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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, 2004

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) 551-2920

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 common stock of the registrant held by non-affiliates of the registrant on March 31, 2004 was $648,112 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 23, 2004 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, 2004

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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, heavy reliance on a small number of major clients, 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 providing human capital management solutions, the new and unproven market for business process outsourcing services internationally, 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, 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, and human capital management services to small and medium sized businesses in the United States. 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, while in human capital management services, Vsource is the co-employer, taking responsibility for managing the payroll, benefits, employee claims processing and administrative functions. If such functions are not outsourced, then a company would need to perform those functions internally, using its own personnel, infrastructure and resources. We began offering human capital management services in October 2003.

We offer sophisticated business process outsourcing solutions to our clients. Our solutions and our operating systems are designed so that companies can confidently rely on us to operate important technical, administrative and sales functions on their behalf in multiple countries globally or in multiple states within the United States. Our business process outsourcing services help clients in reducing the complexities involved with operating on a regional basis and lowering their costs while improving their service levels.

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 deliver our solutions into most major markets in the Asia-Pacific region, the United States and 21 countries in Europe. We support our clients’ operations from two shared service centers located in Malaysia (Kuala Lumpur and Cyberjaya) and two shared service centers located in Taiwan and Japan, respectively. We also have sales and administrative offices in California, Texas and Hong Kong.

Our largest customer is Gateway Japan Inc. (“Gateway”), an affiliate of Gateway Inc., and our other clients include Network Appliance Inc. and affiliates of ABN AMRO Bank N.V. (“ABN AMRO”), Agilent Technologies Inc. (“Agilent Technologies”) and EMC Corp. (“EMC”).

We have entered into sales and purchase agreements with Symphony House Berhad (“Symphony House”) and other investors to sell them 38.8% of the issued and outstanding share capital of Vsource (Malaysia) Berhad, formerly known as Vsource (Malaysia) Sdn Bhd (“Vsource Malaysia”), our wholly-owned Malaysian subsidiary, for total cash consideration of approximately $9.5 million. As part of the transaction, we transferred all of the shares and share capital of our wholly owned subsidiaries in Japan and Taiwan to Vsource Malaysia, and all intercompany amounts outstanding as of November 30, 2003 between these three companies and Vsource and our other subsidiaries were waived or forgiven. All sales were completed by March 23, 2004. As a result, we now hold 61.2% of Vsource Malaysia, and Symphony House and the other investors hold 30.3% and 8.5% respectively.

References to “we”, “us”, “our”, “Vsource” or the “Company” refers to Vsource, Inc. and its subsidiaries. We maintain our executive offices at 7855 Ivanhoe Avenue, Suite 200, La Jolla, California 92037. Our telephone number is (858) 551-2920 and our website is at www.vsource.com.

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. 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; (iii) attracting, maintaining and managing the human talent required to deliver professional and operating skills reliably and seamlessly across multi-national borders; and (iv) a lack of scale in their operations. For managers of Fortune 500 and Global 500 companies operating internationally on a regional or global basis, these challenges are exacerbated by the complexities of operating in

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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 focused on two market segments. The first 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. Secondly, our human capital management business is focused on delivering services to small and medium sized business in the United States. Acting as co-employers, we provide a range of human resource related solutions including: payroll services, benefits administration and administrative services.

We deliver our business process outsourcing solutions to multiple clients on a regional and inter-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 that, 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 five 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 their 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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Human Capital Management Solutions

Acting as co-employers, we manage the human resource and administration activities for our small and medium sized clients in the United States. our human capital management solutions include the following service elements:

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 United States, Europe or 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. Many companies do not operate regional shared service centers and instead build duplicative facilities in each country in which they operate. As such, their cost of providing functions from 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 currently provide a proven international regional solution. Our solutions give our clients a single point of accountability for the regional delivery of services and uniform service standards across multiple and varied countries regionally and globally.

Shared Service Multi-User Platform.    All of our solutions are delivered from our shared service centers in Malaysia, Taiwan and Japan. The markets in many individual countries in the Asia-Pacific region and Europe 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. Moreover, the costs of providing these essential external and internal services in the larger markets in the Asia-Pacific region and Europe may be high.

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Additionally, such costs may be increased even further as a result of operating duplicative facilities and retaining personnel in each country. Our business process outsourcing solutions utilize our shared service centers in Malaysia, Taiwan and Japan, which are configured to be leveraged across multiple client users. This multi-user platform often 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.

Internet Delivery.     Technology utilizing the Internet has significantly improved the flow of information across borders globally and regionally. 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 internationally 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. Our executive officers maintain a significant ownership stake in our company that, as of January 31, 2004, represented over 24% 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. 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, Taiwan 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 four shared service centers: two in Malaysia - Kuala Lumpur and Cyberjaya; one in Taipei, Taiwan 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

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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, Taiwan and Japan and include:

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. 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:

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CLIENTS AND CONTRACTS

International Clients

Our international 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.

