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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2003

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 June 30, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $275.1 million (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, 2004 was 108,850,185.

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 6, 2004, which will be filed with the Commission not later than April 29, 2004.

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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,” “believe,” and “could,” 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; development and application of our operational capabilities, including infrastructure, service center capabilities and capacity, transition and transformation of client processes to our systems, productivity improvements, and cost savings from strategic initiatives including our India operations; service volumes; duration, size, scope and revenue expectations associated with client contracts; client service results and benefits; business mix; growth in our client base and existing contracts; market opportunities; industry leadership and market share; and our accounting, including its effects and potential changes in accounting.

Actual results might differ materially from the results projected due to a number of risks and uncertainties. We are still developing our service capabilities and must continue to increase our operating scale, transition client processes on schedule and transform those processes to reduce delivery costs while meeting contractual service level commitments. We must meet performance standards and serious failures may result in financial penalties, reduction or early termination of the contract. 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 investments, 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. We face increasing competition in the our business. Income tax assets will begin to reduce net income when our tax loss carryforwards are exhausted or the valuation allowance is reversed. These and other risks and uncertainties are described in this report under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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. We nonetheless reserve the right to make such updates from time to time without the need for specific reference to this report. No such update shall be deemed to indicate that other statements not addressed by such updates remain correct or create an obligation to provide any other updates.

This report contains estimates of market size and growth related to the business process outsourcing market, 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

Overview

Our mission is to be the leading provider of human resources-led business process outsourcing services to Global 500 and other large, complex corporations. We provide comprehensive Human Resources outsourcing solutions and expertise in high volume business processes, including related finance and accounting and procurement offerings. We offer tailored solutions to a diverse client base by leveraging our customizable and scalable Multi-Process Outsourcing^SM operational platform, which includes Multi-Client, Multi-Center, Multi-Channel, Multi-Shift and Multi-Shore capabilities. We use Six Sigma standards to design, measure and deliver our processes to provide a high quality service experience to clients. We design our services to help our clients improve productivity, reduce costs, streamline operations, and provide responsive service to clients’ employees throughout the world.

The broad spectrum of process management services we provide is grouped into four major categories:

Our client service centers in North Carolina, Tennessee, Texas, Canada, Scotland, England, Brazil and India house the majority of our client service personnel and systems. 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.

Industry Background

Human Resources Departments in Large Corporations. According to Fortune Magazine, Global 500 corporations employed approximately 46.5 million people in 2002 and the median number of employees for a Global 500 corporation was approximately 61,000, 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 the number of groups serving different business units and the lack of central information repositories and coordinated communications infrastructures. Many other large corporations have similar characteristics. 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 significant resources to administrative functions at the expense of strategic initiatives. At the same time, corporations that extend cost-cutting to their HR departments often focus more on reducing staff than on re-engineering service delivery.

The Emergence of HR Process Outsourcing. Large corporations have outsourced discrete, non-core functions of their operations, such as payroll, tax filings and benefits administration for many years, however, in the last few years a new market for integrated outsourcing of human resources and related finance & accounting processes has emerged. According to Dataquest, the worldwide business process outsourcing market is projected to grow from approximately $110 billion in 2002 to approximately $173 billion in 2007, and the HR BPO market in which we compete is estimated to grow from approximately $25 billion in 2002 to approximately $38 billion in 2007. Comprehensive HR-led 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. It also requires policies, procedures, operations and technologies that yield superior performance, measured by productivity, cost, quality and customer satisfaction metrics.

Our Strategy

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

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Our Service Offering

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

Services

The services we deliver include a broad spectrum of process management functions grouped into four major categories, as follows:

Source & Account

Our Source & Account services include finance and accounting services for accounts payable, accounts receivable, procurement, travel and expense administration, general ledger, cash and banking/treasury, as well as fixed asset accounting services. We also provide procurement services, including RFP management, vendor aggregation, purchasing, supplier contract management, and e-procurement capabilities.

Pay & 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 Pay & Reward services in the payroll area include time and attendance reporting, on and off-cycle pay, garnishments, tax calculations and reporting, severance and leave arrangements, and related accounting. Compensation services include administration of salary, bonus and stock option programs, elections, and total rewards

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statements. Benefits services include support for program design, delivery and administration activities including enrollment, record keeping and reconciliation, benefit accounting, supplier sourcing and management, and claims administration assistance 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, hire and on-boarding administration. Our flexible staffing services include needs identification, resource selection and placement, time administration, invoicing, and conversion to hire, and reporting and compliance assistance.

