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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended June 30, 2004

OR

For the transition period from                      to                      .

Commission File Number 1-14379

CONVERGYS CORPORATION

Incorporated under the laws of the State of Ohio

201 East Fourth Street, Cincinnati, Ohio 45202

I.R.S. Employer Identification Number 31-1598292

Telephone - Area Code (513) 723-7000

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

At July 31, 2004, 174,777,587 Common Shares were outstanding, of which 32,233,157 were held in Treasury (142,544,430 Common Shares in the open market).

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Act of 1934). Yes x No ¨

PART I - FINANCIAL INFORMATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

(Amounts in Millions, Except Per Share Amounts)

See Notes to Financial Statements.

2

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in Millions)

See Notes to Financial Statements.

3

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Millions)

See Notes to Financial Statements.

4

NOTES TO FINANCIAL STATEMENTS

(Amounts in Millions Except Per Share Amounts)

Convergys Corporation (the Company or Convergys) is a global leader in the provision of outsourced customer management, employee care and integrated billing software services. The Company was spun off from its former parent company, Cincinnati Bell Inc. (CBI), in 1998. Convergys focuses on developing long-term strategic relationships with clients in employee- and customer-intensive industries including communications, technology and financial services as well as governmental agencies. The Company has two reporting segments: (i) the Customer Management Group (CMG), which provides outsourced marketing, customer support services, accounts receivable management and employee care services; and (ii) the Information Management Group (IMG), which provides outsourced billing and information services and software. The Company has developed a base of recurring revenues by providing value-added billing and customer management and employee care solutions for its clients, generally under long-term contracts.

These financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and, in the opinion of management, include all adjustments necessary for a fair presentation of the results of operations, financial position and cash flows for each period shown. All adjustments are of a normal and recurring nature. The December 31, 2003 condensed balance sheet has been derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America. It is suggested that these financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the period ended December 31, 2003. Certain prior period amounts have been reclassified to conform to current period presentation.

The Company files annual, quarterly, special reports and proxy statements with the SEC. These filings are available to the public over the Internet on the SEC’s Web site at http://www.sec.gov and on the Company’s Web site at http://www.convergys.com. You may also read and copy any document the Company files with the SEC at its public reference facilities in Washington, D.C. You can also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities. You can also inspect reports, proxy statements and other information about Convergys at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.

In May 2003, the Emerging Issues Task Force (EITF) reached consensus on EITF Issue No. 03-04, “Determining the Classification and Benefit Attribution Method for a ‘Cash Balance’ Pension Plan,” to address specifically the accounting for certain cash balance pension plans. EITF 03-04 requires certain cash balance pension plans to be accounted for as defined benefit plans. For cash balance plans described in the consensus, the consensus also requires the use of the traditional unit credit method for purposes of measuring the benefit obligation and annual cost of benefits earned as opposed to the projected unit credit method. The Company historically has accounted for its cash balance plan as a defined benefit plan; however, the Company adopted the measurement provisions of EITF 03-04 as of December 31, 2003. The adoption of EITF 03-04 will reduce pension expense in 2004 by $4.5.

5

NOTES TO FINANCIAL STATEMENTS

(Amounts in Millions Except Per Share Amounts)

In May 2004, the Company acquired 100% of the outstanding shares of Encore Receivable Management, Inc. (Encore), a Kansas-based provider of accounts receivable management and collection services. This transaction provides CMG entry into the accounts receivable management market and the ability to expand its business process outsourcing capabilities. The purchase price was $53, subject to final purchase price adjustments. Up to $14 in additional earn-out payments is possible based on future operating performance.

During May 2004, the Company also acquired 100% of the outstanding shares of DigitalThink, Inc. (NASDAQ: DTHK), a custom e-learning company. DigitalThink’s solutions include consulting services, simulations, customer online course development and a scalable platform for on-demand course delivery. With this acquisition, Convergys will be able to provide its clients customized, on-demand courses; expand its capabilities in the HR Business Process Outsourcing market to meet the needs of large global organizations for full service learning solutions including consulting and course design, development, delivery, and administration; and support its employee care and customer management clients more efficiently by accelerating the effectiveness of customer support teams through on-the-job training for client programs. Convergys paid approximately $131 for the purchase, including transaction costs.