Most of our contracts and statements of work with international clients 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 also terminable for material uncured breach or insolvency.

U.S. Clients

Under our contracts with small to medium size clients in the United States for our human capital management solutions, we establish a co-employer relationship with our client and employees who work at the client’s location (called worksite employees), and assume responsibility for personnel administration and compliance with most state and federal governmental regulations governing the employment relationship. The client remains the employer of the worksite employees for most other purposes, including the direction and control over employees as necessary to conduct its business, acts, errors and omissions of employees committed within the scope of the client’s business, compliance with any professional licensing, fidelity bonding and/or professional liability insurance requirements, compliance with all applicable immigration laws, and compliance with all applicable federal, state and local health and safety laws, regulations, ordinances, directives and rules relating to workplace, including without limitation Occupational Safety and Health Administration regulations. We charge a comprehensive service fee, which we invoice at the time we handle payroll processing for the worksite employees. The comprehensive service fee includes worksite employee payroll as well as an administrative fee computed as a percentage of payroll cost. Our contracts for human capital management solutions are all terminable upon thirty days written notice.

REVENUES AND OPERATING LOSSES

Our revenues are generated from fees paid pursuant to client contracts. Under our contracts with international clients, we typically receive two types of fees: 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. Many of our contracts provide for guaranteed minimum recurring fees with a variable component based on number of transactions exceeding agreed-upon minimum thresholds. Under our contracts with U.S.-based human capital management clients, we receive a comprehensive service fee, which includes an administrative fee, that is based on the number of worksite employees for whom we provide services.

We have sustained operating losses since inception and we had an accumulated deficit of approximately $103.0 million as of January 31, 2004 that has been funded primarily through issuances of debt and equity securities. In the year ended January 31, 2004, we used net cash in operating activities of $6.7 million, net cash

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used in investing activities of $3.2 million and realized a gain of $0.1 million from exchange rate changes, giving rise to a decrease in cash of $9.7 million. We obtained no funding from financing activities. On December 11, 2003, December 30, 2003 and March 22, 2004, we entered into sales and purchase agreements with Symphony House and other investors to sell them 38.8% of the issued and outstanding share capital of Vsource Malaysia for total consideration of approximately $9.5 million. As part of the transaction, we transferred all of the shares and share capital of our wholly owned subsidiaries in Japan and Taiwan to Vsource Malaysia. All of the sales were completed by March 23, 2004. As a result of these transactions, our management believes that we have adequate funding to continue in operation through January 31, 2005.

SALES AND MARKETING

Our sales cycle begins with a disciplined client screening process. A key consideration in our international client screening process is to focus on Fortune 500 and Global 500 companies who (i) have sizable operations across multiple countries, (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. For our U.S.-based human capital management business, we employ a similar screening process, based on industries and company profiles, whereby a specific list of potential clients is identified in each market. We have generated sales for our human capital management solutions by establishing a telemarketing team based in Asia that targets businesses within the United Stated that fall within established business lines, demographics and geographies. Potential client leads developed by this telemarketing team are then passed to our U.S.-based sales force.

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. Members of the sales team are located in San Diego, Dallas, Houston, 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 internationally. We are positioning Vsource as being uniquely qualified to deliver regional business process outsourcing services regionally and globally and establishing ourselves as the leader in this new market primarily through market research, public relations activities, seminars, speaking engagements and direct sales contacts. For the human capital management business, our marketing efforts are focused on the leveraging of our Fortune 500 and Global 500 experience to deliver world-class services to small and medium sized U.S. companies that, in most cases, would not have access to such levels of services.

INTELLECTUAL PROPERTY

We currently have trademark registrations in the United States and the European Community for the mark “VSOURCE” and are registering our logo in the United States. We also use “Vsource Versatile Solutions”, “Vsource Foundation Solutions” and “Vmarketing” 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. 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

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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 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 licensor, 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 in the Fortune 500 and Global 500 market 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:

In the human capital management business, we compete primarily with other companies focused on delivering a similar set of products and services to the small and medium sized business segments throughout the United States. Our competitors can be divided into two groups:

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EMPLOYEES

We consider our relations with employees to be good. None of our employees are represented by a labor union or under any collective bargaining agreement. As of March 31, 2004, we had approximately 502 full time employees, 345 of whom were located in Malaysia.

