Edgar Filing: BEARINGPOINT INC

Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-31451

BEARINGPOINT, INC.

(Exact name of registrant as specified in its charter)


DELAWARE		22-3680505
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1676 International Drive, McLean, VA		22102
(Address of principal executive office)		(Zip Code)

(703) 747-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12 (b) of the Act: None

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

Common Stock, $.01 Par Value

Series A Junior Participating Preferred Stock Purchase Rights

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. YES ¨ NO x

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

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES x NO ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

As of June 30, 2004, the aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing price of such stock on the New York Stock Exchange on June 30, 2004, was approximately $1.7 billion.

The number of shares of common stock of the Registrant outstanding as of January 3, 2006 was 201,537,999.

EXPLANATORY NOTE

This Form 10-K includes (i) restated financial statements and related selected financial information for the six-month transition period ended December 31, 2003 and for the fiscal years ended June 30, 2003 and 2002, (ii) restated selected financial information for the fiscal year ended June 30, 2001, and the five-month period ended June 30, 2000, and (iii) restated selected financial information for the quarterly periods corresponding to the six-month transition period ended December 31, 2003 and to the fiscal years ended December 31, 2004 and June 30, 2003, to correct accounting errors and departures from generally accepted accounting principles (“GAAP”) in those periods. This filing includes the initial issuance of our financial statements for the year ended December 31, 2004, which have not previously been issued and are not restated. The restated financial statements for the fiscal year ended June 30, 2002 and restated selected financial data relating to the fiscal years ended June 30, 2002 and 2001 and five-month period ended June 30, 2000 are unaudited and, in the opinion of management, have been prepared in accordance with accounting principles generally accepted in the United States of America and reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of results for these periods.

The restated financial statements include a number of restatement adjustments, relating to errors in the accounting for revenue, intercompany loans, leases, employee global mobility and tax equalization, property and equipment, accounts payable, accruals, expense cut-off, stock options, income taxes and other miscellaneous items. The restatement adjustments increased our net loss and loss per share for the six months ended December 31, 2003 by approximately $10.8 million, or $0.05 per share, reduced our net income and earnings per share for the fiscal year ended June 30, 2003 by approximately $8.6 million, or $0.04 per share, and increased our net loss and loss per share for the fiscal year ended June 30, 2002 by approximately $14.6 million, or $0.09 per share. In addition, the restatement adjustments impacted our previously filed financial statements for the quarterly periods during the fiscal year ended December 31, 2004, the six-month period ended December 31, 2003, and the fiscal year ended June 30, 2003.

For a discussion of the individual restatement adjustments and the impact of the restatement adjustments on our previously filed financial statements, see Note 3, “Restatement,” and Note 20, “Results by Quarter (Unaudited),” of the Notes to Consolidated Financial Statements.

In addition to the restatements reported in this Annual Report on Form 10-K, certain of these restatements will also be reported in future amendments to our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2004, June 30, 2004, and September 30, 2004 and will include restatements for the quarterly periods ended March 31, 2003, June 30, 2003 and September 30, 2003. As we have included (i) restated financial statements and related selected financial information for the six-month transition period ended December 31, 2003 and for the fiscal years ended June 30, 2003 and 2002, (ii) restated selected financial information for the fiscal year ended June 30, 2001, and the five-month period ended June 30, 2000, and (iii) restated selected financial information for the quarterly periods corresponding to the six-month transition period ended December 31, 2003 and to the fiscal years ended December 31, 2004 and June 30, 2003, we plan not to file any other amendments to our previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q except as described above.

With respect to the restated financial statements for the fiscal year ended June 30, 2002, the Company is evaluating whether it will complete an audit on such restated financial statements.

TABLE OF CONTENTS


	Description	Page Number
	Part I.

Item 1.	Business	4
Item 2.	Properties	15
Item 3.	Legal Proceedings	15
Item 4.	Submission of Matters to a Vote of Security Holders	18

	Part II.

Item 5.	Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities	19
Item 6.	Selected Financial Data	25
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	69
Item 8.	Financial Statements and Supplementary Data	71
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	153
Item 9A.	Controls and Procedures	153
Item 9B.	Other Information	159

	Part III.

Item 10.	Directors and Executive Officers of the Registrant	160
Item 11.	Executive Compensation	163
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	179
Item 13.	Certain Relationships and Related Transactions	183
Item 14.	Principal Accountant Fees and Services	184

	Part IV.

Item 15.	Exhibits, Financial Statement Schedules	186

Signatures		194

PART I.

ITEM 1. BUSINESS

General

BearingPoint, Inc. (generally referred to below as “we” or the “Company”) is one of the world’s largest management consulting, systems integration and managed services firms serving government agencies, Global 2000 companies, medium-sized businesses and other organizations. We provide business and technology strategy, systems design, architecture, applications implementation, network infrastructure, systems integration and managed services. In North America, we provide consulting services through industry groups in which we have significant industry-specific knowledge. Our focus on specific industries provides us with the ability to better tailor our service offerings to reflect our understanding of the marketplaces in which our clients operate. Our operations outside of North America are organized on a geographic basis, with operations in Latin America, the Asia Pacific region, and Europe, the Middle East and Africa (“EMEA”). We utilize this multinational network to provide consistent integrated services throughout the world. Beginning in 2007, we intend to align our geographic business units more closely with our North American industry groups as we intend to manage our businesses globally through three industry groups, Public Services, Commercial Services and Financial Services. Our service offerings are designed to help our clients generate revenue, reduce costs and access the information necessary to operate their business efficiently.

We were incorporated as a business corporation under the laws of the State of Delaware in 1999. We were part of KPMG LLP, one of the former “Big 5” accounting and tax firms. In January 2000, KPMG LLP transferred its consulting business to our Company. In February 2001, we completed our initial public offering, and on October 2, 2002, we changed our name to BearingPoint, Inc. from KPMG Consulting, Inc. Our principal offices are located at 1676 International Drive, McLean, Virginia 22102-4828. Our main telephone number is 703-747-3000.

During the first quarter of the fiscal year ended June 30, 2003, we significantly expanded our European presence with the purchase of KPMG Consulting AG (subsequently renamed BearingPoint GmbH (“BE Germany”)), which included employees primarily in Germany, Switzerland and Austria. We furthered our global expansion by engaging in purchase business acquisitions relating to all or portions of selected Andersen Business Consulting practices in Brazil, Finland, France, Japan, Norway, Peru, Singapore, South Korea, Spain, Sweden, Switzerland, and the United States, as well as the consulting practice of the KPMG International member firm in Finland and also strengthened our Latin American business with the acquisition of Ernst & Young’s Brazilian consulting practice. By significantly expanding our global reach, we improved our ability to serve clients around the world while diversifying our revenue base.

On February 2, 2004, our Board of Directors approved a change in our fiscal year end from a twelve-month period ending June 30 to a twelve-month period ending December 31. As a requirement of this change, the results for the six-month period from July 1, 2003 to December 31, 2003 are reported as a separate transition period.

Certain Developments in Late 2004, 2005 and 2006

Late Filings

We did not file our Annual Report on Form 10-K for the period ended December 31, 2004 by March 16, 2005 because we experienced significant delays in completing our consolidated financial statements for the year ended December 31, 2004. Such delays were primarily a result of:

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The need to perform significant substantive procedures to compensate for the material weaknesses in our internal control over financial reporting;

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The additional time required for us to complete our expanded financial statement close procedures in a number of areas, including revenue recognition, tax equalization, and accrual of invoices;

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The additional time required to perform a substantive review of the majority of our contracts and other financial records;

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The need to validate information derived from our financial accounting system for our North America operations implemented in April 2004; and

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Our continued efforts to complete our management’s assessment of internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act.

We have not filed our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005 because we experienced significant delays in completing our consolidated financial statements for the year ended December 31, 2004 and our condensed consolidated financial statements for these quarters. Once we file the amendments to the Forms 10-Q for 2004, we plan to file our Forms 10-Q for the first three quarters of 2005 as soon as practicable thereafter. In light of the resources allocated to completing the 2004 Form 10-K and expected to be allocated for the completion of the amendments to the Forms 10-Q for 2004 and the Forms 10-Q for 2005, we expect that we will not be able to timely file our 2005 Form 10-K by March 16, 2006. We plan to file our 2005 Form 10-K as soon as practicable thereafter.

Internal Control Over Financial Reporting

The evaluation of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act identified a number of material weaknesses. As a result, our management has concluded that we did not maintain effective internal control over financial reporting as of December 31, 2004. For more information about our internal control over financial reporting, see Item 9A, “Controls and Procedures” of this Form 10-K.

Restatements

In connection with the audit of our 2004 financial statements, we performed significant substantive procedures to compensate for the material weaknesses in our internal control over financial reporting. On April 20, 2005, we announced that, as a result of performing these additional procedures, we had identified errors in certain of our previously issued financial statements. We also announced that senior management had determined that the financial statements filed with our previously issued reports on Form 10-Q for each of the first three quarters of fiscal year 2004, Form 10-K for the six-month transition period ended December 31, 2003 and Form 10-K for the fiscal year ended June 30, 2003 should not be relied upon because of errors identified in those financial statements. Consequently, this Form 10-K includes (i) restated financial statements and related selected financial information for the six-month transition period ended December 31, 2003 and for the fiscal years ended June 30, 2003 and 2002, (ii) restated selected financial information for the fiscal year ended June 30, 2001, and the five-month period ended June 30, 2000, and (iii) restated selected financial information for the quarterly periods corresponding to the six-month transition period ended December 31, 2003 and to the fiscal years ended December 31, 2004 and June 30, 2003 to correct accounting errors and departures from generally accepted accounting principles in those periods. This filing includes the initial issuance of our financial statements for the year ended December 31, 2004, which are not restated. The restated financial statements for the fiscal year ended June 30, 2002 and restated selected financial data relating to the fiscal years ended June 30, 2002 and 2001 and five-month period ended June 30, 2000 are unaudited and, in the opinion of management, have been prepared in accordance with accounting principles generally accepted in the United States of America and reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of results for these periods. See Note 3, “Restatement,” of the Notes to Consolidated Financial Statements for more information regarding the restatements. See also Note 20, “Results by Quarter (Unaudited),” of the Notes to Consolidated Financial Statements for a summary of the impact of the restatements on our previously issued quarterly information.

Audit Committee Investigation

As disclosed in a press release issued on July 20, 2005, the Audit Committee of the Company’s Board of Directors, advised by special counsel, has been conducting an investigation (the “Audit Committee Investigation”) into issues reported on the Company’s Form 8-K Reports filed March 18 and April 20, 2005, issues relating to the operations of specific international subsidiaries and certain issues that were brought to the attention of the Audit Committee and the Company’s independent registered public accountants, PricewaterhouseCoopers LLP, through a non-executive employee communication to them. The Audit Committee Investigation, which included interviews with more than 125 current and former employees and extensive forensic work in connection with the Company’s North America Operations, as well as its operations in certain foreign countries, is now complete.

The Audit Committee Investigation focused on five primary areas of inquiry. First, issues concerning financial controls that were raised through the non-executive employee’s communication, including circumventions of controls implemented in the Company’s North American financial reporting system (OneGlobe), which was rolled out on April 1, 2004, changes in the reporting chain of contract analysts, and alleged inadequate security with respect to the OneGlobe system. Second, the timing, appropriateness of judgments and disclosures relating to the impairment of goodwill in the Company’s Europe, Middle East and Africa (“EMEA”) region. Third, issues concerning the propriety of accounting practices and controls in certain countries in the Company’s Asia Pacific region. Fourth, issues concerning potential violations of law in connection with doing business with state-controlled entities in the People’s Republic of China. Finally, a survey of other global operations to determine the likelihood of additional internal control or other issues concerning business dealings with state-controlled entities.

The Audit Committee Investigation concluded that the overall compliance and internal control environment at BearingPoint, Inc. as of December 31, 2004, presented an unacceptable risk for the Company, and that financial pressures and management instability contributed to these control deficiencies.

With respect to the issues raised by the non-executive employee concerning the Company’s financial controls in its North America operations, by mid-2004, the Audit Committee Investigation concluded that the internal controls of BearingPoint were placed under increased stress as a result of the premature introduction of the OneGlobe accounting system in North America; and that the OneGlobe System had not been adequately pre-tested, training was inadequate, and the system did not provide for timely reporting of revenues. As a result, the Audit Committee Investigation determined that the system was bypassed on numerous occasions in order to close the second quarter of 2004. The Audit Committee Investigation did not conclude that the employees involved in the bypass intended to distort revenue; nor were there any substantial distortions in revenue that actually occurred. Moreover, the Company has implemented a series of changes designed to strengthen internal controls with respect to revenue recognition. Although many of the issues raised by the bypassing of the OneGlobe System in 2004 have been addressed through subsequent improvements and enhanced training for the OneGlobe System, these 2004 actions still represent a significant and troublesome failure of the Company’s internal controls in that year.

With respect to the impairment of goodwill in EMEA, the Audit Committee Investigation identified no reason to question the Company’s testing processes and pertinent disclosures in 2004 and 2005 concerning the possible impairment of “goodwill”—attributable to the Company’s EMEA operations. The impairment of goodwill in EMEA appears to be due primarily to a failure to meet prior EMEA management’s projections, which were based on limited historical experience in that segment. The Company acquired many of its operations in EMEA by acquisition in 2002. The Audit Committee Investigation found that the Company’s testing process—which has resulted in a goodwill impairment charge of $397.1 million—is based on appropriate and in-depth work and analysis performed by the Company’s management and valuation testing personnel.

With respect to the Company’s Asia Pacific operations, various problems that arose in 2004 in the Asia Pacific region (particularly Australia, Japan and China) represent significant failures in the financial reporting

systems in place for the Company’s operations in that region. Specifically, personnel at all levels in certain countries, often at the instruction of senior regional management, bypassed controls designed to ensure accurate financial reporting. As a result, the utilization data reported for the Company’s operations in China and Japan for 2004 cannot be relied upon. The Audit Committee Investigation concluded that the manipulation of hours charged and other financial reporting practices was motivated by a desire to meet a Company objective of increased utilization for the Company’s operations in China and Japan. In addition, internal controls in Australia were deficient in that they failed to identify and remedy in a timely manner the improper actions of a senior person in Australia who inaccurately characterized a significant amount of unrecoverable accounts receivable and unbilled revenue as current.

The Audit Committee Investigation concluded that much of the misconduct relating to financial reporting practices in the Asia Pacific region during 2004 can be attributable to the wholly deficient “tone at the top” set by former firm management in this region, particularly in China and Japan. Indeed, in some cases, the Audit Committee Investigation concluded that the personnel of the Company’s subsidiaries in these countries bypassed controls at the express direction of Managing Directors in these countries. These leadership failures contributed to an environment in 2004 where serious misconduct, including padding of utilization numbers, occurred in China and Japan in 2004. The Company’s operations in the Asia Pacific region now are under new leadership, and the Company has already taken a number of steps to remediate the deficient financial reporting practices in the region.

In addition to the weaknesses in internal controls in China, certain other internal control issues in the Company’s China operations have resulted in potential exposure to liability under the Foreign Corrupt Practices Act (“FCPA”). BearingPoint China formerly maintained a subcontractor relationship with an entity that may have made inappropriate payments to current and former employees of state-owned enterprises in China. This relationship was terminated in October 2005 and the details of this relationship have been communicated to government authorities. The Investigation revealed other potential FCPA issues stemming from expenditures—approved by senior employees of BearingPoint China, but not by employees of the Company—for gifts, entertainment and international travel provided to employees of state-owned entities. Although the Audit Committee Investigation did not conclude that the Company engaged in conduct that violated the anti-bribery provisions of the FCPA, the Company’s internal controls relevant to the FCPA present an unacceptable level of risk of exposure for the Company. The review of other subcontractor relationships with state-owned enterprises in China, the rest of the Asia Pacific region, and certain other countries did not uncover any issues of potential wrongdoing.

The Audit Committee has reviewed a detailed Report of Investigation (the “Report”) from special counsel and a forensic and litigation consultant, and this Report has been provided to our Board of Directors, PricewaterhouseCoopers LLP, our independent registered public accountants, and to the staff of the Securities and Exchange Commission (the “SEC”)’s Division of Enforcement. The Report has been reviewed by our management, and its findings have been considered in the preparation of this Form 10-K.

New York Stock Exchange

By letter dated April 4, 2005, we were notified by the NYSE that under current NYSE procedures, we had until nine months from the date our 2004 Form 10-K was required to be filed with the SEC before the NYSE would consider commencing delisting actions. In response to a request letter from us dated December 6, 2005, on December 16, 2005, the NYSE granted us a three-month extension until March 31, 2006 to file our 2004 Form 10-K. The filing of this Form 10-K today is within the time period specified by the NYSE.

Until we are current with all of our periodic reporting requirements with the SEC, the NYSE will identify us as a late filer on its website and consolidated tape by affixing the letters “LF” to our common stock ticker symbol. In addition, we did not comply with the NYSE listing standard that required us to send our annual report to our stockholders no later than April 30, 2005, the date 120 days after the close of our fiscal year.

SEC Investigation

By letter dated April 13, 2005, the staff of the SEC’s Division of Enforcement requested that we produce various documents, including documents concerning internal control deficiencies and prior period adjustments identified in the Form 8-K that we filed on March 18, 2005. On October 1, 2003, under the same informal investigation matter number, the SEC staff had earlier contacted us seeking documents concerning our restatement of certain financial statements issued in 2003. Following that earlier request, we provided documents to, and certain of our personnel met with, the SEC staff. On September 7, 2005, we announced that the SEC had issued a formal order of investigation in this matter. We subsequently have received subpoenas from the SEC staff seeking production of documents and information including certain information and documents related to the Audit Committee investigation described above. We continue to cooperate with the SEC investigation.

Separately, we are providing the SEC Division of Enforcement staff with information and documents regarding the circumstances surrounding our April 20, 2005 filings and announcements in a matter related to third party trading in our securities. The staff of the Market Trading Analysis Department of the NYSE also is reviewing transactions in our stock prior to the filing of our April 20, 2005 Form 8-K.

Annual Shareholder Meeting

We expect to hold our next annual meeting of shareholders after we have filed our 2005 Form 10-K. At this time we do not know when we will hold the shareholder meeting because we are not able to predict when we will be able to complete and file the 2005 Form 10-K.

Changes in Senior Management and Board of Directors

Since November 2004, our senior management team has changed significantly, including, but not limited to, the appointment of Harry L. You as Chief Executive Officer effective as of March 21, 2005, Judy A. Ethell as Executive Vice President—Finance and Chief Accounting Officer effective as of July 1, 2005, and Richard J. Roberts as Executive Vice President and Chief Operating Officer effective as of February 16, 2005. Mr. You also currently serves as our Chief Financial Officer effective as of May 24, 2005.

These changes resulted from a series of departures beginning with our then Chief Executive Officer and Chief Financial Officer who both ceased to serve in these positions in November 2004. We appointed a new Chief Financial Officer in January 2005 who resigned his position in May 2005. Since November 2004, a majority of the members of our executive team has changed.

Since November 2004, Roderick C. McGeary has served as Chairman of the Board of Directors. Mr. McGeary also served as our interim Chief Executive Officer from November 2004 until the appointment of Harry L. You as Chief Executive Officer. After such appointment, Mr. McGeary continues to serve the Company in a full-time capacity, focusing on clients, employees and business partners. In addition, Spencer C. Fleischer was appointed to our Board of Directors effective July 15, 2005 in connection with the issuance of debentures and warrants described under the heading “Financings—Debenture/Warrant Offerings” below.

Restricted Stock Unit Grants

On April 12, 2005, the Compensation Committee of our Board of Directors authorized our Chief Executive Officer to grant restricted stock units (“RSUs”) up to an aggregate amount of $165.0 million under our Amended and Restated 2000 Long-Term Incentive Plan (the “LTIP”) to managing directors and other key employees. The grants were made to better align the interests of these employees with our shareholders, to enhance retention of current managing directors and to improve the recruiting of new managing directors. The awards will be made in three primary tranches representing 30%, 30% and 40%, respectively, of the total RSU award for each employee. The actual number of RSUs granted in each award will be based on the total value of the award divided by the closing price of our common stock on the date of such grant. Other awards will also be made at various grant dates as determined by our Chief Executive Officer.

On or about June 24, 2005, we granted approximately 5.5 million RSUs, of which approximately 5.0 million (net of forfeitures) fully vested on January 1, 2006 and will be settled after we are current in our SEC filings and have a valid registration statement covering the shares to be issued. On December 8, 2005, we granted approximately 5.8 million RSUs, of which approximately 5.4 million (net of forfeitures) vested immediately and 50% will settle on January 1, 2007 and the remaining 50% on January 1, 2008, provided we are current in our SEC filings and have a valid registration statement covering the shares to be issued at such time of settlement. Approximately 2.6 million additional RSUs were granted to certain employees at various dates throughout 2005 under the LTIP. These RSUs generally cliff vest three years from the grant date or vest over two to four years from the date of the grant. We expect to grant additional RSUs during 2006.

For additional information regarding our restricted stock grants, see Note 14, “Capital Stock and Option Awards,” of the Notes to Consolidated Financial Statements.

Financings

Since December 2004, we have completed a series of financing transactions, including raising $690.0 million from issuing convertible subordinated debentures and entering into new credit facilities that enable us to draw up to $150.0 million, subject to certain conditions. Among other things, these financings provided cash to repay our then outstanding $220.0 million aggregate principal amount of senior notes and to repay $135.0 million outstanding under the then existing credit facility. Significant financing transactions from December 2004 through December 2005 are summarized below:

Debenture/Warrant Offerings

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In December 2004/January 2005, we issued $250.0 million in aggregate principal amount of 2.50% Series A Convertible Subordinated Debentures (the “Series A Debentures”) and $200.0 million in aggregate principal amount of 2.75% Series B Convertible Subordinated Debentures (the “Series B Debentures” and together with the Series A Debentures, the “Subordinated Debentures”), each due 2024;

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In April 2005, we issued $200.0 million in aggregate principal amount of 5.00% Convertible Senior Subordinated Debentures due 2025 (the “April 2005 Senior Debentures”); and

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In July 2005, we issued $40.0 million in aggregate principal amount of 0.50% Convertible Senior Subordinated Debentures due 2010 (the “July 2005 Senior Debentures” and together with the April 2005 Senior Debentures, the “Senior Debentures”) and warrants to purchase up to an aggregate of 3.5 million shares of our common stock.

For additional information regarding the debentures and warrants, see Item 5, “Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities-Sales of Securities Not Registered Under the Securities Act.”

Credit Facilities

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In December 2004, we entered into a $400.0 million Interim Senior Secured Credit Agreement (the “2004 Interim Credit Facility”) with Bank of America, N.A., as administrative agent, swingline lender and letter of credit issuer, JPMorgan Chase Bank, N.A., as syndication agent and letter of credit issuer, and certain other lenders;

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In March 2005, we entered into amendments to the 2004 Interim Credit Facility, that among other items, reduced the aggregate commitment of the lenders to $300.0 million;

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In April 2005, in connection with the April 2005 Senior Debenture offering, we terminated the 2004 Interim Credit Facility; except that approximately $87.7 million in letters of credit continued to remain

outstanding, which letters of credit primarily supported our obligations to collateralize certain surety bonds issued to support client engagements. In order to support the letters of credit that remained outstanding under the 2004 Interim Credit Facility, the lenders continued to have a security interest in: (i) $94.3 million of cash, and (ii) our domestic accounts receivable;

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In July 2005, we entered into a $150.0 million Senior Secured Credit Facility (the “2005 Credit Facility”) with UBS Securities LLC, as lead arranger, UBS AG, Stamford Branch, as issuing bank and administrative agent and UBS Loan Finance LLC, as swingline lender, and certain other lenders and guarantors party thereto. Upon our entering into the 2005 Credit Facility, the lenders under the 2004 Interim Credit Facility (i) released all but $5.0 million of cash collateral, and (ii) released their security interest in our domestic accounts receivable; and

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In December 2005, we entered into an amendment to the 2005 Credit Facility, that among other items, extended the time period for filing various periodic reports, including our 2004 Form 10-K to January 31, 2006, and increased the amount of permitted litigation payments.

For additional information regarding the credit facilities, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Lawsuit, Purported Notices of Default and Notice of Acceleration Under Subordinated Debentures

On September 9, 2005, we received a purported notice of default from a law firm that claimed to represent certain entities which, in the aggregate, hold more than 25% of our Series B Debentures. Such law firm asserted that, as a result of our failure to timely file with the SEC our 2004 Annual Report on Form 10-K and our Quarterly Reports on Forms 10-Q for the first and second quarters of 2005, we are in default under the Indenture dated as of December 22, 2004, between the Company, as issuer, and The Bank of New York, as trustee (the “Indenture”), relating to the Subordinated Debentures. The notice of default demanded that we cure the purported default within sixty (60) days from the receipt of the notice of default.

On September 14, 2005, we received a purported notice of default from a different law firm that claimed to represent certain entities, which, in the aggregate, hold more than 25% of our Series A Debentures. This law firm made a similar assertion and demand.

On November 21, 2005, we received a purported notice of acceleration from a law firm that claimed to represent certain holders of our Series B Debentures. The law firm asserted that we had not cured the purported default under the Series B Debentures (as discussed above) within sixty (60) days from the receipt of the notice of default on September 9, 2005, and, as a result, declared that all unpaid principal and accrued interest on the outstanding Series B Debentures was immediately due and payable.

On January 18, 2006, a complaint was filed alleging that we are in default on our Series B Debentures because, among other things, we have failed to make our SEC filings on time. For additional information see Item 3, “Legal Proceedings,” and Note 13, “Commitments and Contingencies,” of the Notes to Consolidated Financial Statements in this Form 10-K.

We do not believe that we have failed to perform our obligations under the Indenture relating to the Subordinated Debentures. Therefore, we believe that the above-mentioned notices of default, notice of acceleration and lawsuit are invalid and without merit. We intend to vigorously defend against this lawsuit.

Unlike indentures of some other public companies, the Indenture does not require us to file our annual and quarterly reports with the SEC within the deadlines set forth in the SEC’s rules and regulations. Under the Indenture, we are required to provide the Trustee with copies of all annual and quarterly reports which we are required to file with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, within 15 calendar days after we file such annual and quarterly reports. We will furnish to the Trustee for the Debentures copies of our 2004 Annual Report on Form 10-K and our Quarterly Reports on Forms 10-Q

for the first and second quarters of 2005 within 15 days after we file such reports with the SEC. We believe that such action will satisfy fully the Indenture provision in question.

Although we do not believe that we are in default under the Indenture, if we were to lose the lawsuit or an event of default were to occur as to one of the series of the Subordinated Debentures, the Trustee or certain holders could declare all unpaid principal and accrued interest on such series of the Debentures then outstanding to be immediately due and payable. The acceleration of one of the series of the Subordinated Debentures may become an event of default, and could lead to an acceleration of unpaid principal and accrued interest, under the Indenture as to the other series of Subordinated Debentures, under the April 2005 Senior Debentures, under the July 2005 Senior Debentures and under the 2005 Credit Facility. If any acceleration of the unpaid principal and accrued interest under the 2005 Credit Facility exceeds $18.0 million, such acceleration may become an event of default in respect of the other series of the Subordinated Debentures and the Senior Debentures and could lead to an acceleration of the unpaid principal and accrued interest on the above-mentioned debentures. In such events, we will not be permitted to make payments to the holders of the Debentures until the unpaid principal and accrued interest under the 2005 Credit Facility have been fully paid. In addition, we will not be permitted to make payments to the holders of the Subordinated Debentures until the unpaid principal and accrued interest under the Senior Debentures have been fully paid. If our borrowings under the 2005 Credit Facility, Senior Debentures or Subordinated Debentures were to be accelerated, there would be a material and adverse effect on our financial condition and business absent waiver, amendment or other restructuring of the relevant agreements.

