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FORM 10-Q



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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


(Mark One)

|    |  |                                                                                        
|--- |  | ---------------------------------------------------------------------------------------
|[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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

EXULT, INC.

(Exact Name of Registrant as Specified in Its Charter)


|                                                                        |  |                                                          |  |                                                
|----------------------------------------------------------------------- |  | -------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or Other Jurisdiction of
Incorporation
or Organization) |  | 8742
(Primary Standard
Industrial
Classification Number) |  | 33-0831076
(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)


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  [X] No  [  ]

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 September 30, 2003
|             |  |                                  
|Common Stock |  |                                   | 108,206,726 | 



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TABLE OF CONTENTS



|                              |                                                                                               |  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                              | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II. OTHER INFORMATION   
|                              | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                              | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   
|EXHIBIT INDEX                
|EXHIBIT 4.4                  
|EXHIBIT 4.5                  
|EXHIBIT 10.28.1              
|EXHIBIT 10.28.2              
|EXHIBIT 10.31.6              
|EXHIBIT 10.34                
|EXHIBIT 31.1                 
|EXHIBIT 31.2                 
|EXHIBIT 32                   



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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)
(unaudited)

|                                                    |                                                                                                     |                                                                                         |                                            |          |       |                   |        |                    |       |         |  | 
|--------------------------------------------------- | --------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ------------------------------------------ | -------- | ----- | ----------------- | ------ | ------------------ | ----- | ------- |  | 
|                                                    |                                                                                                     |                                                                                         |                                            |          |       | December 31, 2002 |        | September 30, 2003
|                                                    |                                                                                                     |                                                                                         |                                            |          |       |                   |        |                   
|                                                    |                                                                                                     |                                                                                         |                                            | ASSETS   |       |                   |        |                    |       |         |  | 
|Current Assets:                                     |                                                                                                     |                                                                                         |                                            |          |       |                   |        |                   
|                                                    | Cash and cash equivalents                                                                           |                                                                                         | $                                          | 42,846   |       |                   | $      | 150,825            |      
|                                                    | Short-term investments                                                                              |                                                                                         |                                            | 84,451   |       |                   |        | 44,996             |      
|                                                    | Accounts receivable, net                                                                            |                                                                                         |                                            | 28,587   |       |                   |        | 63,492             |      
|                                                    | Prepaid expenses and other current assets (including
amounts receivable from officer and employees) |                                                                                         |                                            | 27,105   |       |                   |        | 33,765             |      
|                                                    |                                                                                                     |                                                                                         |                                            |          |       |                   |        |                   
|                                                    |                                                                                                     |                                                                                         | Total Current Assets                       |          |       | 182,989           |        |                    |       | 293,078 | 
|Fixed Assets and Direct Contract Costs, net         |                                                                                                     |                                                                                         | 54,105                                     |          |       |                   | 67,487 |                   
|Intangible Assets, net                              |                                                                                                     |                                                                                         | 37,564                                     |          |       |                   | 65,653 |                   
|Other Assets, net                                   |                                                                                                     |                                                                                         | 19,738                                     |          |       |                   | 19,828 |                   
|                                                    |                                                                                                     |                                                                                         |                                            |          |       |                   |        |                   
|                                                    |                                                                                                     |                                                                                         | Total Assets                               |          | $     | 294,396           |        |                    | $     | 446,046 | 
|                                                    |                                                                                                     |                                                                                         |                                            |          |       |                   |        |                   
|                                                    |                                                                                                     |                                                                                         | LIABILITIES AND STOCKHOLDERS EQUITY       |          |       |                   |        |                    |       |         | 
|Current Liabilities:                                |                                                                                                     |                                                                                         |                                            |          |       |                   |        |                   
|                                                    | Accounts payable                                                                                    |                                                                                         | $                                          | 17,683   |       |                   | $      | 24,705             |      
|                                                    | Accrued liabilities and other                                                                       |                                                                                         |                                            | 31,759   |       |                   |        | 62,433             |      
|                                                    | Current portion of long-term liabilities                                                            |                                                                                         |                                            | 2,862    |       |                   |        | 2,631              |      
|                                                    |                                                                                                     |                                                                                         |                                            |          |       |                   |        |                   
|                                                    |                                                                                                     |                                                                                         | Total Current Liabilities                  |          |       | 52,304            |        |                    |       | 89,769  | 
|                                                    |                                                                                                     |                                                                                         |                                            |          |       |                   |        |                   
|Convertible Senior Notes, net of current portion    |                                                                                                     |                                                                                         |                                           |          |       |                   | 96,867 |                   
|Other Long-Term Obligations, net of current portion |                                                                                                     |                                                                                         | 12,794                                     |          |       |                   | 11,764 |                   
|                                                    |                                                                                                     |                                                                                         |                                            |          |       |                   |        |                   
|                                                    |                                                                                                     |                                                                                         | Total Long-Term Liabilities                |          |       | 12,794            |        |                    |       | 108,631 | 
|                                                    |                                                                                                     |                                                                                         |                                            |          |       |                   |        |                   
|Commitments and Contingencies                       |                                                                                                     |                                                                                         |                                            |          |       |                   |        |                   
|Stockholders Equity:                               |                                                                                                     |                                                                                         |                                            |          |       |                   |        |                   
|                                                    | Preferred stock, $0.0001 par value;                                                                 |                                                                                         |                                            |          |       |                   |        |                    |      
|                                                    |                                                                                                     | Authorized  15,000 shares;                                                             |                                            |          |       |                   |        |                    |       |        
|                                                    |                                                                                                     | Issued and outstanding  none at December 31, 2002
and September 30, 2003               |                                            |          |      |                   |        |                    |      |        
|                                                    | Common stock, $0.0001 par value;                                                                    |                                                                                         |                                            |          |       |                   |        |                    |      
|                                                    |                                                                                                     | Authorized  500,000 shares;                                                            |                                            |          |       |                   |        |                    |       |        
|                                                    |                                                                                                     | Issued and outstanding  106,202 at December 31, 2002
and 108,207 at September 30, 2003 |                                            |          | 11    |                   |        |                    | 11    |        
|                                                    | Additional paid-in capital                                                                          |                                                                                         |                                            | 424,505  |       |                   |        | 429,439            |      
|                                                    | Deferred compensation                                                                               |                                                                                         |                                            | (1,928   | )     |                   |        | (2,060             | )    
|                                                    | Accumulated other comprehensive income:                                                             |                                                                                         |                                            |          |       |                   |        |                    |      
|                                                    |                                                                                                     | Cumulative translation adjustments                                                      |                                            |          | 1,285 |                   |        |                    | 2,693 |        
|                                                    |                                                                                                     | Unrealized gain on investments                                                          |                                            |          | 891   |                   |        |                    | 123   |        
|                                                    | Accumulated deficit                                                                                 |                                                                                         |                                            | (195,466 | )     |                   |        | (182,560           | )    
|                                                    |                                                                                                     |                                                                                         |                                            |          |       |                   |        |                   
|                                                    |                                                                                                     |                                                                                         | Total Stockholders Equity                 |          |       | 229,298           |        |                    |       | 247,646 | 
|                                                    |                                                                                                     |                                                                                         |                                            |          |       |                   |        |                   
|                                                    |                                                                                                     |                                                                                         | Total Liabilities and Stockholders Equity |          | $     | 294,396           |        |                    | $     | 446,046 | 
|                                                    |                                                                                                     |                                                                                         |                                            |          |       |                   |        |                   

See accompanying notes to unaudited condensed consolidated financial statements.

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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 September 30, |         | Nine Months Ended September 30,
|                                                      |                                                 |         |         |                                  |         |                                
|                                                      |                                                 |         |         | 2002                             |         | 2003                            |         | 2002   |         | 2003
|                                                      |                                                 |         |         |                                  |         |                                 |         |        |         |     
|Revenue                                               |                                                 | $       | 102,865 |                                  |         | $                               | 130,994 |        |         | $    | 298,746 |         |         | $ | 367,674 |       
|Cost of Revenue                                       |                                                 |         | 95,802  |                                  |         |                                 | 118,097 |        |         |      | 288,919 |         |         |   | 330,139 |       
|                                                      |                                                 |         |         |                                  |         |                                 |         |        |         |      |         |         |         |   |         |       
|                                                      | Gross profit                                    |         |         | 7,063                            |         |                                 |         | 12,897 |         |      |         | 9,827   |         |   |         | 37,535 |        
|Selling, General and Administrative Expense           |                                                 |         | 8,885   |                                  |         |                                 | 8,649   |        |         |      | 24,007  |         |         |   | 26,116  |       
|                                                      |                                                 |         |         |                                  |         |                                 |         |        |         |      |         |         |         |   |         |       
|                                                      | Income (loss) from operations                   |         |         | (1,822                           | )       |                                 |         | 4,248  |         |      |         | (14,180 | )       |   |         | 11,419 |        
|Investment and Interest Income, net                   |                                                 |         | 564     |                                  |         |                                 | 157     |        |         |      | 1,770   |         |         |   | 1,487   |       
|                                                      |                                                 |         |         |                                  |         |                                 |         |        |         |      |         |         |         |   |         |       
|                                                      | Income (loss) before provision for income taxes |         |         | (1,258                           | )       |                                 |         | 4,405  |         |      |         | (12,410 | )       |   |         | 12,906 |        
|Provision for Income Taxes                            |                                                 |         |        |                                  |         |                                 |        |        |         |      |        |         |         |   |        |       
|                                                      |                                                 |         |         |                                  |         |                                 |         |        |         |      |         |         |         |   |         |       
|                                                      | Net income (loss)                               |         | $       | (1,258                           | )       |                                 | $       | 4,405  |         |      | $       | (12,410 | )       |   | $       | 12,906 |        
|                                                      |                                                 |         |         |                                  |         |                                 |         |        |         |      |         |         |         |   |         |       
|Net Income (Loss) per Common Share:                   |                                                 |         |         |                                  |         |                                 |         |        |         |      |         |         |         |   |         |       
|                                                      | Basic                                           |         | $       | (0.01                            | )       |                                 | $       | 0.04   |         |      | $       | (0.12   | )       |   | $       | 0.12   |        
|                                                      |                                                 |         |         |                                  |         |                                 |         |        |         |      |         |         |         |   |         |       
|                                                      | Diluted                                         |         | $       | (0.01                            | )       |                                 | $       | 0.04   |         |      | $       | (0.12   | )       |   | $       | 0.11   |        
|                                                      |                                                 |         |         |                                  |         |                                 |         |        |         |      |         |         |         |   |         |       
|Weighted Average Number
of Common Shares Outstanding: |                                                 |         |         |                                  |         |                                 |         |        |         |      |         |         |         |   |         |       
|                                                      |                                                 | Basic   |         |                                  | 105,406 |                                 |         |        | 107,227 |      |         |         | 105,028 |   |         |        | 106,499 | 
|                                                      |                                                 |         |         |                                  |         |                                 |         |        |         |      |         |         |         |   |         |       
|                                                      |                                                 | Diluted |         |                                  | 105,406 |                                 |         |        | 117,114 |      |         |         | 105,028 |   |         |        | 115,363 | 
|                                                      |                                                 |         |         |                                  |         |                                 |         |        |         |      |         |         |         |   |         |       

EXULT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(amounts in thousands)
(unaudited)

|                                   |                                                                           |                                  |        |                                  |     |                                 |       |      |     |      |         |       |       |   |        |       |     | 
|---------------------------------- | ------------------------------------------------------------------------- | -------------------------------- | ------ | -------------------------------- | --- | ------------------------------- | ----- | ---- | --- | ---- | ------- | ----- | ----- | - | ------ | ----- | --- | 
|                                   |                                                                           |                                  |        | Three Months Ended September 30, |     | Nine Months Ended September 30,
|                                   |                                                                           |                                  |        |                                  |     |                                
|                                   |                                                                           |                                  |        | 2002                             |     | 2003                            |       | 2002 |     | 2003
|                                   |                                                                           |                                  |        |                                  |     |                                 |       |      |     |     
|Net Income (Loss)                  |                                                                           | $                                | (1,258 | )                                |     | $                               | 4,405 |      |     | $    | (12,410 | )     |       | $ | 12,906 |      
|                                   |                                                                           |                                  |        |                                  |     |                                 |       |      |     |      |         |       |       |   |        |      
|Other Comprehensive Income (Loss): |                                                                           |                                  |        |                                  |     |                                 |       |      |     |      |         |       |       |   |        |      
|                                   | Foreign currency translation adjustments                                  |                                  |        | 358                              |     |                                 |       | 928  |     |      |         | 1,007 |       |   |        | 1,408 |    
|                                   | Unrealized
gain (loss) on investments                                     |                                  |        | 374                              |     |                                 |       | (182 | )   |      |         | 793   |       |   |        | (132  | )  
|                                   | Reclassification adjustment for (gain)
loss realized in Net Income (Loss) |                                  |        |                                 |     |                                 |       | 8    |     |      |         |      |       |   |        | (636  | )  
|                                   |                                                                           |                                  |        |                                  |     |                                 |       |      |     |      |         |       |       |   |        |      
|                                   |                                                                           | Total other comprehensive income |        |                                  | 732 |                                 |       |      | 754 |      |         |       | 1,800 |   |        |       | 640 | 
|                                   |                                                                           |                                  |        |                                  |     |                                 |       |      |     |      |         |       |       |   |        |      
|Comprehensive Income (Loss)        |                                                                           | $                                | (526   | )                                |     | $                               | 5,159 |      |     | $    | (10,610 | )     |       | $ | 13,546 |      
|                                   |                                                                           |                                  |        |                                  |     |                                 |       |      |     |      |         |       |       |   |        |      

See accompanying notes to unaudited condensed consolidated financial statements.

