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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

OR

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

For the transition period from ______ to _______

Commission File Number 0-25995

NEXTERA ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)

|                                                                        |  |                                                   
|----------------------------------------------------------------------- |  | --------------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 95-4700410
(I.R.S. Employer
Identification Number)

4 Cambridge Center, 3rd Floor, Cambridge, Massachusetts 02142
(Address of principal executive office, including zip code)

(617) 494-0844
(Registrants telephone number, including area code)

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 and 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   [   ]

As of July 31, 2002 there were 31,885,896 shares of $.001 par value Class
A Common Stock outstanding and 3,869,570 shares of $.001 par value Class B
Common Stock outstanding.



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TABLE OF CONTENTS



|                                 |                                                                                               |                                                      |  |  |  |  |  | 
|-------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I  - FINANCIAL INFORMATION
|                                 | Item 1. Financial Statements                                                                 
|                                 |                                                                                               | Consolidated Balance Sheets                         
|                                 |                                                                                               | Consolidated Statements of Operations               
|                                 |                                                                                               | Consolidated Statements of Operations               
|                                 |                                                                                               | Consolidated Statements of Cash Flows               
|                                 |                                                                                               | NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|                                 | Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                 | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART II  OTHER INFORMATION     
|                                 | Item 1. Legal Proceedings.                                                                   
|                                 | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                      
|EXHIBIT 4.5                     
|EXHIBIT 4.6                     



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##### Table of Contents



NEXTERA ENTERPRISES, INC.
Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 2002

INDEX

|                               |  |         |  |                                                                                           |          |   
|------------------------------ |  | ------- |  | ----------------------------------------------------------------------------------------- | -------- | --
|                               |  |         |  |                                                                                           | Page No.
|                               |  |         |  |                                                                                           |         
|PART I.  FINANCIAL INFORMATION
|                              
|                               |  | Item 1. |  | Financial Statements                                                                      |          |   
|                              
|                               |  |         |  | Consolidated Balance Sheets as of June 30, 2002
  and December 31, 2001                   |          | 3 
|                              
|                               |  |         |  | Consolidated Statements of Operations for the
  Three Months Ended June 30, 2002 and 2001 |          | 4 
|                              
|                               |  |         |  | Consolidated Statements of Operations for the
  Six Months Ended June 30, 2002 and 2001   |          | 5 
|                              
|                               |  |         |  | Consolidated Statements of Cash Flows for the
  Six Months Ended June 30, 2002 and 2001   |          | 6 
|                              
|                               |  |         |  | Notes to Consolidated Financial Statements                                                |          | 7 
|                              
|                               |  | Item 2. |  | Managements Discussion and Analysis of Financial Condition
  and Results of Operations   |          | 13
|                              
|                               |  | Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                |          | 26
|                              
|PART II. OTHER INFORMATION    
|                              
|                               |  | Item 1. |  | Legal Proceedings                                                                         |          | 27
|                              
|                               |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                          |          | 27
|                              
|                               |  |         |  | Signatures                                                                                |          | 28

2



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PART I  FINANCIAL INFORMATION




Item 1. Financial Statements

Nextera Enterprises, Inc.




Consolidated Balance Sheets
(In thousands, except share data)