Additionally, in May 2004, the Company acquired 100% of the outstanding shares of WhisperWire, Inc., a provider of industry-specific sales effectiveness software. WhisperWire’s PowerSeller software complements Convergys’ Infinys^® business support system (BSS) for ordering, billing and customer care for converged voice, data and video services. The acquisition enables Convergys to offer communication providers a complete solution to more effectively drive their sales process from lead-to-cash. In April 2004, the Company acquired 100% of the outstanding shares of two Singapore-based companies, Out-Smart.com Pte. Ltd. and i-Benefits Pte. Ltd., in order to expand its outsourcing capabilities. Both companies provide a range of human resource and benefits services to companies in the Asian Pacific region. The combined purchase price of these three acquisitions was approximately $21.

The following is a summary of the preliminary purchase price allocation related to the acquisitions made by the Company during the second quarter of 2004:

On December 31, 2003, the Company acquired certain billing and customer care assets from ALLTEL Communications Inc., a subsidiary of ALLTEL Corporation (ALLTEL), for $37.0. Additional earn-out payments up to $7.9 are possible based on future performance. As part of the acquisition, Convergys began providing billing services to more than 10.5 million additional wireless and wireline subscribers, and added several new companies to its list of billing clients including Cingular, Centennial Communications and Commonwealth Telephone.

6

NOTES TO FINANCIAL STATEMENTS

(Amounts in Millions Except Per Share Amounts)

In February 2003, the Company acquired Cygent, Inc. (Cygent), a software provider of a Web-based customer, order and service management platform for the communications industry. The purchase price was $3.5. Cygent was acquired in order to expand the Company’s offering to the global communications marketplace, especially in the wireline market.

As discussed more fully in the “Business Restructuring and Asset Impairment” section of the Notes to Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, the Company announced a restructuring plan during the fourth quarter of 2002 in response to continued economic weakness. The restructuring plan includes a reduction in headcount affecting professional and administrative employees worldwide and the consolidation or closure of certain CMG and IMG facilities. The restructuring plan resulted in $26.0 of severance costs, $49.5 of facility abandonment costs associated with ongoing lease obligations and $6.7 of asset impairments for the disposal of leasehold improvements and equipment for the facilities that the Company had abandoned by the end of 2002. Additionally, the Company recorded $12.7 in asset impairments, consisting principally of purchased software that was not deployed or further marketed.

During the fourth quarter of 2002, CMG also recorded $12.8 of additional facility abandonment costs associated with the contact centers that were closed in connection with the restructuring plan initiated by CMG during the third quarter of 2001. Based on its limited success in subleasing these facilities and after further consultation with its real estate advisors, CMG revised its estimate related to the proceeds it expects to receive through the sublease of these facilities, which resulted in this additional restructuring charge.

The facility abandonment component of the charge was equal to the future costs associated with those abandoned facilities, net of the proceeds from any probable future sublease agreements. The Company has used estimates, based on consultation with real estate advisors, to arrive at the proceeds from any future sublease agreements. The Company will continue to evaluate its estimates in recording the facilities abandonment charge. Consequently, there may be additional charges or reversals in the future.

During the fourth quarter of 2003, the Company reversed $1.5 of facility abandonment costs due to such costs being lower than originally anticipated. This was partially offset by $0.5 in additional severance costs.

These actions are expected to result in cash costs of $89.0, of which the Company had spent $40.6 through the first half of 2004 related principally to facility abandonment costs and severance payments. These initiatives resulted in approximately 1,350 headcount reductions compared with the 1,050 that were originally planned. Despite the higher number of redundancies, the average severance payment per employee was lower due to a lower mix of redundancies of higher paid employees. The remaining facility abandonment costs will be paid over several years as the leases expire.

Restructuring liability activity for the 2002 and 2001 plans combined consisted of the following:

7

NOTES TO FINANCIAL STATEMENTS

(Amounts in Millions Except Per Share Amounts)

The Company is required to test goodwill for impairment annually and at other times if events have occurred or circumstances exist that indicate the carrying value of goodwill may no longer be recoverable. The Company performed its annual impairment tests during the fourth quarter of 2003 and concluded that no goodwill impairment existed.

Goodwill increased to $835.8 at June 30, 2004, from $726.3 at December 31, 2003, principally as a result of business combinations discussed in Note 3, partially offset by changes in foreign currency translation adjustments.

