---



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q





(Mark One)

|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
|- |  | --------------------------------------------------------------------------------------



| |  | For the quarterly period ended June 30, 2003
| |  | --------------------------------------------



OR



| ̈TRANSITION |  | REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|----------- |  | ---------------------------------------------

| |  | SECURITIES EXCHANGE ACT OF 1934
| |  | -------------------------------



For the transition period from



Commission file number 0-30035



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EXULT, INC.

(Exact Name of Registrant as Specified in Its Charter)



|Delaware                                                       |  | 8742                                                |  | 33-0831076                          
|-------------------------------------------------------------- |  | --------------------------------------------------- |  | ------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) |  | (Primary Standard Industrial Classification Number) |  | (I.R.S. Employer Identification No.)



121 Innovation
Drive, Suite 200

Irvine, California 92612

(949) 856-8800

(Address, Including Zip Code and Telephone Number, Including Area Code, of
Registrants Principal Executive Offices)



Not
Applicable

(Former name, former address and former fiscal year, if changed since last report)



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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes  xNo ̈



Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  x  No ̈



APPLICABLE ONLY TO CORPORATE ISSUERS:



Indicate the number of shares outstanding of each of the issuers
classes of common stock, as of the latest practicable date.



|Class        |  |  |  | Outstanding at June 30, 2003
|------------ |  |  |  | ----------------------------
|Common Stock |  |  |  | 107,370,984                 



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PART I. FINANCIAL INFORMATION.



ITEM 1. FINANCIAL STATEMENTS.



EXULT, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands except per share amounts)



|                                                                                                            |  | December 31, 2002 |          |   | June 30, 2003 |  
|----------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ------------- | -
|ASSETS                                                                                                      |  |                   |          |   |               |  
|Current Assets:                                                                                             |  |                   |          |   |               |  
|Cash and cash equivalents                                                                                   |  | $                 | 42,846   |   |               | $
|Short-term investments                                                                                      |  |                   | 85,206   |   |               |  
|Accounts receivable, net                                                                                    |  |                   | 28,587   |   |               |  
|Prepaid expenses and other current assets (including amounts receivable from officer and employees)         |  |                   | 26,350   |   |               |  
|                                                                                                            |  |                   |          |   |               |  
|Total Current Assets                                                                                        |  |                   | 182,989  |   |               |  
|Fixed Assets and Direct Contract Costs, net                                                                 |  |                   | 54,105   |   |               |  
|Intangible Assets, net                                                                                      |  |                   | 37,564   |   |               |  
|Other Assets, net                                                                                           |  |                   | 19,738   |   |               |  
|                                                                                                            |  |                   |          |   |               |  
|Total Assets                                                                                                |  | $                 | 294,396  |   |               | $
|                                                                                                            |  |                   |          |   |               |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                        |  |                   |          |   |               |  
|Current Liabilities:                                                                                        |  |                   |          |   |               |  
|Accounts payable                                                                                            |  | $                 | 17,683   |   |               | $
|Accrued liabilities and other                                                                               |  |                   | 31,759   |   |               |  
|Current portion of long-term obligations                                                                    |  |                   | 2,862    |   |               |  
|                                                                                                            |  |                   |          |   |               |  
|Total Current Liabilities                                                                                   |  |                   | 52,304   |   |               |  
|                                                                                                            |  |                   |          |   |               |  
|Long-Term Obligations, net of current portion                                                               |  |                   | 12,794   |   |               |  
|                                                                                                            |  |                   |          |   |               |  
|Commitments and Contingencies                                                                               |  |                   |          |   |               |  
|Stockholders Equity:                                                                                       |  |                   |          |   |               |  
|Preferred stock, $0.0001 par value;                                                                         |  |                   |         |   |               |  
|Authorized15,000 shares; Issued and outstandingnone at December 31, 2002 and June 30,2003                 |  |                   |          |   |               |  
|Common stock, $0.0001 par value;                                                                            |  |                   | 11       |   |               |  
|Authorized500,000 shares; Issued and outstanding106,202 at December 31,
2002 and 107,371 at June 30, 2003 |  |                   |          |   |               |  
|Additional paid-in capital                                                                                  |  |                   | 424,505  |   |               |  
|Deferred compensation                                                                                       |  |                   | (1,928   | ) |               |  
|Accumulated other comprehensive income:                                                                     |  |                   |          |   |               |  
|Cumulative translation adjustments                                                                          |  |                   | 1,285    |   |               |  
|Unrealized gain on investments                                                                              |  |                   | 891      |   |               |  
|Accumulated deficit                                                                                         |  |                   | (195,466 | ) |               |  
|                                                                                                            |  |                   |          |   |               |  
|Total Stockholders Equity                                                                                  |  |                   | 229,298  |   |               |  
|                                                                                                            |  |                   |          |   |               |  
|Total Liabilities and Stockholders Equity                                                                  |  | $                 | 294,396  |   |               | $
|                                                                                                            |  |                   |          |   |               |  



See accompanying notes
to unaudited condensed consolidated financial statements.



1



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EXULT, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(amounts in thousands except per share amounts)

(unaudited)



|                                                      |  | Three Months Ended June 30, |         | Six Months Ended June 30,
|----------------------------------------------------- |  | --------------------------- | ------- | -------------------------
|                                                      |  | 2002                        |         |                          
|Revenue                                               |  | $                           | 100,864 |                          
|Cost of Revenue                                       |  |                             | 99,250  |                          
|                                                      |  |                             |         |                          
|Gross profit                                          |  |                             | 1,614   |                          
|Selling, General and Administrative Expense           |  |                             | 6,707   |                          
|                                                      |  |                             |         |                          
|Income (loss) from operations                         |  |                             | (5,093  | )                        
|Investment and Interest Income, net                   |  |                             | 565     |                          
|                                                      |  |                             |         |                          
|Income (loss) before provision for income taxes       |  |                             | (4,528  | )                        
|Provision for Income Taxes                            |  |                             |        |                          
|                                                      |  |                             |         |                          
|Net income (loss)                                     |  | $                           | (4,528  | )                        
|                                                      |  |                             |         |                          
|Net Income (Loss) per Common Share:                   |  |                             |         |                          
|Basic                                                 |  | $                           | (0.04   | )                        
|                                                      |  |                             |         |                          
|Diluted                                               |  | $                           | (0.04   | )                        
|                                                      |  |                             |         |                          
|Weighted Average Number of Common Shares Outstanding: |  |                             |         |                          
|Basic                                                 |  |                             | 105,077 |                          
|                                                      |  |                             |         |                          
|Diluted                                               |  |                             | 105,077 |                          
|                                                      |  |                             |         |                          



EXULT, INC. AND
SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)

(amounts in thousands)

(unaudited)



|                                                                    |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|------------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | -
|                                                                    |  | 2002                        |        |   | 2003                      |  
|Net Income (Loss)                                                   |  | $                           | (4,528 | ) |                           | $
|                                                                    |  |                             |        |   |                           |  
|Other Comprehensive Income (Loss):                                  |  |                             |        |   |                           |  
|Foreign currency translation adjustment                             |  |                             | 1,208  |   |                           |  
|Unrealized loss on investments                                      |  |                             | 419    |   |                           |  
|Reclassification adjustment for gains realized in Net Income (Loss) |  |                             |       |   |                           |  
|                                                                    |  |                             |        |   |                           |  
|Total other comprehensive income (loss)                             |  |                             | 1,627  |   |                           |  
|                                                                    |  |                             |        |   |                           |  
|Net Comprehensive Income (Loss)                                     |  | $                           | (2,901 | ) |                           | $
|                                                                    |  |                             |        |   |                           |  



See accompanying notes
to unaudited condensed consolidated financial statements.



2



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EXULT, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)



|                                                                                                   |  | Six Months Ended June 30, |         
|-------------------------------------------------------------------------------------------------- |  | ------------------------- | --------
|                                                                                                   |  | 2002                      |         
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |  |                           |         
|Net Income (Loss)                                                                                  |  | $                         | (11,152 
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities |  |                           |         
|Depreciation and amortization                                                                      |  |                           | 10,121  
|Changes in operating assets and liabilities, net of business acquired                             |  |                           |         
|Accounts receivable, net                                                                           |  |                           | (5,362  
|Prepaid expenses and other current assets                                                          |  |                           | (6,844  
|Accounts payable                                                                                   |  |                           | 5,025   
|Accrued liabilities and other                                                                      |  |                           | (9,729  
|                                                                                                   |  |                           |         
|Net cash provided by (used in) operating activities                                                |  |                           | (17,941 
|                                                                                                   |  |                           |         
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                              |  |                           |         
|Expenditures for Fixed Asset Purchases and Direct Contract Costs                                   |  |                           | (12,589 
|Expenditures for Client Contract Related Intangible Assets                                         |  |                           | (13,600 
|Purchase of outsourcing business, net of cash acquired                                             |  |                           |        
|Purchases of Investments                                                                           |  |                           | (186,842
|Proceeds from Investments                                                                          |  |                           | 126,625 
|Change in Other Assets                                                                             |  |                           | (795    
|                                                                                                   |  |                           |         
|Net cash used in investing activities                                                              |  |                           | (87,201 
|                                                                                                   |  |                           |         
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                              |  |                           |         
|Proceeds from Issuance of Common Stock                                                             |  |                           | 2,727   
|Payments on Long-Term Obligations                                                                  |  |                           | (89     
|                                                                                                   |  |                           |         
|Net cash provided by financing activities                                                          |  |                           | 2,638   
|                                                                                                   |  |                           |         
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                            |  |                           | (143    
|                                                                                                   |  |                           |         
|Net Decrease in Cash and Cash Equivalents                                                          |  |                           | (102,647
|Cash and Cash Equivalents, beginning of period                                                     |  |                           | 144,357 
|                                                                                                   |  |                           |         
|Cash and Cash Equivalents, end of period                                                           |  | $                         | 41,710  
|                                                                                                   |  |                           |         
|SUPPLEMENTAL CASH FLOW INFORMATION:                                                                |  |                           |         
|Cash Paid During the Period for:                                                                   |  |                           |         
|Interest                                                                                           |  | $                         | 79      
|                                                                                                   |  |                           |         
|Income taxes                                                                                       |  | $                         | 249     
|                                                                                                   |  |                           |         
|SUMMARY OF NON-CASH INVESTING AND FINANCING ACTIVITIES:                                            |  |                           |         
|Acquisition of Certain Prepaid                                                                     |  |                           |         
|Assets through Long-Term Obligations                                                               |  | $                         | 9,012   
|                                                                                                   |  |                           |         
|Acquisition of Fixed Assets through Long-Term Obligations                                          |  | $                         | 2,788   
|                                                                                                   |  |                           |         
|Common Stock Warrant Issued for Client Contract Related Intangible Asset                           |  | $                         |        
|                                                                                                   |  |                           |         



See accompanying notes
to unaudited condensed consolidated financial statements.





3



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EXULT, INC. AND SUBSIDIARIES



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



1. Summary of Significant Accounting Policies



Basis of Presentation



The unaudited condensed consolidated financial statements of Exult, Inc. and
subsidiaries (Exult or the Company) have been prepared by Exults management and reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the interim periods presented. The
results of operations for the three months and six months ended June 30, 2003 are not necessarily indicative of the results to be expected for any subsequent periods or for the entire year ending December 31, 2003. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted under the Securities and Exchange Commissions rules and
regulations.



These unaudited condensed consolidated financial
statements and notes included herein should be read in conjunction with Exults audited consolidated financial statements and notes for the year ended December 31, 2002, which were included in its Annual Report on Form 10-K filed with the
Securities and Exchange Commission. Certain amounts in the 2002 financial statements have been reclassified to conform with the 2003 presentation.



Accounting Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from estimated amounts.



Segment Information and
Concentration of Revenue/Credit Risk



Management has determined that the Company operates within a single operating segment. For the three months ended June 30, 2002 and 2003, 89% and 88%, respectively, of the Companys revenue has been derived from within the United
States of America with the balance being derived primarily from within the United Kingdom. For the six months ended June 30, 2002 and 2003, 87% and 89%, respectively, of the Companys revenue has been derived from within the United States of
America with the balance being derived primarily from within the United Kingdom.



During the three months ended June 30, 2002, three of the Companys process management clients accounted for 45%, 24% and 18%, respectively, of revenue. During the three months ended June 30, 2003, three of the
Companys process management clients accounted for 57%, 16% and 12%, respectively, of revenue. During the six months ended June 30, 2002, three of the Companys process management clients accounted for 46%, 27% and 16%, respectively, of
revenue. During the six months ended June 30, 2003, three of the Companys process management clients accounted for 53%, 19% and 14%, respectively, of revenue. No other client accounted for more than 10% of revenue in the 2002 and 2003 periods.
The Company believes that the resulting concentration of credit risk in its receivables, with respect to the limited client base, is substantially mitigated by its credit evaluation process. To date, bad debt write-offs have not been significant.



Stock-Based Compensation



The Company has elected to follow Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for employee stock options rather than the alternative fair value accounting allowed by Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock Based Compensation. APB No. 25 provides that compensation expense relative to the Companys employee stock options is measured based on the intrinsic value of stock options
granted and the Company recognizes compensation expense in its statement of operations using the straight-line method over the vesting period for fixed awards. Under SFAS No. 123, the fair value of stock options at the date of grant is recognized in
earnings over the vesting period of the options. In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure. SFAS No. 148
amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of





4



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EXULT, INC. AND SUBSIDIARIES



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)



the
method on reported results. SFAS No. 148 is effective for financial statements for fiscal years and interim periods ending after December 15, 2002. The Company adopted the disclosure provisions of SFAS No. 148 as of December 15, 2002 and continues
to follow APB No. 25 in accounting for employee stock options.