|                                                                                                    |                                                                                                                                                                    |   |               |          |                   |   |         |          |  
|--------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | ------------- | -------- | ----------------- | - | ------- | -------- | -
|                                                                                                    |                                                                                                                                                                    |   | June 30, 2002 |          | December 31, 2001
|                                                                                                    |                                                                                                                                                                    |   |               |          |                  
|                                                                                                    |                                                                                                                                                                    |   | (unaudited)   |          |                   |   |        
|Assets                                                                                              |                                                                                                                                                                    |   |               |          |                   |   |         |         
|Current assets:                                                                                     |                                                                                                                                                                    |   |               |          |                   |   |         |         
|                                                                                                    | Cash and cash equivalents                                                                                                                                          |   | $             | 2,193    |                   |   | $       | 4,465    |  
|                                                                                                    | Restricted cash                                                                                                                                                    |   |               | 372      |                   |   |         |         |  
|                                                                                                    | Accounts receivable, net of allowance for doubtful accounts of
$3,073 and $2,976 at June 30, 2002 and December 31, 2001,
respectively                              |   |               | 21,270   |                   |   |         | 19,526   |  
|                                                                                                    | Due from affiliates                                                                                                                                                |   |               |         |                   |   |         | 65       |  
|                                                                                                    | Assets held for sale                                                                                                                                               |   |               |         |                   |   |         | 11,509   |  
|                                                                                                    | Prepaid expenses and other current assets                                                                                                                          |   |               | 1,187    |                   |   |         | 895      |  
|                                                                                                    |                                                                                                                                                                    |   |               |          |                   |   |         |         
|Total current assets                                                                                |                                                                                                                                                                    |   | 25,022        |          |                   |   | 36,460  |         
|Property and equipment, net                                                                         |                                                                                                                                                                    |   | 3,204         |          |                   |   | 4,003   |         
|Intangible assets, net of accumulated amortization of $6,225 at
June 30, 2002 and December 31, 2001 |                                                                                                                                                                    |   | 77,504        |          |                   |   | 77,504  |         
|Other assets                                                                                        |                                                                                                                                                                    |   | 2,416         |          |                   |   | 3,215   |         
|                                                                                                    |                                                                                                                                                                    |   |               |          |                   |   |         |         
|Total assets                                                                                        |                                                                                                                                                                    | $ | 108,146       |          |                   | $ | 121,182 |         
|                                                                                                    |                                                                                                                                                                    |   |               |          |                   |   |         |         
|Liabilities and Stockholders Equity                                                                |                                                                                                                                                                    |   |               |          |                   |   |         |         
|Current liabilities:                                                                                |                                                                                                                                                                    |   |               |          |                   |   |         |         
|                                                                                                    | Accounts payable and accrued expenses                                                                                                                              |   | $             | 15,621   |                   |   | $       | 22,744   |  
|                                                                                                    | Accrued restructuring costs, current portion                                                                                                                       |   |               | 2,103    |                   |   |         | 1,738    |  
|                                                                                                    | Senior credit facility, current portion                                                                                                                            |   |               | 7,300    |                   |   |         | 14,500   |  
|                                                                                                    | Current portion of long-term debt and capital lease obligations                                                                                                    |   |               | 617      |                   |   |         | 2,618    |  
|                                                                                                    |                                                                                                                                                                    |   |               |          |                   |   |         |         
|Total current liabilities                                                                           |                                                                                                                                                                    |   | 25,641        |          |                   |   | 41,600  |         
|Long-term debt and capital lease obligations                                                        |                                                                                                                                                                    |   | 1,045         |          |                   |   | 1,224   |         
|Senior credit facility, net of current portion                                                      |                                                                                                                                                                    |   | 21,328        |          |                   |   | 23,928  |         
|Debentures due to affiliates, including accrued interest                                            |                                                                                                                                                                    |   | 24,257        |          |                   |   | 23,093  |         
|Accrued restructuring costs, net of current portion                                                 |                                                                                                                                                                    |   | 1,957         |          |                   |   | 4,404   |         
|Other long-term liabilities                                                                         |                                                                                                                                                                    |   | 3,258         |          |                   |   | 1,434   |         
|Stockholders equity:                                                                               |                                                                                                                                                                    |   |               |          |                   |   |         |         
|                                                                                                    | Preferred Stock, $0.001 par value, 10,000,000 shares
authorized, 600,000 authorized shares designated Series A,
210,000 Series A issued and outstanding            |   |               | 23,745   |                   |   |         | 22,944   |  
|                                                                                                    | Class A Common Stock, $0.001 par value, 95,000,000 shares
authorized, 31,885,896 and 31,647,640 shares issued at June
30, 2002 and December 31, 2001, respectively |   |               | 32       |                   |   |         | 32       |  
|                                                                                                    | Class B Common Stock, $0.001 par value, 4,300,000 shares
authorized, 3,869,570 shares issued and outstanding at June
30, 2002 and December 31, 2001                |   |               | 4        |                   |   |         | 4        |  
|                                                                                                    | Additional paid-in capital                                                                                                                                         |   |               | 161,601  |                   |   |         | 162,504  |  
|                                                                                                    | Treasury Stock, at cost, 228,303 shares Class A Common Stock
at December 31, 2001                                                                                  |   |               |         |                   |   |         | (294     | )
|                                                                                                    | Retained earnings (deficit)                                                                                                                                        |   |               | (154,512 | )                 |   |         | (158,600 | )
|                                                                                                    | Accumulated other comprehensive income (loss)                                                                                                                      |   |               | (210     | )                 |   |         | (1,091   | )
|                                                                                                    |                                                                                                                                                                    |   |               |          |                   |   |         |         
|Total stockholders equity                                                                          |                                                                                                                                                                    |   | 30,660        |          |                   |   | 25,499  |         
|                                                                                                    |                                                                                                                                                                    |   |               |          |                   |   |         |         
|Total liabilities and stockholders equity                                                          |                                                                                                                                                                    | $ | 108,146       |          |                   | $ | 121,182 |         
|                                                                                                    |                                                                                                                                                                    |   |               |          |                   |   |         |         

See Notes to Consolidated Financial Statements

3



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Nextera Enterprises, Inc.




Consolidated Statements of Operations
(In thousands, except per share amounts; unaudited)

|                                                    |  |                            |        |      |  |   |         |  
|--------------------------------------------------- |  | -------------------------- | ------ | ---- |  | - | ------- | -
|                                                    |  | Three Months Ended June 30
|                                                    |  |                           
|                                                    |  | 2002                       |        | 2001
|                                                    |  |                            |        |     
|Net revenues                                        |  | $                          | 18,166 |      |  | $ | 35,771  |  
|Cost of revenues                                    |  |                            | 11,122 |      |  |   | 22,314  |  
|                                                    |  |                            |        |      |  |   |         |  
|Gross profit                                        |  |                            | 7,044  |      |  |   | 13,457  |  
|Selling, general and administrative expenses        |  |                            | 3,820  |      |  |   | 10,919  |  
|Amortization expense                                |  |                            |       |      |  |   | 1,361   |  
|Goodwill Impairment                                 |  |                            |       |      |  |   | 26,650  |  
|Special charges/(credits)                           |  |                            | (740   | )    |  |   | 8,045   |  
|                                                    |  |                            |        |      |  |   |         |  
|Income (loss) from operations                       |  |                            | 3,964  |      |  |   | (33,518 | )
|Interest expense, net                               |  |                            | (1,554 | )    |  |   | (2,550  | )
|Other expense                                       |  |                            |       |      |  |   | (551    | )
|                                                    |  |                            |        |      |  |   |         |  
|Income (loss) before income taxes                   |  |                            | 2,410  |      |  |   | (36,619 | )
|Provision for income taxes                          |  |                            | 50     |      |  |   | 361     |  
|                                                    |  |                            |        |      |  |   |         |  
|Net income (loss)                                   |  |                            | 2,360  |      |  |   | (36,980 | )
|Preferred stock dividends                           |  |                            | (407   | )    |  |   | (539    | )
|                                                    |  |                            |        |      |  |   |         |  
|Net income (loss) applicable to common stockholders |  | $                          | 1,953  |      |  | $ | (37,519 | )
|                                                    |  |                            |        |      |  |   |         |  
|Net income (loss) per common share, basic           |  | $                          | 0.05   |      |  | $ | (1.08   | )
|                                                    |  |                            |        |      |  |   |         |  
|Net income (loss) per common share, diluted         |  | $                          | 0.04   |      |  | $ | (1.08   | )
|                                                    |  |                            |        |      |  |   |         |  
|Weighted average common shares outstanding, basic   |  |                            | 35,756 |      |  |   | 34,704  |  
|                                                    |  |                            |        |      |  |   |         |  
|Weighted average common shares outstanding, diluted |  |                            | 64,777 |      |  |   | 34,704  |  
|                                                    |  |                            |        |      |  |   |         |  

See Notes to Consolidated Financial Statements

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Nextera Enterprises, Inc.