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EXULT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)

|                                                                          |                                                                                                     |                                                               |                                                     |         |                                 |         |         |         |         |        | 
|------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | --------------------------------------------------- | ------- | ------------------------------- | ------- | ------- | ------- | ------- | ------ | 
|                                                                          |                                                                                                     |                                                               |                                                     |         | Nine Months Ended September 30,
|                                                                          |                                                                                                     |                                                               |                                                     |         |                                
|                                                                          |                                                                                                     |                                                               |                                                     |         | 2002                            |         | 2003   
|                                                                          |                                                                                                     |                                                               |                                                     |         |                                 |         |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                     |                                                                                                     |                                                               |                                                     |         |                                 |         |         |        
|Net Income (Loss)                                                         |                                                                                                     | $                                                             | (12,410                                             | )       |                                 | $       | 12,906  |        
|                                                                          | Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities  |                                                               |                                                     |         |                                 |         |         |         |        
|                                                                          |                                                                                                     | Depreciation and amortization                                 |                                                     |         | 15,875                          |         |         |         | 21,104  |       
|                                                                          |                                                                                                     | Discount accretion on long-term obligations                   |                                                     |         |                                |         |         |         | 696     |       
|                                                                          |                                                                                                     | Net realized gains, net of premium (discount) price accretion |                                                     |         |                                |         |         |         | 262     |       
|                                                                          | Changes in operating assets and liabilities,
net of business acquired                              |                                                               |                                                     |         |                                 |         |         |         |        
|                                                                          |                                                                                                     | Accounts receivable, net                                      |                                                     |         | (12,449                         | )       |         |         | (30,083 | )     
|                                                                          |                                                                                                     | Prepaid expenses and other current assets                     |                                                     |         | (5,352                          | )       |         |         | (6,240  | )     
|                                                                          |                                                                                                     | Accounts payable                                              |                                                     |         | 13,059                          |         |         |         | 5,609   |       
|                                                                          |                                                                                                     | Accrued liabilities and other                                 |                                                     |         | (11,319                         | )       |         |         | 24,271  |       
|                                                                          |                                                                                                     |                                                               |                                                     |         |                                 |         |         |        
|                                                                          |                                                                                                     |                                                               | Net cash provided by (used in) operating activities |         |                                 | (12,596 | )       |         |         | 28,525 | 
|                                                                          |                                                                                                     |                                                               |                                                     |         |                                 |         |         |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                     |                                                                                                     |                                                               |                                                     |         |                                 |         |         |        
|Expenditures for Fixed Asset Purchases
and Direct Contract Costs          |                                                                                                     |                                                               | (19,124                                             | )       |                                 |         | (21,349 | )      
|Expenditures for Client Contract Related Intangible Assets                |                                                                                                     |                                                               | (13,600                                             | )       |                                 |         | (19,039 | )      
|Purchase of outsourcing business, net of cash acquired                    |                                                                                                     |                                                               |                                                    |         |                                 |         | (16,623 | )      
|Purchases of Investments                                                  |                                                                                                     |                                                               | (206,821                                            | )       |                                 |         | (59,280 | )      
|Proceeds from Investments                                                 |                                                                                                     |                                                               | 154,521                                             |         |                                 |         | 97,783  |        
|Change in Other Assets                                                    |                                                                                                     |                                                               | (1,618                                              | )       |                                 |         | (238    | )      
|                                                                          |                                                                                                     |                                                               |                                                     |         |                                 |         |         |        
|                                                                          | Net cash used in investing activities                                                               |                                                               |                                                     | (86,642 | )                               |         |         | (18,746 | )      
|                                                                          |                                                                                                     |                                                               |                                                     |         |                                 |         |         |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                     |                                                                                                     |                                                               |                                                     |         |                                 |         |         |        
|Proceeds from Issuance of Common Stock                                    |                                                                                                     |                                                               | 2,831                                               |         |                                 |         | 2,639   |        
|Net
proceeds from Issuance of Convertible Senior Notes                    |                                                                                                     |                                                               |                                                    |         |                                 |         | 96,867  |        
|Payments on Other Long-Term Obligations                                   |                                                                                                     |                                                               | (485                                                | )       |                                 |         | (2,582  | )      
|                                                                          |                                                                                                     |                                                               |                                                     |         |                                 |         |         |        
|                                                                          | Net cash provided by financing activities                                                           |                                                               |                                                     | 2,346   |                                 |         |         | 96,924  |        
|                                                                          |                                                                                                     |                                                               |                                                     |         |                                 |         |         |        
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                   |                                                                                                     |                                                               | (139                                                | )       |                                 |         | 1,276   |        
|                                                                          |                                                                                                     |                                                               |                                                     |         |                                 |         |         |        
|Net Increase (Decrease) in Cash and Cash Equivalents                      |                                                                                                     |                                                               | (97,031                                             | )       |                                 |         | 107,979 |        
|Cash and Cash Equivalents, beginning of period                            |                                                                                                     |                                                               | 144,357                                             |         |                                 |         | 42,846  |        
|                                                                          |                                                                                                     |                                                               |                                                     |         |                                 |         |         |        
|Cash and Cash Equivalents, end of period                                  |                                                                                                     | $                                                             | 47,326                                              |         |                                 | $       | 150,825 |        
|                                                                          |                                                                                                     |                                                               |                                                     |         |                                 |         |         |        
|SUPPLEMENTAL CASH FLOW INFORMATION:                                       |                                                                                                     |                                                               |                                                     |         |                                 |         |         |        
|Cash Paid During the Period for:                                          |                                                                                                     |                                                               |                                                     |         |                                 |         |         |        
|                                                                          | Interest                                                                                            |                                                               | $                                                   | 119     |                                 |         | $       | 166     |        
|                                                                          |                                                                                                     |                                                               |                                                     |         |                                 |         |         |        
|                                                                          | Income taxes                                                                                        |                                                               | $                                                   | 293     |                                 |         | $       | 133     |        
|                                                                          |                                                                                                     |                                                               |                                                     |         |                                 |         |         |        
|SUMMARY OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:                   |                                                                                                     |                                                               |                                                     |         |                                 |         |         |        
|Acquisition of Certain Prepaid
Assets through Other Long-Term Obligations |                                                                                                     | $                                                             | 9,012                                               |         |                                 | $       |        |        
|                                                                          |                                                                                                     |                                                               |                                                     |         |                                 |         |         |        
|Acquisition of Fixed Assets
through Other Long-Term Obligations           |                                                                                                     | $                                                             | 3,167                                               |         |                                 | $       | 625     |        
|                                                                          |                                                                                                     |                                                               |                                                     |         |                                 |         |         |        
|Common Stock Warrant Issued for Client Contract Related
Intangible Asset  |                                                                                                     | $                                                             |                                                    |         |                                 | $       | 1,298   |        
|                                                                          |                                                                                                     |                                                               |                                                     |         |                                 |         |         |        

See accompanying notes to unaudited condensed consolidated financial statements.

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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 nine months ended September 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 September 30, 2002 and 2003, 91%
and 81%, 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 and Canada. For the nine months ended September 30, 2002 and
2003, 89% and 86%, 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 and Canada.

During the three months ended September 30, 2002, three of the Companys
process management clients accounted for 43%, 25% and 16%, respectively, of
revenue. During the three months ended September 30, 2003, three of the
Companys process management clients accounted for 47%, 15% and 14%,
respectively, of revenue. During the nine months ended September 30, 2002,
three of the Companys process management clients accounted for 45%, 26% and
16%, respectively, of revenue. During the nine months ended September 30, 2003,
three of the Companys process management clients accounted for 51%, 17% 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

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##### Table of Contents



EXULT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)

the method on reported results. SFAS
No. 148 was 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 September 30, 2002 and 2003, the Company had options outstanding to
acquire 22,622,955 and 26,508,731 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 September 30, |       | Nine Months Ended September 30,
|                                                                                                                                    |                              |   |                                  |       |                                
|                                                                                                                                    |                              |   | 2002                             |       | 2003                            |   | 2002   |       | 2003
|                                                                                                                                    |                              |   |                                  |       |                                 |   |        |       |     
|Net income (loss), as reported                                                                                                      |                              | $ | (1,258                           | )     |                                 | $ | 4,405  |       |      | $ | (12,410 | )     |   | $ | 12,906  |      
|Stock-based employee compensation
expense included in reported net income
(loss), net of related tax effects                        |                              |   | 210                              |       |                                 |   | 285    |       |      |   | 663     |       |   |   | 866     |      
|Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects |                              |   | (7,902                           | )     |                                 |   | (6,545 | )     |      |   | (27,175 | )     |   |   | (19,954 | )    
|                                                                                                                                    |                              |   |                                  |       |                                 |   |        |       |      |   |         |       |   |   |         |      
|Pro forma net loss                                                                                                                  |                              | $ | (8,950                           | )     |                                 | $ | (1,855 | )     |      | $ | (38,922 | )     |   | $ | (6,182  | )    
|                                                                                                                                    |                              |   |                                  |       |                                 |   |        |       |      |   |         |       |   |   |         |      
|Net income (loss) per share:                                                                                                        |                              |   |                                  |       |                                 |   |        |       |      |   |         |       |   |   |         |      
|                                                                                                                                    | Basic, as reported           |   | $                                | (0.01 | )                               |   | $      | 0.04  |      |   | $       | (0.12 | ) |   | $       | 0.12  |  
|                                                                                                                                    |                              |   |                                  |       |                                 |   |        |       |      |   |         |       |   |   |         |      
|                                                                                                                                    | Diluted, as reported         |   | $                                | (0.01 | )                               |   | $      | 0.04  |      |   | $       | (0.12 | ) |   | $       | 0.11  |  
|                                                                                                                                    |                              |   |                                  |       |                                 |   |        |       |      |   |         |       |   |   |         |      
|                                                                                                                                    | Pro forma, basic and diluted |   | $                                | (0.08 | )                               |   | $      | (0.02 | )    |   | $       | (0.37 | ) |   | $       | (0.06 | )
|                                                                                                                                    |                              |   |                                  |       |                                 |   |        |       |      |   |         |       |   |   |         |      

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 nine months ended September 30, 2002 and
2003:

|                        |  |                |       |      |      |   |       |  
|----------------------- |  | -------------- | ----- | ---- | ---- | - | ----- | -
|                        |  | 2002           |       | 2003
|                        |  |                |       |     
|Risk-free interest rate |  | 5.63% to 6.20% |       |      | 3.45 | %
|Expected life           |  |                | 4.00  |      |      |   | 5.63  |  
|Expected volatility     |  |                | 77.70 | %    |      |   | 77.70 | %
|Expected dividends      |  |                |      |      |      |   |      |  

Derivative Financial Instruments

In accordance with SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, the Company recognizes all derivatives as either
assets or liabilities and measures those instruments at fair market value.
Derivatives that are not hedges are adjusted to fair value through earnings.
If the derivative is a hedge, changes in fair value will either be offset
against the change in fair value of the hedged assets, liabilities or firm
commitments through earnings, or recognized in other comprehensive income until
the hedged item is recognized in earnings.