As of June 30, 2002 and 2003, the Company had options outstanding to acquire 21,875,644 and 27,438,647 shares, respectively, of its Common Stock. The following table shows the pro forma net income (loss) as if the fair value method of SFAS
No. 123 had been used to account for its employee stock-based compensation arrangements (in thousands, except per share amounts):





|                                                                                                                                    |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | -
|                                                                                                                                    |  | 2002                        |        |   | 2003                      |  
|Net income (loss), as reported                                                                                                      |  | $                           | (4,528 | ) |                           | $
|Stock-based employee compensation expense included in reported net income (loss), net of related tax effects                        |  |                             | 111    |   |                           |  
|Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                             | (4,766 | ) |                           |  
|                                                                                                                                    |  |                             |        |   |                           |  
|Pro forma net income (loss)                                                                                                         |  | $                           | (9,183 | ) |                           | $
|                                                                                                                                    |  |                             |        |   |                           |  
|Net income (loss) per share:                                                                                                        |  |                             |        |   |                           |  
|Basic, as reported                                                                                                                  |  | $                           | (0.04  | ) |                           | $
|                                                                                                                                    |  |                             |        |   |                           |  
|Diluted, as reported                                                                                                                |  | $                           | (0.04  | ) |                           | $
|                                                                                                                                    |  |                             |        |   |                           |  
|Pro forma, basic and diluted                                                                                                        |  | $                           | (0.09  | ) |                           | $
|                                                                                                                                    |  |                             |        |   |                           |  



The following outlines
the significant assumptions used to calculate the fair value information presented utilizing the Black-Scholes approach with ratable amortization for the three and six months ended June 30, 2002 and 2003:



|                        |  | 2002           |  | 2003  |  
|----------------------- |  | -------------- |  | ----- | -
|Risk-free interest rate |  | 5.63% to 6.20% |  | 2.59  | %
|Expected life           |  | 4.00           |  | 5.63  |  
|Expected volatility     |  | 77.70%         |  | 77.70 | %
|Expected dividends      |  |               |  |      |  



Recent Accounting
Pronouncements



Effective prospectively for
arrangements entered into in fiscal periods beginning after June 15, 2003, EITF Issue 00-21, Revenue Arrangements with Multiple Deliverables, addresses the accounting, by a vendor, for contractual arrangements in which multiple
revenue-generating activities will be performed by the vendor. In some situations, the different revenue-generating activities (deliverables) are sufficiently separable and there exists sufficient evidence of fair values to account separately for
the different deliverables (that is, there are separate units of accounting). In other situations, some or all of the different deliverables are closely interrelated or there is not sufficient evidence of relative fair value to account separately
for the different deliverables. EITF Issue 00-21 addresses when and, if so, how an arrangement involving multiple deliverables should be divided into separate units of accounting. The Company is currently in the process of determining the impact of
the adoption of EITF Issue 00-21 on its consolidated financial statements.



5



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EXULT, INC. AND SUBSIDIARIES



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)



2.
Reclassification of Depreciation and Amortization Expense



Depreciation and amortization expense had previously been set forth as a separate line item in the Condensed Consolidated Statements of Income (Loss) and has been reclassified to Cost of Revenue and Selling, General and Administrative
Expense for all periods presented. Accordingly, for the three months ended June 30, 2002, the effect of this reclassification was to increase Cost of Revenue by $3,750,000 and Selling, General and Administrative Expense by $705,000. For the six
months ended June 30, 2002, the effect of this reclassification was to increase Cost of Revenue and Selling, General and Administrative Expense by $6,261,000 and $2,061,000, respectively. For the three months ended June 30, 2003, Cost of Revenue and
Selling, General and Administrative Expense included depreciation and amortization of $4,731,000 and $529,000, respectively. For the six months ended June 30, 2003, Cost of Revenue and Selling, General and Administrative Expense included
depreciation and amortization of $9,023,000 and $1,323,000, respectively.



3. Short-Term Investments



Short-term
investments are comprised of available-for-sale securities at December 31, 2002 and June 30, 2003, and consist of the following (in thousands):



|                                 |  | December 31, 2002 |         | June 30, 2003       
|-------------------------------- |  | ----------------- | ------- | --------------------
|                                 |  | Amortized Cost    |         | Estimated Fair Value
|Amounts Included in              |  |                   |         |                     
|Cash and Cash Equivalents:       |  |                   |         |                     
|Institutional money market funds |  | $                 | 41,851  |                     
|                                 |  |                   |         |                     
|Amounts Included in Investments: |  |                   |         |                     
|Commercial paper and other       |  |                   | 2,917   |                     
|Corporate notes                  |  |                   | 28,520  |                     
|Asset-backed securities          |  |                   | 21,283  |                     
|U.S. Treasuries and Agencies     |  |                   | 31,595  |                     
|                                 |  |                   |         |                     
|                                 |  |                   | 84,315  |                     
|                                 |  |                   |         |                     
|                                 |  | $                 | 126,166 |                     
|                                 |  |                   |         |                     



The commercial paper in which the
Company invests must have a minimum rating of A-1 or P-1, as rated by Standard & Poors and Moodys, respectively. Corporate notes in which the Company invests must have a minimum rating of A-2 or P-2, as rated by Standard &
Poors and Moodys, respectively. Asset-backed securities in which the Company invests must have a minimum rating of AAA or Aaa, as rated by Standard & Poors and Moodys, respectively. As of June 30, 2003, there are gross
unrealized holding gains of $303,000 and gross unrealized holding losses of $6,000 from available-for-sale securities.



Amortized cost and estimated fair market value of debt securities classified as available-for-sale by contractual maturities at December 31, 2002 and June
30, 2003, consist of the following (in thousands):



|                          |  | December 31, 2002 |        | June 30, 2003       
|------------------------- |  | ----------------- | ------ | --------------------
|                          |  | Amortized Cost    |        | Estimated Fair Value
|Due in less than one year |  | $                 | 48,854 |                     
|Due in one to three years |  |                   | 32,538 |                     
|                          |  |                   |        |                     
|                          |  | $                 | 81,392 |                     
|                          |  |                   |        |                     



6



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EXULT, INC. AND SUBSIDIARIES



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)



4.
Unbilled Receivables



Included in accounts receivable as
of December 31, 2002, and June 30, 2003, is $7,057,000 and $22,016,000, respectively, of unbilled receivables consisting of revenue in excess of billings on certain long-term outsourcing contracts. All unbilled receivables are recoverable over the
remaining respective lives of the contracts through billings made in accordance with the respective contract provisions. Included in accrued liabilities and other as of June 30, 2003, is $2,626,000 of deferred revenue representing billings in excess
of amounts earned on certain long-term outsourcing contracts. There was no deferred revenue as of December 31, 2002.



5. Business Optimization Costs



The Company has incurred business optimization costs from time to time as it implements new organization structures, technologies, processes and other
changes in its business. For the year ended December 31, 2002, and the six months ended June 30, 2003, there were no business optimization costs incurred. The following is a summary of the business optimization costs incurred during 2001, and the
ending accrual balance, which is included in accrued liabilities and other, as of December 31, 2002, and June 30, 2003, (in thousands):



|                                 |  | Accruals |        |   | Non-Cash Charges |   | Total
|-------------------------------- |  | -------- | ------ | - | ---------------- | - | -----
|Severance and Related Charges    |  | $        | 6,648  |   |                  | $ | 3,040
|Processing Centers Closure Costs |  |          | 6,621  |   |                  |   |     
|Write-off of Database            |  |          |       |   |                  |   | 2,165
|                                 |  |          |        |   |                  |   |      
|                                 |  |          | 13,269 |   |                  | $ | 5,205
|                                 |  |          |        |   |                  |   |      
|2001 Cash Payments               |  |          | (3,976 | ) |                  |   |      
|                                 |  |          |        |   |                  |   |      
|Balance at December 31, 2001     |  |          | 9,293  |   |                  |   |      
|                                 |  |          |       
|2002 Cash Payments               |  |          | (5,118 | ) |                  |   |      
|2002 Accrual Adjustments         |  |          | (2,309 | ) |                  |   |      
|                                 |  |          |        |   |                  |   |      
|Balance at December 31, 2002     |  |          | 1,866  |   |                  |   |      
|                                 |  |          |       
|2003 Year-to-Date Cash Payments  |  |          | (1,112 | ) |                  |   |      
|2003 Accrual Adjustments         |  |          | (44    | ) |                  |   |      
|                                 |  |          |        |   |                  |   |      
|Balance at June 30, 2003         |  | $        | 710    |   |                  |   |      
|                                 |  |          |        |   |                  |   |      



The accrual adjustments were made as a
result of completion of certain of these arrangements at amounts less than previously estimated and changes in certain estimates with regard to the remaining arrangements. The Company expects the remaining balance to be paid out during the next 12
months.



6. Income Taxes



The Company did not record a tax provision for the three-month and six-month
periods ended June 30, 2002, as it had incurred only net operating losses as of that date. A full valuation allowance is provided against the tax benefit generated by the net operating losses because of the uncertainty of realizing the deferred tax
assets associated therewith. For the three months and six months ended June 30, 2003, the Company did not record a tax provision as a result of partial utilization of the benefit from tax losses. As of June 30, 2003, Exult has $59.0 million of
remaining deferred tax assets, arising primarily from its net operating losses, for which it has fully reserved through its valuation allowance as a result of the uncertainty of realizing these deferred tax assets.



7



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EXULT, INC. AND SUBSIDIARIES



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)



7.
Net Income (Loss) Per Share



The following is the
calculation for net income (loss) per share (in thousands, except per share amounts):



|                                           |  | Three Months EndedJune 30, |         | Six Months Ended June 30,
|------------------------------------------ |  | -------------------------- | ------- | -------------------------
|                                           |  | 2002                       |         |                          
|Basic:                                     |  |                            |         |                          
|Net income (loss)                          |  | $                          | (4,528  | )                        
|Weighted average common shares             |  |                            | 105,077 |                          
|                                           |  |                            |         |                          
|Net income (loss) per common share         |  | $                          | (0.04   | )                        
|                                           |  |                            |         |                          
|Diluted:                                   |  |                            |         |                          
|Net income (loss)                          |  | $                          | (4,528  | )                        
|                                           |  |                            |         |                          
|Weighted average common shares             |  |                            | 105,077 |                          
|Stock option and warrant equivalent shares |  |                            |        |                          
|                                           |  |                            |         |                          
|Average common shares outstanding          |  |                            | 105,077 |                          
|                                           |  |                            |         |                          
|Net income (loss) per common share         |  | $                          | (0.04   | )                        
|                                           |  |                            |         |                          



For the three months
and six months ended June 30, 2002, the impact of all outstanding warrants and stock options to purchase Common Stock were excluded from the computations of diluted net loss per common share as their effect is antidilutive. As of June 30, 2002, the
Company had a warrant outstanding exercisable for 2,500,000 shares of Common Stock with an exercise price of $11.00 per share and options outstanding exercisable for 21,875,644 shares of Common Stock with a weighted average exercise price of $7.92
per share. For the three months ended June 30, 2003, the weighted average number of shares outstanding used to compute diluted net income per share excluded the effect of a warrant outstanding exercisable for 2,500,000 shares of Common Stock with an
exercise price of $11.00 per share and options outstanding exercisable for 13,146,885 shares of Common Stock with a weighted average exercise price of $10.59 per share because such warrant and options have exercise prices in excess of the average
market value of the Companys Common stock during the period and their effect is therefore antidilutive. For the six months ended June 30, 2003, the weighted average number of shares outstanding used to compute diluted net income per share
excluded the effect of a warrant outstanding exercisable for 2,500,000 shares of Common Stock with an exercise price of $11.00 per share and options outstanding exercisable for 13,553,821 shares of Common Stock with a weighted average exercise price
of $10.57 per share because such warrant and options have exercise prices in excess of the average market value of the Companys Common stock during the period and their effect is therefore antidilutive.



8. Commitments and Contingencies



The Company and its subsidiaries are from time to time parties to legal
proceedings, lawsuits and other claims incident to their business activities. Such matters include, among other things, assertions of contract breach and claims by persons whose employment with the Company has been terminated in connection with
facilities consolidations, headcount rationalizations, outsourcing of certain operational functions, including in some cases to offshore vendors, and other measures that the Company has undertaken and expects to continue to undertake in the ordinary
course of its business. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, management is unable to ascertain the ultimate aggregate amount of monetary liability, amounts which may be covered
by insurance, or the financial impact with respect to these matters as of June 30, 2003. However, management believes at this time that the final resolution of these matters, individually and in the aggregate, will not have a material adverse effect
upon the Companys consolidated financial position, results of operations or cash flows.



9. Acquisition



On June
9, 2003, the Company acquired from a single seller certain legal entities and assets and assumed certain liabilities constituting a business process management outsourcing business that the Company intends to continue to operate. The results of
operations of the acquired business for the period from June 10, 2003 through June 30, 2003 are included in the Companys condensed consolidated statements of income (loss). The cash purchase price, including transaction costs, was $17,716,000,
subject to



8



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EXULT, INC. AND SUBSIDIARIES



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(continued)



adjustment for finalization of the value of the net assets acquired. The preliminary allocation of the purchase price to the assets acquired, including the excess of net tangible assets acquired over liabilities assumed, is as follows:



|Current assets            |  | $ | 8,024 
|------------------------- |  | - | ------
|Fixed assets              |  |   | 6,060 
|Intangible asset          |  |   | 12,673
|Other assets              |  |   | 97    
|                          |  |   |       
|Total assets acquired     |  |   | 26,854
|Current liabilities       |  |   | 9,138 
|                          |  |   |       
|Total liabilities assumed |  |   | 9,138 
|Net assets acquired       |  | $ | 17,716
|                          |  |   |       



The value attributed to the purchased
outsourcing contracts has been recorded as an intangible asset. The intangible asset will be amortized as cost of revenue over the remaining terms of the purchased contracts.



10. Capital Transaction



On April 23, 2003, Exult entered into an agreement to provide business process management services to BMO Financial Group. In connection with the
outsourcing services arrangement, the Company issued BMO Financial Group a fully vested warrant to purchase up to 1,000,000 shares of the Companys common stock. The warrant expires in April 2008 and may not be exercised prior to April 2005.
The warrant may only be exercised in its entirety, must be exercised in a single transaction and must be exercised on a cashless, net issuance basis. The exercise price is derived from a formula with a minimum exercise price of $7.55 per share. The
warrant has been recorded at its fair value of $1.3 million calculated by utilizing the Black-Scholes methodology as of the date of issuance and is included in intangible assets. The intangible asset will be amortized as a reduction of revenue over
the term of the related outsourcing contract.



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|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- |  | --------------------------------------------------------------------------------------



This report contains forward-looking statements that are based on our current expectations, assumptions, estimates and
projections about our company and our industry. When used in this report, the words may, will, should, predict, continue, plans, expects, anticipates,
estimates, intends and similar expressions are intended to identify forward-looking statements. These statements include, but are not limited to, statements in this report under the caption Managements Discussion
and Analysis of Financial Condition and Results of Operations and elsewhere concerning, among other things, our anticipated performance, including revenue, margin, cash flow, balance sheet and profit expectations; size and duration of client
contracts; business mix; development, implementation and scaling of our Exult Service Delivery ModelSMoperational
capabilities, including transition and transformation of client processes to our systems, productivity improvements, and cost savings from strategic initiatives; performance under client contracts; market opportunities; international operations;
growth in our client base and existing contracts; client benefits and satisfaction; workforce improvements; and service center capacities.