Consolidated Statements of Operations
(In thousands, except per share amounts; unaudited)

|                                                    |  |                          |        |      |  |   |         |  
|--------------------------------------------------- |  | ------------------------ | ------ | ---- |  | - | ------- | -
|                                                    |  | Six Months Ended June 30
|                                                    |  |                         
|                                                    |  | 2002                     |        | 2001
|                                                    |  |                          |        |     
|Net revenues                                        |  | $                        | 39,015 |      |  | $ | 73,293  |  
|Cost of revenues                                    |  |                          | 23,577 |      |  |   | 49,659  |  
|                                                    |  |                          |        |      |  |   |         |  
|Gross profit                                        |  |                          | 15,438 |      |  |   | 23,634  |  
|Selling, general and administrative expenses        |  |                          | 8,997  |      |  |   | 26,026  |  
|Amortization expense                                |  |                          |       |      |  |   | 2,719   |  
|Goodwill Impairment                                 |  |                          |       |      |  |   | 26,650  |  
|Special charges/(credits)                           |  |                          | (740   | )    |  |   | 13,454  |  
|                                                    |  |                          |        |      |  |   |         |  
|Income (loss) from operations                       |  |                          | 7,181  |      |  |   | (45,215 | )
|Interest expense, net                               |  |                          | (2,993 | )    |  |   | (4,313  | )
|Other expense                                       |  |                          |       |      |  |   | (1,196  | )
|                                                    |  |                          |        |      |  |   |         |  
|Income (loss) before income taxes                   |  |                          | 4,188  |      |  |   | (50,724 | )
|Provision for income taxes                          |  |                          | 100    |      |  |   | 442     |  
|                                                    |  |                          |        |      |  |   |         |  
|Net income (loss)                                   |  |                          | 4,088  |      |  |   | (51,166 | )
|Preferred stock dividends                           |  |                          | (802   | )    |  |   | (1,057  | )
|                                                    |  |                          |        |      |  |   |         |  
|Net income (loss) applicable to common stockholders |  | $                        | 3,286  |      |  | $ | (52,223 | )
|                                                    |  |                          |        |      |  |   |         |  
|Net income (loss) per common share, basic           |  | $                        | 0.09   |      |  | $ | (1.50   | )
|                                                    |  |                          |        |      |  |   |         |  
|Net income (loss) per common share, diluted         |  | $                        | 0.06   |      |  | $ | (1.50   | )
|                                                    |  |                          |        |      |  |   |         |  
|Weighted average common shares outstanding, basic   |  |                          | 35,705 |      |  |   | 34,789  |  
|                                                    |  |                          |        |      |  |   |         |  
|Weighted average common shares outstanding, diluted |  |                          | 64,486 |      |  |   | 34,789  |  
|                                                    |  |                          |        |      |  |   |         |  

See Notes to Consolidated Financial Statements

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Nextera Enterprises, Inc.




Consolidated Statements of Cash Flows
(In thousands, unaudited)