Recent Accounting Pronouncements

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 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 adopted EITF Issue 00-21 for transactions
entered into after June 30, 2003.  The impact of adopting EITF
Issue 00-21 was not material to the Companys financial statements.
Management anticipates that, for the foreseeable future, services and
deliverables to be provided under new business process management
contracts will generally be similar in nature to services and
deliverables provided in connection with the Companys existing
contracts. The Companys market and service offering is
relatively new. Competitors are just beginning to enter the market
and certain of the Companys services have not been sold on a
stand alone basis either by us or competitors. Therefore, management
believes that, both at present and for the foreseeable future, there
is not, and will not be, sufficient evidence of fair value for
certain elements of the Companys contracts. Accordingly, as
long as there continues to be a lack of fair value for certain
elements of the Companys contracts and some portion of these
elements remain undelivered until the completion of the contract,
management anticipates accounting for each multiple-element future
contract that shares these characteristics as a single unit and in
the same manner as the Company accounts for its existing
multiple-element contracts.

5



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##### Table of Contents



EXULT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)

2. Reclassification of Depreciation and Amortization Expense

Prior to January 1, 2003, depreciation and amortization expense was set
forth as a separate line item in the Condensed Consolidated Statements of
Income (Loss). Commencing January 1, 2003, depreciation and amortization
expense is included in Cost of Revenue and Selling, General and Administrative
Expense. For comparison purposes, all periods presented have been reclassified
to conform with the current periods presentation. Accordingly, for the three
months ended September 30, 2002, the effect of this reclassification was to
increase Cost of Revenue by $3,827,000 and Selling, General and Administrative
Expense by $966,000. For the nine months ended September 30, 2002, the effect
of this reclassification was to increase Cost of Revenue and Selling, General
and Administrative Expense by $10,088,000 and $3,027,000, respectively. For the
three months ended September 30, 2003, Cost of Revenue and Selling, General and
Administrative Expense included depreciation and amortization of $6,739,000 and
$439,000, respectively. For the nine months ended September 30, 2003, Cost of
Revenue and Selling, General and Administrative Expense included depreciation
and amortization of $15,762,000 and $1,761,000, respectively.

3. Short-Term Investments

Short-term investments are comprised of available-for-sale securities and
consist of the following (in thousands):

|                                               |                                  |   |                   |        |                    |   |                |        |            |   |         |         |           |   |         |         | 
|---------------------------------------------- | -------------------------------- | - | ----------------- | ------ | ------------------ | - | -------------- | ------ | ---------- | - | ------- | ------- | --------- | - | ------- | ------- | 
|                                               |                                  |   | December 31, 2002 |        | September 30, 2003
|                                               |                                  |   |                   |        |                   
|                                               |                                  |   |                   |        |                    |   | Estimated      |        |            |   |         |         | Estimated
|                                               |                                  |   | Amortized Cost    |        | Fair Value         |   | Amortized Cost |        | Fair Value
|                                               |                                  |   |                   |        |                    |   |                |        |           
|Amounts Included in
Cash and Cash Equivalents: |                                  |   |                   |        |                    |   |                |        |            |   |         |         |           |   |         |        
|                                               | Institutional money market funds |   | $                 | 41,851 |                    |   | $              | 41,851 |            |   | $       | 133,913 |           |   | $       | 133,913 | 
|                                               |                                  |   |                   |        |                    |   |                |        |            |   |         |         |           |   |         |        
|Amounts Included in Investments:               |                                  |   |                   |        |                    |   |                |        |            |   |         |         |           |   |         |        
|                                               | Commercial paper and other       |   |                   | 2,917  |                    |   |                | 2,917  |            |   |         | 2,501   |           |   |         | 2,501   | 
|                                               | Corporate notes                  |   |                   | 28,125 |                    |   |                | 28,373 |            |   |         | 9,611   |           |   |         | 9,654   | 
|                                               | Asset-backed securities          |   |                   | 21,253 |                    |   |                | 21,301 |            |   |         | 19,860  |           |   |         | 19,904  | 
|                                               | U.S. Treasuries and Agencies     |   |                   | 31,265 |                    |   |                | 31,860 |            |   |         | 12,901  |           |   |         | 12,937  | 
|                                               |                                  |   |                   |        |                    |   |                |        |            |   |         |         |           |   |         |        
|                                               |                                  |   | 83,560            |        |                    |   | 84,451         |        |            |   | 44,873  |         |           |   | 44,996  |        
|                                               |                                  |   |                   |        |                    |   |                |        |            |   |         |         |           |   |         |        
|                                               |                                  | $ | 125,411           |        |                    | $ | 126,302        |        |            | $ | 178,786 |         |           | $ | 178,909 |        
|                                               |                                  |   |                   |        |                    |   |                |        |            |   |         |         |           |   |         |         | 

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 September 30, 2003, there
are gross unrealized holding gains of $129,000 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 consist of the
following (in thousands):

|                          |  |                   |        |                    |  |                |        |            |  |   |        |           |  |   |        | 
|------------------------- |  | ----------------- | ------ | ------------------ |  | -------------- | ------ | ---------- |  | - | ------ | --------- |  | - | ------ | 
|                          |  | December 31, 2002 |        | September 30, 2003
|                          |  |                   |        |                   
|                          |  |                   |        |                    |  | Estimated      |        |            |  |   |        | Estimated
|                          |  | Amortized Cost    |        | Fair Value         |  | Amortized Cost |        | Fair Value
|                          |  |                   |        |                    |  |                |        |           
|Due in less than one year |  | $                 | 48,490 |                    |  | $              | 48,764 |            |  | $ | 19,978 |           |  | $ | 20,020 | 
|Due in one to three years |  |                   | 32,153 |                    |  |                | 32,770 |            |  |   | 22,394 |           |  |   | 22,475 | 
|                          |  |                   |        |                    |  |                |        |            |  |   |        |           |  |   |        | 
|                          |  | $                 | 80,643 |                    |  | $              | 81,534 |            |  | $ | 42,372 |           |  | $ | 42,495 | 
|                          |  |                   |        |                    |  |                |        |            |  |   |        |           |  |   |        | 

6



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##### Table of Contents



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 September 30,
2003, is $7,057,000 and $27,556,000, respectively, of unbilled receivables
consisting of revenue in excess of billings on certain long-term outsourcing
contracts. All unbilled receivables are expected to be recovered 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 September 30, 2003, is $1,853,000 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 nine
months ended September 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 (in thousands):

|                                      |  |          |        |         |  |          |       |  |  |   |        | 
|------------------------------------- |  | -------- | ------ | ------- |  | -------- | ----- |  |  | - | ------ | 
|                                      |  |          |        |         |  | Non-Cash |       |  |  |  
|                                      |  | Accruals |        | Charges |  | Total   
|                                      |  |          |        |         |  |         
|Severance and Related Charges         |  | $        | 6,648  |         |  | $        | 3,040 |  |  | $ | 9,688  | 
|Processing Centers Closure Costs      |  |          | 6,621  |         |  |          |      |  |  |   | 6,621  | 
|Write-off of Database                 |  |          |       |         |  |          | 2,165 |  |  |   | 2,165  | 
|                                      |  |          |        |         |  |          |       |  |  |   |        | 
|                                      |  |          | 13,269 |         |  | $        | 5,205 |  |  | $ | 18,474 | 
|                                      |  |          |        |         |  |          |       |  |  |   |        | 
|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       |  |          | (1,280 | )       |  |          |       |  |  |   |        | 
|2003
Year-to-Date Accrual Adjustments |  |          | (88    | )       |  |          |       |  |  |   |        | 
|                                      |  |          |        |         |  |          |       |  |  |   |        | 
|Balance at September 30, 2003         |  | $        | 498    |         |  |          |       |  |  |   |        | 
|                                      |  |          |        |         |  |          |       |  |  |   |        | 

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 nine months.

6. Income Taxes

The Company did not record a tax provision for the three-month and
nine-month periods ended September 30, 2002, as it had incurred only net
operating losses from the Companys inception through September 30, 2002. A
full valuation allowance has been provided against the tax benefit generated by
the net operating losses and other deferred net tax assets because of the
uncertainty associated with their realization. For the three months and nine
months ended September 30, 2003, the Company generated net income for financial
reporting purposes. The net income for these periods resulted in the creation
of deferred tax liabilities which will allow the Company to recognize in the
future the benefit of certain deferred tax assets. Accordingly, the Company
reduced its valuation allowance on its deferred net tax assets during the three
and nine months ended September 30, 2003, to the extent the newly generated
deferred tax liabilities will allow recovery of certain deferred tax assets.
Therefore, no net tax provision was recorded for the three months and nine
months ended September 30, 2003.

As of September 30, 2003, Exult has $68.8 million of remaining net 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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##### Table of Contents



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 Ended September 30, |         | Nine Months Ended September 30,
|         |                                            |  |                                  |         |                                
|         |                                            |  | 2002                             |         | 2003                            |  | 2002 |         | 2003
|         |                                            |  |                                  |         |                                 |  |      |         |     
|Basic:   |                                            |  |                                  |         |                                 |  |      |         |      |  |   |         |   |  |   |        
|         | Net income (loss)                          |  | $                                | (1,258  | )                               |  | $    | 4,405   |      |  | $ | (12,410 | ) |  | $ | 12,906  | 
|         | Weighted average common shares             |  |                                  | 105,406 |                                 |  |      | 107,227 |      |  |   | 105,028 |   |  |   | 106,499 | 
|         |                                            |  |                                  |         |                                 |  |      |         |      |  |   |         |   |  |   |        
|         | Net income (loss) per common share         |  | $                                | (0.01   | )                               |  | $    | 0.04    |      |  | $ | (0.12   | ) |  | $ | 0.12    | 
|         |                                            |  |                                  |         |                                 |  |      |         |      |  |   |         |   |  |   |         | 
|Diluted: |                                            |  |                                  |         |                                 |  |      |         |      |  |   |         |   |  |   |        
|         | Net income (loss)                          |  | $                                | (1,258  | )                               |  | $    | 4,405   |      |  | $ | (12,410 | ) |  | $ | 12,906  | 
|         |                                            |  |                                  |         |                                 |  |      |         |      |  |   |         |   |  |   |        
|         | Weighted average common shares             |  |                                  | 105,406 |                                 |  |      | 107,227 |      |  |   | 105,028 |   |  |   | 106,499 | 
|         | Stock option and warrant equivalent shares |  |                                  |        |                                 |  |      | 9,887   |      |  |   |        |   |  |   | 8,864   | 
|         |                                            |  |                                  |         |                                 |  |      |         |      |  |   |         |   |  |   |        
|         | Average common shares outstanding          |  |                                  | 105,406 |                                 |  |      | 117,114 |      |  |   | 105,028 |   |  |   | 115,363 | 
|         |                                            |  |                                  |         |                                 |  |      |         |      |  |   |         |   |  |   |        
|         | Net income (loss) per common share         |  | $                                | (0.01   | )                               |  | $    | 0.04    |      |  | $ | (0.12   | ) |  | $ | 0.11    | 
|         |                                            |  |                                  |         |                                 |  |      |         |      |  |   |         |   |  |   |         | 

For the three months and nine months ended September 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 was antidilutive. As of September 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 22,622,955
shares of Common Stock with a weighted average exercise price of $7.71 per
share. For the three months ended September 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 7,974,845 shares of Common Stock with a weighted
average exercise price of $11.80 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 nine months ended September 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
13,222,941 shares of Common Stock with a weighted average exercise price of
$10.60 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.  In addition,
until such time that one of the conversion criteria has been met,
the impact of the conversion of the Companys 2.50% Convertible
Senior Notes issued on September 30, 2003 will be excluded from
the computation of net income per share.  Based upon the current
conversion price, the 2.50% Convertible Senior Notes will be
convertible into 8,503,401 shares of Common Stock, 9,353,741 shares
including the notes issued in October 2003.

