##### Table of Contents



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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549



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FORM 10-Q

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| |  | Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 for quarterly period ended December 31,
2000            
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| |  | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period _________ to __________

Commission File Number 000-31351

KPMG CONSULTING, INC.(Exact name of registrant as specified in its charter)

|                                                                             |  |                                             
|---------------------------------------------------------------------------- |  | --------------------------------------------
|DELAWARE
(State or other jurisdiction of incorporation or organization)      |  | 22-3680505
(IRS Employer Identification No.)
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|1676 International Drive, McLean, VA
(Address of principal executive office) |  | 22102
(Zip Code)                            

(703) 747-3000
(Registrants telephone number, including area code)

(Former name, 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 reports), and (2) has been subject to such
filing requirements for the past 90 days.

|    |  |   
|--- |  | --
|YES |  | NO

The number of shares of common stock of the Registrant outstanding as of
February 28, 2001 was 155,959,938.

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TABLE OF CONTENTS



|                                           |                                                                                                                        |  |  |  |  |  |  | 
|------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I  FINANCIAL STATEMENTS             
|                                           | Item 1:  Financial Statements (unaudited)                                                                             
|                                           | Consolidated/Combined Condensed Statements of Operations for the Three and Six Months Ended December 31, 2000
and 1999
|                                           | Consolidated Condensed Balance Sheets as of December 31, and June 30, 2000                                            
|                                           | Consolidated/Combined Condensed Statements of Cash Flows for the Six Months Ended December 31, 2000 and 1999          
|                                           | Notes to Consolidated/Combined Condensed  Financial Statements                                                        
|                                           | Item 2:   Management's Discussion and Analysis of Financial Condition and Results of Operations                       
|                                           | Item 3:  Quantitative and Qualitative Disclosure about Market Risk                                                    
|PART II  OTHER INFORMATION:              
|                                           | Item 1:  Legal Proceedings                                                                                            
|                                           | Item 2:  Changes in Securities and Use of Proceeds                                                                    
|                                           | Item 6:  Exhibits                                                                                                     
|SIGNATURES                                
|Factors Affecting Future Financial Results



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KPMG CONSULTING, INC.

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2000

TABLE OF CONTENTS

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|---------------------------------------------------------------------------------------------------------------------- |  |  | -- |  |  |  |  | 
|PART I  FINANCIAL STATEMENTS                                                                                         
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|Item 1: Financial Statements (unaudited)                                                                              
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|Consolidated/Combined Condensed Statements of Operations for the Three and Six Months Ended December 31, 2000
and 1999 |  |  | 3  | 
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|Consolidated Condensed Balance Sheets as of December 31, and June 30, 2000                                             |  |  | 5  | 
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|Consolidated/Combined
Condensed Statements of Cash Flows for the Six Months Ended
December 31, 2000 and 1999           |  |  | 6  | 
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|Notes to Consolidated/Combined Condensed Financial Statements                                                          |  |  | 7  | 
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|Item 2:
Management's Discussion and Analysis of Financial Condition and Results of Operations                          |  |  | 11
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|Item 3: Quantitative and Qualitative Disclosure about Market Risk                                                      |  |  | 28 | 
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|PART II  OTHER INFORMATION:                                                                                          
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|Item 1: Legal Proceedings                                                                                              |  |  | 29 | 
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|Item 2: Changes in Securities and Use of Proceeds                                                                      |  |  | 29 | 
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|Item 6: Exhibits                                                                                                       |  |  | 30 | 
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|SIGNATURES                                                                                                             |  |  | 31 | 

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##### Table of Contents















PART I, ITEM 1.  FINANCIAL STATEMENTS







KPMG CONSULTING, INC.
CONSOLIDATED / COMBINED CONDENSED STATEMENTS OF OPERATIONS (1)
(in thousands, except share and per share amounts)
(unaudited)

|                                                                                              |                                                                |                        |         |              |         |   |              |         |         | 
|--------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ---------------------- | ------- | ------------ | ------- | - | ------------ | ------- | ------- | 
|                                                                                              |                                                                |                        |         | Consolidated |         |   | Combined     |        
|                                                                                              |                                                                |                        |         | Three Months |         |   | Three Months |        
|                                                                                              |                                                                |                        |         | Ended        |         |   | Ended        |        
|                                                                                              |                                                                |                        |         | December 31, |         |   | December 31, |        
|                                                                                              |                                                                |                        |         | 2000         |         |   | 1999         |        
|                                                                                              |                                                                |                        |         |              |         |   |              |        
|Revenues                                                                                      |                                                                | $                      | 702,604 |              |         | $ | 540,561      |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Costs of Service:                                                                            
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Professional compensation                                      |                        |         | 263,208      |         |   |              | 181,892 |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Other direct contract expenses                                 |                        |         | 196,589      |         |   |              | 119,335 |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Amortization of goodwill and other intangible assets           |                        |         | 7,487        |         |   |              | 3,963   |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Other costs of service                                         |                        |         | 90,533       |         |   |              | 93,769  |        
|                                                                                              |                                                                |                        |         |              |         |  
|                                                                                              |                                                                | Total costs of service |         |              | 557,817 |   |              |         | 398,959 | 
|                                                                                              |                                                                |                        |         |              |         |  
|Gross Margin                                                                                  |                                                                |                        | 144,787 |              |         |   | 141,602      |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Selling, general and administrative expenses                                                  |                                                                |                        | 104,071 |              |         |   | 96,885       |        
|                                                                                              |                                                                |                        |         |              |         |  
|Operating income                                                                              |                                                                |                        | 40,716  |              |         |   | 44,717       |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Interest expense, net                                                                         |                                                                |                        | (5,560  | )            |         |   | (12,665      | )      
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Equity in losses of affiliate and loss on redemption of
equity interest in affiliate (Note 5) |                                                                |                        | (63,330 | )            |         |   | (5,563       | )      
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Minority interests                                                                            |                                                                |                        | 20      |              |         |   | 49           |        
|                                                                                              |                                                                |                        |         |              |         |  
|Income before partner distributions and benefits                                              |                                                                |                        |         |              |         | $ | 26,538       |        
|                                                                                              |                                                                |                        |         |              |         |   |             
|Loss before taxes                                                                             |                                                                |                        | (28,154 | )           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Income tax expense                                                                            |                                                                |                        | 9,417   |             
|                                                                                              |                                                                |                        |        
|Net loss                                                                                      |                                                                |                        | (37,571 | )           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Dividend on Series A Preferred Stock                                                          |                                                                |                        | 15,836  |             
|                                                                                              |                                                                |                        |        
|Net loss applicable to common stockholders                                                    |                                                                | $                      | (53,407 | )           
|                                                                                              |                                                                |                        |        
|Loss per share:                                                                              
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Net loss applicable to common stockholders -
basic and diluted |                        | $       | (0.70        | )      
|                                                                                              |                                                                |                        |        
|                                                                                              | Weighted
average shares - basic and diluted                    |                        |         | 75,760,067   |        
|                                                                                              |                                                                |                        |        

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



|(1) |  | Through January 31, 2000, KPMG LLPs consulting business was operated in partnership form and
all of its earnings were allocable to its partners. Accordingly, partner distributions and benefits have
not been reflected in our historical financial statements through January 31, 2000. As a corporation,
effective February 1, 2000, payments for services rendered by our managing directors are included
as professional compensation, and we are subject to corporate income taxes.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



KPMG CONSULTING, INC.
CONSOLIDATED / COMBINED CONDENSED STATEMENTS OF OPERATIONS (1)
(in thousands, except share and per share amounts)
(unaudited)

|                                                                                              |                                                                |                        |           |              |           |   |              |         |         | 
|--------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ---------------------- | --------- | ------------ | --------- | - | ------------ | ------- | ------- | 
|                                                                                              |                                                                |                        |           | Consolidated |           |   | Combined     |        
|                                                                                              |                                                                |                        |           | Six Months   |           |   | Six Months   |        
|                                                                                              |                                                                |                        |           | Ended        |           |   | Ended        |        
|                                                                                              |                                                                |                        |           | December 31, |           |   | December 31, |        
|                                                                                              |                                                                |                        |           | 2000         |           |   | 1999         |        
|                                                                                              |                                                                |                        |           |              |           |   |              |        
|Revenues                                                                                      |                                                                | $                      | 1,382,040 |              |           | $ | 1,065,707    |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Costs of Service:                                                                            
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Professional compensation                                      |                        |           | 532,767      |           |   |              | 361,844 |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Other direct contract expenses                                 |                        |           | 346,560      |           |   |              | 219,593 |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Amortization of goodwill and other intangible assets           |                        |           | 14,575       |           |   |              | 7,721   |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Other costs of service                                         |                        |           | 173,499      |           |   |              | 171,926 |        
|                                                                                              |                                                                |                        |           |              |           |  
|                                                                                              |                                                                | Total costs of service |           |              | 1,067,401 |   |              |         | 761,084 | 
|                                                                                              |                                                                |                        |           |              |           |  
|Gross Margin                                                                                  |                                                                |                        | 314,639   |              |           |   | 304,623      |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Selling, general and administrative expenses                                                  |                                                                |                        | 212,965   |              |           |   | 185,257      |        
|                                                                                              |                                                                |                        |           |              |           |  
|Operating income                                                                              |                                                                |                        | 101,674   |              |           |   | 119,366      |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Interest expense, net                                                                         |                                                                |                        | (10,178   | )            |           |   | (22,100      | )      
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Equity in losses of affiliate and loss on redemption of
equity interest in affiliate (Note 5) |                                                                |                        | (76,020   | )            |           |   | (11,526      | )      
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Minority interests                                                                            |                                                                |                        | 74        |              |           |   | 105          |        
|                                                                                              |                                                                |                        |           |              |           |  
|Income before partner distributions and benefits                                              |                                                                |                        |           |              |           | $ | 85,845       |        
|                                                                                              |                                                                |                        |           |              |           |   |             
|Income before taxes                                                                           |                                                                |                        | 15,550    |             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Income tax expense                                                                            |                                                                |                        | 32,588    |             
|                                                                                              |                                                                |                        |          
|Net loss                                                                                      |                                                                |                        | (17,038   | )           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Dividend on Series A Preferred Stock                                                          |                                                                |                        | 31,672    |             
|                                                                                              |                                                                |                        |          
|Net loss applicable to common stockholders                                                    |                                                                | $                      | (48,710   | )           
|                                                                                              |                                                                |                        |          
|Loss per share:                                                                              
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Net loss applicable to common stockholders -
basic and diluted |                        | $         | (0.64        | )        
|                                                                                              |                                                                |                        |          
|                                                                                              | Weighted
average shares - basic and diluted                    |                        |           | 75,795,884   |          
|                                                                                              |                                                                |                        |          

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



|(1) |  | Through January 31, 2000, KPMG LLPs consulting business was operated in partnership form and
all of its earnings were allocable to its partners. Accordingly, partner distributions and benefits have
not been reflected in our historical financial statements through January 31, 2000. As a corporation,
effective February 1, 2000, payments for services rendered by our managing directors are included
as professional compensation, and we are subject to corporate income taxes.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents









KPMG CONSULTING, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share and per share amounts)

|                                                            |                                                                                                                                                                     |                                            |           |              |           |   |           |          |          |  
|----------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ------------ | --------- | - | --------- | -------- | -------- | -
|                                                            |                                                                                                                                                                     |                                            |           | December 31, |           |   | June 30,  |         
|                                                            |                                                                                                                                                                     |                                            |           | 2000         |           |   | 2000      |         
|                                                            |                                                                                                                                                                     |                                            |           |              |           |   |           |         
|                                                            |                                                                                                                                                                     |                                            |           | (unaudited)  |          
|ASSETS                                                     
|                                                           
|                                                           
|                                                           
|                                                           
|Current Assets:                                            
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Cash and cash equivalents                                                                                                                                           |                                            | $         | 15,315       |           |   | $         | 26,991   |         
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Accounts receivable, net                                                                                                                                            |                                            |           | 452,633      |           |   |           | 318,182  |         
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Unbilled revenues, net                                                                                                                                              |                                            |           | 151,107      |           |   |           | 238,128  |         
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Due from KPMG LLP                                                                                                                                                   |                                            |           |             |           |   |           | 2,155    |         
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Prepaid and other current assets                                                                                                                                    |                                            |           | 110,017      |           |   |           | 82,144   |         
|                                                            |                                                                                                                                                                     |                                            |           |              |           |  
|                                                            |                                                                                                                                                                     | Total current assets                       |           |              | 729,072   |   |           |          | 667,600  |  
|                                                           
|                                                           
|                                                           
|                                                           
|Investment in affiliate                                     |                                                                                                                                                                     |                                            |          |              |           |   | 66,075    |         
|                                                           
|                                                           
|                                                           
|                                                           
|Property and equipment, net of depreciation                 |                                                                                                                                                                     |                                            | 55,933    |              |           |   | 51,546    |         
|                                                           
|                                                           
|                                                           
|                                                           
|Goodwill and other intangible assets, net of amortization   |                                                                                                                                                                     |                                            | 177,855   |              |           |   | 131,287   |         
|                                                           
|                                                           
|                                                           
|                                                           
|Other assets                                                |                                                                                                                                                                     |                                            | 40,699    |              |           |   | 35,130    |         
|                                                            |                                                                                                                                                                     |                                            |           |              |           |  
|                                                            |                                                                                                                                                                     | Total assets                               |           | $            | 1,003,559 |   |           | $        | 951,638  |  
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            |                                                                                                                                                                     |                                            |           |              |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)             
|                                                           
|                                                           
|                                                           
|                                                           
|Current liabilities:                                       
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Current portion of notes payable                                                                                                                                    |                                            | $         | 56,419       |           |   | $         | 24,924   |         
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Due to KPMG LLP                                                                                                                                                     |                                            |           | 118,573      |           |   |           | 18,343   |         
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Acquisition obligations                                                                                                                                             |                                            |           | 83,680       |           |   |           | 82,200   |         
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Accounts payable                                                                                                                                                    |                                            |           | 34,750       |           |   |           | 32,011   |         
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Accrued payroll and related liabilities                                                                                                                             |                                            |           | 174,323      |           |   |           | 144,288  |         
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Distribution payable to managing directors                                                                                                                          |                                            |           |             |           |   |           | 73,230   |         
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Other current liabilities                                                                                                                                           |                                            |           | 113,169      |           |   |           | 117,615  |         
|                                                            |                                                                                                                                                                     |                                            |           |              |           |  
|                                                            |                                                                                                                                                                     | Total current liabilities                  |           |              | 580,914   |   |           |          | 492,611  |  
|                                                           
|                                                           
|                                                           
|                                                           
|Notes payable, less current portion                         |                                                                                                                                                                     |                                            | 61,226    |              |           |   | 42,383    |         
|                                                           
|                                                           
|                                                           
|                                                           
|Other liabilities                                           |                                                                                                                                                                     |                                            | 29,140    |              |           |   | 34,219    |         
|                                                            |                                                                                                                                                                     |                                            |           |              |           |  
|                                                            |                                                                                                                                                                     | Total liabilities                          |           |              | 671,280   |   |           |          | 569,213  |  
|                                                           
|                                                           
|                                                           
|                                                           
|Series A Mandatorily Redeemable Convertible Preferred Stock |                                                                                                                                                                     |                                            | 1,050,000 |              |           |   | 1,050,000 |         
|                                                           
|                                                           
|                                                           
|                                                           
|Stockholders Equity (Deficit) :                           
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Preferred Stock, $.01 par value 10,000,000 shares authorized                                                                                                        |                                            |           |             |           |   |           |         |         
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Common Stock, $.01 par value 1,000,000,000 shares authorized,
75,880,842 shares outstanding on June 30, 2000 and
75,759,279 shares outstanding on December 31, 2000 |                                            |           | 758          |           |   |           | 759      |         
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Additional paid-in capital                                                                                                                                          |                                            |           | (643,413     | )         |   |           | (643,415 | )       
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Accumulated deficit                                                                                                                                                 |                                            |           | (66,513      | )         |   |           | (17,802  | )       
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Notes receivable from stockholders                                                                                                                                  |                                            |           | (6,154       | )         |   |           | (5,845   | )       
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Accumulated other comprehensive loss                                                                                                                                |                                            |           | (2,399       | )         |   |           | (1,272   | )       
|                                                            |                                                                                                                                                                     |                                            |           |              |           |  
|                                                            |                                                                                                                                                                     | Total stockholders equity (deficit)       |           |              | (717,721  | ) |           |          | (667,575 | )
|                                                            |                                                                                                                                                                     |                                            |           |              |           |  
|                                                            |                                                                                                                                                                     | Total liabilities and stockholders equity |           | $            | 1,003,559 |   |           | $        | 951,638  |  
|                                                            |                                                                                                                                                                     |                                            |           |              |           |  

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

5



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##### Table of Contents









KPMG CONSULTING, INC.
CONSOLIDATED / COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

|                                                     |                                                                                  |                                                                                      |                                                     |         |              |         |        |              |          |         |  
|---------------------------------------------------- | -------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | --------------------------------------------------- | ------- | ------------ | ------- | ------ | ------------ | -------- | ------- | -
|                                                     |                                                                                  |                                                                                      |                                                     |         | Consolidated |         |        | Combined     |         
|                                                     |                                                                                  |                                                                                      |                                                     |         | Six Months   |         |        | Six Months   |         
|                                                     |                                                                                  |                                                                                      |                                                     |         | Ended        |         |        | Ended        |         
|                                                     |                                                                                  |                                                                                      |                                                     |         | December 31, |         |        | December 31, |         
|                                                     |                                                                                  |                                                                                      |                                                     |         | 2000         |         |        | 1999         |         
|                                                     |                                                                                  |                                                                                      |                                                     |         |              |         |        |              |         
|Cash flows from operating activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Income before partner distributions and benefits                                 |                                                                                      |                                                     |         |              |         | $      | 85,845       |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net income (loss)                                                                |                                                                                      | $                                                   | (17,038 | )           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile to net cash provided by (used in) operating activities:
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                  | Equity in losses of affiliate and loss on redemption of equity interest in affiliate |                                                     |         | 76,020       |         |        |              | 11,526   |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                  | Depreciation and amortization                                                        |                                                     |         | 28,171       |         |        |              | 19,035   |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                  | Deferred income taxes and other                                                      |                                                     |         | (19,172      | )       |        |              | (1,011   | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Changes in assets and liabilities:                                              
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                  | Accounts receivable                                                                  |                                                     |         | (127,332     | )       |        |              | (135,053 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                  | Unbilled revenues                                                                    |                                                     |         | 86,963       |         |        |              | 759      |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                  | Prepaid expenses and other current assets                                            |                                                     |         | (2,096       | )       |        |              | (7,389   | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                  | Other assets                                                                         |                                                     |         | 2,951        |         |        |              | (1,844   | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                  | Due to KPMG LLP, net                                                                 |                                                     |         | 86,285       |         |        |              |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                  | Accrued payroll and related liabilities                                              |                                                     |         | 28,060       |         |        |              | (68,160  | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                  | Accounts payable and other current liabilities                                       |                                                     |         | (29,086      | )       |        |              | 22,234   |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                  | Distribution payable to managing directors                                           |                                                     |         | (73,230      | )       |        |              |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                  | Other liabilities                                                                    |                                                     |         | (1,593       | )       |        |              | (3,921   | )      
|                                                     |                                                                                  |                                                                                      |                                                     |         |              |         |       
|                                                     |                                                                                  |                                                                                      | Net cash provided by (used in) operating activities |         |              | 38,903  |        |              |          | (77,979 | )
|                                                     |                                                                                  |                                                                                      |                                                     |         |              |         |       
|Cash flows from investing activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                  | Purchases of property and equipment                                                  |                                                     |         | (17,195      | )       |        |              | (11,574  | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                  | Businesses acquired, net of cash acquired                                            |                                                     |         | (2,536       | )       |        |              | (21,714  | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                  | Purchases of other intangible assets                                                 |                                                     |         | (443         | )       |        |              | (2,683   | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                  | Investment in affiliate                                                              |                                                     |         | (9,945       | )       |        |              |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                  | Purchases of equity investments                                                      |                                                     |         | (7,500       | )       |        |              |         |        
|                                                     |                                                                                  |                                                                                      |                                                     |         |              |         |       
|                                                     |                                                                                  |                                                                                      | Net cash used in investing activities               |         |              | (37,619 | )      |              |          | (35,971 | )
|                                                     |                                                                                  |                                                                                      |                                                     |         |              |         |       
|Cash flows from financing activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                  | Net payments from KPMG LLP                                                           |                                                     |         |             |         |        |              | 121,620  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                  | Proceeds from notes payable                                                          |                                                     |         | 386,360      |         |        |              | 3,000    |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                  | Repayment of notes payable                                                           |                                                     |         | (336,022     | )       |        |              | (4,254   | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                  | Repayment of acquisition obligations                                                 |                                                     |         | (34,380      | )       |        |              |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                  | Dividends paid on Series A Preferred Stock                                           |                                                     |         | (28,918      | )       |        |              |         |        
|                                                     |                                                                                  |                                                                                      |                                                     |         |              |         |       
|                                                     |                                                                                  |                                                                                      | Net
cash provided by (used in) financing activities |         |              | (12,960 | )      |              |          | 120,366 |  
|                                                     |                                                                                  |                                                                                      |                                                     |         |              |         |       
|Net increase (decrease) in cash and cash equivalents |                                                                                  |                                                                                      | (11,676                                             | )       |              |         | 6,416  |             
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents - beginning of period      |                                                                                  |                                                                                      | 26,991                                              |         |              |         | 14,328 |             
|                                                     |                                                                                  |                                                                                      |                                                     |         |              |         |       
|Cash and cash equivalents - end of period            |                                                                                  | $                                                                                    | 15,315                                              |         |              | $       | 20,744 |             
|                                                     |                                                                                  |                                                                                      |                                                     |         |              |         |       
|Supplementary cash flow information:                
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Interest paid                                                                    |                                                                                      | $                                                   | 11,871  |              |         | $      | 24,324       |         
|                                                     |                                                                                  |                                                                                      |                                                     |         |              |         |       
|                                                     | Taxes paid                                                                       |                                                                                      | $                                                   | 80,674  |              |         | $      |             |         
|                                                     |                                                                                  |                                                                                      |                                                     |         |              |         |       

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

6



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##### Table of Contents









KPMG Consulting, Inc.
Notes to Consolidated/Combined Condensed Financial Statements
(Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited interim consolidated or combined condensed
financial statements of KPMG Consulting, Inc. (the Company) have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC) for quarterly reports on Form 10-Q and do not include all of
the information and note disclosures required by generally accepted accounting
principles, and should be read in conjunction with our consolidated/combined
financial statements and notes thereto for the fiscal year ended June 30, 2000,
included in the Companys Prospectus dated February 7, 2001 filed with the SEC
pursuant to rule 424 (b) under the Securities Act of 1933. The accompanying
consolidated/combined condensed financial statements have been prepared in
accordance with generally accepted accounting principles and reflect all
adjustments (consisting solely of normal, recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of results for
these interim periods. The results of operations for the three and six months
ended December 31, 2000 are not necessarily indicative of the results that may
be expected for the fiscal year ending June 30, 2001. Certain prior period
amounts have been reclassified to conform with the current period presentation.

We completed the separation of our company from KPMG LLP on January 31,
2000. For periods preceding the separation of our business from KPMG LLP, the
Company refers to KPMG LLPs management and information technology consulting
business, which was operated in partnership form. As a partnership, all of
KPMG LLPs earnings were allocable to its partners. Accordingly, distributions
and benefits to partners were not reflected as an expense in our historical
financial statements through January 31, 2000. Additionally, as a partnership,
KPMG LLP was not subject to income taxes and, as a result, our historical
financial statements through January 31, 2000 do not include a provision for
income taxes. Effective February 1, 2000, following our separation from KPMG
LLP and our commencement of operations in corporate form, our historical
financial statements include payments for services rendered by our managing
directors, who were formerly consulting partners of KPMG LLP, in professional
compensation and a provision for income taxes. Consequently, the historical
results of operations for the three and six months ended December 31, 2000,
which reflect a corporate basis of presentation, and the three months and six
months ended December 31, 1999, which reflect a partnership basis of
presentation, are not directly comparable.

On January 17, 2001, our board of directors and stockholders approved a
reverse stock split of approximately one share for every 5.045 shares effective
immediately prior to our initial public offering. All share and per share
amounts reflect this reverse stock split.

7



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##### Table of Contents



Note 2. Initial Public Offering

During February 2001, the Company sold 34.2 million shares of common stock
in an initial public offering, and a selling stockholder (KPMG LLP) sold an
additional 95.1 million shares of common stock (including a portion of the
shares of common stock that were issued in connection with the conversion of
the Series A Mandatorily Redeemable Convertible Preferred Stock that were
purchased by KPMG LLP, (the Series A Preferred Stock)) for a total offering
of 129.3 million shares. In connection with the initial public offering, the
Company also repurchased 1.4 million shares of the Series A Preferred Stock,
and the remaining shares of Series A Preferred Stock were converted into 44.6
million shares of common stock (including 29.2 million shares sold by KPMG
LLP). As of February 28, 2001, there were 155,959,938 shares of common stock
issued and outstanding.

The Companys proceeds from the initial public offering, net of the
underwriting discount of $24.7 million and our pro rata portion of other
estimated expenses of the offering of $3.1 million, were $588.6 million. Of
the net proceeds, $378.3 million were used to repurchase 1.4 million shares of
the Series A Preferred Stock, $112.0 million were used to repay all of the
Companys outstanding indebtedness to KPMG LLP, $70.0 million were used to
repay the outstanding indebtedness under the Companys receivables purchase
facility with PNC Bank and $28.3 million were used for working capital
purposes.

In connection with the initial public offering, the Company granted
approximately 16.1 million stock options with an exercise price of $18 per
share to employees. These options vest over a three and one half year period
with 25% vesting on August 8, 2001 and an additional 25% vesting on August 8 in
each of the years 2002 through 2004. As of February 8, 2001, the Company has
approximately 20.1 million options outstanding with an exercise price of $18
and approximately 7.6 million options outstanding with an exercise price of
$55.50.

Note 3. Comprehensive Income

The Company accounts for comprehensive income under Statement of Financial
Accounting Standard (SFAS) No. 130, Reporting Comprehensive Income. SFAS
No. 130 established standards for reporting and displaying comprehensive income
and its components in a financial statement that is displayed with the same
prominence as other financial statements. The components of comprehensive
income are as follows:

|                                                     |  |                    |         |   |                    |   |         |  
|---------------------------------------------------- |  | ------------------ | ------- | - | ------------------ | - | ------- | -
|                                                     |  | Three Months       |         |   | Six Months         |  
|                                                     |  | Ended December 31, |         |   | Ended December 31, |  
|(Dollars in thousands)                               |  | 2000               |         |   | 2000               |  
|                                                     |  |                    |         |   |                    |  
|
|                                                    
|                                                    
|                                                    
|                                                    
|Net loss                                             |  | $                  | (37,571 | ) |                    | $ | (17,038 | )
|                                                    
|                                                    
|                                                    
|                                                    
|Foreign currency translation adjustment
(net of tax) |  |                    | 274     |   |                    |   | (1,127  | )
|                                                     |  |                    |         |   |                    |  
|Comprehensive loss                                   |  | $                  | (37,297 | ) |                    | $ | (18,165 | )
|                                                     |  |                    |         |   |                    |  

8



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##### Table of Contents



Note 4. Segment Reporting

The Company discloses business segments under SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information. SFAS No. 131
established standards for the way public business enterprises report
information about operating segments in annual financial statements and
required those enterprises to report selected information about operating
segments in interim financial statements.

The Company provides consulting services through six major industry
groups. The following is a summary of certain financial information by
reportable segment:

|                                |  |                                         |         |  |          |           |          |         |  |   |         |  |           |   |         |  
|------------------------------- |  | --------------------------------------- | ------- |  | -------- | --------- | -------- | ------- |  | - | ------- |  | --------- | - | ------- | -
|                                |  | For the Three Months Ended December 31, |        
|                                |  | 2000 (1)                                |         |  | 1999 (1) |          
|                                |  |                                         |         |  |          | Operating |          |         |  |   |         |  | Operating |  
|(Dollars in thousands)          |  | Revenue                                 |         |  | Income   |           |          | Revenue |  |   | Income  | 
|                                |  |                                         |         |  |          |           |          |         |  |   |         | 
|Public Services                 |  | $                                       | 178,595 |  |          | $         | 46,995   |         |  | $ | 166,508 |  |           | $ | 53,202  |  
|                               
|                               
|                               
|                               
|Financial Services              |  |                                         | 132,309 |  |          |           | 29,962   |         |  |   | 120,784 |  |           |   | 36,281  |  
|                               
|                               
|                               
|                               
|Communications and Content      |  |                                         | 131,923 |  |          |           | 24,682   |         |  |   | 71,203  |  |           |   | 13,365  |  
|                               
|                               
|                               
|                               
|High Tech                       |  |                                         | 96,729  |  |          |           | 23,093   |         |  |   | 60,925  |  |           |   | 15,546  |  
|                               
|                               
|                               
|                               
|Consumer and Industrial Markets |  |                                         | 81,772  |  |          |           | 17,607   |         |  |   | 86,052  |  |           |   | 19,938  |  
|                               
|                               
|                               
|                               
|Health Care                     |  |                                         | 21,863  |  |          |           | 3,710    |         |  |   | 22,998  |  |           |   | 5,162   |  
|                               
|                               
|                               
|                               
|Corporate / Other (2)           |  |                                         | 59,413  |  |          |           | (105,333 | )       |  |   | 12,091  |  |           |   | (98,777 | )
|                                |  |                                         |         |  |          |           |          |         |  |   |         | 
|Total                           |  | $                                       | 702,604 |  |          | $         | 40,716   |         |  | $ | 540,561 |  |           | $ | 44,717  |  
|                                |  |                                         |         |  |          |           |          |         |  |   |         | 

|                                |  |                                       |           |  |          |           |          |         |  |   |           |  |           |   |          |  
|------------------------------- |  | ------------------------------------- | --------- |  | -------- | --------- | -------- | ------- |  | - | --------- |  | --------- | - | -------- | -
|                                |  | For the Six Months Ended December 31, |          
|                                |  | 2000 (1)                              |           |  | 1999 (1) |          
|                                |  |                                       |           |  |          | Operating |          |         |  |   |           |  | Operating |  
|(Dollars in thousands)          |  | Revenue                               |           |  | Income   |           |          | Revenue |  |   | Income    | 
|                                |  |                                       |           |  |          |           |          |         |  |   |           | 
|Public Services                 |  | $                                     | 358,695   |  |          | $         | 99,410   |         |  | $ | 336,049   |  |           | $ | 101,688  |  
|                               
|                               
|                               
|                               
|Financial Services              |  |                                       | 269,868   |  |          |           | 56,126   |         |  |   | 245,775   |  |           |   | 77,750   |  
|                               
|                               
|                               
|                               
|Communications and Content      |  |                                       | 249,125   |  |          |           | 54,092   |         |  |   | 130,928   |  |           |   | 23,579   |  
|                               
|                               
|                               
|                               
|High Tech                       |  |                                       | 185,020   |  |          |           | 44,453   |         |  |   | 119,772   |  |           |   | 33,905   |  
|                               
|                               
|                               
|                               
|Consumer and Industrial Markets |  |                                       | 166,348   |  |          |           | 35,278   |         |  |   | 173,728   |  |           |   | 43,254   |  
|                               
|                               
|                               
|                               
|Health Care                     |  |                                       | 42,927    |  |          |           | 9,072    |         |  |   | 46,825    |  |           |   | 11,975   |  
|                               
|                               
|                               
|                               
|Corporate / Other (2)           |  |                                       | 110,057   |  |          |           | (196,757 | )       |  |   | 12,630    |  |           |   | (172,785 | )
|                                |  |                                       |           |  |          |           |          |         |  |   |           | 
|Total                           |  | $                                     | 1,382,040 |  |          | $         | 101,674  |         |  | $ | 1,065,707 |  |           | $ | 119,366  |  
|                                |  |                                       |           |  |          |           |          |         |  |   |           | 



|(1) |  | The periods ended December 31, 2000 include managing directors compensation
and benefit expense in each segment. The periods ended December 31, 1999 exclude
payments for partner distributions and benefits as the company was operating in
partnership form. 
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Corporate / Other revenues are primarily attributable to international
operations for all periods. Corporate / Other operating losses are principally
due to infrastructure and shared services costs, as well as operating results of
international operations.

9



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##### Table of Contents



Note 5. Investment in Affiliate

Since June 1999, the Company held a 49% joint venture interest in Qwest
Cyber.Solutions, LLC (QCS), with the remaining 51% interest being held by
Qwest Communications International Inc. QCS periodically required additional
capital to fund its operations and acquire equipment to support the expansion
of its business. The Company decided not to make any additional capital
contributions to QCS. On December 27, 2000, QCS redeemed the Companys 49%
ownership interest in the joint venture in exchange for a nominal amount.
Accordingly, the Companys investment in QCS of $63.3 million ($58.5 million on
an after tax basis) was written off through a non-cash charge to earnings in
the quarter ended December 31, 2000.

Concurrent with the disposition of the Companys equity investment in QCS,
the Company entered into an agreement pursuant to which the Company continues
to have a significant marketing relationship with QCS. Under this arrangement,
the Company will continue to work with QCS to develop sales and marketing plans
for the distribution of QCS products and services through the Company, and to
market QCS products and services. The Companys marketing relationship with
QCS allows the Company to continue to offer its clients application service
provider services. The Companys marketing relationship with QCS extends
through June 2, 2009 or the date of an initial public offering by QCS, if
earlier.

Note 6. Business Combinations

During the six months ended December 31, 2000, the company acquired the
consulting businesses of KPMG International member firms in Brazil, Colombia,
Ireland, and Peru. In connection with these acquisitions, the company paid
cash of $2.4 million and incurred obligations of $35.9 million payable to
former owners of the Irish consulting business, $7.0 million payable to former
owners of the Brazilian consulting business and $.8 million payable to KPMG
LLP. The preliminary allocation of the purchase price to acquired assets
resulted in the allocation of $1.5 million to assembled workforce and $44.8
million to goodwill. Any adjustments to the allocation of the purchase price
for these acquisitions upon finalization of our valuation of these assets
acquired and liabilities assumed is not expected to have a significant effect
on our balance sheet.

On February 7, 2001, the Company acquired the Netherlands Antilles
consulting business of a KPMG International member firm for $10.9 million in
cash. The company is currently in the process of determining the allocation of
the purchase price to the acquired assets and liabilities.

The acquisitions have been accounted for as purchases and, accordingly,
the purchase price of each acquisition was assigned to the assets acquired and
liabilities assumed based on their fair values at the respective dates of
acquisition.

* * * * * * *

10



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##### Table of Contents









PART I, ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following information should be read in conjunction with the
information contained in the Consolidated/Combined Condensed Financial
Statements and notes thereto appearing elsewhere in this Quarterly Report on
Form 10-Q. This Quarterly Report on Form 10-Q contains forward-looking
statements that involve risks and uncertainties. See the discussion relating
to Forward-Looking Statements below.

Historical Overview

We completed the separation of our company from KPMG LLP on January 31,
2000. As a partnership, all of KPMG LLPs earnings were allocable to its
partners. Accordingly, distributions and benefits to partners were not
reflected as an expense in our historical financial statements through January
31, 2000. Additionally, as a partnership, KPMG LLP was not subject to income
taxes and, as a result, our historical financial statements through January 31,
2000 do not include a provision for income taxes. Effective February 1, 2000,
following our separation from KPMG LLP and our commencement of operations in
corporate form, our historical financial statements include payments for
services rendered by our managing directors, who were formerly consulting
partners of KPMG LLP, in professional compensation and a provision for income
taxes. Consequently, the historical results of operations for the three and
six months ended December 31, 2000, which reflect a corporate basis of
presentation, and the three months and six months ended December 31, 1999,
which reflect a partnership basis of presentation, are not directly comparable.
Results of operations for the six months ended December 31, 2000 are not
necessarily indicative of the results of operations for the fiscal year ending
June 30, 2001.

Company Overview

We are one of the worlds largest consulting firms with approximately
9,000 professionals. We serve over 2,500 clients, including global companies,
Fortune 1000 companies, small and medium-sized businesses, government agencies
and other organizations. We provide our clients with a range of service
offerings that combine industry specific business strategy and operational
improvements, technology selection and implementation. Our service offerings
are designed to help our clients generate revenues, improve efficiency and
contain costs.

These services include:



| |                                              
| | ---------------------------------------------
| |  business and technology strategy;          
|
| |  process design and operations improvement; 
|
| |  systems integration;                       
|
| |  network integration and infrastructure; and
|
| |  outsourcing.                               

We provide consulting services through six industry groups in which we
have significant industry-specific knowledge. These groups are public
services, financial services, communications and content, high tech, consumer
and industrial markets, and health care. In addition, we have multi-national
operations covering North America, Latin America, Ireland, Israel, Japan, New
Zealand and South Korea.

11



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##### Table of Contents



HISTORICAL RESULTS OF OPERATIONS OVERVIEW

The Company incurred a net loss of $37.6 million ($53.4 million after
deducting preferred stock dividends of $15.8 million), or $.70 per share, for
the three months ended December 31, 2000 and a net loss of $17.0 million ($48.7
million after deducting preferred stock dividends of $31.7 million), or $.64
per share, for the six months ended December 31, 2000. These losses were
attributable to the Companys after-tax equity in losses of affiliate and loss
on redemption of equity interest in affiliate of $58.5 million and $71.2
million, for the three and six months ended December 31, 2000, respectively.
Excluding the effect of equity in losses of affiliate and loss on
redemption of
equity interest in affiliate, the Company earned $20.9 million ($5.1 million
after deducting preferred stock dividends, or $.07 per share) for the three
months ended December 31, 2000, and $54.2 million ($22.5 million after
deducting preferred stock dividends, or $.30 per share) for the six months
ended December 31, 2000. As a result of the redemption of our equity interest
in QCS on December 27, 2000, we are no longer committed to making capital
contributions to support the expansion of its business. In addition, there
will be no further losses associated with this investment.

12



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##### Table of Contents



Three Months Ended December 31, 2000 Compared to Three Months Ended December
31, 1999

The following table sets forth the dollars and percent of revenues represented
by items in our statements of operations for the three month periods ended
December 31, 2000 and December 31, 1999. As discussed in Note 1 of the
Consolidated/Combined Condensed Financial Statements, the historical results of
operations for the three months ended December 31, 2000, which reflect a
corporate basis of presentation, and the three months ended December 31, 1999,
which reflect a partnership basis of presentation, are not directly comparable.

Historical Results of Operations

|                                                                                     |  |              |            |   |              |  |       |   |  |   |         |   |  |  |       |  
|------------------------------------------------------------------------------------ |  | ------------ | ---------- | - | ------------ |  | ----- | - |  | - | ------- | - |  |  | ----- | -
|                                                                                     |  | Consolidated |            |   | Combined     | 
|                                                                                     |  | Three Months |            |   | Three Months | 
|                                                                                     |  | Ended        |            |   | Ended        | 
|(Dollars in thousands, except share and per share amounts)                           |  | December 31, |            |   | December 31, | 
|Financial Data:                                                                      |  | 2000         |            |   | 1999         | 
|                                                                                     |  |              |            |   |              | 
|Revenues                                                                             |  | $            | 702,604    |   |              |  | 100.0 | % |  | $ | 540,561 |   |  |  | 100.0 | %
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Total costs of service                                                               |  |              | 557,817    |   |              |  | 79.4  |   |  |   | 398,959 |   |  |  | 73.8  |  
|                                                                                     |  |              |            |   |              |  |       |   |  |   |         |  
|Gross Margin                                                                         |  |              | 144,787    |   |              |  | 20.6  |   |  |   | 141,602 |   |  |  | 26.2  |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Selling, general & administrative expenses                                           |  |              | 104,071    |   |              |  | 14.8  |   |  |   | 96,885  |   |  |  | 17.9  |  
|                                                                                     |  |              |            |   |              |  |       |   |  |   |         |  
|Operating income                                                                     |  |              | 40,716     |   |              |  | 5.8   |   |  |   | 44,717  |   |  |  | 8.3   |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Interest expense, net and other                                                      |  |              | (5,540     | ) |              |  | (0.8  | ) |  |   | (12,616 | ) |  |  | (2.3  | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Equity in losses of affiliate and loss on
redemption of equity interest in affiliate |  |              | (63,330    | ) |              |  | (9.0  | ) |  |   | (5,563  | ) |  |  | (1.0  | )
|                                                                                     |  |              |            |   |              |  |       |   |  |   |         |  
|Income before distributions and
benefits to partners                                 |  |              |            |   |              |  |       |   |  | $ | 26,538  |   |  |  | 5.0   |  
|                                                                                     |  |              |            |   |              |  |       |   |  |   |         |   |  | 
|Loss before taxes                                                                    |  |              | (28,154    | ) |              |  | (4.0  | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Income tax expense                                                                   |  |              | 9,417      |   |              |  | 1.3   |  
|                                                                                     |  |              |            |   |              | 
|Net loss                                                                             |  |              | (37,571    | ) |              |  | (5.3  | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Dividend on Series A Preferred Stock                                                 |  |              | 15,836     |   |              |  | 2.3   |  
|                                                                                     |  |              |            |   |              | 
|Net loss applicable to common
stockholders                                           |  | $            | (53,407    | ) |              |  | (7.6  | )
|                                                                                     |  |              |            |   |              | 
|Net loss applicable to common
stockholders per share - basic and diluted             |  | $            | (0.70      | )
|                                                                                     |  |              |           
|Weighted
average shares - basic and diluted                                          |  |              | 75,760,067 |  
|                                                                                     |  |              |           

13



---



##### Table of Contents



Revenues. Revenues increased $162.0 million, or 30.0%, from $540.6 million in
the three months ended December 31, 1999 to $702.6 million in the three months
ended December 31, 2000. This overall increase is primarily attributable to a
20% increase in client service hours billed due to growth in several of our
operating segments, including communications and content, high tech, public
services and financial services, as well as several international acquisitions
completed over the past year.

Strong revenue growth was experienced in the communications and content and
high tech segments, which increased 85.3% and 58.8%, respectively. This growth
was partially due to joint marketing relationships with our alliance
partners, growth in our next generation operations support systems / business
support systems offerings, business-to-business Internet-related services, and
growth from our key accounts. In addition, international revenue grew 381% to
$59.4 million due to the completion of 12 acquisitions since December, 1999.

Gross Margin.Gross margin as a percentage of revenue decreased from 26.2% to
20.6% from the three months ended December 31, 1999 to the three months ended
December 31, 2000 as a result of the following factors:



| |  |  | beginning February 1, 2000, we have included payments for services
rendered by our managing directors who were formerly consulting
partners of KPMG LLP in professional compensation;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our investment in training our professionals in required Internet skills;                                                                                                            
|
| |  |  | our investment in the development of new Internet-related service offerings;                                                                                                         
|
| |  |  | increased other direct contract expenses directly attributable to
client engagements, including costs associated with subcontractors; and                                            
|
| |  |  | increased amortization of goodwill and other intangible assets due
to recently completed acquisitions.                                                                               

In dollar terms, gross margin increased by $3.2 million, or 2.2%, from
$141.6 million for the three months ended December 31, 1999 to $144.8 million
for the three months ended December 31, 2000. The increase in dollar terms was
due to the $162.0 million increase in revenues described above, offset by:



| |  |  | an increase in professional compensation of $81.3 million, or
44.7%, from $181.9 million to $263.2 million, primarily attributable to
$57.8 million in managing directors base compensation for the three
months ended December 31, 2000,$16.1 million attributable to higher
wages paid to new and existing staff, and an increase of $14.6 million
in accruals for incentive compensation. These increases were partially
offset by $7.2 million of cost savings from the elimination of an
employees defined benefit pension plan;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | an increase in other direct contract expenses of $77.3 million, or
64.7%, from $119.3 million to $196.6 million, due to higher travel and
lodging expenses for our client service personnel to travel to client
locations, and other disbursements connected with specific client
engagements, including the cost of subcontractors to supplement our own
resources; and                                                                                                                                                               
|
| |  |  | an increase of $3.5 million in the amortization of goodwill and
other intangible assets primarily due to recently completed
acquisitions;                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | offset by a reduction of $3.2 million in other costs of service.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

14



---



##### Table of Contents



Selling, General and Administrative Expenses.Selling, general and
administrative expenses increased by $7.2 million, or 7.4%, from $96.9 million
to $104.1 million primarily due to:



| |  |  | an increase of $2.4 million as a result of allocated and direct
costs incurred to support growth in the business primarily relating to
office space, support and operation services, and increased staffing in
infrastructure departments;                                                                                                               
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | an increase of $3.2 million related to new business development
costs;                                                                                                                                                                                                                                                                                   
|
| |  |  | an increase of $4.4 million due to recently acquired international
consulting businesses; and                                                                                                                                                                                                                                                            
|
| |  |  | offset by a decrease of $2.8 million relating to the cost of
outsourced services that are no longer provided or charged to the
Company by KPMG LLP. Effective July 1, 2000, the Company and KPMG LLP
entered into an amended and restated outsourcing agreement whereby
certain services were discontinued and the related costs were no longer
incurred.

Interest Expense, net. Interest expense, net decreased $7.1 million, or 56.1%, from
$12.7 million to $5.6 million, due to lower interest expense on outstanding
borrowings under our credit facility for the three months ended December 31, 2000
than allocated interest expense for the three months ended December 31, 1999.
Effective July 1, 2000, the Company is no longer allocated interest costs by
KPMG LLP.

Equity in Losses of Affiliate and Loss on Redemption of Equity Interest in
Affiliate.Equity in losses of affiliate and loss on redemption of equity
interest in affiliate, which relates to our equity investment in QCS, increased
$57.8 million, from $5.6 million to $63.3 million.QCS periodically required
additional capital to fund its operations and acquire equipment to support the
expansion of its business. The Company decided not to make any additional
capital contributions to QCS. On December 27, 2000, QCS redeemed the Companys
49% ownership interest in the joint venture in exchange for a nominal amount.
Accordingly, the Companys investment in QCS of $63.3 million ($58.5 million on
an after-tax basis), was written off through a non-cash charge to earnings in
the quarter ended December 31, 2000.

15



---



##### Table of Contents



Income tax expense. For the three months ended December 31, 2000, the Company
incurred a loss before taxes of $28.2 million and provided income taxes of $9.4
million. The $9.4 million income tax provision on a loss before taxes of $28.2
million is primarily attributable to the non-deductibility of certain losses
associated with the redemption of our investment by QCS on December 27, 2000.
No tax provision is included for the three months ended December 31, 1999 as
the Company was operating under a partnership structure until January 31, 2000.
(See Note 1 of the Consolidated/Combined Condensed Financial Statements).

For the year ending June 30, 2001, our Company expects to report its book-basis
effective tax rate to be approximately 60% of its consolidated pre-tax income
for the year, including the negative impact of the equity in losses of
affiliate and other non-deductible expenses. Accounting rules require that our
Company apportion that total income tax provision for the year to each quarter,
in the ratio that each quarters pre-tax income bears to the years pre-tax
income. Therefore, the effective tax rate for the third and fourth quarters of
FY2001 will be negatively impacted by the equity in losses of affiliate
incurred in the first and second quarters of the year.

Net Loss. Net loss incurred for the three months ended December 31, 2000 was
$37.6 million principally due to equity in losses of affiliate and loss on
redemption of equity interest in affiliate, partially offset by net income from
operations.

Preferred Stock Dividend. Our Series A Preferred Stock carried a 6% annual
dividend, payable quarterly. Dividends totaling $15.8 million have been
recognized in the three months ended December 31, 2000. The Series A Preferred
Stock was repurchased or converted to common stock upon the completion of our
initial public offering and, as a result, there will be no preferred dividends
relating to the Series A Preferred Stock after December 31, 2000.

Net Loss to Common Stockholders. After deducting dividends on our Series A
Preferred Stock, net loss applicable to common stockholders for the three
months ended December 31, 2000 was $53.4 million, or $.70 per share.

16



---



##### Table of Contents



Six Months Ended December 31, 2000 Compared to Six Months Ended December 31, 1999

The following table sets forth the dollars and percent of revenues represented
by items in our statements of operations for the six month periods ended
December 31, 2000 and December 31, 1999. As discussed in Note 1, the
historical results of operations for the six months ended December 31, 2000,
which reflect a corporate basis of presentation, and six months ended December
31, 1999, which reflect a partnership basis of presentation, are not directly
comparable.

Historical Results of Operations

|                                                                                     |  |              |            |   |              |  |       |   |  |   |           |   |  |  |       |  
|------------------------------------------------------------------------------------ |  | ------------ | ---------- | - | ------------ |  | ----- | - |  | - | --------- | - |  |  | ----- | -
|                                                                                     |  | Consolidated |            |   | Combined     | 
|                                                                                     |  | Six Months   |            |   | Six Months   | 
|                                                                                     |  | Ended        |            |   | Ended        | 
|(Dollars in
thousands, except share and per share amounts)                           |  | December 31, |            |   | December 31, | 
|Financial Data:                                                                      |  | 2000         |            |   | 1999         | 
|                                                                                     |  |              |            |   |              | 
|Revenues                                                                             |  | $            | 1,382,040  |   |              |  | 100.0 | % |  | $ | 1,065,707 |   |  |  | 100.0 | %
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Total costs of service                                                               |  |              | 1,067,401  |   |              |  | 77.2  |   |  |   | 761,084   |   |  |  | 71.4  |  
|                                                                                     |  |              |            |   |              |  |       |   |  |   |           |  
|Gross Margin                                                                         |  |              | 314,639    |   |              |  | 22.8  |   |  |   | 304,623   |   |  |  | 28.6  |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Selling, general & administrative expenses                                           |  |              | 212,965    |   |              |  | 15.4  |   |  |   | 185,257   |   |  |  | 17.4  |  
|                                                                                     |  |              |            |   |              |  |       |   |  |   |           |  
|Operating income                                                                     |  |              | 101,674    |   |              |  | 7.4   |   |  |   | 119,366   |   |  |  | 11.2  |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Interest expense, net and other                                                      |  |              | (10,104    | ) |              |  | (0.7  | ) |  |   | (21,995   | ) |  |  | (2.1  | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Equity in losses of affiliate and loss on
redemption of equity interest in affiliate |  |              | (76,020    | ) |              |  | (5.5  | ) |  |   | (11,526   | ) |  |  | (1.1  | )
|                                                                                     |  |              |            |   |              |  |       |   |  |   |           |  
|Income before distributions and
benefits to partners                                 |  |              |            |   |              |  |       |   |  | $ | 85,845    |   |  |  | 8.0   |  
|                                                                                     |  |              |            |   |              |  |       |   |  |   |           |   |  | 
|Income before taxes                                                                  |  |              | 15,550     |   |              |  | 1.2   |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Income tax expense                                                                   |  |              | 32,588     |   |              |  | 2.4   |  
|                                                                                     |  |              |            |   |              | 
|Net loss                                                                             |  |              | (17,038    | ) |              |  | (1.2  | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Dividend on Series A Preferred Stock                                                 |  |              | 31,672     |   |              |  | 2.3   |  
|                                                                                     |  |              |            |   |              | 
|Net loss applicable to common
stockholders                                           |  | $            | (48,710    | ) |              |  | (3.5  | )
|                                                                                     |  |              |            |   |              | 
|Net loss applicable to common
stockholders per share - basic and diluted             |  | $            | (0.64      | )
|                                                                                     |  |              |           
|Weighted
average shares - basic and diluted                                          |  |              | 75,795,884 |  
|                                                                                     |  |              |           

17



---



##### Table of Contents



Revenues. Revenues increased $316.3 million, or 29.7%, from $1,065.7 million
in the six months ended December 31, 1999 to $1,382.0 million in the six months
ended December 31, 2000. This overall increase is primarily attributable to a
23% increase in client service hours billed due to growth in several of our
operating segments, including communications and content, high tech, and public
services as well as several international acquisitions completed over the past
year.

Strong revenue growth was experienced in the communications and content and
high tech segments, which increased 90.3% and 54.5%, respectively. This growth
was partially due to joint marketing relationships with our alliance partners,
growth in our next generation operations support systems/business support
systems offerings, business-to-business Internet-related services, and growth
from our key accounts. In addition, international revenue grew 785% to $109.4
million when compared to the prior year six month period.

Gross Margin.Gross margin as a percentage of revenue decreased from 28.6% to
22.8% from the six months ended December 31, 1999 to the six months ended
December 31, 2000 as a result of the following factors:



| |  |  | beginning February 1, 2000, we have included payments for services
rendered by our managing directors who were formerly consulting
partners of KPMG LLP in professional compensation;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our investment in training our professionals in required Internet skills;                                                                                                            
|
| |  |  | our investment in the development of new Internet-related service offerings;                                                                                                         
|
| |  |  | increased other direct contract expenses directly attributable to
client engagements, including costs associated with subcontractors; and                                            
|
| |  |  | increased amortization of goodwill and other intangible assets due
to recently completed acquisitions;                                                                               
|
| |  |  | partially offsetting the above was $6.5 million from a favorable
settlement of a contract dispute which is included in revenues for the
six months ended December 31, 2000.          

In dollar terms, gross margin increased by $10.0 million, or 3.3%, from $304.6
million for the six months ended December 31, 1999 to $314.6 million for the
six months ended December 31, 2000. The increase in dollar terms was due to
the $316.3 million increase in revenues (which includes $6.5 million from the
contract dispute settlement described above), offset by:



| |  |  | an increase in professional compensation of $170.9 million, or
47.2%, from $361.8 million to $532.8 million, primarily attributable to
$111.5 million in managing directors base compensation for the six
months ended December 31, 2000, $30.3 million attributable to higher
wages paid to new and existing staff, and an increase of $43.5 million
in accruals for incentive compensation. These increases were partially
offset by $14.4 million of cost savings from the elimination of an
employees defined benefit pension plan;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | an increase in other direct contract expenses of $127.0 million, or
57.8%, from $219.6 million to $346.6 million, due to higher travel and
lodging expenses for our client service personnel to travel to client
locations, and other disbursements connected with specific client
engagements, including the cost of subcontractors to supplement our own
resources;                                                                                                                                                                    
|
| |  |  | an increase of $6.9 million in the amortization of goodwill and
other intangible assets primarily due to recently completed
acquisitions; and                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  |  | an increase of $1.6 million in other
costs of service.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

18



---



##### Table of Contents



Selling, General and Administrative Expenses.Selling, general and
administrative expenses increased by $27.7 million, or 15.0%, from $185.3
million to $213.0 million primarily due to:



| |  |  | a net increase of $12.2 million as a result of allocated and direct
costs incurred to support growth in the business primarily relating to
office space, support and operation services, and increased staffing in
infrastructure departments;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | an increase of $10.7 million related to new business development costs;                                                                                                                                                                       
|
| |  |  | an increase of $15.2 million due to recently acquired international consulting businesses;                                                                                                                                                    
|
| |  |  | offset by a decrease of $10.4 million relating to the cost of
outsourced services that are no longer provided or charged to the
Company by KPMG LLP.                                                                                          

Interest Expense, net. Interest expense, net decreased $11.9 million, or 53.9%,
from $22.1 million to $10.2 million, due to lower interest expense on
outstanding borrowings under our credit facility for the six months ended
December 31, 2000 than interest expense allocated to the Company by KPMG LLP for
the six months ended December 31, 1999.

Equity in Losses of Affiliate and Loss on Redemption of Equity Interest in
Affiliate. Equity in losses of affiliate and loss on redemption of equity
interest in affiliate which relates to our equity investment in QCS, increased
$64.5 million, from $11.5 million to $76.0 million. QCS periodically required
additional capital to fund its operations and acquire equipment to support the
expansion of its business. The Company decided not to make any additional
capital contributions to QCS. On December 27, 2000, QCS redeemed the Companys
49% ownership interest in the joint venture in exchange for a nominal amount.
Accordingly, the Companys investment in QCS of $63.3 million ($58.5 million on
an after tax basis), was written off through a non-cash charge to earnings in
December 2000.

Income tax expense. For the six months ended
December 31, 2000, the Company
earned income before taxes of $15.6 million and incurred income taxes of $32.6
million. The $32.6 million income tax provision on income before taxes of
$15.6 million is primarily attributable to the non-deductibility of losses
associated with the redemption of our investment in QCS on December 27, 2000.
No tax provision is included for the six months ending December 31, 1999 as the
Company was operating under a partnership structure until January 31, 2000.

Net Loss. Net loss incurred for the six months ended December 31, 2000 was
$17.0 million principally due to equity in losses of affiliate and loss on
redemption of equity interest in affiliate, partially offset by net income from
operations.

Preferred Stock Dividend. Series A Preferred Stock dividends totaling $31.7
million have been recognized in the six months ended December 31, 2000.

Net Loss Attributable to Common Stockholders. After deducting dividends on our
Series A Preferred Stock, net loss applicable to common stockholders for the
six months ended December 31, 2000 was $48.7 million, or $.64 per share.

19



---



##### Table of Contents



PRO FORMA FINANCIAL INFORMATION

The following tables set forth our pro forma consolidated/combined
condensed statements of operations for the three and six month periods ended December 31,
2000 and December 31, 1999.

Pro Forma Combined Condensed Statement of Operations
Three Months Ended December 31, 1999
(in
thousands, except share and per share amounts)

|                                                                                     |                                                               |      |              |             |           |      |              |   |     |              |   |         |            |  
|------------------------------------------------------------------------------------ | ------------------------------------------------------------- | ---- | ------------ | ----------- | --------- | ---- | ------------ | - | --- | ------------ | - | ------- | ---------- | -
|                                                                                     |                                                               |      | Historical   |             | Pro Forma
|                                                                                     |                                                               |      |              |             |          
|                                                                                     |                                                               |      | Three Months |             |           |      |              |   |     | Three Months
|                                                                                     |                                                               |      | Ended        |             |           |      |              |   |     | Ended       
|                                                                                     |                                                               |      | December 31, |             | Pro Forma |      | December 31,
|                                                                                     |                                                               | 1999 |              | Adjustments |           | 1999
|                                                                                     |                                                               |      |              |             |           |     
|Revenue                                                                              |                                                               | $    | 540,561      |             |           |      |              |   |     |              | $ | 540,561 |           
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     |                                                               |      |              |             |           | $    | 45,342       |   | (1)
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     |                                                               |      |              |             |           |      | 1,937        |   | (2)
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Cost of services                                                                     |                                                               |      | 398,959      |             |           |      | (7,186       | ) | (3) |              |   | 439,052 |           
|                                                                                     |                                                               |      |              |             |           |      |              |   |     |              |   |         |           
|Gross margin                                                                         |                                                               |      | 141,602      |             |           |      | (40,093      | ) |     |              |   | 101,509 |           
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     |                                                               |      |              |             |           |      | 2,000        |   | (4)
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Selling, general and administrative expenses                                         |                                                               |      | 96,885       |             |           |      | (9,640       | ) | (5) |              |   | 89,245  |           
|                                                                                     |                                                               |      |              |             |           |      |              |   |     |              |   |         |           
|Operating income                                                                     |                                                               |      | 44,717       |             |           |      | (32,453      | ) |     |              |   | 12,264  |           
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Interest expense, net                                                                |                                                               |      | (12,665      | )           |           |      | 5,200        |   | (6) |              |   | (7,465  | )         
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Equity in losses of affiliate and loss on
redemption of equity interest in affiliate |                                                               |      | (5,563       | )           |           |      |              |   |     |              |   | (5,563  | )         
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Minority interest                                                                    |                                                               |      | 49           |             |           |      |              |   |     |              |   | 49      |           
|                                                                                     |                                                               |      |              |             |           |      |              |   |     |              |   |         |           
|Income before partner distributions and
benefits                                     |                                                               | $    | 26,538       |            
|                                                                                     |                                                               |      |              |            
|Loss before taxes                                                                    |                                                               |      |              |             |           |      | (27,253      | ) |     |              |   | (715    | )         
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Income tax expense (benefit)                                                         |                                                               |      |              |             |           |      | (500         | ) | (7) |              |   | (500    | )         
|                                                                                     |                                                               |      |              |             |           |      |              |   |     |              |   |         |           
|Net loss applicable to common
stockholders                                           |                                                               |      |              |             |           | $    | (26,753      | ) |     |              | $ | (215    | )         
|                                                                                     |                                                               |      |              |             |           |      |              |   |     |              |   |         |           
|Loss per share:                                                                     
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Net loss applicable to common
stockholders -basic and diluted |      |              |             |           |      |              |   |     |              |   | $       | (0.00      | )
|                                                                                     |                                                               |      |              |             |           |      |              |   |     |              |   |         |           
|                                                                                     | Weighted
average shares - basic and diluted                   |      |              |             |           |      |              |   |     | (9)          |   |         | 89,222,575 |  
|                                                                                     |                                                               |      |              |             |           |      |              |   |     |              |   |         |           

See notes to pro forma financial information.

20



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##### Table of Contents



Pro Forma Combined Condensed Statement of Operations
Six Months Ended December 31, 1999
(in thousands, except share and per share amounts)

|                                                                                     |                                             |                                                                  |           |              |  |           |         |              |     |     |            |           |            |      | 
|------------------------------------------------------------------------------------ | ------------------------------------------- | ---------------------------------------------------------------- | --------- | ------------ |  | --------- | ------- | ------------ | --- | --- | ---------- | --------- | ---------- | ---- | 
|                                                                                     |                                             |                                                                  |           | Historical   |  | Pro Forma
|                                                                                     |                                             |                                                                  |           |              |  |          
|                                                                                     |                                             |                                                                  |           | Six Months   |  |           |         |              |     |     | Six Months
|                                                                                     |                                             |                                                                  |           | Ended        |  |           |         |              |     |     | Ended     
|                                                                                     |                                             |                                                                  |           | December 31, |  | Pro Forma |         | December 31,
|                                                                                     |                                             | 1999                                                             |           | Adjustments  |  | 1999     
|                                                                                     |                                             |                                                                  |           |              |  |          
|Revenue                                                                              |                                             | $                                                                | 1,065,707 |              |  |           |         |              |     |     | $          | 1,065,707 |           
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     |                                             |                                                                  |           |              |  | $         | 90,684  |              | (1)
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     |                                             |                                                                  |           |              |  |           | 3,874   |              | (2)
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Cost of services                                                                     |                                             |                                                                  | 761,084   |              |  |           | (14,370 | )            | (3) |     |            | 841,272   |           
|                                                                                     |                                             |                                                                  |           |              |  |           |         |              |     |     |            |           |           
|Gross margin                                                                         |                                             |                                                                  | 304,623   |              |  |           | (80,188 | )            |     |     |            | 224,435   |           
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     |                                             |                                                                  |           |              |  |           | 4,000   |              | (4)
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Selling,
general and administrative expenses                                         |                                             |                                                                  | 185,257   |              |  |           | (19,280 | )            | (5) |     |            | 169,977   |           
|                                                                                     |                                             |                                                                  |           |              |  |           |         |              |     |     |            |           |           
|Operating income                                                                     |                                             |                                                                  | 119,366   |              |  |           | (64,908 | )            |     |     |            | 54,458    |           
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Interest expense, net                                                                |                                             |                                                                  | (22,100   | )            |  |           | 10,121  |              | (6) |     |            | (11,979   | )         
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Equity in losses of affiliate and loss on
redemption of equity interest in affiliate |                                             |                                                                  | (11,526   | )            |  |           |         |              |     |     |            | (11,526   | )         
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Minority interest                                                                    |                                             |                                                                  | 105       |              |  |           |         |              |     |     |            | 105       |           
|                                                                                     |                                             |                                                                  |           |              |  |           |         |              |     |     |            |           |           
|Income before partner distributions and
benefits                                     |                                             | $                                                                | 85,845    |             
|                                                                                     |                                             |                                                                  |           |             
|Income (loss) before taxes                                                           |                                             |                                                                  |           |              |  |           | (54,787 | )            |     |     |            | 31,058    |           
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Income tax expense                                                                   |                                             |                                                                  |           |              |  |           | 21,741  |              | (7) |     |            | 21,741    |           
|                                                                                     |                                             |                                                                  |           |              |  |           |         |              |     |     |            |           |           
|Net income (loss) applicable to common
stockholders                                  |                                             |                                                                  |           |              |  | $         | (76,528 | )            |     |     | $          | 9,317     |           
|                                                                                     |                                             |                                                                  |           |              |  |           |         |              |     |     |            |           |           
|Earnings per share:                                                                 
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     |                                             | Net income applicable to common
stockholders - basic and diluted |           |              |  |           |         |              |     |     |            |           | $          | 0.10 | 
|                                                                                     |                                             |                                                                  |           |              |  |           |         |              |     |     |            |           |           
|                                                                                     | Weighted
average shares - basic and diluted |                                                                  |           |              |  |           |         |              |     | (9) |            |           | 89,222,575 |     
|                                                                                     |                                             |                                                                  |           |              |  |           |         |              |     |     |            |           |           

See notes to pro forma financial information.

21



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##### Table of Contents



Pro Forma Consolidated Condensed Statement of Operations
Three Months Ended December 31, 2000(in thousands, except share and per share amounts)

|                                                                                     |                                                                |      |              |             |           |      |              |   |              |     |         |             |  
|------------------------------------------------------------------------------------ | -------------------------------------------------------------- | ---- | ------------ | ----------- | --------- | ---- | ------------ | - | ------------ | --- | ------- | ----------- | -
|                                                                                     |                                                                |      | Historical   |             | Pro Forma
|                                                                                     |                                                                |      |              |             |          
|                                                                                     |                                                                |      | Three Months |             |           |      |              |   | Three Months
|                                                                                     |                                                                |      | Ended        |             |           |      |              |   | Ended       
|                                                                                     |                                                                |      | December 31, |             | Pro Forma |      | December 31,
|                                                                                     |                                                                | 2000 |              | Adjustments |           | 2000
|                                                                                     |                                                                |      |              |             |           |     
|Revenue                                                                              |                                                                | $    | 702,604      |             |           |      |              |   |              | $   | 702,604 |            
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Cost of services                                                                     |                                                                |      | 557,817      |             |           |      |              |   |              |     | 557,817 |            
|                                                                                     |                                                                |      |              |             |           |      |              |   |              |     |         |            
|Gross margin                                                                         |                                                                |      | 144,787      |             |           |      |              |   |              |     | 144,787 |            
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Selling, general and administrative expenses                                         |                                                                |      | 104,071      |             |           | $    | 2,000        |   | (4)          |     | 106,071 |            
|                                                                                     |                                                                |      |              |             |           |      |              |   |              |     |         |            
|Operating income                                                                     |                                                                |      | 40,716       |             |           |      | (2,000       | ) |              |     | 38,716  |            
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Interest expense, net                                                                |                                                                |      | (5,560       | )           |           |      | 2,125        |   | (6)          |     | (3,435  | )          
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Equity in losses of affiliate and loss on
redemption of equity interest in affiliate |                                                                |      | (63,330      | )           |           |      |              |   |              |     | (63,330 | )          
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Minority interest                                                                    |                                                                |      | 20           |             |           |      |              |   |              |     | 20      |            
|                                                                                     |                                                                |      |              |             |           |      |              |   |              |     |         |            
|Loss before taxes                                                                    |                                                                |      | (28,154      | )           |           |      | 125          |   |              |     | (28,029 | )          
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Income tax expense (benefit)                                                         |                                                                |      | 9,417        |             |           |      | (23,151      | ) | (7)          |     | (13,734 | )          
|                                                                                     |                                                                |      |              |             |           |      |              |   |              |     |         |            
|Net loss                                                                             |                                                                |      | (37,571      | )           |           |      | 23,276       |   |              |     | (14,295 | )          
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Dividend on Series A Preferred Stock                                                 |                                                                |      | 15,836       |             |           |      | (15,836      | ) | (8)          |     |        |            
|                                                                                     |                                                                |      |              |             |           |      |              |   |              |     |         |            
|Net loss applicable to common
stockholders                                           |                                                                | $    | (53,407      | )           |           | $    | 39,112       |   |              | $   | (14,295 | )          
|                                                                                     |                                                                |      |              |             |           |      |              |   |              |     |         |            
|Loss per share:                                                                     
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Net loss applicable to common
stockholders - basic and diluted |      | $            | (0.70       | )         |      |              |   |              |     | $       | (0.09       | )
|                                                                                     |                                                                |      |              |             |           |      |              |   |              |     |         |            
|                                                                                     | Weighted
average shares  - basic and diluted                   |      |              | 75,760,067  |           |      |              |   |              | (9) |         | 155,959,938 |  
|                                                                                     |                                                                |      |              |             |           |      |              |   |              |     |         |            

See notes to pro forma financial information.

22



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##### Table of Contents



Pro Forma Consolidated Condensed Statement of Operations
Six Months Ended December 31, 2000(in thousands, except share and per share amounts)

|                                                                                     |                                                                         |      |              |             |           |   |         |              |     |            |   |           |             | 
|------------------------------------------------------------------------------------ | ----------------------------------------------------------------------- | ---- | ------------ | ----------- | --------- | - | ------- | ------------ | --- | ---------- | - | --------- | ----------- | 
|                                                                                     |                                                                         |      | Historical   |             | Pro Forma |  
|                                                                                     |                                                                         |      |              |             |           |  
|                                                                                     |                                                                         |      | Six Months   |             |           |   |         |              |     | Six Months
|                                                                                     |                                                                         |      | Ended        |             |           |   |         |              |     | Ended     
|                                                                                     |                                                                         |      | December 31, |             | Pro Forma |   |         | December 31,
|                                                                                     |                                                                         | 2000 |              | Adjustments |           |   | 2000   
|                                                                                     |                                                                         |      |              |             |           |   |        
|Revenue                                                                              |                                                                         | $    | 1,382,040    |             |           |   |         |              |     |            | $ | 1,382,040 |            
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Cost of services                                                                     |                                                                         |      | 1,067,401    |             |           |   |         |              |     |            |   | 1,067,401 |            
|                                                                                     |                                                                         |      |              |             |           |   |         |              |     |            |   |           |            
|Gross margin                                                                         |                                                                         |      | 314,639      |             |           |   |         |              |     |            |   | 314,639   |            
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Selling, general and administrative expenses                                         |                                                                         |      | 212,965      |             |           | $ | 4,000   |              | (4) |            |   | 216,965   |            
|                                                                                     |                                                                         |      |              |             |           |   |         |              |     |            |   |           |            
|Operating income                                                                     |                                                                         |      | 101,674      |             |           |   | (4,000  | )            |     |            |   | 97,674    |            
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Interest expense, net                                                                |                                                                         |      | (10,178      | )           |           |   | 4,250   |              | (6) |            |   | (5,928    | )          
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Equity in losses of affiliate and loss on
redemption of equity interest in affiliate |                                                                         |      | (76,020      | )           |           |   |         |              |     |            |   | (76,020   | )          
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Minority interest                                                                    |                                                                         |      | 74           |             |           |   |         |              |     |            |   | 74        |            
|                                                                                     |                                                                         |      |              |             |           |   |         |              |     |            |   |           |            
|Income before taxes                                                                  |                                                                         |      | 15,550       |             |           |   | 250     |              |     |            |   | 15,800    |            
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Income tax expense (benefit)                                                         |                                                                         |      | 32,588       |             |           |   | (24,846 | )            | (7) |            |   | 7,742     |            
|                                                                                     |                                                                         |      |              |             |           |   |         |              |     |            |   |           |            
|Net income (loss)                                                                    |                                                                         |      | (17,038      | )           |           |   | 25,096  |              |     |            |   | 8,058     |            
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Dividend on Series A Preferred Stock                                                 |                                                                         |      | 31,672       |             |           |   | (31,672 | )            | (8) |            |   |          |            
|                                                                                     |                                                                         |      |              |             |           |   |         |              |     |            |   |           |            
|Net income (loss) applicable to common
stockholders                                  |                                                                         | $    | (48,710      | )           |           | $ | 56,768  |              |     |            | $ | 8,058     |            
|                                                                                     |                                                                         |      |              |             |           |   |         |              |     |            |   |           |            
|Earnings (loss) per share:                                                           |                                                                         |      |              |             |           |   |         |              |     |           
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Net income (loss) applicable to common
stockholders - basic and diluted |      | $            | (0.64       | )         |   |         |              |     |            |   | $         | 0.05        | 
|                                                                                     |                                                                         |      |              |             |           |   |         |              |     |            |   |           |            
|                                                                                     | Weighted average shares - basic and diluted                             |      |              | 75,795,884  |           |   |         |              |     | (9)        |   |           | 155,959,938 | 
|                                                                                     |                                                                         |      |              |             |           |   |         |              |     |            |   |           |            

See notes to pro forma financial information.

23



---



##### Table of Contents



NOTES TO PRO FORMA FINANCIAL INFORMATION

For purposes of preparing the accompanying pro forma financial information, we
have assumed that the Companys separation from KPMG LLP and initial public
offering was completed on July 1, 1999, with shares sold at the actual offering
price of $18.00, and have made the following adjustments to the historical combined
and consolidated condensed financial statements. These notes should be read in
conjunction with our consolidated/combined pro forma financial information and
notes thereto for the fiscal year ended June 30, 2000, included in the
Companys Prospectus dated February 7, 2001, filed with the SEC pursuant
to rule 424(b) under the Securities Act of 1933.

(1) Adjustment to reflect partner compensation and benefit costs that we
would have incurred for our managing directors under the terms of our new
compensation plan which we have adopted and implemented effective July 1, 2000,
had the new plan been in place during the historical periods.

(2) Adjustment to reflect the increase in partner accrued vacation pay
for the periods preceding our Companys separation from KPMG LLP on January 31,
2000.

(3) Adjustment to reflect changes to our employee (professional and
administrative) pension plan. Following the separation from KPMG LLP on
January 31, 2000, our employees no longer participate in the KPMG LLP pension
plan. The adjustments to eliminate costs under the employee pension plan were
based on the actual amounts allocated to us by KPMG LLP during the pro forma
periods.

(4) Adjustment to reflect the incremental costs of operating as an
independent public company, such as investor services and external financial
reporting.

(5) KPMG LLP historically allocated costs incurred in the coordination
and management of a multidisciplinary professional services organization to each
of its functional business units. For the period from January 31, 2000 until
June 30, 2000, we received these services pursuant to the original outsourcing
agreement. Certain services provided to us pursuant
to the original outsourcing agreement prior to July 1, 2000 are not necessary
for us to operate our business as an independent company since they are
duplicative or are performed by us internally. Consequently, these services
were no longer charged to us effective as of July 1, 2000. These costs, which
have been eliminated for the three month and six month periods ended December
31, 1999, primarily relate to executive management costs incurred in relation
to the management of a national and international multidisciplinary services
firm which we no longer require. Because we have historically had a full
executive management team responsible for the consulting business of KPMG LLP,
these allocated costs are no longer incurred. The costs related to our
executive management are reflected in our historical financial statements for
non-partner costs and are included in pro forma adjustment (1) for managing
directors. Additionally, we no longer are a member of KPMG International since
the initial public offering. KPMG International costs previously allocated to
us by KPMG LLP are for executive management costs and headquarter support costs
for KPMG International. KPMG International s management is duplicative of
our executive management costs. We will not incur these costs incrementally
since we will operate in corporate form and our existing executive management
team will oversee our international operations.

24



---



##### Table of Contents



The pro forma effect of the elimination of those costs for the three and
six months ended December 31, 1999, pursuant to the transition services
agreement is as follows (in thousands):

|                                                                |            |       |       |                   |       |   |                   |       |        | 
|--------------------------------------------------------------- | ---------- | ----- | ----- | ----------------- | ----- | - | ----------------- | ----- | ------ | 
|                                                                |            |       |       | Three Months      |       |   | Six Months        |      
|                                                                |            |       |       | Ended             |       |   | Ended             |      
|                                                                |            |       |       | December 31, 1999 |       |   | December 31, 1999 |      
|                                                                |            |       |       |                   |       |   |                   |      
| International and U.S.
partnership level management
structure |            | $     | 7,864 |                   |       | $ | 15,729            |      
|                                                               
|                                                               
|                                                               
|                                                               
| International and firmwide
partnership meetings               |            |       | 1,272 |                   |       |   | 2,543             |      
|                                                               
|                                                               
|                                                               
|                                                               
| Support of the KPMG                                          
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Foundation |       |       | 504               |       |   |                   | 1,008 |       
|                                                                |            |       |       |                   |       |  
|                                                                |            | Total |       | $                 | 9,640 |   |                   | $     | 19,280 | 
|                                                                |            |       |       |                   |       |  

(6) For the three and six month periods ended December 31, 2000 and 1999,
the adjustment reflects a reduction of the interest expense related to working
capital and financing needs that we have funded with proceeds from our initial
public offering.

(7) Reflects an adjustment for an estimated income tax provision as if we
had operated as a corporation, including tax benefits of certain losses, at a
pro forma effective tax rate of 70% for the year ended June 30, 2000, and 49%
for the year ended June 30, 2001. Due to our non-deductible goodwill
amortization and our high level of non-deductible travel related expenses, our
effective tax rate is impacted to a great extent by our level of earnings. If
our earnings grow and non-deductible expenses and goodwill amortization grow at
a lesser rate or decrease, our effective tax rate will decrease in the future.

(8) Reflects an adjustment to eliminate the dividend on the Series A
preferred stock to reflect the partial repurchase and conversion of the Series
A preferred stock into common stock as if the conversion had occurred upon
issuance (January 31, 2000).

25



---



##### Table of Contents



(9) Weighted average shares outstandingbasic and diluted, are calculated
based on:

|                                                                                      |  |             |         |  |              |                         |            |              |  |  |            | 
|------------------------------------------------------------------------------------- |  | ----------- | ------- |  | ------------ | ----------------------- | ---------- | ------------ |  |  | ---------- | 
|                                                                                      |  |             |         |  |              | Pro Forma Periods Ended |           
|                                                                                      |  |             |         |  |              |                         |           
|                                                                                      |  | Assumed     |        
|                                                                                      |  | Outstanding |         |  | December 31, |                         |            | December 31, | 
|Common Stock Issuances                                                                |  | From        |         |  | 1999         |                         |            | 2000         | 
|                                                                                      |  |             |         |  |              |                         |            |              | 
|Separation transaction                                                                |  |             | 7/1/99  |  |              |                         | 75,563,773 |              |  |  | 75,563,773 | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Conversion of KPMG LLPs 0.5%
interest in our operating
subsidiary                    |  |             | 7/1/99  |  |              |                         | 433,487    |              |  |  | 433,487    | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|New shares from our initial public
offering*                                          |  |             | 7/1/99  |  |              |                         | 13,225,315 |              |  |  | 13,225,315 | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Series A preferred stock repurchase                                                   |  |             | 1/31/00 |  |              |                         |           |              |  |  | 21,018,300 | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Series A preferred stock conversion                                                   |  |             | 1/31/00 |  |              |                         |           |              |  |  | 44,606,701 | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Stock awards, net of forfeitures                                                      |  |             | 1/31/00 |  |              |                         |           |              |  |  | 194,690    | 
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Acquisition of the consulting
business of the Irish member firm
of KPMG International |  |             | 9/15/00 |  |              |                         |           |              |  |  | 917,672    | 

*Actual net proceeds from the initial public offering were utilized in
computing our pro forma interest adjustment in note (6).

* * * * *

26



---



##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES

The Company has primarily funded its operations through cash
generated from operations. Additionally, the Company has borrowing
arrangements available including a revolving credit facility with $55 million
outstanding at December 31, 2000 (not to exceed $100 million), a revolving line
of credit facility with no outstanding balance at December 31, 2000 (not to
exceed $100 million), a note agreement with KPMG LLP to lend up to $100 million
with no outstanding balance at December 31, 2000 (which terminated on February
8, 2001, the effective date of our initial public offering), as well as a note
payable related to an accounts receivable financing facility with $45 million
outstanding at December 31, 2000 (not to exceed $200 million). The revolving
credit facility and revolving line of credit facility expire on May 24, 2004
and May 23, 2001, respectively, while the accounts receivable financing
facility permits sales of accounts receivable through May 21, 2003, subject
to annual renewal. The credit facilities described above include covenants
relating to the maintenance of certain financial ratios and restrictions on
the Companys ability to pay dividends.

The Companys cash and cash equivalents declined $11.7 million to $15.3
million at December 31, 2000 when compared with June 30, 2000. The decline in
cash and cash equivalents was due to $37.6 million of cash used in investing
activities and $13.0 million of cash used in financing activities, offset by
$38.9 million of cash provided by operating activities.

Cash provided by operating activities during the six months ended December
31, 2000 was $38.9 million, principally due to operating results of $68.0
million and net increases in current liabilities of $85.2 million. Offsetting
these sources of cash were distributions made to our managing directors
relating to fiscal 2000 of $73.2 million; net growth in accounts receivable
from clients of $40.4 million, and other net of $0.7 million.

Cash used in investing activities during the six months ended December 31,
2000 was $37.6 million principally due to $17.2 million of property and
equipment purchases, $9.9 million of additional capital invested in QCS
through October 2000, as well as $7.5 million of equity investments.

Cash used in financing activities for the six months ended December 31,
2000 was $13.0 million due to the payment of $28.9 million of preferred stock
dividends and repayment of $34.4 million of acquisition obligations, offset by
a $50.3 million net increase in notes payable.

A complete discussion of the Companys initial public offering and use of
proceeds can be found in Note 2 of the Consolidated/Combined Condensed
Financial Statements and Part II, Item 2. Changes in Securities and Use of
Proceeds of this Form 10-Q.

The Company believes that the cash provided from operations, borrowings
available under the various facilities described above, existing cash and cash
equivalents and proceeds from the February 8, 2001 initial public offering
should be sufficient to meet working capital and capital expenditure needs.

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements relating to our operations
that are based on our current expectations, estimates and projections. Words
such as expects, intends, plans, projects, believes, estimates, and
similar expressions are used to identify these forward-looking statements.
These statements are not guarantees of future performance and involve risks,
uncertainties and assumptions that are difficult to predict. Forward-looking
statements are based upon assumptions as to future events that may not prove to
be accurate. Actual outcomes and results may differ materially from what is
expressed or forecast in these forward-looking statements. As a result, these
statements speak only as of the date they were made.

Our actual results may differ from the forward-looking statements for many
reasons, including:



| |  |  | the business decisions of our clients regarding the use of our services;
| | - |  | ------------------------------------------------------------------------
|
| |  |  | the timing of projects and their termination;                           
|
| |  |  | the availability of talented professionals to provide our services;     
|
| |  |  | the pace of technological change;                                       
|
| |  |  | the strength of our joint marketing relationships;                      
|
| |  |  | our separation from KPMG LLP; and                                       
|
| |  |  | the actions of our competitors.                                         



| |                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition, these statements could be affected by general domestic and
international economic and political conditions. For a more detailed
discussion of certain of these factors, see Exhibit 99.1 to this Form 10-Q.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise.







PART I, ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to a number of market risks in the ordinary course of
business. These risks, which include interest rate risk and foreign currency
exchange risk, arise in the normal course of business rather than from trading
activities. Our exposure to changes in interest rates arises because our
indebtedness primarily carries variable interest rates. Foreign currency
exchange risk is not significant as foreign currency transactions have not been
significant and are not concentrated in a single foreign currency.

In connection with our borrowings and as a result of continual monitoring
of interest rates, we may in the future enter into interest rate swap
agreements for purposes of managing our borrowing costs.

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PART II. OTHER INFORMATION







ITEM 1. LEGAL PROCEEDINGS

We are from time to time the subject of lawsuits and other claims and
regulatory proceedings arising in the ordinary course of our business. We do
not expect that any of these matters, individually or in the aggregate, will
have a material impact on our financial condition or results of operations.







ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Our first registration statement filed under the Securities Act of 1933
(Form S-1 registration statement, Registration No. 333-36328, Commission File
No. 000-31351) was declared effective by the Commission on February 7, 2001. A
total of 202,227,307 shares of our common stock were registered under the
registration statement. The managing underwriters for the offering were Morgan
Stanley & Co. Incorporated, Goldman, Sachs & Co., J.P. Morgan Securities Inc.
and Merrill Lynch, Pierce, Fenner & Smith Incorporated.

The offering commenced on February 8, 2001 and has been completed.
129,354,300 shares were sold at a per share public offering price of $18.00,
which included 16,872,300 shares that were sold upon exercise of the
underwriters over-allotment option. Of the shares sold, 34,243,614 shares
with an aggregate offering price of $616,385,052 were sold by us and 95,110,686
shares with an aggregate offering price of $1,711,992,348 were sold by the
selling stockholder. An aggregate underwriting discount of $93,135,096 was
paid in connection with the offering, $24,655,402 of which was paid by us and
$68,479,694 of which was paid by the selling stockholder. Our pro-rata portion
of other expenses of the offering are estimated at $3,141,000.

Our net proceeds from the sale of our 34,243,614 shares in the offering,
after deducting the underwriting discount and our share of the estimated
offering expenses, were $588,588,650. We received no proceeds from the sale of
our common stock by the selling stockholder. Our net proceeds from our sale of
common stock in this offering were fully used as follows:



| |  |  | $378,329,391 to repurchase 1,441,254.9 shares of our
Series A Mandatorily Redeemable Convertible Preferred Stock from
Cisco Systems, Inc.;                                                                                                                                                                                                                                                                                 
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | $112,037,809 to repay all of our outstanding
indebtedness to KPMG LLP, consisting of a note that was incurred
in connection with our acquisition of the consulting business of
the Canadian member firm of KPMG International, all of the
outstanding indebtedness pursuant to our subordinated revolving
line of credit from KPMG LLP, and other trade payables due to
KPMG LLP incurred in the normal course of business;
|
| |  |  | $70,000,000 to repay our outstanding indebtedness under
our receivables purchase facility with PNC Bank, National
Association; and                                                                                                                                                                                                                                                                                         
|
| |  |  | $28,221,450 for working capital purposes.                                                                                                                                                                                                                                                                                                                                                                                  

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With the exception of working capital that was used for salaries and
expense reimbursement in the ordinary course of business, none of the net
proceeds of the offering that we received have been paid, directly or
indirectly, to any of our directors or officers or any of their associates, to
any persons owning 10 percent or more of any class of our equity securities, or
to any of our affiliates.

ITEMS 3-5. NONE







ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits



| |                                        
| | ---------------------------------------
| | Reference is made to the Exhibit Index.

(b) Reports on Form 8-K



| |     
| | ----
| | None

Exhibit Index

|               |  |                                                                                                                                                                                                                                                                                                                                  
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                                      
|               |  |                                                                                                                                                                                                                                                                                                                                  
|              
|              
|              
|              
|              
|10.1           |  | Securities Purchase Agreement, dated as of October 4, 2000, between
the Company and KPMG LLP, which is incorporated herein by
reference from the Companys Registration Statement on Form S-1
(Registration No. 333-36328), which is contained in Commission File
No. 000-31351) (referred to below as the Companys Form S-1).
|              
|              
|              
|              
|              
|              
|              
|              
|              
|10.2           |  | Strategic Alliance Agreement, dated as of December 27, 2000, among
Qwest Communications International, Inc., KPMG Consulting, LLC,
Softline Consulting and Integrators, Inc. and Qwest Cyber.Solutions
LLC, which is incorporated herein by reference from the Companys
Form S-1.                                               
|              
|              
|              
|              
|              
|              
|              
|              
|              
|10.3           |  | Credit Agreement, dated as of May 24, 2000, and related amendments, which
is incorporated herein by reference from the Companys Form S-1.                                                                                                                                                                                       
|              
|              
|              
|              
|              
|              
|              
|              
|              
|99.1           |  | Factors Affecting Future Financial Results                                                                                                                                                                                                                                                                                       

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SIGNATURES

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

|                     |  |                                                                                                                         
|-------------------- |  | ------------------------------------------------------------------------------------------------------------------------
|                     |  | KPMG Consulting, Inc.                                                                                                   
|                    
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|                    
|                    
|                    
|                    
|DATE: March 22, 2001 |  | By: /S/ Randolph C. Blazer
Randolph C. Blazer,
Chief Executive Officer,
President and Chairman of the Board of
Directors
|                    
|                    
|                    
|                    
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|                    
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|                     |  | Principal Financial and Accounting Officer                                                                              
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|                    
|DATE: March 22, 2001 |  | /S/ Robert C. Lamb, Jr.
Robert C. Lamb, Jr.,
Executive Vice President
and Chief Financial Officer                       

31