|                                                                                     |                                             |                                       |         |                          |         |      |         |        |       |  
|------------------------------------------------------------------------------------ | ------------------------------------------- | ------------------------------------- | ------- | ------------------------ | ------- | ---- | ------- | ------ | ----- | -
|                                                                                     |                                             |                                       |         | Six Months Ended June 30
|                                                                                     |                                             |                                       |         |                         
|                                                                                     |                                             |                                       |         | 2002                     |         | 2001
|                                                                                     |                                             |                                       |         |                          |         |     
|Operating activities                                                                 |                                             |                                       |         |                          |         |      |         |       
|Net income (loss)                                                                    |                                             | $                                     | 4,088   |                          |         | $    | (51,166 | )     
|Adjustments to reconcile net income (loss) to net cash
used in operating activities: |                                             |                                       |         |                          |         |      |         |       
|                                                                                     | Depreciation and amortization               |                                       |         | 930                      |         |      |         | 5,356  |      
|                                                                                     | Goodwill write-off                          |                                       |         |                         |         |      |         | 26,650 |      
|                                                                                     | Provision for bad debts                     |                                       |         |                         |         |      |         | 1,566  |      
|                                                                                     | Interest paid-in-kind                       |                                       |         | 1,164                    |         |      |         | 2,110  |      
|                                                                                     | Non-cash charges, other                     |                                       |         | 27                       |         |      |         | 1,284  |      
|                                                                                     | Change in operating assets and liabilities: |                                       |         |                          |         |      |         |        |      
|                                                                                     |                                             | Accounts receivable                   |         |                          | (1,744  | )    |         |        | 913   |  
|                                                                                     |                                             | Due from affiliate                    |         |                          | 65      |      |         |        | (165  | )
|                                                                                     |                                             | Prepaid expenses and other assets     |         |                          | 296     |      |         |        | 3,100 |  
|                                                                                     |                                             | Accounts payable and accrued expenses |         |                          | (10,604 | )    |         |        | 6,221 |  
|                                                                                     |                                             | Other                                 |         |                          | 1,824   |      |         |        | 341   |  
|                                                                                     |                                             |                                       |         |                          |         |      |         |       
|Net cash used in operating activities                                                |                                             |                                       | (3,954  | )                        |         |      | (3,790  | )     
|                                                                                    
|Investing activities                                                                 |                                             |                                       |         |                          |         |      |         |       
|Purchase of property and equipment                                                   |                                             |                                       | (482    | )                        |         |      | (2,673  | )     
|Proceeds from sale of business                                                       |                                             |                                       | 14,720  |                          |         |      |        |       
|Changes in restricted cash                                                           |                                             |                                       | (372    | )                        |         |      |         |       
|                                                                                     |                                             |                                       |         |                          |         |      |         |       
|Net cash provided by (used in) investing activities                                  |                                             |                                       | 13,866  |                          |         |      | (2,673  | )     
|                                                                                    
|Financing activities                                                                 |                                             |                                       |         |                          |         |      |         |       
|Due from officers                                                                    |                                             |                                       |        |                          |         |      | 30      |       
|Repayments under senior credit facility                                              |                                             |                                       | (9,800  | )                        |         |      | (1,050  | )     
|Proceeds from debentures due to affiliates                                           |                                             |                                       |        |                          |         |      | 7,500   |       
|Repurchases of Class A Common Stock                                                  |                                             |                                       |        |                          |         |      | (323    | )     
|Repayments of long-term debt and capital lease obligations                           |                                             |                                       | (2,369  | )                        |         |      | (2,707  | )     
|Other                                                                                |                                             |                                       |        |                          |         |      | (294    | )     
|                                                                                     |                                             |                                       |         |                          |         |      |         |       
|Net cash provided by (used in) financing activities                                  |                                             |                                       | (12,169 | )                        |         |      | 3,156   |       
|Effects of exchange rates on cash and cash equivalents                               |                                             |                                       | (15     | )                        |         |      | 27      |       
|                                                                                     |                                             |                                       |         |                          |         |      |         |       
|Net decrease in cash and cash equivalents                                            |                                             |                                       | (2,272  | )                        |         |      | (3,280  | )     
|Cash and cash equivalents at beginning of period                                     |                                             |                                       | 4,465   |                          |         |      | 4,322   |       
|                                                                                     |                                             |                                       |         |                          |         |      |         |       
|Cash and cash equivalents at end of period                                           |                                             | $                                     | 2,193   |                          |         | $    | 1,042   |       
|                                                                                     |                                             |                                       |         |                          |         |      |         |       

See Notes to Consolidated Financial Statements

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NEXTERA ENTERPRISES, INC




NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements of Nextera
Enterprises, Inc. (Nextera or the Company) have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three and six-month periods ended June 30, 2002 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2002.

The balance sheet as of December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.

These financial statements should be read in conjunction with the financial
statements and notes thereto, together with managements discussion and
analysis of financial condition and results of operations, contained in the
Companys Annual Report on Form 10-K filed by the Company with the Securities
and Exchange Commission on April 1, 2002.

Restricted Cash

Restricted cash relates to cash deposits held by the Companys Senior Lenders,
in accordance with the Amended and Restated Credit Agreement dated March 29,
2002, to finance working capital requirements related to employment
compensation that is primarily payable in early 2003. The terms of the Amended
and Restated Credit Agreement require the Company to restrict such amounts on a
monthly basis based on the earned bonus amounts so that a certain percentage of
the projected earned bonus is escrowed or paid by the end of year. An
additional $1.5 million was escrowed to a restricted account subsequent to June
30, 2002 for bonuses earned through June 30, 2002. Payment of certain portions
of the restricted cash is predicated upon extending employment agreements for
certain key employees. Failure to extend the employment agreements for certain
key employees by January 1, 2003 will be an event of default by the Company
under its senior credit facility. Under an event of default, the Senior
Lenders would be able to exercise any remedy available to them, including using
all amounts on deposit to offset credit obligations.

Reclassification

Certain reclassifications were made to the 2001 financial statements in order
that they may be consistent with the 2002 presentation.

Recent Accounting Pronouncements

In November 2001, the Emerging Issues Task Force (EITF) of the FASB issued
Topic D-103 regarding Income Statement Characterization of Reimbursements
Received for Out-of-Pocket Expenses Incurred. Under this pronouncement, it
was concluded that reimbursements received for out-of-pocket expenses should
be classified as revenue, and correspondingly cost of revenues, in the income
statement. Upon application of the pronouncement, comparative financial
statements for prior periods must also be reclassified in order to ensure
consistency among all periods presented. The Company has adopted this
pronouncement as of January 1, 2002 and has included reimbursements for
out-of-pocket expenses within net revenues and costs of revenue for all
periods presented.

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NEXTERA ENTERPRISES, INC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 2. Earnings (Loss) per Share

Basic net income (loss) per share (Basic EPS) is computed by dividing net
income (loss) available to common stockholders by the weighted average number
of common shares outstanding. Diluted net income (loss) per common share
(Diluted EPS) is computed by dividing net income available to common
stockholders by the weighted average number of common shares and dilutive
common share equivalents then outstanding.