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, claims
for indemnity arising in the course of the Companys business 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 recoverable
from third parties, or the financial impact with respect to these matters as of
September 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 group of affiliated
sellers certain legal entities and assets and assumed certain liabilities
constituting a business process management outsourcing business that the
Company intends to continue to operate.

8



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##### Table of Contents



EXULT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)

The results of operations of the
acquired business for the period from June 10, 2003 through September 30, 2003
are included in the Companys condensed consolidated statements of income
(loss). The cash purchase price, including transaction costs and net of
$2,666,000 of cash acquired, was $16,623,000. The 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              |  | $ | 5,242  | 
|Fixed assets                |  |   | 6,453  | 
|Intangible assets           |  |   | 12,647 | 
|Other assets                |  |   | 97     | 
|                            |  |   |        | 
|Total assets acquired       |  |   | 24,439 | 
|Current liabilities assumed |  |   | 7,816  | 
|                            |  |   |        | 
|Net assets acquired         |  | $ | 16,623 | 
|                            |  |   |        | 

The value attributed to each purchased outsourcing contract has been recorded
as an intangible asset. The intangible asset will be amortized as cost of
revenue over the remaining terms (ranging up to approximately six
years) 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 is being amortized as a reduction of revenue over the term of the related
outsourcing contract.

11. Issuance of 2.50% Convertible Senior Notes

On September 30, 2003, the Company sold $100.0 million principal amount of
its newly issued 2.50% Convertible Senior Notes (Notes) due October 1, 2010
to certain initial purchasers for resale to qualified institutional buyers in
reliance on Rule 144A under the United States Securities Act of 1933. On
October 9, 2003, the Company sold an additional $10.0 million principal amount
of Notes pursuant to an option held by the initial purchasers. The initial
purchasers purchased the Notes from the Company at 97% of the principal amount
thereof. The net proceeds received by the Company were $96.9 million on
September 30, 2003 (with an additional $9.7 million received on October 9, 2003
upon exercise of the initial purchasers option) after the initial purchasers
discount and all estimated costs and expenses. Interest is payable in cash on
each April 1 and October 1 commencing April 1, 2004. The Notes are senior
unsecured obligations of the Company and rank equally with all of the Companys
existing and future senior unsecured indebtedness. The indenture under which
the Notes have been issued does not restrict the incurrence of debt by the
Company.

All Notes that have not been repurchased or converted must be repaid with
any accrued unpaid interest on October 1, 2010, subject to acceleration under
certain circumstances, including events of default and insolvency, as described
in the indenture. No sinking fund is provided for the Notes. Commencing October
5, 2008, the Company has the option at any time to redeem all, or a portion, of
the Notes for cash at 100% of the principal amount of the Notes plus accrued
unpaid interest. On October 1, 2008, each holder of the Notes has the one-time
right to require the Company to purchase all or a portion of such holders
Notes for cash at a purchase price of 100% of the principal amount plus accrued
unpaid interest. Furthermore, upon a change in control (as defined in the
indenture governing the Notes), each holder has the right, subject to certain
conditions and restrictions, to require the Company to repurchase all or a
portion of such holders Notes at a purchase price of 100% of the principal
amount plus accrued unpaid interest.

Subject to certain conditions, the holders of the Notes have the right to
convert their Notes, in whole or part, into shares of the Companys common
stock at an initial rate of 85.0340 shares of common stock per $1,000
principal
amount of Notes (which is

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EXULT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)

equivalent to a conversion price of approximately $11.76 per share)
(Conversion Price). The Conversion Price is subject to anti-dilution
adjustment under various circumstances. The conditions triggering the
conversion right include: (i) if on or before March 31, 2008, the closing sale
price of the Companys common stock for at least 20 trading days in the period
of 30 consecutive trading days ending on the last trading day of any fiscal
quarter is more than 110% of the then current Conversion Price, the Notes may
be converted during the following fiscal quarter; (ii) if, on any date after
March 31, 2008, the closing sale price of the Companys common stock is more
than 110% of the then current Conversion Price, then the Notes may be converted
at all times thereafter; and, (iii) if the Company elects to call some portion
or all of the Notes after October 5, 2008, then the portion being called for
redemption may be converted. The Notes are also convertible in certain other
circumstances, including certain simultaneous market conditions in
which the trading price for the Notes is less than 95% of the
conversion value of the Notes (based upon the value of the
Companys
common stock), certain mergers or sales of assets, and other events
constituting a change in control of the Company.  Until such time that
one of the above conversion criteria has been met, the impact of
such conversion will be excluded from the computation of net income
per share on a diluted basis.

The Company has agreed to register the resale of the Notes and the sale of
the shares of common stock issuable upon conversion of the Notes pursuant to a
shelf registration statement filed with the U.S. Securities and Exchange
Commission. If the registration statement is not timely filed or declared
effective, or if the Company does not keep it available for requisite periods,
then the Company may be required to pay liquidated damages to the holders of
the Notes and shares received upon conversion. The liquidated damages would be
in the form of payment (in addition to any interest that may be payable) on the
principal amount or value of the securities entitled to registration, at a rate
per annum equal to 0.25% or 0.50%, depending on the circumstances.
The liquidated damages provision represents an embedded derivative as
defined in SFAS No. 133, which management believes does not have
material value.

The Company recorded the Notes at the net proceeds received and is
accreting this value over the remaining term of the Notes to their stated
maturity value using the effective interest method.

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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, debt service, balance sheet and profit expectations; size and duration of
client contracts; business mix; development, implementation and scaling of our
Exult Service Delivery ModelSM operational 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. To date, we
have generated leads for potential process management clients primarily through
our management team, existing outsourcing and consulting relationships, our
board of directors, third-party consultants, contact with key executives at
Global 500 corporations or direct communication from such companies in the form
of inquiry or request for proposal. After initial discussions with and
qualification of the potential client, we may enter into a non-disclosure
agreement. If subsequent discussions result in a mutual desire to pursue a
transaction, we then may enter into a non-binding letter of intent with the
client that establishes a framework for due diligence and contract
negotiations. Our letter of intent may provide for reimbursement of some or all
of our costs incurred during this process.

Our larger, integrated multi-process management service contracts
generally have terms of seven to ten 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.

Revenue under our process management contracts can be broadly divided into
two categories: revenue associated with processes that we manage directly and
revenue derived from processes that we manage by using third-party vendors. We
typically agree to

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provide a minimum savings to the client on the labor-based portion of
direct-managed processes after a pre-determined period of time, usually several
months to approximately one year from contract signing. For the portion of the
contract covering services previously subcontracted by the client and for which
we continue to use third-party vendors, we generally share with the clients
savings we are able to achieve from the clients historical spending levels.
The amount of minimum savings is determined in accordance with the terms of the
applicable contracts; in general, our fees are no greater than our clients
historical cost of operating the functions assumed by us. 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. We anticipate that gross margin associated with direct
managed revenues will generally be greater than gross margin associated with
third-party processes. It is important to our value proposition to the client
that we manage both types of processes in order to fulfill our mission to be
the single point of accountability for all HR processes on their behalf.
However, our overall gross margin may vary as the mix of revenue changes
between direct managed and third party.

We are contractually responsible for the delivery and acceptability to our
clients of the services we provide 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 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 services provided by 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.

When we sign a new process management contract, we typically announce our
estimate of the revenue potential for that contract over its anticipated term.
These estimates are intended to provide information that is relevant to an
understanding of our business, but are not a representation or guaranty
regarding future performance. Initially, our information about a new clients
historical volumes and costs for the HR processes we take on is imperfect, and
verification procedures that take place after contract announcement may result
in reduction in our anticipated fees. Further, our revenue expectations for
each contract change over its life. Once we have announced estimated revenue
potential for a new contract, we generally do not undertake to update that
estimate to reflect all of these changes. Rather, we try to maintain a
reasonably current estimate of the aggregate anticipated revenue for our entire
contract base.

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 three 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.

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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 cumulative 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.

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.

We have
adopted Emerging Issues Task Force (EITF) Issue 00-21,
Revenue Arrangements with Multiple Deliverables,
prospectively for contracts we enter into after June 30, 2003.
EITF issue 00-21 addresses the accounting, by a vendor such as us,
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. We
anticipate that, for the foreseeable future, services and
deliverables to be provided under new business process management
contracts will generally be similar in nature to services and
deliverables provided in connection with our existing contracts. Our
market and service offering is relatively new. Competitors are just
beginning to enter the market and certain of our services have not
been sold on a stand alone basis either by us or our competitors.
Therefore, we believe that, both at present and for the foreseeable
future, there is not, and will not be, sufficient evidence of fair
value for certain elements of our contracts. Accordingly, as long as
there continues to be a lack of fair value for certain elements of
our contracts and some portion of these elements remain undelivered
until the completion of a contract, we anticipate accounting for each
future multiple-element contract that shares these characteristics as
a single unit and in the same manner as we account for our existing
multiple-element contracts.

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 it is probable we will achieve, 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.

Factors that can cause our revenue expectations for a given contract to
decrease include: client financial difficulties or business contractions that
lead to reductions in workforce or discretionary spending on services such as
staffing and training; amendments

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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. 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 reflected as a reduction in revenue and
gross profit 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
reflected as an increase in revenue and gross profit 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.

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 increase efficiency and
commensurately reduce service delivery costs over the life of our
outsourcing contracts.  However, our ability to deliver additional
savings that are sustainable over the life of the contract becomes
more speculative in the later years due to the potential for
increasing delivery costs, uncertainty regarding future efficiency
improvements and client needs, and other factors.  Therefore,
life-of-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.  This time horizon is a function of the maturity of our
business, the development of our infrastructure and other factors.
The horizon included in the contract estimates as of September 30,
2003, includes the estimated savings that we believe are probable of
being achieved through the second quarter of calendar 2004, which are
then assumed to be maintained for the remaining life of each
contract.  At present, we consider efficiency improvements and cost
savings that we plan to achieve beyond that time horizon too
speculative to include in our life-of-contract cost estimates.
However, as our operating experience increases and our ability to
plan and execute cost savings improves, we would anticipate extending
the period of estimate.

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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 one or more 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 we determine such costs are
recoverable by the receipt of future contractually committed amounts. Capitalized set-up and other direct installation costs are
included in Fixed Assets and Direct Contract Costs and are amortized over the
applicable contract term. As of December 31, 2002 and September 30, 2003, we
had Direct Contract Costs of $10.7 million and $16.5 million, respectively, net
of accumulated amortization.

Deferred Tax Assets

As of December 31, 2002 and September 30, 2003, we had $64.9 million and
$68.8 million, respectively, of net deferred tax assets, arising primarily from
our net operating losses, for which we have fully reserved through a
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 accordingly. We
were profitable during the nine months ended September 30, 2003, but did not
record a tax provision because the net income for the period resulted in the
creation of deferred tax liabilities which will allow the Company to recognize
in the future the benefit of certain of its deferred tax assets. Accordingly,
the Company reduced its valuation allowance on its deferred net tax assets
during the nine months ended September 30, 2003, to the extent the newly
generated deferred tax liabilities will allow recovery of certain deferred tax
assets. Therefore, no net tax provision was recorded for the nine months ended
September 30, 2003. 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. We

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have met our primary objectives to date and we believe our clients value
our services, but 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 expect our contracts with Bank of America Corporation, BMO Financial
Group, BP p.l.c., International Paper Company, and Prudential Financial to
provide most of our revenue through 2003 and possibly in future periods. For
fiscal 2002 and the first nine months of 2003, these clients collectively
accounted for approximately 91% and 92%, 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 by the client
for convenience after a specified portion of the term has elapsed, upon
required notice and, in many cases, payment of specified early termination
penalties. The point at which a contract may be terminated for convenience
varies from client to client, generally ranging from one to five years from
contract signing, and the point has passed for some clients, including Bank of
America Corporation and BP p.l.c. 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 by the client.