North American Industry Groups

Our North American operations are managed on an industry basis, where we have significant industry-specific knowledge. This focus on specific industries provides us with the ability to tailor our service offerings to reflect our understanding of the marketplaces in which our clients operate. During fiscal year 2004, we provided consulting services through the following four industry groups:

•

Public Services provides traditional management consulting, managed services and systems integration services to the United States Department of Defense, civilian agencies of the Federal government, public sector healthcare agencies, private sector payor and provider companies, aerospace and defense companies, provincial, state and local governments and higher education clients. Specifically, we assist these clients by providing them with our process improvement, program management, enterprise resource planning, managed services and internet integration service offerings. Additionally, through our Emerging Markets sector, Public Services provides financial and economic advisory services to governments, corporations and financial institutions around the world.

•

Financial Services delivers strategic, operational and technology services to many of the world’s leading banking, insurance, securities, real estate, hospitality and professional services institutions. Our offerings include new business and technical architectures that take advantage of existing application systems and e-business strategies and development, delivered through consumer and wholesale lines of business.

•

Communications, Content and Utilities (previously referred to as Communications & Content) provides financial, operational and technical services to wireline and wireless communications carriers, cable system operators, media and entertainment service providers and public and private utilities. We assist clients with business strategy development, business process flow optimization, technology integration and asset preservation.

•

Consumer, Industrial and Technology serves a wide range of clients, including Global 2000 clients in the consumer, industrial (manufacturing, automotive, aerospace, chemicals and oil & gas) and technology sectors. These clients face a myriad of business challenges such as global competition, industry consolidation, cost reduction and accelerated time-to-market. We support our clients by providing strategy and management consulting services as well as implementing enterprise systems and business processes, helping them improve supply chain efficiency and visibility, and designing and

implementing customer management solutions. Additionally, we provide Managed Services offerings, where we help our clients take advantage of alternative business and systems strategies around the management, maintenance and ongoing operations support of key IT functions. We provide our clients with actionable blueprints and experience in project management and knowledge training to support their current and future business initiatives.

Beginning in fiscal year 2005, we combined our Communications, Content and Utilities and Consumer, Industrial and Technology industry groups to form the Commercial Services industry group.

International Operations

Our operations outside of North America are organized on a geographic basis, with operations in Latin America, the Asia Pacific region, and Europe, the Middle East and Africa (“EMEA”). We utilize this multinational network to provide consistent integrated services to our clients throughout the world. For the year ended December 31, 2004, our international operations represented 31.1% of our business (measured in gross revenue dollars), compared to 32.5%, 29.5%, and 7.8% for the six months ended December 31, 2003 and the fiscal years ended June 30, 2003 and 2002, respectively.

We intend to align our international operations more closely with our North American industry groups and to manage our businesses globally through our three industry groups (Public Services, Financial Services and Commercial Services) beginning in fiscal year 2007. However, we currently have global industry leaders who assist in client service to our industry groups within the geographic business units and our global clients and projects.

For information regarding our international acquisitions, see Note 7, “Acquisitions,” of the Notes to Consolidated Financial Statements.

Our Joint Marketing Relationships

As of December 31, 2004, our Alliance program had approximately 60 joint marketing relationships with key technology providers that support and complement our service offerings. We have created joint marketing relationships to enhance our ability to provide our clients with high value services. Those relationships typically entail some combination of commitments regarding joint marketing, sales collaboration, training and service offering development.

Our most significant joint marketing and product development relationships are with Oracle Corporation, Microsoft Corporation, SAP AG, and Siebel Systems, Inc. We work together to develop comprehensive solutions to common business issues, offer the expertise required to deliver those solutions, develop new products, capitalize on joint marketing opportunities and remain at the forefront of technology advances. These joint marketing agreements help us to generate revenue since they provide a source of referrals and the ability to jointly target specific accounts.

Competition

We operate in a highly competitive and rapidly changing market and compete with a variety of organizations that offer services similar to those we offer. Our competitors include specialized consulting firms, systems consulting and implementation firms, former “Big 5” and other large accounting and consulting firms, application software firms providing implementation and modification services, service and consulting groups of computer equipment companies, outsourcing companies, systems integration companies, aerospace and defense contractors and general management consulting firms. We also compete with our clients’ internal resources.

Some of our competitors have significantly greater financial and marketing resources, name recognition, and market share than we do. The competitive landscape continues to experience rapid changes and large, well-

capitalized competitors exist with the ability to attract and retain professionals and to serve large organizations with the high quality of services they require.

We believe that the principal competitive factors in the consulting industry in which we operate include scope of services, service delivery approach, technical and industry expertise, perception of value added, availability of appropriate resources, global reach, pricing and relationships.

Our ability to compete also depends in part on several factors beyond our control, including the ability of our competitors to hire, retain and motivate skilled professionals, the price at which others offer comparable services and our competitors’ responsiveness. There is a significant risk that changes in these dynamics could intensify competition and adversely affect our future financial results.

Intellectual Property

Our success has resulted in part from our methodologies and other proprietary intellectual property rights. We rely upon a combination of nondisclosure and other contractual arrangements, non-solicitation agreements, trade secrets, copyright and trademark laws to protect our proprietary rights and the rights of third parties from whom we license intellectual property. We also enter into confidentiality and intellectual property agreements with our employees that limit the distribution of proprietary information. We currently have only a limited ability to protect our important intellectual property rights. As of December 31, 2005, we had only two issued patents in the United States to protect our products or methods of doing business.

Seasonality

Typically, client service hours, which translate into chargeable hours and directly affect revenue, are reduced during the second half of the calendar year (i.e., July 1 through December 31) due to the larger number of holidays and vacation time taken by our employees and our clients.

Customer Dependence

During the year ended December 31, 2004, the six months ended December 31, 2003 and the fiscal years ended June 30, 2003 and 2002, our revenue from the United States Federal government was $1,004.0 million, $437.0 million, $715.7 million, and $619.9 million, respectively, representing 29.7%, 28.7%, 22.7%, and 26.0% of our total revenue. A loss of all or a substantial portion of our contracts with the U.S. Federal government would have a material adverse effect on our business. While most of our government agency clients have the ability to unilaterally terminate their contracts, our relationships are generally not with political appointees, and we have not historically experienced a loss of Federal government business with a change of administration. For more information regarding government proceedings and risks associated with U.S. government contracts, see Item 3, “Legal Proceedings,” Note 13, “Commitments and Contingencies,” of the Notes to Consolidated Financial Statements and Exhibit 99.1, “Factors Affecting Future Financial Results,” to this Form 10-K.

Backlog

Although our level of bookings is an indication of how our business is performing, we do not characterize our bookings, or our engagement contracts associated with new bookings, as backlog because our engagements can generally be cancelled or terminated on short notice.

Compliance with Environmental Laws

U. S. Federal, state and local statutes and regulations relating to the protection of the environment have had no material adverse effect on our operating results or competitive position, and we anticipate that they will have no material adverse effect on our future operating results or competitive position in the industry.

Employees

As of December 31, 2004, we had approximately 16,800 full-time employees, including approximately 14,600 professional consultants. As of December 31, 2005, we had approximately 17,600 full-time employees, including approximately 15,400 professional consultants.

Our future growth and success largely depends upon our ability to attract, retain and motivate qualified employees, particularly professionals with the advanced information technology skills necessary to perform the services we offer. Our professionals possess significant industry experience, understand the latest technology, and build productive business relationships. We are committed to the long-term development of our employees and will continue to dedicate significant resources to our hiring, training and career advancement programs. We strive to reinforce our employees’ commitment to our clients, culture and values through a comprehensive performance review system and a competitive compensation philosophy that rewards individual performance and teamwork.

For the year ended December 31, 2005, our voluntary annualized turnover levels for our professional consulting staff reached approximately 27%, an increase above our 2004 voluntary turnover rate of approximately 22%. To address this issue we implemented certain retention programs as described below.

Our key goals relating to our people include reducing our excess management layers and streamlining senior management, enhancing our retention of managing directors and recruitment of new managing directors, revising the compensation structure to reduce the fixed percentage of compensation and increase the variable compensation component, encouraging non-managing director employee stock ownership, and creating better metrics to evaluate employee performance and link rewards and advancement to accountability and performance. Subsequent to December 31, 2004, we made considerable progress in strengthening our executive and senior management ranks with the recruitment of several key individuals, including a new Chief Executive Officer.

On April 12, 2005, we approved restricted stock unit grants (“RSUs”) under our Amended and Restated 2000 Long-Term Incentive Plan (the “LTIP”) to our current managing directors and to newly hired managing directors and a limited number of key employees. The primary purpose of the program was to align the interests of key employees with those of the shareholders, to enhance retention of current managing directors and to improve the recruiting of new managing directors from outside our Company. See Item 1, “Business—Certain Developments in Late 2004, 2005 and 2006—Restricted Stock Unit Grants,” and Note 14, “Capital Stock and Option Awards,” of the Notes to Consolidated Financial Statements.

In June 2005, we announced a program to align the interests of employees below the managing director level with the Company’s performance and to retain our current employees. Under this program, as amended (the “BE an Owner Program”), we will:

•

In January 2006, make a cash payment to each eligible employee in an amount equal to 1.5% of such employee’s annual salary as of October 3, 2005; and

•

On January 1, 2007, make a contribution, as a special offering under our Employee Stock Purchase Plan (“ESPP”), to each eligible employee an amount equal to 1.5% of such employee’s annual salary as of October 3, 2005 into such eligible employee’s ESPP account, which contribution will then be used to purchase shares of our common stock at a 15% discount.

Generally, an eligible employee is a full-time employee below the managing director level who has been continuously employed from October 3, 2005 through the applicable date above. See Note 14, “Capital Stock and Options Awards,” of the Notes to Consolidated Financial Statements.

Financial Information About Industry Segments and Geographic Areas

Information required by Items 1(b) and 1(d) is incorporated herein by reference to Note 19, “Segment Information,” of the Notes to Consolidated Financial Statements included under Item 8 of this Form 10-K. For a

discussion of risks associated with our international operations, see Exhibit 99.1, “Factors Affecting Future Financial Results,” to this Form 10-K.

Available Information

Our website address is www.bearingpoint.com. Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as any amendments to those reports, are available free of charge through our website as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission. Information contained or referenced on our website is not incorporated by reference into and does not form a part of this Form 10-K.

ITEM 2. PROPERTIES

Our properties consist of leased office facilities for specific client contracts and for sales, support, research and development, consulting, administrative and other professional personnel. Our corporate headquarters consists of approximately 235,000 square feet in McLean, Virginia. As of December 31, 2004, we had more than 100 additional offices in the United States and more than 70 offices in Latin America, Canada, the Asia Pacific region and EMEA. All office space referred to above is leased pursuant to operating leases that expire over various periods during the next 10 years. Portions of this office space are sublet under operating lease agreements, which expire over various periods during the next 10 years and are also being marketed for sublease or disposition. Although we believe our facilities are adequate to meet our needs in the near future, our business requires that our leaseholdings accommodate the dynamic needs of our various consulting engagements, and, given business demands, the makeup of our leasehold portfolio may change within the next twelve month period to address these demands.

In August 2003, we announced a plan to reduce our global office space in order to eliminate capacity wherever possible and to align global office space usage with the current workforce and needs of the business. During the year ended December 31, 2004 and the six months ended December 2003, we recorded $11.7 million and $61.4 million, respectively, in restructuring charges related to lease, facilities and other costs associated (including the write-off of the net book value of leasehold improvements in these offices) with exiting facilities. On December 16, 2004, we announced that we expect to record additional lease and facilities related restructuring charges prior to December 31, 2005. We expect to record approximately $36.0 million in additional lease and facilities related restructuring charges throughout fiscal year 2005. For additional information regarding the lease and facilities charges see Note 18, “Reduction in Workforce and Other Charges,” of the Notes to Consolidated Financial Statements.

ITEM 3. LEGAL PROCEEDINGS

Peregrine Investigations and Litigation

We have received a subpoena from the U.S. Securities and Exchange Commission (“SEC”) and requests for documents and information from the U.S. Attorney’s Office for the Southern District of California regarding certain software resale transactions with Peregrine Systems, Inc. in the period 1999 – 2001. On November 16, 2004, Larry Rodda, a former employee, pled guilty to one count of criminal conspiracy in connection with the transactions that are the subject of the government inquiries. Mr. Rodda also was named in a civil suit brought by the SEC. We were not named in the indictment or civil suit, and are cooperating with the government investigations.

We were named as a defendant in several civil lawsuits regarding the Peregrine software resale transactions, in which purchasers and other individuals who acquired Peregrine stock alleged that we participated in or aided and abetted a fraudulent scheme by Peregrine to inflate Peregrine’s stock price, and we were also sued by a trustee succeeding the interests of Peregrine for the same conduct. Specifically, we were named as a defendant in the following actions: Ariko v. Moores (Superior Court, County of San Diego), Allocco v. Gardner (Superior Court, County of San Diego), Bains v. Moores (Superior Court, County of San Diego), Peregrine Litigation Trust v. KPMG LLP (Superior Court, County of San Diego), and In re Peregrine Systems, Inc. Securities Litigation (U.S.

District Court for the Southern District of California). Our former parent, KPMG LLP, also sought indemnity from us for certain liability it may face in the same litigations, and we had agreed to indemnify them in certain of these matters. As a result of tentative agreements reached in December 2005, we have executed settlement agreements whereby, if the courts in each of the cases give certain approvals, we will be released from liability in the Allocco, Ariko, Bains and Peregrine Litigation Trust matters and in all claims for indemnity by KPMG LLP in each of these cases. Settlement payments under these agreements will total approximately $35.9 million and are expected to be made to the plaintiffs on or after March 31, 2006. The settlement payments are included as part of costs of service in the consolidated statement of operations for the year ended December 31, 2004. We did not settle the In re Peregrine Systems, Inc. Securities Litigation. On January 19, 2005 the In re Peregrine Systems, Inc. Securities Litigation matter was dismissed by the trial court as it relates to us and on January 17, 2006 the court granted plaintiffs’ motion for entry of judgment so the plaintiffs can appeal the dismissal in advance of any trial on the merits against the remaining parties.

Government Investigation

In December 2004, we were served with a subpoena by the Grand Jury for the U.S. District Court for the Central District of California. The subpoena seeks records relating to 12 contracts between the Federal government and us, including two General Services Administration (“GSA”) schedules, as well as other documents and records. The December 2004 subpoena is extraordinarily broad in its coverage and does not identify any underlying statute that would be the basis of the government’s investigation. We have produced documents to the government in accordance with an agreement with the Assistant U.S. Attorney that narrows substantially the materials that are to be provided. We continue to be under an obligation to preserve all documents responsive to the subpoena and the Assistant U.S. Attorney may at any time require us to produce additional documents within the scope of the full subpoena. We believe that the focus of the government review is upon our billing and time/expense practices, as well as alliance agreements when referral or commission payments were permitted. Given the extremely broad scope of the subpoena and the limited information we have received from the U.S. Attorney’s office regarding the status of its investigation, it is impossible to predict with any degree of accuracy how this matter will develop, how it will be resolved and whether the focus of the investigation is in pursuit of criminal or civil remedies. Accordingly, it is not possible to predict with certainty whether or not we will ultimately be successful in this matter or, if not, what the impact might be.

Travel Rebate Investigation

In December 2005, we executed a settlement agreement with the Civil Division of the U.S. Department of Justice to settle allegations of potential understatement of travel credits to government contracts. Pursuant to the settlement agreement, we paid $15.5 million in the aggregate, including related fees, in December 2005. The settlement payment is included as part of selling, general & administrative expenses in the Consolidated Statement of Operations for the year ended December 31, 2004.

Core Financial Logistics System

There is an ongoing investigation of the Core Financial Logistics System (“CoreFLS”) project by the Inspector General’s Office (“VA IG”) of the Department of Veterans Affairs and by the U.S. Attorney for the Central District of Florida (“AUSA”). To date, we have been issued two subpoenas, in June 2004 and December 2004, seeking the production of documents relating to the CoreFLS project. We are cooperating with the investigation and have produced documents in response to the subpoenas. Throughout the process, counsel for the Company has had discussions with the VA IG and AUSA offices and has been advised that the investigation is not focused on the Company alone, but instead on the CoreFLS project as a whole. To date, there have been no specific allegations of criminal or fraudulent conduct on the part of the Company. Similarly, there have been no contractual claims filed against us by the Veterans Administration in connection with the CoreFLS project. We believe that we have complied with all of our obligations under the CoreFLS contract. We cannot, however, predict the outcome of the inquiry or whether any criminal, civil or contractual allegations or claims will be made

in the future. Accordingly, it is not possible to predict with certainty whether or not we will ultimately be successful in this matter or, if not, what the impact might be.

2003 Class Action

As disclosed in our prior reports, various separate complaints purporting to be class actions were filed in the U.S. District Court for the Eastern District of Virginia alleging that we and certain of our officers violated Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act. The complaints contain varying allegations, including that we made materially misleading statements with respect to our financial results for the first three quarters of fiscal year 2003 in our SEC filings and press releases. The Plaintiffs’ Amended Consolidated Complaint was filed on December 31, 2003. Defendants’ Motion to Dismiss was filed on February 10, 2004. On March 31, 2004, the parties filed a stipulation requesting that the court approve a settlement of this matter for $1.7 million, all of which is to be paid by our insurer. On April 2, 2004, the court considered and gave preliminary approval to the proposed settlement. Notice of the proposed settlement was sent to the purported class of shareholders and the court gave final approval to the proposed settlement on July 16, 2004.

2005 Class Action Suits

In and after April 2005, various separate complaints purporting to be class actions were filed in the U.S. District Court for the Eastern District of Virginia alleging that we and certain of our current and former officers and directors violated Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), Rule 10b-5 promulgated thereunder and Section 20(a) of the Exchange Act. The complaints contained varying allegations, including that we made materially misleading statements with respect to our financial results for the first three quarters of fiscal year 2004 in our SEC filings and press releases. Following the Court’s appointment of Matrix Capital Management Fund L.P. (“Matrix”) as lead plaintiff, on October 7, 2005, Matrix filed its Consolidated Complaint which seeks class action certification, contains varying allegations, including that we made materially misleading statements between August 14, 2003 and April 20, 2005 with respect to our financial results in our SEC filings and press releases and does not specify the amount of damages sought. On December 2, 2005, a hearing was held on our Motion to Dismiss this complaint. On January 17, 2006, the court certified a class. It is not possible to predict with certainty whether or not we will ultimately be successful in this matter or, if not, what the impact might be.

2005 Shareholders’ Derivative Demand

On May 20, 2005, we received a letter from counsel representing one of our shareholders requesting that we initiate a lawsuit against our Board of Directors and certain present and former officers of the Company, alleging breaches of the officers’ and directors’ duties of care and loyalty to the Company relating to the events disclosed in our report filed on Form 8-K, dated April 20, 2005. We have responded to this demand by stating that we will communicate further with counsel for the shareholder following completion of the investigation being conducted by the Audit Committee of the Board of Directors. It is not possible to predict the outcome of this matter, or what the impact might be, if any.

Series B Debentures Suit

As previously disclosed in Forms 8-K filed on November 7, 2005 and November 21, 2005, counsel for certain holders of our 2.75% Series B Convertible Subordinated Debentures due 2024 (the “Series B Debentures”) delivered purported notices of default and acceleration to us asserting that, as the result of our failure to file certain periodic reports timely, we were in default under the indenture (the “Indenture”) related to the Series B Debentures and asserting that all of the principal and accrued interest on the Series B Debentures was immediately due and payable. On January 18, 2006, the Bank of New York, as Indenture Trustee on behalf of all holders of the Series B Debentures of the Company, filed a lawsuit in the Supreme Court of the State of

New York, County of New York, alleging a breach of the Indenture and a breach of the covenant of good faith and fair dealing consistent with the prior assertions and seeking a determination that we had breached the Indenture. The lawsuit seeks various forms of relief, including that we pay the holders of the Series B Debentures either the principal, any accrued and unpaid interest, premium, and liquidated damages due or the difference between the fair market value of the Series B Debentures on November 17, 2005 and par, whichever is greater.

For the reasons previously disclosed in the above Form 8-Ks, in our view the purported notices of default and acceleration did not comply with the Indenture requirements, were substantively flawed as to the reporting covenant in question, and consequently were invalid and without merit. The subsequent claims discussed above are, in our view, invalid and without merit.

Other Legal Proceedings

In addition to the matters referred to above, we are from time to time the subject of lawsuits and other claims and regulatory proceedings arising in the ordinary course of our business. Except for the matters set forth above, we do not expect that any of these matters, individually or in the aggregate, will have a material effect on our results of operations. Additional information regarding our legal proceedings is incorporated by reference herein from Note 13, “Commitments and Contingencies,” of the Notes to Consolidated Financial Statements in this Form 10-K.

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

There were no matters submitted to a vote of security holders during the quarter ended December 31, 2004.

PART II.

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is traded on the New York Stock Exchange (“NYSE”) under the trading symbol “BE.” Until we are current with all of our periodic reporting requirements with the SEC, the NYSE will identify us as a late filer on its website and consolidated tape by affixing the letters “LF” to our common stock ticker symbol. Prior to October 3, 2002, our common stock was listed on the Nasdaq National Market under the trading symbol “KCIN.” On October 2, 2002, we changed our name to BearingPoint, Inc. and ceased trading on the Nasdaq National Market. On October 3, 2002, our common stock began trading on the NYSE. The following table sets forth the high and low sales prices for our common stock as reported on the Nasdaq National Market (for periods before October 3, 2002) and on the NYSE (for periods on or after October 3, 2002) for the quarterly periods indicated.

Price Range of Common Stock


	Price Range of Common Stock
	High		Low
Fiscal Year 2004
Fourth Quarter ended December 31, 2004	$	9.98	$	7.29
Third Quarter ended September 30, 2004		9.25		7.22
Second Quarter ended June 30, 2004		11.00		8.03
First Quarter ended March 31, 2004		11.30		9.50

Six Month Period Ended December 31, 2003
Quarter ended December 31, 2003		10.25		7.90
Quarter ended September 30, 2003		11.25		6.75

Fiscal Year 2003
Fourth Quarter ended June 30, 2003		10.80		5.80
Third Quarter ended March 31, 2003		8.60		5.78
Second Quarter ended December 31, 2002		9.02		5.03
First Quarter ended September 30, 2002		15.01		5.35

Holders

At January 3, 2006, we had approximately 1,050 stockholders of record.

Dividends

We have never paid cash dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock for at least the next 12 months. We intend to retain all of our earnings, if any, for general corporate purposes, and, if appropriate, to finance the expansion of our business. Our credit facility contains prohibitions on our payment of dividends. Our future dividend policy will also depend on our earnings, capital requirements, financial condition and other factors considered relevant by our Board of Directors.

Issuer Purchases of Equity Securities

In August 2001, our Board of Directors authorized us to repurchase up to $100.0 million of our common stock. As of December 31, 2004, we had repurchased 3,812,250 shares of our common stock at an aggregate

purchase price of $35.7 million and were authorized to repurchase up to $64.3 million of additional amounts of our common stock. In April 2005, our Board of Directors authorized a stock repurchase program allowing for the repurchase of up to an additional $100.0 million of our common stock over a twelve-month period beginning April 11, 2005; therefore, together with the previous stock repurchase program, we are authorized to repurchase an aggregate of $164.3 million of our common stock. Any shares repurchased under the stock repurchase programs will be held as treasury shares. We did not repurchase any of our common stock during the year ended December 31, 2004. In addition, our credit facility contains limitations on our ability to repurchase shares of our common stock.

Sales of Securities Not Registered Under the Securities Act

2.50% Series A Convertible Subordinated Debentures and 2.75% Series B Convertible Subordinated Debentures due 2024

On December 22, 2004, we completed the sale of the $225.0 million aggregate principal amount of our 2.50% Series A Convertible Subordinated Debentures due 2024 (the “Series A Debentures”) and $175.0 million of our 2.75% Series B Convertible Subordinated Debentures due 2024 (the “Series B Debentures” and together with the Series A Debentures, the “Subordinated Debentures”) to certain qualified institutional buyers, as defined in Rule 144A. The Subordinated Debentures were offered to the initial purchasers pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”).

On January 5, 2005, we completed the sale of an additional $25.0 million aggregate principal amount of our Series A Debentures and an additional $25.0 million of our Series B Debentures. The additional Subordinated Debentures were offered to the initial purchasers pursuant to the exemption from registration provided by Section 4(2) of the Securities Act. The additional Subordinated Debentures were sold only to certain qualified institutional buyers pursuant to Rule 144A of the Securities Act.

The net proceeds from the sale of the Subordinated Debentures were approximately $435.6 million, after deducting offering expenses and the initial purchasers’ commissions of approximately $11.4 million and other fees and expenses of approximately $3.0 million. We used approximately $242.6 million of the net proceeds from the sale of the Subordinated Debentures to repay our outstanding senior notes and approximately $135.0 million to repay amounts outstanding under our then existing revolving credit facility. We also used the proceeds to pay fees and expenses in connection with entering into a $400.0 million Interim Senior Secured Credit Agreement (the “2004 Interim Credit Facility”). The remainder was used for general corporate purposes.

The Series A Debentures bear interest at a rate of 2.50% per year and will mature on December 15, 2024. The Series B Debentures bear interest at a rate of 2.75% per year and will mature on December 15, 2024. Interest will be payable on the Subordinated Debentures on June 15 and December 15 of each year, beginning June 15, 2005. The Subordinated Debentures are unsecured and are subordinated to our existing and future senior debt, including the Senior Debentures and the Senior Secured Credit Facility (the “2005 Credit Facility”) (see below). Due to the delay in the completion of our audited financial statements for the fiscal year ended December 31, 2004, we were unable to file a timely registration statement with the SEC to register for resale our Subordinated Debentures and underlying common stock. Accordingly, pursuant to the terms of these securities, the applicable interest rate on each series of Subordinated Debentures increased by 0.25% beginning on March 23, 2005 and increased another 0.25% beginning on June 22, 2005. These changes combined to increase the interest rate on the Series A Debentures and the Series B Debentures to 3.00% and 3.25%, respectively, and will be the applicable interest rates through the date the registration statement is declared effective.

The Subordinated Debentures are initially convertible, under certain circumstances, into shares of our common stock at a conversion rate of 95.2408 shares for each $1,000 principal amount of the Subordinated Debentures, subject to adjustments, equal to an initial conversion price of approximately $10.50 per share. Holders of the Subordinated Debentures may exercise the right to convert the Subordinated Debentures prior to their maturity only under certain circumstances, including when our stock price reaches a specified level for a

specified period of time, upon notice of redemption, and upon specified corporate transactions. Upon conversion of the Subordinated Debentures, we will have the right to deliver, in lieu of shares of common stock, cash or a combination of cash and shares of common stock. The Subordinated Debentures will be entitled to an increase in the conversion rate upon the occurrence of certain change of control transactions or, in lieu of the increase, at our election, in certain circumstances, to an adjustment in the conversion rate and related conversion obligation so that the Subordinated Debentures are convertible into shares of the acquiring or surviving company.

On December 15, 2011, December 15, 2014 and December 15, 2019, holders of Series A Debentures, at their option, have the right to require us to repurchase any outstanding Series A Debentures. On December 15, 2014 and December 15, 2019, holders of Series B Debentures, at their option, have the right to require us to repurchase any outstanding Series B Debentures. In each case, we will pay a repurchase price in cash equal to 100% of the principal amount of the Subordinated Debentures, plus accrued and unpaid interest, including liquidated damages, if any, to the repurchase date. In addition, holders of the Subordinated Debentures may require us to repurchase all or a portion of the Subordinated Debentures on the occurrence of a designated event, at a repurchase price equal to 100% of the principal amount of the Subordinated Debentures, plus any accrued but unpaid interest and liquidated damages, if any, to but not including the repurchase date. A designated event includes certain change of control transactions and a termination of trading, occurring if our common stock is no longer listed for trading on a U.S. national securities exchange.