Basic and diluted earnings (loss) per share were calculated as follows:

(In thousands, except per share amounts; unaudited)

|                                                   |  |                    |        |                  |  |      |         |      |  |   |        |   |  |   |         |  
|-------------------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                                   |  | Three Months Ended |        | Six Months Ended
|                                                   |  | June 30            |        | June 30         
|                                                   |  |                    |        |                 
|                                                   |  | 2002               |        | 2001             |  | 2002 |         | 2001
|                                                   |  |                    |        |                  |  |      |         |     
|Basic net income (loss) per Common Share           |  |                    |        |                  |  |      |         |      |  |   |        |   |  |   |         |  
|Net income (loss)                                  |  | $                  | 2,360  |                  |  | $    | (36,980 | )    |  | $ | 4,088  |   |  | $ | (51,166 | )
|Preferred stock dividends                          |  |                    | (407   | )                |  |      | (539    | )    |  |   | (802   | ) |  |   | (1,057  | )
|                                                   |  |                    |        |                  |  |      |         |      |  |   |        |   |  |   |         |  
|Net income (loss) available to common
stockholders |  | $                  | 1,953  |                  |  | $    | (37,519 | )    |  | $ | 3,286  |   |  | $ | (52,223 | )
|                                                   |  |                    |        |                  |  |      |         |      |  |   |        |   |  |   |         |  
|Weighted average common shares
outstandingbasic   |  |                    | 35,756 |                  |  |      | 34,704  |      |  |   | 35,705 |   |  |   | 34,789  |  
|                                                   |  |                    |        |                  |  |      |         |      |  |   |        |   |  |   |         |  
|Basic net income (loss) per common share           |  | $                  | 0.05   |                  |  | $    | (1.08   | )    |  | $ | 0.09   |   |  | $ | (1.50   | )
|                                                   |  |                    |        |                  |  |      |         |      |  |   |        |   |  |   |         |  
|Diluted net income (loss) per Common Share         |  |                    |        |                  |  |      |         |      |  |   |        |   |  |   |         |  
|Net income (loss)                                  |  | $                  | 2,360  |                  |  | $    | (36,980 | )    |  | $ | 4,088  |   |  | $ | (51,166 | )
|Preferred stock dividends                          |  |                    |       |                  |  |      | (539    | )    |  |   |       |   |  |   | (1,057  | )
|                                                   |  |                    |        |                  |  |      |         |      |  |   |        |   |  |   |         |  
|Net income (loss) available to common
stockholders |  | $                  | 2,360  |                  |  | $    | (37,519 | )    |  | $ | 4,088  |   |  | $ | (52,223 | )
|                                                  
|Weighted average common shares
outstandingbasic   |  |                    | 35,756 |                  |  |      | 34,704  |      |  |   | 35,705 |   |  |   | 34,789  |  
|Dilutive effect of convertible preferred stock     |  |                    | 26,832 |                  |  |      |        |      |  |   | 26,832 |   |  |   |        |  
|Dilutive effect of options and warrants            |  |                    | 2,189  |                  |  |      |        |      |  |   | 1,949  |   |  |   |        |  
|                                                   |  |                    |        |                  |  |      |         |      |  |   |        |   |  |   |         |  
|Weighted average common shares
outstandingdiluted |  |                    | 64,777 |                  |  |      | 34,704  |      |  |   | 64,486 |   |  |   | 34,789  |  
|                                                   |  |                    |        |                  |  |      |         |      |  |   |        |   |  |   |         |  
|Diluted net income (loss) per common share         |  | $                  | 0.04   |                  |  | $    | (1.08   | )    |  | $ | 0.06   |   |  | $ | (1.50   | )
|                                                   |  |                    |        |                  |  |      |         |      |  |   |        |   |  |   |         |  

8



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##### Table of Contents



NEXTERA ENTERPRISES, INC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 3. Comprehensive Income (Loss)

Comprehensive income combines net income (loss) and other comprehensive
items, which represents certain amounts that are reported as components of
stockholders equity in the accompanying balance sheet, including foreign
currency translation adjustments and unrealized gains and losses on
available-for-sale investments, net of taxes and reclassification adjustments.
During the second quarter of 2002 and 2001, the Companys comprehensive income
totaled $2.3 million and a comprehensive loss of $36.8 million, respectively.
For the six months ended June 30, 2002 and 2001, the Companys comprehensive
income was $5.0 million and a comprehensive loss of $51.5 million.

Note 4. Senior Credit Facility and Debentures Due to Affiliates

Senior Credit Facility

Effective March 29, 2002, the Company entered into an Amended and Restated
Credit Agreement (Senior Credit Facility) with the Companys Senior Lenders.
Under the new agreement, the Company agreed to permanently reduce the
borrowings outstanding under the facility by $6.5 million in 2002 and by $8.0
million in 2003. The amended Senior Credit Facility matures on January 2,
2004. Borrowings under the facility will bear interest at the lenders base
rate plus 2.0%, with the potential for the borrowing rate to be reduced 100
basis points upon achieving certain financial and operational milestones. In
connection with the amended Senior Credit Facility, the Company agreed to pay a
$0.9 million fee to the Senior Lenders over the next two years and issued the
Senior Lenders additional warrants to purchase 400,000 shares of the Companys
Class A Common Stock at an exercise price of $0.60 per share, exercisable at
the Senior Lenders sole discretion at any time prior to 18 months after
payment in full of all of the Companys obligations due under the amended
Senior Credit Facility. The Senior Lenders can elect in their sole discretion
to require the Company to redeem the warrants for a $0.2 million cash payment.
An affiliate of Knowledge Universe, an entity that indirectly controls Nextera,
has agreed to continue to guarantee $2.5 million of the Companys obligations
under the amended Senior Credit Facility. The amended Senior Credit Facility
contains covenants related to the maintenance of financial ratios, extending
employment agreements with certain key personnel (which begin to expire on
December 31, 2002) by January 1, 2003, operating restrictions, restrictions on
the payment of dividends, restrictions on cash (see note 1), and disposition of
assets. The covenants were based on the Companys operating plan for 2002 and
2003. As of June 30, 2002, the Company is in compliance with all of its
financial covenants.

Debentures due to affiliates

In July 2002, the Company has approved an exchange
of $20.0 million of outstanding Series A
Cumulative Convertible Preferred Stock for additional debentures due to
affiliates. The exchange will increase the indebtedness of debentures due to
affiliates to approximately $45.1 million, including approximately $0.8 million
of additional interest as part of the exchange provision.