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’ deficit of approximately $16.6 million as of January 31, 2004 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, 2004, we had cash of $1.5 million, a decrease of $9.7 million from $11.2 million at January 31, 2003, mainly reflecting net cash used in operating activities of $6.7 million and net cash used in investing activities of $3.2 million. We have entered into sales and purchase agreements with Symphony House and other investors to sell them 38.8% of the issued and outstanding share capital of Vsource Malaysia, our wholly-owned Malaysian subsidiary, for total cash consideration of approximately $9.5 million. All sales were completed by March 23, 2004. The proceeds from this sale helped to ensure that we would have adequate funding to continue operations through January 31, 2005. There can be no assurance that we would be able to raise funds in a similar manner in the future if required.

We are heavily reliant on a limited number of customers.

We are heavily reliant on a limited number of customers, including one, Gateway, which generated approximately 60% of our total revenues in the year ended January 31, 2004. We have a three-year contract with Gateway to provide support services for Gateway’s warranty obligations to its installed base of end users that is scheduled to expire in October 2004. Another four customers represented approximately 16% of our total revenues for the year ended January 31, 2004.

We may be required to redeem our Series 4-A Convertible Preferred Stock (“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. There were 17,364 shares of our Series 4-A Preferred outstanding as of March 31, 2004, 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. 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:

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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 internationally, 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 internationally on a regional or global basis 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 the human capital management business.

We began providing human capital management solutions to clients in the United States in October 2003 and therefore do not have proven experience in this area. Moreover, this is our first business that has focused on small- to medium-sized clients in the United States, which requires different sales and marketing strategies and different service delivery requirements compared to the Fortune 500 and Global 500 companies that have been our traditional focus.

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

Because, apart from our human capital management clients, 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 internationally on a regional or global basis 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 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

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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, including all of our human capital management 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, or an economic slowdown such as that experienced in the United States in 2001 to 2003, could significantly slow economic growth 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.

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

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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 human resources, 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. The human capital management business in which we have recently started offering services is already dense with well-established competitors. In addition, increasing numbers of companies are entering the business process outsourcing industry. 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, we do compete with companies that fall into two basic categories:

In the human capital management business, we compete primarily with other companies focused on delivering a similar set of products and services to the small and medium sized business segments throughout the United States. Our competitors can be divided into two groups:

All of 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

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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.

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, Quilvest, BAPEF Investments XII Ltd. (“BAPEF”), Mercantile Capital Partners I, L.P. (“MCP”) and Asia Internet Investment Group I, LLC (“AIIG”). As of March 31, 2004, these parties in aggregate hold common stock and Series 4-A Preferred on a fully converted basis representing approximately 88% 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:

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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:

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

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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 that we have licensed from a third-party licensor, 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 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.

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.

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.

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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 a substantial majority 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 that continued for several years.

If the human capital management market does not develop and expand as we anticipate, demand for our human capital management solutions may be absent, which would negatively impact our net sales.

Our future success with our human capital management solutions is dependent upon the growth of the market for professional employer organizations, common referred to as “PEOs”. The PEO market is new and growth is driven by several key factors, including:

If such factors, and other additional factors, do not continue to drive demand for our human capital management solutions, the market for these services and the growth of this aspect of our business will be significantly limited. Moreover, if we fail to address the changing market conditions and the key factors that influence our business, sales of our human capital management solutions may never reach the anticipated levels.

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 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.

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

Our recent entry into the human capital management business raises new and unsettled legal and regulatory risks.

Our recently launched human capital management solutions are affected by numerous federal, state and local laws and regulations relating to labor, tax, insurance and employment matters.

By entering into an employment relationship with employees who work at client locations, we assume some obligations and responsibilities of an employer under these laws. Uncertainties arising under the Internal Revenue Code of 1986, include, but are not limited to, the qualified tax status and favorable tax status of certain benefit plans we provide. The unfavorable resolution of these unsettled issues could have a material adverse effect on our results of operations and financial condition.

While many states do not explicitly regulate companies that provide human capital management solutions, commonly referred to as PEOs, approximately half of the states have enacted laws that have licensing or registration requirements for such companies, and several additional states are considering such laws. Such laws vary from state to state but generally provide for the monitoring of the fiscal responsibility and specify the employer responsibilities assumed by PEOs. We presently hold a license in Texas, and are registered in California. Regardless of whether a state has a licensing, registration and / or certification requirement, there are other state and local regulations that must be adhered, and may raise obstacles and challenges to our ability to introduce profitable services. There can be no assurance that we will be able to comply with any such regulations that may be imposed upon us in the future, and our inability to comply with any such regulations could have a material adverse effect on our results of operations and financial prospects.

We may be liable for our human capital management solutions clients’ mistreatment of our employees.

Because we are in the business of placing our co-employees in the workplace of our clients, we may be subject to a wide variety of employment-related claims such as claims for injuries, wrongful death, harassment, discrimination, wage and hours violations and other matters, even if we do not participate in such violations. Although our client agreements generally provide that the client indemnifies us for any liability attributable to the client’s failure to comply with its contractual obligations and to the requirements imposed by law, we may not be able to collect on a contractual indemnification claim, and thus may be responsible for satisfying these liabilities.