Actual results might differ materially from the results projected due to a number of risks and uncertainties. We are still expanding, developing and
enhancing our service capabilities and must operate at greater scale than historically, transition client processes on schedule and transform those processes to reduce delivery costs while meeting contractual service level commitments. Financial
performance targets might not be achieved due to various risks including slower-than-expected process transitions or business development or higher-than-expected costs to meet service commitments or sign new contracts. Our cash consumption may
exceed expected levels if profitability does not meet expectations, strategic opportunities require cash investment, or growth exceeds current expectations. Frontlog (see discussion below) is estimated based upon various assumptions, is subject to
change, and is not necessarily indicative of what new business we may sign. Client contracts may terminate early, and new business is not assured. These and other risks and uncertainties are described in this report under the heading Risk
Factors and in our other filings made from time to time with the Securities and Exchange Commission. The cautionary statements made in this report should be read as being applicable to all related forward-looking statements wherever they
appear. These statements are only predictions. We cannot guarantee future results, levels of activity, performance or achievements. We assume no obligation to publicly update or revise these forward-looking statements for any reason, or to update
the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.



OVERVIEW



Our primary source of revenue is fees we earn for providing our HR-led business process management services under long-term contracts. We also receive
additional revenue from client projects and consulting services. Our process management service contracts generally have terms of 7 to 10 years, encompass multiple HR and related administrative processes, and require us to provide high levels of
service at reduced costs to the client. These contracts contain multiple responsibilities for us, including both our assumption of responsibility for transaction processing and administration, and transformation of the way work is performed over
time by the client. The transformation work we do is largely in addition to the work required to initiate and sustain service under the contract, and may be ongoing for the life of the contract. Transformation activities include implementation and
integration of new systems and tools, process change and standardization, consolidation of related activities, globalization of solutions across the clients business and geographic reach, rationalization of third-party vendors to produce lower
costs and better service, establishment of an overall integrated service delivery model and the design and implementation of performance measurements, metrics and reports that support the clients goals. The process management service contracts
also identify specific deliverables associated with the multiple elements described above, in addition to numerous deliverables that are produced for the benefit of the client in the ordinary course under the contract that are not specifically
identified in the contract. While these deliverables generally can be completed by third parties, clients choose to obligate us to perform this work to obtain the benefit of our expertise, detailed knowledge and previous success in implementing
change in complex environments.



Our business process
management contracts are generally structured so that we receive a fee that is no greater than our clients historical cost of operating the functions assumed by us. We typically agree to provide a minimum savings to the client on the
labor-based portion of the contract that we refer to as direct after a pre-determined period of time, approximately one year from contract signing, and we may be required to share further savings with our clients in negotiated gain
sharing arrangements for the indirect spend portion of the contract covering services previously subcontracted by the client. The amount of minimum savings is determined in accordance with the terms of the applicable contracts. By
operating client processes on a long-term contract basis using our service platforms and methodologies, we seek to reduce the costs of service delivery below the minimum savings provided in the contract, and recover the investment we make during the
early part of the contract term for transition and integration of client processes.



10



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We fulfill some of our service delivery obligations through the use of third-party vendors, including
vendors that had previously contracted directly with our clients and were then assigned, or are in the process of being assigned, to us in connection with our process management services. We may continue to use these vendors, hire replacement
vendors, or provide some of these services directly. We are contractually responsible for the delivery and acceptability to our clients of these third-party vendor services, and we include in revenue all charges for services for which we are
contractually responsible, whether we provide these services directly using our own personnel or through third-party vendors. Sometimes we pay the charges of the third-party vendors that provide services and bill our clients for the cost of the
service. Other times our client pays the third-party vendor directly on our behalf. In either case, such costs are included in our cost of revenue. In many cases our initial cost of paying these vendors is equal to our revenue attributable to their
services. We intend to realize a profit from revenue received in connection with services provided under these third-party vendor contracts, and in order to do so, we must reduce these vendor costs by rationalizing the vendors, improving
efficiencies, obtaining more favorable pricing, or performing the services ourselves at a lower cost.



We incurred a net loss of $94.8 million, $74.7 million and $10.6 million in 2000, 2001 and 2002, respectively. While we reported profitable operations in
the fourth quarter of 2002 and the first two quarters of 2003, and we expect to operate profitably in the future, we may incur net losses in future periods. We anticipate ongoing significant expenditures to fund the development and expansion of our
technology and general operating infrastructures. We may also make substantial investments to pursue, obtain and transition new client contracts; to augment our service offering and process capabilities; to develop new service center capacity to
accommodate any growth we may achieve beyond the capacity of our existing service center infrastructure; and to expand geographically to better serve our clients or compete more effectively. To the extent that revenue does not increase at a rate
commensurate with our increasing costs and expenditures, our future operating results and liquidity could be materially and adversely affected.



Critical Accounting Policies and Estimates



Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to long-term service contracts, bad debts, fixed assets and direct contract costs,
intangible assets, income taxes, accruals in connection with certain business optimization costs, contingencies and litigation. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the
circumstances. We may revise these estimates and judgments from time to time as a result of changes in assumptions or conditions. The following critical accounting policies affect significant judgments and estimates used in the preparation of our
consolidated financial statements.



Long-Term Contracts



General. We provide outsourcing services under multi-year,
multi-element arrangements, which generally extend up to ten years. These contracts are principally structured on a fee-for-service basis and provide that we receive a fee that is no greater than the clients historical cost of operating the
functions assumed by us. For some components of our outsourcing fees we provide negotiated discounts from the clients historical costs. For other components of our outsourcing fees, principally reflecting amounts previously paid by clients to
third-party vendors, after we have recovered our costs and/or achieved a negotiated minimum cost reduction, we may be required to share further savings with our clients in a negotiated gain sharing arrangement.



We recognize revenue and profit as work progresses based upon the proportion
of costs incurred to the total expected costs. We maintain for each of our contracts estimates of total revenue and cost over the respective contract term. For purposes of periodic financial reporting, we accumulate total actual costs incurred to
date under the contract. The ratio of those actual costs to our then-current estimate of total costs for the life of the contract is then applied to our then-current estimate of total revenue for the life of the contract to determine the maximum
portion of total estimated revenue that should be recognized. To the extent that revenue is recognized under this policy in excess of amounts billed under the contract, unbilled receivables will be recorded. We follow this method because reasonably
dependable estimates of the revenue and costs applicable to various stages of a contract can be made. Revisions in our contract estimates are reflected in the period in which the determination is made that facts and circumstances dictate a change of
estimate. Favorable changes in estimates result in additional revenue and profit recognition, and unfavorable changes in estimates result in a reduction of recognized revenue and profit. Provisions for estimated losses on individual contracts are
made in the period in which the loss is first determined.



11



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Our previous practice was to limit the amount of revenue recognized as described above to the amounts
that had been or could be currently billed as of the end of the reporting period under the terms of the contracts. This limitation was implemented earlier in our history to minimize the potential impact of changes in estimates, which were more
likely to be significant before we had achieved operational maturity in our business and operational stability in our underlying contracts. Now that our business has matured, our practice is to apply the revenue limitation on a contract-by-contract
basis only until each contract reaches operational stability, and then to adjust the cumulative revenue recognized to date for that contract to fully reflect the then-current estimates of profitability for the contract over its term. We measure the
achievement of operational stability for each contract by considering various factors, including: completion of initial transition of client processes to our service delivery infrastructure; completion of the initial software and systems integration
necessary to support our performance of services to the client; and achievement of stable operations under the contract as evidenced by the predictability of costs incurred. In addition, there may be other factors relevant to the operational
stability of any particular contract, which we consider as appropriate in determining whether to cease to apply the revenue limitation to that contract. The revenue and gross profit adjustment on a contract resulting from discontinuance of the
revenue limitation may be significant, depending on factors including the size of the contract and the cumulative costs incurred as of the date at which the contract achieved operational stability, but should not be considered indicative of future
period results.



Estimates and Changes in
Estimates. Our method of accounting is intended to reflect the economic substance of our long-term outsourcing contracts. Several factors can cause variability of reported results.



We make estimates of total contract revenue and cost, and we periodically
update those estimates to reflect our evolving estimates of the life-of-contract economics. While we believe we can make reasonably dependable estimates, all estimates are inherently uncertain and subject to change. Incorrect assumptions or
erroneous perceptions of the resources required or revenue potential of a contract may need to be corrected. Changes in circumstances may require modification of estimates that were appropriate when made. Uncertainties inherent in the performance of
contracts may affect our assessment of our contracts over time.



In an effort to maintain appropriate estimates, our policy is to review each of our long-term outsourcing contracts on a regular basis, not less than annually, and to revise our estimates of revenue and cost as appropriate. Various factors
could cause us to increase our estimates of contract expense. For example, our employment expenses and fees paid to vendors will tend to increase over time and may increase significantly from time to time depending upon market conditions and other
factors. Changes in technology or competition may require us to increase infrastructure spending to maintain appropriate service capabilities. Changes in law may increase compliance costs. Our cost estimates may include the effect of some
anticipated future cost savings that we believe are probable of achieving, in addition to savings already achieved, and anticipated future cost savings may not be realized. Other factors could cause us to decrease our estimates of contract expense.
For example, improvements in service delivery that we achieve through process engineering, application of technology, and vendor rationalization all tend to decrease contract costs.



In addition, various factors could cause us to reduce our estimates of contract revenue. For example, clients may reduce
contract scope, either by canceling processes due to performance issues or, under some circumstances, by in-sourcing processes, subject to the terms of the contract with the client. Service volumes may decrease due to contraction of the client
organization. Other factors could cause us to increase our estimates of contract revenue. For example, service volumes may increase due to growth in the clients business, and clients may increase the scope of services they acquire from us
through contract amendment.



Increases in cost estimates and
decreases in revenue estimates can have material adverse effects on our earnings. If we determine that our previous cost estimates for a contract were too low, or our previous revenue estimates were too high, we will change our estimates
appropriately in the period in which the determination is made, including the recognition of the cumulative impact of the revision. The amount by which prior period revenue and gross profit was higher than it would have been if the updated estimates
had been applied during earlier periods will be a revenue and gross profit reduction in the period that the estimates are changed, and the lower estimated contract margin will also reduce our future gross profit outlook. Conversely, if we determine
that our previous cost estimates for a contract were too high, or our previous revenue estimates were too low, the amount by which prior period revenue and gross profit was lower than it would have been if the updated estimates had been applied
during earlier periods will be a revenue and gross profit increase in the period that the estimates are changed (subject to our revenue recognition limitation if it is then still in place for that particular contract), and the higher estimated
contract margin will also increase our future gross profit outlook. The magnitude of these effects will increase proportionately with the size of the contract, the proportion of the contract completed and the extent of the change in estimates. Some
of these effects could be significant. Further, because we have a relatively small number of contracts and high client concentration, adverse changes in estimates for a single client contract could have a material adverse effect on our results of
operations.



12



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We do not enter into contracts that are expected to result in a loss, but from time to time increases in
cost estimates or reductions in revenue estimates may result in projected negative margins on a contract. In that case, the expected life-of-contract loss would be reflected as a loss in the period in which the loss determination was made, and the
contract would then be accounted for at a zero margin for the remainder of its term. This could have a material adverse effect on our results of operations in the period in which the loss determination is made and would reduce our gross profit
outlook.



Policies and Practices. We apply
various policies and practices, including principally the three described below, to guide our estimates of contract revenue and cost and to produce financial statements that we believe appropriately reflect the economic substance of our outsourcing
business. Over time we may modify our policies and practices and implement new ones.



Revenue Limitation until Operational Stability.As described above, we limit revenue recognized for each contract to amounts billed or billable until the contract reaches operational stability. Therefore,
client contracts can contribute negative margins until operational stability is achieved. In the quarter in which contract operational stability is achieved, there generally is a change of estimate for the contract resulting in a one-time
recognition of cumulative additional revenue and income attributable to the application of estimated life-of-contract margin to costs incurred in prior periods. This change of estimate typically increases unbilled receivables and has a positive
effect on our revenue and operating results for the period in which it occurs, but should not be considered to be an appropriate indication of future results.



Revenue recognition for variable services.Some services included in our process management contracts, such as
staffing and learning, can have high variability in service volumes because client spending in these areas is discretionary to a significant degree, and highly sensitive to changes in client policies and strategies, as well as economic conditions
and developments in the clients business and outlook. Clients may choose to reduce or avoid such expenditures, which reduces our service volumes and revenue. Further, our costs for these resources can change quickly depending upon changing
conditions in geographic or industry markets. Accordingly, our financial results from provision of these services are more variable than for other services such as payroll. Because of this variability, we do not believe we can make reasonably
dependable estimates in these areas. As a consequence, revenue and cost for these services are not included in contract estimates. Revenues and costs for these variable services are recognized in the period the services are performed and are not
impacted by our long-term contract estimates.



Limited
horizon for estimates.We intend to achieve cost savings over the life of our outsourcing contracts. However, the achievement of such savings becomes more speculative in the later years due to the potential for increasing delivery costs,
uncertainty regarding client needs, and other factors. Therefore, contract estimates generally will reflect only those reductions in our costs of service delivery that we believe are probable of being realized within a limited time following the
date of analysis. As our operating experience increases and our ability to plan and execute cost savings improves, we would anticipate extending the period of estimate. The horizon included in the contract estimates as of June 30, 2003, includes the
estimated savings that we believe are probable of being achieved during the remainder of the current fiscal year, which are then assumed to be maintained for the remaining life of each contract.



Short-Term Arrangements



In addition to our outsourcing contracts that extend over long periods of time, we provide our customers services on a
short-term basis. These include consulting services primarily to non-outsourcing clients, which services are generally structured on a per diem basis, and project-based services for our outsourcing clients, which services may be structured on a per
diem or fee-for-service basis. For these short-term arrangements, we recognize revenue as services are performed provided there is evidence of an arrangement, we have met our delivery obligation, the fee is deemed fixed or determinable, and
collectibility is reasonably assured.



Allowance for Doubtful Accounts



We maintain an allowance for doubtful accounts for
estimated losses resulting from inability of our clients to make required payments. If the financial condition of our clients were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.