9



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##### Table of Contents



NEXTERA ENTERPRISES, INC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 5. Special Charges

The restructuring charges and their utilization as of June 30, 2002 are
summarized as follows (in thousands):

|                                         |  |            |       |        |  |               |   |          |  |      |      |                |  |               |   |                  |  |            |        |   |  |          |     |  |  |   |       | 
|---------------------------------------- |  | ---------- | ----- | ------ |  | ------------- | - | -------- |  | ---- | ---- | -------------- |  | ------------- | - | ---------------- |  | ---------- | ------ | - |  | -------- | --- |  |  | - | ----- | 
|                                         |  | Utilized  
|                                         |  |           
|                                         |  |            |       |        |  |               |   |          |  |      |      |                |  |               |   |                  |  |            |        |   |  | Reserves |     |  |  |  
|                                         |  | Balance at |       | Q1     |  | Q2            |   |          |  |      |      |                |  |               |   | established with |  |            |        |  
|                                         |  | December   |       | 2002   |  | 2002          |   |          |  |      |      |                |  |               |   | the sale of      |  | Balance at
|                                         |  | 31, 2001   |       | charge |  | charge/credit |   | Non-Cash |  | Cash |      | business unit* |  | June 30, 2002
|                                         |  |            |       |        |  |               |   |          |  |      |      |                |  |              
|Severance                                |  | $          | (255  | )      |  | $             |  |          |  | $    |     |                |  | $             |  |                  |  | $          | (255   | ) |  | $        |    |  |  | $ |      | 
|Facilities                               |  |            | 5,579 |        |  |               |  |          |  |      | (740 | )              |  |               |  |                  |  |            | (1,431 | ) |  |          | 285 |  |  |   | 3,693 | 
|Fixed Assets and
other asset
write-downs |  |            | 308   |        |  |               |  |          |  |      |     |                |  |               |  |                  |  |            | (391   | ) |  |          | 450 |  |  |   | 367   | 
|                                         |  |            |       |        |  |               |   |          |  |      |      |                |  |               |   |                  |  |            |        |   |  |          |     |  |  |   |       | 
|                                         |  | $          | 6,142 |        |  | $             |  |          |  | $    | (740 | )              |  | $             |  |                  |  | $          | (2,077 | ) |  | $        | 735 |  |  | $ | 4,060 | 
|                                         |  |            |       |        |  |               |   |          |  |      |      |                |  |               |   |                  |  |            |        |   |  |          |     |  |  |   |       | 



|* |  | In connection with the sale of the human capital consulting business
(see note 7), a portion of the proceeds received in excess of the net
assets acquired were used to establish restructuring reserves for
liabilities and obligations relating to the human capital business that
were not assumed by the buyer.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During the quarter ended June 30, 2002, the Company recorded a net reversal of
$0.7 million of previously recorded restructuring reserves due to the favorable
settlement of real estate rental obligations (see note 10). The reversal had
the effect of increasing diluted earnings per share by $0.01 for the three and
six-month periods ended June 30, 2002. Of the $4.1 million of restructuring
reserves recorded at June 30, 2002, approximately $2.1 million of cash is
expected to be expended over the next twelve months, primarily related to real
estate rental obligations and lease commitments, and the remainder is expected
to be paid over the following two years.

During the quarter ended March 31, 2001, the Company undertook actions to
re-align and re-size the Companys cost structure, primarily within the
technology consulting business, as a result of softening market conditions and
reduced demand for technological services. As a result, the Company recorded
special charges totaling $5.4 million, consisting of $1.6 million for
severance, $0.6 million for the termination of certain Company initiatives,
$0.8 million related to the costs of exiting or reducing certain leased
premises, and $2.4 million related to certain employee incentives. The
headcount reductions included 48 consultants and 7 administrative personnel.

During the second quarter ended June 30, 2001, the Company recorded special
charges totaling $8.0 million, consisting of a $1.8 million severance charge
associated with a headcount reduction of 60 professional and support personnel,
primarily in the technology consulting services group; a $5.1 million charge to
provide for the expected costs of exiting or reducing certain leased premises
and an employee incentive-related expense of $1.1 million.

Note 6. Other Expense

During the quarter ended June 30, 2001, the Company recorded Other Expense of
$0.6 million associated with the write down to fair market value of certain
investments. For the six months ended June 30, 2001, the write down of
investments to fair market was $1.2 million.

10



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##### Table of Contents



NEXTERA ENTERPRISES, INC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 7. Sale of Human Capital Consulting Business

Effective January 30, 2002, the Company sold substantially all of the assets
and certain liabilities of its human capital consulting business. The sales
price was $14.7 million in cash with potential additional consideration based
on the operating performance of the human capital consulting business over the
next two years. The sales price is also subject to a working capital
adjustment based on the working capital at the time of the closing. Such
adjustment has not yet been finalized. All consultants and support staff of
the human capital consulting business were transferred to the acquiring
company. In connection with the anticipated sale, a goodwill impairment charge
of $7.5 million was recorded in the fourth quarter of 2001.

Note 8. Goodwill

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 142 (SFAS 142), Goodwill and Other
Intangible Assets, which became effective for the Company January 1, 2002.
Under the new standard, goodwill and other intangible assets with indefinite
useful lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statement.