In addition, since we are co-employers with our clients, worksite employees may be deemed to be our agents, subjecting us to liability for the actions of the worksite employees of our clients.

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 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.

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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 3,000 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 currently trades on Nasdaq’s OTC Bulletin Board and we do not meet the listing requirements for the Nasdaq national market or any other major stock market in the United States. 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 $0.35 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, 2004 the closing price of our common stock was $0.40 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, 2004, 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 22.5 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 executive headquarters are located in 2,170 square feet of space in La Jolla, California and is leased through May 31, 2006. Our principal shared customer service centers are located in Kuala Lumpur, Malaysia; Cyberjaya, Malaysia; Taipei, Taiwan; and Osaka, Japan. The Kuala Lumpur facility occupies 39,015 square feet of office space, which is comprised of two leases, one for 13,055 square feet which expires on November 30, 2006, and a second lease for 26,010 square feet which expired on March 9, 2004 and is currently on a month-to-month tenancy. We are currently in the process of negotiating a renewal of the lease for the 26,010 square foot

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facility. The Cyberjaya facility occupies 8,178 square feet of office space, with a lease that expires on October 31, 2005. The Taipei facility occupies 8,348 square feet of office space, with a lease that expires on October 31, 2005. The Japan facility occupies 8,680 square feet of office space and the lease expires on January 31, 2005.

We also have offices in Plano, Texas occupying 2,303 square feet with the lease expiring on October 31, 2005, and Hong Kong occupying 2,934 square feet with the lease expiring on August 31, 2005.

Item 3.    LEGAL PROCEEDINGS

In January 2004, we entered into a settlement agreement in connection with two lawsuits filed in October 2001 by holders of our Series 2-A convertible preferred stock. The settlement involved no admission of liability from us but required us to pay the plaintiffs’ attorneys’ fees and costs and issue warrants to purchase a total of 24,092 shares of our common stock at an exercise price of $14.20 each to the plaintiffs. Pursuant to the court’s order dated December 23, 2003, the cases were dismissed without prejudice to reopening within 30 days thereof if the settlement was not consummated. Upon final payment of attorneys’ fees and costs, which we anticipate taking place in July 2004, we and the plaintiffs have agreed to deem the litigation dismissed with prejudice.

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

Our annual meeting of stockholders was held on December 17, 2003 in San Diego, California.

The number of shares of the Company that were issued and outstanding as of the November 13, 2003 record date established by the Board of Directors for determining stockholders entitled to vote at the meeting of stockholders, and therefore the number of shares and the number of votes entitled to vote at the meeting, were as follows:

Holders of common stock were entitled to one vote per share held; holders of Series 1-A preferred stock were entitled to 0.378 votes per share held; holders of Series 2-A preferred stock were entitled to 0.451 votes per share held; and holders of Series 4-A preferred stock were entitled to 1,000 votes per share held.

There were present in person or by proxy at the meeting stockholders representing a total of 14,271,496 votes or 71.7% of the total number of shares outstanding and entitled to vote at the meeting, meaning that a quorum was present.

At the meeting, the following persons were duly elected as directors of the Company and received the number of votes for election next to their names:

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Mr. Villette replaced one of our former directors Bruno Seghin who resigned from our Board prior to the annual meeting and, in accordance with our bylaws and charter, votes cast in favor of Mr. Seghin at the meeting were counted as votes cast in favor of Mr. Villette.

The appointment of PricewaterhouseCoopers as our independent auditors for the fiscal year ended January 31, 2004, was also ratified by our stockholders at the meeting.

We presently intend to hold our annual meeting on June 23, 2004. As noted in our last proxy statement, the deadline for receipt of stockholder proposals for the 2004 annual meeting was April 25, 2004, and that deadline passed without receipt of any stockholder proposals. A stockholder, however, may present a proposal at the 2004 annual meeting if it is submitted to the Company’s Secretary no later than June 7, 2004. If timely submitted, the stockholder may present the proposal at the 2004 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 is 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, 2004, there were 897 stockholders of record of our common stock, 28 holders of our Series 1-A convertible preferred stock, referred to herein as Series 1-A Preferred, 9 holders of our Series 2-A 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, 2004 based on the original purchase price of $6.41 per share, as may

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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, 2004 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. We currently intend to retain all future earnings to finance future growth and, therefore, do 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 “Securities Authorized for Issuance under Equity Compensation Plans”.

Fiscal Year-End Equity Compensation Plan Information

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RECENT SALE OF UNREGISTERED SECURITIES

None.

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.