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 course catalog administration, event scheduling and logistics, sourcing, evaluation and assessment, and accounting. Our expatriate global mobility services include plan assignment, and support for candidate selection, pre-departure preparation, on assignment support, repatriation, and post-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.

Multi-Process Outsourcing^SM Operational Platform

We deliver our process management services through our Multi-Process Outsourcing^SM platform, which includes: MultiClient, MultiCenter, MultiChannel, MultiShore and MultiShift capabilities. Our 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. The enabling components include:

Client Service Centers

We have eight client service centers in North Carolina, Tennessee, Texas, Canada, Scotland, England, Brazil and India. These centers house the majority of 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, accounts payable management, 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. These centers are intended 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. Our Multi-Process Outsourcing^SM platform is designed to enable us to distribute work across our international network of service centers and among vendors as efficiently as possible based upon the tasks being performed, staff training and expertise, costs, regulatory issues, language, and other factors.

In connection with various client engagements, we acquired the Texas center at the end of 1999, the North Carolina center in 2001, the Tennessee center in 2002, and the Canada center in 2003. Each of these centers had provided some services for the client before we acquired it. We established the Scotland center specifically to accommodate our United Kingdom service center requirements. We established a service center in India to pursue further globalization and to provide additional service capabilities to current and future clients. The India center began 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 provide services for existing and future clients. We acquired the service centers in England and Brazil in connection with our acquisition of certain of PricewaterhouseCoopers’ (“PwC”) international BPO operations in June of 2003. We are continuing to invest in the development of these centers into multi-service, multi-client environments that utilize our Exult Service Delivery Model^SM, or 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 has contributed to our ability to transition new client processes to our service delivery relatively quickly.

We expect that our existing service center capacity can accommodate significant expansion 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

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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 and Production Applications

In order to deliver comprehensive, integrated HR-led 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 sophisticated software applications and database tools for their HR and F&A information systems, including programs licensed from PeopleSoft USA, Inc. and SAP AG, as well as certain legacy systems developed by our clients in lieu of or supplementing the features of third-party packages. Some of these systems must be replaced or consolidated and others require substantial integration. In most cases, significant work is required to interface and integrate the client’s systems with our systems as appropriate for our contracted services. We assist in these processes, both directly and through vendors we supervise, so that the combination of our systems and our client’s internal information systems provide us with an adequate platform for integrated process management.

In addition, 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 manner that permits multi-sourcing from various temporary staffing suppliers. 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.

Our Multi-Process Outsourcing^SM solution 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 offering incorporates the services of third-party vendors in two important ways. First, our process management contracts may include certain services previously provided to the client by third-party vendors. At the time we commence services, we generally assume responsibility for the services provided by these vendors. We frequently provide these services by continuing to utilize the third-party vendors then in place and obtaining assignment of their contracts to us. Alternatively, in some instances, we assume responsibility for managing certain third-party vendors rather than assuming responsibility for their services. 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, replace the vendor with a new third-party provider, or, in those instances where we are responsible for providing the services, take over provision of the services ourselves.

Second, in addition to the third-party vendors who had preexisting relationships with our clients, we also utilize selected third parties to complement our integrated service offering with specialized services that can be more effectively and efficiently provided by third parties rather than through our internal resources. For example, we currently outsource background checks, outplacement, management of various pension and benefit arrangements and some elements of 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 third-party vendor contracts. In addition to changing the supply chain for third-party HR vendors in ways that benefit our clients and generate margin for us, our client base and integrated management of supplier relationships can provide to vendors who work with us a beneficial sales channel and opportunities to reduce their sales, invoicing and administrative costs.

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Business Process Outsourcing Clients and Contracts

Summary

We have a number of business process outsourcing contracts, the majority of which we entered into directly and the balance of which we acquired from PwC in June 2003. Our contracts with Bank of America Corporation, BMO Financial Group (operating in Canada through its Bank of Montreal subsidiary and in the United States through its Harris Bank subsidiary), BP p.l.c., International Paper Company, and Prudential Financial are large contracts covering broad scopes of services. These contracts provided approximately 92% of our revenue in 2003, and we expect these same clients continue to provide the bulk of our revenue in 2004. Our contracts with Algar, Circuit City Stores, Inc., Equifax, McKesson Corporation, Pactiv Corporation, Safeway U.K., Standard Chartered Bank, Unisys Corporation, Universal Music Group, and Vivendi Universal Entertainment, are smaller in size and scope. We pursue large contracts because they facilitate growth and because our experience, broad service offering and Multi-Process Outsourcing^SM operating platform enable us to compete effectively for this business. We also pursue smaller contracts because they are quicker and less expensive to implement, and they allow us to initiate work with marquee clients offering long-term prospects for scope expansion. Smaller contracts also help us maximize the utilization of our resources.