Based on the Companys review, the Company does not believe that the currently
existing goodwill is impaired. At June 30, 2002, total goodwill related to the
Companys economic consulting business was $77.5 million. Total goodwill
amortization for the second quarter 2001 was $1.4 million and the total
goodwill amortization for the six months ended June 30, 2001 was $2.7 million.
The following unaudited schedule reconciles net income (loss) per share amounts
for the period ended June 30, 2001 adjusted for SFAS 142 (in thousands, except
per share data):

|                                                     |                       |   |                    |      |                    |   |                  |       |                  |   |       |      |  |   |         |       |  
|---------------------------------------------------- | --------------------- | - | ------------------ | ---- | ------------------ | - | ---------------- | ----- | ---------------- | - | ----- | ---- |  | - | ------- | ----- | -
|                                                     |                       |   | Three Months Ended |      | Three Months Ended |   | Six Months Ended |       | Six Months Ended
|                                                     |                       |   | June 30, 2002      |      | June 30, 2001      |   | June 30, 2002    |       | June 30, 2001   
|                                                     |                       |   |                    |      |                    |   |                  |       |                 
|Net income (loss) as reported                        |                       | $ | 2,360              |      |                    | $ | (36,980          | )     |                  | $ | 4,088 |      |  | $ | (51,166 | )    
|Add back: Goodwill amortization                      |                       |   |                   |      |                    |   | 1,361            |       |                  |   |      |      |  |   | 2,719   |      
|                                                     |                       |   |                    |      |                    |   |                  |       |                  |   |       |      |  |   |         |      
|Adjusted net income (loss)                           |                       | $ | 2,360              |      |                    | $ | (35,619          | )     |                  | $ | 4,088 |      |  | $ | (48,447 | )    
|                                                     |                       |   |                    |      |                    |   |                  |       |                  |   |       |      |  |   |         |      
|Basic earnings per common share:                     |                       |   |                    |      |                    |   |                  |       |                  |   |       |      |  |   |         |      
|                                                     | Net Income (loss)     |   | $                  | 0.05 |                    |   | $                | (1.08 | )                |   | $     | 0.09 |  |   | $       | (1.50 | )
|                                                     | Goodwill amortization |   |                    |     |                    |   |                  | 0.04  |                  |   |       |     |  |   |         | 0.08  |  
|                                                     |                       |   |                    |      |                    |   |                  |       |                  |   |       |      |  |   |         |      
|Adjusted net income (loss) per
common share, basis   |                       | $ | 0.05               |      |                    | $ | (1.04            | )     |                  | $ | 0.09  |      |  | $ | (1.42   | )    
|                                                     |                       |   |                    |      |                    |   |                  |       |                  |   |       |      |  |   |         |      
|Diluted earnings per common
share:                   |                       |   |                    |      |                    |   |                  |       |                  |   |       |      |  |   |         |      
|                                                     | Net Income (loss)     |   | $                  | 0.04 |                    |   | $                | (1.08 | )                |   | $     | 0.06 |  |   | $       | (1.50 | )
|                                                     | Goodwill amortization |   |                    |     |                    |   |                  | 0.04  |                  |   |       |     |  |   |         | 0.08  |  
|                                                     |                       |   |                    |      |                    |   |                  |       |                  |   |       |      |  |   |         |      
|Adjusted net income (loss) per
common share, diluted |                       | $ | 0.04               |      |                    | $ | (1.04            | )     |                  | $ | 0.06  |      |  | $ | (1.42   | )    
|                                                     |                       |   |                    |      |                    |   |                  |       |                  |   |       |      |  |   |         |      

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NEXTERA ENTERPRISES, INC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 9. Income taxes

The Company recorded no federal income tax expense for the three months ended
June 30, 2002 due to the availability of net operating loss carryforwards from
prior years which are fully reserved. The Company did record $0.1 million in
state tax expense.

Note 10. Commitments and Contingencies

The Company is subject to certain asserted claims arising in the ordinary
course of business. The Company intends to vigorously assert its rights and
defend itself in any litigation which may arise from such claims. While the
ultimate outcome of these matters could affect the results of operations of any
one quarter or year when resolved in future periods, and while there can be no
assurance with respect thereto, management believes that after final
disposition, any financial impact to the Company would not be material to the
Companys financial position and results of operations or liquidity.

In April 2002, Intercontinental Fund II 343 Congress Street
(Intercontinental) filed a lawsuit against the Company in the Commonwealth of
Massachusetts Trial Court alleging that the Company was in default for failure
to pay rent under a ten-year lease for the Companys prior corporate
headquarters located at 343 Congress Street, Boston, Massachusetts.
Intercontinental sought relief in the amount of $4,366,180.61, which consisted
of back rent, reletting costs, operating expenses and the excess of present
value over fair market value for the remainder of the lease. On July 19, 2002,
Intercontinental and the Company entered into a lease termination agreement
whereby in exchange for mutual releases of all claims, liabilities and
obligations arising under the lease, the Company agreed to pay Intercontinental
$2.0 million in cash through April 2003, $0.6 million of which was paid in June
2002, and grant Intercontinental warrants to purchase one million shares of the
Companys Class A Common Stock at an exercise price of $0.20 per share,
exercisable at Intercontinentals sole discretion at any time prior to December
31, 2004. Intercontinental can elect in their sole discretion to require the
Company to redeem the warrants for a $0.65 million cash payment.

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##### Table of Contents



NEXTERA ENTERPRISES, INC.

Item 2.




MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The disclosure and analysis in this quarterly report contain forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. These statements can be identified by the fact that
they do not relate strictly to historic or current facts. They use words such
as anticipate, estimate, expect, project, intend, plan, believe,
and other words and terms of similar meaning in connection with any discussion
of future operating or financial performance. In particular, these
forward-looking statements include statements relating to future actions or the
outcome of financial results. From time to time, we also may provide oral or
written forward-looking statements in other materials released to the public.
Any or all of the forward-looking statements in this quarterly report and in
any other public statements may turn out to be incorrect. They can be affected
by inaccurate assumptions or by known or unknown risks and uncertainties.
Consequently, no forward-looking statement can be guaranteed. Actual results
may vary materially.