Our outsourcing clients typically entrust us with important functions over
a long period of time. Accordingly, they demand contractual provisions to
protect their interests. Among other things, our client contracts specify
service level requirements that we must meet, and generally permit the client
to impose monetary penalties or terminate the contract for repeated failures to
meet requirements on identified critical services. We generally meet or exceed
these service levels, but occasionally we have experienced service level issues
due to the complex nature of the work and high standards set. Most times we
identified these issues through our review and reporting procedures and took
pro-active action to address the service. In limited other cases, clients have
claimed that we missed a critical service level, and we agreed or disagreed,
depending upon the circumstances. In our experience to date, in these
situations, clients have been primarily interested in addressing certain
service needs and have not ultimately sought significant remedies. However, in
the future we may miss a contractual service level on occasion, and instances
of severe or repeated breach, as defined by each contract, could permit a
client to assess significant monetary penalties against us, or, depending on
the terms of the contract, terminate the contract in whole or part.

As our business matures, the original terms of our major contracts will
begin to expire. For example, our agreements for services to BP p.l.c. 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.

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. Furthermore, such
an occurrence could lead to a charge to operations if we determine that the
recoverability of certain of our assets is impaired. We expect to face similar
risks with other significant clients until our business is more firmly
established and our client base is more diversified.

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 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 that are beyond our control. 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 guarantee cost
savings to our client, 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

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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
Exult Service Delivery ModelSM (ESDMSM) into 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 ESDMSM involves 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, as well as unique
operating costs to manage and coordinate work across international centers and
to satisfy regulatory requirements for global operations, 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 (approximately half of our
business process management revenue for the nine months ended September 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 provide services directly
to our clients under our control; in either case, we have certain contractual
responsibilities 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 also 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 ESDMSM is evolving and requires ongoing development.

We are still developing the ESDMSM infrastructure, including our
MultiDeliverySM operational methodology, and our ability to continue to deliver
and expand our broad process management solution depends upon our continued
ability to assemble and manage

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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 myHRSM solution 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 receivables, 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 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 September 30, 2003, we had
unbilled receivables of approximately $27.6 million. We expect unbilled
receivables to increase as our business grows and as our ability to
estimate cost reductions in future periods with greater certainty
results in extending the period over
which future anticipated reductions in our costs to perform under long-term
contracts are factored into our estimates of contract costs.

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

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for our existing long-term contracts is not inconsistent with these new
rules and interpretations. We adopted EITF Issue 00-21 prospectively
for transactions entered into after June 30, 2003. We
anticipate that, for the foreseeable future, services and
deliverables to be provided under new business process management
contracts will generally be similar in nature to services and
deliverables provided in connection with our existing contracts. Our
market and service offering is relatively new. Competitors are just
beginning to enter the market and certain of our services have not
been sold on a stand alone basis either by us or our competitors.
Therefore, we believe that, both at present and for the foreseeable
future, there is not, and will not be, sufficient evidence of fair
value for certain elements of our contracts. Accordingly, as long as
there continues to be a lack of fair value for certain elements of
our contracts and some portion of these elements remain undelivered
until the completion of a contract, we anticipate accounting for each
future multiple-element contract that shares these characteristics as
a single unit and in the same manner as we account for our existing
multiple-element contracts. Future developments in applicable accounting rules
and their interpretation may require us to adopt different accounting for
long-term contracts. There can be no assurances that in the future accounting
rulemaking bodies and the staff of the SEC will not determine that
EITF Issue 00-21
or other standards may require us to adopt different accounting, which may have
a material adverse effect on our revenues and results of operations.

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.

Our new business objectives and announced frontlog estimates for prospective
clients 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 10
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 three 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.

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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 this Risk Factors section and in our 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, which 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 increased revenue 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 nine
months ended September 30, 2003, cash flow from operating activities provided
cash of $28.5 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 $57.0 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.

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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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| |  |  | 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 significantly 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,
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;
|
| |  |  | 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;                                                             
|
| |  |  | the possibility that we may incur legal or contract liabilities that
are not covered by insurance and cannot be recovered from third parties;                  
|
| |  |  | our ability to sustain overall profitability;                                                                                                                  
|
| |  |  | changes in industry conditions affecting our clients, their spending
on HR services and the selection of services to outsource; and                            
|
| |  |  | changes in the global economy or the economies of countries in which
we have significant operations.                                                           

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

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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 ESDMSM.
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 are dependent upon technology services and if we experience damage, service
interruptions or failures at our client service centers or in our computer and
telecommunications systems, our client relationships and ability to attract new
clients may be adversely affected.

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 that could impair our client relationships
and expose us to liability and other damages.

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 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. 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.

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

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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 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 and 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.

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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;                                                     
|
| |  |  | 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 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

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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 European Union and many other countries, a variety of new
federal and state laws are beginning to present compliance challenges. For
example, new privacy regulations have been promulgated under the federal Health
Insurance Portability and Accountability Act of 1996 (HIPAA) which will
impact our business operations. Under the new HIPAA regulations, 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 that more privacy legislation will be
implemented, however, we cannot predict the scope and burdens of compliance
related thereto.

From time to time we may be party to legal proceedings, lawsuits and other
claims which could result in imposition of damages against us and could harm
our business and financial condition.

We are from time to time party to legal proceedings, lawsuits and other
claims incident to our business activities. Such matters include, among other
things, assertions of contract breach, claims for indemnity arising in the
course of our business and claims by persons whose employment with us 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 we have undertaken and
expect to continue to undertake in the ordinary course of our business. Such
matters are subject to many uncertainties and we cannot predict the outcomes
and financial impacts of them with assurance. There can be no assurances that
actions that have been or may be brought against us in the future will be
resolved in our favor. Any losses resulting from these claims could adversely
affect our consolidated financial position, results of operations and cash
flows.

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 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 business 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 business customers;                                                     
|
| |  |  | inability to retain the acquired business 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.

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

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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
or any patent rights we may establish, 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.

The 2.5% Convertible Senior Notes
we issued in September 2003 and October 2003 present
liquidity, dilution and volatility risks.

Interest payments on the Notes require cash and will reduce earnings;
repayment at maturity would be a significant cash
outlay.We have $110 million in principal amount of our 2.5% Convertible
Senior Notes (the Notes) outstanding. We must pay cash interest on the
outstanding principal amount of the Notes on April 1 and October 1 of each
year. Until repurchase or conversion reduces the outstanding principal amount,
interest payments will be $2,750,000 per year, thereby reducing our
cash accordingly, and which, together with amortization of the
related Notes discount, will reduce our pre-tax earnings
commensurately.

Holders of the Notes may require us to repurchase them on October 1, 2008,
or (subject to certain conditions and limitations) upon a change in control.
All Notes that have not been repurchased or converted must be repaid with any
accrued unpaid interest on October 1, 2010, subject to acceleration under
certain circumstances including events of default and insolvency, as described
in the indenture under which the Notes have been issued. No sinking fund is
provided for the Notes. The decision of a holder of Notes to convert the Notes
or hold them to maturity for repayment depends upon the trading price of our
common stock. If the trading price of our common stock does not rise above the
effective conversion price of the Notes, conversion of the Notes is unlikely
and we would be required to repay the principal amount in cash.

Paying interest on the Notes, repaying the Notes at maturity (if
necessary), paying other debt we may incur in the future, and continuing to
finance growth of our business will require increased cash flow or access to
other sources of capital. Our ability to generate sufficient cash flow to meet
these needs depends upon many factors, including our ability to grow our
business and operate profitably, as well as economic, financial, competitive,
legislative, and other factors that are beyond our control. Our business may
not generate sufficient cash flow from operations and we may not have future
access to capital sufficient for us to pay our debt, including the Notes, or to
fund other liquidity needs.

Conversion
of the Notes will dilute the ownership interest of existing
stockholders.Subject to certain conditions, the holders of the Notes can
convert them into shares of our common stock at a rate of 85.0340 shares per
$1,000 principal amount of Notes (subject to anti-dilution adjustments under
various circumstances). Conversion of all of the Notes at the current
conversion rate will result in issuance of approximately 9,354,000 shares of
our common stock, diluting the ownership interests of existing stockholders.
We are required to register the resale of the Notes and the shares issuable
upon conversion until they can be resold freely without registration, so any
shares of common stock obtained upon conversion can be expected to be sold into
the public markets. Such sales could adversely affect prevailing market prices
of our common stock.

Upon
the date the holders of the Notes have
the right to convert the Notes into shares of common stock, the
impact of the right to convert the Notes will act to reduce net income
per share on a diluted basis.  Until such time that one of the
conversion criteria has been met, the impact of the conversion of
the Notes will be excluded from the computation of net income per
share.  Once one of the criteria has been met, the impact of the
conversion of the Notes will be included in the computation of net
income per share on a diluted basis and will act to reduce net
income per share on a diluted basis.  Based upon the current
conversion price, the Notes will be convertible into 9,354,000 shares
of our common stock.

Hedging and other transactions may affect the value of our common stock
and the Notes.Purchasers of the Notes may implement hedging strategies
including short selling of our common stock, and these hedging strategies can
include modifying hedge positions from time to time by purchasing and selling
shares of our common stock. These strategies may increase the volatility and
reduce the market price of our common stock.

We are not restricted from incurring additional debt.The Notes are our
senior unsecured obligations and rank equally with all of our existing and
future senior unsecured indebtedness. The indenture under which the Notes have
been issued does not restrict the incurrence of additional debt, and the notes
are effectively subordinated to any secured indebtedness to the extent of the
value of that security, and to any liabilities of our subsidiaries to the
extent of their assets.

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 September 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

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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 us, 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 September 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 profitability, 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.

Future sales of our common stock or equity-related securities in the public
market or the issuance of securities senior to our common stock could cause the
price of our common stock 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. In addition, as of September 30,
2003, approximately 29.7 million shares of our common stock are reserved for issuance
to our employees, directors and officers pursuant to our stock incentive plans.
Upon issuance, these shares may be sold publicly without registration and may
also have an adverse effect on the market price of our common stock. Holders
of our recently issued convertible notes may elect to convert these notes into
shares of common stock under certain circumstances and resell such shares in
the public market. Such sales may have an adverse effect on the market price
of our common stock.

Our board of directors has the authority to issue, without the vote or
action of stockholders, shares of preferred stock and other equity-related
securities with priorities, rights and preferences superior to those of our
common stock, including but not limited to dividend rights, conversion rights,
voting rights, terms of redemption, redemption prices, and liquidation
preferences. No prediction can be made as to the effect, if any, that future
sales of shares of common stock, preferred stock or other equity-related
securities or the availability of such securities for future sale, will have on
the trading price of our common stock.

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.

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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 September 30, |      | Nine Months Ended September 30,
|                                            |                                                 |  |                                  |      |                                
|                                            |                                                 |  | 2002                             |      | 2003                            |  | 2002  |     | 2003
|                                            |                                                 |  |                                  |      |                                 |  |       |     |     
|Revenue                                     |                                                 |  | 100.0                            | %    |                                 |  | 100.0 | %   |      |  | 100.0 | %    |    |  | 100.0 | %   
|Cost of Revenue                             |                                                 |  | 93.1                             |      |                                 |  | 90.2  |     |      |  | 96.7  |      |    |  | 89.8  |     
|                                            |                                                 |  |                                  |      |                                 |  |       |     |      |  |       |      |    |  |       |     
|                                            | Gross profit                                    |  |                                  | 6.9  |                                 |  |       | 9.8 |      |  |       | 3.3  |    |  |       | 10.2 |  
|Selling, General and Administrative Expense |                                                 |  | 8.7                              |      |                                 |  | 6.6   |     |      |  | 8.0   |      |    |  | 7.1   |     
|                                            |                                                 |  |                                  |      |                                 |  |       |     |      |  |       |      |    |  |       |     
|                                            | Income (loss) from operations                   |  |                                  | (1.8 | )                               |  |       | 3.2 |      |  |       | (4.7 | )  |  |       | 3.1  |  
|Investment and Interest Income, net         |                                                 |  | 0.6                              |      |                                 |  | 0.1   |     |      |  | 0.6   |      |    |  | 0.4   |     
|                                            |                                                 |  |                                  |      |                                 |  |       |     |      |  |       |      |    |  |       |     
|                                            | Income (loss) before provision for income taxes |  |                                  | (1.2 | )                               |  |       | 3.3 |      |  |       | (4.1 | )  |  |       | 3.5  |  
|Provision for Income Taxes                  |                                                 |  |                                 |      |                                 |  |      |     |      |  |      |      |    |  |      |     
|                                            |                                                 |  |                                  |      |                                 |  |       |     |      |  |       |      |    |  |       |     
|                                            | Net income (loss)                               |  |                                  | (1.2 | )%                              |  |       | 3.3 | %    |  |       | (4.1 | )% |  |       | 3.5  | %
|                                            |                                                 |  |                                  |      |                                 |  |       |     |      |  |       |      |    |  |       |     

We have
adopted EITF Issue 00-21, Revenue Arrangements with Multiple
Deliverables, for transactions entered into after June 30,
2003.  The impact for adopting EITF Issue 00-21 was not material to
our financial statements.