We may redeem some or all of the Series A Debentures beginning on December 23, 2011 and, beginning on December 23, 2014, may redeem the Series B Debentures, in each case at a redemption price in cash equal to 100% of the principal amount of the Subordinated Debentures plus accrued and unpaid interest and liquidated damages, if any, on the Subordinated Debentures to, but not including, the redemption date.

Upon a continuing event of default, the trustee or the holders of at least 25% in aggregate principal amount of the Subordinated Debentures may declare the applicable series of Debentures immediately due and payable. An event of default generally means that we:

•

Fail to satisfy our conversion obligation upon conversion of the Subordinated Debentures upon exercise of a holder’s conversion right;

•

Fail to provide timely notice of a designated event or the effective date of a change in control and such failure continues for a period of 5 days;

•

Fail to repurchase the Subordinated Debentures at the option of holders or following a designated event;

•

Fail to redeem the Subordinated Debentures after we exercise our redemption option;

•

Fail to pay the principal amount of the Subordinated Debentures at maturity when due and payable;

•

Fail to pay any interest or liquidated damages when due and payable on the Subordinated Debentures and such failure continues for a period of 30 days;

•

Fail to perform or observe any term, covenant or agreement in the Subordinated Debentures or the Indenture, including, without limitation, the covenant that we deliver copies of our annual and quarterly reports to the trustee within 15 calendar days after they are filed with the SEC, for a period of 60 days after written notice of such failure is provided to us by the trustee or to us and the trustee by the holders of at least 25% in aggregate principal amount of the Subordinated Debentures then outstanding; or

•

Fail to pay when due at maturity or upon the acceleration of the maturity of any of our indebtedness or our designated subsidiaries for borrowed money in an aggregate amount of $25.0 million or more unless rescinded or waived.

In addition, upon the occurrence of certain events of bankruptcy, insolvency or reorganization, the aggregate principal amount of the Subordinated Debentures will become immediately due and payable. For information regarding the purported notices of default, the purported notice of acceleration and lawsuit under the Subordinated Debentures, see Item 1, “Business.”

5.00% Convertible Senior Subordinated Debentures due 2025

On April 27, 2005, we completed the sale of the $200.0 million aggregate principal amount of the 5.00% Convertible Senior Subordinated Debentures (the “April 2005 Senior Debentures”) due 2025 to accredited investors that are also qualified institutional buyers, as defined in Rule 144A. The April 2005 Senior Debentures were offered pursuant to the exemption from registration provided by Regulation D under the Securities Act.

The net proceeds from the sale of the April 2005 Senior Debentures, after deducting offering expenses and the placement agents’ commissions and other fees and expenses, were approximately $192.8 million. We used the net proceeds from the offering to replace the working capital recently used to cash collateralize letters of credit under the 2004 Interim Credit Facility, and used the remaining net proceeds to support letters of credit or surety bonds otherwise in respect to our state and local business and for general corporate purposes.

The April 2005 Senior Debentures bear interest at a rate of 5.00% per year and will mature on April 15, 2025. Interest will be payable on the April 2005 Senior Debentures on April 15 and October 15 of each year, beginning October 15, 2005. The April 2005 Senior Debentures are unsecured and are subordinated to our existing and future senior debt. The April 2005 Senior Debentures are pari passu with the July 2005 Senior Debentures (discussed below) and senior to the Series A Debentures and the Series B Debentures. Since we failed to file a registration statement with the SEC to register for resale our April 2005 Senior Debentures and the underlying common stock by December 31, 2005, the interest rate on the April 2005 Senior Debentures increased by 0.25% to 5.25% beginning on January 1, 2006 and will continue to be the applicable interest rate through the date the registration statement is filed.

The April 2005 Senior Debentures are initially convertible into shares of our Common Stock at a conversion rate of 151.5151 shares for each $1,000 principal amount of the April 2005 Senior Debentures, subject to adjustments, equal to an initial conversion price of $6.60 per share at any time prior to the stated maturity. Upon conversion of the April 2005 Senior Debentures, we will have the right to deliver, in lieu of shares of Common Stock, cash or a combination of cash and shares of Common Stock. The April 2005 Senior Debentures will be entitled to an increase in the conversion rate upon the occurrence of certain change of control transactions or, in lieu of the increase, at our election, in certain circumstances, to an adjustment in the conversion rate and related conversion obligation so that the April 2005 Senior Debentures are convertible into shares of the acquiring or surviving company.

The holders of the April 2005 Senior Debentures have the right, at their option, to require us to repurchase all or some of their debentures on April 15, 2009, 2013, 2015 and 2020. In each case, we will pay a repurchase price in cash equal to 100% of the principal amount of the April 2005 Senior Debentures, plus any accrued but unpaid interest, including additional interest, if any, to the repurchase date. In addition, holders of the April 2005 Senior Debentures may require us to repurchase all or a portion of the April 2005 Senior Debentures on the occurrence of a designated event, at a repurchase price equal to 100% of the principal amount of the April 2005 Senior Debentures, plus any accrued but unpaid interest and additional interest, if any, to but not including the repurchase date. A designated event includes certain change of control transactions and a termination of trading, occurring if our Common Stock is no longer listed for trading on a U.S. national securities exchange.

The April 2005 Senior Debentures will be redeemable at our option on or after April 15, 2009 at a redemption price in cash equal to 100% of the principal amount of the April 2005 Senior Debentures plus accrued and unpaid interest and additional interest, if any, on the April 2005 Senior Debentures to but not including the redemption date. Upon a continuing event of default, the trustee or the holders of at least 25% in aggregate principal amount of the April 2005 Senior Debentures may declare the April 2005 Senior Debentures immediately due and payable.

An event of default generally means that we:

•

Fail to satisfy our conversion obligation upon conversion of the April 2005 Senior Debentures upon exercise of a holder’s conversion right;

•

Fail to provide timely notice of a designated event or the effective date of a change in control and such failure continues for a period of 5 days;

•

Fail to repurchase the April 2005 Senior Debentures at the option of holders or following a designated event;

•

Fail to redeem the April 2005 Senior Debentures after we exercise our redemption option;

•

Fail to pay the principal amount of the April 2005 Senior Debentures at maturity when due and payable;

•

Fail to pay any interest or additional interest when due and payable on the April 2005 Senior Debentures and such failure continues for a period of 30 days;

•

Fail to perform or observe any term, covenant or agreement in the April 2005 Senior Debentures or the Indenture, including, without limitation, the covenant that we deliver copies of our annual and quarterly reports to the trustee within 15 calendar days after they are filed with the SEC, for a period of 60 days after written notice of such failure is provided to us by the trustee or to us and the trustee by the holders of at least 25% in aggregate principal amount of the April 2005 Senior Debentures then outstanding; or

•

In addition, upon the occurrence of certain events of bankruptcy, insolvency or reorganization, the aggregate principal amount of the April 2005 Senior Debentures will become immediately due and payable.

0.50% Convertible Senior Subordinated Debentures

On July 15, 2005, we completed the sale of the $40.0 million aggregate principal amount of our 0.50% Convertible Senior Subordinated Debentures due July 2010 (the “July 2005 Senior Debentures” and together with the April 2005 Senior Debentures, the “Senior Debentures”) and common stock warrants (the “July 2005 Warrants”) to purchase up to 3.5 million shares of our common stock, pursuant to a securities purchase agreement, dated July 15, 2005 (the “July 2005 Securities Purchase Agreement”). The July 2005 Senior Debentures and the July 2005 Warrants were offered only to accredited investors pursuant to the exemption from registration provided by Regulation D under the Securities Act.

The net proceeds from the sale of the July 2005 Senior Debentures and the July 2005 Warrants, after deducting offering expenses and other fees and expenses, were approximately $37.8 million. We intend to use the net proceeds from the offering for general corporate purposes, including the funding of strategic acquisitions to build capabilities in certain areas.

The July 2005 Senior Debentures bear interest at a rate of 0.50% per year and will mature on July 15, 2010. Interest will be payable on the July 2005 Senior Debentures on January 15 and July 15 of each year, beginning January 15, 2006. The July 2005 Senior Debentures are unsecured and are subordinated to our existing and future senior debt. The July 2005 Senior Debentures are pari passu to the April 2005 Senior Debentures and senior to the Series A Debentures and the Series B Debentures. Since we failed to file a registration statement with the SEC to register for resale our July 2005 Senior Debentures and the underlying common stock by December 31, 2005, the interest rate on the July 2005 Senior Debentures increased by 0.25% beginning on January 1, 2006 and will be the applicable interest rate through the date the registration statement is filed.

The July 2005 Senior Debentures are initially convertible on or after July 15, 2006 into shares of our common stock at a conversion price of $6.75 per share, subject to anti-dilution and other adjustments. The July 2005 Senior Debentures will be entitled, in certain change of control transactions, to an adjustment in the conversion obligation so that the July 2005 Senior Debentures are convertible into shares of stock, other securities or other property or assets receivable upon the occurrence of such transaction by a holder of shares of

our common stock in such transaction. Prior to July 15, 2006, the July 2005 Senior Debentures may only be converted upon the occurrence of certain change of control transactions, a termination of trading, or a continuing event of default.

The holders of the July 2005 Senior Debentures may require us to repurchase all or a portion of the July 2005 Senior Debentures on the occurrence of a designated event, at a repurchase price equal to 100% of the principal amount of the July 2005 Senior Debentures, plus any accrued but unpaid interest and additional interest, if any, to but not including the repurchase date. The list of designated events includes certain change of control transactions and a termination of trading occurring if our common stock is no longer listed for trading on a U.S. national securities exchange.

Upon a continuing event of default, the holders of at least 25% in aggregate principal amount of the July 2005 Senior Debentures may declare the July 2005 Senior Debentures immediately due and payable. An event of default generally means that we:

•

Fail to satisfy our conversion obligation upon conversion of the July 2005 Senior Debentures upon exercise of a holder’s conversion right;

•

Fail to provide timely notice of a designated event or the effective date of a change of control and such failure continues for a period of 5 days;

•

Fail to repurchase the July 2005 Senior Debentures at the option of holders or following a designated event;

•

Fail to redeem the July 2005 Senior Debentures after we exercise our redemption option;

•

Fail to pay the principal amount of the July 2005 Senior Debentures at maturity when due and payable;

•

Fail to pay any interest or additional interest when due and payable on the Debentures and such failure continues for a period of 30 days;

•

Fail to make cash payments upon conversion;

•

Fail to perform or observe any term, covenant or agreement in the July 2005 Senior Debentures or certain covenants in the July 2005 Securities Purchase Agreement, including, without limitation, the covenant that we deliver copies of our annual and quarterly reports to the trustee within 15 calendar days after they are filed with the SEC, for a period of 60 days after written notice of such failure is provided to us by the holders of at least 25% in aggregate principal amount of the July 2005 Senior Debentures then outstanding; or

•

In addition, upon the occurrence of certain events of bankruptcy, insolvency or reorganization, the aggregate principal amount of the July 2005 Senior Debentures will become immediately due and payable.

The July 2005 Warrants may be exercised on or after July 15, 2006 and have a five-year term. The initial number of shares issuable upon exercise of the July 2005 Warrants is 3.5 million shares of common stock, and the initial exercise price per share of common stock is $8.00. The number of shares and exercise price are subject to certain customary anti-dilution protections and other customary terms, including, in certain change of control transactions, an adjustment in the conversion obligation so that the July 2005 Warrants, upon exercise, will entitle the July 2005 Warrant holders to receive shares of stock, other securities or other property or assets receivable upon the occurrence of such transaction by a holder of shares of our common stock in such transaction.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data as of December 31, 2004 and 2003 and for the year ended December 31, 2004, the six months ended December 31, 2003 and the year ended June 30, 2003 is derived from audited consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K. The selected financial data as of and for the year ended June 30, 2002 is derived from unaudited consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K. The selected financial data for the periods prior to June 30, 2002 are derived from unaudited consolidated financial statements and, in the opinion of management, have been prepared in accordance with accounting principles generally accepted in the United States of America and reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of results for these periods. With the exception of December 31, 2004, the financial information shown below has been restated to reflect restatement adjustments for corrections of accounting errors and departures from generally accepted accounting principles in all periods presented (see also the “Explanatory Note” in this Form 10-K and Note 3, “Restatement” of the Notes to the Consolidated Financial Statements). Selected financial data should also be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and the related notes thereto included herein.

Statements of Operations


	Year Ended December 31, 2004			Six Months Ended December 31, 2003			Year Ended									Five Months Ended June 30, 2000
	Year Ended December 31, 2004			Six Months Ended December 31, 2003			June 30, 2003			June 30, 2002			June 30, 2001			Five Months Ended June 30, 2000
				(as restated)			(as restated)			(as restated)			(as restated)			(as restated)
										(unaudited)			(unaudited)			(unaudited)
	(in thousands, except per share amounts)
Revenue	$	3,375,782		$	1,522,503		$	3,157,898		$	2,383,099		$	2,805,464		$	1,164,733

Costs of service:
Costs of service		2,816,559			1,221,249			2,436,864			1,761,444			2,092,458			878,509
Lease and facilities restructuring charges		11,699			61,436			17,283			—			—			—
Impairment charges		—			—			—			23,914			7,827			8,000

Total costs of service		2,828,258			1,282,685			2,454,147			1,785,358			2,100,285			886,509

Gross profit		547,524			239,818			703,751			597,741			705,179			278,224
Amortization of purchased intangible assets		3,457			10,212			45,127			3,014			—			—
Amortization of goodwill		—			—			—			—			18,176			5,210
Goodwill impairment charge (1)		397,065			127,326			—			—			—			—
Selling, general and administrative expenses		641,176			272,250			550,098			477,230			465,905			206,511
Special payment to managing directors (2)		—			—			—			—			—			34,520

Operating income (loss)		(494,174	)		(169,970	)		108,526			117,497			221,098			31,983
Interest / other income (expense), net (3)		(17,644	)		(1,773	)		(10,493	)		1,217			(16,119	)		(10,691	)
Loss on early extinguishment of debt		(22,617	)		—			—			—			—			—
Gain on sale of assets		—			—			—			—			6,867			—
Equity in losses of affiliate and loss on redemption of equity interest in affiliate		—			—			—			—			(76,019	)		(15,812	)

Income (loss) before taxes and cumulative effect of change in accounting principle		(534,435	)		(171,743	)		98,033			118,714			135,827			5,480
Income tax expense		11,791			4,872			65,342			80,263			102,798			27,782

Income (loss) before cumulative effect of change in accounting principle		(546,226	)		(176,615	)		32,691			38,451			33,029			(22,302	)
Cumulative effect of change in accounting principle, net of tax (4)		—			—			—			(79,960	)		—			—

Net income (loss) (5)		(546,226	)		(176,615	)		32,691			(41,509	)		33,029			(22,302	)

Dividend on Series A Preferred Stock		—			—			—			—			(31,672	)		(25,992	)
Preferred stock conversion discount		—			—			—			—			(131,250	)		—

Net income (loss) applicable to common stockholders	$	(546,226	)	$	(176,615	)	$	32,691		$	(41,509	)	$	(129,893	)	$	(48,294	)

Earnings (loss) per share—basic and diluted:
Income (loss) before cumulative effect of change in accounting principle applicable to common stockholders	$	(2.77	)	$	(0.91	)	$	0.18		$	0.24		$	(1.20	)	$	(0.64	)
Cumulative effect of change in accounting principle		—			—			—			(0.50	)		—			—

Net income (loss) applicable to common stockholders	$	(2.77	)	$	(0.91	)	$	0.18		$	(0.26	)	$	(1.20	)	$	(0.64	)

Balance Sheet Data


	December 31, 2004		December 31, 2003		June 30, 2003		June 30, 2002		June 30, 2001		June 30, 2000
			(as restated)		(as restated)		(as restated)		(as restated)		(as restated)
							(unaudited)		(unaudited)		(unaudited)
	(in thousands)
Cash and cash equivalents	$	244,810	$	122,475	$	121,790	$	222,636	$	93,327	$	47,841
Total assets		2,182,707		2,211,613		2,150,210		948,029		1,072,018		1,033,440
Long-term liabilities		648,565		408,324		375,991		28,938		17,877		77,827
Total debt (6)		423,226		248,228		277,176		1,846		13,440		67,307
Total liabilities		1,558,009		1,141,618		1,006,990		384,935		464,828		665,470
Series A Mandatorily Redeemable Convertible Preferred Stock		—		—		—		—		—		1,050,000
Total stockholders’ equity (deficit)		624,698		1,069,995		1,143,220		563,094		607,190		(682,030	)

(1)

During the year ended December 31, 2004 and the six months ended December 31, 2003, we recorded goodwill impairment charges of $397.1 million and $127.3 million, respectively, related to our EMEA operating segment. During the year ended June 30, 2003, we significantly expanded our international presence through a series of acquisitions. For additional information regarding the goodwill impairment charges and international acquisitions, see Note 6, “Goodwill and Other Intangible Assets,” and Note 7, “Acquisitions,” of the Notes to Consolidated Financial Statements, respectively.

(2)

For the period from January 31, 2000 through June 30, 2000, the profits of KPMG LLP and our Company were allocated among the partners of KPMG LLP and our Managing Directors as if the entities had been combined through June 30, 2000. Under this agreement, our Managing Directors received a special payment of $34.5 million by our Company for the five-month period ended June 30, 2000.

(3)

During the year ended December 31, 2004, we recorded a change in accounting principle resulting in a charge of $0.5 million related to the elimination of a one-month lag in reporting for certain Asia Pacific subsidiaries, as well as a subsidiary within the EMEA region. While the elimination of the one-month lag is considered a change in accounting principle, the effect of the change is included in other income (expense) due to the immateriality of the change in relation to consolidated net loss.

(4)

During the year ended June 30, 2002, we recognized a transitional impairment loss of $80.0 million as the cumulative effect of a change in accounting principle in connection with adopting Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” For additional information regarding the transitional impairment charge, see Note 6, “Goodwill and Other Intangible Assets,” of the Notes to Consolidated Financial Statements.

(5)

See Note 3, “Restatement,” of the Notes to Consolidated Financial Statements for the effect of restatement adjustments on net income (loss) for the six months ended December 31, 2003 and the years ended June 30, 2003 and 2002. The restatement adjustments increased net loss for the year ended June 30, 2001 by $1.9 million or $0.01 per share, primarily related to the correction of accounting errors for accounts payable cutoff and correction of accounting errors for customer contracts, partially offset by correction of accounting errors for variable accounting adjustments for stock options. The restatement adjustments increased net loss for the five months ended June 30, 2000 by $4.5 million or $0.06 per share primarily related to correction of accounting errors for income taxes, partially offset by correction of accounting errors for accounts payable cutoff.

(6)	For additional information regarding our 2005 debt issuances, see Note 8, “Notes Payable,” of the Notes to Consolidated Financial Statements.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Conditions and Results of Operations (MD&A) should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K. This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. See the “Disclosure Regarding Forward-Looking Statements.” All references to “years,” unless otherwise noted, refer to our twelve-month fiscal year, which prior to July 1, 2003, ended on June 30. In February 2004, our Board of Directors approved a change in our fiscal year end from a twelve-month period ending June 30 to a twelve-month period ending December 31. For example, a reference to “2003” or “fiscal year 2003” means the twelve-month period that ended on June 30, 2003, and a reference to “2004” or “fiscal year 2004” means the twelve-month period that ended on December 31, 2004.

The MD&A includes a non-Generally Accepted Accounting Principles (“GAAP”) constant-currency measure that monitors our constant-currency performance for non-U.S. operations and the Company as a whole. Constant-currency results are calculated by translating actual current-year and prior-year local currency revenues at the same predetermined exchange rates. The translated results are then used to determine year-over-year percentage increases or decreases that exclude the impact of currency. We believe presenting certain results on a constant-currency basis is useful to investors because it allows for a more meaningful comparison of the performance of our foreign operations from period to period.

Throughout this MD&A, all referenced amounts for prior periods and prior period comparisons reflect the balances and amounts on a restated basis.

Overview

We are one of the world’s largest management consulting, systems integration and managed services firms, serving government agencies, Global 2000 companies, medium-sized businesses and other organizations. We provide business and technology strategy, systems design, architecture, applications implementation, network infrastructure, systems integration and managed services. In North America, we provide consulting services through industry groups in which we have significant industry-specific knowledge. Our focus on specific industries provides us with the ability to tailor our service offerings to reflect our understanding of the marketplaces in which our clients operate. Our operations outside of North America are organized on a geographic basis, with operations in Latin America, the Asia Pacific region, and Europe, the Middle East and Africa (“EMEA”). We utilize this multinational network to provide consistent integrated services throughout the world. Beginning in 2007, we intend to align our geographic business units more closely with our North American industry groups as we intend to manage our businesses globally through three industry groups, Public Services, Commercial Services and Financial Services. Our service offerings are designed to help our clients generate revenue, reduce costs and access the information necessary to operate their business efficiently.

We derive substantially all of our revenue from professional services activities. Our revenue is driven by our ability to continuously generate new opportunities to serve clients, by the prices we obtain for our service offerings, and by the size and utilization of our professional workforce. Our ability to generate new business is directly influenced by the economic conditions in the industries and regions we serve, our anticipation and response to technological change, and the type and level of technology spending by our clients.

The general economic downturn throughout the majority of calendar year 2003 negatively affected the operations of many of our clients and potential clients and, in turn, affected their consulting services spending. As consulting services spending diminished, the competition for new engagements increased, causing a decline in our volume of business and a decrease in our overall profitability during the greater part of calendar year 2003. However, throughout 2004 there were improvements in global economic conditions, which led to increased spending on consulting services in certain markets, particularly in our Public Services and Financial Services business units and in certain international regions.

Our revenue for the year ended December 31, 2004 was $3,375.8 million. This represented an increase in revenue of $245.6 million, or 7.8%, from revenue generated during the twelve months ended December 31, 2003 of $3,130.1 million. This increase in revenue was primarily attributable to growing customer demand, which resulted in an increase in engagement hours. To serve this increase in demand, we increased our billable headcount and improved utilization. In constant currency terms, we achieved consolidated revenue growth of approximately 5.2%. Our gross profit for the year ended December 31, 2004 was $547.5 million compared with $577.1 million for the twelve months ended December 31, 2003. Gross profit as a percentage of revenue decreased to 16.2% during the current year compared to 18.4% during the prior twelve-month period. For the year ended December 31, 2004 we realized a net loss of $546.2 million, or loss of $2.77 per share, compared to a net loss of $163.5 million, or loss of $0.85 per share, for the twelve months ended December 31, 2003.

Our net loss for the year ended December 31, 2004 included a goodwill impairment charge of $397.1 million. During the fourth quarter of the year ended December 31, 2004, we determined that a triggering event had occurred, causing us to perform a goodwill impairment test for all reporting units. The triggering event resulted from recent downgrades in our credit rating in December 2004, significant changes in senior management and underperforming foreign legal entities. As required by SFAS No. 142, “Goodwill and Other Intangible Assets,” we performed a two-step impairment test to identify the potential impairment and, if necessary, to measure the amount of the impairment. Under step one of the impairment test, we determined there was an impairment in our EMEA reporting unit. In determining the fair value of our EMEA reporting unit at December 31, 2004, we revised certain assumptions relative to EMEA, which significantly decreased the fair value of this reporting unit relative to the fair value determined during our annual goodwill impairment test, which was as of April 1, 2004. These revisions include lowering our EMEA segment revenue growth expectations, increasing selling, general and administrative cost projections and factoring in a less than anticipated decline in compensation expense. These changes reflect lower than expected results for the year ended December 31, 2004 and management’s current expectations of future results. In order to quantify the impairment, under step two of the impairment test, we completed a hypothetical purchase price allocation of fair value determined in step one to all assets and liabilities of our EMEA reporting unit. As a result, a goodwill impairment loss of $397.1 million was recognized in our EMEA reporting unit as the carrying amount of the reporting unit was greater than the revised fair value of the reporting unit (as determined using the expected present value of future cash flows) and the carrying amount of the reporting unit goodwill exceeded the implied fair value of that goodwill.

As of December 31, 2004, we had approximately 16,800 employees, including approximately 14,600 client service personnel. This represented an increase in our billable headcount of approximately 12.3% when compared to the prior year. Moreover, our consolidated utilization during the year ended December 31, 2004 improved by 5.1% when compared to the twelve months ended December 31, 2003. Utilization represents the percentage of time spent by our client service personnel on billable work. The improvement in our overall utilization was primarily the result of better alignment of our workforce with market demand for services. In general, we believe that our workforce is in line with the needs of the business; however, as economic conditions continue to improve, we will continue to hire qualified employees with the advanced consulting services skills necessary to deliver the services we offer. As of December 31, 2005, we had approximately 17,600 full-time employees, including approximately 15,400 professional consultants.

Although we experienced increases in client spending due to improvements in global economic conditions, we continued to experience pricing pressures, as competition for new engagements remained strong and as movement toward the use of lower-cost service delivery personnel continued to grow within our industry. For the year ended December 31, 2004, our consolidated billing rates declined 4.5% when compared to the twelve months ended December 31, 2003. We experienced continued pricing pressures in 2005 and we anticipate that we will continue to experience pricing pressures going forward; however, we are working to maintain our margins by implementing various cost control initiatives and complementing our solutions offerings by building greater offshore capabilities.

Over the past year we completed a number of private securities offerings in an effort to improve our overall liquidity. During December 2004 we completed the offering of $225.0 million aggregate principal amount of 2.50% Series A Convertible Subordinated Debentures and $175.0 million aggregate principal amount of 2.75% Series B Convertible Subordinated Debentures. During the first half of 2005 we issued an additional $25.0 million aggregate principal amount of our Series A Convertible Subordinated Debentures and $25.0 million aggregate principal amount of Series B Convertible Subordinated Debentures, issued an aggregate principal amount of $200.0 million of 5.00% Convertible Senior Subordinated Debentures and issued an aggregate principal amount of $40.0 million of 0.50% Convertible Senior Subordinated Debentures. In total, we received approximately $666.3 million in net proceeds from the offerings. The proceeds from the offerings were used to repay amounts outstanding under our existing borrowings, to support letters of credit and surety bonds in connection with our state and local business, and for general corporate purposes. For additional information regarding our debt restructuring, see Note 8, “Notes Payable,” of the Notes to Consolidated Financial Statements.

As previously disclosed in our Notification of Late Filing on Form 12b-25 filed with the SEC on March 17, 2005, we were unable to file this Annual Report on Form 10-K on a timely basis as we experienced significant delays in completing our consolidated financial statements for the year ended December 31, 2004. Such delays were primarily the result of (1) the need to perform significant substantive procedures to compensate for the material weaknesses in our internal control over financial reporting, (2) the additional time required for us to complete our expanded financial statement close procedures in a number of areas, including revenue recognition, tax equalization and accrual of invoices, (3) the additional time required to perform a substantive review of the majority of our contracts in North America and other financial records, (4) the need to validate information derived from our financial accounting system for our North America operations implemented in April 2004, and (5) our continued efforts to complete management’s assessment of internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Our review and evaluation of our internal control over financial reporting have identified a number of material weaknesses. As a result, management’s assessment of internal control over financial reporting concluded that we did not maintain effective internal control over financial reporting as of December 31, 2004. For additional information regarding the material weaknesses, see Item 9A, “Controls and Procedures.”

