Warrants issued in conjunction with the Series B-1 Notes, upon issuance. The expense, which arose from a beneficial conversion feature resulting from the fact that such convertible securities could be converted into our common stock at an amount below its market price on the commitment date of the securities, was recognized in accordance with Emerging Issues Task Force (“EITF”) 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios to Certain Convertible Instruments” and EITF 00-27 “Application of EITF Issue 98-5”. The decrease from $2.8 million in 2002 to $1.7 million in 2003 was due to the early extinguishment in October 2002 and January 2003 of these convertible debt instruments, which would otherwise mature on June 30, 2003.

Extraordinary Item—Loss on Extinguishment of Debt

In 2003, we recognized a loss on extinguishment of debt of $6.8 million, which resulted from the exchange of our Series A Notes and Series B-1 Notes on October 25, 2002 and January 15, 2003 for shares of our Series 4-A Preferred. The resulting loss was accounted for as an extraordinary item in accordance with Statement of Financial Accounting Standards No. 4, “Reporting Gains and Losses from Extinguishment of Debt”. However a

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recent accounting pronouncement FASB Statement No. 145, Recession of FASB 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 30, 2003 when adopted will require such losses not be treated as extraordinary. The impact of the adoption of this standard is set out in Note 2 to the financial statements.

Net Loss

As a result of the foregoing, we had a net loss in 2003 of $11.8 million in 2003, which was significantly less than our net loss of $20.4 million in 2002.

Deemed Non-cash Dividend to Preferred Shareholders

In 2003, we had a credit of $6.5 million for deemed non-cash dividend to preferred shareholders, arising primarily from the exchange of Series 2-A Preferred and Series B and Series B-1 Warrants for Series 4-A Preferred. The credit represented the excess of the carrying value of these securities over the fair value of the Series 4-A Preferred issued for the exchange. In 2002, the deemed dividend was $2.1 million, representing the amortization of beneficial conversion feature on the issuance of preferred stock.

Net Loss Available to Common Shareholders

Net loss available to common shareholders is computed from net loss after extraordinary item and adding or deducting deemed non-cash dividend to preferred shareholders. As a result of the $6.5 million in deemed dividend credit in 2003 we had a net loss available to common shareholders of $5.3 million, or $3.06 per basic and diluted share in 2003, compared to $22.5 million, or $20.87 per basic and diluted share, in 2002 after deducting $2.1 million in deemed dividends.

Years Ended January 31, 2002 and 2001

We have not discussed our results of operations below on the basis of segment data because we did not prepare segment reporting in 2001, as prior to the quarter ended July 31, 2001, our principal business was the development and sale of a technology solution and therefore we do not believe that such discussion would be meaningful.

Revenue

Revenue in 2002 was derived primarily from two sources: (i) distribution services revenue, derived primarily from the distribution of Gateway products in Hong Kong and Singapore, and (ii) business process outsourcing revenue, derived primarily from our warranty solutions for Gateway, human resource solutions and Vsource Foundation Solutions.

In 2002, revenues increased to $12.7 million from $0.04 million in 2001, an increase of $12.7 million, primarily due to two new contracts, the Reseller Agreement with Gateway Manufacturing and the Support Services Agreement with Gateway. The Reseller Agreement was in effect from July 1, 2001 to November 1, 2001, when it was terminated as part of Gateway Manufacturing’s termination of its operations in the Asia-Pacific region. We generated total revenues of $2.7 million under the Reseller Agreement.

Effective November 1, 2001, we began to provide warranty solutions under the Support Services Agreement to support Gateway’s warranty obligations with respect to its installed base of customers in the Asia-Pacific region. Revenues of $35,000 in 2001 were derived from the sale of procurement software and our application service provider business. Both of these lines of business were discontinued in 2002.

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Cost of Revenue

Cost of revenue increased to $8.8 million for 2002 from $0 in 2001. The costs of goods for 2002 were derived from the distribution of Gateway Manufacturing products, personnel and rental costs for distribution of Gateway Manufacturing products, personnel costs from providing warranty solutions under the Support Services Agreement and other expenses that were directly related to our business process outsourcing services, inclusive of personnel, technology and outside vendor agreements. In 2001, we were primarily focused on selling procurement software and being an application service provider but we never achieved meaningful sales of the products that were under development. Therefore there was no cost of revenue associated with such products.