As of June 30, 2004, the Company’s other intangible assets acquired through business combinations consisted of the following:

Intangible amortization expense for the six-month periods ended June 30, 2004 and June 30, 2003 was $10.0 and $7.6, and is estimated to be approximately $21 for the year ending December 31, 2004. Estimated intangible amortization expense for the four subsequent fiscal years is as follows:

The intangible assets are being amortized using the following amortizable lives: two to seven years for software and two to ten years for contracts and other. The weighted average amortization period for intangible assets is eight years (six years for software, nine years for contracts and other).

On February 25, 2003, the Company’s Board of Directors authorized the repurchase of 10 million of its common shares. On April 2, 2003, the Company’s Board of Directors authorized the additional repurchase of up to 10 million of its common shares. The Company repurchased 13.6 million common shares at a cost of $191.9 during 2003 pursuant to these authorizations. During the second quarter of 2004, the Company purchased an additional 0.4 million common shares for a cost of $6.3. Due to timing, $1.8 was settled in early July and, therefore, is reflected as an other current liability as of June 30, 2004. During July 2004, the Company purchased an additional 0.4 million shares for a cost of $5.8. The Company may repurchase 5.6 million additional shares pursuant to these authorizations.

At June 30, 2004, the Company had authorized 38 million common shares for issuance under the Convergys Corporation 1998 Long-Term Incentive Plan (Convergys LTIP), as amended. The Convergys LTIP provides for the issuance of stock-based awards to certain employees. Convergys accounts for its stock-based compensation plan under the intrinsic value method of accounting as defined by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations.

8

NOTES TO FINANCIAL STATEMENTS

(Amounts in Millions Except Per Share Amounts)

Pursuant to the plan, the Company granted restricted stock awards that generally vest over terms of three to five years. During the restriction period, restricted stock awards entitle the holder to all the rights of a holder of common shares. Unvested shares are restricted as to disposition and subject to forfeiture under certain circumstances.

The Company also granted stock options with exercise prices that were no less than market value of the stock at the grant date, had a ten-year term and vesting terms of three to four years.

Since early 2004, the Company issued no stock options to employees or directors. Instead, the Company began granting certain employees and directors restricted stock units. Unlike restricted stock awards discussed above, a holder of restricted stock units is not entitled to dividend and voting rights. Under the terms of the awards, the restrictions lapse over a period of 3 to 6 years and, in certain cases, are subject to performance measures. The Company first granted 1.7 million restricted stock units in April 2004.

The Company’s operating results for the three- and six-month periods ended June 30, 2004 and June 30, 2003 reflect the recognition of $4.3 and $6.8, and $3.0 and $6.0, respectively, in compensation expense.

The effect on net income and earnings per share, if the Company had accounted for stock options under the fair value method of accounting under SFAS No. 123, as amended by SFAS No. 148, is as follows:

The weighted average fair value on the date of grant for the Convergys options granted during the six months ended June 30, 2004 and June 30, 2003 was $7.48 and $4.92, respectively. Such amounts were estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

9

NOTES TO FINANCIAL STATEMENTS

(Amounts in Millions Except Per Share Amounts)

The Company sponsors a defined benefit pension plan, which includes both a qualified and a non-qualified portion, for all eligible employees (the cash balance plan). The Company also sponsors a non-qualified, unfunded executive deferred compensation plan and a supplemental, non-qualified, unfunded plan for certain senior executives. The pension benefit formula for the cash balance plan is determined by a combination of compensation-based credits and annual guaranteed interest credits. Benefits for the executive deferred compensation plan are based on employee deferrals, matching contributions and investment earnings on participant accounts. Benefits for the supplemental plan are based on age, years of service and eligible pay. Funding of the cash balance plan has been achieved through contributions made to a trust fund. The contributions have been determined using the aggregate cost method. The Company’s measurement date for all plans is December 31. The projected unit credit cost method is used for determining pension cost for financial reporting purposes. Beginning in 2004, pension cost for the cash balance plan is determined based on the traditional unit credit cost method pursuant to EITF 03-04.

Pension cost for the cash balance plan included the following components:

Pension cost for the unfunded executive pension plans included the following components:

The Company expects to contribute less than $0.5 to its cash balance plan during 2004 to fund non-qualified pension distributions.