As a result of performing these expanded financial statement close and data validation procedures, we identified errors and departures from GAAP that impacted certain of our previously issued financial statements. Consequently, our management has determined that our previously issued financial statements and related financial information for the six months ended December 31, 2003 and the fiscal years ended June 30, 2003, 2002, 2001 and five-month period ended June 30, 2000 and corresponding quarterly periods therein, should be restated to correct accounting errors and departures from GAAP identified in those periods. The restated financial statements include a number of restatement adjustments, relating to errors in the accounting for revenue, intercompany loans, leases, employee global mobility and tax equalization, property and equipment, accounts payable, accruals, expense cut-off, stock options, income taxes and other miscellaneous items. The restatement adjustments increased our net loss and loss per share for the six months ended December 31, 2003 by approximately $10.8 million, or $0.05 per share, reduced our net income and earnings per share for the year ended June 30, 2003 by approximately $8.6 million, or $0.04 per share, and increased our net loss and loss per share for the year ended June 30, 2002 by approximately $14.6 million, or $0.09 per share. The net effect of the restatement adjustments to consolidated revenue for the six months ended December 31, 2003 and years ended June 30, 2003 and 2002, was an increase (decrease) of $(31.9) million, $18.6 million and $15.5 million, respectively. In addition, the restatement adjustments impacted our previously issued financial statements for the quarterly periods during the year ended December 31, 2004. Accordingly, all referenced amounts in this Annual Report on Form 10-K for the prior periods mentioned above have been restated to reflect amounts on a restated basis. For additional information regarding the individual restatement adjustments, see Note 3, “Restatement,” of the Notes to the Consolidated Financial Statements.

Principal Business Goals for 2005 and Beyond

Our principal business goals for 2005 were focused on, and in 2006 will continue to be focused on, resolving the issues related to our processes and financial reporting, strengthening our business model and addressing human resources issues.

Financial Reporting and Processes: Our top priorities with respect to financial reporting and process issues have been to resolve the process, training and system issues related to financial accounting for our North America operations and focusing on the remediation of material weaknesses in our internal controls identified as part of management’s review and evaluation of internal control over financial reporting. Successful resolution of these issues will help us to file our periodic reports with the SEC, including Form 10-K and Forms 10-Q, on a timely basis. In addition, we expect that the resolution of these issues will improve our billings and cash collections procedures and result in improved cash flow. Our intent is to improve our credit rating and reduce the cash or credit capacity required to support performance bonds and letters of credit primarily in connection with our state and local practice.

Strengthen our Business Model: We have taken various actions to strengthen our business model that we expect will improve our competitive position and financial results. Our actions included:

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Improving our service offerings and go-to-market strategy. We increased our investment in the development of superior solutions and insights, while working to improve our relationships with more senior and influential decision makers. In 2005, we established the BearingPoint Institute for Executive Insight to advance our thought leadership and facilitate the development of premium, higher-margin services.

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Improving engagement profitability. We increased, and we intend to continue to increase, our focus on projects that are larger in nature and that are more profitable. We increased our investment in strategic services that support our clients’ mission critical programs. These are services that garner improved margins. Early in 2005, we conducted a comprehensive portfolio review to assess the profitability of our services across our global business. Since then, we have taken steps to reduce our presence in certain non-core and under-performing business areas and geographies and have established a deal review committee to review significant proposals and contracts. Those proposals and contracts are reviewed for a number of factors, including profitability and engagement risk.

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Improving the management of projects and reducing the cost of delivery. We also intend to leverage our workforce more effectively by improving the managing director to staff ratio on projects, while increasing the use of lower cost resources both offshore (China and India) and domestically (Hattiesburg, Mississippi) to support engagement work. We also implemented stricter criteria concerning the use of subcontractors in an effort to reduce our use of subcontractors and drive greater utilization of internal resources.

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Reducing the cost and improving the quality of our corporate services. In an effort to reduce our SG&A costs and improve service levels, we launched a comprehensive review of all corporate services including our finance support, real estate and occupancy, information technology, human resources, marketing and other functions. We are aggressively exploring cost reduction opportunities to move non-core administrative activities off shore and we continue to make progress against our previously announced office space reduction program in order to reduce real estate costs. In addition, because each of our international regions is operating on its own IT platforms, we are considering various options, including significant investments in 2006 and 2007 to more closely integrate our world-wide systems and to reduce future SG&A costs. In early 2005, we essentially completed the transition of infrastructure and support services that were provided by KPMG LLP. See Note 13, “Commitments and Contingencies,” of the Notes to the Consolidated Financial Statements.

Human Resources: Our efforts in human resources are intended to improve the quality of our management and to enhance the attractiveness of career opportunities at BearingPoint. Subsequent to December 31, 2004, we

made considerable progress in strengthening our executive and senior management ranks with the recruitment of several key individuals, including a new Chief Executive Officer, a new Chief Accounting Officer, and a new Controller and streamlined our management structure. We have also taken actions to raise the quality of our Managing Director group and are implementing a new compensation structure tied to new metrics to better evaluate Managing Director performance and link rewards and advancement to accountability and corporate performance. In April 2005, we announced a program that would issue up to $165.0 million of restricted stock units to Managing Directors and other key employees. In June 2005, we announced that certain employees below the managing director level will be eligible to participate in the BE an Owner Program. Under this program, as amended, in January 2006, we will make a cash payment to each eligible employee in an amount equal to 1.5% of such employee’s annual salary as of October 3, 2005 (which payment is estimated to be approximately $18.4 million in the aggregate), and in January 1, 2007, we will make a contribution, as a special offering under our Employee Stock Purchase Plan (“ESPP”), to each eligible employee in an amount equal to 1.5% of such employee’s annual salary as of October 3, 2005 into such eligible employee’s ESPP account, which contribution will be used to purchase shares of our common stock at a 15% discount. We estimate that the RSUs and BE an Owner Program would raise the levels of employee ownership from approximately 2% to approximately 13%. However, we will not be able to settle the RSUs or purchase shares as a special offering under the ESPP until we are current on our SEC filings and we have a valid registration statement covering the shares to be issued.

Segments

For the year ended December 31, 2004, our reportable segments consist of our four North America industry groups (Public Services, Financial Services, Communications, Content and Utilities (previously referred to as Communications & Content) and Consumer, Industrial and Technology), our three international regions (EMEA, Asia Pacific and Latin America) and the Corporate/Other category (which consists primarily of infrastructure costs). Our chief operating decision maker, the Chief Executive Officer (who also serves as interim Chief Financial Officer), evaluates performance and allocates resources among the segments. Accounting policies of the segments are the same as those described in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements. Upon consolidation, all intercompany accounts and transactions are eliminated. Inter-segment revenue is not included in the measure of profit or loss for each reportable segment. Performance of the segments is evaluated on operating income excluding the costs of infrastructure functions (such as information systems, finance and accounting, human resources, legal and marketing) as described in Note 19, “Segment Information,” of the Notes to Consolidated Financial Statements. Beginning in fiscal year 2005, we combined our Communications, Content and Utilities and Consumer, Industrial and Technology industry groups to form the Commercial Services industry group. We intend to align the operations within our geographic business units more closely with our North American industry groups and to manage our businesses globally by the three industries beginning in 2007.

Significant Components of Our Statements of Operations

Revenue. We derive substantially all of our revenue from professional service activities. Revenue includes all amounts that are billed or billable to clients, including out-of-pocket costs such as travel and subsistence for client service professional staff, costs of hardware and software and costs of subcontractors (collectively referred to as “other direct contract expenses”). Unbilled revenue represents revenue for services performed that have not been billed. Billings in excess of revenue recognized for which payments have been received are recorded as deferred revenue until the applicable revenue recognition criteria are met. We recognize revenue when it is earned. We consider revenue to be earned when persuasive evidence of an arrangement exists, services have been rendered, fees are fixed or determinable and collection of revenue is reasonably assured. We generally enter into long-term, fixed-price, time-and-materials, time-and-materials not to exceed and cost-plus contracts to design, develop or modify multifaceted, client specific information technology systems. We generally recognize the majority of our revenue on a time-and-materials or percentage-of-completion basis as services are provided (See Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements).

We enter into contracts with our clients that contain varying terms and conditions. These contracts provide that they can be terminated without significant advance notice or penalty. Generally, if a client terminates a project, the client remains obligated to pay for services performed and expenses incurred by us through the date of termination.

Costs of Service. Our costs of service include professional compensation and other direct contract expenses, as well as costs attributable to the support of client service professional staff, depreciation and amortization costs related to assets used in revenue-generating activities, bad debt expense relating to accounts receivable, and other costs attributable to serving our client base. Professional compensation consists of payroll costs and related benefits associated with client service professional staff (including costs associated with reductions in workforce and tax equalization for employees on foreign assignments). Other direct contract expenses include costs directly attributable to client engagements. These costs include out-of-pocket costs such as travel and subsistence for client service professional staff, costs of hardware and software and costs of subcontractors. Additionally, our costs of service include restructuring or impairment charges related to assets used in revenue-generating activities, such as costs incurred associated with our office space reduction effort.

Amortization of Purchased Intangible Assets. Amortization of purchased intangible assets represents the amortization expense on identifiable intangible assets related to customer and market-related intangible assets, which resulted from our various acquisitions of businesses.

Goodwill Impairment Charge. Goodwill impairment charges represent the amount by which the carrying value of our goodwill exceeded the implied fair value of our goodwill as measured in accordance with SFAS No. 142 (see Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements).

Selling, General and Administrative Expenses. Selling, general and administrative expenses include costs related to marketing, information systems, depreciation and amortization, finance and accounting, human resources, sales force, and other expenses related to managing and growing our business. During fiscal year 2003, selling, general and administrative expenses also included costs associated with our rebranding effort.

Interest Income (Expense), Net. Interest expense reflects interest incurred on our borrowings, including interest incurred on private placement senior notes, borrowings under revolving lines of credit and borrowings under foreign currency denominated term loans. Interest income represents interest earned on short-term investments of available cash and cash equivalents.

Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt represents the make-whole premium, unamortized debt issuance costs and fees that were paid in connection with the early extinguishment of our $220.0 million in aggregate principal of senior notes (see Note 8, “Notes Payable,” of the Notes to Consolidated Financial Statements).

Income Tax Expense. Income tax expense is based upon pre-tax earnings and enacted income tax rates. Our income tax expense will differ from the applicable statutory rates due to the amount of nondeductible items, primarily nondeductible goodwill.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management’s estimates, assumptions and judgments are derived and continually evaluated based on available information, historical experience and various other assumptions that are believed to be reasonable under the

circumstances. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates. The areas that we believe are our most critical accounting policies include revenue recognition, valuation of accounts receivable, valuation of goodwill, accounting for income taxes, valuation of long-lived assets, accounting for leases, restructuring charges, legal contingencies, retirement benefits, accounting for stock options, accounting for intercompany loans and accounting for employee global mobility and tax equalization.

A critical accounting policy is one that involves making difficult, subjective or complex accounting estimates that could have a material effect on our financial condition and results of operations. Critical accounting policies require us to make assumptions about matters that are highly uncertain at the time of the estimate, and different estimates that we could have used, or changes in the estimate that are reasonably likely to occur, may have a material impact on our financial condition or results of operations.

Revenue Recognition

We earn revenues from three primary sources: (1) technology integration services where we design, build and implement new or enhanced system applications and related processes, (2) services to provide general business consulting, such as system selection or assessment, feasibility studies, business valuations, and corporate strategy services, (3) and managed services in which we manage, staff, maintain, host or otherwise run solutions and systems provided to our customers. Contracts for these services have different terms based on the scope, deliverables, and complexity of the engagement which require us to make judgments and estimates in recognizing revenues. Fees for these contracts may be in the form of time-and-materials, cost-plus and fixed price.

Technology integration services represent a significant portion of our business and are generally accounted for under the percentage-of-completion method in accordance with the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” Under the percentage-of-completion method, management estimates the percentage-of-completion based upon costs to the client incurred as a percentage of the total estimated costs to the client. When total cost estimates exceed revenues, we accrue for the estimated losses immediately. The use of the percentage-of-completion method requires significant judgment relative to estimating total contract revenues and costs, including assumptions relative to the length of time to complete the project, the nature and complexity of the work to be performed, and anticipated changes in estimated salaries and other costs. Incentives and award payments are included in estimated revenues using the percentage-of-completion method when the realization of such amounts is deemed probable upon achievement of certain defined goals. Estimates of total contract revenues and costs are continuously monitored during the term of the contract, and recorded revenues and costs are subject to revision as the contract progresses. When revisions in estimated contract revenues and costs are determined, such adjustments are recorded in the period in which they are first identified.

Revenues for general business consulting services are recognized as work is performed and amounts are earned in accordance with the Securities and Exchange Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” as amended by SAB No. 104, “Revenue Recognition.” We consider amounts to be earned once evidence of an arrangement has been obtained, services are delivered, fees are fixed or determinable, and collectibility is reasonably assured. For contracts with fees based on time and materials or cost plus, we recognize revenue over the period of performance. Depending on the specific contractual provisions and nature of the deliverable, revenue may be recognized on a proportional performance model based on level of effort, as milestones are achieved or when final deliverables have been provided.

For our managed service arrangements, we typically implement or build system applications for customers that we then manage or run for periods that may span several years. Such arrangements include the delivery of a combination of one or more of our service offerings and are governed by the Emerging Issues Task Force Issue 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” In managed service arrangements in

which the system application implementation or build has standalone value to the customer, and we have evidence of fair value for the managed services, we bifurcate the total arrangement into two units of accounting: (i) the system application implementation or build which is recognized as technology integration services using the percentage-of-completion method under SOP 81-1, and (ii) managed services that are recognized under SAB No. 104 ratably over the estimated life of the customer relationship. In instances where we are unable to bifurcate implementation or build are deferred and recognized together with managed services upon completion of the system application implementation or build ratably over the estimated life of the customer relationship. Certain managed service arrangements may also include transaction-based services in addition to the system application implementation or build and managed services. Fees from transaction-based services are recognized as earned if we have evidence of fair value for such transactions; otherwise, transaction fees are spread ratably over the remaining life of the customer relationship period as received. The determination of fair value requires us to use significant judgment. We determine the fair value of service revenues based upon our recent pricing for those services when sold separately and/or prevailing market rates for similar services.

Valuation of Accounts Receivable

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Assessing the collectibility of customer receivables requires management judgment. We determine our allowance for doubtful accounts by specifically analyzing individual accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness, current economic and accounts receivable aging trends and changes in our customer payment terms. Our valuation reserves are periodically reevaluated and adjusted as more information about the ultimate collectibility of accounts receivable becomes available.

Valuation of Goodwill

Effective July 1, 2001, we early-adopted SFAS No. 142 and as a result, we recognized a transitional impairment loss of $80.0 million, net of tax, ($0.50 per share) as the cumulative effect of a change in accounting principle. This transitional impairment loss resulted from a change in the method of measuring impairments as prescribed by SFAS 142.

Following the adoption of SFAS No. 142, we no longer amortize goodwill and certain intangible assets, but instead assess the impairment of goodwill and identifiable intangible assets on at least an annual basis on April 1^st and whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Factors we consider important that could trigger an impairment review include significant underperformance relative to historically or projected future operating results, identification of other impaired assets within a reporting unit, the disposition of a significant portion of a reporting unit, significant adverse changes in business climate or regulations, significant changes in senior management, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period, a decline in our credit rating, or a reduction of our market capitalization relative to net book value. Determining whether a triggering event has occurred includes significant judgment from management.

The goodwill impairment test prescribed by SFAS No. 142 requires us to identify reporting units and to determine estimates of the fair value of our reporting units as of the date we test for impairment. As of December 31, 2004, our reporting units consisted of our four North America industry groups and our three international regions. To conduct a goodwill impairment test, the fair value of the reporting unit is compared with its carrying value. If the reporting unit’s carrying value exceeds its fair value, we record an impairment loss to the extent that the carrying value of the goodwill exceeds its implied fair value. The fair value of a reporting unit is the amount for which the unit as a whole could be bought or sold in a current transaction between willing parties. We estimate the fair values of our reporting units using discounted cash flow valuation models. Those models require estimates of future revenue, profits, capital expenditures and working capital for each unit. We

estimate these amounts by evaluating historical trends, current budgets, operating plans and industry data. Determining the fair value of reporting units and goodwill includes significant judgment by management and different judgments could yield different results.

During the fourth quarter of the year ended December 31, 2004, we determined that a triggering event had occurred, causing us to perform a goodwill impairment test for all reporting units. The triggering event resulted from downgrades in our credit rating in December 2004, significant changes in senior management and underperforming foreign legal entities. As required by SFAS No. 142, we performed a two-step impairment test to identify the potential impairment and, if necessary, measure the amount of the impairment. Under step one of the impairment test, we determined there was an impairment in our EMEA reporting unit. In determining the fair value of our EMEA reporting unit at December 31, 2004, we revised certain assumptions relative to EMEA, which significantly decreased the fair value of this reporting unit relative to the fair value determined during our annual goodwill impairment test, which is as of April 1, 2004. These revisions include lowering our EMEA segment revenue growth expectations, increasing selling, general and administrative cost projections and factoring in a less than anticipated decline in compensation expense. These changes reflect lower than expected results for the year ended December 31, 2004 and management’s current expectations of future results. In order to quantify the impairment, under step two of the impairment test, we completed a hypothetical purchase price allocation of fair value determined in step one to all assets and liabilities of our EMEA reporting unit. As a result, a goodwill impairment loss of $397.1 million was recognized in our EMEA reporting unit as the carrying amount of the reporting unit was greater than the revised fair value of the reporting unit (as determined using the expected present value of future cash flows) and the carrying amount of the reporting unit goodwill exceeded the implied fair value of that goodwill.

Accounting for Income Taxes

Provisions for federal, state and foreign income taxes are calculated on reported pre-tax earnings based on current tax law and also include, in the current period, the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Such provisions differ from the amounts currently receivable or payable because certain items of income and expense are recognized in different time periods for financial reporting purposes than for income tax purposes. Significant judgment is required in determining income tax provisions and evaluating tax positions. We establish reserves for income tax when, despite the belief that our tax positions are fully supportable, there remain certain positions that are probable to be challenged and possibly disallowed by various authorities. The consolidated tax provision and related accruals include the impact of such reasonably estimable losses and related interest as deemed appropriate. To the extent that the probable tax outcome of these matters changes, such changes in estimate will impact the income tax provision in the period in which such determination is made.

The majority of our deferred tax assets at December 31, 2004 consist of foreign and state net operating loss carryforwards that will expire between 2007 and 2024. During 2004, the valuation allowance against foreign net operating loss and foreign tax credit carryforwards was increased by $26.8 million based on projections of future loss of certain foreign subsidiaries.

Since our inception various foreign, state and local authorities have audited us in the area of income taxes. Those audits included examining the timing and amount of deductions, the allocation of income among various tax jurisdictions and compliance with foreign, state and local tax laws. In evaluating the exposure associated with various tax filing positions we accrue charges for exposures related to uncertain tax positions.

During 2005, the Internal Revenue Service commenced a federal income tax examination for the tax years ended June 30, 2001 and June 30, 2003. We are unable to determine the ultimate outcome of these examinations, but we believe that we have established appropriate reserves related to apportionment of income between jurisdictions, the impact of the restatement items and certain filing positions. We are also under examination from time to time in foreign, state and local jurisdictions.

During the year ended December 31, 2004, the six months ended December 31, 2003 and the year ended June 30, 2003, no reserves established would have expired based on the statute of limitations with respect to certain tax examination periods. In addition, an increase to the reserve for tax exposures of $8.0 million, $3.4 million and $6.0 million, respectively, was recorded as an income tax expense for additional exposures, including interest and penalties.

At December 31, 2004, we believe we have appropriately accrued for exposures related to uncertain tax positions. To the extent we were to prevail in matters for which accruals have been established or be required to pay amounts in excess of reserves, our effective tax rate in a given financial statement period may be materially impacted.

The carrying value of our net deferred tax assets assumes that we will be able to generate sufficient future taxable income in certain tax jurisdictions to realize the value of these assets. If we are unable to generate sufficient future taxable income in these jurisdictions, a valuation allowance is recorded when it is more likely than not that the value of the deferred tax assets is not realizable. Management evaluates the realizability of the deferred tax assets and assesses the need for any valuation allowance.

Valuation of Long-Lived Assets

Long-lived assets primarily include property and equipment and intangible assets with finite lives (purchased software, internal capitalized software, and customer lists). In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we periodically review long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If an impairment is indicated, the asset is written down to its estimated fair value based on a discounted cash flow analysis. Determining the fair value of long-lived assets includes significant judgment by management, and different judgments could yield different results.

Accounting for Leases

We lease all of our office facilities under non-cancelable operating leases that expire at various dates through 2015, along with options that permit renewals for additional periods. Rent abatements and escalations are considered in the determination of straight-line rent expense for operating leases. Leasehold improvements made at the inception of or during the lease are amortized over the shorter of the asset life or the lease term. We receive incentives to lease office facilities in certain areas. These incentives are recorded as a deferred credit and recognized as a reduction to rent expense on a straight-line basis over the lease term.

Restructuring Charges

We periodically record restructuring charges resulting from restructuring our operations (including consolidation and/or relocation of operations), changes in our strategic plan or managerial responses to increasing costs or declines in demand. The determination of restructuring charges requires management to utilize significant judgment and estimates related to expenses for employee benefits, such as costs of severance and termination benefits, and costs for future lease commitments on excess facilities, net of estimated future sublease income. In determining the amount of lease and facilities restructuring charges, we are required to estimate such factors as future vacancy rates, the time required to sublet excess facilities and sublease rates. These estimates are reviewed and potentially revised on a quarterly basis based on available information and known market conditions. If our assumptions prove to be inaccurate, we may need to make changes in these estimates that could impact our financial position and results of operations.

Legal Contingencies

We are currently involved in various claims and legal proceedings. We periodically review the status of each significant matter and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. We use significant judgment in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information at that time. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions in the estimates of potential liabilities could have a material impact on our financial position and results of operations. We expense legal fees as incurred.

Retirement Benefits

Our pension plans and postretirement benefit plans are accounted for using actuarial valuations required by SFAS No. 87, “Employers’ Accounting for Pensions,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” Accounting for retirement plans requires management to make significant subjective judgments about a number of actuarial assumptions, including discount rates, salary growth, long-term return on plan assets, retirement, turnover, health care cost trend rates and mortality rates. Depending on the assumptions and estimates used, the pension and postretirement benefit expense could vary within a range of outcomes and have a material effect on our financial position and results of operations. In addition, the assumptions can materially affect accumulated benefit obligations and future cash funding. For a detailed discussion of our retirement benefits, see Note 17, “Employee Benefit Plans,” of the Notes to Consolidated Financial Statements.

Accounting for Stock Options

We recognize stock option costs pursuant to APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and have elected to disclose the impact of expensing stock options pursuant to SFAS No. 123, “Accounting for Stock-Based Compensation,” in the notes to our financial statements. Effective for the quarter ended March 31, 2006, we will adopt the provisions of SFAS No. 123R, “Share-Based Payment.” Both SFAS No. 123 and 123R require management to make assumptions to determine the underlying value of stock options, including the expected life of the stock options and the volatility of the stock options. Changes to the underlying assumptions may have a significant impact on the underlying value of the stock options, which could have a material impact on our financial statements.

Accounting for Intercompany Loans

Intercompany loans are classified between long and short term based on management’s intent regarding repayment. Translation gains and losses on short term debt are recorded in other income (expense), net in the income statement and similar gains and losses on long-term debt are recorded as other comprehensive income in shareholder’s equity. Accordingly, changes in management’s intent relative to the expected repayment of these intercompany loans will change the amount of translation gains and losses included in the income statement.

Accounting for Employee Global Mobility and Tax Equalization

We have a tax equalization policy designed to ensure our employees on domestic long-term and foreign assignments will be subject to the same level of personal tax regardless of the tax jurisdiction in which the employee works. We accrue for tax equalization expenses in the period incurred. As more fully described in Note 3, “Restatement,” of the Notes to Consolidated Financial Statements, we recorded restatement adjustments related to accounting errors for employee mobility and tax equalization. Included within the restatement adjustments, we calculated interest and penalties associated with failure to timely file and withhold payroll taxes. As of December 31, 2004, we have accrued approximately $67.6 million of expenses associated with tax

equalization expenses and related interest and penalties. In the event we can settle the liability for less than the amount accrued, a credit to expenses will be recorded in the period of adjustment.

Financial Statement Presentation

The consolidated financial statements reflect the operations of our Company and all of our majority-owned subsidiaries. Upon consolidation, all significant intercompany accounts and transactions are eliminated. Prior to calendar year 2004, certain of our consolidated foreign subsidiaries within the EMEA and Asia Pacific regions reported their results on a one-month lag. During calendar year 2004, the one-month lag for certain of these subsidiaries within the EMEA and Asia Pacific regions was eliminated (see Note 2, “Summary of Significant Accounting Principles” of the Notes to Consolidated Financial Statements). As of December 31, 2004, certain of our consolidated foreign subsidiaries within EMEA continue to report their results of operations on a one-month lag.

On February 2, 2004, we changed our fiscal year end from a twelve-month period ending June 30 to a twelve-month period ending December 31. As a requirement of this change, the results for the six-month period from July 1, 2003 to December 31, 2003 are reported as a separate transition period within the consolidated financial statements. Accordingly, management’s discussion and analysis of financial condition and results of operations will: (i) compare the audited results of operations for the year ended December 31, 2004 to the unaudited results of operations for the twelve months ended December 31, 2003; (ii) compare the audited results of operations for the six months ended December 31, 2003 to the unaudited results of operations for the six months ended December 31, 2002; (iii) compare the results of operations for the fiscal year ended June 30, 2003 to the unaudited results of operations for the fiscal year ended June 30, 2002; and (iv) discuss our liquidity and capital resources as of December 31, 2004.

Throughout the consolidated financial statements and accompanying notes, all referenced amounts related to prior periods reflect the balances and amounts on a restated basis. The restated financial statements for the fiscal year ended June 30, 2002 are presented unaudited and, in the opinion of management, have been prepared in accordance with accounting principles generally accepted in the United States of America and reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of results for the period.

Results of Operations

The following table presents certain comparative financial information for (1) the twelve months ended December 31, 2004 and 2003 and (2) the six months ended December 31, 2003 and 2002, respectively.


	Twelve Months Ended December 31,						Six Months Ended December 31,
	2004			2003			2003			2002
				(as restated)			(as restated)			(as restated)
				(unaudited)						(unaudited)
	(in thousands, except share and per share amounts)
Revenue	$	3,375,782		$	3,130,139		$	1,522,503		$	1,550,263

Costs of service:
Professional compensation		1,532,423			1,432,958			694,859			691,092
Other direct contract expenses		991,493			787,658			396,392			351,800
Lease and facilities restructuring charges		11,699			76,454			61,436			2,265
Other costs of service		292,643			255,924			129,998			138,680

Total costs of service		2,828,258			2,552,994			1,282,685			1,183,837

Gross profit		547,524			577,145			239,818			366,426
Amortization of purchased intangible assets		3,457			35,861			10,212			19,479
Goodwill impairment charge		397,065			127,326			127,326			—
Selling, general and administrative expenses		641,176			534,110			272,250			288,236

Operating income (loss)		(494,174	)		(120,152	)		(169,970	)		58,711
Loss on early extinguishment of debt		(22,617	)		—			—			—
Interest/other income (expense), net		(17,644	)		(8,853	)		(1,773	)		(3,415	)

Income (loss) before taxes		(534,435	)		(129,005	)		(171,743	)		55,296
Income tax expense		11,791			34,523			4,872			35,692

Net income (loss)	$	(546,226	)	$	(163,528	)	$	(176,615	)	$	19,604

Earnings (loss) per share—basic and diluted	$	(2.77	)	$	(0.85	)	$	(0.91	)	$	0.11

Weighted average shares—basic		197,039,303			192,148,757			193,596,759			180,278,748

Weighted average shares—diluted		197,039,303			192,148,757			193,596,759			180,408,595

Year Ended December 31, 2004 Compared to Twelve Months Ended December 31, 2003

The following table presents certain financial information and performance metrics for each of our reportable segments for the year ended December 31, 2004 and the twelve months ended December 31, 2003. Amounts are in thousands, except percentages of total revenue and gross profit percentages.