In 2003, we entered into outsourcing agreements with BMO Financial Group, Circuit City Stores, Inc., McKesson Corporation, Universal Music Group, and Vivendi Universal Entertainment. Including these contracts as well as the contracts we acquired from PwC in June 2003, we now support approximately 600,000 client employees through one or more of our services. We process approximately 15 million payroll transactions per year for our clients, with aggregate annual payroll of approximately $21 billion. We recruit approximately 40,000 employees and handle approximately 310,000 learning enrollments per year. We process approximately $35 billion per year in accounts payable transactions for our clients.

The table below shows, for our five largest broad-based contracts, the contract date, the anticipated base term, and the approximate number of employees affected by our services. Not all employees of a client have access to, or benefit from, all services we provide to that client. The number of employees affected by our services 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 the number of employees affected do not necessarily correlate to changes in anticipated revenue or margins attributable to a contract. Our contracts with Bank of America Corporation, BP p.l.c., and International Paper Company each provided more than 10% of our revenue for 2003, and we expect each to provide more than 10% of our revenue for 2004 as well. Our contracts with BMO Financial Group and Prudential Financial could also each provide more than 10% of our 2004 revenue, depending upon service volumes for them and the overall level of 2004 revenue. Revenue from each client is variable and client contracts are terminable under various circumstances, so we cannot predict with certainty the level of revenue from any particular client.

Contract Terms

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

Responsibilities and Performance Commitments

Most of the contracts cover multiple processes — some more than others. For each in-scope HR process, we specifically agree upon the responsibilities that we perform and the related responsibilities retained by 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 its particular employment practices, business rules, pay and benefits plans, 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 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, or to terminate the services at issue, or the agreement, for serious repeated failures.

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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 contractually obligated discounts from the cost that the client incurred to provide those services internally. Our discounts have varied among clients to some extent due to variations in the level of optimization the client had achieved before outsourcing, the overall volume of work, the extent of up-front and ongoing investments we assume in our pricing, and factors relating to the systems supported, jurisdictions involved, tax effects, service complexity, service locations, and other factors. For indirect or third-party services, we have also agreed to pricing mechanisms that are intended to provide savings to our clients, with the form of such savings resulting from either (i) “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, or (ii) reduced costs realized from our “insourcing” third-party work when we replace vendors with our resources. In the future, we may utilize additional pricing mechanisms. For example, we anticipate increased use of unit-based pricing, which maximizes clients’ flexibility, and we may offer guaranteed savings to clients on our assumption or management of third-party vendor arrangements.

We also provide some services, including project work, on a transaction basis, or case-by-case at negotiated time and materials rates.

Termination

Most 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, generally ranging from one to five years from contract signing. In case of termination for convenience, the client is generally required to provide six to 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 to compensate for the overall adverse impact to us, including the revenue or profit that could be lost as a result of contract termination and any write-off of un-recovered assets including but not limited to software, unbilled receivables and intangible assets associated with that contract at the time of termination. Conversely, early termination could result in the recovery of deferred revenue, if any, associated with the contract at that time.

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.

Sales and Marketing

The value proposition we offer to potential clients includes various elements, including our experience as the innovator and leading provider of HR-led BPO services, our record of providing high-quality services to improve the HR and F&A experience of our clients and their personnel, our responsiveness to each client’s unique concerns and our flexible approach to adapting our service offering, our service innovation, our willingness to make service quality commitments, and our ability to help reduce client costs by

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sharing transition expenses and delivering services at lower cost. Generally, clients seek initial savings of 15-25%, including savings over efficiencies that they believe they could have achieved over the life of the contract if they had not outsourced. Our ability to deliver cost savings to our clients while earning a margin depends upon the pricing we are able to negotiate with the client, which is often a function of the client’s historical costs of providing the services outsourced to us, and our ability to minimize delivery costs through process improvement and technology and infrastructure savings. We must continue to improve our service delivery capabilities and reduce our delivery costs, and we seek to do so through operational discipline and innovation. It is critical for us to strike the appropriate balance between efficient operations and first-time quality in our service delivery.