Direct Contract Costs



We capitalize certain set-up and other direct installation costs
(Direct Contract Costs) to the extent that management determines such costs are recoverable. Capitalized set-up and other direct installation costs are included in Fixed Assets and Direct Contract Costs



13



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and are amortized over the applicable contract term. As of December 31, 2002, and June 30, 2003, we had Direct Contract
Costs of $10.7 million and $12.3 million, respectively, net of accumulated amortization.



Deferred Tax Assets



As
of December 31, 2002, and June 30, 2003, we had $64.9 million and $59.0 million, respectively, of net deferred tax assets, arising primarily from our net operating losses, for which we have fully reserved through the valuation allowance. We record a
valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the
valuation allowance and we continue to monitor our ability to realize our deferred tax assets. As we begin to demonstrate consistent profitability, we may record one or more adjustments to reduce the valuation allowance to recognize on a current
basis our anticipated use of our deferred tax assets to reduce our future income tax liabilities. Each such adjustment will be recorded in the period that we determine it is more likely than not that we can recover all or a portion of our deferred
tax assets. Each adjustment will increase income for that period by an amount equal to the portion of the valuation allowance that we then determine we are more likely than not to recover. We were profitable during the quarter and six months ended
June 30, 2003, but did not record a tax provision due to the partial utilization of the benefit of tax losses. Upon utilization or expiration of the underlying net operating loss carry forwards, we will begin to record income tax expense and
commensurately lower net income for future periods in which we are profitable.



RISK FACTORS



Any of
the following risks and uncertainties could adversely affect our business, financial condition or results of operations. Other risks and uncertainties may also have an adverse effect on our business. The risks described in this report, and other
risks that may become apparent from time to time, should be considered in assessing the Companys prospects.



We have a relatively brief operating history and our future operating results are uncertain.



We entered into our first process management contract in December 1999. Our success depends on our ability to provide a high
quality, cost-effective service offering, operate it profitably, produce satisfactory results for our clients and attract new clients. While we have met our objectives to date and we believe our clients value our services, we have not been in
operation long enough to judge whether we can continue to accomplish all of these objectives, particularly in an increasingly complex and competitive marketplace. Accordingly, our future operating results are uncertain.



We currently depend on a small number of clients for most of our revenue. If any of these
clients were to substantially reduce or stop using our services, or if we experience significant, repeated performance failures in providing services to these clients, our reputation and future revenues would be seriously impaired.



We anticipate that revenue from Bank of America Corporation, BMO
Financial Group, BP p.l.c., International Paper Company, and Prudential Financial will represent a substantial portion of our revenue through 2003 and possibly in future periods. For fiscal 2002 and the first six months of 2003, these clients
collectively accounted for approximately 92% and 94%, respectively, of our revenue. We believe our ability to secure future clients and revenues will be largely dependent upon our ability to perform and achieve the contracted service levels and cost
savings for our current clients.



Each of our process
management contracts can be terminated for material breach, significant or repeated performance failures or in certain instances for convenience upon required notice and, in many cases, payment of specified early termination penalties. The early
termination penalties provided for under these contracts are designed to help defray the expenses we incur in implementing the contract, including diligence, transition, set-up and installation costs, and may provide some compensation to us, but
they are not adequate substitutes for the revenue or profit that could be lost as a result of contract termination.



As our business matures, the original terms of our major contracts will begin to expire. For example, our agreements for services to BP in the U.S. and
U.K. will expire late in 2004. We anticipate seeking to renew contracts as they expire, but clients are not obligated to renew and various factors, including changes in the client organization or in the market for HR outsourcing services, could
cause clients to take services back in-house or contract with other vendors. Further, we might choose not to bid on renewal, or not to bid aggressively, due to limited profit opportunity with the client, changes in our business model, or other
factors.



14



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If any of our major clients were to substantially reduce or stop using our services, or if we experience
significant, repeated performance failures, our reputation and future revenues would be seriously impaired. We expect to face similar risks with other significant clients until our business is more firmly established.



Our client contracts and vendor relationships may not yield the results we expect.



Our revenue expectations may decrease.We maintain
estimates of our aggregate anticipated annual revenue for our entire contract base. We may from time to time disclose some of these estimates. All of these estimates change as our contracts evolve, and a number of factors can cause our revenue
expectations to decrease. These factors include client financial difficulties or business contractions or restructurings that lead to reductions in workforce or discretionary spending on services such as staffing and training; amendments agreed to
by us which reduce the scope or revenue for services; early termination of client contracts in whole or part, whether resulting from adverse developments in the clients business or the clients exercise of discretion; insourcing or
retention by the client of processes previously contracted to us (subject to our approval when required under the terms of the contract); non-assignment to us of third-party vendor contracts that we initially envisioned taking over from the client;
and other circumstances within the clients organization. In addition, our receipt of revenue under any particular contract may be delayed if transition of the clients processes to our infrastructure takes longer than anticipated. While
our contracts with our clients may contemplate further expansion, this may not occur, and if it does occur, significant additional expenditures by us may be required to fund such expansion. In addition, our process management contracts generally
permit our clients to impose financial penalties against us for specified material performance failures.



We might not be able to achieve the cost savings required to sustain and increase profits under our contracts. Our business model inherently places
ongoing pressure on our operating margins. We provide our direct outsourcing services over long terms for fixed fees that are generally equal to or less than our clients historical costs to provide for themselves the services we contract to
deliver. Additionally, our contracts generally require one or more reductions of this fixed fee during the contract term, often beginning upon completion of process transitions or approximately one year after we commence services, irrespective of
our cost of providing these services. As a result, we bear the risk of increases in the cost of delivering HR process management services to our clients, and our margins associated with particular contracts will depend on our ability to control our
costs of performance under those contracts and meet our service commitments cost-effectively. Over time, vendor costs and our own internal operating expenses will tend to increase as we invest in additional infrastructure and implement new
technologies to maintain our competitive position and meet our client service commitments. Further, taking over services previously delivered by vendors involves further increases to our internal operating expense. We must respond by continuously
improving our service efficiency and vendor management and continuing to grow our business so that our costs are spread over an increasing revenue base. If we stop improving, our ability to sustain and increase profitability will be jeopardized.



Achieving the efficiency we need to sustain and increase our
profitability depends upon our ability to continue to develop our process operations and our ESDMSMinto a
standardized management system that can be operated from our client service centers and extended to multiple clients with limited client-specific adaptation and modification. The actual cost reductions we are able to achieve will vary by client for
a variety of reasons, including the scope of services we agree to provide and the existing state of our clients departments and processes. If we miscalculate the resources or time we need to perform under any of our contracts, or if our
transformation efforts are not as successful as we anticipate, the costs of providing our services could exceed the fees we receive from our clients, and we could lose money.



Our ESDMSMinvolves distribution of our work across our international network of service centers and among vendors, including overseas vendors, as efficiently as possible based upon the tasks being performed, staff training and
expertise, costs, regulatory issues, language, and other factors. This practice is critical to our business plans and we expect to continue and increase it. Some clients and potential clients may resist this approach to work distribution because of
concerns about service quality, data security, legal and cultural issues, and other reasons. Disruption of our work distribution methods, including limitations on our ability to use overseas vendors or to move work among our multi-shore locations,
would increase our costs and adversely affect our profitability. Overseas vendors may be difficult to manage and require significant investments in monitoring and systems integration. If we have disputes with overseas vendors it may be difficult for
us to enforce our rights, and replacing overseas vendors may involve delay and expense.



Our use of vendors presents liability risks and margin pressures.A significant part of our revenue (including somewhat more than half of our process management outsourcing revenue for the six months ended June
30, 2003) is attributable to services we offer to our clients which we fulfill through the use of third-party vendors that provide specialized services, such as temporary staffing, training, learning content, benefits administration and relocation
services. We select some of these vendors and assume others from relationships established by our clients before contracting with us. These vendors may act as subcontractors or vendors to us or



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provide services directly to our clients under our control; in either case, we have contractual responsibility for the
delivery and acceptability of these services, and errors or omissions, service failures, breach of contract or insolvency by our vendors could cause us to have liability to our clients. This liability could exceed the limits of liability the vendors
have to us. If our clients are not satisfied with the services provided by these third-party vendors, they may be entitled to recover penalties or to terminate their agreements with us, which could seriously harm our business.



Further, targeted operating margins are more difficult to achieve in the
portion of our revenue attributable to third-party vendors. Our third-party vendor business is composed of several different types of processes across numerous vendors. In many cases, our initial cost of paying these vendors is equal to our revenue
attributable to their services. In order to generate targeted operating margins and realize a profit from revenue received in connection with these third-party vendor contracts, we must reduce these vendor costs by rationalizing and consolidating
the vendors, improving efficiencies, obtaining more favorable pricing, or performing the services ourselves at a lower cost. This may involve delay as existing contracts run their course and we attempt to renegotiate with or replace these vendors.
In addition, at the conclusion of these third-party contracts, we must negotiate new third-party contracts, or provide these services ourselves, at the same or more favorable rates in order to generate our target operating margins. We may need our
clients consent to substitute new vendors or ourselves for previous vendors, either because of contractual provisions or operational concerns. We are still developing our third-party vendor management capabilities, and our efforts may lead to
varying results depending upon the process, vendor, and client involved and other factors. To date, our operating margins on the portion of our revenue attributable to services provided through third-party vendors have been limited.
Accordingly, until we are able to develop substantial portions of our third-party vendor business to the point that it generates meaningful operating margins, our overall margins and profitability will rely upon strong performance in the
direct process management and project and consulting services that make up the balance of our revenue.



Our ESDMSMis evolving and requires
ongoing development.



We are still developing the
Exult Service Delivery ModelSMinfrastructure, including our MultiDeliverySMoperational methodology, and our ability to continue to deliver and expand our broad process management solution depends upon our continued ability
to assemble and manage our own systems and capabilities and third-party vendors into an integrated and efficient delivery platform. Our clients use disparate information systems and operating methods, and transitioning their processes to our
operating platforms requires significant technology and process integration. We often must adapt or develop new systems and processes to accommodate various clients needs. Clients employees may access and utilize our myHRSMsolution and systems through interfaces that require significant development and integration of many independent programs and
complex functions, as well as ongoing revision, adaptation and maintenance. If we fail to develop a clients service delivery infrastructure in accordance with the specifications and delivery milestones agreed upon, or if we are unable to
complete development of scalable systems and achieve the functionality we expect, our ability to deliver our services and achieve our business objectives in general could be seriously impaired.



Our proportional cost method of accounting relies upon assumptions, estimates and policies
that may change over time; such changes may have significant adverse effects on our reported results of operations.



Use of proportional cost accounting for our long-term outsourcing contracts requires us to make assumptions and estimates and implement relevant policies.
Assumptions affect various matters, including when reasonably dependable estimates of revenue and cost under any particular contract can be made. Estimates of life-of-contract revenue and cost form the basis of reported operating results. Policies
dictate crucial matters such as how and when estimates are made and revised and how costs are allocated. These assumptions, estimates and policies involve the exercise of judgment and discretion, which may evolve over time in light of operational
experience, regulatory direction, developments in accounting principles, and other factors. Further, initially foreseen effects could change over time as a result of changes in assumptions, estimates and policies. Application of, and changes in,
assumptions, estimates and policies may result in adverse changes in periodic financial results.



From the time we begin providing services under a long-term outsourcing contract until the contract reaches operational stability, we limit the amount of
revenue recognized under our proportional cost methodology to amounts that have been or can be currently billed under the terms of the contract. Once the contract reaches operational stability, we discontinue this limitation and adjust the
cumulative revenue recognized to date for that contract to fully reflect the then-current estimates of profitability for the contract over its term. Thereafter, we recognize revenue and profit as work progresses based upon the proportion of costs
incurred to total expected costs for the life of the contract which may result in unbilled receivables. The amount of unbilled receivables associated with that contract will then diminish over the remainder of the contract term as billings exceed
revenue recognized. However, if a contract were to terminate early, any remaining unbilled receivable together with any other client-specific capitalized costs associated with that contract would be recognized as a cost in the period in which
termination occurs to the extent that they exceed termination payments



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we are entitled to recover. Termination payments may not be sufficient to defray the entire unbilled receivable and any
other client-specific capitalized costs, and the net write-off may be significant and could have a material adverse effect on our results of operations. Furthermore, cessation of payments by a client under a contract for which we have
client-specific capitalized costs, including outstanding unbilled receivables, because of insolvency, legal claims or other factors, would have similar consequences. As of June 30, 2003, we had unbilled receivables of approximately $22.0 million. We
expect unbilled receivables to increase as our business grows.



Proportional cost accounting requires us to maintain estimates of life-of-contract revenue and cost for each of our multi-year outsourcing contracts. All estimates are inherently uncertain and subject to change to correct inaccurate
assumptions and reflect changes in circumstances. In an effort to maintain appropriate estimates, we review each of our long-term outsourcing contracts on a regular basis. If we determine that our cost estimates for a contract are too low, or our
revenue estimates are too high, we will change our estimates in the period in which the determination is made, resulting in the recognition in that period of the cumulative portion of the revision that applies to prior periods. The amount by which
prior period revenue and gross profit was higher than it would have been if the updated estimates had been applied during prior periods would result in a reduction of revenue and gross profit in the period that the estimates are changed, and the
lower estimated margin would reduce our future gross profit outlook. The magnitude of these effects would increase proportionately with the size of the contract, the extent of the change in estimates, and the duration of the prior period to which
the updated estimates must be applied. Some of these effects could be significant. Further, because we have a relatively small number of long-term outsourcing contracts and high client concentration, changes in estimates for a single client contract
could have a material adverse effect on our results of operations.



New
standards may affect our accounting.



Accounting
rulemaking bodies and the staff of the SEC have promulgated new rules and interpretations related to accounting for long-term service contracts, including the recently released Emerging Issues Task Force Issue 00-21, Revenue Arrangements with
Multiple Deliverables. We believe, based upon our analysis and consultation with our advisors, that our accounting for our existing long-term contracts is not inconsistent with these new rules and interpretations. We are in the process of
determining the impact that adopting Emerging Issues Task Force Issue 00-21 may have on our accounting for any future long-term contracts that we obtain. Future developments in applicable accounting rules and their interpretation may require us to
adopt different accounting for long-term contracts.



Capacity constraints
and the length of our new client sales and integration cycles may limit our revenue growth.