	Year Ended					Twelve Months Ended
	December 31, 2004					December 31, 2003
						(as restated) (unaudited)
				% of Total Revenue					% of Total Revenue
Revenue:
Public Services	$	1,343,670		40	%	$	1,121,943		36	%
Financial Services		326,452		10	%		241,120		8	%
Communications, Content and Utilities		206,904		6	%		298,244		9	%
Consumer, Industrial and Technology		447,118		13	%		469,375		15	%
EMEA		642,686		19	%		585,851		19	%
Asia Pacific		328,338		10	%		323,546		10	%
Latin America		79,302		2	%		89,085		3	%
Corporate/Other		1,312		n/m			975		n/m

	$	3,375,782		100	%	$	3,130,139		100	%


				Gross Profit %					Gross Profit %
Gross Profit:
Public Services	$	290,582		22	%	$	346,022		31	%
Financial Services		101,075		31	%		69,409		29	%
Communications, Content and Utilities		26,100		13	%		80,807		27	%
Consumer, Industrial and Technology		103,684		23	%		121,880		26	%
EMEA		96,236		15	%		70,469		12	%
Asia Pacific		31,063		9	%		58,523		18	%
Latin America		13,454		17	%		20,542		23	%
Corporate/Other (1)		(114,670	)	n/m			(190,507	)	n/m

	$	547,524		16	%	$	577,145		18	%

(1)	Corporate/Other gross profit (loss) is principally due to infrastructure and shared services costs.

n/m = not meaningful

Revenue. Revenue increased $245.6 million, or 7.8%, from $3,130.1 million during the twelve months ended December 31, 2003, to $3,375.8 million during the year ended December 31, 2004. The increase in revenue was primarily attributable to a $193.5 million increase in revenue within our North America operating segments and a $51.8 million increase within our international operating segments. Our North America revenue of $2,324.1 million for the year ended December 31, 2004 increased 9.1% when compared to the twelve months ended December 31, 2003. The increase in our North America revenue was primarily the result of strong growth in both our Public Services and Financial Services business units. Revenue from our international operations for the year ended December 31, 2004 was $1,050.3 million, an increase of 5.2% when compared to the twelve months ended December 31, 2003. Revenue for our international operations increased predominantly due to growth in both the EMEA and Asia Pacific regions and the effect of currency exchange rate fluctuations on reported revenue.

Public Services, our largest business unit, generated revenue during the year ended December 31, 2004 of $1,343.7 million, representing an increase of $221.7 million, or 19.8%, over the twelve months ended

December 31, 2003. This increase was predominantly the result of growth in the Federal business sector. Our Public Services business unit experienced increases in engagement hours of 16.8% associated with a greater demand for our services.

Our Financial Services business unit generated revenue during the year ended December 31, 2004 of $326.5 million, representing growth of $85.3 million, or 35.4% over the twelve months ended December 31, 2003. This increase in revenue was principally due to a 54.5% increase in engagement hours and a 12.0% increase in utilization when compared to the prior year. Although engagement hours and utilization increased, billing rates for the year ended December 31, 2004 declined 12.3% when compared to the twelve months ended December 31, 2003 as a result of pricing pressure from both our clients and competition across the industry and a change in the business mix toward more technology-driven projects.

Our Communications, Content and Utilities (previously referred to as Communications & Content) business unit generated revenue of $206.9 million during the year ended December 31, 2004, representing a decline of $91.3 million, or 30.6%, from the twelve months ended December 31, 2003. This decrease was primarily the result of a decline in revenue in our Wireline sector. Revenue in our Wireline sector declined when compared to the prior year due to the completion of several large contracts involving testing related to compliance with the 1996 Telecommunications Act. While engaged on compliance testing contracts, certain clients decided to curtail our involvement in non-compliance related projects. Revenue for our Communications, Content and Utilities business unit experienced a decline in average billing rates of 24.6% when compared to the prior year. Contracts involving testing related to compliance with the 1996 Telecommunications Act generally had higher levels of profitability than other contracts within the Communications, Content and Utilities business unit.

Our Consumer, Industrial and Technology business unit generated revenue during the year ended December 31, 2004, of $447.1 million, representing a decline of $22.3 million, or 4.7%, over the twelve months ended December 31, 2003. The decline was primarily the result of challenging economic conditions during the first six months of calendar year 2004, which led to a decrease in technology spending and increased pricing pressures. Consumer, Industrial and Technology experienced a 9.1% decline in average billing rates when compared to the prior year.

Our EMEA business unit generated revenue of $642.7 million during the year ended December 31, 2004, representing growth of $56.8 million, or 9.7%, over the twelve months ended December 31, 2003. The reported revenue for our EMEA business unit is affected by currency exchange-rate fluctuations. Over the past year, the strengthening of foreign currencies (primarily the Euro) against the U.S. dollar has resulted in a favorable currency translation that has increased our reported U.S. dollar revenue when compared to the prior year. In constant currency terms, revenue for our EMEA business unit was essentially flat as compared to the twelve months ended December 31, 2003. We believe that the lack of revenue growth was primarily due to overcapacity in the marketplace and significant write-offs primarily related to loss contracts.

Our Asia Pacific business unit generated revenue of $328.3 million during the year ended December 31, 2004 representing growth of $4.8 million, or 1.5%, over the twelve months ended December 31, 2003. The reported revenue for our Asia Pacific business unit is affected by currency exchange-rate fluctuations. Over the past year, the strengthening of foreign currencies against the U.S. dollar has resulted in a favorable currency translation that has increased our reported U.S. dollar revenue when compared to the prior year. During the course of 2004, the Asia Pacific business unit has worked on a number of fixed fee engagements where the average rate per hour is lower than the historical average for the region. As a result, revenue in constant currency terms, declined by 5.5% when compared to the prior year. The average rate per hour for these engagements, primarily in Australia, China and Japan, is lower than the historical average as a result of expending additional time and effort to deliver under our contractual arrangements than was initially planned. In addition, average billing rates were negatively impacted by significant investments made on certain engagements in an effort to position ourselves favorably for prospective work.

Our Latin America business unit generated revenue of $79.3 million during the year ended December 31, 2004, representing a decline of $9.8 million, or 11.0%, over the twelve months ended December 31, 2003. Revenue for Latin America decreased as a result of increased market pressures impacting our average billing rates, primarily in Mexico and Brazil. Currency exchange-rate fluctuations have not had a significant impact on our Latin America operations during the year.

Gross Profit. During the year ended December 31, 2004, our revenue increased $245.6 million and total costs of service increased $275.3 million when compared to the twelve months ended December 31, 2003, resulting in a decrease in gross profit of $29.6 million, or 5.1%. Gross profit as a percentage of revenue declined to 16.2% for the year ended December 31, 2004, compared to 18.4% for the twelve months ended December 31, 2003. Our gross profit for the year ended December 31, 2004 includes a $11.7 million lease and facilities restructuring charge, while our gross profit for the twelve months ended December 31, 2003 includes a $76.5 million lease and facilities restructuring charge. The change in gross profit for the year ended December 31, 2004 compared to the twelve months ended December 31, 2003 resulted primarily from the following:

•

Professional compensation expense improved slightly as a percentage of revenue to 45.4% for the year ended December 31, 2004 compared to 45.8% during the twelve months ended December 31, 2003. We experienced a net increase in professional compensation expense of $99.5 million, or 6.9%, from $1,433.0 million for the twelve months ended December 31, 2003, to $1,532.4 million for the year ended December 31, 2004. The increase in professional compensation expense is primarily the result of hiring additional billable employees in response to overall market demand for services.

•

Other direct contract expenses increased as a percentage of revenue to 29.4% for the year ended December 31, 2004 compared to 25.2% during the twelve months ended December 31, 2003. We experienced a net increase in other direct contract expenses of $203.8 million, or 25.9%, from $787.7 million for the twelve months ended December 31, 2003, to $991.5 million for the year ended December 31, 2004. The $203.8 million increase in other direct contract expenses is mainly attributable to our increased use of subcontractors, particularly in the Public Services and EMEA business units. The increase in other direct contract expenses, including the cost of subcontractors, has negatively impacted our gross profit, as the cost of subcontractors is generally more expensive than the cost of our own workforce. Although we require subcontractors to handle specific requirements on some engagements, the majority of our subcontractor usage is not a skill-set issue, as many times clients mandate the use of certain contractors. In addition, the size and complexity of some of our projects make usage of subcontractors a key ingredient to winning the projects. We are focused on limiting the use of subcontractors and minimizing travel-related expenses whenever possible and increasing our hiring in order to align our skill base with the market demand for our services.

•

Other costs of service as a percentage of revenue increased from 8.2% during the twelve months ended December 31, 2003 to 8.7% during the year ended December 31, 2004. We experienced a net increase in other costs of service of $36.7 million, or 14.3%, from $255.9 million for the twelve months ended December 31, 2003, to $292.6 million for the year ended December 31, 2004. The increase in other costs of service in dollar terms was primarily attributable to an increase in costs associated with the overall growth of our business over the past year, offset by savings achieved as a result of our office space reduction efforts.

•

During the year ended December 31, 2004, we recorded, within the Corporate/Other operating segment, a charge of $11.7 million for lease and facilities restructuring costs related to our previously announced reduction in office space primarily within the North America, EMEA and Asia Pacific regions. We reduced our overall office space in an effort to eliminate excess capacity and to align our office space usage with our current workforce and the needs of the business. During the twelve months ended December 31, 2003, we recorded a $76.5 million charge for lease and facilities restructuring costs. As of December 31, 2004, we have a remaining lease and facilities accrual of $23.0 million and $27.4 million, identified as current and non-current portions, respectively. The remaining lease and facilities accrual will be paid over the remaining lease terms.

Gross profit for our Public Services business unit was $290.6 million, a decrease of $55.4 million, or 16.0%, over the prior year. Gross profit as a percentage of revenue declined to 21.6% in the year ended December 31, 2004, from 30.8% in the twelve months ended December 31, 2003. This decline was principally due to the adverse impact of $35.9 million related to litigation settlements in the Peregrine case (see Item 3, “Legal Proceedings”) and, to a lesser extent, write-offs on loss contracts. Additionally, the increase in other direct contract expenses, which includes subcontractors and materials procurement relating to specific contracts, negatively impacted gross profit margin, as the gross profit margin on revenue derived from other direct contract expenses is generally less profitable than the gross profit margin on revenue derived from services provided from our own workforce. Although we require subcontractors to handle specific requirements on some engagements, the majority of our subcontractor usage is not a skill-set issue, as many times clients mandate the use of certain contractors. In addition, the size and complexity of some of our projects make usage of subcontractors a key ingredient to winning the projects. In addition, the gross profit was reduced because our professional compensation as a percent of net revenue increased slightly as we attempted to 1) add headcount in response to market demand for services and our continued effort to hire employees with the advanced information technology skills necessary to perform the services we offer and, 2) increase headcount in our Government Contracts and Compliance groups.

Gross profit for the Financial Services business unit was $101.1 million, an increase of $31.7 million, or 45.6%, over the prior year. Gross profit as a percentage of revenue increased to 31.0% in the year ended December 31, 2004 from 28.8% in the twelve months ended December 31, 2003. The increase in gross profit was principally due to an increase in revenue of $85.3 million, or 35.4%, from the twelve months ended December 31, 2003 compared to the year ended December 31, 2004. In addition, other direct contract expenses decreased slightly to 17.0% as a percentage of revenue during the year ended December 31, 2004 from 18.5% of revenue during the twelve months ended December 31, 2003.

Gross profit for the Communications, Content and Utilities business unit was $26.1 million, a decrease of $54.7 million, or 67.7%, over the prior year. Gross profit as a percentage of revenue decreased to 12.6% in the year ended December 31, 2004 from 27.1% in the twelve months ended December 31, 2003. The decline in gross profit was principally due to a decrease in revenue of $91.3 million resulting primarily from the completion of several large contracts involving testing related to compliance with the 1996 Telecommunications Act. Contracts involving testing related to compliance with the 1996 Telecommunications Act generally had higher levels of profitability than other contracts within the Communications, Content and Utilities business unit.

Gross profit for the Consumer, Industrial and Technology business unit was $103.7 million, a decrease of $18.2 million, or 14.9%, over the prior year. Gross profit as a percentage of revenue decreased to 23.2% in the year ended December 31, 2004 from 26.0% in the twelve months ended December 31, 2003. The decline in gross profit was principally due to a $22.3 million decrease in revenue resulting from the challenging economic conditions and cautious IT spending during the first six months of calendar year 2004.

Gross profit for the EMEA business unit was $96.2 million, an increase of $25.8 million, or 36.6%, over the prior year. Gross profit as a percentage of revenue improved to 15.0% during the year ended December 31, 2004, compared to 12.0% during the twelve months ended December 31, 2003. This improvement was primarily a result of a $56.8 million increase in revenue as well as a decrease in professional compensation as a percentage of revenue during the year ended December 31, 2004. The decrease in professional compensation expense as a percentage of revenue was primarily the result of our workforce reduction charges recorded during the prior year.

Gross profit for the Asia Pacific business unit was $31.1 million, a decrease of $27.5 million, or 46.9%, over the prior year. Gross profit as a percentage of revenue declined to 9.5%, during the year ended December 31, 2004, compared to 18.1% for the twelve months ended December 31, 2003. This decline in gross profit was primarily the result of lower than expected revenue during the current period due to the decline in our average billing rates, coupled with increases in both other direct contract expenses and professional compensation expense. Other direct contract expenses and professional compensation expense have increased mainly due to the

overall growth of our business throughout the region, which caused an increase in our use of subcontractors and overall headcount when compared to the prior year.

Gross profit for the Latin America business unit was $13.5 million, a decrease of $7.1 million, or 34.5%, over the prior year. Gross profit as a percentage of revenue declined to 17.0% during the year ended December 31, 2004 compared to 23.1% during the twelve months ended December 31, 2003. This decline was primarily due to a decrease in revenue during the year ended December 31, 2004 resulting from increased market pressures impacting our billing rates in Mexico and Brazil, offset by a reduction in our use of subcontractors during the last six months of the year.

Amortization of Purchased Intangible Assets. Amortization of purchased intangible assets decreased $32.4 million to $3.5 million for the year ended December 31, 2004, from $35.9 million for the twelve months ended December 31, 2003. This decrease in amortization expense primarily relates to the fact that the majority of the value relating to order backlog, customer contracts and related customer relationships that were acquired during the six months ended December 31, 2002, was fully amortized by August 2003.

Goodwill Impairment Charge. In December 2004, a goodwill impairment loss of $397.1 million was recognized in the EMEA reporting unit as the carrying amount of the reporting unit’s goodwill exceeded the implied fair value of that goodwill. In December 2003, a goodwill impairment loss of $127.3 million was recognized in the EMEA reporting unit as the carrying amount of the reporting unit’s goodwill exceeded the implied fair value of that goodwill.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $107.1 million, or 20.0%, from $534.1 million for the twelve months ended December 31, 2003, to $641.2 million for the year ended December 31, 2004. This increase is predominantly related to an increase in sales and infrastructure costs associated with the overall growth of our business over the past year as well as higher expenses related to audit fees, Sarbanes-Oxley compliance and the continued build-out of our internal IT function. The increase was partially offset by savings as we continue to wind down services provided under our transition services agreement with KPMG LLP. Selling, general and administrative expenses as a percentage of gross revenue increased to 19.0% compared to 17.1% for the twelve months ended December 31, 2003.

Loss on Early Extinguishment of Debt. In December 2004, we recorded a loss on early extinguishment of debt of $22.6 million related to the make whole premium, unamortized debt issuance costs and fees that were paid in connection with the early extinguishment of our $220.0 million Senior Notes.

Income Tax Expense. We incurred income tax expense of $11.8 million for the year ended December 31, 2004 and $34.5 million for the twelve months ended December 31, 2003. The principal reasons for the difference between the effective income tax rate on loss from continuing operations of (2.2)% and (26.8)% for the year ended December 31, 2004 and the twelve months ended December 31, 2003, respectively, and the U.S. Federal statutory income tax rate are the nondeductible goodwill impairment charge of $385.9 million and $125.5 million; nondeductible meals and entertainment expense of $19.2 million and $16.9 million; increase to deferred tax asset valuation allowance of $24.8 million and $26.0 million; state and local income taxes of $(8.2) million and $6.2 million; impact of foreign recapitalization of $54.8 million and $0; and other nondeductible items of $26.3 million and $10.3 million, respectively.

Net Income (Loss). For the year ended December 31, 2004, we incurred a net loss of $546.2 million, or a loss of $2.77 per share. Included in our results for the year ended December 31, 2004 is the $397.1 million goodwill impairment charge, $51.4 million for certain litigation settlement charges and $11.7 million of lease and facilities restructuring charges. For the twelve months ended December 31, 2003, we incurred a net loss of $163.5 million, or a loss of $0.85 per share. Included in our results for the twelve months ended December 31, 2003 is the $127.3 million goodwill impairment charge, $76.5 million of lease and facilities restructuring charges and $32.1 million related to workforce reductions.

Six Months Ended December 31, 2003 Compared to Six Months Ended December 31, 2002

The following table presents certain financial information and performance metrics for each of our reportable segments for the six months ended December 31, 2003 and the six months ended December 31, 2002. Amounts are in thousands, except percentages of total revenue and gross profit percentages.


	Six Months Ended					Six Months Ended
	December 31, 2003					December 31, 2002
	(as restated)					(as restated)
						(unaudited)
				% of Total Revenue					% of Total Revenue
Revenue:
Public Services	$	562,372		37	%	$	540,048		35	%
Financial Services		118,528		8	%		118,199		8	%
Communications, Content and Utilities		134,217		9	%		190,047		12	%
Consumer, Industrial and Technology		209,190		14	%		273,268		18	%
EMEA (2)		288,994		19	%		271,023		17	%
Asia Pacific		159,482		10	%		127,290		8	%
Latin America		46,593		3	%		29,842		2	%
Corporate/Other		3,127		n/m			546		n/m

	$	1,522,503		100	%	$	1,550,263		100	%


				Gross Profit %					Gross Profit %
Gross Profit:
Public Services	$	176,207		31	%	$	178,372		33	%
Financial Services		34,827		29	%		34,042		29	%
Communications, Content and Utilities		34,236		26	%		64,121		34	%
Consumer, Industrial and Technology		49,482		24	%		69,655		25	%
EMEA (2)		28,380		10	%		67,189		25	%
Asia Pacific		31,420		20	%		17,206		14	%
Latin America		8,001		17	%		8,670		29	%
Corporate/Other (1)		(122,735	)	n/m			(72,829	)	n/m

	$	239,818		16	%	$	366,426		24	%

(1)	Corporate/Other gross profit (loss) is principally due to infrastructure and shared services costs.

(2)	Substantially all of the operations comprising EMEA were purchased during the year ended June 30, 2003.

n/m = not meaningful

Revenue. Revenue decreased $27.8 million, or 1.8%, from $1,550.3 million during the six months ended December 31, 2002, to $1,522.5 million during the six months ended December 31, 2003. The decrease in revenue was primarily attributable to a decrease in North America revenue of $97.3 million, offset by an increase within our international operating segments totaling $66.9 million. Our North America revenue for the six months ended December 31, 2003 of $1,024.3 million declined 8.7% when compared to the same period in the prior year. The decline in our North America revenue was primarily the result of a slow economy and cautious IT spending. In North America, we experienced a 4.0% decrease in engagement hours as well as a 4.8% decrease in our average billing rates. Revenue from our international operations for the six months ended December 31, 2003 was $495.1 million, an increase of 15.6% when compared to the same period in the prior year. Our international operations experienced a 6.4% increase in engagement hours as well as an 8.6% increase in average billing rates.

Public Services, our largest business unit, generated revenue during the six months ended December 31, 2003 of $562.4 million, representing an increase of $22.3 million, or 4.1%, over the six months ended December 31, 2002. This increase was predominantly the result of growth in the Federal business sector, driven by success on international engagements. Revenue for our State, Local & Education (SLED) business sector decreased due to the impact of state budget and spending constraints. Overall, our Public Services business unit experienced increases in both engagement hours and billing rates of 2.6% and 1.5%, respectively, despite both client-driven and competitor-driven pricing pressures.

Our Financial Services business unit generated revenue during the six months ended December 31, 2003 of $118.5 million, representing an increase of $0.3 million, or 0.3% over the six months ended December 31, 2002. The increase in revenue was principally due to a 2.9% increase in engagement hours, despite a 2.5% decline in billing rates. The Financial Services business unit experienced a decline in the Global Markets sector, which was offset by significant growth in the Banking & Insurance sector.

The Communications, Content and Utilities business unit generated revenue of $134.2 million during the six months ended December 31, 2003, representing a decline of $55.8 million, or 29.4%, from the six months ended December 31, 2002. This decline was primarily the result of our completion of several large contracts involving testing related to compliance with the 1996 Telecommunications Act. While engaged on compliance testing contracts, certain clients decided to curtail our involvement in non-compliance related projects. We do not expect these clients to engage us for many of their future projects, as such, engagement hours have declined 17.0%. In addition, pricing pressures within the communications industry have resulted in a 14.9% decrease in billing rates.

The Consumer, Industrial and Technology business unit generated revenue during the six months ended December 31, 2003 of $209.1 million, representing a decline of $64.1 million, or 23.4%, over the six months ended December 31, 2002. The decline was primarily the result of challenging economic conditions, which have led to a decrease in technology spending. Revenue was significantly impacted by the cancellation of two of our larger accounts. When compared to the same period in the prior year, engagement hours decreased 17.5% and billing rates decreased 7.2% during the six months ended December 31, 2003.

The EMEA business unit generated revenue of $289.0 million during the six months ended December 31, 2003, representing growth of $18.0 million, or 6.6%, over the six months ended December 31, 2002. The growth in our reported EMEA revenue resulted from a strengthening of foreign currencies (primarily the Euro) against the U.S. dollar during the six months ended December 31, 2003. In constant currency terms, revenue for our EMEA business unit for the six months ended December 31, 2003 declined by approximately 8.7% when compared to the six months ended December 31, 2002. This decline was the result of a decrease in engagement hours caused by the adverse changes in the business climate within certain of our EMEA operations. In response to this trend, we completed a reduction in workforce during the six months ended December 31, 2003, resulting in an increase in our utilization of approximately 5.6% for the six months ended December 31, 2003 when compared to the six months ended December 31, 2002.

The Asia Pacific business unit generated revenue of $159.5 million during the six months ended December 31, 2003 representing growth of $32.2 million, or 25.3%, over the six months ended December 31, 2002. This revenue growth was primarily driven by an 11.1% increase in utilization and an 11.3% increase in engagement hours as well as the strengthening of foreign currencies against the U.S. dollar. In constant currency terms, growth was 14.8%. The increases in utilization and engagement hours were a result of strong bookings in Japan and the continued integration of acquisitions made during the six months ended December 31, 2002 throughout the region. We experienced improvement in our performance within Greater China, and continue to focus on the emerging economies of Southeast Asia such as Thailand, Malaysia and Singapore. Revenue for Korea, Australia and New Zealand for the six months ended December 31, 2003 remained consistent with revenue for the six months ended December 31, 2002 due to difficult market conditions within those countries, which negatively impacted IT spending.

Our Latin America business unit generated revenue of $46.6 million during the six months ended December 31, 2003, representing growth of $16.8 million, or 56.1%, over the six months ended December 31, 2002. The increase in revenue was primarily due to the positive impact of the acquisitions made during the first quarter of fiscal year 2003, as well as increased volume within Mexico and Brazil. This increase was reflected in a 50.7% growth in engagement hours, while our utilization improved 1.3% and our billing rate per hour in the region increased 3.6% despite increased pricing pressure within this market. Currency exchange-rate fluctuations have not had a significant impact on our Latin America operations during the year.

Gross Profit. For the six months ended December 31, 2003, revenue decreased $27.8 million and total costs of service increased $98.8 million, from the six months ended December 31, 2002. In dollar terms, gross profit decreased by $126.6 million, or 34.6%, from $366.4 million for the six months ended December 31, 2002, to $239.8 million for the six months ended December 31, 2003. Gross profit as a percentage of revenue declined to 15.8% for the six months ended December 31, 2003, compared to 23.6% for the six months ended December 31, 2002. This decline was mainly attributable to an increase in other direct contract expenses and the impact of the $61.4 million lease and facilities restructuring charge related to office space reductions and the $13.6 million reduction in workforce charge recorded during the six months ended December 31, 2003. The change in gross profit for the six months ended December 31, 2003 compared to the same period in the prior year resulted primarily from the following:

•

A net increase in professional compensation of $3.8 million, or less than 1.0%, from $691.1 million for the six months ended December 31, 2002, to $694.9 million for the six months ended December 31, 2003. Professional compensation expense for the six months ended December 31, 2003 includes a $13.6 million charge related to a reduction in workforce recorded during the period. The impact of this charge was significantly offset by savings achieved through our workforce reduction actions in response to the challenging economy.

•

A net increase in other direct contract expenses of $44.6 million, or 12.7%, from $351.8 million, or 22.7% of revenue, for the six months ended December 31, 2002, to $396.4 million, or 26.0% of revenue, for the six months ended December 31, 2003. The $44.6 million increase in other direct contract expenses was mainly attributable to our increased use of subcontractors and higher levels of materials procurement, particularly in both the Public Services and EMEA business units. The increase in other direct contract expenses, including the cost of subcontractors, has negatively impacted our gross profit, as the cost of subcontractors is generally more expensive than the cost of our own workforce. We are focused on limiting the use of subcontractors whenever possible, working to increase our margins by complementing our solutions offerings with greater offshore capabilities and increasing our hiring in order to balance our skill base with the market demand for our services.

•

A net decrease in other costs of service of $8.7 million, or 6.3%, from $138.7 million for the six months ended December 31, 2002, to $130.0 million for the six months ended December 31, 2003. The decline in other costs of service was primarily attributable to savings achieved as a result of our office space reduction efforts.

•

During the six months ended December 31, 2003, we recorded, within the Corporate/Other operating segment, a charge of $61.4 million for lease and facilities restructuring costs related to our previously announced reduction in office space primarily within the North America, EMEA and Asia Pacific regions. We reduced our overall office space in an effort to eliminate excess capacity and to align our office space usage with our current workforce and the needs of the business. The $61.4 million lease and facilities restructuring charge included $46.3 million related to the fair value of future lease obligations (net of estimated sublease income), $7.4 million representing the unamortized cost of fixed assets and $7.7 million in other costs associated with exiting facilities. As of December 31, 2003, we had a remaining lease and facilities accrual of $22.0 million and $33.9 million, identified as current and noncurrent portions, respectively. The remaining lease and facilities accrual was paid over the remaining lease terms.

Gross profit for our Public Services business unit was $176.2 million during the six months ended December 31, 2003, a decrease of $2.2 million, or 1.2%, from the six months ended December 31, 2002. Gross profit as a percentage of revenue declined to 31.3% in the six months ended December 31, 2003, from 33.0% in the six months ended December 31, 2002. This decline was principally due to a $33.8 million increase in other direct contract expenses as a result of our increased use of subcontractors and materials procurement relating to specific engagements, coupled with a $2.8 million increase in compensation expense, which includes a $1.0 million reduction in workforce charge. Although we require subcontractors to handle specific requirements on some engagements, the majority of our use of subcontractors is not a skill-set issue, as many times clients mandate the use of certain contractors.

Gross profit for the Financial Services business unit was $34.8 million during the six months ended December 31, 2003, a decrease of $0.8 million, or 2.3%, from the six months ended December 31, 2002. Gross profit as a percentage of revenue increased to 29.4% in the six months ended December 31, 2003 from 28.8% in the six months ended December 31, 2002. The decline in gross profit was principally due to a $0.6 million increase in professional compensation expense, which includes a $0.4 million charge related to our reduction in workforce.