Both of the Company’s segments derive significant revenues from AT&T Wireless Services, Inc. (AT&T Wireless).

Revenues from AT&T Wireless were 19.9% and 20.6% of the Company’s consolidated revenues for the six-month periods ended June 30, 2004 and June 30, 2003, respectively. Related accounts receivable from AT&T Wireless totaled $83.7 and $90.9 at June 30, 2004 and December 31, 2003, respectively.

10

NOTES TO FINANCIAL STATEMENTS

(Amounts in Millions Except Per Share Amounts)

The Company is from time to time subject to claims and administrative proceedings that are filed in the ordinary course of business. The Company believes that the results of any such claims or administrative proceedings, either individually or in the aggregate, will not have a materially adverse effect on the Company’s financial condition.

In September 2002, the Company was named as an additional defendant in an action filed with the Employment Tribunal in Glasgow, Scotland, by 156 former employees of Telesens against Telesens (in receivership) and the three individual receivers (Receivers). Prior to the Company’s acquisition of Telesens’ assets, the Receivers declared certain employees of Telesens redundant and terminated their employment. The claimants allege that the dismissals were unlawful under Scottish law and that the Company, as purchaser of the Telesens business, is liable for the dismissals.

Although not specified in the complaint, the Company believes the claimants are seeking damages of approximately $15. The Employment Tribunal had scheduled a hearing for June 2004 to hear evidence from all parties and then determine whether the Company is correctly named as a defendant to this action. However, the Employment Tribunal delayed this hearing indefinitely. The Company is defending the case vigorously and intends to continue to do so. In the event of an adverse judgment, the Company believes that the results of the claim would not have a materially adverse effect on the Company’s financial condition.

From December 2003 through February 2004, six separate lawsuits were filed in the Court of Common Pleas, Cuyahoga County, Ohio, against Cincinnati SMSA Limited Partnership and other defendants. Convergys is a limited partner of Cincinnati SMSA Limited Partnership, with a 45% ownership interest. Five of the suits were filed by companies purporting to be resellers (the “Resellers Cases”), while the sixth was filed by an individual consumer purporting to represent a class of damaged consumers (the “Consumer Case”). Each of the Reseller Cases seeks damages ranging from $1 to $3 plus treble damages under Ohio law. The Consumer Case seeks damages in excess of $60 plus treble damages under Ohio law. Motions to dismiss all of the lawsuits are pending.

Pursuant to the partnership agreement, Convergys, as a limited partner, has no right to participate in the operation of the partnership, no right to direct or participate in the defense of these actions and, therefore, has no current ability to assess the merit of any claims made in these actions or identify any possible loss which could result from these claims against the partnership.

The Company leases certain equipment and facilities used in its operations under operating leases. This includes the Company’s office complex in Orlando, Florida, which is leased from Wachovia Development Corporation (Lessor), a wholly owned subsidiary of Wachovia Corporation, under an agreement that expires in June 2010. The Lessor acquired the complex from an unrelated third party for $65.0, its appraised value, and began leasing it to the Company in June 2003. The Lessor partially funded the purchase of the office complex with the issuance of $55.0 in notes sold to two non-affiliated institutional investors. The remaining $10.0 was funded through a combination of bank debt and equity. The Company’s monthly lease payments include a fixed and variable component.

Upon termination or expiration, the Company must either purchase the property from the Lessor for $65.0 or arrange to have the office complex sold to a third party. If the office complex is sold to a third party for an amount less than the $65.0 financed by the Lessor, the Company has agreed under a residual value guarantee to pay the Lessor up to $55.0. If the office complex is sold to a third party for an amount in excess of $65.0, the Company is entitled to collect the excess. At the inception of the lease, the Company recognized a liability of approximately $5 for the related residual value guarantee. The value of the guarantee was determined by computing the estimate present value of probability-weighted cash flows that might be expended under the guarantee. The Company recorded a liability for the fair value of the obligation with a corresponding asset recorded as prepaid rent, which is being amortized to rental expense over the lease term. The liability will remain on the balance sheet until the end of the lease term.

11

NOTES TO FINANCIAL STATEMENTS

(Amounts in Millions Except Per Share Amounts)

Under the terms of the lease, the Company also provides certain indemnities to the Lessor, including environmental indemnities. Due to the nature of such potential obligations, it is not possible to estimate the maximum amount of such exposure or the fair value. The Company does not expect such amounts, if any, to be material.