Our sales efforts target senior executives of potential clients through professional relationships and introductions, and through inquiries directly received from the client prospect. These inquiries can be in the form of information meetings or Requests for Proposals (“RFPs”). 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. Once we have identified a prospect, we work with the prospect and its third-party advisors to create potential solutions.

We have focused our marketing efforts on creating awareness of the comprehensive nature of our solution, our Multi-Process Outsourcing^SM operational platform and establishing us 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 us as the leading provider of comprehensive HR-led BPO 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.

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.” Frontlog represents our estimate of revenue potential from qualified client prospects with which we are in discussion regarding an outsourcing contract, as characterized by a confidentiality agreement, a letter of intent, a very small group of serious bidders, or other factors. Qualified prospective clients are those who meet our criteria for scope, number of employees and access to decision makers. 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.

Our current operations are in the U.S., Canada, England, Scotland, Brazil, India, Hong Kong and Singapore. 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 or cause us to expand our existing offices overseas. 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.

Competition

As of December 2003, According to Data & Analysis from the Everest Group, an independent BPO sourcing and advisory firm, for HR BPO contracts among Global 500 companies with 20,000 or more employees, Exult has the market leading position with a market share approximately of 40%. Our next closest competitor has a market share of approximately 10%. However, in the last three years, we have seen rapid and significant change in the market for our services. Market acceptance of the HR-led BPO service offering has developed and demand has increased. Our progress to date and the experiences of other service providers have provided evidence of the market’s viability. Growth in demand for integrated HR-led process management services exceeds our capacity to absorb new business. The number of serious competitors has increased and the nature of competition has changed.

To win new business, our first challenge has been to convince potential clients to choose outsourcing over internal solutions. For clients that decide to outsource, we have for some time viewed our current and potential competitors as including technology outsourcers, single-service providers, and consulting firms that are expanding their offerings to include broad HR offerings. Recently, large technology and process outsourcers and a few companies that built strong businesses and reputations providing payroll or benefits-related services have committed themselves to our market, made substantial infrastructure investments, and signed major contracts to provide HR BPO services. As a result, we believe that there are now between five and ten competitors that any company contemplating HR-led business process outsourcing might view as potentially viable providers. We expect that market experience to date and the predicted growth of the HR outsourcing market will continue to attract and motivate more competitors. In addition, we believe there will be future consolidation in our market, which could affect competition in ways that may be beneficial or adverse to us. Additional information about risks to us resulting from competitive conditions in the market is set forth in “Risk Factors.”

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Employees

As of January 31, 2004, we employed approximately 2,424 people, including approximately 1,978 in our client service centers, approximately 271 in information technology, approximately 15 in consulting and approximately 160 in general & administrative roles. Approximately half of our employees were outside the U.S. as of January 31, 2004.

Available Information

Our new Internet address is www.exult.com as we have recently acquired this domain name. www.exult.net continues to be operational. 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.

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 relatively brief operating history and our future operating results are uncertain.

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

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

We expect our contracts with Bank of America Corporation, BMO Financial Group, BP p.l.c., International Paper Company, and Prudential Financial to provide most of our revenue through 2004 and possibly in future periods. For fiscal 2002 and 2003, these clients collectively accounted for approximately 95% and 92%, respectively, of our revenue. We believe our ability to secure future clients and revenues will be largely dependent upon our ability to perform and achieve the contracted service levels and cost savings for our current clients.

Each of our process management contracts can be terminated by the client for convenience after a specified portion of the term has elapsed, upon required notice and, in many cases, payment of specified early termination penalties. The point at which a contract may be terminated for convenience varies from client to client, generally ranging from one to five years from contract signing. That point has passed for some clients, including Bank of America Corporation, BP p.l.c. and Unisys Corporation. 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 overall adverse impact to us, including revenue or profit that could be lost as a result of contract termination by the client and any write-off of assets including unbilled receivables and intangible assets associated with that contract at the time of termination. Conversely, early termination could result in the recovery of deferred revenue, if any, associated with the contract.

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

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each contract, could permit a client to assess significant monetary penalties against us, or, depending on the terms of the contract, terminate the contract in whole or part without further payment to us.

As our business matures, the original terms of our major contracts will begin to expire. For example, our agreement with BP p.l.c. now has a termination date of December 2006. 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.