Gross profit for the Communications, Content and Utilities business unit was $34.2 million during the six months ended December 31, 2003, a decrease of $29.9 million, or 46.6%, from the six months ended December 31, 2002. Gross profit as a percentage of revenue decreased to 25.5% in the six months ended December 31, 2003 from 33.7% in the six months ended December 31, 2002. The decline in gross profit was principally due to the decrease in revenue of $55.8 million resulting from the completion of several large contracts involving testing related to compliance with the 1996 Telecommunications Act. In addition, gross profit for the six months ended December 31, 2003 was impacted by a $1.8 million charge related to our reduction in workforce.

Gross profit for the Consumer, Industrial and Technology business unit was $49.5 million during the six months ended December 31, 2003, a decrease of $20.2 million, or 29.0%, from the six months ended December 31, 2002. Gross profit as a percentage of revenue declined to 23.7% in the six months ended December 31, 2003 from 25.5% in the six months ended December 31, 2002. The decline in gross profit was principally due to the decrease in revenue resulting from the challenging economic conditions and cautious IT spending as mentioned above. In addition, gross profit for the six months ended December 31, 2003 was impacted by a $2.8 million charge related to our reduction in workforce.

Gross profit for the EMEA business unit was $28.4 million during the six months ended December 31, 2003, a decrease of $38.8 million, or 57.8%, from the six months ended December 31, 2002. Gross profit as a percentage of revenue declined to 9.8% during the six months ended December 31, 2003, compared to 24.8% during the six months ended December 31, 2002. This decline was primarily a result of an increase in other direct contract expenses due to increased use of subcontractors during the six months ended December 31, 2003. The increase in our use of subcontractors was a result of our need to contract for certain types of skills in order to meet client requirements. In addition, gross profit for the six months ended December 31, 2003 was impacted by a $4.4 million charge related to our reduction in workforce.

Gross profit for the Asia Pacific business unit was $31.4 million during the six months ended December 31, 2003, an increase of $14.2 million, or 82.6%, from the six months ended December 31, 2002. Gross profit as a percentage of revenue improved to 19.7% during the six months ended December 31, 2003 compared to 13.5% for the six months ended December 31, 2002. This improvement was the result of several factors including the improvement in utilization of our personnel resulting in a reduction in professional compensation expense as a percentage of revenue and a reduction in other costs of services due to tight spending controls imposed during the six months ended December 31, 2003. This improvement was partially offset by a $0.5 million workforce reduction charge recorded in the six months ended December 31, 2003.

Gross profit for the Latin America business unit was $8.0 million during the six months ended December 31, 2003, a decrease of $0.7 million, or 7.7%, from the six months ended December 31, 2002. Gross profit as a percentage of revenue declined to 17.2% during the six months ended December 31, 2003 compared to 29.1% during the six months ended December 31, 2002. This decline was primarily the result of our increased use of subcontractors at key clients to satisfy the demands resulting from our revenue growth discussed above. In addition, a $0.3 million workforce reduction charge recorded in the six months ended December 31, 2003 negatively impacted gross profit.

Amortization of Purchased Intangible Assets. Amortization of purchased intangible assets decreased $9.3 million to $10.2 million for the six months ended December 31, 2003, from $19.5 million for the six months ended December 31, 2002. This decrease in amortization expense primarily relates to the fact that the majority of the value relating to order backlog, customer contracts and related customer relationships that were acquired during the six months ended December 31, 2002, was fully amortized by August 2003.

Goodwill Impairment Charge. In December 2003, a goodwill impairment loss of $127.3 million ($0.66 per share) was recognized in the EMEA reporting unit as the carrying amount of the reporting unit’s goodwill exceeded the implied fair value of that goodwill.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $16.0 million, or 5.5%, from $288.2 million for the six months ended December 31, 2002, to $272.3 million for the six months ended December 31, 2003. This decrease was predominantly due to $21.8 million in costs associated with our rebranding initiative incurred during the six months ended December 31, 2002. This decrease was also attributable to savings in infrastructure costs as we continue to wind down services provided under our transition services agreement with KPMG LLP. This savings was offset by an increase in infrastructure costs associated with the international acquisitions completed during the first quarter of fiscal year 2003. Selling, general and administrative expenses as a percentage of gross revenue declined slightly to 17.9% compared to 18.6% for the six months ended December 31, 2003 and 2002, respectively.

Income Tax Expense. We incurred income tax expense of $4.9 million and $35.7 million for the six months ended December 31, 2003 and December 31, 2002, respectively. The principal reasons for the difference between the effective income tax rate on income (loss) from continuing operations of (2.8)% and 64.5% for the six months ended December 31, 2003 and December 31, 2002, respectively, and the U.S. Federal statutory income tax rate are the nondeductible goodwill impairment charge of $125.2 million and $0; nondeductible meals and entertainment expense of $8.8 million and $8.1 million; increase to deferred tax asset valuation allowance of $18.2 million and $7.9 million; state and local income taxes of $(1.0) million and $6.8 million; and other nondeductible items of $6.6 million and $3.7 million, respectively.

Net Income (Loss). For the six months ended December 31, 2003, we incurred a net loss of $176.6 million, or a loss of $0.91 per share. For the six months ended December 31, 2002, we realized net income of $19.6 million, or $0.11 per share. Included in our results for the six months ended December 31, 2003 is the $127.3 million goodwill impairment charge, $61.4 million of lease and facilities restructuring charges and $13.6 million related to workforce reductions.

Year Ended June 30, 2003 Compared to Year Ended June 30, 2002

The following table presents certain financial information and performance metrics for each of our reportable segments for the year ended June 30, 2003 and the year ended June 30, 2002. Amounts are in thousands, except percentages of total revenue and gross profit percentages.


	Year Ended June 30, 2003					Year Ended June 30, 2002
	(as restated)					(as restated) (unaudited)
				% of Total Revenue					% of Total Revenue
Revenue:
Public Services	$	1,099,620		35	%	$	973,777		41	%
Financial Services		240,791		8	%		237,536		10	%
Communications, Content and Utilities		354,074		11	%		473,051		20	%
Consumer, Industrial and Technology		533,453		17	%		507,347		21	%
EMEA (2)		567,880		18	%		16,089		1	%
Asia Pacific		291,353		9	%		128,035		5	%
Latin America		72,335		2	%		42,822		2	%
Corporate/Other		(1,608	)	n/m			4,442		n/m

	$	3,157,898		100	%	$	2,383,099		100	%


				Gross Profit %					Gross Profit %
Gross Profit:
Public Services	$	348,187		32	%	$	342,104		35	%
Financial Services		68,625		28	%		49,948		21	%
Communications, Content and Utilities		110,692		31	%		140,577		30	%
Consumer, Industrial and Technology		142,053		27	%		153,215		30	%
EMEA (2)		109,279		19	%		1,468		9	%
Asia Pacific		44,308		15	%		10,682		8	%
Latin America		21,211		29	%		1,864		4	%
Corporate/Other (1)		(140,604	)	n/m			(102,117	)	n/m

	$	703,751		22	%	$	597,741		25	%

(1)	Corporate/Other gross profit (loss) is principally due to infrastructure and shared services costs.

(2)	Substantially all of the operations comprising EMEA were purchased during the year ended June 30, 2003.

n/m = not meaningful

Revenue. Revenue increased $774.8 million, or 32.5%, from $2,383.1 million in the year ended June 30, 2002 (fiscal year 2002), compared to $3,157.9 million in the year ended June 30, 2003 (fiscal year 2003). The overall increase in revenue was predominantly due to the impact of the acquisitions completed during the first half of fiscal year 2003. Our three international operating segments (i.e., EMEA and the Asia Pacific and Latin America regions) accounted for $744.6 million, or 96.1%, of the global revenue increase, principally resulting from the aforementioned acquisitions. Total North America revenue increased by $36.2 million, or 1.7%, to $2,227.9 million as increases in three of our North America business units (Public Services, Financial Services and Consumer, Industrial and Technology) were almost completely offset by declines in the Communications, Content and Utilities business unit. North America revenue was positively impacted by personnel acquired from Andersen Business Consulting during the first quarter of fiscal year 2003 as engagement hours increased by 5.8%; however, a decline in the average gross billing rate per hour for the fiscal year ended June 30, 2003 compared to the fiscal year ended June 30, 2002 partially offset the higher level of engagement hours. Average gross billing rates in certain markets have declined due to continuous pricing pressures resulting from the challenging economic environment.

Public Services, our largest business unit, generated revenue in the year ended June 30, 2003 of $1,099.6 million, representing an increase of $125.8 million, or 12.9%, over the year ended June 30, 2002. This increase was predominantly due to growth in the Federal and State and Local business segments, driven by an 11.6% increase in engagement hours and a 1.3% increase in gross billing rates.

Our Financial Services business unit generated revenue in the year ended June 30, 2003 of $240.8 million, representing growth of $3.3 million, or 1.4%, over the year ended June 30, 2002. The increase in revenue was principally due to an increase in engagement hours offset by a slight decline in the gross billing rate year over year.

The Communications, Content and Utilities business unit generated revenue of $354.1 million in the year ended June 30, 2003, representing a decline of $119.0 million, or 25.2%, over the year ended June 30, 2002. This decline was primarily the result of reduced spending in the telecommunications industry and our completion of several large contracts involving testing related to compliance with the 1996 Telecommunications Act, resulting in a 23.5% decrease in engagement hours and a slight decline in the gross billing rate year over year.

The Consumer, Industrial and Technology business unit, representing the combination of our former High Technology and Consumer and Industrial Markets business units, generated revenue in the year ended June 30, 2003 of $533.5 million, representing growth of $26.1 million, or 5.1%, over the year ended June 30, 2002. This business unit received the greatest revenue and resource impact from personnel hired from Andersen Business Consulting in the United States. The growth in revenue was principally due to a 25.7% increase in engagement hours, partially offset by a 16.2% decline in the gross billing rate year over year.

Our acquisitions completed in the first half of fiscal year 2003 significantly expanded our international presence and diversified our revenue base. For the fiscal year ended June 30, 2003, North America generated 70.6% of consolidated gross revenue, while EMEA, Asia Pacific and Latin America contributed 18.0%, 9.2% and 2.3%, respectively. By comparison, for the fiscal year ended June 30, 2002, North America contributed 92.0% of consolidated gross revenue, with EMEA, Asia Pacific and Latin America providing 0.7%, 5.4% and 1.8%, respectively. For the fiscal year ended June 30, 2003, the EMEA, Asia Pacific and Latin America operating segments generated revenue of $567.9 million, $291.4 million and $72.3 million, respectively, compared to revenue for the fiscal year ended June 30, 2002 of $16.1 million, $128.0 million and $42.8 million, respectively. The increase in revenue was predominantly due to the impact of the aforementioned acquisitions, coupled with organic growth.

Gross Profit. In the fiscal year ended June 30, 2003, revenue and total costs of service increased $774.8 million and $668.8 million, respectively, from the fiscal year ended June 30, 2002. In dollar terms, gross profit increased by $106.0 million, or 17.7%, from $597.7 million for the fiscal year ended June 30, 2002, to $703.8 million for the fiscal year ended June 30, 2003. Gross profit as a percentage of revenue declined to 22.3% for the fiscal year ended June 30, 2003, compared to 25.1% for the fiscal year ended June 30, 2002. This decline was mainly attributable to an increase in professional compensation expense in relation to revenue resulting from the addition of approximately 7,000 billable employees in connection with the acquisitions completed in the first half of fiscal year 2003, offset in part by our continued focus on a variety of revenue growth and cost control initiatives, including continued evaluation of required office space and the size of our workforce in relation to overall client demand for services. The increase in gross profit was due to an increase in revenue of $774.8 million described above, offset by:

•

A net increase in professional compensation of $480.6 million, or 50.7%, from $948.6 million for the year ended June 30, 2002, to $1,429.2 million for the year ended June 30, 2003. This increase was primarily related to the additional compensation expense in relation to revenue resulting from the addition of approximately 7,000 billable employees as a result of acquisitions completed in the first half of fiscal year 2003, including $13.5 million relating to common stock awards made to certain former partners of the Andersen Business Consulting practices. These increases were partially offset by savings

achieved though our workforce reduction actions that have occurred over the past twelve months in response to the challenging economy.

•

A net increase in other direct contract expenses of $142.4 million, or 23.7%, from $600.7 million, or 25.2% of revenue, for the year ended June 30, 2002, to $743.1 million, or 23.5% of revenue, for the year ended June 30, 2003. The $142.4 million increase in other direct contract expenses was attributable to higher revenue levels, while the improvement in other direct contract expenses as a percentage of revenue to 23.5% was due to our continued efforts to limit the use of subcontractors and travel-related expenses.

•

A net increase in other costs of service of $52.5 million, or 24.8%, from $212.1 million for the year ended June 30, 2002, to $264.6 million for the year ended June 30, 2003. This increase was primarily due to an increase in other costs of service resulting from the acquisitions completed in the first half of fiscal year 2003, partially offset by lower levels of bad debt expense and tighter controls on discretionary spending.

•

An impairment charge of $23.9 million ($20.8 million net of tax) recorded in the year ended June 30, 2002, primarily related to the write down of equity investments by $16.0 million and software licenses held for sale by $7.6 million.

Gross profit for the Public Services business unit was $348.2 million during the fiscal year ended June 30, 2003, an increase of $6.1 million, or 1.8%, from the fiscal year ended June 30, 2002. Gross profit as a percentage of revenue declined to 31.7% in fiscal year 2003 from 35.1% in fiscal year 2002, principally due to higher solution development costs, coupled with an increase in compensation expense.

Gross profit for the Financial Services business unit was $68.6 million during the fiscal year ended June 30, 2003, an increase of $18.7 million, or 37.4%, from the fiscal year ended June 30, 2002. Gross profit as a percentage of revenue increased to 28.5% in fiscal year 2003 from 21.0% in fiscal year 2002, principally due to revenue growth combined with overall declines in cost of service expense margins in fiscal year 2003.

Gross profit for the Communications, Content and Utilities business unit was $110.7 million during the fiscal year ended June 30, 2003, a decrease of $29.9 million, or 21.3%, from the fiscal year ended June 30, 2002. Gross profit as a percentage of revenue increased to 31.3% in fiscal year 2003 from 29.7% in fiscal year 2002. The improvement in gross profit was principally due to reduced reliance on subcontractors in fiscal year 2003, as well as an impairment charge related to software licenses in fiscal year 2002.

Gross profit for the Consumer, Industrial and Technology business unit was $142.1 million during the fiscal year ended June 30, 2003, a decrease of $11.2 million, or 7.3%, from the fiscal year ended June 30, 2002. Gross profit as a percentage of revenue declined to 26.6% in fiscal year 2003 from 30.2% in fiscal year 2002. The decline in gross profit was principally due to a decline in the gross billing rate, increased compensation as a result of the change in mix of resources, as well as the hiring of Andersen Business Consulting personnel.

Gross profit for our international operating segments was $174.8 million during the fiscal year ended June 30, 2003, an increase of $160.8 million from the fiscal year ended June 30, 2002. Gross profit as a percentage of revenue improved during the fiscal year ended June 30, 2003 compared to the fiscal year ended June 30, 2002. Gross profit for EMEA, Asia Pacific and Latin America improved to 19.2%, 15.2% and 29.3% of revenue in fiscal year 2003, respectively, compared to 9.1%, 8.3% and 4.4% of revenue in fiscal year 2002, respectively. The improvement in gross profit was principally due to higher revenue combined with reduced reliance on subcontractors and an overall decline in cost of service expense margins in fiscal year 2003.

Amortization of Purchased Intangible Assets. Amortization of purchased intangible assets increased $42.1 million to $45.1 million for the year ended June 30, 2003, from $3.0 million for the year ended June 30, 2002. This increase in amortization expense primarily related to $45.7 million of value of order backlog, customer

contracts and related customer relationships acquired as part of our acquisitions, which was amortized over 12 to 15 months.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $72.9 million, or 15.3%, from $477.2 million for the year ended June 30, 2002, to $550.1 million for the year ended June 30, 2003. This increase was principally due to the impact of the acquisitions completed in the first half of fiscal year 2003 and $28.2 million in costs associated with our rebranding initiative, offset partially by reduced discretionary spending and current cost control initiatives. Selling, general and administrative expenses as a percentage of gross revenue improved to 17.4% compared to 20.0% for the years ended June 30, 2003 and 2002, respectively.

Interest Income (Expense), Net. Interest income (expense), net, decreased $12.1 million to $11.3 million of net interest expense from $0.9 million of net interest income for the years ended June 30, 2003 and 2002, respectively. This increase in net interest expense was due to an increase in borrowings outstanding of $275.3 million from $1.8 million at June 30, 2002 to $277.2 million at June 30, 2003. The increase in borrowings was primarily due to our borrowing of $220.0 million in August 2002 under a short-term revolving credit facility, which was retired in November 2002 upon our completion of a private placement of $220.0 million in senior notes. Additionally, we have increased borrowings under our other credit facilities. We have used the borrowings primarily to finance a portion of the cost of our acquisitions completed during the first half of fiscal year 2003.

Income Tax Expense. We incurred income tax expense of $65.3 million and $80.3 million for the years ended June 30, 2003 and June 30, 2002, respectively. The principal reasons for the difference between the effective income tax rate on income from continuing operations of 66.7% and 67.6% for the years ended June 30, 2003 and June 30, 2002, respectively, and the U.S. Federal statutory income tax rate are nondeductible meals and entertainment expense of $16.1 million and $16.6 million; increase to deferred tax asset valuation allowance of $15.7 million and $14.0 million; state and local income taxes of $13.7 million and $17.1 million; and other nondeductible items of $7.4 million and $3.0 million, respectively.

Cumulative Effect of Change in Accounting Principle. We early adopted SFAS No. 142 during the first quarter of the fiscal year ended June 30, 2002 (as of July 1, 2001). This standard eliminated goodwill amortization upon adoption and required an assessment for goodwill impairment upon adoption and at least annually thereafter. As a result of adoption of this standard, we no longer amortize goodwill, and during the fiscal year ended June 30, 2002, we incurred a non-cash transitional impairment charge of $80.0 million (net of tax). This transitional impairment charge was a result of the change in accounting principle, which required measuring impairments on a discounted rather than undiscounted cash flow basis.

Net Income (Loss). For the fiscal year ended June 30, 2003, we realized net income of $32.7 million, or $0.18 per share. For the fiscal year ended June 30, 2002, we incurred a net loss of $41.5 million, or $0.26 loss per share. Included in the results for the year ended June 30, 2002 is the cumulative effect of a change in accounting principle of $80.0 million (net of tax) and an impairment charge of $20.8 million (net of tax) related to the write down of equity investments and software licenses held for sale.

Obligations and Commitments

As of December 31, 2004, we had the following obligations and commitments to make future payments under contracts, contractual obligations and commercial commitments:


			Payment due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		After 5 years
	(in thousands)
Long-term debt (1)	$	632,216	$	28,145	$	26,633	$	20,875	$	556,563
Operating leases		403,093		80,615		122,961		97,819		101,698
Unconditional purchase obligations (2)		153,791		49,298		100,600		3,893		—
Benefit payments to participants under the pension and postretirement medical plans		58,435		4,666		10,381		10,353		33,035
Employee Stock Purchase Plan (3)		18,408		—		18,408		—		—
Outsourcing services agreement		8,438		8,438		—		—		—
Reduction in workforce		532		532		—		—		—

Total	$	1,274,913	$	171,694	$	278,983	$	132,940	$	691,296

(1)	Long-term debt includes both principal and interest payment obligations.

(2)

Unconditional purchase obligations include material agreements to purchase goods or services, principally software and telecommunications services, that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Unconditional purchase obligations exclude agreements that are cancelable without penalty.

(3)	Amount relates to cash disbursement made to eligible ESPP participants under the BE an Owner Program on January 31, 2006. For additional information regarding the program, see Note 14, “Capital Stock and Option Awards” of the Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

The following table presents the cash flow statements for the year ended December 31, 2004 and the twelve months ended December 31, 2003:


	Year Ended December 31, 2004			Twelve Months Ended December 31, 2003
				(as restated) (unaudited)
	(in thousands)
Cash flows from operating activities:
Net loss	$	(546,226	)	$	(163,528	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Deferred income taxes		39,332			(48,688	)
Provision (benefit) for doubtful accounts		(1,057	)		473
Stock awards		9,874			14,592
Loss on early extinguishment of debt		2,317			—
Impairment of goodwill		397,065			127,326
Depreciation and amortization of property and equipment		78,690			83,503
Amortization of purchased intangible assets		3,457			35,861
Lease and facilities restructuring charges		11,699			61,436
Other		3,072			(4,851	)
Changes in assets and liabilities:
Accounts receivable		(33,180	)		50,129
Unbilled revenue		(62,323	)		(65,675	)
Income tax receivable, prepaid expenses and other current assets		(38,581	)		(22,999	)
Other assets		(49,869	)		46,459
Accrued payroll and employee benefits		47,574			(54,271	)
Accounts payable and other current liabilities		121,409			58,620
Other liabilities		65,012			41,488

Net cash provided by operating activities		48,265			159,875

Cash flows from investing activities:
Purchases of property and equipment		(88,334	)		(98,690	)
Increase in restricted cash		(21,053	)		—
Businesses acquired, net of cash acquired		—			(4,365	)

Net cash used in investing activities		(109,387	)		(103,055	)

Cash flows from financing activities:
Proceeds from issuance of common stock		26,904			24,985
Proceeds from notes payable		1,531,849			938,373
Repayments of notes payable		(1,360,288	)		(985,357	)
Decrease in book overdrafts		(22,986	)		(2,546	)
Borrowings on notes receivable from stockholders		1,059			117

Net cash provided by (used in) financing activities		176,538			(24,428	)

Effect of exchange rate changes on cash and cash equivalents		6,919			6,616

Net increase in cash and cash equivalents		122,335			39,008
Cash and cash equivalents—beginning of period		122,475			83,467

Cash and cash equivalents—end of period	$	244,810		$	122,475

As of December 31, 2005, our primary sources of liquidity are cash flows from operations, borrowings available under our existing credit facility and existing cash balances. Advances under our existing credit facility is limited by the available borrowing base, which is based upon a percentage of eligible accounts receivable. We do not currently have availability under the borrowing base. At December 31, 2004, we had a cash and cash equivalents balance of $244.8 million (and restricted cash of $21.1 million), which increased $122.3 million, or 99.9%, from a cash and cash equivalents balance of $122.5 million at December 31, 2003. This increase in our cash balance was predominantly due to the net proceeds received from the sale of $400.0 million aggregate principal amount of our Convertible Subordinated Debentures in December 2004, offset by the use of such proceeds to repay our existing debt.

Net cash provided by operating activities during the year ended December 31, 2004 was $48.3 million, a decrease of $111.6 million over the twelve months ended December 31, 2003. This decrease was due to a $107.9 million decrease in cash operating results (which consists of net income adjusted for changes in deferred income taxes, provision for doubtful accounts, stock awards, loss on early extinguishment of debt, goodwill impairment, depreciation and amortization, the lease and facilities restructuring charge and other non-cash items). Our days sales outstanding increased from 70 days at December 31, 2003 to 72 days at December 31, 2004. Days sales outstanding represents the trailing twelve months revenue divided by 365 days, which is divided into the consolidated accounts receivables, unbilled revenue and deferred revenue balances to arrive at days sales outstanding at a point in time. Our days sales outstanding increased during the year ended December 31, 2004 due to delays in invoicing clients caused by problems with our billings process arising from the conversion of our North American financial accounting system.

Net cash used in investing activities during the year ended December 31, 2004 was $109.4 million, an increase of $6.3 million when compared to the twelve months ended December 31, 2003. Investing activities during 2004 included the purchase of property and equipment (including internal use software) incurred in connection with our ongoing operations, the implementation of a new North American financial accounting system, and our continued infrastructure build-out. We expect to continue to make additional investments in property and equipment as we continue the build-out of our infrastructure and support capabilities in connection with the termination of the transition services agreement with KPMG LLP, as discussed below.

Net cash provided by financing activities for the year ended December 31, 2004 was $176.5 million, resulting primarily from net proceeds on the sale of $400.0 million in Subordinated Debentures offset by the repayments of our existing debt. Additionally, the issuance of common stock, primarily from our employee stock purchase plan, generated $26.9 million in cash, offset by a $23.0 million net decrease in book overdrafts. For the twelve months ended December 31, 2003, we had net cash used in financing activities of $24.4 million principally due to net repayments of borrowings.

As previously disclosed, we were unable to file this Annual Report on Form 10-K on a timely basis as we experienced significant delays in completing our consolidated financial statements for the year ended December 31, 2004. Consequently, we devoted substantial additional internal and external resources toward the completion of our consolidated financial statements for the year ended December 31, 2004. As a result, we expect that in addition to approximately $25.0 million in previously expected Sarbanes-Oxley related fees and $15.0 million to $20.0 million in previously expected audit fees, we will spend between $95.0 million to $105.0 million during fiscal 2005 and 2006 to cover the other third party expenses associated with the completion of our consolidated financial statements for fiscal year 2004 and the preparation and completion of our consolidated financial results for the quarterly periods and year ended 2005. While we do not expect the third party expenses and other expenses relating to the preparation of our financial results for future periods to remain at this level, we do expect that these expenses will remain relatively higher than historical expenses in this category for the next several quarters.

We have experienced significant variations in cash flows from month to month, and as a result, we expect to experience lower cash balances during points of time within any given quarter as compared to the end of the quarter. These intra-quarter fluctuations in cash flow have occasionally resulted in operating cash needs during a quarter of up to $150.0 million greater than required at quarter end plus other non-recurring cash requirements. For example, in 2005, we incurred substantial costs to perform the work necessary to prepare our financial statements in

connection with the 2004 Form 10-K. While such incremental costs will continue in 2006, we expect them to be incurred at declining levels through the second half of 2006. In addition, in December 2005, we reached tentative agreements to settle various disputes and litigation matters. Settlement payments under these agreements will total approximately $51.4 million. See Item 3, “Legal Proceedings.” We continue to actively manage client billings and collections and maintain tight controls over discretionary spending. We believe that the cash provided from operations and existing cash balances will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. We also believe that we will generate enough cash from operations and have sufficient access to the capital markets to meet our long-term liquidity needs.

Debt Obligations

The following tables present a summary of the activity in our debt obligations for the years ended December 31, 2004 and 2005:


	Balance December 31, 2003		Borrowings		Repayments			Reclassifications			Other (a)		Balance December 31, 2004
	(in thousands of U.S. Dollars)
Current portion:
Yen-denominated term loan (January 31, 2003)	$	6,230	$	—	$	(6,230	)	$	6,230		$	279	$	6,509
Yen-denominated term loan (June 30, 2003)		3,115		—		(3,115	)		3,114			140		3,254
Yen-denominated line of credit(b)		—		9,190		(1,890	)		—			495		7,795

Total current portion		9,345		9,190		(11,235	)		9,344			914		17,558

Long-term portion:
Convertible subordinated debentures		—		400,000		—			—			—		400,000
Senior notes		220,000		—		(220,000	)		—			—		—
Yen-denominated term loan (January 31, 2003)		9,308		—		—			(6,230	)		137		3,215
Yen-denominated term loan (June 30, 2003)		4,654		—		—			(3,114	)		69		1,609
Yen-denominated line of credit(b)		4,000		1,122,650		(1,126,650	)		—			—		—
Other		921		9		(86	)		—			—		844

Total long-term portion		238,883		1,522,659		(1,346,736	)		(9,344	)		206		405,668

Total notes payable	$	248,228	$	1,531,849	$	(1,357,971	)	$	—		$	1,120	$	423,226


	Balance December 31, 2004		Borrowings		Repayments			Other (a)			Balance December 31, 2005
	(in thousands of U.S. Dollars)
Convertible subordinated debentures	$	400,000	$	290,000	$	—		$	—		$	690,000
Yen-denominated term loan (January 31, 2003)		9,724		—		(5,732	)		(777	)		3,215
Yen-denominated term loan (June 30, 2003)		4,863		—		(2,672	)		(582	)		1,609
Yen-denominated line of credit		7,795		—		(6,678	)		(1,117	)		—
Other		844		289		—			(149	)		984

Total notes payable	$	423,226	$	290,289	$	(15,082	)	$	(2,625	)	$	695,808

(a)	Other changes in notes payable consist primarily of foreign currency translation adjustments.