The Company has concluded that it is not required to consolidate the Lessor pursuant to Interpretation No. 46, “Consolidation of Variable Interest Entities,” an interpretation of ARB No. 51, as the Company is not the primary beneficiary. Additionally, the Company is not required to consolidate the office complex and the related lease, as the lease does not qualify as a variable interest entity.

Industry Segment Information

The Company has two segments, which are identified by service offerings. CMG provides outsourced customer care and employee care services. IMG provides outsourced billing and information services and software.

The Company does not allocate activities below the operating income level to its reported segments. The Company’s business segment information is as follows:

12

NOTES TO FINANCIAL STATEMENTS

(Amounts in Millions Except Per Share Amounts)

The following is a reconciliation of the numerator and denominator of the basic and diluted earnings per share (EPS) computations:

The diluted EPS calculation for the six months ended June 30, 2004 and June 30, 2003 excludes the effect of 14.7 million and 13.3 million outstanding stock options, respectively, because they are anti-dilutive.

13

MANAGEMENT DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Amounts in Millions Except Per Share Amounts)

OVERVIEW

Convergys Corporation (the Company or Convergys) is a global leader in the provision of outsourced customer management, employee care and integrated billing software services. The Company was spun off from its former parent company, Cincinnati Bell Inc. (CBI) in 1998. Convergys focuses on developing long-term strategic relationships with clients in employee- and customer-intensive industries including communications, technology and financial services as well as governmental agencies. The Company has two reporting segments: (i) the Customer Management Group (CMG), which provides outsourced marketing, customer support services, accounts receivable management and employee care services; and (ii) the Information Management Group (IMG), which provides outsourced billing and information services and software.

CMG

CMG provides outsourced customer management and employee care services for its clients utilizing advanced information systems capabilities, human resource management skills and industry expertise. In its multi-channel contact centers, CMG service agents provide a full range of customer support and employee care services including initial product information requests, customer retention initiatives, technical support inquiries for consumers and business customers, accounts receivable management, staffing, benefits administration, payroll administration and general human resource and administration services.

CMG principally focuses on developing long-term strategic outsourcing relationships with large clients in the communications, technology and financial services industries for customer management services and large employers in any industry or government for employee care services. CMG focuses on these types of clients because of the complexity of services required, the anticipated growth of their market segments and their increasing need for more cost-effective customer management and employee care services. CMG generally recognizes revenues as services are performed based on staffing hours, number of contacts or participants handled by CMG or a flat monthly fee. Supplemental revenues can sometimes be earned depending on service levels or achievement of certain performance measurement targets. The Company recognizes these supplemental revenues only after it has achieved the required measurement target.

During the second quarter of 2004, CMG made some strategic investments to expand its service offerings and enhance its competitive position. In addition to its ongoing investment in offshore capacity and employee care operations, CMG expanded its service offering and market presence through acquisitions. CMG entered the accounts receivable management market and expanded its business process outsourcing capabilities with the acquisition of Encore Receivable Management, Inc. (Encore). It expanded its learning outsourcing services to include innovative content development and delivery services through its acquisition of DigitalThink, Inc. (DigitalThink). Finally, it expanded its global payroll and benefits outsourcing capabilities with the acquisition of two companies in Singapore: Out-Smart.com Pte. Ltd. (Out-Smart.com) and i-Benefits Pte. Ltd. (i-Benefits).

The Company expects that growth of outsourced customer management and employee care services will be driven by the trend of large companies and governmental agencies turning to outsourcers to provide cost-effective, high quality customer support and employee care solutions. Additionally, the Company also believes that the expansion of offshore capacity, which provides customer management clients with lower costs and a highly educated labor force, will drive growth in the industry.

However, despite this growing demand, CMG’s operating margins in the near term will continue to be challenged as pricing pressure intensifies and as it continues to invest in its employee care operations and offshore customer contact center capacity. Additionally, margins will continue to be negatively impacted by a weakened U.S. dollar.

14

MANAGEMENT DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Amounts in Millions Except Per Share Amounts)

IMG

IMG serves clients principally by providing and managing complex billing and information software that addresses all segments of the communications industry. IMG provides its software products in one of three delivery modes: outsourced, licensed or build-operate-transfer (BOT). In the outsourced delivery mode, IMG provides the billing services by running its software in one of its data centers. In the licensed delivery mode, the software is licensed to clients who perform billing internally. Finally, the BOT delivery mode entails IMG implementing and initially running its software in the client’s data center with the option of transferring the operation of the center to the client at a future date.

In the first half of 2004, 52.7% of IMG’s revenues were for data processing services generated from recurring monthly payments from its clients based upon the number of client subscribers or bills processed by IMG in its data centers. Most of IMG’s wireless data processing agreements, which are typically for multiple years, are priced on a monthly, per subscriber or per event basis. Professional and consulting services for installation, implementation, customization and enhancement services accounted for 14.4% of IMG’s first half 2004 revenues. The Company invoices its clients for these services based on time and material costs at contractually agreed upon rates or, in some instances, for a fixed fee. IMG’s remaining revenues were primarily from software license arrangements and international sales. International revenues consist of a mix of professional and consulting, license and support and maintenance revenues.

Over the last few years, the communications industry has experienced one of the most difficult periods in its history. Communications companies have focused their attention on cost reduction and margin improvement, with lower investment in billing information systems. This has had an adverse impact on IMG’s revenues and operating margin. However, the Company believes that the sector is showing signs of improvement. As communications companies continue to expand their service offerings, the requirements of billing information systems are becoming increasingly complex. In order to remain competitive, the Company believes that many communications companies are turning to third-party vendors, such as Convergys, for their billing information system needs.

In order to meet this demand, Convergys continues to invest in research and development of new products. During 2003, the Company introduced Infinys, its modular and convergent business support system software. Infinys enables communications companies or operators to accelerate the delivery of new services for a wide range of offerings including voice, video and data services. In addition, during the second quarter of 2004, the Company acquired WhisperWire, Inc. (WhisperWire), a provider of industry-specific sales effectiveness software. The Company believes that the acquired software, PowerSeller, closely complements Infinys and enables the Company to offer communications providers a complete solution to drive their sales process more effectively from the original lead-to-cash generation.

However, despite signs of improvement in the communications sector, IMG expects that it will continue to be challenged by pricing pressure, moderate subscriber growth by leading North American wireless carriers and consolidation in the sector.

The Company believes that its financial structure and condition are solid. At June 30, 2004, total capitalization was $1,502.8, consisting of $312.2 of short-term and long-term debt and $1,190.6 of equity. Although the Company has occasionally used its various borrowing facilities to help fund its investing and financing activities, cash flows from operating activities have been the major source of funding.

15

MANAGEMENT DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Amounts in Millions Except Per Share Amounts)

FORWARD-LOOKING STATEMENTS

This report contains “forward-looking” statements, as defined in the Private Securities Litigation Reform Act of 1995, that are based on current expectations, estimates and projections. Statements that are not historical facts, including statements about the beliefs and expectations of the Company, are forward-looking statements. Sometimes these statements will contain words such as “believes,” “expects,” “intends,” “could,” “should,” “will,” “plans,” “anticipates” and other similar words. These statements discuss potential risks and uncertainties; and, therefore, actual results may differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they were made. The Company expressly states that it has no current intention to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Important factors that may affect these projections or expectations include, but are not limited to: the consequence of potential terrorist activities and the responses of the United States and other nations to such activities; the loss of a significant client or significant business from a client; difficulties in completing a contract or implementing its provisions, or completing or implementing an acquisition; changes in the overall economy; changes in competition in markets in which the Company operates; changes in the legal or regulatory environment in which the Company and its clients operate; changes in the demand for the Company’s services; changes in technology that impact both the markets served and the types of services offered; consolidation within the industries in which the Company’s clients operate; and difficulties in conducting business internationally.

RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the condensed consolidated financial statements and segment data. Detailed comparisons of revenue and expenses are presented in the discussions of the operating segments, which follow the consolidated results discussion. Results for interim periods may not be indicative of the results for the full years.

Consolidated Overview

Three Months Ended June 30, 2004 versus Three Months Ended June 30, 2003

The Company’s revenues for the second quarter of 2004 totaled $601.7, a 7% increase from the second quarter of 2003. The revenue increase is attributable to a 13% increase in CMG revenues, partially offset by a 5% decrease at IMG. The Company’s operating income was $46.2 in the second quarter of 2004 versus $71.0 in the prior year. This 35% decrease reflects the impact of pricing pressure, as well as increased costs of providing services, selling, general and administrative expenses and amortization expenses. In addition, the decrease in operating income reflects increased stock compensation expense resulting from restricted stock units awarded to employees in April 2004 pursuant to the Company’s long-term incentive plan. Partially offsetting these items were lower research and development costs.

As a percentage of revenues, costs of products and services increased to 62.7% from 57.3% in the prior year. This reflects the impact of pricing changes affecting both segments as well as increased costs incurred in connection with the ramp of new CMG clients. This was partially offset by increased utilization of CMG’s offshore contact centers, reflecting client demand, as well as savings realized through restructuring and other cost reduction initiatives. The 9% increase in selling, general and administrative expenses to $125.2 was principally due to further expansion in CMG’s employee care operations. Amortization expense increased 38% to $5.4 reflecting intangible assets acquired in connection with recent business combinations. Research and development expenses decreased 19% to $19.1 as a result of lower spending at IMG.

During the second quarter of 2004, the Company recorded equity income in the Cellular Partnerships of $1.7 compared with an equity loss of $1.3 in the prior year. Interest expense was slightly higher compared to the prior year, reflecting higher levels of debt and slightly higher average interest rates. The Company’s effective tax rate was 36.8% for the three months ended June 30, 2004 and 2003.

16

MANAGEMENT DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Amounts in Millions Except Per Share Amounts)

Net income in the second quarter of 2004 was $28.7, a 33% decrease from $42.8 in the second quarter of 2003. Earnings per diluted share decreased to $0.20 for the second quarter of 2004 versus $0.29 during the second quarter of 2003.

Six Months Ended June 30, 2004 versus Six Months Ended June 30, 2003

The Company’s revenues for the first half of 2004 totaled $1,175.6, a 5% increase from the first half of 2003. The revenue increase is attributable to a 10% increase in CMG revenues, partially offset by a 6% decrease at IMG. The Company’s operating income was $101.1 in the first six months of 2004 versus $139.5 in the prior year. This 28% decrease reflects the impact of pricing pressure, increased costs of providing services and selling, general and administrative expenses and amortization expenses. Partially offsetting these items were lower research and development costs.

As a percentage of revenues, costs of products and services increased to 62.0% from 57.5% in the prior year. This reflects the impact of pricing pressure impacting both segments as well as increased costs incurred in connection with the ramp of new CMG clients. This was partially offset by increased utilization of CMG’s offshore contact centers, reflecting client demand, as well as savings realized through restructuring and other cost reduction initiatives. The increase in selling, general and administrative expenses reflects further expansion in CMG’s employee care and offshore contact center operations. Amortization expense increased 32% to $10.0 reflecting intangible assets acquired in connection with recent business combinations. Research and development expenses decreased as a result of lower spending at IMG.

During the first half of 2004, the Company recorded equity income from the Cellular Partnerships of $1.6 compared to an equity loss of $11.2 in the prior year. During the first quarter of 2003, the general partner of Cincinnati SMSA Limited Partnership, a provider of wireless communications of which the Company owns 45%, settled a lawsuit against the partnership for $22.0. The Company’s share of this loss was $9.9, which it recorded as a loss from its equity investment in the partnership.

Interest expense was slightly higher compared to the prior year reflecting higher levels of debt. The Company’s effective tax rate was 36.8% for the six months ended June 30, 2004, versus 36.9% during the six months ended June 30, 2003.

Compared to prior year, net income in the first six months of 2004 decreased 21% to $61.2, while diluted earnings per share decreased 18% to $0.42. The fluctuation in earnings per share reflects, in part, 6.6 million fewer diluted weighted average shares outstanding for the six months ended June 30, 2004 over June 30, 2003 due to common share repurchases in 2003, as well as the 0.4 million shares repurchased during the second quarter of 2004. The first half of 2003 also included the $9.9 ($6.4 after tax or $0.04 per diluted share) equity loss resulting from the partnership settlement in the first quarter of 2003.

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MANAGEMENT DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Amounts in Millions Except Per Share Amounts)

CUSTOMER MANAGEMENT