Three Months Ended September 30, 2003 and 2002

Revenue.Revenue for the three months ended September 30, 2003 and 2002,
was $131.0 million and $102.9 million, respectively. The portion of the revenue
derived from our business process management clients was approximately 99% and
97% in the 2003 and 2002 periods, respectively. The balance of our revenue for
each period primarily consisted of consulting revenue generated from various
non-business process management clients. For the three months ended September
30, 2003, three business process management clients accounted for 47%, 15% and
14%, respectively, of revenue as compared to three business process management clients
accounting for 43%, 25% and 16%, respectively, of revenue for the three months
ended September 30, 2002. No other client accounted for more than 10% of
revenue in the 2003 and 2002 periods. Furthermore, for the three months ended
September 30, 2003 and 2002, 29% and 23%, respectively, of our
business 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. 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 the highly variable volume services is
recognized as the services are performed and is excluded from our contract
estimates. The increase in the percentage of revenue generated from the
provision of these highly variable volume services primarily resulted from
increased usage of these services under our client contracts executed
prior to 2003 and was
not materially impacted by the transition of service responsibility to us under
the business process management contracts executed in 2003 or the June 2003
acquisition of certain business process management contracts.

The $28.1 million revenue increase in the 2003 period as compared to the
2002 period resulted from a $14.8 million net increase in combined revenue from
our business process management contracts with Bank of America Corporation, BP
p.l.c., International Paper Company, Pactiv Corporation, Prudential Financial
and Unysis Corporation which were the only business process management
contracts common to both periods (Common Contracts Base); $8.0 million from
business process management contracts signed with new clients during 2003; and,
$7.9 million from six business process management contracts
acquired in June 2003. Offsetting the increases to our revenue was a $0.7
million revenue reduction as a result of the completion of one of our business
process management contracts during the fourth quarter of 2002 and a $1.9
million reduction in our consulting revenue. The net increase in revenue from
the Common Contracts Base consisted of a $13.0 million increase in the
provision of services with highly variable volumes together with a $5.6 million
increase in project revenue partially offset by a $3.8 million decrease driven by negotiated cost reductions for
certain services provided by third-party vendors.  As third-party
vendor costs decrease, our life-of-contract revenue decreases to the
extent these costs were recoverable from the client.  However, our
life-of-contract margins tend to improve as a result of the reduced
costs and revenue over the remaining term of the contract and the
margins are further enhanced to the extent we share in the savings
from these cost reductions achieved in the provision of these
services to our clients. Included
in the Common Contracts Base revenue, and operating income, for the three
months ended September 30, 2003 and 2002, was $7.0 million and $4.8 million,
respectively, reflecting the cumulative impact of the change in estimates
in each period arising from our updated life-of-contract estimates.
These cumulative adjustments include application of our current
contract estimates to inception-to-date contract costs incurred as of
the beginning of the period for each contract that has reached
operational stability to appropriately reflect the
inception-to-date contract profits

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based upon our revised margin estimates and should not be considered
indicative of future results. 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 September
30, 2003 and 2002, was $118.1 million and $95.8 million, respectively. 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
business process management contracts, and expenses associated with third-party vendors
who provide services on our behalf for our clients within the scope of our
business 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). Commencing January 1, 2003,
depreciation and amortization expense is included in cost of revenue and
selling, general and administrative expense and, accordingly, the financial
statements for the three months ended September 30, 2002 have been reclassified
to conform with the 2003 presentation. Depreciation and amortization expense
included in cost of revenue for the three months ended September 30, 2003 and
2002, was $6.7 million and $3.8 million, respectively. The increase in the cost
of revenue for the three months ended September 30, 2003 as compared to the
three months ended September 30, 2002 principally resulted from the progressive
transition of service responsibility to Exult under our various business
process management contracts, the June 2003 acquisition of certain business
process management contracts and the continuing expansion of our infrastructure
and service capacity.

Our gross profit increased $5.8 million, or 81.7%, to $12.9 million, or
9.8% of revenue, for the three months ended September 30, 2003 from $7.1
million, or 6.9% of revenue, for the three months ended September 30, 2002. The
gross profit from our Common Contract Base improved to $19.8 million, or 17.4%
of Common Contract Base revenue, in the 2003 period from $10.1 million, or
10.2% of Common Contract Base revenue, in the 2002 period. Offsetting the gross
margin improvement from the Common Contract Base was the impact of $2.1 million
of start-up costs incurred and charged to expense during the 2003 period from our newly-opened India
client service center; a $0.9 million reduction in our gross profit from
consulting engagements; a reduction in gross profit of
$0.6 million from the completion of a business process
management contract in December 2002 and the combination of
a net gross loss from the contracts acquired in June 2003 and the business process management contracts
signed during 2003; and, a net increase of $0.3 million in our
currently unutilized capacity as
we expand our Exult Service Delivery Model capabilities.  The gross
loss from the combination of contracts acquired in June 2003 and
the business process management contracts signed during 2003 arises
primarily from certain transition costs incurred during the period in
connection therewith and we expect all of these contracts to be
profitable over the respective life of each contract.

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 September 30, 2003 and 2002,
was $8.6 million, or 6.6% of revenue, and $8.9 million, or 8.7% 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. After reclassifying the 2002 period financial statements to
conform with the 2003 presentation as discussed above, included in selling, general and
administrative expense for the three months ended September 30, 2003 and 2002,
was $0.4 million and $1.0 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 was expected to total $13.3 million. Through September 30, 2003, we have made
cash payments totaling $10.4 million and reduced the initial accrual, and
accordingly selling, general and administrative expense, by $0.1 million, $0.5
million and $2.3 million during the three months ended September 30, 2003 and
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 September 30, 2003 and 2002 was $8.7 million, or 6.6% of revenue,
and $9.4 million, or 9.2% of revenue, respectively. The reduction in selling,
general and administrative expense exclusive of the impact of business
optimization costs in the 2003 period compared to the 2002 period was primarily
the result of $0.7 million of additional compensation paid to a senior
executive in the 2002 period.

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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 September 30, 2003 and 2002 consisted of investment
and interest income of $0.4 million and $1.0 million, respectively, partially
offset by interest expense of $0.3 million and $0.4 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
September 30, 2002, we realized $0.1 million in net gains from sales of
short-term investments. There was no similar net gain or loss for the three
months ended September 30, 2003. Excluding the net gain, 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.  In September and
October 2003, we issued $110 million principal amount of
our 2.50% Convertible Senior Notes due October 1, 2010, and
accordingly, subject to reduction as a result of any conversions or
redemptions of the notes, our future interests expense will increase
by accretion of the related discounts and offering costs plus
$2.8 million per year in connection with the coupon payments.
The discounts and offering costs totaled approximately
$3.4 million and are being accreted over the remaining term of
the notes to their stated maturity using the effective interest
method.

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 three quarters of 2003. The net income for
these periods resulted in the creation of deferred tax liabilities which will
allow us to recognize in the future the benefit of certain deferred tax assets.
Accordingly, we reduced our valuation allowance on our deferred net tax assets
during the three months ended September 30, 2003, to the extent the newly
generated deferred tax liabilities will allow recovery of certain deferred tax
assets. Therefore, no net tax provision was recorded for the three months ended
September 30, 2003. 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.
Upon utilization or expiration of the underlying net operating loss
carryforwards, or elimination of the valuation allowance, we will
begin to record income tax expense and commensurately lower net
income for future periods in which we are profitable.

Net Income (Loss).The foregoing resulted in net income for the three
months ended September 30, 2003, of $4.4 million, or $0.04 per basic and
diluted share, and a net loss for the three months ended September 30, 2002, of
$1.3 million, or $0.01 per basic and diluted share.

Nine Months Ended September 30, 2003 and 2002

Revenue.Revenue for the nine months ended September 30, 2003 and 2002,
was $367.7 million and $298.7 million, respectively. The portion of our revenue
derived from our business process management clients for the 2003 and 2002
periods was 99% and 96%, respectively. The balance of our 2003 and 2002 revenue
primarily consisted of consulting revenue generated from various non-business
process management clients. For the nine months ended September 30, 2003, three
business process management clients accounted for 51%, 17% and 14%, respectively, of
revenue as compared to three business process management clients accounting for 45%, 26%
and 16%, respectively, of revenue for the nine months ended September 30, 2002.
No other client accounted for more than 10% of revenue in the 2003 and 2002
periods. Furthermore, for the nine months ended September 30, 2003 and 2002,
31% and 25%, respectively, of our business 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. 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. The increase in the percentage of revenue generated from
the provision of these highly variable volume services primarily resulted from
increased usage of these services under our client contracts executed
prior to 2003 and was
not materially impacted by the transition of service responsibility to us under
the business process management contracts executed in 2003 or the June 2003
acquisition of certain business process management contracts.

The $68.9 million revenue increase in the 2003 period as compared to the 2002
period resulted from a $56.5 million net increase in combined revenue from the
Common Contracts Base; $10.9 million from business process management contracts
signed with new clients during 2003; and, $9.7 million from six business
process management contracts acquired in June 2003. Offsetting the
increases to our revenue was a $2.1 million revenue reduction as a result of
the completion of one of our business process management contracts during the
fourth quarter of 2002 and a $6.1 million reduction in our consulting revenue.
The net increase in revenue from the Common Contracts Base consisted of a $38.6
million increase in the provision of services with highly variable volumes, an
$11.0 million increase in project revenue and a
$6.9 million increase driven primarily by the progressive
transition of service responsibility to us throughout 2002 under the
business management contract executed in early 2002 which was
partially offset by negotiated cost reductions for certain services
provided by third parties as discussed above.  As third-party vendor
costs decrease, our life-of-contract revenue decreases to the extent
these costs were recoverable from the client.  However, our
life-of-contract margins tend to improve as a result of the reduced
costs and revenue over the remaining term of the contract and the
margins are further enhanced to the extent we share in the savings
from these cost reductions achieved in the provision of these
services to our clients.  Included in the Common Contracts Base
revenue, and operating income, for the nine months ended September 30, 2003 and
2002, was $19.5 million and $4.8 million, respectively, reflecting the
cumulative impact of the change in estimates in each period arising
from our updated life-of-contract estimates. These cumulative
adjustments include application of our current contract estimates to
inception-to-date contract costs incurred as of the beginning of the
period for each contract that has reached operational stability to appropriately reflect the inception-to-date contract profits based
upon our revised margin

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estimates and should not be considered indicative of future results. 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 nine months ended September
30, 2003 and 2002, was $330.1 million and $288.9 million, respectively. As
previously discussed, commencing January 1, 2003, depreciation and amortization
expense is included cost of revenue and selling, general and administrative
expense and the 2002 financial statements have been reclassified to conform
with the 2003 presentation. Depreciation and amortization included in cost of
revenue for the nine months ended September 30, 2003 and 2002, was $15.8
million and $10.1 million, respectively. The increase in the cost of revenue
for the nine months ended September 30, 2003 as compared to the nine months
ended September 30, 2002 principally resulted from the progressive transition
of service responsibility to Exult under our various business process
management contracts, the June 2003 acquisition of certain business process
management contracts and the continuing expansion of our infrastructure and
service capacity.