Selling, General and Administrative Expenses

The increase in selling, general and administrative expenses to $11.2 million for 2002 from $3.8 million in 2001 was due primarily to the significant increase in headcount arising from our change in business model following the acquisition of substantially all of the assets of NetCel360 and significant growth of our business following such acquisition. Being a business process outsource services provider and supporting significantly higher revenues, we had significantly higher staffing requirements than those typically required for software development. We also incurred higher costs associated with being a public company after losing our small business issuer designation. Furthermore, there were increased costs resulting from our contesting the delisting of our common stock from the Nasdaq National Market. The increase in selling, general and administration expenses amounted to $3.8 million in 2001 was attributable to our growth that year and the acquisition costs related to the acquisition of OTT, which was acquired in 2001.

Research and Development Expenses

Research and development expenses consist primarily of employee-related costs and operating expenses associated with the operation of our research and development facility in Los Angeles. During 2002, we incurred research and development expenses of $2.3 million in connection with the development of our procurement software and the technologies acquired from OTT. A significant majority of these expenses were incurred in the first half of 2002, before we decided to discontinue the development of such procurement software and the technologies we acquired from OTT due to the slow rate of customer acceptance, the need for additional functionalities, uncertainty as to whether we would be able to develop a commercially viable product and uncertainty as to whether there would be market acceptance of such product. As a result of the termination of these lines of business, our research and development expenses were significantly less than in 2001, when they were $6.2 million. As technical feasibility of products under development was unproven, costs could not be capitalized and were expensed as incurred in 2002 and 2001.

Non-cash Stock-based Compensation

Non-cash stock-based compensation is related to the issuance of stock options to employees with an exercise price below the fair market value of the underlying stock at the date of measurement. The decrease to $3.1 million in 2002 from $17.7 million in 2001, a difference of $14.6 million (82%), was due to the cancellation of 99,098 stock options of employees that left the employment of Vsource before their vesting period had fully expired, which was partially offset by the issuance of 985,024 new options at an exercise price below fair market value at the date of grant, which had a corresponding charge of $2.2 million in 2002. The increase to $17.7 million in 2001 was due to the employment of a substantial number of new employees during 2001, most of whom were granted options with exercise prices below the fair market value on the date of measurement.

Impairment of Long-lived Assets

We incurred an impairment charge on goodwill of $4.1 million pertaining to the acquisition of OTT in 2002. No impairment of goodwill was incurred for 2001. After our management elected in 2002 to slow down the

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development of technologies acquired from OTT, we evaluated the long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with these assets. We determined that goodwill did not continue to represent the value originally attributed to these assets. As a result, the assets were reduced to their net realizable value of $0. We took a $2.2 million charge in the first quarter of 2002 in connection with the decision to slow down the development of the technologies acquired from OTT. In the second quarter of 2002, we took another charge of $1.9 million for the remaining balance, as management then decided to completely discontinue the development of the technologies due to uncertainty as to whether we would be able to develop a commercially viable product and uncertainty as to whether there would be market acceptance of such product.

Operating Loss

As a result of the foregoing, we had an operating loss in 2002 of $16.7 million, which was significantly less than our operating loss of $27.7 million in 2001.

Interest Expense

Interest expense increased to $694,000 in 2002 from $12,000 in 2001. This was primarily due to the interest accruing on the convertible debt instruments in the principal amount of $15.4 million issued or assumed during 2002, which carried interest rates ranging between 5% and 10% per annum.

Non-cash Beneficial Conversion Feature Expense

We recognized a $2.8 million non-cash expense relating to our bridge loan, Series A Notes, Series B Notes and Series B Warrants issued in conjunction with the Series B Notes, upon issuance. The expense, which arose from a beneficial conversion feature resulting from the fact that such convertible securities could be converted into our common stock at an amount below its market price on the commitment date of the securities, was recognized in accordance with Emerging Issues Task Force (“EITF”) 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios to Certain Convertible Instruments” and EITF 00-27 “Application of EITF Issue 98-5”.

Extraordinary Item—Loss on Extinguishment of Debt

We recognized a loss on extinguishment of debt of $0.3 million, which resulted from the repayment of our Series B Notes on December 28, 2001. The resulting loss was accounted for as an extraordinary item in accordance with Statement of Financial Accounting Standards No. 4, “Reporting Gains and Losses from Extinguishment of Debt”.

Net Loss

As a result of the foregoing, we had a net loss in 2002 of $20.4 million, a decline of $7.2 million from our net loss of $27.6 million in 2001 (there was no extraordinary item in 2001).

Deemed Non-cash Dividend to Preferred Shareholders

In 2002, we had deemed non-cash dividend to preferred shareholders of $2.1 million, representing the amortization of beneficial conversion feature on the issuance of preferred stock. This amount represented a significant reduction from the deemed dividend of $14.5 million in 2001, arising from amortization of the embedded beneficial conversion feature of the Series 1-A Preferred and Series 2-A Preferred issued in 2001.