Restatement

In 2003 and 2002, we recognized an extraordinary loss on extinguishment of debt of $6.8 million and $0.3 million respectively. Under the provisions of FAS 145 which was adopted in the year ended January 31, 2004 the extraordinary loss is no longer recognised as extraordinary and was reclassified as part of loss before tax and the 2003 and 2002 financial statements have been restated to reflect this effect.

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, contain 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 heavy reliance on a few major clients, 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 human capital management business, the new and unproven market for business process outsourcing services internationally, 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

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small number of vendors and service providers, management of acquisitions, 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.

OVERVIEW

OUR FISCAL YEAR ENDS ON JANUARY 31 OF THE FOLLOWING CALENDAR YEAR. UNLESS OTHERWISE INDICATED, REFERENCES TO “2002”, “2003” AND “2004” RELATE TO THE FISCAL YEARS ENDED JANUARY 31, 2002, 2003 AND 2004, RESPECTIVELY, RATHER THAN CALENDAR YEARS.

Our revenues in 2004 decreased by $8.2 million from $26.5 million in 2003 to $18.3 million, representing a drop of 31%. Our primary source of revenues was fees earned from delivering business process outsourcing solutions such as warranty solutions, human resource solutions and Vsource Foundation Solutions. The main source of our revenue (approximately 60% in 2004) was 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 derived revenues from the sales of products through our sales solutions. Because Gateway terminated its operations in the region in 2001 and therefore is not selling any new products in Asia, revenues from the Support Services Agreement have been declining and are expected to continue to decline sequentially as the installed base of end users who will be covered by Gateway’s warranties declines over time.

Our operating loss increased to $11.4 million in 2004 from $2.8 million in 2003, primarily as a result of our revenue declining by 31% to $18.3 million in 2004 from $26.5 million in 2003 while operating expenses increased. We were unable to reduce our operating costs and selling, general and administrative expenses even though revenues were declining because we sought to maintain certain minimum levels of staffing and infrastructure to support our existing operations and maintain the ability to rapidly scale our business upon the acquisition of new clients. Operating expenses increased to $29.7 million in 2004 from $29.3 million in 2003. Although the cost of revenue for warranty solutions declined by 50%, in line with the decline in warranty solution revenues, there were increases related to other businesses and operations. In the human resource solutions business, the cost of revenue increased by 189% to $2.8 million in 2004 from $1.0 million in 2003 to support two regional implementations. In addition, selling, general and administrative costs increased by 7% to $16.6 million in 2004 from $15.6 million in 2003.

Part of the increase in operating expenses was attributable to one-time expenses incurred in connection with the terminated merger between us and TEAM America, Inc. (“TEAM America”). On September 26, 2003, we announced that we had terminated the merger agreement, dated as of June 12, 2003, by and among us, TEAM America and Beaker Acquisition Co., Inc., due to the breach by TEAM America of various representations, warranties, covenants and agreements set forth in the merger agreement and the occurrence of a material adverse effect on TEAM America. Subsequent to such termination, TEAM America announced that it had filed a voluntary petition pursuant to Chapter 11 of the United States Bankruptcy Code and suspended its operations while considering alternatives. As a result, we wrote off $1.47 million of expenses associated with the merger and $0.7 million of accounts receivable from TEAM America for services provided.

FUNDING

Sale of Interest in Vsource Malaysia

We have entered into sales and purchase agreements with Symphony House and other investors to sell them 38.8% of the issued and outstanding share capital of Vsource Malaysia for total cash consideration of approximately $9.5 million. As part of the transaction, we transferred all of the shares and share capital of our

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wholly owned subsidiaries in Japan and Taiwan to Vsource Malaysia. All sales were completed by March 23, 2004. As a result, we now hold 61.2% of Vsource Malaysia, and Symphony House and the other investors hold 30.3% and 8.5% respectively.

Future Funding

We had an accumulated deficit of approximately $103.0 million as of January 31, 2004 that has been funded primarily through issuances of debt and equity securities. We have sustained operating losses since inception. In 2004, we used net cash of $6.7 million from operating activities, used $3.2 million in investing activities, and realized a gain of $0.1 million from exchange rate changes that resulted in a decrease in cash of $9.7 million. We obtained no funding from financing activities.

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 countries. As described above, we sold an interest in Vsource Malaysia, and an indirect interest in our subsidiaries in Japan and Taiwan, to outside investors in February and March 2004. Following the closure of the sale of interests in Vsource Malaysia, we received proceeds of approximately $9.5 million. As a result, our management believes that we have adequate funding to continue in operation for at least the next 12 months. We are exploring the possibility of publicly listing Vsource Malaysia on the Malaysian MESDAQ market in 2004 subject to market conditions.

CRITICAL ACCOUNTING POLICIES

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

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 clients on a monthly basis with fixed revenues recognized on an accrual basis while variable revenues are recognized when incremental transactions are performed.