From time to time, our clients may acquire other companies, or be acquired themselves. These acquisitions may present opportunities for clients to re-evaluate the extent to which they will continue outsourcing their HR and other business processes to us, and it is possible that an existing client may decide to increase or decrease the amount of business it outsources to us or terminate the outsourcing relationship in its entirety for convenience as a result of such a transaction. For example, acquisition activity by BP p.l.c resulted in increased business for us, and divestitures by Prudential Financial reduced our volumes on that contract. It is not yet clear what effect the announced merger of Bank of America Corporation and FleetBoston Financial Corporation may have, although Bank of America has informed us that, as part of its merger integration planning, it is reviewing various alternatives for the provision of HR BPO services to the new post-merger organization, including certain services we currently provide and potential new services.

If any of our major clients were to substantially reduce or stop using our services, or if we experience significant, repeated performance failures, our reputation and future revenues would be seriously impaired. Furthermore, any termination or significant reduction in scope of a client contract could lead to a significant earnings charge if we determine that the recoverability of assets associated with that contract, such as intangibles related to contract acquisition and transition, is impaired, or as a result of write-off of unbilled receivables associated with that contract. We expect to face similar risks with other significant clients until our business is more firmly established and our client base is more diversified.

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

Our revenue expectations may decrease. We maintain estimates of our aggregate anticipated revenue for our entire contract base, and from time to time we disclose some of these estimates. These estimates change as our contracts evolve, and a number of factors can cause our revenue expectations to decrease. While our client contracts generally include commitments by clients regarding service scope and pricing, there are also provisions pursuant to which billings can increase or decrease in response to changes in the client’s organization. Further, other factors give clients leverage to renegotiate price and other terms with us, such as the right to terminate for convenience, our desire to obtain additional business from the client, looming expiration of the contract, negotiation over potential penalties associated with service level issues, and our general desire to be responsive to clients’ business needs. In this context, various circumstances can lead to reduction in revenues from any particular client, including: client financial difficulties or business contractions or restructurings that lead to reductions in workforce or discretionary spending on services such as staffing and training; amendments agreed to by us which reduce the scope or revenue for services; early termination of client contracts in whole or part, whether resulting from adverse developments in the client’s business or the client’s exercise of discretion; insourcing or retention by the client of processes previously contracted to us (subject to our approval when required under the terms of the contract); non-assignment to us of third-party vendor contracts that we initially envisioned taking over from the client; and other circumstances within the client’s organization that are beyond our control. In addition, our receipt of revenue under any particular contract may be delayed if transition of the client’s processes to our infrastructure takes longer than anticipated. While our contracts with our clients may contemplate further expansion, this may not occur, and if it does occur, significant additional expenditures by us may be required to fund such expansion. In addition, our process management contracts generally permit our clients to impose financial penalties against us for specified material performance failures.

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

Achieving the efficiency we need to sustain and increase our profitability depends upon our ability to continue to develop our process operations and our operational platform into a standardized management system that can be operated from our client service

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centers and extended to multiple clients with limited client-specific adaptation and modification. The actual cost reductions we are able to achieve will vary by client for a variety of reasons, including the scope of services we agree to provide and the existing state of our clients’ departments and processes. If we miscalculate the resources or time we need to perform under any of our contracts, or if our transformation efforts are not as successful as we anticipate, the costs of providing our services could exceed the fees we receive from our clients, and we could lose money.

We use our operational platform to distribute our work across our international network of service centers and among vendors, including overseas vendors, as efficiently as possible based upon the tasks being performed, staff training and expertise, costs, regulatory issues, language, and other factors. This practice is critical to our business plans and we expect to continue and increase it. Some clients and potential clients may resist this approach to work distribution because of concerns about service quality, data security, legal and cultural issues, and other reasons. Regulatory and political factors may also cause difficulties as “offshoring” is blamed for job losses in the U.S. and Europe. Disruption of our work distribution methods, including limitations on our ability to use overseas vendors or to move work among our multi-shore locations, as well as unique operating costs to manage and coordinate work across international centers and to satisfy regulatory requirements for global operations, would increase our costs and adversely affect our profitability. Overseas vendors may be difficult to manage and require significant investments in monitoring and systems integration. If we have disputes with overseas vendors it may be difficult for us to enforce our rights, and replacing overseas vendors may involve delay and expense.

Our use of vendors presents liability risks, revenue volatility and margin pressures. Approximately half of our 2003 revenue was attributable to services we offer to our clients which we fulfill through the use of third-party vendors that provide specialized services, such as temporary staffing, training, learning content, benefits administration and relocation services. We select some of these vendors and assume others from relationships established by our clients before contracting with us. These vendors may act as subcontractors or vendors to us or provide services directly to our clients under our control; in either case, we have certain contractual responsibilities for the delivery and acceptability of these services, and errors or omissions, service failures, breach of contract or insolvency by our vendors could cause us to have liability to our clients. This liability could exceed the limits of liability the vendors have to us. If our clients are not satisfied with the services provided by these third-party vendors, they may be entitled to recover penalties or to terminate their agreements with us, which could seriously harm our business.

Approximately half of the revenue derived through the use of third parties is quite variable in nature. The revenue attributable to temporary staffing is particularly variable as clients order such services on an as-needed basis. This can cause material changes in our revenue growth rates, although the impact on profit is far less significant.

Further, targeted operating margins are more difficult to achieve in the portion of our revenue attributable to third-party vendors. Our third-party vendor business is composed of several different types of processes across numerous vendors. In many cases, our initial cost of paying these vendors is equal to our revenue attributable to their services. In order to generate targeted operating margins and realize a profit from revenue received in connection with these third-party vendor contracts, we must reduce these vendor costs by rationalizing and consolidating the vendors, improving efficiencies, obtaining more favorable pricing, or performing the services ourselves at a lower cost. This may involve delay as existing contracts run their course and we attempt to renegotiate with or replace these vendors. In addition, at the conclusion of these third-party contracts, we must negotiate new third-party contracts, or provide these services ourselves, at the same or more favorable rates in order to generate our target operating margins.

We may also need our clients’ consent to substitute new vendors or ourselves for previous vendors, either because of contractual provisions or operational concerns. We are still developing our third-party vendor management capabilities, and our efforts may lead to varying results depending upon the process, vendor, and client involved and other factors. To date, our operating margins on the portion of our revenue attributable to services provided through third-party vendors have been limited. Accordingly, until we are able to develop substantial portions of our third-party vendor business to the point that it generates meaningful operating margins, our overall margins and profitability will rely upon strong performance in the “direct” process management and project services that make up the balance of our revenue.

Our service delivery infrastructure is evolving and requires ongoing development.

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

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In addition to client-specific infrastructure requirements, we face general development imperatives. As our market becomes more competitive, it becomes increasingly important to us to continue to innovate. We must reduce our costs of delivery year over year to enable us to meet competitive pricing pressures. We must maintain our service quality competitive advantage by continuing to reduce process cycle times and work output variability in our operating facilities. We must deliver new and better information and analytics to help clients obtain maximum benefit from our services. We must develop our ability to provide services in different parts of the world through an infrastructure that takes advantage of common resources and methodologies, but accounts for linguistic, cultural, geographic, and regulatory differences. We must broaden the scope of services we offer clients. And we must maintain a configurable service offering that has the flexibility to accommodate clients’ divergent demands and priorities. Failure to meet these challenges will weaken our competitive position and adversely affect our financial results.

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

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

From the time we begin providing services under a long-term outsourcing contract until the contract reaches operational stability, we limit the amount of revenue recognized under our proportional cost methodology to amounts that have been or can be currently billed under the terms of the contract. Once the contract reaches operational stability, we discontinue this limitation and adjust the cumulative revenue recognized to date for that contract to fully reflect the then-current estimates of profitability for the contract over its term. Thereafter, we recognize revenue and profit as work progresses based upon the proportion of costs incurred to total expected costs for the life of the contract. This results in unbilled receivables to the extent that revenue recognized exceeds billings. Later in the contract term, the amount of unbilled receivables associated with that contract will diminish as billings exceed revenue recognized. However, if a contract were to terminate early, any unbilled receivables, together with any other client-specific capitalized costs associated with that contract, would need to be written off in the period in which termination occurs to the extent that they exceed termination payments we are entitled to recover. Termination payments may not be sufficient to defray the entire unbilled receivable and any other client-specific capitalized costs, and the net write-off may be significant and could have a material adverse effect on our results of operations. Furthermore, cessation of payments by a client under a contract for which we have client-specific capitalized costs, including outstanding unbilled receivables, because of insolvency, legal claims or other factors, would have similar consequences. As of December 31, 2003, we had unbilled receivables of approximately $30 million, slightly more than half of which was associated with our contract with Bank of America. We expect unbilled receivables to increase as our business grows and as our ability to estimate cost reductions in future periods with greater certainty results in extending the period over which future anticipated reductions in our costs to perform under long-term contracts are factored into our estimates of contract costs.

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

New reporting standards may require us to adopt different accounting, which may adversely affect our revenues and results of operations.