We expect most of our future revenue growth to come from new client engagements. However, because the size of our client engagements tends to be
relatively large and new client transition can be complex, our ability to take on multiple new client engagements concurrently is limited. This may limit our revenue growth until we have developed to the point that our services can be extended more
rapidly across a greater number of clients.



Our client
contracts involve significant commitments and cannot be made without a lengthy, mutual due diligence process during which we identify the potential clients service needs and costs, and our ability to meet those needs and provide specified cost
savings. We must devote significant management time and other resources to each due diligence process over a period of six months or more, and we can conduct at most only a few of these due diligence undertakings at one time. This lengthy due
diligence process limits our revenue growth, and we have invested significant time and expense in some potential client relationships that have not resulted in contracts. It is possible that future client due diligence processes could result in a
decision by us or the potential client not to enter into a contract after we have made significant investments of time and resources.



After a new client contract is signed, we generally convert the clients HR processes to our systems and infrastructure. This transition period can
take from three months to over one year and may involve unanticipated difficulties and delays. Transition usually takes longer for greenfield clients that have not centralized their HR operations than for brownfield clients
that have consolidated HR operations that we can take over in place. We cannot realize the full efficiencies of providing services to the client through our infrastructure until this transition is complete. Therefore, any increase in our revenues
that could be expected from new agreements will generally be delayed for several months after the contract is signed, and it could take a significant amount of time for new agreements to contribute significantly to profits or cash flow. We attempt
to negotiate long-term contracts in order to give us time to complete the transition and earn a profit, but if implementation of our service model is delayed, or if the client terminates our engagement early for convenience or because we do not meet
our service commitments, we might experience no return, and possibly a loss, on our substantial investment of time and resources in that client.



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Our new business objectives may not be realized.



Our sales pipeline consists of potential expansions of contracts with existing clients, as well as potential contracts with
new clients. From time to time, we publicly discuss our estimated frontlog in order to provide investors with information that is relevant to an understanding of our business. Frontlog represents our estimate of revenue potential from qualified
client prospects with which we are in discussion regarding an outsourcing contract, as characterized by a confidentiality agreement, a letter of intent, a very small group of serious bidders, or other factors. Qualified prospective clients are those
who meet our criteria for scope, number of employees and access to decision makers. Our frontlog estimates are based upon our assumptions regarding potential scope and pricing, and assume an average ten-year contract term. Frontlog estimates are not
representations; the sales cycle for our services is long and complex and the frontlog is fluid, so the frontlog does not represent any assurance of future revenue and it is impossible to predict in advance which prospects may become clients or how
quickly contracts may be signed or implemented.



There is no assurance that
we will sustain profitability and positive cash flows.



The fourth quarter of 2002 and the first two quarters of 2003 were our first profitable quarters since our formation. We have not yet had a profitable fiscal year, and the creation of our business has consumed significant amounts of cash.
We incurred net losses of $94.8 million, $74.7 million and $10.6 million for the years ended December 31, 2000, 2001 and 2002, respectively. We may incur net losses in future periods. While we do not enter into contracts for which we expect to incur
a loss, and although we estimate and model each of our client contracts to be individually profitable, we cannot be certain that we can sustain or increase profitability on a quarterly or annual basis in the future. Further, our ability to sustain
positive cash flow depends upon a number of factors, including fuller utilization of our infrastructure and achievement of additional scale in our business. Cash flow can vary significantly from quarter to quarter for various reasons, including
investments we make in connection with new client transitions and strategic initiatives and timing differences between our receipt of payments from our clients and payments to our vendors.



From time to time we make projections about our future operating results,
including the amount of potential profitability and cash flows. These projections are estimates intended to provide information that is relevant to an understanding of our business, but are not a representation or guaranty regarding future
performance. The timing and magnitude of any profitability and positive cash flows we may achieve depends upon a number of factors including those set forth in these Risk Factors and in our other filings with the SEC.



Due to economic conditions, we failed to achieve some of the revenue growth
we had originally anticipated in 2002. In order to compensate for this and to enhance our ability to reach our goal of achieving profitability for the fourth quarter of 2002 and beyond, we implemented various cost reduction programs in 2002. These
programs included overhead facilities consolidations and limited headcount reductions that may need to be reversed to support long-term growth, as well as various reductions in manager discretionary compensation and discretionary employee benefit
programs that are not sustainable in the long run. Accordingly, our future profitability depends upon revenue increases as well as efficient operations.



We may need additional capital, which might not be available or might dilute existing stockholders.



For the years ended December 31, 2000, 2001 and 2002, we used cash of $56.2 million, $35.0 million and $5.5 million,
respectively, in operating activities and $23.8 million, $21.4 million and $38.1 million, respectively, to fund expenditures for direct contract costs and acquire property, plant and equipment as well as certain intangible assets. In addition, for
the six months ended June 30, 2003, cash flow from operating activities provided cash of $22.8 million while cash used in investing activities to fund expenditures for direct contract costs, acquiring property, plant, equipment and contract related
intangible assets, and the purchase of an outsourcing business totaled $46.4 million. Ongoing development and expansion of our infrastructure and service capacity, acquiring new client contracts and transitioning their services requires significant
capital investment. We may decide to raise additional funds through public or private debt or equity financings in order to maintain adequate cash balances to satisfy the expectations of prospective clients; finance acquisitions, new client
contracts with capital investment requirements, and other strategic opportunities; and address operating issues. If we are required to raise additional funds through the issuance of equity securities, the percentage ownership of our existing
stockholders would be reduced. Further, such equity securities may be sold at prices below those paid by existing stockholders, and have rights, preferences or privileges senior to those of our common stock. We cannot be certain that we will be able
to raise additional funds on favorable terms, or at all, and if we need additional funds but cannot obtain them, our ability to fund our operations or strategic initiatives may be impaired.



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To succeed we must hire, assimilate and retain key personnel, allocate work appropriately, open new client service
centers, assimilate our clients personnel and systems and expand our own systems and controls.



To sustain and increase profitability, we must extend our service model across many client organizations and gain additional critical mass in the size and
breadth of our operations. Our ability to achieve growth depends upon the following essential elements:



| |  |  | The market for skilled employees is competitive, and we must be able to hire, train and retain key personnel including managers, human resources specialists, web and Internet
technologists and programmers, business development and process management specialists and technical and customer support personnel.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have recently added four client service centers: one in India, which we have created to provide supporting services across our system; one in Canada, which we have begun
operating in connection with our contract with BMO Financial Group; and one each in England and Brazil, which we acquired as part of the purchase of business process outsourcing contracts. We anticipate opening an additional center in Eastern
Europe. Our plan is to use these new centers, together with our centers in Texas, Tennessee, North Carolina and Scotland, as an integrated multi-shore network within which we will allocate work as efficiently as possible based upon the tasks being
performed, staff training and expertise, costs, regulatory issues, language, and other factors. Optimal work allocation is an important part of the ESDMSM, and can be difficult to achieve due to significant training, organizational integration, and systems requirements, among other factors. If we are unable to optimize work allocation, our profitability
and ability to structure competitive new BPO contracts will suffer.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our client service centers are designed to handle our existing client demands and have capacity to accommodate anticipated near-term growth in our service volumes. We will need to
expand our existing centers or open new client service centers to handle the long-term growth we seek. We must devote substantial financial and management resources to launch and operate new centers successfully, and we may not select appropriate
locations for these centers, open them in time to meet our client service commitments or manage them profitably.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As we assume responsibility for the existing HR departments of our clients, we must be able to assimilate certain HR personnel from these clients and integrate disparate systems,
procedures, controls and infrastructures.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | If we do not manage growth effectively, our ability to perform under our contracts may be jeopardized and our reputation may be harmed.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



Our quarterly financial results may vary and cause our stock price to fluctuate.



Our quarterly financial results have varied in the past
and are likely to vary significantly in the future. It is possible that in some future quarter or quarters our financial results will be below the revenue or profit or cash flow expectations of public market analysts or investors. If so, the market
price of our common stock may decline significantly. Factors that may cause our results to fluctuate include but are not limited to:



| |  |  | the growth of the market for our HR services and our ability to obtain new client contracts;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | our ability to continue to execute successfully on client contracts;
| | - |  | --------------------------------------------------------------------



| |  |  | the length of the sales and integration cycle for our new clients;
| | - |  | ------------------------------------------------------------------



| |  |  | cancellations or reductions in the scope of our contracts;
| | - |  | ----------------------------------------------------------



| |  |  | delays in transitioning various client processes to our infrastructure;
| | - |  | -----------------------------------------------------------------------



| |  |  | changes we may make in our estimates of revenues and costs pursuant to our proportional cost method of accounting for our outsourcing contracts;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to develop and implement additional service offerings and technologies;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | our ability to successfully market and sell to our clients complementary third-party products and offerings that we have purchased in advance of client orders;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------





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| |  |  | the introduction of comprehensive HR services by new and emerging competitors;
| | - |  | ------------------------------------------------------------------------------



| |  |  | changes in our pricing policies or those of our competitors;
| | - |  | ------------------------------------------------------------



| |  |  | our ability to manage costs, including personnel costs, support services costs and third-party vendor costs;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | the timing and cost of strategic initiatives and openings or expansions of client service centers; and
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | our ability to sustain overall profitability.
| | - |  | ---------------------------------------------



We have in the past purchased assets and hired personnel from our clients and third parties. We expect to continue such transactions from time to time in
the future. Acquisitions may result in amortization expense and other charges. In addition, rationalizing headcount and facilities consolidation following acquisitions or transition of client processes to our systems may result in severance and
closing expenses. As our business evolves, we may from time to time incur costs for severance and infrastructure consolidation, as well as costs relating to the implementation of new organization structures, technologies, processes and other changes
in our business. These costs will reduce our reported earnings. Our service delivery infrastructure is represented by significant tangible and intangible assets reflected on our balance sheet. Our existing assets and infrastructure can accommodate
some growth in our business, and we expect our capacity to increase in the future, both as a result of acquisitions of new assets and efficiency improvements in our Exult Service Delivery ModelSM. We try to maintain sufficient assets and capacity to support reasonably anticipated business growth without carrying excessive assets or idle capacity. To
the extent that we might in the future determine that our assets or the capacity of our service delivery infrastructure exceed our reasonably anticipated needs, it may be necessary to take a charge to operations for excess assets or capacity, which
would reduce our reported earnings.



We could experience damages, service
interruptions or failures at our client service centers or in our computer and telecommunications systems.



Our business could be interrupted by damage to or disruption of our client service centers, computer and telecommunications equipment and software systems
from fire, power loss, hardware or software malfunctions, penetration by computer hackers, computer viruses, natural disasters, vendor performance failures or insolvency, and other causes. We may lose data. Our clients businesses may be harmed
by any system or equipment failure we experience. As a result of any of the foregoing, our relationships with our clients may be impaired, we may lose clients, our ability to attract new clients may be adversely affected and we could be exposed to
contract liability. We cannot be certain that we will be able to route calls and other operations from an affected center to another in the event service is disrupted and we may not be able to recover data used in our operations. In addition, in the
event of widespread damage or failures at our facilities, we cannot guarantee that the disaster recovery plans we have in place will protect our business.



We could experience fraud or theft.



Our services involve access to systems and accounts containing confidential personal data and monies of clients and their personnel. Notwithstanding our
efforts, complete security is difficult to achieve. Dishonest acts by our employees, client employees or vendor personnel could expose us to liability, damage our reputation, and impair our client relationships.



We are subject to risks associated with our international operations.



We believe multinational capabilities will be important as the competitive
market for outsourcing evolves and our business strategy includes international expansion. We have recently acquired international BPO contracts and related infrastructure, including client service centers in England and Brazil and operating
presences in the Netherlands, Hong Kong and Singapore. We have also commenced operation of client service centers in Canada and India. We now operate eight client service centers on four continents. We expect to continue to expand our international
operations in the future as we take on additional large, multinational clients. Overseas expansion requires capital investment and presents significant risks and operational challenges. Foreign legal and regulatory requirements, affecting business
operations in general as well as human resources processes in particular, may be complex and require significant investment in compliance capabilities. Development and maintenance of the expertise required to deal effectively with different
countries workplace practices could be expensive and time consuming. Tariffs and other trade barriers, high taxes, political instability, and international currency exchange rates and related issues may increase the cost and risks associated
with our operations. We must design and operate web sites and other service delivery components that are accessible by employees of overseas clients, and differing technology standards and Internet regulations may affect access to and operation of
our web sites and our clients web sites.



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We will need to rely upon third parties to supplement our overseas service delivery capabilities and to address
potentially complex regulatory, systems integration, service delivery, and relationship issues. Because of these and other factors, our overseas operations will require significant financial and management resources and may be more prone to service
delivery errors and delays, which could damage our reputation and jeopardize contracts.



One of our service centers is in India, and some of our vendors are also located there. In the future, we may open new service centers or work with new vendors in other areas of political instability. Acts of war,
terrorism or political unrest could disrupt our facilities or operations or those of our vendors and impair our service delivery capabilities, resulting in additional expense, damage to our reputation and potential material adverse effects on our
business, results of operations and financial condition.



Recruitment and retention of key employees may be difficult and expensive.



We believe that our success is dependent upon the leadership and operational skills of our senior management team and other key employees. In general, the employment of our key personnel may be terminated by either us
or the employee at any time, for any reason without cause or advance notice subject to severance benefit obligations under some circumstances. Due to the competitive nature of our industry and other factors, we may not be able to retain all of our
senior managers and key personnel. If any of these individuals were unable or unwilling to continue working for us, we could have difficulty finding a replacement and our business could be harmed.



We have relied heavily upon stock options to supplement compensation for many
of our employees, particularly at higher levels. Our stock price has been volatile, and a number of our existing stock options have exercise prices above our current stock price. If stock options become less effective as a recruitment or retention
device due to public market conditions, trends in our stock price or other factors, we may need to rely more heavily upon cash compensation. This could significantly increase our costs of doing business. Further, because we have relied heavily upon
stock options, treating options as an expense, in response to legal or regulatory requirements or evolving business practices, would significantly increase our reported costs.



The market for our services and our revenue growth depends on our ability to use the Internet as a means of delivering human resources
services.