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 recognize such additional inventory costs on a LIFO basis in each accounting period.

Other business process outsourcing agreements

We provide services under our other business process outsourcing agreements. These types of agreements generally have two main revenue sources: set-up fees during the implementation period when we perform set-up

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procedures to facilitate delivery of its services and monthly charges for the subsequent use of these services. Under this method, set-up fees are deferred and recognized on a straight-line basis over the initial term of the contract or the expected period during which the specified services will be performed. Costs related to implementation are deferred and amortized on the same basis. Monthly transaction fees under these types of agreements are accounted for separately and are recognized on a monthly basis.

Profits recognized on contracts in process are based upon contracted revenue and related estimated costs to completion. Revisions in cost estimates as contracts progress have the effect of increasing or decreasing profits in the current period. Provisions for anticipated losses are made in the period in which they first become determinable.

Impairment of long-lived assets

We assess the impairment of long-lived assets 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)

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MANAGEMENT’S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS – YEAR ENDED JANUARY 31, 2004 COMPARED TO THE YEAR ENDED JANUARY 31, 2003

Revenue

Revenue in 2004 was derived primarily from two sources: (i) services revenue, derived primarily from our warranty solutions for Gateway, human resource solutions, human capital management solutions and Vsource Foundation Solutions, and (ii) product revenue, derived from our sales solutions. Revenues are recognized in accordance with the policies set forth in “Critical Accounting Policies and Estimates” above.

In 2004, total revenues decreased to $18.3 million from $26.5 million in 2003, a decrease of $8.2 million, or 31%, primarily due to the decline in the volume of our 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 decreased 36% in 2004 to $16.3 million compared to $25.5 million in 2003, primarily due to the decline in the volume of the warranty solutions transactions to support Gateway’s warranty obligations. The decrease in revenues from warranty solutions was partially off-set by increases of 154% in revenues from our human resource solutions, 28% in revenues from our Vsource Foundation solutions and 19% in revenues from our sales solutions. In addition we launched our human capital management solutions business in October 2003, which generated revenues of $0.07 million. The decrease in services revenue was partially off-set by an increase in products revenue, which improved by 89% to $2.0 million in 2004 compared to $1.1million in 2003 due to an increase in parts and computer sales of $0.9 million, mainly derived from the sale of computers for a new client in Japan.

In 2004, revenues from warranty solutions represented 60% of our total revenues, compared to 81% in 2003. Warranty solutions revenues decreased by 49% to $11.0 million in 2004 from $21.5 million in 2003, primarily due to the decline in the requirement to support Gateway’s warranty obligation as we moved into the third year of a declining contract.

Revenues from human resource solutions constituted 11% of our total revenues in 2004, compared to 3% in 2003, and increased by 154% to $1.9 million in 2004 from $0.8 million in 2003. This increase reflected our continued delivery and expansion of business with our existing clients and fees charged to TEAM America under our services agreement with them of $0.7 million. However, the fees from TEAM America were written off as bad debt as a result of TEAM America’s Chapter 11 proceedings. Excluding revenue from TEAM America, our revenue from human resource solutions would have been $1.2 million rather than $1.9 million, representing an increase of 62% from 2003 rather than 154%.

Our human capital management solutions were launched in October 2003, generating a revenue of $0.07 million in the first four months of operations.

In 2004, revenues from Vsource Foundation Solutions represented 12% of our total revenues, compared to 6% in 2003. Vsource Foundation Solutions revenues increased by 28% to $ 2.1 million in 2004 from $1.7 million in 2003, reflecting the continued delivery of customer relationship management services to clients such as Network Appliance and the expansion of our services to EMC in the Asia Pacific and European regions.

Revenues from sales solutions constituted 18% of our total revenues in 2004, compared to 10% in 2003. Sales solutions revenues, which in 2004 were comprised of sales of products, such as computers and computer parts and the sales of services, such as extended warranties and one-time fixes, increased by 19% to $3.2 million in 2004 from $2.7 million in 2003. The increase in 2004 was mainly due to an increase in sales of computers and computer parts of $0.9 million, mainly derived from the sale of computers for a new client in Japan.

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

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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 decreased by 13% to $11.5 million in 2004 from $13.2 million in 2003. Our cost of revenue did not decline as quickly as our revenues, which fell 31% from 2003 to 2004. This was mainly due to the higher cost of revenue in our human resource solutions, as costs related to two regional implementations were incurred, and in our Vsource Foundation Solutions, as costs of infrastructure build-out was incurred for two new client contracts acquired during the year. Total cost of revenues in 2004 represented 63% of total revenue compared to 50% in 2003, as more projects’ implementation costs were recorded in 2004. Cost of revenue from services in 2004 represented 54% of our total revenue and 61% of service revenues, representing increases from 47% and 49% respectively in 2003. Cost of revenue from products in 2004 represented 9% of our total revenues, compared to only 3% in 2003. This was consistent with the 89% increase that we experienced in product revenues from 2003 to 2004.