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Net Loss Available to Common Shareholders

As a result of the foregoing, in 2002 we had a net loss available to common shareholders of $22.5 million, or $20.87 per basic and diluted share, compared to $42.1 million, or $52.55 per basic and diluted share, in 2001. Before the extraordinary item of $0.3 million for loss on extinguishment of debt, we had a net loss available to common shareholders of $22.2 million, or $20.56 per basic and diluted share, in 2002, compared to a net loss available to common shareholders before extraordinary item of $22.5 million, or $20.56 per basic and diluted share, in 2002. There was no extraordinary item in 2001.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents totaled $11.2 million as of January 31, 2003, as compared to $4.8 million as of January 31, 2002 and $5.4 million as of January 31, 2001. As of January 31, 2003, we had working capital of $9.2 million, long-term liabilities of $0.9 million and shareholders’ equity of $5.4 million. To date, we have financed our operations primarily through preferred stock financings and issuances of debt, and beginning in the fourth quarter of 2002, we generated cash from operating activities. During 2002, we received a $3 million advance from Gateway under the Support Services Agreement, which will be used to offset outstanding accounts receivable from Gateway at a monthly rate from May 2002 through October 2004. The balance of this advance as of January 31, 2003 amounted to $2.1 million.

Net cash provided by operating activities was $0.4 million in 2003, net cash used in operating activities was $5.8 million in 2002 and $9.6 million in 2001. Net cash provided by operating activities in 2003 consisted primarily of $11.8 million net loss and $0.9 million changes in working capital components, offset by non-cash charges of $13.1 million primarily related to depreciation and amortization, stock based compensation, beneficial conversion feature charges and loss on extinguishment of debt. Net cash used in 2002 consisted primarily of $20.4 million net loss, offset by non-cash charges of $14.1 million primarily related to depreciation and amortization, the write-off of goodwill, stock based compensation and beneficial conversation feature charges. Net cash used in operating activities in 2001 consisted primarily of $27.6 million net loss, offset by a non-cash charge of $17.9 million.

Net cash used in investing activities was $0.7 million in 2003, $0.8 million in 2002 and $1.2 million in 2001. Net cash used in investing activities for 2003 was primarily related to the acquisition of property and equipment and the provision of a letter of credit required as a guarantee by one of the customers. In 2002, net cash used in investing activities was primarily related to the acquisition of property and equipment and the acquisition of the assets of NetCel360, net of cash acquired. In 2001, net cash used in investing activities was related to the acquisition of fixed assets and the acquisition of OTT, less cash acquired.

Net cash provided by financing activities was $6.7 million in 2003, $5.9 million in 2002 and $11.0 million in 2001. Net cash provided by financing activities in 2003 came from the sale of Series 4-A Preferred, offset by cost of issuance of $0.6 million, repayment of $53,000 in principal amount of Series B-1 Notes and the redemption of $0.1 million of Series 1-A Preferred. In 2002, net cash provided by financing activities came from the sale of $3.3 million in principal amount of Series A notes for cash, the sale of $4.3 million in principal amount of Series B Notes for cash, and the sale of $2.9 million in principal amount of Series B-1 Notes, offset by repayment of $4.5 million in principal and accrued interest of the Series B Notes. In 2001, net cash provided by financing activities came mainly from the issuance of 1,672,328 shares of Series 2-A Preferred for cash.

As of January 31, 2003, we had 17,442 shares of our Series 4-A Preferred outstanding. If we do not meet one or more certain conditions by March 31, 2006, then each holder of our Series 4-A Preferred shall have the right, at any time after March 31, 2006 and on or before September 30, 2006, to require us to purchase all but not less than all of the Series 4-A Preferred held by such holder at a price per share equal to the original issue price, which is $2,000, plus an amount equal to 50% of that per share price. Based on the number of Series 4-A Preferred outstanding as of January 31, 2003, the redemption sum would amount to $52.3 million.

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As of January 31, 2003, the only significant contractual obligations or commercial commitments outstanding consisted of our future minimum lease commitments totaling $1.5 million, of which $0.7 million will be paid out in 2004, $0.7 million in 2005 and $0.1 million thereafter. (See Note 9 to the Notes to the Consolidated Financial Statements for further details.)

We have no other off-balance sheet arrangement that could significantly reduce our liquidity. Management believes that we have adequate funding for existing operations for at least the next 12 months.

RECENT ACCOUNTING PRONOUNCEMENTS

On April 30 2002, the Financial Accounting Standard Board (“FASB”) issued FASB Statement No. 145 (“SFAS 145”), Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 30, 2002. Among other provisions, SFAS 145 rescinds SFAS No. 4 “Reporting Gains and Losses from Extinguishment of Debt”. Accordingly, gains or losses from extinguishment of debt shall not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the criteria of Accounting Principles Board (“APB”) Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”. Gains or losses from extinguishment of debt that do not meet the criteria of APB No. 30 should be reclassified to income from continuing operations in all prior periods presented. SFAS 145 is effective for fiscal years beginning after May 15, 2002. The impact of the provisions of SFAS 145 when it comes into effect is the loss on extinguishment of debt of $6.8 million for the year ended January 31, 2003 and $0.3 million for the year ended January 31, 2002 will not be classified under extraordinary item. The resulting impact on net loss before extraordinary item and earnings per share, adjusted for the reverse stock split on November 20, 2002 is shown in the following table:

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS No. 148 are effective for our fiscal year 2003. The interim disclosure requirements are effective for the first quarter of our fiscal year 2004. We have decided not to adopt the fair value method of accounting for stock-based compensation.

Effectively prospectively for all arrangements entered into in fiscal periods beginning after June 15, 2003, Emerging Issues Task Force (“EITF”) Issue 00-21, “Revenue Arrangements with Multiple Deliverables”, addresses the accounting, by a vendor, for contractual arrangements in which multiple revenue-generating activities will be performed by the vendor. In some situations, the different revenue-generating activities (deliverables) are sufficiently separable and there exists sufficient evidence of fair values to account separately for the different deliverables (that is, there are separate units of accounting). In other situations, some or all of the different deliverables are interrelated closely or there is not sufficient evidence of fair value to account separately

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for the different deliverables. EITF Issue 00-21 addresses when and, if so, how an arrangement involving multiple deliverables should be divided into separate units of accounting. The Company adopted EITF Issue 00-21 in the year ended January 31, 2003 and it had no significant impact on its financial position and results of operations.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our cash on deposit with high quality financial institutions. While we are exposed with respect to interest rate fluctuations in many countries, our interest income is most sensitive to fluctuations in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on our cash. However, changes in interest income will not have a material impact on our financial results, as we derived only $0.1 million from interest income in 2003.

Foreign Currency Risk

As a business that derives most of its revenues from operations in the Asia-Pacific region, we face exposure to adverse movements in foreign currency exchange rates. This exposure may change over time as business practices evolve and could seriously harm our financial results. Substantially all of our revenues are currently denominated in U.S. dollars. An increase in the value of the U.S. dollar relative to foreign currencies could make our services more expensive and therefore reduce the demand for our services. Reduced demand for our services could seriously harm our financial results. Currently, we do not hedge against any foreign currencies and, as a result, could incur unanticipated gains or losses.

We incur expenses in foreign currencies, principally Malaysian Ringgit and Japanese Yen. Our Japanese Yen and Malaysian Ringgit-denominated expenses represented approximately 22% and 45%, respectively, of our total cash expenses for the year ended January 31, 2003. The Malaysian Ringgit currently has a fixed exchange rate to the U.S. dollar and there is no exchange exposure at present although there is no assurance that such fixed exchange rate will be maintained in the future.

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Item 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Accountants

To The Board of Directors and Shareholders of

Vsource, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholders’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Vsource, Inc. and its subsidiaries at January 31, 2003 and 2002, and the results of their operations and their cash flows for each of the two years in the period ended January 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers

Hong Kong

April 8, 2003

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors

Vsource, Inc.

We have audited the accompanying consolidated statements of operations, shareholders’ equity (deficit) and cash flows of Vsource, Inc. (a Delaware corporation) and subsidiaries for the year ended January 31, 2001. The consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Vsource, Inc. and subsidiaries for the year ended January 31, 2001 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the previously issued January 31, 2001 financial statements included in Form 10-K for such year, the Company had sustained substantial losses from operations since inception, has used, rather than provided, cash from operations and had an accumulated deficit of approximately $52 million. Continued losses were projected for the next fiscal year. And, at that time, the Company had no proven plan for generation of material revenue. These factors, and others, raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue operations was subject to its ability to secure additional capital to meet its obligations and to fund operations. Management’s plans in regard to these matters were also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Grant Thornton LLP

Los Angeles, California

April 13, 2001 (except for Note 11, as to

which the date is September 24, 2001.)

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VSOURCE, INC.

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Table of Contents

VSOURCE, INC.

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these Consolidated Financial Statements