We rely on the Internet as a mechanism for
delivering our services to our clients and achieving efficiencies in our service model, and this reliance exposes us to various risks.



| |  |  | We use public networks to transmit and store extremely confidential information about our clients and their employees. We may be required to expend significant capital and other
resources to address security breaches. We cannot be certain that our security measures will be adequate and security breaches could disrupt our operations, damage our reputation and expose us to litigation and possible liability.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our target clients may not continue to be receptive to human resources services delivered over the Internet because of concerns over transaction security, user privacy, the
reliability and quality of Internet service and other reasons. In addition, growth in Internet traffic may cause performance and reliability to decline. Interruptions in Internet service and infrastructure delays could interfere with our ability to
use the Internet to support our ESDMSM, which could disrupt our service delivery and expose us to contractual
service credit penalties or damages for breach. Further, repeated Internet service failures could impair our revenue growth and results of operations.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Laws and regulations may be adopted relating to Internet user privacy, pricing, usage fees and taxes, content, distribution and characteristics and quality of products and services.
This could decrease the popularity or impede the expansion of the Internet and decrease demand for our services. Moreover, the applicability of existing laws to the Internet is uncertain with regard to many important issues, including property
ownership, intellectual property, export of encryption technology, libel and personal privacy. The application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and
regulations to the Internet and other online services, could also harm our business.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We must keep our computing and communications infrastructure on pace with changing technologies.



Our success depends on our sophisticated computer, Internet and telecommunications systems. We have invested significantly in our technological
infrastructure and anticipate that it will be necessary to continue to do so in the future to remain competitive. These technologies are evolving rapidly and are characterized by short product life cycles, which require us to anticipate
technological



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changes and developments. Our success in designing and delivering high quality, cost-effective services that add value
for our clients depends, in part, upon our ability to adapt our processes to incorporate new and improved software applications, communications systems and other technologies and devices. If we fail to adapt to technological developments, our
clients may experience service implementation delays or our services may become non-competitive or obsolete.



We rely on third-party vendors for software. If their products are not available or are inadequate, our business could be seriously harmed.



Our service delivery capability incorporates and relies on software owned by third parties that we license directly or use
through existing license arrangements between our clients and the vendor. If these vendors change or fail to maintain a product that we are using or do not permit use by us or our vendors, or if these agreements are terminated or not renewed, we
might have to delay or discontinue our services until equivalent technology can be found, licensed and installed and replacing technology could expose us to significantly increased expense.



The markets we serve are evolving and increasingly competitive and our competitors may
have much greater resources to commit to growth, new technology and marketing.



We expect growth in demand for integrated HR process management services to continue to result in increased competition, and we believe these factors will lead to rapid and significant changes in the market we serve.
Our ability to compete effectively depends in part upon our ability to anticipate market developments. If we are unable to react quickly to changes in the market, if the market fails to develop in the ways we expect, or if our services do not
achieve additional market acceptance, then we are unlikely to maintain our leadership position or to increase or sustain profitability.



Our current and potential competitors include in-house HR departments of our target clients, as well as technology outsourcers, single-service providers,
and consulting firms that are expanding their offerings to include broad HR offerings. We expect that the predicted growth of the HR outsourcing market will attract and motivate more competitors to assume responsibility for broad integration of HR
processes.



Several of our existing or potential competitors
have substantially greater financial, technical and marketing resources, larger customer bases, greater name recognition and more established relationships with their customers and key product and service suppliers than we do. Our competitors may be
able to:



| |  |  | develop and expand their delivery infrastructure and service offerings more quickly;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | adapt better to new or emerging technologies and changing client needs;
| | - |  | -----------------------------------------------------------------------



| |  |  | take advantage of acquisitions and other opportunities more readily;
| | - |  | --------------------------------------------------------------------



| |  |  | establish operations in overseas markets more rapidly than we can;
| | - |  | ------------------------------------------------------------------



| |  |  | devote greater resources to the marketing and sale of their services; and
| | - |  | -------------------------------------------------------------------------



| |  |  | adopt more aggressive pricing policies and provide clients with additional benefits at lower overall costs.
| | - |  | -----------------------------------------------------------------------------------------------------------



The capabilities described above might enable competitors to overtake us. In
addition, we believe there will be future consolidation in our market, which could increase competition in ways that may be adverse to us.



We operate in a complex regulatory environment, and failure to comply with applicable laws and regulations could adversely affect our business.



Corporate human resources operations are subject to a number of laws and
regulations, including those applicable to payroll practices, benefits administration, employment practices and data privacy. Because our clients have employees in states across the United States and in various countries around the world, we must
perform our services in compliance with the legal and regulatory requirements of multiple jurisdictions. Some of these laws and regulations may be difficult to ascertain or interpret, may change, and may be inconsistent with our business practices.
The addition of new services may subject us to additional laws and regulations from



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time to time. Violation of laws and regulations could subject us to fines and penalties, damage our reputation,
constitute breach of our client contracts and impair our ability to do business in various jurisdictions or according to our established processes.



The European Commissions Directive on Data Privacy limits transfer of personal data outside the European Union. In order to receive personal data
about our clients European employees and fulfill our service commitments, we have elected to comply with the Safe Harbor Principles established by the United States Department of Commerce, in collaboration with the European Commission, to
provide adequate protection for personal data about European Union residents. Because we process HR data, we are required by the Safe Harbor Principles to submit to the jurisdiction of the European Union Data Protection Authorities
(DPAs). Specifically, we must cooperate with the DPAs in the investigation and resolution of complaints brought under the Safe Harbor Principles by European citizens and comply with any corrective advice and remedial or compensatory
measures they dictate. In addition, operation under the Safe Harbor Principles subjects us to the jurisdiction of the Federal Trade Commission. If we fail to process personal data in accordance with these principles, we could be subject to legal
penalties under the Federal Trade Commission Act and foreign privacy laws. We could also lose our ability to move personal data from the European Union to the United States, which would significantly impair our ability to fulfill our contractual
commitments to our clients. We expect to have to comply with similar laws of other foreign jurisdictions in which we do business in the future.



Our business is also increasingly affected by privacy legislation in the United States. Although the United States does not have comprehensive privacy
legislation like the EU and many other countries, a variety of new federal and state laws are beginning to present compliance challenges. For example, the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) has
new privacy regulations that will impact our business operations. Covered entities may only use an individuals protected health information for purposes related to health care and all disclosures of health information must be limited to the
minimum necessary for the purpose of the disclosure. In addition, covered entities must have proper security measures and policies to guard data integrity, confidentiality and availability. As a service provider to our clients for the processing of
protected health care information, we are required to enter into written agreements with affected clients to ensure our compliance with HIPAA. Similarly, we are obligated to pass through similar compliance obligations to our vendors and
subcontractors that assist us with the handling of health information for the benefit of our clients. Recently enacted legislation in California limits our use of social security numbers and requires us to inform individuals about potential breach
of security related to their protected information. We expect more privacy legislation.



Acquisitions may limit our ability to manage and maintain our business, may result in adverse accounting treatment and may be difficult to integrate into our business.



We have recently acquired international BPO contracts and related infrastructure, including client service centers in
England and Brazil and operating presences in the Netherlands, Hong Kong and Singapore. We expect to pursue additional acquisitions under appropriate circumstances. We cannot provide any assurance that we will be able to complete any additional
acquisitions, or that any acquisitions we may complete will enhance our business. The recently completed transaction and any acquisition we complete in the future could subject us to a number of risks, including:



| |  |  | diversion of our managements attention;
| | - |  | ----------------------------------------



| |  |  | inability to integrate the acquired company and its employees into our organization effectively, and to retain key personnel of the acquired business;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | inability to provide the required types and levels of service to the acquired companys customers;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | inability to retain the acquired companys customers;
| | - |  | -----------------------------------------------------



| |  |  | additional costs incurred in connection with headcount rationalizations; and
| | - |  | ----------------------------------------------------------------------------



| |  |  | exposure to legal claims for activities of the acquired business prior to acquisition.
| | - |  | --------------------------------------------------------------------------------------



Client satisfaction or performance problems with an acquired business also could affect our reputation as a whole. In addition, any acquired
business could significantly under perform relative to our expectations.



23



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We must protect our intellectual property and avoid infringing upon the intellectual property rights of others.



We may not be able to detect or deter unauthorized use of
our intellectual property. If third parties infringe upon or misappropriate our trade secrets, copyrights, trademarks, service marks, trade names or proprietary information, our business could be seriously harmed. In addition, although we believe
that our proprietary rights do not infringe upon the intellectual property rights of others, other parties may assert that we have violated their intellectual property rights. These claims, even if not true, could result in significant legal and
other costs and may be a distraction to management. In addition, protection of intellectual property in many foreign countries is weaker and less reliable than in the United States. As our business expands into additional foreign countries, risks
associated with protecting our intellectual property will increase.



Our
executive officers, directors and their affiliates control the company.



Our executive officers, directors and their respective affiliates have the right to vote a majority of our outstanding common stock as of June 30, 2003. As a result, these stockholders, acting together, have the
ability to control matters requiring stockholder approval, including the election of directors and mergers, consolidations and sales of all or substantially all of our assets. These stockholders may have interests that differ from other investors
and they may approve actions that other investors vote against or reject actions that other investors have voted to approve. In addition, this concentration of ownership may also have the effect of preventing, discouraging or deferring a change in
control of Exult, which, in turn, could depress the market price of our common stock.



Our stock price is likely to be highly volatile.



The price at which our common stock trades has fluctuated significantly and is likely to continue to be highly volatile. From our IPO in June 2000 through June 30, 2003, the sales price of our stock, as reported on the Nasdaq National
Market, has ranged from a low of $1.97 to a high of $19.85. We are a relatively new company without a long history of profits, and we utilize the Internet and a technology infrastructure to deliver our services. The share prices for other companies
with similar characteristics have at times increased to levels that bore no relationship to their operating performance, and at other times have declined dramatically, even without apparent changes in their business.



In addition, the stock market in general has from time to time experienced
significant price and volume fluctuations that have affected the market prices for companies like ours. In the past, this kind of market price volatility has often resulted in securities class action litigation against companies comparable to ours.
Securities litigation could result in substantial costs and divert our managements attention and resources.



Substantial sales of our common stock by our existing investors could cause our stock price to decline.



The majority of our outstanding shares are in the hands of their original
purchasers and can be sold publicly pursuant to Rule 144 or other exemptions from registration. These investors may seek to sell their shares, and sales of large numbers of shares in the same time period could cause the market price of our common
stock to decline significantly. These sales also might make it more difficult for us to sell securities in the future at a time and price that we deem appropriate.



Our charter documents and Delaware law could deter a takeover effort.



Provisions of our certificate of incorporation and bylaws, including those that provide for a classified board of directors,
authorized but unissued shares of common and preferred stock and notice requirements for stockholder meetings, and Delaware law regarding the ability to conduct specific types of mergers within specified time periods, could make it more difficult
for a third party to acquire the company, even if doing so would provide our stockholders with a premium to the market price of their common stock. A classified board of directors may inhibit acquisitions in general, and a tender offer not endorsed
by our board of directors in particular, because approximately only one-third of our directors are reelected annually, thereby requiring two annual meetings before a majority of our directors could be replaced. The authorization of undesignated
preferred stock gives our board of directors the ability to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of the company. If a change in control or change in
management is delayed or prevented, the market price of our common stock could decline.



24



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RESULTS OF OPERATIONS



Because of the rapidly evolving nature of our business and our limited operating history, we believe that period to period
comparisons of our operating results, including our revenue, expenses, gross profit and expenses as a percentage of revenue, should not be relied upon as an indication of our future performance. The following table sets forth statement of operations
data expressed as a percentage of revenue for the periods indicated:



|                                                |  | Three Months Ended June 30, |    |  | Six Months Ended June 30, |  
|----------------------------------------------- |  | --------------------------- | -- |  | ------------------------- | -
|                                                |  | 2002                        |    |  | 2003                      |  
|Revenue                                         |  | 100.0                       | %  |  | 100.0                     | %
|Cost of Revenue                                 |  | 98.4                        |    |  | 89.2                      |  
|                                                |  |                             |    |  |                           |  
|Gross profit                                    |  | 1.6                         |    |  | 10.8                      |  
|Selling, General and Administrative Expense     |  | 6.7                         |    |  | 7.5                       |  
|                                                |  |                             |    |  |                           |  
|Income (loss) from operations                   |  | (5.1                        | )  |  | 3.3                       |  
|Investment and Interest Income, net             |  | 0.6                         |    |  | 0.4                       |  
|                                                |  |                             |    |  |                           |  
|Income (loss) before provision for income taxes |  | (4.5                        | )  |  | 3.7                       |  
|Provision for Income Taxes                      |  |                            |    |  |                          |  
|                                                |  |                             |    |  |                           |  
|Net income (loss)                               |  | (4.5                        | )% |  | 3.7                       | %
|                                                |  |                             |    |  |                           |  



The impact of the
revenue and related expenses from the business process management outsourcing business acquired on June 9, 2003, is not material for the three and six months ended June 30, 2003.



Three Months Ended June 30, 2002 and 2003



Revenue. Revenue for the three months ended June 30, 2002 and 2003, was $100.9 million and $122.5 million, respectively. The portion of
the revenue derived from our business process management clients was approximately 96% in each of the periods. The balance of our revenue for each period primarily consisted of consulting revenue generated from various non-business process
management clients. The revenue increase for the 2003 period as compared to the 2002 period principally resulted from the progressive transition of service responsibility to us under two process management contracts that were executed in January
2002 and April 2003, together with various scope expansions with respect to several clients, partially offset by the completion of one of our business process management contracts during the fourth quarter of 2002. In addition, as a result of the
maturation of our business, we determined during the third quarter of 2002 that it was no longer necessary to limit revenue recognition to amounts billed once a contract has reached operational stability, resulting in recognition of revenue in
proportion to costs incurred for our multi-year, multi-element outsourcing contracts. As previously discussed, we make estimates of total contract revenue and cost, and we periodically update those estimates to reflect our evolving estimates of the
life-of-contract economics. This periodic update resulted in recognition of $6.3 million of net additional outsourcing revenue and operating income for the three months ended June 30, 2003 reflecting the cumulative impact of our change in estimates
in the June 30, 2003 quarter. This cumulative adjustment includes application of our current contract estimates to previous periods and should not be considered indicative of future results. There was no similar adjustment in the June 30, 2002
quarter.



For the three months ended June 30, 2002, three
process management clients accounted for 45%, 24% and 18%, respectively, of revenue as compared to three process management clients accounting for 57%, 16% and 12%, respectively, of revenue for the three months ended June 30, 2003. No other client
accounted for more than 10% of revenue in the 2002 and 2003 periods. For the three months ended June 30, 2002 and 2003, 27% and 33%, respectively, of our process management revenue was generated from the provision of services with more highly
variable volumes, such as staffing and learning, which depend upon client discretionary spending. The increase in the percentage of revenue generated from the provision of these services primarily resulted from increased usage of these services
under previously executed contracts and was not materially impacted by the transition of service responsibility to us under the two process management contracts executed in January 2002 and April 2003, respectively. Client usage of our staffing and
learning services varies, and can decrease. Recent increases in our staffing services are associated with positions that are sensitive to economic conditions and may be less in demand if interest rates increase or other economic conditions change.
As described above, revenue from these services is recognized as the services are performed and is excluded from our contract estimates. Revenue growth in 2004 and future periods will depend primarily upon our ability to obtain new clients and sell
additional services to existing clients.



Cost of Revenue. Our cost of revenue for the three months ended June 30, 2002 and 2003, was $99.3 million and $109.3 million, respectively, and our gross margin for the same
periods was 1.6% and 10.8%, respectively, as a percentage of revenue. Cost of revenue consists primarily of compensation and benefits paid to our employees who are directly involved in providing our services, computer and communications equipment
and services costs, facilities costs, depreciation and amortization of capitalized expenditures incurred in connection with our process management contracts, and expenses associated with third-party vendors who provide services



25



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on our behalf for our clients within the scope of our process management contracts. Prior to January 1, 2003,
depreciation and amortization expense had been set forth as a separate line item in our Condensed Consolidated Statements of Income (Loss) and has been reclassified to cost of revenue and selling, general and administrative expense for the three
months ended June 30, 2002 to conform with the 2003 presentation. Accordingly, depreciation and amortization included in cost of revenue for the three months ended June 30, 2002 and 2003, was $3.8 million and $4.7 million, respectively.



The increase in the cost of revenue for the three months ended June 30,
2003 as compared to the three months ended June 30, 2002 principally resulted from the progressive transition of service responsibility to Exult under our various process management contracts and the continuing expansion of our infrastructure and
service capacity. The improvement in our gross margin in the 2003 period as compared to the 2002 period reflects the increased leverage achieved through higher utilization of our client service centers and other service delivery systems combined
with the impact of continuing cost controls and efficiency programs instituted in connection with our Exult Service Delivery Model as well as the in-quarter impact during the second quarter of 2003 of our revised life-of-contract estimates.
Operating expense will tend to increase to support any growth we may achieve, and our profitability depends upon our ability to scale our business by leveraging existing resources across a broader revenue base and limiting increases in operating
expense associated with new business to levels significantly below our clients historical costs of operating the processes we assume. Significant expansion of capacity in connection with new contracts may delay our achievement of this scale.
We have incurred, and may incur in the future, negative gross margins as we continue to transition and transform our clients HR processes.



Selling, General and Administrative Expense. Selling, general and administrative expense for the three months
ended June 30, 2002 and 2003, was $6.7 million, or 6.7% as a percentage of revenue, and $9.2 million, or 7.5% as a percentage of revenue, respectively. Selling, general and administrative expense generally consists of compensation for employees
engaged in developing product features and service delivery capabilities; marketing, promoting and selling our services; and management and administrative activities. Selling, general and administrative expense also includes third-party consulting
and marketing expenditures; facilities and office costs; legal, accounting and recruiting fees and expenses; and certain depreciation and amortization of capitalized expenditures. Included in selling, general and administrative expense for the three
months ended June 30, 2002 and 2003, was $0.7 million and $0.5 million, respectively, of depreciation and amortization expense from certain capitalized costs and compensation deferrals. In addition, selling, general and administrative expense may
include business optimization costs that are incurred during the period. We call these charges business optimization costs because they reflect our pursuit of strategies intended to enhance our efficiency and profitability as our
operating scale increases and our business progresses toward operational maturity. For the year ended December 31, 2001, selling, general and administrative expense included business optimization costs totaling $18.5 million; the cash portion of
these 2001 charges totaled $13.3 million. Through June 30, 2003, we have made cash payments totaling $11.1 million and reduced the initial accrual, and accordingly selling, general and administrative expense, by $1.1 million and $2.3 million during
the three months ended June 30, 2002 and the year ended December 31, 2002, respectively, as a result of completion of certain of these arrangements at amounts less than previously estimated and changes in estimates with regard to the remaining
arrangements. Exclusive of the impact of reducing the initial accrual for business optimization costs, selling, general and administrative expense for the three months ended June 30, 2002 was $7.8 million, or 7.7% as a percentage of revenue.
Exclusive of business optimization costs, the increase in selling, general and administrative expense for the three months ended June 30, 2003 as compared to the three months ended June 30, 2002, included approximately $0.8 million for the
recruitment and relocation of a senior executive and $0.4 million of incremental selling costs. Future improvement in selling, general and administrative expense as a percentage of revenue depends upon revenue growth and leveraging existing
infrastructure over a broader revenue base.



Investment
and Interest Income, net. Investment and interest income, net for the three months ended June 30, 2002 and 2003 consisted of investment and interest income of $0.8 million and $0.8 million, respectively, partially offset by interest expense
of $0.3 million and $0.3 million, respectively. Investment and interest income is generated primarily from short-term investing of cash in excess of current requirements. During the three months ended June 30, 2003, we realized $0.2 million in gains
from sales of short-term investments. There were no similar sales during the three months ended June 30, 2002. Excluding these gains, investment and interest income in the 2003 period was reduced versus the 2002 period primarily by the lower rates
of interest in the market and also by the lower available cash balances in the 2003 period. Interest expense is associated with certain long-term obligations in both periods.



Provision for Income Taxes. We incurred losses from our founding in 1998 through September 30, 2002, resulting
in federal, state and foreign net operating loss carryforwards. We achieved our first profitable quarters for the fourth quarter of 2002 and the first two quarters of 2003, but did not record tax expense as a result of partial utilization of the
benefit from tax losses. The remaining federal and state net operating loss carryforwards expire beginning in 2018 and 2005, respectively. The foreign net operating loss may be carried forward indefinitely. A full valuation allowance has been
provided against the tax benefit generated by the net operating losses because of the uncertainty of realizing the deferred tax assets.



26



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Net Income (Loss). The foregoing resulted in a net loss for the three months ended June 30,
2002, of $4.5 million, or $0.04 per basic and diluted share, and net income for the three months ended June 30, 2003, of $4.6 million, or $0.04 per basic and diluted share.



Six Months Ended June 30, 2002 and 2003



Revenue. Revenue for the six months ended June 30, 2002 and 2003, was $195.9 million and $236.7 million, respectively. The portion of our
revenue derived from our business process management clients for the 2002 and 2003 periods was 96% and 97%, respectively. The balance of our 2002 and 2003 revenue primarily consisted of consulting revenue generated from various non-business process
management clients.



The revenue increase for the 2003 period
as compared to the 2002 period principally resulted from the progressive transition of service responsibility to us under two process management contracts that were executed in January 2002 and April 2003, together with various scope expansions with
respect to several clients, partially offset by the completion of one of our business process management contracts during the fourth quarter of 2002. In addition, the periodic update of our life-of-contract estimates resulted in recognition of $12.6
million of net additional outsourcing revenue and operating income for the six months ended June 30, 2003 reflecting the cumulative impact of our change in estimates. This cumulative adjustment includes application of our current contract estimates
to previous periods and should not be considered indicative of future results. There was no similar adjustment in the six months ended June 30, 2002.



For the six months ended June 30, 2002, three process management clients accounted for 46%, 27% and 16%, respectively, of revenue as compared to three
process management clients accounting for 53%, 19% and 14%, respectively, of revenue for the six months ended June 30, 2003. No other client accounted for more than 10% of revenue in the 2002 and 2003 periods. For the six months ended June 30, 2002
and 2003, 25% and 32%, respectively, of our process management revenue was generated from the provision of services with more highly variable volumes, such as staffing and learning, which depend upon client discretionary spending. The increase in
the percentage of revenue generated from the provision of these services primarily resulted from increased usage of these services under previously executed contracts and was not materially impacted by the transition of service responsibility to us
under the two process management contracts executed in January 2002 and April 2003, respectively. Client usage of our staffing and learning services varies, and can decrease. Recent increases in our staffing services are associated with positions
that are sensitive to economic conditions and may be less in demand if interest rates increase or other economic conditions change. As described above, revenue from these services is recognized as the services are performed and is excluded from our
contract estimates.



Cost of Revenue. Our cost of
revenue for the six months ended June 30, 2002 and 2003, was $193.1 million and $212.0 million, respectively, and our gross margin for the same periods was 1.4% and 10.4%, respectively, as a percentage of revenue. Depreciation and amortization
included in cost of revenue for the six months ended June 30, 2002 and 2003, was $6.3 million and $9.0 million, respectively. The increase in the cost of revenue for the six months ended June 30, 2003 as compared to the six months ended June 30,
2002 principally resulted from the progressive transition of service responsibility to Exult under our various process management contracts and the continuing expansion of our infrastructure and service capacity. The improvement in our gross margin
in the 2003 period as compared to the 2002 period reflects the increased leverage achieved through higher utilization of our client service centers and other service delivery systems combined with the impact of continuing cost controls and
efficiency programs instituted in connection with our Exult Service Delivery Model as well as the in-period impact during the 2003 period of our revised life-of-contract estimates. Operating expense will tend to increase to support any growth we may
achieve, and our profitability depends upon our ability to scale our business by leveraging existing resources across a broader revenue base and limiting increases in operating expense associated with new business to levels significantly below our
clients historical costs of operating the processes we assume. Significant expansion of capacity in connection with new contracts may delay our achievement of this scale. We have incurred, and may incur in the future, negative gross margins as
we continue to transition and transform our clients HR processes.



Selling, General and Administrative Expense. Selling, general and administrative expense for the six months ended June 30, 2002 and 2003, was $15.1 million, or 7.7% as a percentage of
revenue, and $17.5 million, or 7.4% as a percentage of revenue, respectively. Included in selling, general and administrative expense for the six months ended June 30, 2002 and 2003, was $2.1 million and $1.3 million, respectively, of depreciation
and amortization expense from certain capitalized costs and compensation deferrals. In addition, during the six months ended June 30, 2002, we reduced the initial accrual with respect to the 2001 business optimization costs, and accordingly selling,
general and administrative expense, by $1.4 million as a result of completion of certain of these arrangements at amounts less than previously estimated and changes in estimates with regard to the remaining arrangements. Exclusive of the impact of
reducing the initial accrual for business optimization costs, selling, general and administrative expense for the six months ended June 30, 2002 was $16.5 million, or 8.4% as a percentage of revenue. Exclusive of business optimization costs, the
increase in selling,



27



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general and administrative expense for the six months ended June 30, 2003 as compared to the six months ended June 30,
2002, primarily resulted from $0.8 million for the recruitment and relocation of a senior executive. The decrease in the expense as a percentage of revenue was impacted by our rate of revenue growth. Future improvement in selling, general and
administrative expense as a percentage of revenue depends upon revenue growth and leveraging existing infrastructure over a broader revenue base.



Investment and Interest Income, net. Investment and interest income, net for the six months ended June 30, 2002 and 2003 consisted of
investment and interest income of $1.5 million and $1.9 million, respectively, partially offset by interest expense of $0.3 million and $0.6 million, respectively. During the six months ended June 30, 2003, we realized $0.6 million in gains from
sales of short-term investments. There were no similar sales during the six months ended June 30, 2002. Excluding these gains, investment and interest income in the 2003 period was reduced versus the 2002 period primarily by the lower rates of
interest in the market and also by the lower available cash balances in the 2003 period. Interest expense is associated with certain long-term obligations in both periods.



Provision for Income Taxes. We incurred losses from our founding in 1998 through September 30, 2002, resulting
in federal, state and foreign net operating loss carryforwards. We achieved our first profitable quarters for the fourth quarter of 2002 and the first two quarters of 2003, but did not record the tax expense as a result of partial utilizaztion of
the benefit from tax losses. The remaining federal and state net operating loss carryforwards expire beginning in 2018 and 2005, respectively. The foreign net operating loss may be carried forward indefinitely. A full valuation allowance has been
provided against the tax benefit generated by the net operating losses because of the uncertainty of realizing the deferred tax assets.



Net Income (Loss). The foregoing resulted in a net loss for the six months ended June 30, 2002, of $11.2 million, or $0.11 per basic and
diluted share, and net income for the six months ended June 30, 2003, of $8.5 million, or $0.08 and $0.07 per basic and diluted share, respectively.



Liquidity and Capital Resources



Since our inception in October 1998 through June 30, 2003, we have financed our operations primarily with equity contributions, including net cash
received from private placement sales of our capital stock totaling $169.5 million from inception, the net proceeds from our June 2000 initial public offering and the August 2001 follow-on public offering totaling $157.0 million, and, to a lesser
extent, by cash generated from our business and the exercise of stock options and warrants.



During the six months ended June 30, 2002, we began generating revenue from our sixth and seventh process management clients, International Paper and Prudential Financial, respectively. We also opened our fourth
primary client service center in January 2002. By December 31, 2002, all of our then existing process management contracts had reached operational stability and we had substantially completed transition activities with respect thereto. During the
six months ended June 30, 2003, we began generating revenue from three new process management clients, BMO Financial Group, Universal Music Group and Vivendi Universal Entertainment, and we began operating client service centers in Canada and India.
During the six-month periods ended June 30, 2002 and 2003, we expended operating cash in support of revenue generated by our process management contracts and to fund the transition and transformation costs associated with our newest process
management contracts. We also used cash during both periods to pursue additional business opportunities and the development of our corporate infrastructure.



Net cash used in operating activities for the six months ended June 30, 2002, was $17.9 million and net cash provided by operating activities was $22.8
million for the six months ended June 30, 2003. The improvement in net cash provided by operating activities in the 2003 period as compared to the 2002 period principally results from the attainment of operational stability for all of our then
existing contracts by the end of 2002 in conjunction with improved efficiency in, and leverage of, our service delivery model together with a short-term benefit in the timing of certain contract related payments in the 2003 period.



Net cash used in investing activities for the six months ended June 30, 2002
and 2003 was $87.2 million and $28.9 million, respectively. The decrease in cash used in investing activities in the 2003 period as compared to the 2002 period arises primarily from the impact of investments of the Companys available cash.
Prior to December 2001, the Company invested substantially all of its available cash in highly liquid temporary cash investments with initial maturities of 90 days or less which it classifies as cash equivalents. Commencing in December 2001, and
continuing throughout 2002, in order to enhance its investment yield, the Company began to invest a portion of its available cash in financial instruments with maturity dates in excess of 90 days which it classifies as short-term investments. These
financial instruments consist primarily of U.S. government debt securities and high-grade investment quality debt securities with maturities of less than three years. Accordingly, the transactions in such securities are included in investing
activities and represent net cash used in investing activities of $60.2 million for the six months ended June 30, 2002, and net cash



28



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provided by investing activities $18.0 million for the six months ended June 30, 2003. Excluding the impact of the
temporary investment of the Companys available cash balances, cash used in investing activities was $27.0 million for the 2002 period and $46.7 million for the 2003 period. Cash was used primarily to construct and expand our client service
centers and our internal systems, to make certain payments with respect to new client contracts or expansion of existing contracts, and to fund certain client set up costs in both the 2002 and 2003 periods. In addition during the 2003 period, the
Company expended $16.6 million (net of cash acquired of $2.7 million) to purchase a business process outsourcing business.



We generated $2.6 million and $0.1 million in cash, net from financing activities during the six months ended June 30, 2002 and 2003, respectively. We
generated cash of $2.7 million and $1.2 million for the six months ended June 30, 2002 and 2003, respectively, from the exercise of stock options and purchases under our employee stock purchase plan while we made payments of $0.1 million and $1.0
million, respectively under our long-term obligations.



We may generate negative cash flow from operations in the future. We also expect to continue our investments in fixed assets and direct contract costs to support the expansion and renovation of our facilities, including our existing client
service centers, to make certain payments with regard to new client acquisitions, and to purchase related computer and other equipment necessary to support our client contracts and growth. In addition, from time to time in the ordinary course of
business, we evaluate potential acquisitions of related businesses, assets, services and technologies. Such acquisitions, if completed, may require significant cash expenditures.



As of June 30, 2003, we had cash and marketable securities of $103.7 million. We believe that our cash on hand will be
sufficient to satisfy our working capital requirements for at least the next 12 months. If we experience rapid growth or unanticipated expenses, we may need to raise additional funds through public or private debt or equity financings in order to
maintain adequate cash balances to satisfy the expectations of prospective clients; finance acquisitions, new client contracts with capital investment requirements, and other strategic opportunities; and address operating issues. We cannot be
certain that we will be able to raise additional funds on favorable terms, or at all, and if we need additional funds but cannot obtain them, our ability to fund our operations or strategic initiatives may be impaired.



Contractual Obligations and Commercial Commitments



The Company has the following contractual obligations and commercial
commitments for the periods indicated (in thousands):



|                                   |  | July 1, 2003 Through December 31, 2005 |        | January 1, 2006 Through December 31, 2007 |   | Thereafter |  | Total
|---------------------------------- |  | -------------------------------------- | ------ | ----------------------------------------- | - | ---------- |  | -----
|Long-Term Obligations              |  | $                                      | 14,448 |                                           | $ | 168        |  | $    
|Operating Leases                   |  |                                        | 14,157 |                                           |   | 9,133      |  |      
|Unconditional Purchase Obligations |  |                                        | 1,710  |                                           |   | 11,000     |  |      
|                                   |  |                                        |        |                                           |   |            |  |      
|                                   |  | $                                      | 30,315 |                                           | $ | 20,301     |  | $    
|                                   |  |                                        |        |                                           |   |            |  |      



Certain of the agreements provide the
Company with the ability to cancel the respective agreement for convenience upon the payment of a fee.



Recent Accounting Pronouncements



Effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003, Emerging Issues Task Force (EITF) Issue 00-21, Revenue Arrangements with Multiple
Deliverables, addresses the accounting, by a vendor, for contractual arrangements in which multiple revenue-generating activities will be performed by the vendor. In some situations, the different revenue-generating activities (deliverables)
are sufficiently separable and there exists sufficient evidence of fair values to account separately for the different deliverables (that is, there are separate units of accounting). In other situations, some or all of the different deliverables are
interrelated closely or there is not sufficient evidence of fair value to account separately for the different deliverables. EITF Issue 00-21 addresses when and, if so, how an arrangement involving multiple deliverables should be divided into
separate units of accounting. We are in the process of determining the impact of the adoption of EITF Issue 00-21 on our consolidated financial statements.



29



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|ITEM 3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|------- |  | -----------------------------------------------------------



Interest Rate Sensitivity



At June 30, 2003, our investment portfolio consisted primarily of fixed income securities totaling $64.1 million. The carrying amount of these securities
approximates fair market value. These securities are subject to interest rate risk and will decline in value if market rates increase. If market rates were to increase immediately and uniformly by 10% from levels as of June 30, 2003, the decline in
the fair value of the portfolio would not be material to our financial position.



|ITEM 4. |  | CONTROLS AND PROCEDURES.
|------- |  | ------------------------



Evaluation of disclosure controls and procedures. Based on their evaluation, as of a date within 90 days of the filing of this Quarterly Report on
Form 10-Q, the Companys Chief Executive Officer and Chief Financial Officer have concluded that they are unaware of any reason to believe that the Companys disclosure controls and procedures (as defined in Rule 13a-14 promulgated under
the Securities Exchange Act of 1934) are not effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) that is required to be included in the Companys periodic filings.



Changes in internal controls. There were no significant
changes in the Companys internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referred to above, including any corrective actions with regard to significant deficiencies
and material weaknesses.



30



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PART II. OTHER INFORMATION.



|ITEM 1. |  | LEGAL PROCEEDINGS.
|------- |  | ------------------



The Company and its subsidiaries are from time to time parties to legal proceedings, lawsuits and other claims incident to their business activities. Such
matters include, among other things, assertions of contract breach and claims by persons whose employment with the Company has been terminated in connection with facilities consolidations, headcount rationalizations, outsourcing of certain
operational functions, including in some cases to offshore vendors, and other measures that the Company has undertaken and expects to continue to undertake in the ordinary course of its business. Such matters are subject to many uncertainties and
outcomes are not predictable with assurance. Consequently, management is unable to ascertain the ultimate aggregate amount of monetary liability, amounts which may be covered by insurance, or the financial impact with respect to these matters as of
June 30, 2003. However, based on its knowledge at the time of this report management believes that the final resolution of these matters, individually and in the aggregate, will not have a material adverse effect upon the Companys consolidated
financial position, results of operations or cash flows.



|ITEM 2. |  | CHANGES IN SECURITIES AND USE OF PROCEEDS.
|------- |  | ------------------------------------------



|(b) |  | On April 23, 2003, Exult issued Bank of Montreal a warrant to purchase up to 1,000,000 shares of Exults common stock at an exercise price equal to the greater of (i) $7.55 per
share; and (ii) the difference obtained by subtracting the Maximum Spread from the Market Price on the date of exercise. The Maximum Spread initially means $10.36 per share. The Market Price is the arithmetic mean of the
closing price of Exults common stock for the five days ending on or immediately before the exercise date. The amount and kind of securities obtainable pursuant to the warrant, the exercise price, and the Maximum Spread are subject to
adjustment pursuant to the provisions contained in the warrant, a copy of which is filed as Exhibit 10.32.2 to this Quarterly Report on Form 10-Q. The warrant is only exercisable between April 23, 2005 and April 23, 2008 and only pursuant to a net
exercise procedure. The warrant was issued pursuant to the private placement exemption available under Section 4(2) of the Securities Act of 1933, as amended.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|(a) |  | The Annual Meeting of Stockholders was held on May 7, 2003.
|--- |  | -----------------------------------------------------------



|(b) |  | Four Class 3 directors were elected to serve for a term of three years ending at the 2006 annual meeting of stockholders. The four Class 3 directors are J. Michael Cline, Steven A.
Denning, James C. Madden, V and Karl M. von der Heyden. Continuing directors included three Class 1 directors, Mark F. Dzialga, Michael A. Miles and Thomas J. Neff, and three Class 2 directors, John R. Oltman, A. Michael Spence and Russell P.
Fradin. The board of directors appointed Mary Alice Taylor as an additional Class 1 director effective following the annual meeting.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) |  | The election of four Class 3 directors:
|--- |  | ---------------------------------------



|                       |  | For        |  | Against/Broker Non-Votes/Withheld
|---------------------- |  | ---------- |  | ---------------------------------
|J. Michael Cline       |  | 85,010,840 |  | 935,533                          
|Steven A. Denning      |  | 84,914,543 |  | 1,031,830                        
|James C. Madden, V     |  | 85,760,278 |  | 186,095                          
|Karl M. von der Heyden |  | 85,768,450 |  | 177,923                          



In addition, the
Stockholders ratified the appointment of KPMG LLP as independent auditors of the Registrant for the fiscal year ending December 31, 2003. The votes cast for the ratification were 85,610,232; votes cast against or withheld were 336,141; and, there
were no abstentions and broker non-votes. No other matters were voted upon at the meeting.



|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K.
|------- |  | ---------------------------------



|(a) |  | Exhibits.
|--- |  | ---------



The following Exhibits are incorporated herein by reference.



31



---

|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                          
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1*          |  | Fourth Amended and Restated Certificate of Incorporation of Exult, Inc.                                                                                                                                                                                                                                              
|3.2*          |  | Amended and Restated Bylaws of Exult, Inc.                                                                                                                                                                                                                                                                           
|              | 
|10.19.9       |  | Amendment 3 to Master Services agreement between Exult, Inc. and Bank of America Corporation dated as of April 14, 2003.                                                                                                                                                                                             
|              | 
|10.19.10     |  | Addendum 3A to Master Services Agreement between Exult, Inc. and Bank of America Corporation dated as of June 2, 2003.                                                                                                                                                                                               
|              | 
|10.19.11     |  | Addendum 7 to Master Services Agreement between Exult, Inc. and Bank of America Corporation dated as of [April 25], 2003.                                                                                                                                                                                            
|              | 
|10.31.1       |  | Employment Agreement dated as of June 2, 2003, between Exult, Inc. and John A. Adams.                                                                                                                                                                                                                                
|              | 
|10.31.2       |  | Severance Agreement dated as of June 2, 2003, between Exult, Inc. and John A. Adams.                                                                                                                                                                                                                                 
|              | 
|10.31.3       |  | Stock Option Addendum dated as of June 2, 2003, between Exult, Inc. and John A. Adams.                                                                                                                                                                                                                               
|              | 
|10.31.4       |  | Indemnification Agreement dated as of June 2, 2003, between Exult, Inc. and John A. Adams.                                                                                                                                                                                                                           
|              | 
|10.31.5       |  | Restricted Stock Agreement dated as of June 2, 2003, between Exult, Inc. and John A. Adams.                                                                                                                                                                                                                          
|              | 
|10.32.1      |  | Master Services Agreement between Exult Canada, Inc. and Bank of Montreal, dated as of April 23, 2003.                                                                                                                                                                                                               
|              | 
|10.32.2       |  | Common Stock Warrant issued to Bank of Montreal on April 23, 2003.                                                                                                                                                                                                                                                   
|              | 
|10.32.3**    |  | Guaranty dated as of April 23, 2003 between Exult, Inc. and Bank of Montreal.                                                                                                                                                                                                                                        
|              | 
|10.33***      |  | Sale and Purchase Agreement, among Exult, Inc., PwC BPO BV, PwC BPO (UK) Limited, PricewaterhouseCoopers (Resources), P.W. & Co., PricewaterhouseCoopers LLP (UK),
PricewaterhouseCoopers LLP (US), PricewaterhouseCoopers Accountants NV, and PricewaterhouseCoopers Belastingadviseurs NV dated as of June 9, 2003.
|              | 
|99            |  | Written statement of the Chief Executive Officer and Chief Financial Officer of Exult, Inc. pursuant to section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                               

---

|* |  | Previously filed with the Companys Registration Statement on Form S-1 Registration No. 333-31754, and incorporated herein by reference.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|** |  | Filed as Exhibit U to the Master Service Agreement filed as Exhibit 10.32.1 to this Quarterly Report on Form 10-Q.
|-- |  | ------------------------------------------------------------------------------------------------------------------

|*** |  | Previously filed as Exhibit 2.1 to the Companys Current Report on Form 8-K filed with the SEC on June 24, 2003, and incorporated herein by reference.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Confidential treatment is being sought with respect to certain portions of this exhibit. Such portions have been omitted from this filing and have been filed separately with the
Securities and Exchange Commission.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | Reports on Form 8-K.
|--- |  | --------------------



Current Report on Form 8-K dated April 24, 2003, furnishing a copy of the Registrants press release announcing its earnings for the quarter ended
March 31, 2003.



Current Report on Form 8-K dated June 9,
2003, furnishing a copy the Sale and Purchase Agreement entered into by the Registrant with PricewaterhouseCoopers LLP and various affiliated PricewaterhouseCoopers entities (collectively PwC) whereby Registrant purchased certain assets
of PwC. A copy of the Registrants press release announcing the transaction was also filed as an exhibit to that Current Report on Form 8-K.



32



---

SIGNATURES



Pursuant to the requirements of the Securities Act of 1934, as amended, the undersigned has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 24th day of July, 2003.



EXULT, INC.By:

/s/    JAMES C. MADDEN,
VJames C. Madden, V Chief Executive Officer and Chairman of the Board (principal executive officer)




By:

/s/    JOHN A. ADAMSJohn A. Adams Executive Vice President and Chief Financial Officer (principal financial officer)




By:

/s/    ROBERT G. MCGRAWRobert G. McGraw Vice President, Finance and Chief Accounting Officer (principal accounting officer)




33



---

CERTIFICATIONS



I, James C. Madden, V, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Exult, Inc.;
|-- |  | ------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14
and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this quarterly report is being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the
Evaluation Date); and
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Date: July 24, 2003 |  |  |  | /s/    JAMES C. MADDEN,
V                                           
|------------------- |  |  |  | --------------------------------------------------------------------
|                    |  |  |  | James C. Madden, V Chief Executive Officer and Chairman of the Board



34



---

I, John A. Adams, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Exult, Inc.;
|-- |  | ------------------------------------------------------------------



|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14
and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this quarterly report is being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the
Evaluation Date); and
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Date: July 24, 2003 |  |  |  | /s/    JOHN A. ADAMS                                              
|------------------- |  |  |  | ------------------------------------------------------------------
|                    |  |  |  | John A. Adams Executive Vice President and Chief Financial Officer



35