Cost of revenues from warranty solutions represented 42% of same-segment revenues and 25% of our total revenues, compared to 43% and 35% respectively, in 2003. The decline in cost as a percentage of same-segment revenue indicated that we were able to manage our warranty solutions delivery costs to cause them to decline proportionately with the decline in warranty solutions revenue.

In 2004, cost of revenues from human resource solutions constituted 146% of same-segment revenues and 15% of total revenues, compared to 129% and 4%, respectively, in 2003. This was the result of our continued build-out of infrastructure and operations to support this line of business. While human resource solutions revenue increased by 154% from 2003 to 2004, the same-segment cost of revenue increased by 189%. Cost of revenue increased faster than revenue mainly because of expenditure required to complete implementation of human resource solutions. However, if costs incurred in regards to TEAM America were disregarded, then human resource solutions cost of revenue would amount to $2.4 million, rather than $2.8 million, representing an increase of 147% over 2003 rather than 189%.

Cost of revenues from human capital management solutions represented 445% of same-segment revenues and 2% of total revenues in 2004. This was the result of the build-out and launch of this business segment in October 2003.

Cost of revenues from Vsource Foundation Solutions represented 73% of same-segment revenues and 8% of our total revenues in 2004, compared to 65% and 4% respectively in 2003. The marginal increase in cost as a percentage of same-segment revenue was the result of the build-out of infrastructure and operations for new contracts acquired in 2004. Similarly, the increase in cost as a percentage of total revenues reflected the expansion in our Vsource Foundation Solutions business coupled with the decline in our warranty solutions business. While Vsource Foundation Solutions revenue increased by 28% from 2003 to 2004, the same-segment cost of revenue increased by 42%. Cost of revenue increased faster than revenue because of the infrastructure build-out cost of $0.4 million incurred for two new client contracts secured during the year. In 2004, cost of revenues from sales solutions constituted 70% of same-segment revenues and 12% of total revenues, compared to 72% and 7% respectively in 2003. The decrease in cost as a percentage of same-segment revenues was the result of being able to generate proportionally more sales of Gateway parts and products in support of the warranty business, and the economies of scale resulting from the larger volume of computers and computer parts being sold by us as the result of the acquisition of a new sales solutions client in Japan in 2004. The increase in cost as a percentage of total revenues corresponded with the increase in sales solutions revenue as a percentage of total revenues

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.

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Selling, general and administrative expenses increased by 7% to $16.6 million in 2004 from $15.6 million in 2003. As a percentage of total revenues, selling, general and administrative expenses increased to 91% in 2004 from 59% in 2003. Although our revenues were declining during this period, our selling, general and administrative expenses increased because in addition to strengthening our sales and marketing team during the year, significant costs were incurred in relation to our build-out of a new facility in Cyberjaya, Malaysia and the build-out and staffing of our new facility in Taiwan to support our new operations there.

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. In 2004, stock-based compensation was fully amortized.

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 loss was previously recognized as an extraordinary item. Under the provision of FAS 145, which was adopted during the year ended January 31, 2004 this extraordinary loss is no longer recognised as extraordinary and has been reclassified as part of loss before tax and the 2003 financial statements have been restated to reflect this effect.

Operating Loss

As a result of the foregoing, we had an operating loss in 2004 of $11.4 million, which was higher than our operating loss of $2.8 million in 2003.

Interest Expense

We had no interest expense in 2004, compared to $0.6 million in 2003. This was primarily due to the early extinguishment of $7.4 million in principal amount of convertible debt instruments in October 2002 and extinguishments of 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”.

Taxation

Taxation charge for 2004 amounted to $22,000 with $12,000 and $10,000 arising from our operations in Taiwan and Japan respectively.

Net Loss

As a result of the foregoing, we had a net loss in 2004 of $11.4 million in 2004, which was marginally less than our net loss of $11.8 million in 2003. If non-cash beneficial conversion feature expense and loss on extinguishments of debt from 2003 are not included, then our net loss of $11.3 million in 2004 represents a 245% increase from a net loss of $3.3 million in 2003.

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Deemed Non-cash Dividend to Preferred Shareholders

In 2004, we had a $11.9 million deemed dividend arising from Series 4-A preferred stock representing the amortization of the discount on the issue of this stock for both attached warrants and beneficial conversion features. 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.

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 $11.9 million in deemed dividend credit in 2004 we had a net loss available to common shareholders of $23.2 million, or $12.15 per basic and diluted share in 2004, compared to $5.3 million, or $3.06 per basic and diluted share, in 2003 after deducting $6.5 million in deemed dividends.