(b)	Yen-denominated line of credit was terminated on December 16, 2005.

2004 Debt Obligations Activity

At December 31, 2004, we had total outstanding debt of $423.2 million, compared to total outstanding debt of $248.2 million at December 31, 2003. The $175.0 million increase in total outstanding debt was mainly attributable to the completion of the $400.0 million offering of convertible subordinated debentures on December 22, 2004. The offering consisted of $225.0 million of 2.50% Series A Convertible Subordinated Debentures due 2024 (the “Series A Debentures”) and $175.0 million of 2.75% Series B Convertible Subordinated Debentures due 2024 (the “Series B Debentures” and together with the Series A Debentures the “Subordinated Debentures”). On January 5, 2005, we issued an additional $25.0 million of our Series A Debentures and an additional $25.0 million of our Series B Debentures upon the exercise in full of the option granted to the initial purchasers of the Subordinated Debentures. The net proceeds from the sale of the Subordinated Debentures were used to repay our $220.0 million of outstanding senior notes (and $22.6 million of associated prepayment fees), to repay the entire $135.0 million balance outstanding under our then existing revolving credit facility and for general corporate purposes.

Due to the delay in the completion of our audited financial statements for the fiscal year ended December 31, 2004, we were unable to timely file a registration statement with the SEC to register for resale our Subordinated Debentures and underlying common stock. Accordingly, the applicable interest rate on each series of Subordinated Debentures increased by 0.25% beginning on March 23, 2005 and by an additional 0.25% beginning on June 22, 2005. As a result, the current interest rates on our Series A Debentures and Series B Debentures are 3.00% and 3.25%, respectively, and will continue to be the applicable interest rates through the date the registration statement is declared effective. The aggregate amount of additional interest paid for the period from March 23, 2005 through June 21, 2005 is $0.3 million and for the period commencing on June 22, 2005 is $0.2 million per month.

At December 31, 2004, we had additional borrowings outstanding of $23.2 million principally related to credit facilities in place at our Japanese subsidiary. The Japanese subsidiary had then existing yen-denominated term loans of $14.6 million and yen-denominated borrowings of $7.8 million under a revolving line of credit. Maximum permitted borrowings under the revolver were 1.85 billion yen ($18.0 million). Borrowings under the term facilities accrued interest of TIBOR plus 1.40%. Borrowings under the revolving line of credit accrued interest of TIBOR plus 0.70% and borrowings under the overdraft line of credit facility accrued interest at the Short Term Prime Rate plus 0.125%. The Japanese subsidiary also maintained a yen 0.5 billion overdraft line of credit ($0 outstanding at December 31, 2004). The revolving and overdraft lines of credit did not contain financial covenants and were not guaranteed by us and were scheduled to mature on August 31, 2005, but were extended to, and paid in full, on December 16, 2005. For additional information regarding our notes payable and other recent financing activities, see Note 8, “Notes Payable,” of the Notes to Consolidated Financial Statements.

On December 17, 2004, we entered into a $400.0 million Interim Senior Secured Credit Agreement (the “2004 Interim Credit Facility”), which provided for up to $400.0 million in revolving credit, all of which was to be available for issuance of letters of credit (subject to restrictions), and included up to $20.0 million in a swingline subfacility. At December 31, 2004, borrowings under the facility were limited to $150.0 million and would increase to $400.0 million upon our delivery of our audited financial statements for the year ended December 31, 2004, provided that we did so within 90 days of the end of the fiscal year (an extension to 120 days was permitted if the reason for delay was attributable to work associated with compliance with Section 404 of the Sarbanes-Oxley Act). Borrowings available under the 2004 Interim Credit Facility were intended for working capital, capital expenditure and general corporate purposes. Upon entering into the 2004 Interim Credit Facility, we terminated our existing receivables purchase agreement. The 2004 Interim Credit Facility (which was secured by substantially all of our assets) was scheduled to mature on May 22, 2005. However, the 2004 Interim Credit Facility was terminated by us on April 26, 2005, as discussed below.

The 2004 Interim Credit Facility contained customary affirmative and negative covenants, including a minimum consolidated net worth covenant and a minimum consolidated adjusted earnings before interest, taxes, dividends and amortization (“EBITDA”). The facility also contained covenants that restricted certain of our

corporate activities, including, among other things, our ability to make acquisitions or investments, make capital expenditures, repay other indebtedness, merge or consolidate with other entities, dispose of assets, incur additional indebtedness, pay dividends, create liens, make investments and engage in certain transactions with affiliates. The 2004 Interim Credit Facility also contained customary events of default, including, among others, defaults based on certain bankruptcy and insolvency events; nonpayment; cross-defaults to other debt; breach of specified covenants; change of control; material inaccuracy of representations and warranties and failure to timely deliver audited financial statements (subject to certain exceptions for a limited period of time).

2005 Debt Obligations Activity

In March 2005, we obtained amendments to the 2004 Interim Credit Facility. Based on preliminary information available to us during the first quarter of 2005, it was anticipated that we may not meet one or more of the covenants contained within the 2004 Interim Credit Facility. In order to avoid any potential events of default from occurring under the 2004 Interim Credit Facility, we obtained amendments on March 17, 2005 and on March 24, 2005, which provided us with relief from certain covenant compliance requirements. While the amendments did not change our maximum permitted borrowings of $150.0 million, among other things, the amendments (i) reduced the amount available under the facility from $400.0 million to $300.0 million; (ii) reduced the letter of credit sublimit from $400.0 million to $200.0 million; (iii) extended the deadline by which we were required to deliver our audited financial statements for the fiscal year ended December 31, 2004 to April 29, 2005; (iv) decreased the minimum consolidated net worth that we were required to maintain from $1.0 billion to $900.0 million; (v) decreased the minimum consolidated EBITDA that we were required to attain from $45.0 million to $28.0 million for the fiscal quarter ended December 31, 2004 and from $54.0 million to $33.0 million for the fiscal quarter ended March 31, 2005; (vi) extended the deadline by which we were required to deliver unaudited financial statements for the quarter ended March 31, 2005 to May 22, 2005 (i.e., the maturity date); (vii) required that as a condition precedent to borrowings, but not to issuances of letters of credit, that (A) we repatriate not less than $40.0 million from our foreign subsidiaries and (B) we and our domestic subsidiaries had no more than $5.0 million in cash; (viii) amended the definition of consolidated EBITDA to include charges and expenses of up to $230.0 million incurred with respect to the impairment of goodwill; and (ix) provided that interest on all loans would be calculated using the higher of the prime rate or the Federal funds rate plus 50 basis points. The amendment also required borrowings to be repaid in seven days, provided that if the conditions set forth in clause (vii) (A) and (B) above continue to be met, the repayment date would be extended for successive seven-day periods.

In addition, pursuant to Amendment No. 1, the lenders waived any and all existing defaults or events of default based on a breach of the minimum consolidated EBITDA covenant, and based on certain other breaches of representations, warranties and covenants, including, without limitation, those relating to the potential restatement of our previously issued financial statements and our failure to file our Form 10-K on time and deliver audited financial statements to our lenders for the fiscal year ended December 31, 2004.

We terminated the 2004 Interim Credit Facility on April 26, 2005 after we notified the lenders that we would be unable to deliver our audited financial statements on or before April 29, 2005, as was required. We replaced the 2004 Interim Credit Facility with the 2005 Credit Facility on July 19, 2005 (see below). Immediately prior to termination of the 2004 Interim Credit Facility, there were no outstanding loans under the 2004 Interim Credit Facility; however, there were outstanding letters of credit of approximately $87.7 million, which were issued primarily to meet our obligations to collateralize certain surety bonds issued to support client engagements, mainly in our state and local government business. The $87.7 million in letters of credit remained outstanding after the termination of the 2004 Interim Credit Facility. In order to support the letters of credit that remained outstanding, we provided the lenders of the 2004 Interim Credit Facility with the following collateral: (i) $94.3 million of cash which was sourced from cash on hand; and (ii) a security interest in our domestic accounts receivable. Upon our entering into the 2005 Credit Facility, the lenders under the 2004 Interim Credit Facility (i) released all but $5.0 million of the cash collateral; (ii) released their security interest in the domestic accounts receivable; and (iii) received an $85.4 million letter of credit issued by the lenders under the 2005 Credit Facility.

On March 21, 2005, Moody’s downgraded our issuer rating to Ba3 from Ba2 with a stable outlook. Separately, on March 18, 2005, Standard & Poor’s Ratings Services (“Standard & Poor’s”) downgraded our corporate credit and senior unsecured ratings to BB from BB+ with negative implications. These downgrades by Moody’s and Standard & Poor’s followed downgrades by each of the rating agencies on December 15, 2004. The most recent rating changes were made on April 21, 2005, when Moody’s downgraded our corporate family rating to B1 from Ba2 and our senior unsecured issuer rating to B2 from Ba3; and on April 22, 2005, when Standard & Poor’s downgraded our corporate credit rating to B- from BB.

Actions by the rating agencies may also affect our ability to obtain financing or the terms on which such financing may be obtained. If the rating agencies provide a low rating for our debt, this may increase the interest rate we must pay if we issue new debt. Our inability to obtain additional financing, or obtain additional financing on terms favorable to us, could hinder our ability to fund general corporate requirements, limit our ability to compete for new business and increase our vulnerability to adverse economic and industry conditions. Any further ratings downgrades could further materially and adversely impact our borrowing costs and our ability to obtain financing.

On April 27, 2005, we issued $200.0 million aggregate principal amount of our 5.00% Convertible Senior Subordinated Debentures due 2025 (the “April 2005 Senior Debentures”). The April 2005 Senior Debentures bear interest at a rate of 5.00% per year and will mature on April 15, 2025. Interest is payable on the April 2005 Senior Debentures on April 15 and October 15 of each year, beginning October 15, 2005. The April 2005 Senior Debentures are unsecured and are subordinated to our existing and future senior debt. The April 2005 Senior Debentures are senior to the Series A Debentures and the Series B Debentures issued in December 2004 and January 2005. Since we failed to file a registration statement with the SEC to register for resale our April 2005 Senior Debentures and the underlying common stock by December 31, 2005, the interest rate on the April 2005 Senior Debentures increased by 0.25% to 5.25% beginning on January 1, 2006 and will continue to be the applicable interest rate through the date the registration statement is filed.

The net proceeds from the sale of the April 2005 Senior Debentures, after deducting offering expenses and the placement agents’ commissions and other fees and expenses, were approximately $192.8 million. We used the net proceeds from the offering to replace the working capital used to cash collateralize letters of credit under the 2004 Credit Facility, and intend to use the remaining net proceeds to support letters of credit or surety bonds otherwise relating to our state and local business and for general corporate purposes.

On July 15, 2005, we issued $40.0 million aggregate principal amount of our 0.50% Convertible Senior Subordinated Debentures due July 2010 (the “July 2005 Senior Debentures”) and common stock warrants (the “July 2005 Warrants”) to purchase up to 3,500,000 shares of our common stock. The July 2005 Senior Debentures bear interest at a rate of 0.50% per year and will mature on July 15, 2010. Interest will be payable on the July 2005 Senior Debentures on January 15 and July 15 of each year, beginning January 15, 2006. The July 2005 Senior Debentures are pari passu to the April 2005 Senior Debentures and senior to the Series A Debentures and the Series B Debentures. Since we failed to file a registration statement with the SEC to register for resale our July 2005 Senior Debentures and the underlying common stock by December 31, 2005, the interest rate on the July 2005 Senior Debentures increased by 0.25% to 0.75% beginning on January 1, 2006 and will continue to be the applicable interest rate through the date the registration statement is filed.

The net proceeds from the sale of the July 2005 Senior Debentures and July 2005 Warrants, after deducting offering expenses and other fees and expenses, were approximately $37.8 million. We intend to use the net proceeds from the offering for general corporate purposes, including the funding for potential strategic acquisitions to build capabilities in certain areas.

On July 19, 2005, we entered into a $150.0 million Senior Secured Credit Facility (the “2005 Credit Facility”), which provides for up to $150.0 million in revolving credit and advances, all of which can be available for issuance of letters of credit, and includes up to $15.0 million in a swingline subfacility. Advances under the

revolving credit line are limited by the available borrowing base, which is based upon a percentage of eligible accounts receivable and unbilled receivables. As of December 31, 2005, we do not have access to the entire $150.0 million because (i) certain accounts receivable for government contracts cannot be included in the calculation of borrowing base without obtaining certain consents, which we have chosen not to pursue at this point in time; and (ii) the impact of timing issues associated with certain month end accounts receivables reports. Borrowings available under the 2005 Credit Facility will be used for general corporate purposes. The 2005 Credit Facility matures on July 15, 2010 (unless on or before December 15, 2008, the April 2005 Senior Debentures shall have not been (i) fully converted into common stock of the Company or (ii) refinanced or replaced with securities that do not require us to make any principal payments (including, without limitation, by way of a put option) on or prior to July 15, 2010, in which case the 2005 Credit Facility matures on December 15, 2008.

The 2005 Credit Facility contains affirmative, financial and negative covenants. The financial covenants include (i) a minimum cash collections covenant requiring minimum U.S. cash collections of $125.0 million monthly and $420.0 million on a rolling three month basis, (ii) a minimum trailing twelve-month EBITDA covenant which increases quarterly from $107.6 million (for the quarter ending September 30, 2005) to $333.8 million (for the quarter ending March 31, 2009 and thereafter) as at the end of the applicable quarter, (iii) a maximum leverage ratio which decreases from 7.7 to 1 (for the quarter ending September 30, 2005) to 2.4 to 1 (for the quarter ending March 31, 2009 and thereafter) as at the end of the applicable quarter and (iv) a maximum trailing twelve-month capital expenditures covenant which starts at $111.3 million for the quarter ending September 30, 2005 and fluctuates thereafter including reducing to $89.7 million a year thereafter and ultimately remaining fixed at $94.1 million starting with the quarter ending December 31, 2006. The EBITDA and maximum leverage ratio will not be tested for a quarterly test period if (i) at all times during the test period that the borrowing base was less than $120.0 million, borrowing availability was greater than $15.0 million, (ii) at all times during the test period that the borrowing base was greater than or equal to $120.0 million and less than $130.0 million, borrowing availability was greater than $20.0 million, and (iii) at all times during the test period that the borrowing base was greater than or equal to $130.0 million, borrowing availability was greater than $25.0 million.

The 2005 Credit Facility contains affirmative covenants, including, among other things, that we must become current in our SEC filings no later than December 31, 2005 and as soon as practicable but in no event later than December 31, 2005 (see discussion regarding amendment and extension of deadline below), and we must have repatriated at least $65.0 million of cash from foreign subsidiaries. In addition, we must provide weekly reports with respect to our cash position until we become current in our SEC filings and have satisfactory collateral systems, as defined by our lender (i.e., internal controls and accounting systems with respect to accounts receivable, cash and accounts payable), at which time we must provide monthly reports. We must also provide monthly reports with respect to our utilization and bookings data through 2005. In December 2005, we repatriated $66.6 million of cash from our foreign subsidiaries.

The covenants also restrict certain of our corporate activities, including, among other things, our ability to make acquisitions or investments, make capital expenditures, repay other indebtedness, merge or consolidate with other entities, dispose of assets, incur additional indebtedness, pay dividends, create liens, make investments (including limitations on loans to our foreign subsidiaries), settle litigation and engage in certain transactions with affiliates. The 2005 Credit Facility also contains events of default, including, among others, defaults based on certain bankruptcy and insolvency events; nonpayment; cross-defaults to other debt (after an $18.0 million threshold); judgments against us in excess of $18.0 million; breach of specified covenants; change of control; termination of trading of our stock; material inaccuracy of representations and warranties; failure to timely deliver audited financial statements (subject to certain exceptions for a limited time period); inaccuracy of the borrowing base; the prohibition on restraint on our or any loan party from conducting its business in any manner that has or could reasonably be expected to result in a material adverse effect because of any ruling, decision or order of a court or governmental authority; and indictment, conviction or the commencement of criminal proceedings of or against us or any subsidiary pursuant to which (i) either damages or penalties could be in excess of $5.0 million or (ii) such indictment could reasonably be expected to result in a material adverse effect.

Interest on loans (other than swingline loans) and letters of credit under the 2005 Credit Facility is calculated, at our option, at a rate equal to LIBOR, or, for dollar-denominated loans or letters of credit, equal to the higher of the bank’s corporate base rate or the Federal funds rate plus 50 basis points (“Base Rate Loans”), in each case plus an applicable margin that varies depending upon availability under the revolver. For Base Rate Loans, the applicable margin ranges from 0.25% (when availability is greater than $100.0 million) to 1.25% (when availability is less than or equal to $25.0 million); provided that until December 31, 2005, the applicable margin shall be 1.00%. For LIBOR loans, the applicable margin ranges from 1.25% (when availability is greater than $100.0 million) to 2.25% (when availability is less than or equal to $25.0 million); provided that until December 31, 2005, the applicable margin shall be 2.00%. Interest on swingline loans under the 2005 Credit Facility is calculated at a rate equal to the higher of the bank’s corporate base rate or the Federal funds rate plus 50 basis points plus the applicable margin for Base Rate Loans. A facility fee on the unused portion of the commitments of the lenders under the 2005 Credit Facility will be due at a rate of 0.50% per annum.

Our obligations under the 2005 Credit Facility are secured by liens and security interests in substantially all of our present and future tangible and intangible assets and those of certain of our domestic subsidiaries, as guarantors of such obligations (including 65.0% of the stock of our foreign subsidiaries), subject to certain exceptions.

Effective as of December 21, 2005, we amended the 2005 Credit Facility. Among other things, the amendment amends certain covenants contained in the 2005 Credit Facility as follows:

•

Extends the deadline for filing (a) the Form 10-K for the year ended December 31, 2004 (the “2004 Form 10-K”) to January 31, 2006, (b) the Forms 10-Q for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005 (collectively, the “2005 Forms 10-Q”) to March 31, 2006, (c) the Form 10-K for the year ending December 31, 2005 (the “2005 Form 10-K”) to May 31, 2006, and (d) the Form 10-Q for the quarter ending March 31, 2006 (the “March 31, 2006 Form 10-Q”) to June 30, 2006;

•

Extends the deadline for having a satisfactory collateral system to March 31, 2006;

•

Extends the month for commencement of accelerated delivery of certain monthly reports, such as the month end income statements and cash flow statements, to be delivered within 45 days after the end of such month to March 2006 and April 2006 and within 30 days after the end of such month to May 2006 and thereafter;

•

Extends the date for the delivery of a budget for 2006 to January 31, 2006;

•

Amends the amount of civil litigation payments that we are permitted to pay as follows: up to $55.0 million during the twelve-month period following the closing date of the 2005 Credit Facility and up to $15.0 million during any period of twelve consecutive months thereafter, in each case, net of any insurance proceeds; and

•

Amends the aggregate amount of investments and indebtedness we make and incur, respectively, in 2006 as it relates to our foreign subsidiaries to an aggregate of $25.0 million, of which $15.0 million is available without restriction and an additional $10.0 million will be available only if we meet certain requirements, including a required fixed charge coverage ratio.

Under the 2005 Credit Facility, we are required to file our 2005 quarterly financial statements on Form 10-Q by March 31, 2006 with the SEC. Our cash balances could be adversely impacted if we are unable to file by this date and unable to obtain further amendments or waivers to such requirement. The 2005 Credit Facility also provides that upon an acceleration of the unpaid principal and accrued interest exceeding $18.0 million, such acceleration may become an event of default under the 2005 Credit Facility and could result in an acceleration of the unpaid principal and accrued interest on the Senior Debentures and the Subordinated Debentures. If our borrowings under the 2005 Credit Facility, Senior Debentures or Subordinated Debentures were to be accelerated, there would be a material and adverse effect on our financial condition and business absent waiver, amendment or other restructuring of the relevant agreement.

In addition, pursuant to the amendment, we are required to cash collateralize 105% of our borrowings, including any outstanding letters of credit, under the 2005 Credit Facility and any accrued and unpaid interest and fees thereon. As of December 31, 2005, we have no borrowings under the 2005 Credit Facility but have letters of credit outstanding of approximately $80.1 million. We fulfilled our obligation to cash collateralize using cash on hand. The requirement to deposit and maintain cash collateral will terminate and such cash collateral will be released to us when, among other things, we have filed our 2004 Form 10-K and our 2005 Forms 10-Q, have implemented satisfactory collateral systems, have delivered certain monthly financial statements, are not in default under the 2005 Credit Facility and no default will result from the release of collateral, have borrowing availability of at least $15.0 million (without giving effect to any cash collateral that is held by the administrative agent), and the administrative agent and the collateral agent are satisfied as to the results of a collateral field exam.

Pursuant to the amendment, we will be permitted to continue to borrow or issue or replace letters of credit so long as there is availability under the borrowing base and so long as we deposit and maintain the required cash collateral described above, without the requirement to meet certain financial covenants. Advances under the revolving credit line are limited by the available borrowing base, which is based upon a percentage of eligible accounts receivable. We do not currently have availability under the borrowing base.

Transition Services Agreement with KPMG LLP

Our liquidity has also been affected by our various agreements with KPMG LLP, including the transition services agreement. As described in Note 13, “Commitments and Contingencies,” and Note 16, “Transactions with Related Parties,” of the Notes to Consolidated Financial Statements, we contracted to receive certain infrastructure and support services from KPMG LLP until we completed the build-out of our own infrastructure and support capabilities or made arrangements with third party providers of such services. Both parties agreed that during the term of the transition services agreement (which expired on February 13, 2004 for most non-technology services and February 13, 2005 for most technology-related services), the parties would work together to wind down the receipt of services in a manner such that the only costs payable by us to KPMG LLP at the expiration of the agreement would be for capital assets or existing contracts with third party providers that could continue to be used by us in a similar manner after the expiration of the agreement. However, if we terminated any services provided by KPMG LLP under the agreement prior to the end of the applicable term for such services, we were potentially liable to pay KPMG LLP any termination costs (as defined in the transition services agreement) incurred as a result of KPMG LLP having made investments in systems, personnel and other assets that were used by KPMG LLP in providing services under the agreement.

During the year ended December 31, 2004, we terminated certain services provided by KPMG LLP under the transition services agreement prior to the end of the applicable term for such services for which we paid KPMG LLP $1.3 million in termination costs. On February 13, 2005, the transition services agreement with KPMG LLP expired. Upon expiration of the agreement, KPMG LLP claimed that we owed approximately $21.7 million for the termination of information technology services provided under the agreement. However, in accordance with the terms of the agreement, we do not believe that we are liable for termination costs arising upon the expiration of the agreement. The Company and KPMG LLP are proceeding under the dispute resolution procedures specified in the transition services agreement in an attempt to reach an agreement as to the amount, if any, of additional costs payable by us to KPMG LLP in connection with the expiration of the agreement. Additionally, in connection with the expiration of the transition services agreement, we also agreed to settle a separate arrangement under which we pay KPMG LLP for the use of occupancy related assets in the office facilities that we sublease from KPMG LLP. Accordingly, KPMG LLP notified us that we owe approximately $31.7 million for the cost of our proportionate share of the occupancy related assets in the subleased office locations. However, we believe that certain of the assets identified by KPMG LLP do not relate to office locations currently subleased by us. As such, during July 2005, we paid KPMG LLP $17.4 million for our share of the cost of the occupancy related assets that we believe relate to our existing subleased locations. We continue to work with KPMG LLP to reach agreement on the amount, if any, of additional costs payable by us to KPMG LLP in connection with finalizing this agreement.

Guarantees and Indemnification Obligations

In the normal course of business, we have indemnified third parties and have commitments and guarantees under which we may be required to make payments in certain circumstances. These indemnities, commitments and guarantees include: indemnities of KPMG LLP with respect to the consulting business that was transferred to us in January 2000; indemnities to third parties in connection with surety bonds; indemnities to various lessors in connection with facility leases; indemnities to customers related to intellectual property and performance of services subcontracted to other providers; and indemnities to directors and officers under the organizational documents and agreements with them. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. Certain of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments we could be obligated to make. We estimate that the fair value of these agreements was minimal. Accordingly, no liabilities have been recorded for these agreements as of December 31, 2004.

Some of our Public Services clients, largely in the state and local market, require us to obtain surety bonds, letters of credit or bank guarantees for client engagements. As of December 31, 2004, we had approximately $149.8 million of outstanding surety bonds and $36.5 million of outstanding letters of credit for which we may be required to make future payment ($20.0 million of the letters of credit were used to support surety bonds, $9.2 million provided direct guaranties to clients for our work and $7.3 million supported various other obligations). The issuers of our outstanding surety bonds may, at any time, require that we post collateral as security to support these obligations. As of December 31, 2004, if all of the issuers of our surety bonds had exercised this right, we would have been required to deposit or advance approximately $105.1 million in cash collateral or letters of credit, including the $36.5 million letter of credit previously mentioned. On April 26, 2005, in connection with the termination of the 2004 Interim Credit Facility, we posted cash collateral of approximately $94.3 million in support of letters of credit which were issued to meet our obligations to collateralize certain surety bonds. In the future, we may be subject to greater cash or letter of credit collateral demands from our surety bond issuers, which in turn, could materially and adversely affect our liquidity. As of December 31, 2005, we had approximately $141.5 million of outstanding surety and surety related bonds; $80.1 million of outstanding letters of credit and issuers had the right to an additional $41.6 million in surety bond collateral ($68.0 million of the letters of credit are used to support surety and surety related bonds, $6.8 million provided direct guaranties to clients for our work and $5.3 million supported various other obligations).

Income Taxes

In 2005, we filed federal refund claims related to 2004 and prior years in the amount of $20.4 million regarding net operating loss carrybacks, foreign tax credit carrybacks, corrections of previous amounts reported and other miscellaneous items. In December 2005, we received from the Internal Revenue Service $15.5 million in tentative refunds related to the 2004 net operating loss carryback. These refunds are subject to U.S. Congress Joint Committee on Taxation review.

We expect to file amended federal and state income tax returns in 2006 for prior fiscal years due to the restatement of earnings and the completion of the filing of the 2004 Form 10-K. It is anticipated that Federal, certain foreign and state amended income tax returns will result in additional income taxes due and income tax refunds. The U.S. Federal amended income tax return will also be subject to review by the Internal Revenue Service and U.S. Congress Joint Committee on Taxation. It is contemplated that we will not receive any refunds until after 2006.

Recently Issued Accounting Pronouncements

In December 2004, FASB Staff Position (“FSP”) No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP 109-2”), was issued which provides guidance under SFAS No. 109, “Accounting for Income Taxes,” with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on

enterprises’ income tax expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109.

In May 2004, the FASB issued FSP No. 106-2 (“FSP 106-2”), “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the “Medicare Act”). The Medicare Act was enacted December 8, 2003. FSP 106-2 supersedes FSP 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” and provides authoritative guidance on accounting for the Federal subsidy specified in the Medicare Act. The Medicare Act provides for a Federal subsidy equal to 28% of certain prescription drug claims for sponsors of retiree health care plans with drug benefits that are at least actuarially equivalent to those to be offered under Medicare Part D, beginning in 2006. We have concluded that the prescription drug benefits provided under our postretirement medical plan are not actuarially equivalent to the prescription drug benefits offered under Medicare Part D, thus, no accounting for the Federal subsidy is required. Accordingly, adoption of FSP No. 106-2 did not have a material impact on our consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”) and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first reporting period following our fiscal year that begins on or after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. We are required to adopt SFAS 123R in the first quarter of fiscal 2006, beginning January 1, 2006. Under SFAS 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. In March 2005, Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment,” was issued regarding the SEC’s interpretation of SFAS 123R and the valuation of share-based payments for public companies. We are evaluating the requirements of SFAS 123R and SAB No. 107 and expect that the adoption of SFAS 123R will have a material impact on our consolidated results of operations and earnings per share. We have not yet determined the method of adoption or the effect of adopting SFAS 123R, and it has not been determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets—An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions” (“SFAS 153”). SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for nonmonetary asset exchanges occurring in reporting periods beginning after June 15, 2005. We are required to adopt SFAS 153 effective July 1, 2005. We do not expect the adoption of SFAS 153 to have a material impact on our consolidated financial statements.

In March 2005, the FASB issued Interpretation No. (“FIN”) 47, “Accounting for Conditional Asset Retirement Obligations.” This is an interpretation of SFAS No. 143, “Accounting for Asset Retirement Obligations” which applies to all entities and addresses the legal obligations with the retirement of tangible long-

lived assets that result from the acquisition, construction, development or normal operation of a long-lived asset. The SFAS requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Interpretation No. 47 further clarifies what the term “conditional asset retirement obligation” means with respect to recording the asset retirement obligation discussed in SFAS No. 143. The provisions of FIN No. 47 are effective no later than December 31, 2005. We do not expect that the adoption of FIN No. 47 to have a material impact on our Consolidated Financial Statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 replaces APB Opinion No. 20, “Accounting Changes” and SFAS No. 3 “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 requires restatement of prior period financial statements, unless impracticable, for changes in accounting principle. The retroactive application of a change in accounting principle should be limited to the direct effect of the change. Changes in depreciation, amortization or depletion methods should be accounted for as a change in accounting estimate. Corrections of accounting errors will be accounted for under the guidance contained in APB Opinion No. 20. The effective date of this new pronouncement is for fiscal years beginning after December 15, 2005 and prospective application is required. We do not expect the adoption of SFAS 154 to have a material impact on our consolidated financial statements.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements in this report constitute “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995. These statements relate to our operations that are based on our current expectations, estimates and projections. Words such as “may,” “will,” “could,” “would,” “should,” “anticipate,” “predict,” “potential,” “continue,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “in our view” and similar expressions are used to identify these forward-looking statements. The forward-looking statements contained in this report include, without limitation, statements about when we will be able to file our 2004 Form 10-K, amended 2004 Forms 10-Q, 2005 Form 10-K and 2005 Forms 10-Q (which could be affected by the complexity of the process, the nature of the requisite reviews and other factors), our internal control over financial reporting, our results of operations and financial condition and the restatement of prior period financial statements. These statements are only predictions and as such are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are based upon assumptions as to future events or our future financial performance that may not prove to be accurate. Actual outcomes and results may differ materially from what is expressed or forecast in these forward-looking statements. As a result, these statements speak only as of the date they were made, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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

•

Any direct or indirect impact of the matters disclosed in this report on our operating results, financial condition or stock price;

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Our ability to file SEC reports on a timely basis;

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Any continuation of pricing pressures and declining billing rates;

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Any adverse report or decision from any Federal or state government or agency, including the Defense Contract Audit Agency, relating to its audits or reviews of our contracts and systems that could reduce our ability to obtain new government business or require the refund of payments received on government contracts;

•

The outcome of the pending SEC investigation;

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Statements about claimed defaults with respect to our Subordinated Debentures, including our Series B Debentures, and potential consequences;

•

Competitive pricing pressures and their impact on our billing rates;

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The business decisions of our clients regarding the use of our services and the related need to use subcontractors to complete certain engagements;

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The timing of projects and their termination;

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Our ability to address liquidity concerns;

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Our ability to remediate internal control material weaknesses and significant deficiencies identified by us and our independent registered public accountants and the associated costs;

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The availability of surety bonds, letters of credit or bank guarantees supporting client engagements;

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Our inability to meet contractual obligations under client contracts;

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The impact of rating agency actions;

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The ability to retain the listing of our common stock on the New York Stock Exchange;

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The availability of talented professionals to provide our services or any significant attrition of our talented professionals;

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The pace of technology change;

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The strength of our joint marketing relationships;

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The actions of our competitors;

•

Changes in spending policies or budget priorities of the U.S. government, particularly the Department of Defense, in light of the large U.S. budget deficit and competing budget requirements (such as those due to Hurricane Katrina or the conflict in Iraq);

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Our inability to use losses in some of our foreign subsidiaries to offset earnings in the United States;

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Our inability to accurately forecast our results of operations and the growth of our business;

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Changes in, or the application of changes to, accounting principles or pronouncements under accounting principles generally accepted in the United States, particularly those related to revenue recognition;

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Difficulties relating to changes in our management;

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Continued failure to complete Sarbanes-Oxley requirements, including the requirements of Section 404 of Sarbanes-Oxley; and

•

The outcome of pending and future legal proceedings.

In addition, our results and forward-looking statements could be affected by general domestic and international economic and political conditions, uncertainty as to the future direction of the economy and vulnerability of the economy to domestic or international incidents, as well as market conditions in our industry. For a more detailed discussion of certain of these factors, see Exhibit 99.1, “Factors Affecting Future Financial Results,” to this Form 10-K. We caution the reader that the factors we have identified above may not be exhaustive. We operate in a continually changing business environment, and new factors that may affect our forward-looking statements emerge from time to time. Management cannot predict such new factors, nor can it assess the impact, if any, of such new factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those implied by any forward-looking statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to a number of market risks in the ordinary course of business. These risks, which include interest rate risk and foreign currency exchange risk, arise in the normal course of business rather than from trading activities.

Interest Rate Risk

Our exposure to potential losses due to changes in interest rates relates primarily to our variable rate Japanese yen denominated debt. As a result, we have relatively minimal exposure to changes in interest rates related to our long-term debt obligations. The fair value of our debt obligations may increase or decrease for various reasons, including fluctuations in the market price of our common stock, fluctuations in market interest rates and fluctuations in general economic conditions.

The table below presents principal cash flows and related weighted average interest rates by expected maturity dates for our debt obligations as of December 31, 2004:


	Expected Maturity Date Year ended December 31,
	(in thousands of U.S. Dollars, except interest rates)
	2005		2006		2007		2008	2009	Thereafter		Total		Fair Value

Japanese Yen Functional Currency
Third party Japanese Yen denominated debt—variable rate	17,558		4,824		—		—	—	—		22,382		22,382
Average interest rate	1.18	%	1.50	%	—		—	—	—		1.25	%

Euro Functional Currency—Germany	—		—		844		—	—	—		844		844
Average fixed interest rate	—		—		2.25	%	—	—	—		2.25	%

U.S. Dollar Functional Currency
Series A Convertible Subordinated Debentures	—		—		—		—	—	225,000		225,000		235,688
Average fixed interest rate	—		—		—		—	—	2.50	%	2.50	%

U.S. Dollar Functional Currency
Series B Convertible Subordinated Debentures	—		—		—		—	—	175,000		175,000		183,094
Average fixed interest rate	—		—		—		—	—	2.75	%	2.75	%

Due to the delay in the completion of our audited financial statements for the fiscal year ended December 31, 2004, we were unable to file a timely registration statement with the SEC to register for resale our convertible notes and underlying common stock. Accordingly, pursuant to the terms of the Series A Debentures and the Series B Debentures, the applicable interest rate increased by 0.25% beginning on March 23, 2005 and increased another 0.25% beginning on June 22, 2005 through the date the registration statement is declared effective, and pursuant to the terms of the April 2005 Senior Debentures and the July 2005 Senior Debentures, the applicable interest rate increased by 0.25% beginning on January 1, 2006 through the date the registration statement is filed. These changes combined to increase the interest rate on the Series A Debentures and the Series B Debentures to 3.00% and 3.25%, respectively, and on the April 2005 Senior Debentures and the July 2005 Senior Debentures to 5.25% and 0.75%, respectively. For additional information refer to Note 2, “Summary of Significant Accounting Policies,” and Note 8, “Notes Payable,” of the Notes to Consolidated Financial Statements.

Foreign Currency Exchange Risk

We operate internationally and are exposed to potentially adverse movements in foreign currency rate changes. Any foreign currency transaction, defined as a transaction denominated in a currency other than the U.S. dollar, will be reported in U.S. dollars at the applicable exchange rate. Assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet date and income and expense items are translated at average rates for the period. During the year ended December 31, 2004, we used foreign currency forward contracts to offset currency-related changes in certain of our foreign currency denominated assets and liabilities. All purchased foreign exchange contracts were offset by sold foreign exchange contracts and all foreign exchange contracts were settled by October 29, 2004.

We have significant foreign exchange exposures related primarily to short-term intercompany loans denominated in non-U.S. dollars to certain of our foreign subsidiaries, which the Company has not historically hedged. The potential gain or loss in the fair value of these intercompany loans that would result from a hypothetical change of 10% in exchange rates would be approximately $16.7 million and $10.7 million as of December 31, 2004 and 2003, respectively. For additional information refer to Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements.

Item 8: Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of BearingPoint, Inc.:

We have completed an integrated audit of BearingPoint, Inc.’s December 31, 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its December 31, 2003 and June 30, 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of BearingPoint, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for the year ended December 31, 2004, for the six months ended December 31, 2003 and for the year ended June 30, 2003, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information for the year ended December 31, 2004, for the six months ended December 31, 2003 and for the year ended June 30, 2003 when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 3 to the consolidated financial statements, the Company has restated its consolidated financial statements for the six months ended December 31, 2003 and for the year ended June 30, 2003.

We were not engaged to audit or review the June 30, 2002 consolidated financial statements and accordingly, we do not express an opinion or any other form of assurance on the June 30, 2002 consolidated financial statements taken as a whole. Such June 30, 2002 consolidated financial statements are unaudited.

Internal control over financial reporting

Also, we have audited management’s assessment, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, that BearingPoint, Inc. did not maintain effective internal control over financial reporting as of December 31, 2004, because (1) the Company did not maintain an effective control environment, (2) the Company did not maintain effective controls, including monitoring, over the financial close and reporting process, (3) the Company did not design and maintain effective controls over the completeness, accuracy, existence, valuation and disclosure of revenue, costs of service, accounts receivable, unbilled revenue and deferred revenue, (4) the Company did not design and maintain effective controls over the completeness, accuracy, existence, valuation, and disclosure of accounts payable, other current liabilities, other long-term liabilities and the related expense accounts, (5) the Company did not maintain effective controls over the completeness and accuracy of compensation expense classified as costs of service, (6) the Company did not design and maintain effective controls over the completeness, accuracy, valuation, and disclosure of payroll, employee benefits and other compensation liabilities and related expense accounts, (7) the Company did not design and maintain effective controls over the completeness, accuracy, existence, valuation and disclosure of property and equipment and the related depreciation and amortization expense, (8) the Company did not design

and maintain effective controls over the completeness, accuracy, valuation, and disclosure of prepaid lease and long-term lease obligation accounts and the related amortization and lease rental expenses, and (9) the Company did not design and maintain effective controls over the completeness, accuracy, existence, valuation and presentation and disclosure of income tax payable, deferred income tax assets and liabilities, the related valuation allowance and income tax expense, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management’s assessment as of December 31, 2004:

1. The Company did not maintain an effective control environment. Specifically, the Company identified the following material weaknesses in its control environment:

•

Senior management did not establish and maintain a proper tone as to internal control over financial reporting. Specifically, senior management did not emphasize, through consistent communication, the importance of internal control over financial reporting and adherence to the code of business conduct and ethics.

•

The Company did not maintain a sufficient complement of personnel, either in the corporate offices or foreign locations, with an appropriate level of knowledge, experience and training in the application of GAAP and in internal controls over financial reporting commensurate with financial reporting requirements.

•

The Company did not maintain sufficient formalized and consistent finance and accounting policies and procedures nor did the Company maintain adequate controls with respect to the review, supervision and

monitoring of accounting operations at certain foreign locations. Specifically, the Company failed to prevent or detect instances of non-compliance with established policies and procedures, as well as instances of non-compliance with laws and regulations, including improper conduct in the Asia Pacific operations which resulted in adjustments to the consolidated 2004 financial statements.

•

The Company did not establish and maintain, through senior management, sufficient oversight and communication of internal controls to ensure the proper use of the North America financial accounting system, implemented during 2004. Specifically, the Company did not enforce the consistent performance of manual controls designed to complement system controls. As a result, transactions and data were not completely and accurately recorded, processed and reported in the financial statements.

•

The Company did not have adequate procedures or sufficient monitoring by management to ensure that actual or perceived violations of policies and procedures could be reported through the whistleblower hotline or other channels. In addition, the Company did not have sufficient procedures to ensure the appropriate notification, investigation, resolution and remediation procedures were applied to reported violations.

The material weaknesses in the control environment described above contributed to the existence of the material weaknesses discussed in items 2 through 9 below. Additionally, these material weaknesses could result in a misstatement to substantially all of the financial statement accounts that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

2. The Company did not maintain effective controls, including monitoring, over the financial close and reporting process. Specifically, the Company identified the following material weaknesses in the financial close and reporting process:

•

The Company did not maintain formal, written policies and procedures governing the financial close and reporting process.

•

The Company did not maintain effective controls to ensure that management oversight and review procedures were properly performed over the accounts and disclosures in the financial statements. In addition, the Company did not maintain effective controls to ensure adequate management reporting information was available to monitor financial statement accounts and disclosures.

•

The Company did not maintain effective controls over the recording of recurring and non-recurring journal entries. Specifically, effective controls were not designed and in place to provide reasonable assurance that journal entries were prepared with sufficient supporting documentation and reviewed and approved to ensure the completeness and accuracy of the entries recorded.

•

The Company did not maintain effective controls to provide reasonable assurance that accounts were complete and accurate and agreed to detailed support and that reconciliations of accounts were properly performed, reviewed and approved.

•

The Company did not maintain effective controls to provide reasonable assurance that intercompany loans were properly classified based on management’s intent for repayment and that the related foreign currency translation amounts were accurately recorded and reported in the consolidated financial statements.

These material weaknesses contributed to the material weaknesses identified in items 3 through 9 below and resulted in adjustments, including audit adjustments, to the consolidated financial statements for the year ended December 31, 2004 and to the restatement of the consolidated financial statements as of and for the six-month period ended December 31, 2003; the consolidated financial statements for the fiscal years ended June 30, 2003 and 2002; and the condensed consolidated financial statements for the quarterly periods during the year ended December 31, 2004; the six-month period ended December 31, 2003; and the fiscal year ended June 30, 2003 (the “Restated Periods”). Additionally, these material weaknesses could result in a misstatement to substantially

all of the financial statement accounts that would result in a material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected.

3. The Company did not design and maintain effective controls over the completeness, accuracy, existence, valuation and disclosure of revenue, costs of service, accounts receivable, unbilled revenue, and deferred revenue. Specifically, the Company identified the following material weaknesses:

•

The Company did not design and maintain effective controls to provide reasonable assurance over the initiation, recording, processing, and reporting of customer contracts, including the existence of and adherence to policies and procedures and adequate monitoring by management.

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The Company did not design and maintain effective controls to provide reasonable assurance that contract costs, such as engagement subcontractor costs, were completely and accurately accumulated for contracts accounted for under the percentage-of-completion method of accounting.

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The Company did not design and maintain effective controls to provide reasonable assurance that the Company adequately evaluated customer contracts to identify and provide reasonable assurance regarding the proper application of the appropriate method of revenue recognition in accordance with generally accepted accounting principles.

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The Company did not design and maintain effective controls to provide reasonable assurance regarding the completeness of information recorded in the financial accounting system. Specifically, the Company did not design and have in place effective controls to provide reasonable assurance that invoices issued outside of the financial accounting system were appropriately recorded in the general ledger. As a result, the Company did not ensure that cash received was applied to the correct accounts in the appropriate accounting period.

4. The Company did not design and maintain effective controls over the completeness, accuracy, existence, valuation, and disclosure of accounts payable, other current liabilities, other long-term liabilities and related expense accounts. Specifically, the Company did not design and maintain effective controls over the initiation, authorization, processing, recording, and reporting of purchase orders and invoices as well as authorizations for cash disbursement to provide reasonable assurance that liability balances and operating expenses were accurately recorded in the appropriate accounting period and to prevent or detect misappropriation of assets. In addition, the Company did not have effective controls to: i) provide reasonable assurance regarding the complete identification of subcontractors used in performing services to customers; or ii) monitor subcontractor activities and accumulation of subcontractor invoices to provide reasonable assurance regarding the complete and accurate recording of contract-related subcontractor costs.

5. The Company did not maintain effective controls over the completeness and accuracy of compensation expense, classified as costs of service. Specifically, the Company did not maintain effective controls to identify and monitor employees working outside their resident state for extended periods of time or their home country. In addition, the Company did not maintain effective controls to completely and properly calculate the related compensation expense and employee income tax liability attributable to each tax jurisdiction.

6. The Company did not design and maintain effective controls over the completeness, accuracy, valuation, and disclosure of payroll, employee benefit and other compensation liabilities and related expense accounts. Specifically, the Company did not have effective controls designed and in place to provide reasonable assurance of the initiation, recording, processing, and reporting of payroll costs including bonus, health and welfare and severance amounts in the accounting records. Additionally, the Company did not design and maintain effective controls over the administration of employee data or controls to provide reasonable assurance regarding the proper authorization of non-recurring payroll changes.

7. The Company did not design and maintain effective controls over the completeness, accuracy, existence, valuation and disclosure of property and equipment and related depreciation and amortization expense. Specifically, the Company did not design and maintain effective controls to provide reasonable assurance that asset additions and disposals were completely and accurately recorded; depreciation and amortization expense was accurately recorded based on appropriate useful lives assigned to the related assets; existence of assets was

confirmed through periodic inventories; and the identification and determination of impairment losses was performed in accordance with generally accepted accounting principles. In addition, the Company did not design and maintain effective controls to provide reasonable assurance of the adherence to the capitalization policy, and the Company did not design and maintain effective controls to provide reasonable assurance that expenses for internally developed software were completely and accurately capitalized, amortized, and adjusted for impairment in accordance with generally accepted accounting principles.

8. The Company did not design and maintain effective controls over the completeness, accuracy, valuation, and disclosure of prepaid lease and long-term lease obligation accounts and the related amortization and lease rental expenses. Specifically, the Company did not design and maintain effective controls to provide reasonable assurance that new, amended, and terminated leases, and the related assets, liabilities and expenses associated with rent holidays, escalation clauses, landlord/tenant incentives and asset retirement obligations, were reviewed, approved, and accounted for in accordance with generally accepted accounting principles.

9. The Company did not design and maintain effective controls over the completeness, accuracy, existence, valuation and presentation and disclosure of income tax payable, deferred income tax assets and liabilities, the related valuation allowance and income tax expense. Specifically, the Company identified the following material weaknesses:

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The Company did not maintain effective controls over the reconciliation of the tax and financial reporting bases of assets and liabilities with the deferred income tax assets and liabilities. The Company also did not maintain effective controls to identify and determine permanent differences between income for tax and financial reporting income purposes.

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The Company did not maintain effective controls, including monitoring, over the calculation and recording of foreign income taxes, including tax reserves, acquired tax contingencies associated with business combinations and the income tax impact of foreign debt recapitalization. In addition, the Company did not maintain effective controls over determining the correct foreign jurisdictions or tax treatment of certain foreign subsidiaries for United States tax purposes.

•

The Company did not design and maintain effective controls over withholding taxes associated with interest payable on intercompany loans and intercompany trade payables between various tax jurisdictions.

Each of the control deficiencies discussed in items 3 through 9 above resulted in adjustments, including audit adjustments, to the consolidated financial statements for the year ended December 31, 2004 and to the restatement of the Company’s consolidated financial statements for the Restated Periods. Additionally, these control deficiencies could result in misstatements of the aforementioned financial statement accounts that would result in a material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that each of the control deficiencies in items 3 through 9 above constitutes a material weakness. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2004 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

In our opinion, management’s assessment that BearingPoint, Inc. did not maintain effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the COSO. Also, in our opinion, because of the effects of the material weaknesses described above on the achievement of the objectives of the control criteria, BearingPoint, Inc. has not maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the COSO.

PricewaterhouseCoopers LLP

Boston, Massachusetts

January 31, 2006

BEARINGPOINT, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)


	December 31, 2004			December 31, 2003
				(as restated)
ASSETS
Current assets:
Cash and cash equivalents	$	244,810		$	122,475
Restricted cash (note 2)		21,053			—
Accounts receivable, net of allowances of $11,296 at December 31, 2004 and $17,240 at December 31, 2003		400,285			357,653
Unbilled revenue		381,681			315,431
Income tax receivable		50,518			22,942
Deferred income taxes		59,566			57,976
Prepaid expenses		31,196			29,379
Other current assets		33,038			23,261

Total current assets		1,222,147			929,117
Property and equipment, net		203,403			199,517
Goodwill		656,877			991,347
Other intangible assets, net		3,810			8,156
Deferred income taxes, less current portion		20,522			59,568
Other assets		75,948			23,908

Total assets	$	2,182,707		$	2,211,613


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of notes payable	$	17,558		$	9,345
Accounts payable		306,325			232,577
Accrued payroll and employee benefits		269,876			217,965
Deferred revenue		107,308			74,378
Income tax payable		33,927			48,886
Current portion of accrued lease and facilities charge		22,956			22,048
Deferred income taxes		16,750			10,917
Other current liabilities		134,744			117,178

Total current liabilities		909,444			733,294
Notes payable, less current portion		405,668			238,883
Accrued employee benefits		84,631			62,821
Accrued lease and facilities charge, less current portion		27,386			33,850
Deferred income taxes, less current portion		6,810			11,073
Other liabilities		124,070			61,697

Total liabilities		1,558,009			1,141,618

Commitments and contingencies (note 13)
Stockholders’ equity:
Preferred stock, $.01 par value 10,000,000 shares authorized		—			—
Common stock, $.01 par value 1,000,000,000 shares authorized, 203,132,716 shares issued and 199,320,466 shares outstanding on December 31, 2004 and 198,295,364 shares issued and 194,483,114 shares outstanding on December 31, 2003		2,022			1,973
Additional paid-in capital		1,143,059			1,105,631
Accumulated deficit		(762,556	)		(216,330	)
Notes receivable from stockholders		(8,055	)		(9,114	)
Accumulated other comprehensive income		285,955			223,562
Treasury stock, at cost (3,812,250 shares)		(35,727	)		(35,727	)

Total stockholders’ equity		624,698			1,069,995

Total liabilities and stockholders’ equity	$	2,182,707		$	2,211,613

The accompanying footnotes are an integral part of these consolidated financial statements.

BEARINGPOINT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)


	Year Ended December 31, 2004			Six Months Ended December 31, 2003			Year Ended June 30,
	Year Ended December 31, 2004			Six Months Ended December 31, 2003			2003			2002
				(as restated)			(as restated)			(as restated)
										(unaudited)
Revenue	$	3,375,782		$	1,522,503		$	3,157,898		$	2,383,099

Costs of service:
Professional compensation		1,532,423			694,859			1,429,192			948,618
Other direct contract expenses		991,493			396,392			743,066			600,729
Lease and facilities restructuring charges		11,699			61,436			17,283			—
Impairment charge		—			—			—			23,914
Other costs of service		292,643			129,998			264,606			212,097

Total costs of service		2,828,258			1,282,685			2,454,147			1,785,358

Gross profit		547,524			239,818			703,751			597,741
Amortization of purchased intangible assets		3,457			10,212			45,127			3,014
Goodwill impairment charge		397,065			127,326			—			—
Selling, general and administrative expenses		641,176			272,250			550,098			477,230

Operating income (loss)		(494,174	)		(169,970	)		108,526			117,497
Interest income		1,441			646			2,346			3,144
Interest expense		(18,710	)		(8,611	)		(13,598	)		(2,248	)
Loss on early extinguishment of debt		(22,617	)		—			—			—
Other income (expense), net		(375	)		6,192			759			321

Income (loss) before taxes and cumulative effect of change in accounting principle		(534,435	)		(171,743	)		98,033			118,714
Income tax expense		11,791			4,872			65,342			80,263

Income (loss) before cumulative effect of change in accounting principle		(546,226	)		(176,615	)		32,691			38,451
Cumulative effect of change in accounting principle, net of tax		—			—			—			(79,960	)

Net income (loss)	$	(546,226	)	$	(176,615	)	$	32,691		$	(41,509	)

Earnings (loss) per share—basic and diluted:
Income (loss) before cumulative effect of change in accounting principle	$	(2.77	)	$	(0.91	)	$	0.18		$	0.24
Cumulative effect of change in accounting principle		—			—			—			(0.50	)

Net income (loss)	$	(2.77	)	$	(0.91	)	$	0.18		$	(0.26	)

Weighted average shares—basic		197,039,303			193,596,759			185,461,995			157,559,989

Weighted average shares—diluted		197,039,303			193,596,759			185,637,693			158,715,730

The accompanying footnotes are an integral part of these consolidated financial statements.

BEARINGPOINT, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)


	Common stock				Additional paid-in capital		Retained earnings (accumulated deficit)			Notes receivable from stockholders			Accumulated other comprehensive income (loss)			Treasury stock					Comprehensive income (loss)			Total
	Shares issued		Amount		Additional paid-in capital		Retained earnings (accumulated deficit)			Notes receivable from stockholders			Accumulated other comprehensive income (loss)			Shares		Amount			Comprehensive income (loss)			Total
Balance at June 30, 2001 (as restated) (unaudited)	158,569		$	1,576	$	647,225	$	(30,897	)	$	(7,434	)	$	(3,280	)	—		$	—					$	607,190
Exercise of stock options under Long-Term Incentive Plan, including tax benefit of $181	209			2		3,782		—			—			—		—			—						3,784
Transfer of shares in trust to treasury	—			—		—		—			—			—		(999	)		—						—
Common stock repurchased	—			—		—		—			—			—		(2,813	)		(35,727	)					(35,727	)
Sale of common stock under Employee Stock Purchase Plan, including tax benefit of $995	2,280			23		27,273		—			—			—		—			—						27,296
Compensation recognized under Long-Term Incentive Plan for restricted stock	420			4		1,862		—			—			—		—			—						1,866
Notes receivable from stockholders, including $57 in interest and repayment of loan	—			—		—		—			(1,726	)		—		—			—						(1,726	)
Comprehensive income (loss):
Net loss	—			—		—		(41,509	)		—			—		—			—		$	(41,509	)		(41,509	)
Foreign currency translation adjustment, net of tax	—			—		—		—			—			1,920		—			—			1,920			1,920

Total comprehensive loss (as restated) (unaudited)	—			—		—		—			—			—		—			—		$	(39,589	)

Balance at June 30, 2002 (as restated) (unaudited)	161,478			1,605		680,142		(72,406	)		(9,160	)		(1,360	)	(3,812	)		(35,727	)					563,094

Sale of common stock under Employee Stock Purchase Plan, including tax benefit of $804	3,548			35		27,695		—			—			—		—			—						27,730
Notes receivable from stockholders, including $72 in interest and repayment of loan	—			—		—		—			24			—		—			—						24
Issuance of common stock in connection with acquisition of KPMG Consulting AG (BE Germany)	30,471			305		364,132		—			—			—		—			—						364,437
Restricted stock awards to board of directors	20			—		157		—			—			—		—			—						157
Compensation recognized under Long-Term Incentive Plan for restricted stock, net of tax benefit of $16	—			—		1,546		—			—			—		—			—						1,546
Compensation recognized for stock awards related to transactions involving Andersen Business Consulting	8			—		13,531		—			—			—		—			—						13,531
Forfeiture of restricted stock	(50	)		—		—		—			—			—		—			—						—
Comprehensive income:
Net income	—			—		—		32,691			—			—		—			—		$	32,691			32,691
Derivative instruments, net of tax	—			—		—		—			—			695		—			—			695			695
Foreign currency translation adjustment, net of tax	—			—		—		—			—			139,315		—			—			139,315			139,315
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