Our gross profit increased $27.7 million, or 282.0%, to $37.5 million, or
10.2% of revenue, for the nine months ended September 30, 2003 from $9.8
million, or 3.3% of revenue, for the nine months ended September 30, 2002. The
gross profit from our Common Contract Base improved to $54.9 million, or 16.1%
of Common Contract Base revenue, in the 2003 period from $19.9 million, or 7.0%
of Common Contract Base revenue, in the 2002 period. Offsetting the gross
margin improvement from the Common Contract Base was the impact of $3.1 million
of start-up costs incurred and charged to expense during the 2003 period from our newly-opened India
client service center; a $2.5 million reduction in our gross profit from
consulting engagements; a reduction in gross profit of
$1.2 million from the completion of a business process
management contract in December 2002 and the combination of
a net gross loss from the contracts acquired in June 2003 and the business process management contracts
signed during 2003; and, a net increase of $0.5 million in our
currently unutilized capacity as
we expand our Exult Service Delivery Model capabilities.  The gross
loss from the combination of contracts acquired in June 2003 and
the business process management contracts signed during 2003 arises
primarily from certain transition costs incurred during the period
in connection therewith and we expect all of these contracts to be
profitable over the respective life of each contract.

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 nine months ended September 30, 2003 and 2002,
was $26.1 million, or 7.1% of revenue, and $24.0 million, or 8.0% of revenue,
respectively. After reclassifying the 2002 financial statements to conform with
the 2003 presentation as discussed above, included in selling, general and
administrative expense for the nine months ended September 30, 2003 and 2002,
was $1.8 million and $3.0 million, respectively, of depreciation and
amortization expense from certain capitalized costs and compensation deferrals.
In addition, during the nine months ended September 30, 2003 and 2002, we
reduced the initial accrual with respect to the 2001 business optimization
costs (see above discussion for the three-month period), and accordingly
selling, general and administrative expense, by $0.1 million and $1.9 million,
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 nine months ended September 30, 2003 and 2002, was $26.2
million, or 7.1% of revenue, and $25.9 million, or 8.7% of revenue,
respectively. 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 nine months ended September 30, 2003 and 2002 consisted of investment
and interest income of $2.4 million and $2.6 million, respectively, partially
offset by interest expense of $0.9 million and $0.8 million, respectively.
During the nine months ended September 30, 2003 and 2002, we realized $0.6
million and $0.1 million in net gains from sales of short-term investments.
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.  In September and October 2003, we issued $110 million
principal amount of our 2.50% Convertible Senior Notes due
October 1, 2010, and accordingly, subject to reduction as a
result of any conversions or redemptions of the notes, our future
interest expense will increase by accretion of the related discounts
and offering costs plus $2.8 million per year in connection with
the coupon payments.  The discounts and offering costs totaled
approximately $3.4 million and are being accreted over the
remaining term of the notes to their stated maturity using the
effective interest method.

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 three quarters of 2003. The net income for
these periods resulted in the creation of deferred tax liabilities which will
allow us to recognize in the future the benefit of certain deferred tax assets.
Accordingly, we reduced our valuation allowance on our deferred net tax assets
during the nine months ended September 30, 2003, to the extent the newly
generated deferred tax liabilities will allow recovery of certain deferred tax
assets. Therefore, no net tax provision was recorded for the nine months ended
September 30, 2003. The remaining federal and state net operating loss
carryforwards expire beginning in 2018 and 2005, respectively. The foreign net

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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.  Upon utilization or expiration of the underlying net
operating loss carryforwards, or elimination of the valuation
allowance, we will begin to record income tax expense and
commensurately lower net income for future periods in which we are
profitable.

Net Income (Loss).The foregoing resulted in net income for the nine
months ended September 30, 2003, of $12.9 million, or $0.12 and $0.11 per basic
and diluted share, respectively, and a net loss for the nine months ended
September 30, 2002, of $12.4 million, or $0.12 per basic and diluted share.

Liquidity and Capital Resources

Since our inception in October 1998 through September 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, the net proceeds from our September 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. In addition, we also raised net proceeds of $96.9 million
from the sale of our convertible senior notes during September 2003 (with an
additional $9.7 million received in October 2003 upon exercise of the initial
purchasers option).

During the nine months ended September 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 nine months ended September 30, 2003, we began generating revenue from
three new process management clients, BMO Financial Group, Universal Music
Group and Vivendi Universal Entertainment, none of which has reached
operational stability as of September 30, 2003, and we began operating client
service centers in Canada and India. In addition during June 2003, we acquired
six business process management contracts along with two additional client
service centers (in Brazil and the United Kingdom) and operating presences in
continental Europe, Hong Kong and Singapore. During the nine-month periods
ended September 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 new process management
contracts. We also used cash during both periods to pursue additional business
opportunities and the development of our corporate infrastructure.

Net cash provided by operating activities for the nine months ended
September 30, 2003, was $28.5 million as compared to net cash used in operating
activities of $12.6 million for the nine months ended September 30, 2002. 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 resulting in net income of $12.9 million in the 2003 period as
compared to a net loss of $12.4 million in the 2002 period. In addition, the
increase in cash provided by operating activities in the 2003 period as
compared to the 2002 period was also due to increased depreciation and
amortization, as well as net realized gains on sales of short-term
investments, net of
interest accretion, collectively totaling $6.2 million more in
the 2003 period than the 2002 period, and increases in
accounts payable and accrued liabilities and other of
$29.9 million in the 2003
period as compared to a net increase of $1.7 million in the 2002 period. Partially offsetting
these increases in cash provided by operations were increases in accounts
receivable, net and prepaid expenses and other current assets of $36.3 million
and $17.8 million for the nine months ended September 30, 2003 and 2002,
respectively. Included in the 2003 increase in accrued liabilities and other
was a short-term benefit in the timing of certain contract related payments in
the 2003 period.

Net cash used in investing activities for the nine months ended September
30, 2003 and 2002 was $18.7 million and $86.6 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 our
available cash. Prior to December 2001, we invested substantially all of our
available cash in highly liquid temporary cash investments with initial
maturities of 90 days or less which we classify as cash equivalents. Commencing
in December 2001, in order to enhance our investment yield, we began to invest
a portion of our available cash in financial instruments with maturity dates in
excess of 90 days which we classify 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 provided by investing activities of $38.5
million for the nine months ended September 30, 2003, and net cash used in
investing activities of $52.3 million for the nine months ended September 30,
2002. Excluding the impact of the temporary investment of our available cash
balances, cash used in investing activities was $57.2 million for the 2003
period and $34.3 million for the 2002 period. Cash was used primarily to
construct and expand our client service centers and our internal systems, to
make payments with respect to new client contracts or expansion of existing
contracts, and to fund client set up costs in both the 2002 and 2003 periods.
In addition during the 2003 period as discussed above, we expended $16.6
million (net of cash acquired of $2.7 million) to purchase six business process
management contracts and the related business operations.

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We generated $96.9 million and $2.3 million in cash, net from financing
activities during the nine months ended September 30, 2003 and 2002,
respectively. During the 2003 period, we generated $96.9 million from the sale
of our convertible senior notes and there was no similar transaction in the
2002 period. We also generated cash of $2.6 million and $2.8 million for the
nine months ended September 30, 2003 and 2002, respectively, from the exercise
of stock options and purchases under our employee stock purchase
plan. Partially offsetting the cash generated by these activities
were payments we made of $2.6 million and $0.5 million with respect to
our long-term obligations during the nine months ended September 30, 2003 and 2002,
respectively.

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
September 30, 2003, we had cash and short-term investments of $195.8
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, expansion of our service capabilities, 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

We have the following contractual obligations and commercial commitments
for the periods indicated (in thousands):

|                                   |  |                   |        |                   |  |            |        |       |  |   |         |  |  |   |         | 
|---------------------------------- |  | ----------------- | ------ | ----------------- |  | ---------- | ------ | ----- |  | - | ------- |  |  | - | ------- | 
|                                   |  | October 1, 2003   |        | January 1, 2006   |  |            |        |       |  |   |         | 
|                                   |  | Through           |        | Through           |  |            |        |       |  |   |         | 
|                                   |  | December 31, 2005 |        | December 31, 2007 |  | Thereafter |        | Total
|                                   |  |                   |        |                   |  |            |        |      
|Long-Term Obligations              |  | $                 | 14,146 |                   |  | $          | 242    |       |  | $ | 96,875  |  |  | $ | 111,263 | 
|Operating Leases                   |  |                   | 14,425 |                   |  |            | 9,133  |       |  |   | 11,070  |  |  |   | 34,628  | 
|Unconditional Purchase Obligations |  |                   | 1,254  |                   |  |            | 11,000 |       |  |   |        |  |  |   | 12,254  | 
|                                   |  |                   |        |                   |  |            |        |       |  |   |         |  |  |   |         | 
|                                   |  | $                 | 29,825 |                   |  | $          | 20,375 |       |  | $ | 107,945 |  |  | $ | 158,145 | 
|                                   |  |                   |        |                   |  |            |        |       |  |   |         |  |  |   |         | 

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

Recent Accounting Pronouncements

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. We adopted EITF
Issue 00-21 for transactions entered into after June 30, 2003.
The impact of adopting EITF Issue 00-21 was not material to our
financial statements. We anticipate that, for the foreseeable
future, services and deliverables to be provided under new business
process management contracts will generally be similar in nature to
services and deliverables provided in connection with our existing
contracts. Our market and service offering is relatively new.
Competitors are just beginning to enter the market and certain of our
services have not been sold on a stand alone basis either by us or
our competitors. Therefore, we believe that, both at present and for
the foreseeable future, there is not, and will not be, sufficient
evidence of fair value for certain elements of our contracts.
Accordingly, as long as there continues to be a lack of fair value
for certain elements of our contracts and some portion of these
elements remain undelivered until the completion of a contract, we
anticipate accounting for each future multiple-element contract that
shares these characteristics as a single unit and in the same manner
as we account for our existing multiple-element contracts.

33



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Sensitivity

At September 30, 2003, our investment portfolio consisted primarily of
fixed income securities totaling $42.5 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 September 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. As of the end of the
period covered by this report, the Company carried out an evaluation, under the
supervision and with the participation of the Companys management, including
the Companys Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the Companys disclosure controls and procedures (as defined
in Rule 13a-15(e) of the Securities Exchange Act of 1934). Based upon that
evaluation, the 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 are not effective in timely alerting them to
material information relating to the Company (and its consolidated
subsidiaries) that is required to be included in the Companys periodic filings
with the Commission, except that it was determined that additional
measures should be implemented to ensure that information about the
Company's performance against client service delivery requirements
is communicated promptly to the Company's Disclosure Committee.

Changes
in internal controls. There was no significant change in the
Companys internal controls over financial reporting that occurred during our
most recent fiscal quarter that materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.

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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, claims
for indemnity arising in the course of the Companys business 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 recoverable
from third parties, or the financial impact with respect to these matters as of
September 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.

(c)  On September 30, 2003, the Company sold $100.0 million principal amount of
its newly issued 2.50% Convertible Senior Notes (Notes) due October 1, 2010
to Goldman, Sachs & Co., Morgan Stanley and Banc of America
Securities LLC, for resale to qualified institutional buyers in
reliance on Rule 144A under the United States Securities Act of 1933. On
October 9, 2003, the Company sold an additional $10.0 million principal amount
of Notes pursuant to an option held by the initial purchasers. The initial
purchasers purchased the Notes from the Company at 97% of the principal amount
thereof. Interest is payable in cash on each April 1 and October 1 commencing
April 1, 2004. The Notes are senior unsecured obligations of the Company and
rank equally with all of the Companys existing and future senior unsecured
indebtedness.
The indenture under which the Notes have been issued does not restrict the
incurrence of debt by the Company, and the notes are effectively subordinated
to any secured indebtedness to the extent of the value of that security, and to
any liabilities of the Companys subsidiaries to the extent of their assets.

All Notes that have not been repurchased or converted must be repaid with
any accrued unpaid interest on October 1, 2010, subject to acceleration under
certain circumstances including events of default and insolvency, as described
in the indenture. No sinking fund is provided for the Notes. Commencing October
5, 2008, the Company has the option at any time to redeem all, or a portion, of
the Notes for cash at 100% of the principal amount of the Notes plus accrued
unpaid interest. On October 1, 2008, each holder of the Notes has the one-time
right to require the Company to purchase all or a portion of such holders
Notes for cash at a purchase price of 100% of the principal amount plus accrued
unpaid interest. Furthermore, upon a change in control (as defined in the
indenture governing the Notes), each holder has the right, subject to certain
conditions and restrictions, to require the Company to repurchase all or a
portion of such holders Notes at a purchase price of 100% of the principal
amount plus accrued unpaid interest; the repurchase price is payable in cash,
or at the Companys option and subject to certain limitations, in shares of the
Companys common stock valued at 95% of the average closing sales price for the
stock for the five trading days ending on the third trading day before the
repurchase date.

Subject to certain conditions, the holders of the Notes have the right to
convert their Notes, in whole or part, into shares of the Companys common
stock at an initial rate of 85.0340 shares of common stock per $1,000
principal
amount of Notes (which is equivalent to a conversion price of approximately
$11.76 per share) (Conversion Price). The Conversion Price is subject to
adjustment under various circumstances including dividends, various kinds of
distributions, stock splits and combinations, and repurchase by the Company of
its common stock pursuant to a tender or exchange offer at a premium to market
price. The conditions triggering the conversion right are: (i) if on or before
March 31, 2008, the closing sale price of the Companys common stock for at
least 20 trading days in the period of 30 consecutive trading days ending on
the last trading day of any fiscal quarter is more than 110% of the then
current Conversion Price, the Notes may be converted during the following
fiscal quarter; (ii) if, on any date after March 31, 2008, the closing sale
price of the Companys common stock is more than 110% of the then current
Conversion Price, then the Notes may be converted at all times thereafter;
(iii) if the Company elects to call some portion or all of the Notes after
October 5, 2008, then the portion being called for redemption may be converted;
(iv) if the Company distributes to all or substantially all holders of its
common stock any rights to purchase common stock at less than the closing sales
price of the common stock on the day preceding the declaration for the
distribution, and holders may not participate in the distribution without
converting, then holders may convert their Notes at any time until the day
before the ex-dividend date; (v) if the Company distributes to all or
substantially all holders of its common stock cash and/or assets with a value
per share exceeding 5% of the closing price of the Companys common

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stock on the day preceding the declaration of the distribution, then
holders may convert their Notes at any time until the day before the
ex-dividend date; (vi) if the Company becomes party to a consolidation, merger
or sale of all or substantially all of its assets, subject to certain
exceptions, then holders may convert their Notes at any time from 15 days
before the anticipated effective date until 15 days after the actual date of
the transaction; and (vii) if the average trading price for the Notes for any
five consecutive-trading-day period was less than 95% of the average conversion
value for the Notes during that period, then holders may convert their Notes
for the following five business days, provided that if on the conversion date,
the closing price of the Companys common stock is greater than the then
current Conversion Price and less than or equal to 110% of the then current
Conversion Price, then a holder surrendering for conversion Notes
that are
not otherwise convertible, will receive, (a) at the Companys
option for a conversion date on or before October 4, 2008, cash or common stock
with a value equal to the principal amount of such holders Notes, or (b) for a
conversion date on or after October 5, 2008, cash equal to the principal amount
of such holders Notes.

The Company has agreed pursuant to a registration rights agreement between
the Company and the initial purchasers of the Notes to register pursuant to a
shelf registration statement filed with the U.S. Securities and Exchange
Commission the resale of the Notes and the sale of the shares of common stock
issuable upon conversion of the Notes. Failure to file the shelf registration
by December 29, 2003, or have the registration statement declared effective by
March 29, 2004, will constitute a registration default obligating the Company
to pay liquidated damages until the registration statement is filed or declared
effective, as the case may be. Liquidated damages are in the form of a payment
(in addition to any interest that may be payable) on the principal amount or
value of the securities entitled to registration, at a rate per annum equal to
0.25% to and including the 90th day following such Registration Default, and
0.50% from and after the 91st day following such Registration Default. Failure
to keep the registration statement available for use by holders of the
registrable securities until October 2005 (or earlier if all the registered
securities have been sold), subject to limited suspensions, for more than 30
days, whether or not consecutive, in any 90-day period, or for more than 90
days, whether or not consecutive, during any 12-month period will constitute an
effective failure obligating the Company to pay liquidated damages until the
holders are again able to sell under the registration statement. Liquidated
damages are in the form of a payment (in addition to any interest that may be
payable) on the principal amount or value of the securities entitled to
registration, at a rate per annum equal to 0.50% from the 31st day of the
applicable 90-day period or the 91st day of the applicable 12-month period, as
the case may be.




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



|(a) |  | Exhibits.                                                   
|--- |  | ------------------------------------------------------------
|   
|    |  | The following Exhibits are incorporated herein by reference.

|        |          |             |                                                                                                                                                                                                                                                                                 |  |  |  | 
|------- | -------- | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |          |             |                                                                                                                                                                                                                                                                                 |  |  | 
|Number  |          | Description |                                                                                                                                                                                                                                                                                 |  |  | 
|        |          |             |                                                                                                                                                                                                                                                                                 |  |  | 
|        | 3.1*     |             | Fourth Amended and Restated Certificate of Incorporation of Exult, Inc.                                                                                                                                                                                                        
|        |          |             |                                                                                                                                                                                                                                                                                
|        | 3.2*     |             | Amended and Restated Bylaws of Exult, Inc.                                                                                                                                                                                                                                     
|        |          |             |                                                                                                                                                                                                                                                                                
|        | 4.4      |             | Indenture, dated as of September 30, 2003, by and between Exult, Inc. and Bank One Trust
Company, N.A., as Trustee (including Form of 2.50% Convertible Senior Notes due October 1,
2010).                                                                                     
|        |          |             |                                                                                                                                                                                                                                                                                
|        | 4.5      |             | Registration Rights Agreement, dated as of September 30, 2003, between Exult, Inc. and Goldman,
Sachs & Co., Banc of America Securities LLC, and Morgan Stanley & Co. Incorporated, as Initial
Purchasers.                                                                     
|        |          |             |                                                                                                                                                                                                                                                                                
|        | 10.28.1 |             | Amendment No. 2 to Services Agreement between Exult and Prudential dated as of January 11, 2002.                                                                                                                                                                               
|        |          |             |                                                                                                                                                                                                                                                                                
|        | 10.28.2 |             | Amendment No. 4 to Services Agreement between Exult and Prudential dated as of January 11, 2002.                                                                                                                                                                               
|        |          |             |                                                                                                                                                                                                                                                                                
|        | 10.31.6  |             | Amendment No. 1 to Employment Agreement dated as of September 8, 2003, by and between John A.
Adams and Exult, Inc.                                                                                                                                                            
|        |          |             |                                                                                                                                                                                                                                                                                
|        | 10.34    |             | Purchase Agreement dated September 24, 2003, between Exult, Inc. and Goldman, Sachs & Co., Banc
of America Securities LLC, and Morgan Stanley & Co. Incorporated, as Initial Purchasers,
related to issuance of Exult Inc.s 2.5% Convertible Senior Notes due October 1, 2010.
|        |          |             |                                                                                                                                                                                                                                                                                
|        | 31.1     |             | Written statement of the Chief Executive Officer of Exult, Inc. pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                                     
|        |          |             |                                                                                                                                                                                                                                                                                
|        | 31.2     |             | Written statement of the Chief Financial Officer of Exult, Inc. pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                                     

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|        |  |                                                                                                                                                        |  |  |  | 
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  | 
|Exhibit |  |                                                                                                                                                        |  |  |  | 
|Number  |  | Description                                                                                                                                            |  |  |  | 
|        |  |                                                                                                                                                        |  |  |  | 
|32      |  | 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.                                                                             
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | 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 July 24, 2003, furnishing a copy of the
Registrants press release announcing its earnings for the quarter ended
June 30, 2003.                                                                                                                                                                                                            
|   
|    |  | An amendment on Form 8-K/A filed on August 25, 2003, amending the
Registrants Current Report on Form 8-K dated June 9, 2003, indicating
that no financial information is required to be furnished in connection
with Registrants purchase of certain assets from PricewaterhouseCoopers
LLP and various affiliated PricewaterhouseCoopers entities.                       
|   
|    |  | Current Report on Form 8-K dated September 25, 2003, furnishing copies of
the Registrants press release dated September 23, 2003, announcing its
intention to commence a private placement of $100 million principal amount
of convertible senior notes and the Registrants press release dated
September 24, 2003, announcing the pricing terms of the private placement.

37



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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 12th day of November, 2003.

| |  |             |  |     |  |                               
| |  | ----------- |  | --- |  | ------------------------------
| |  | EXULT, INC. |  |    
| |  |             |  |     |  |                               
| |  | By:         |  | /s/ |  | JAMES C. MADDEN, V            
| |  |             |  |    
| |  |             |  |     |  | James C. Madden, V            
| |  |             |  |     |  | Chief Executive Officer and   
| |  |             |  |     |  | Chairman of the Board         
| |  |             |  |     |  | (principal executive officer) 
| |  |             |  |     |  |                               
| |  | By:         |  | /s/ |  | JOHN A. ADAMS                 
| |  |             |  |    
| |  |             |  |     |  | John A. Adams                 
| |  |             |  |     |  | Executive Vice President and  
| |  |             |  |     |  | Chief Financial Officer       
| |  |             |  |     |  | (principal financial officer) 
| |  |             |  |     |  |                               
| |  | By:         |  | /s/ |  | ROBERT G. McGRAW              
| |  |             |  |    
| |  |             |  |     |  | Robert G. McGraw              
| |  |             |  |     |  | Vice President, Finance and   
| |  |             |  |     |  | Chief Accounting Officer      
| |  |             |  |     |  | (principal accounting officer)

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EXHIBIT INDEX

|         |  |                                                                                                                                                                                                                                                                                
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  |                                                                                                                                                                                                                                                                                
|Number   |  | Description                                                                                                                                                                                                                                                                    
|         |  |                                                                                                                                                                                                                                                                                
|3.1*     |  | Fourth Amended and Restated Certificate of Incorporation of Exult, Inc.                                                                                                                                                                                                        
|         |  |                                                                                                                                                                                                                                                                                
|3.2*     |  | Amended and Restated Bylaws of Exult, Inc.                                                                                                                                                                                                                                     
|         |  |                                                                                                                                                                                                                                                                                
|4.4      |  | Indenture, dated as of September 30, 2003, by and between Exult, Inc. and Bank One Trust
Company, N.A., as Trustee (including Form of 2.50% Convertible Senior Notes due October 1,
2010).                                                                                     
|         |  |                                                                                                                                                                                                                                                                                
|4.5      |  | Registration Rights Agreement, dated as of September 30, 2003, between Exult, Inc. and Goldman,
Sachs & Co., Banc of America Securities LLC, and Morgan Stanley & Co. Incorporated, as Initial
Purchasers.                                                                     
|         |  |                                                                                                                                                                                                                                                                                
|10.28.1 |  | Amendment No. 2 to Services Agreement between Exult and Prudential dated as of January 11, 2002.                                                                                                                                                                               
|         |  |                                                                                                                                                                                                                                                                                
|10.28.2 |  | Amendment No. 4 to Services Agreement between Exult and Prudential dated as of January 11, 2002.                                                                                                                                                                               
|         |  |                                                                                                                                                                                                                                                                                
|10.31.6  |  | Amendment No. 1 to Employment Agreement dated as of September 8, 2003, by and between John A.
Adams and Exult, Inc.                                                                                                                                                            
|         |  |                                                                                                                                                                                                                                                                                
|10.34    |  | Purchase Agreement dated September 24, 2003, between Exult, Inc. and Goldman, Sachs & Co., Banc
of America Securities LLC, and Morgan Stanley & Co. Incorporated, as Initial Purchasers,
related to issuance of Exult Inc.s 2.5% Convertible Senior Notes due October 1, 2010.
|         |  |                                                                                                                                                                                                                                                                                
|31.1     |  | Written statement of the Chief Executive Officer of Exult, Inc. pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                                     
|         |  |                                                                                                                                                                                                                                                                                
|31.2     |  | Written statement of the Chief Financial Officer of Exult, Inc. pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.                                                                                                                                                     
|         |  |                                                                                                                                                                                                                                                                                
|32       |  | 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.                                                                             
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | 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.