MANAGEMENT’S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS – YEAR ENDED JANUARY 31, 2003 COMPARED TO THE YEAR ENDED JANUARY 31, 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 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 Inc. 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 $21.5 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.

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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 substantially all of the assets of NetCel360 Holdings Limited (“NetCel360”) in June 2001.

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 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 129% 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.

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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

We had no research and development expenses in 2003, compared to $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.

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.

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 loss was previously recognized as an extraordinary item. Under the provision of FAS 145, which was adopted during the year ended January 31, 2004 this extraordinary loss is no longer recognised as extraordinary and has been reclassified as part of loss before tax and the 2003 financial statements have been restated to reflect this effect.

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.

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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.

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 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.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents totaled $1.5 million as of January 31, 2004, as compared to $11.2 million as of January 31, 2003 and $4.8 million as of January 31, 2002. As of January 31, 2004, we had working capital of negative $2.7 million and shareholders’ deficit of $16.6 million. We had no long term liabilities as of January 31, 2004. To date, we have financed our operations primarily through preferred stock financings and issuances of debt. 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, 2004 amounted to $0.9 million.

We have entered into sales and purchase agreements with Symphony House and other investors to sell them 38.8% of the issued and outstanding share capital of Vsource Malaysia for total cash consideration of approximately $9.5 million. As part of the transaction, we transferred all of the shares and share capital of our wholly owned subsidiaries in Japan and Taiwan to Vsource Malaysia. All sales were completed on March 23, 2004. As a result, we now hold 61.2% of Vsource Malaysia, and Symphony House and the other investors will hold 30.3% and 8.5% respectively.

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Net cash used in operating activities was $6.7 million in 2004, compared with net cash provided by operating activities of $0.4 million in 2003 and $5.8 million used in 2002. Net cash used in operating activities in 2004 consisted primarily of $11.4 million net loss and $1.1 million changes in working capital components, offset by non-cash charges of $3.7 million primarily related to depreciation and amortization, bad debts written-off and a write-off of expenses related to the terminated merger with TEAM America. Net cash provided in 2003 consisted primarily of $11.8 million net loss, offset by non-cash charges of $13.1 million primarily related to depreciation and amortization, stock based compensation, loss on extinguishments of debt and beneficial conversation feature charges. Net cash used in operating activities in 2002 consisted primarily of $20.4 million net loss, offset by a non-cash charge of $14.1 million.

Net cash used in investing activities was $3.2 million in 2004, $0.7 million in 2003 and $0.8 million in 2002. Net cash used in investing activities for 2004 was primarily related to the acquisition of property and equipment of $1.7 million and the $1.5 million expenses related to the terminated merger with TEAM America. 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.

Net cash provided by financing activities was $0.03 million in 2004, $6.7 million in 2003 and $5.9 million in 2002. Net cash provided by financing activities in 2004 came from issuance of common stock under our Employee Stock Purchase Plan. 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 $2.8 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.

As of January 31, 2004, we had 17,364 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 $52.1 million.

As of January 31, 2004, the only significant contractual obligations or commercial commitments outstanding consisted of our future minimum lease commitments totaling $2.0 million, of which $1.2 million will be paid out in 2005, $0.5 million in 2006 and $0.3 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. Our management believes that we have adequate funding for existing operations for at least the next 12 months.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2003, the FASB issues SFAS No. 149 (“SFAS No. 149”) “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively the “derivatives”) and for hedging activities under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”. We currently do not expect the adoption of SFAS No. 149 to have a material impact on our financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” This Statement established standards for how an issuer classifies

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and measures certain financial instruments with characteristics of both liabilities and equity. We adopted SFAS No. 150 during the current year. The adoption of this statement has had no significant impact on our financial position or results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities”, an interpretation of ARB No. 51, which was further revised in December 2003, which amended FIN 46 and deferred its application in certain cases. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. We currently do not expect the adoption of FIN 46 to have a material impact on our financial position or 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 $0.03 million from interest income in 2004.

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. A substantial portion 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. Conversely, a decline in the value of the U.S. dollar relative to foreign currencies could make our expenses, most of which are denominated in foreign currencies, higher, which could reduce our net income or increase our operating losses. 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, Japanese Yen and New Taiwan (NT) Dollars. Our Japanese Yen and Malaysian Ringgit-denominated expenses represented approximately 25% and 45%, respectively, of our total cash expenses for the year ended January 31, 2004. The Taiwan expenses represented only 1.0% of our expenses, as we did not launch operations in Taiwan until October 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

Report of Independent Auditor

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, 2004 and 2003, and the results of their operations and their cash flows for each of the three years ended January 31, 2004 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 27, 2004

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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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VSOURCE, INC.

CONSOLIDATED BALANCE SHEETS

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

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VSOURCE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS