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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2002

OR

For the transition period from                          to                         

Commission file number 0-30035

EXULT, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:    (949) 856-8800

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.0001 Par Value

(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x  Yes ¨  No

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

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

The aggregate market value of the Common Stock of the registrant held by non-affiliates of the registrant as of January 31, 2003 was approximately $250,727,000 (based upon the closing price on the Nasdaq National Market on that date).

The number of shares of Common Stock of the registrant outstanding as of January 31, 2003 was 106,374,399.

DOCUMENTS INCORPORATED BY REFERENCE

        Part III incorporates by reference certain information from the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held May 7, 2003, which will be filed with the Commission not later than April 30, 2003.

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

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

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

This report contains estimates of market size and growth related to the business process outsourcing market, the use of the Internet, the Global 500 and other industry data. These estimates have been included in studies published by Dataquest, a division of GartnerGroup and Fortune Magazine. These estimates contain certain assumptions regarding current and future events, trends and activities. Although we believe that these estimates are generally indicative of the matters reflected in those studies, these estimates are inherently imprecise, and we caution you to read these estimates in conjunction with the rest of the disclosure in this report, particularly the “Risk Factors” section.

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PART I

Item 1. BUSINESS.

Overview

Our mission is to be the leading provider of outsourced HR services to Global 500 corporations. We design our services to enable Global 500 corporations to enhance human capital productivity, reduce HR costs, streamline HR processes and provide superior HR services to their employees. We provide comprehensive, integrated HR process management through the Exult Service Delivery Model^SM (“ESDM”), which includes:

The broad spectrum of process management services we provide through our ESDM^SM is grouped into four major categories:

Our shared service centers in North Carolina, Tennessee, Texas, Scotland and India house the personnel and systems that manage our clients’ transaction, production and service center requirements. Our myHR^SM applications are designed to enable our clients and their employees to access and manage HR information via the Internet in a self-service environment. We have six HR outsourcing clients: Bank of America Corporation, BP p.l.c., International Paper Company, Pactiv Corporation, Prudential Financial, and Unisys Corporation. In addition, we have many process consulting clients, including Alcan, Unilever, Gillette, and Marriott.

Industry Background

Human Resources Departments in the Global 500. According to the Global 500 List for the Year 2002 published by Fortune Magazine, Global 500 corporations employed more than 47 million people in 2001, and the median number of employees for a Global 500 corporation was approximately 63,000, in multiple locations and countries. An employee base of this magnitude presents logistical complexities, and the human resources functions of Global 500 corporations are often complicated by multiple human resources groups for different business units and the lack of central information repositories and coordinated communications infrastructures. As a result, the HR operational processes of large corporations often are redundant and inefficient. In addition, the large number of third-party vendors typically used by a human resources department to handle discrete functions complicates HR process management. By necessity, HR departments typically devote most of their resources to administrative functions rather than strategic planning and initiatives. At the same time, corporations that extend cost-cutting to their HR departments often focus more on reducing staff than on reengineering service delivery.

The Emergence of HR Process Outsourcing. Many large corporations outsource discrete, non-core functions of their operations, such as payroll, tax filings and benefits administration. According to Dataquest, the worldwide business process outsourcing market is projected to grow from approximately $119 billion in 2000 to approximately $234 billion in 2005. The market for multi-process HR outsourcing is relatively new. We believe that approximately 300 of the Global 500 are viable candidates for HR outsourcing provided by Exult. Based on the median employee base and our estimates of annual spending per employee for services that we perform, we estimate that the addressable market for our services consists of annual spending of approximately $29 billion per year. Comprehensive HR process outsourcing for large corporations requires a well-developed service delivery infrastructure and significant expertise in analyzing, providing and managing HR processes across many divisions and third-party vendors, and using policies, procedures, operations and technologies that yield superior performance as measured by productivity, cost, quality and customer satisfaction metrics.

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Our Strategy

We rely upon the following strategic elements in the development and management of our business:

Our Exult Service Delivery Model^SM Solution

Our ESDM^SM solution combines a broad process management services offering, shared service center resources and service delivery, third-party vendor management, and strategic consulting expertise, and is designed to simplify and standardize our clients’ HR practices and procedures and deliver improved management information and employee communications at significant cost savings.

Services

Our ESDM^SM includes a broad spectrum of process management services grouped into four major categories, as follows:

    Record & Support

We maintain and manage employee data and HR records for our clients. This enables us to capture, track, modify and report large amounts of employee-related data, which facilitates various HR functions including HRIS reporting, HR systems management and support, performance management, employee data and records management, employee contact centers and HR strategy and compliance. Our Record & Support services also include finance and accounting services for accounts payable management and travel and expense administration, as well as fixed asset accounting services.

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    Reward

We manage clients’ payroll, compensation and benefits processes and related production requirements so as to reduce our clients’ investment of internal resources in transaction processing. Our Reward services in the payroll area include time and attendance reporting, on and off-cycle pay, garnishments, tax calculations and reporting, and related accounting. Compensation services include administration of salary, bonus and stock option programs, elections, and total rewards statements. Benefits services include enrollment, plan administration, record keeping, and claims administration for health and welfare and retirement benefits.

    Acquire & Staff

We provide recruiting and flexible staffing services to process and manage clients’ workforce changes and help our clients effectively develop and deploy their human capital. Our recruiting services include needs identification, candidate sourcing, screening, interviewing, assessment, and offer and hire administration. Our flexible staffing services include needs identification, resource selection and placement, time reporting, invoicing, and conversion to hire.

    Retain & Grow

We provide learning, global mobility, and relocation services to help our clients develop and deploy their human capital effectively. We offer complete learning solutions that include performance review, learning planning, demand management, sourcing, evaluation and assessment, and accounting. Our expatriate global mobility services include plan assignment, candidate selection, pre-departure preparation, on assignment support, and repatriation assistance. Our relocation services encompass relocation initiation, policy briefing and administration, expense processing and accounting, inventory management, and related services such as home sales.

Shared Resources and Service Delivery

We deliver our process management services through an infrastructure of client service centers, web-enabled technology systems, functional applications, and third-party service providers. Our model involves leveraging shared resources to provide consistent HR process management while achieving economies of scale, which we believe enables us to deliver exemplary HR services at a reduced cost.

    Client Service Centers

We have five client service centers, in North Carolina, Tennessee, Texas, Scotland and our developing center in India. These centers house the personnel and systems we use to manage our clients’ transaction, production and service center requirements, including customer service representatives and production operations staff for functions such as payroll processing, benefits administration, training administration, and information technology support and maintenance. These client service centers also contain systems and technology, such as contact/case management systems, imaging and workflow, and HR application software and databases. Our clients’ employees can communicate with the client service centers online through myHR^SM, their own intranet systems, or by phone, fax, or e-mail. All of these centers are designed to give us efficiencies and economies of scale by leveraging the functionality, staff and technology of centralized processes and services across many business units for multiple clients. They also provide important redundancies for service continuity purposes.

In connection with various client engagements, we acquired the Texas center at the end of 1999, the North Carolina center in 2001, and the Tennessee center in 2002. Each of these centers had provided some services for the client before we took over. We are continuing to invest in the development of these centers into multi-service, multi-client environments that utilize our ESDM^SM to increase efficiency and productivity. We have developed substantial expertise in converting and consolidating clients’ existing HR facilities to the ESDM^SM, and our ability to retain key managers and operate these centers during conversion contributed to our ability to transition new client processes relatively quickly.

We established the Scotland center during 2000 specifically to accommodate our United Kingdom service center requirements. We selected Scotland because of its accessibility, educated English-speaking workforce, relatively low cost of doing business, and European Union membership. The Scotland center currently manages the processes we provide to BP in the United Kingdom, as well as our own United Kingdom internal processing requirements. In addition, the Scotland center can accommodate additional client demands, and we anticipate that it will play a significant role in service delivery to future clients in the U.K., continental Europe, and other parts of the world, including North America.

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We recently announced our plans to establish a service center in India to pursue further globalization and to provide additional service capabilities to current and future clients. We selected India because of its educated population and relatively low cost of doing business. We expect the India center to begin providing specific process support to our other service centers in the spring of 2003, and we anticipate expanding the process capabilities of the India service center as appropriate to support processing and provide services for existing and future clients.

In the aggregate, we expect that our overall existing service center capacity can accommodate significant expansion of our client base from “greenfield” client opportunities, in which we do not acquire significant amounts of client assets or employees. We also envision selectively developing additional centers in the future, as may be appropriate to handle growth or to take advantage of opportunities to contract with clients that have previously consolidated HR services to some degree and seek to transfer their HR facilities and workforce to us in connection with retaining us for HR process management services.

    Systems, Production Applications

In order to deliver comprehensive, integrated HR process management, we have developed a service infrastructure that relies upon our own intellectual property, licensed components, and third-party vendors.

Performance under our process management contracts requires sophisticated information technology capabilities. All of our clients utilize database tools for their HR information systems, including programs licensed from PeopleSoft USA, Inc. and SAP AG, and some legacy systems. Some of these systems must be replaced or consolidated and others require substantial integration. In most cases, significant interface work is required to integrate the client’s systems with our systems. We assist in these processes, both directly and through vendors we supervise, so that the client’s internal HR information systems provide an adequate platform for integrated HR process management.

Many of our process management capabilities are based upon third-party software that we have selected for service capability and compatibility with our infrastructure. For example, we use an open web platform for workforce planning, hiring and deployment licensed from Deploy Solutions in our delivery of strategic resourcing management. Our relationship with IQNavigator allows us to manage our clients’ temporary staffing needs in an efficient vendor-neutral manner, and our Hireright relationship provides for a variety of automated background screening services in support of client recruiting needs. Our relationships with Docent and SkillSoft assist us in providing employee learning management systems and e-Learning content to our clients.

In general, we manage essential back-end systems, such as HR application management, in order to provide full service accountability and control. We contract with third parties to perform certain services related to applications management. For example, in the fourth quarter of 2001, we contracted with two firms domiciled in India to perform this work at a cost significantly below our historical cost. Application server management and hosting is generally provided by our information technology infrastructure partners, principally Unisys, and backed-up by their business continuity and disaster recovery systems.

Our ESDM^SM provides for the integration of software applications and business processes with a client’s own internal information and communications systems to compile and centralize a wealth of HR information. Our myHR^SM applications are designed to provide self-service capability to enable our clients’ managers and employees to access and update data and perform certain administrative functions.

    Third-Party Service Providers

Our ESDM^SM incorporates the services of third-party vendors in two important ways. First, our process management contracts may include certain services being provided to the client by third-party vendors. At the time we become responsible for a client’s HR organization, we generally assume responsibility for administration of many of these vendors, either by assignment of their contracts to us or through management arrangements. Depending upon a number of factors, including the type of services involved, terms of the vendors’ contracts, and client preferences, over time we may retain the vendor as a service provider to the client within the scope of our contract and under our management, replace the vendor with a new third-party provider under our management, or take over provision of the services ourselves.

Second, in addition to management of third-party vendors who had preexisting relationships with our clients, we also utilize selected third parties to complement our integrated service offering with specialized HR services that can be more effectively and efficiently provided by third-party vendors and subcontractors than through our internal resources. For example, we currently outsource background checks, outplacement, management of various pension and benefit arrangements and some elements of

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relocation administration. Over time, we may outsource additional elements of our service offering, or bring some elements “in house,” depending upon the availability of appropriately skilled third parties in various areas, competition, the development of our own capabilities, client demands, acquisition opportunities, capital availability and requirements, and other factors.

We believe our familiarity and experience with HR process management and with the market for third-party HR vendors enables us to evaluate whether the services being provided by a third party meet client needs and represent an appropriate blend of quality and value. In addition, we believe we will be able to provide improved service levels and greater cost savings on behalf of our clients through negotiation and management of these third-party vendor contracts.

In June 2001, we entered into a basic framework agreement with Automatic Data Processing, Inc. under which we use ADP as a subcontractor to Exult to provide transactional and administrative services to supplement and enhance our service offering, including specific parts of our payroll processing, benefits and systems integration work, including wage garnishment, tax deposits, flexible spending accounts, and Cobra administration. This relationship with ADP is non-exclusive, and there is no requirement that we or our clients use ADP, or that ADP accept any particular work. In addition, in connection with initiation of the relationship, ADP purchased approximately 1.5 million shares of our common stock for approximately $20 million, and under certain circumstances based upon the amount of business we direct to ADP by July 2005, Exult may require ADP to purchase up to an additional $30 million of stock.

Strategic Consulting Expertise

In November 1999, we acquired the business of Gunn Partners, Inc., a business process improvement consulting company with operations in the United States and Europe. Gunn Partners has been consulting with Global 500 corporations since 1991 on administrative staff functions such as human resources and finance and accounting, as well as procurement, information technology, and customer service. Gunn Partners generates revenue through its own consulting activities. Gunn Partners has provided consulting services to some of the largest companies in the Global 500.

Business Process Management Clients and Contracts

Client Summary

The table below lists our business process management clients and shows for each the contract date, the anticipated base term, the processes we manage and the number of affected employees.

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(1) The contract with Bank of America Corporation was expanded in March 2001 to include expatriate administration services and in September 2001 to include regional staffing services.

(2) The relationship with BP p.l.c. is reflected by a seven-year Framework Agreement signed in December 1999, pursuant to which two five-year country agreements were entered into, one covering the U.S. and the other covering the U.K. The arrangement with BP has expanded to cover certain persons who became BP employees in connection with BP’s acquisitions of ARCO and Burmah Castrol.

(3) The contract with International Paper has been expanded to include temporary staffing services.

(4) The contract with Pactiv Corporation is a renewal of the original three-year agreement with Pactiv entered into in January 2000.

The column labeled “Contract Date” shows the date each contract was signed. Each client relationship involves a transition period following contract signing during which we prepare for and then assume responsibility for the processes we have agreed to manage. Generally, process take-on is staggered. The transition period can be as short as a few months, and as long as a year or more. In general, the transition period is shorter for “brownfield” clients that already have concentrated their internal management of the processes we are taking over, and longer for “greenfield” clients with less concentration and little take-on of client facilities or employees. Other factors, including contract scope, complexity of information systems integration and geographic dispersion, can affect the transition time.

The column labeled “Anticipated Term – Years” shows the anticipated base term of the contract. Any contract may terminate before the completion of the anticipated term, and may also be extended beyond the anticipated term. In addition, the anticipated revenues under any contract may increase or decrease during its term as client volumes change or the scope of services under the contract change.

The descriptions in the column labeled “Processes” correspond to the items below:

“Comprehensive HR” generally means that the contract covers substantially all of the services we provide within four major categories of services described above.

“Substantial HR” generally means that the contract covers integrated process management for a substantial number of the services we provide within four major categories of services described above, but that a significant number of processes are not included.

“Some Finance and Accounting” generally means that the contract covers accounts payable and expense reimbursement and fixed asset accouting processes, along with some other supporting finance or accounting oriented processes.

We strive to maximize commonality in our processes across our client base, but client-specific requirements and differing allocation between us and clients of the component tasks and responsibilities comprising each particular process mean that there are differences between our management of the same process for different clients.

We currently provide our services in the U.S. and, with respect to BP, in the U.S. and U.K. Some services for some clients have overseas components, but these overseas components are not yet a material part of our business.

The column labeled “Estimated Affected Employees” shows the approximate number of employees of the client or its affiliates who have access to or benefit directly from one or more of our services. Different processes we manage for a particular client may have different scopes within the client organization, so not all Estimated Affected Employees of that client have access to, or benefit directly from, all services we provide to that client. The Estimated Affected Employees under each client contract may vary from time to time as a result of increases or decreases in the client’s workforce and expansions or contractions in the scope of our services. Changes in Estimated Affected Employees under a client contract do not necessarily correlate to changes in anticipated revenue under that contract.

Contract Terms

Our business process management contracts have certain common features, as described below.

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Responsibilities and Performance Commitments

The contracts all cover multiple processes – some more than others. For each in-scope process, responsibilities are divided between us and the client. In general, we are responsible for systems design and implementation, routine employee communications, data gathering, processing and retrieval, management reporting, vendor management, and overall administration of related functions. The client generally remains responsible for strategic planning, policy decisions, employee relations, legal compliance, and professional resources.

We are generally entitled to determine our methods of service delivery and to use the tools, vendors and subcontractors that we develop and select. We remain ultimately responsible for performance, even when vendors assist us. The contracts all set forth performance standards applicable to key elements of our services, and if our performance falls below the applicable standards, the client may be entitled to service credits or payments from us.

The contracts contain multiple responsibilities for us, including both our assumption of responsibility for transaction processing and administration, and transformation of the way HR work is performed over time by the client. The transformation work we do is largely in addition to the work required to initiate and sustain service under the contract, and is ongoing for the life of the contract. Transformation activities include implementation and integration of new systems and tools, process change and standardization, consolidation of related activities, globalization of solutions across the client’s business and geographic reach, rationalization of third-party vendors to produce lower costs and better service and service metrics, establishment of an overall integrated service delivery model and the design and implementation of performance measurements, metrics and reports that support the client’s goals. The process management service contracts also identify specific deliverables associated with the multiple elements described above, in addition to numerous deliverables that are produced for the benefit of the client in the ordinary course under the contract that are not specifically identified in the contract. While these deliverables generally can be completed by third parties, clients choose to obligate us to perform this work to obtain the benefit of our expertise, detailed knowledge and successful track record in implementing change in complex environments.

Fees

Our services, and correspondingly our revenue, can be divided into two categories. The first, which we call “direct managed,” refers to our taking responsibility for processes and tasks that the client had previously performed internally through its own employees. The second, which we call “indirect” or “third party,” refers to our taking responsibility for processes and tasks that the client had previously contracted to receive from third-party vendors.

For direct managed services, our price to our client generally includes a contractually obligated discount from the cost that the client incurred to provide those services to itself. This discount generally takes effect after a transition period of up to approximately one year, and sometimes increases periodically during the contract term. For third-party services, we have generally entered into “gain sharing” arrangements, pursuant to which we attempt to (but are not obligated to) reduce the cost to the client of outside vendors and share with the client any savings we achieve. The sharing ratio is negotiated and varies according to the circumstances. In the future, we may utilize additional pricing mechanisms. For example, we may charge for direct services on a transaction basis, and we may offer guaranteed savings to clients on our assumption or management of third-party vendor arrangements.

We also provide additional services to clients on a case-by-case basis at negotiated time and materials or project rates.

Termination

All of the contracts may be terminated by the client for “convenience” after a certain point in the contract term. This point varies from client to client, ranging up to five years from contract signing; it is January 2004 for Pactiv Corporation, July 2004 for Prudential Financial, January 2006 for International Paper Company, and has passed for Bank of America Corporation, BP p.l.c. and Unisys Corporation.

In case of termination for convenience, the client is generally required to provide 6-12 months notice and compensate us for certain costs of winding down the contract. An early termination payment to us may also be required. The amount of the early termination payment generally declines over time, and in some cases diminishes to zero before the end of the anticipated contract term. Payments are designed to help defray the unrecovered expenses we incur in implementing the contract, including diligence, transition, set-up and installation costs, and may provide some compensation to us, but they are not adequate substitutes for the revenue or profit that could be lost as a result of contract termination.

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All of the contracts may be terminated by the client for our excessive performance failure, material uncured breach or insolvency. Some contracts also include special termination provisions related to various events or circumstances including change of control. We generally do not have a right to terminate the contract unless the client fails to pay us or under certain other limited circumstances.

In most cases of termination, the contract provides for a transition assistance period during which we continue to perform and be paid.

Business Expansion

Our sales pipeline consists of potential expansions of contracts with existing clients, as well as potential contracts with new clients. We currently define the highly qualified portion of the new contract pipeline as “frontlog.” These are the contract prospects which we have identified as highly desirable, the client is seriously assessing the advisability of outsourcing its HR processes, has generally agreed to go forward on a sole-source or limited competitive proposal solicitation basis and for which a non-disclosure agreement has generally been executed. From time to time we publicly discuss our estimated frontlog in order to provide investors with information that is relevant to an understanding of our business. These estimates are based upon our assumptions regarding potential scope and pricing, and assume an average ten-year contract term. Frontlog estimates are not representations; the sales cycle for our services is long and complex and the pipeline is fluid, so the frontlog does not represent any assurance of future revenue and it is impossible to predict in advance which prospects may become clients or how quickly contracts may be signed.

Each of our client contracts has a defined scope that is narrower than the client’s overall HR administration. Clients retain responsibility for various processes because of internal expertise, established relationships, strategic sensitivities or other reasons. Portions of each client’s employee base may be excluded for geographic or organizational reasons. We view these situations as growth opportunities within our existing contract base, particularly in relation to those contracts whose initial scope is only for “Substantial HR processes” as defined above, and we actively seek to capitalize upon such growth opportunities by marketing additional services. Our clients generally are not required to give us more business, so we rely upon our performance record and the value we deliver to motivate our clients to increase the size of our existing contracts.

Our current operations are in the U.S., the U.K. and India. Our aspirations are global. We have existing clients with overseas operations that represent growth opportunities for us, and we are currently pursuing new business opportunities that could lead us into other countries. However, overseas expansion requires capital investment and presents several operational challenges, including cultural and language differences, legal and regulatory requirements, and significant investment of management time. We plan to expand the geographic scope of our business as appropriate based upon client opportunities, and as our resources permit without compromising service delivery in our existing contract base.

Revenue and Margins

When we sign a new process management contract, we typically announce our estimate of the revenue potential for that contract over its anticipated term. These estimates are intended to provide information that is relevant to an understanding of our business, but are not a representation or guaranty regarding future performance. Initially, our information about a new client’s historical volumes and costs for the HR processes we take on is imperfect, and verification procedures that take place after contract announcement may result in reduction in our fees. Further, our revenue expectations for each contract change over its life. Factors that can cause our revenue expectations for a given contract to increase include expansion of the contract to add processes or employee subpopulations not included in the original scope, client requests that we perform work on a separately billed project basis, volume increases that result from increasing workforce demands and the impact of inflation adjustments which are applicable to certain portions of our fees and certain of our contracts.

Factors that can cause our revenue expectations for a given contract to decrease include client financial difficulties or business contractions that lead to reductions in workforce or discretionary spending on services such as staffing and training; amendments agreed to by us which reduce the scope or revenue for services; early termination of client contracts in whole or part, whether resulting from adverse developments in the client’s business or the client’s exercise of discretion; insourcing or retention by the client of processes previously contracted to us (subject to our approval as required under the terms of the contract); non-assignment to us of third-party vendor contracts that we initially envisioned taking over from the client; and other circumstances within the client’s organization. In addition, our receipt of revenue under any particular contract may be delayed if transition of the client’s processes to our infrastructure takes longer than anticipated. While our contracts with our clients may contemplate further expansion, this may not occur, and if it does occur, significant additional expenditures by us may be required to fund such expansion. In addition, our process

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management contracts generally permit our clients to impose financial penalties against us for specified material performance failures. Similarly, a number of factors could cause our estimates of contract costs to increase, including the need to invest in additional infrastructure and to implement new technologies, maintain our competitive position, and meet our client service commitments. Some of these dynamics have resulted in decreases from our original estimates of anticipated revenue and margins from various contracts.

Once we have announced estimated revenue potential for a new contract, we generally do not undertake to update that estimate to reflect all of these changes. Rather, we try to maintain a reasonably current estimate of the aggregate anticipated revenue for our entire contract base.

Our revenue is broadly divided into two categories: revenue associated with direct managed processes, and revenue derived from third-party processes. We anticipate that gross margin associated with direct managed revenues will generally be greater than gross margin associated with third-party processes. It is important to our value proposition to the client that we manage both types of processes in order to fulfill our mission to be the single point of accountability for all HR processes on their behalf. However, our overall gross margin may vary as the mix of revenue changes between direct managed and third party.

Sales and Marketing

Our sales efforts target senior executives of Global 500 corporations, through professional relationships and introductions, and through an increasing component of inquiries directly received from the client prospect. These inquiries can be in the form of information meetings or Requests for Proposals (“RFP”s). Due to the importance of these senior executive relationships, most of our selling efforts involve the active participation of our executives. We employ a team approach to business development, working with colleagues in our information technology delivery, client services centers, strategy and other functional areas to identify, qualify and prioritize prospects, manage due diligence processes, negotiate contracts, and craft specific solutions for our clients.

We have focused our marketing efforts on creating awareness of the comprehensive nature of our ESDM^SM solution and establishing Exult as the leader in this new market primarily through market research, information pieces and written articles published for industry trade press, public relations activities, seminars, speaking engagements and relationships with industry analysts. The goal of these activities is to promote Exult as the leading provider of comprehensive HR services, and to publicize the advantages of integrated HR process management. We have also pursued client lead generation in a more targeted manner through direct sales contacts.

Competition

We believe our primary competitors are human resource departments within Global 500 corporations who may be averse to outsourcing. This is another key reason why we focus our sales and client relationship efforts on senior executives, including in particular those in charge of HR. We also believe we are in competition with third parties including certain information technology outsourcers and broad-based outsourcing and consultancy firms that are now providing or may seek to provide HR business process outsourcing services; companies that provide a discrete group of transactional services, such as payroll or benefits administration, and aspire to provide additional services; and other consulting companies that perform individual projects, such as development of HR strategy and HR information systems. Historically, most of these vendors have focused upon discrete processes, but many of them are now promoting integrated process management offerings that may be viewed as competitive with ours. We expect competition to increase, and competitors to develop broad service capabilities that match ours.

Employees

As of January 31, 2003, we employed 1,359 people, including approximately 1,101 in our client service centers, approximately 162 in information technology, approximately 39 in consulting and approximately 57 in general & administrative roles.

Available Information

Our Internet address is www.exult.net. Beginning from at least November 15, 2002, we have made available free of charge on or through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material was electronically filed with, or furnished to, the SEC.

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Risk Factors

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

We have a limited operating history.

We entered into our first process management contract in December 1999. Our success depends on our ability to develop and implement a high quality, cost-effective service offering, operate it profitably, produce satisfactory results for our clients and attract new clients. While we have met our development objectives to date, and we believe our current clients have perceived our services as beneficial, we have not been in operation long enough to judge whether we can accomplish all of these objectives. Accordingly, our revenue and income potential and future operating results are uncertain.

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

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

Each of our process management contracts can be terminated for material breach, significant or repeated performance failures or in certain instances for convenience upon required notice and, in many cases, payment of specified early termination penalties. In addition, Bank of America has the right to terminate its agreement with us if our current Chief Executive Officer or our current Chief Operating Officer ceases to be employed by us (other than due to non-performance, death or disability) within one year after specified contract milestones are met. The early termination penalties provided for under these contracts are designed to help defray the expenses we incur in implementing the contract, including diligence, transition, set-up and installation costs, and may provide some compensation to us, but they are not adequate substitutes for the revenue or profit that could be lost as a result of contract termination.

As our business matures, the original terms of our major contracts will begin to expire. For example, our agreements for services to BP in the U.S. and U.K. will expire late in 2004. We anticipate seeking to renew contracts as they expire, but clients are not obligated to renew and various factors, including changes in the client organization or in the market for HR outsourcing services, could cause clients to take services back in-house or contract with other vendors. Further, we might choose not to bid on renewal, or not to bid aggressively, due to limited profit opportunity with the client, changes in our business model, or other factors. For example, in 2002, one small client migrated to a middle-market vendor upon expiration of its contract with us. This was not significant to us because the client would have represented less than 1 percent of our 2002 revenue, mostly from payroll services, and was not a candidate for our broad-based, integrated services offering. But it does illustrate the fact that our client relationships should not be considered permanent.

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

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

We maintain estimates of our aggregate anticipated annual revenue for our entire contract base. We may from time to time disclose some of these estimates. All of these estimates change as our contracts evolve, and a number of factors can cause our revenue expectations to decrease. These factors include client financial difficulties or business contractions that lead to reductions in workforce or discretionary spending on services such as staffing and training; amendments agreed to by us which reduce the scope or revenue for services; early termination of client contracts in whole or part, whether resulting from adverse developments in the client’s business or the client’s exercise of discretion; insourcing or retention by the client of processes previously contracted to us (subject to our approval as required under the terms of the contract); non-assignment to us of third-party vendor contracts that we initially envisioned taking over from the client; and other circumstances within the client’s organization. In addition, our receipt of revenue under any

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particular contract may be delayed if transition of the client’s processes to our infrastructure takes longer than anticipated. While our contracts with our clients may contemplate further expansion, this may not occur, and if it does occur, significant additional expenditures by us may be required to fund such expansion. In addition, our process management contracts generally permit our clients to impose financial penalties against us for specified material performance failures. Similarly, a number of factors could cause our estimates of contract costs to increase, including the need to invest in additional infrastructure and to implement new technologies, maintain our competitive position, and meet our client service commitments. Changes in estimates could adversely affect our reported results and future prospects.

A significant part of our revenue is attributable to services we offer to our clients through third-party vendors that provide specialized services, such as temporary staffing, training, learning content, benefits administration and relocation services. We select some of these vendors and assume others from relationships established by our clients before contracting with us. These vendors may act as subcontractors or vendors to us or provide services directly to our clients under our control; in either case, we have contractual responsibility for the delivery and acceptability of these services, and errors or omissions, service failures, breach of contract or insolvency by our vendors could cause us to have liability to our clients in excess of the limits of liability the vendors have to us. If our clients are not satisfied with the services provided by these third-party vendors, they may be entitled to recover penalties or to terminate their agreements with us, which could seriously harm our business. In many cases, our initial cost of paying these vendors is equal to our revenue attributable to their services. In order to generate target operating margins and realize a profit from revenue received in connection with these third-party vendor contracts, we must reduce these vendor costs by rationalizing the vendors, improving efficiencies, obtaining more favorable pricing, or performing the services ourselves at a lower cost. We plan to achieve these efficiencies and cost reductions through vendor management and consolidation. This may involve delay as existing contracts run their course and we attempt to renegotiate with or replace these vendors. In addition, at the conclusion of these third-party contracts, we must negotiate new third-party contracts, or provide these services ourselves, at the same or more favorable rates in order to generate our target operating margins. We may need our clients’ consent to substitute new vendors or ourselves for previous vendors, either because of contractual provisions or operational concerns. We are still developing our third-party vendor management capabilities, and to date our third-party business has not generated significant operating margins.

We might not be able to achieve the cost savings required to sustain and increase profits under our contracts

We provide our se