Forward-looking statements are based on many factors that may be outside our
control, causing actual results to differ materially from those suggested.
These factors include, but are not limited to, those disclosed below under the
heading Factors That May Affect Our Future Performance. New factors emerge
from time to time, and it is not possible for us to predict all these factors
nor can we assess the impact of these factors on our business or the extent to
which any factor or combination of factors may cause actual results to differ
materially from those contained in any forward-looking statements. Given these
risks and uncertainties, you should not place undue reliance on forward-looking
statements as a prediction of actual results.

Overview

Nextera Enterprises exited the technology consulting business during the latter
half of 2001 and sold its human capital consulting business (Sibson) on January
30, 2002. After the January 30, 2002 sale, Nextera Enterprises consists of
Lexecon, one of the worlds preeminent economics consulting firms. For nearly
25 years, Lexecon has provided law firms, corporations and regulatory agencies
with expert analysis of complex economic issues in connection with legal and
regulatory proceedings, strategic planning and other business
activities.

Lexecon was founded in 1977. Its professional staff of economists includes
many well-known academics and three Nobel laureates. Lexecons clients include
major law firms and the corporations that they represent, government and
regulatory agencies, public and private utilities and national and
multinational corporations.

Lexecons services involve the application of economic, financial and public
policy principles to marketplace issues in a large variety of industries. The
firms services fall into three broad areas: litigation support, business
consulting and public policy studies.

Litigation Support: Lexecon provides expert witness testimony and other
litigation-related services in adversarial proceedings in courts and before
regulatory bodies and arbitrators. The firm applies economic principles in
understanding the specific features of its clients business and the
competitive and regulatory context in which it operates.

Business Consulting: Lexecon assists corporate clients in analyzing business
and strategic issues outside the context of litigation or regulation. Lexecon
consults on the likely competitive impact of proposed mergers, predicting the
likely reaction of regulatory agencies, competitors and
customers to possible business combinations. Lexecon also advises on pricing
and other strategic decisions, such as entry into new business areas, addition
of new production capacity, and by helping firms predict how competitors are
likely to react and how these events would affect the nature of future
competition.

Public Policy Studies: Lexecon has performed numerous public policy studies on
behalf of individual companies, trade associations and governmental agencies in
the United States and internationally. Lexecons studies have been submitted to
such agencies as the U.S. Department of Transportation, the Securities and
Exchange Commission, the National Association of Securities Dealers, the
Federal Communications Commission, and the U.S. Department of Commerce.

13



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##### Table of Contents



COMPARISON OF THREE MONTHS ENDED JUNE 30, 2002 AND THREE MONTHS ENDED
JUNE 30, 2001

Net Revenues.Net revenues decreased $17.6 million, or 49.2%, to $18.2
million for the three months ended June 30, 2002 from $35.8 million for the
three months ended June 30, 2001. This decrease was primarily attributable to
the sale of our human capital consulting business in January 2002 and, to a
lesser extent, to the exiting of the technology consulting business in the
second half of 2001. Net revenues from our economic consulting business
decreased $1.7 million from $19.8 million in the quarter ended June 30, 2001
due to lower utilization of the professional staff due to the timing of project
commencements and completions.

Gross Profit.Gross profit decreased 47.7% to $7.0 million for the three
months ended June 30, 2002 from $13.4 million for the three months ended June
30, 2001. Gross profit as a percentage of net revenues increased to 38.8% for
the three months ended June 30, 2002 from 37.6% for the three months ended June
30, 2001. The decrease in gross profit was primarily due to the sale of the
human capital consulting group in January 2002, which had generated gross
profit of $4.7 million in the second quarter of 2001. The gross profit of the
economic consulting business decreased from $8.2 million in the second quarter
of 2001 to $7.0 million in the second quarter of 2002, primarily due to lower
net revenues in the second quarter of 2002. The increase in gross profit as a
percentage of net revenues was primarily attributed to the absence of the low
gross margin from the technology consulting business. The economic consulting
business gross profit as a percentage of net revenues declined to 38.8% for the
three months ended June 30, 2002 from 41.5% in the second quarter of 2001, due
to lower net revenues in the 2002 period.

Selling, General and Administrative Expenses.Selling, general and
administrative expenses decreased 65.0% to $3.8 million for the three months
ended June 30, 2002 from $10.9 million for the three months ended June 30,
2001. As a percentage of revenues, such expenses decreased to 21.0% for the
three months ended June 30, 2002 from 30.5% for the three months ended June 30,
2001. The decrease is attributable to the following components: a decrease of
$1.4 million in selling and marketing expense, primarily travel; a $1.8
decrease in compensation, primarily relating to reduced support infrastructure
due to exiting the technology consulting business in the second half of 2001
and the sale of the human capital consulting business in January 2002; a
decrease of $1.0 million in general office expense, primarily legal and audit
expenses and costs associated with equipment leases; a $2.4 million decrease in
facility cost, attributed to the exiting of certain leased properties; and a
$0.5 million decrease in development expenses, primarily recruiting expenses
associated with the technology and human capital consulting businesses.

Goodwill Impairment. During the three months ended June 30, 2001, the
Company recorded a $26.7 million goodwill impairment charge substantially
related to the technology consulting business.

14



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##### Table of Contents



Special Charges.The restructuring charges and their utilization as of
June 30, 2002 are summarized as follows (in thousands):

|                                         |  |            |       |        |  |               |   |          |  |      |      |                |  |               |   |                  |  |            |        |   |  |          |     |  |  |   |       | 
|---------------------------------------- |  | ---------- | ----- | ------ |  | ------------- | - | -------- |  | ---- | ---- | -------------- |  | ------------- | - | ---------------- |  | ---------- | ------ | - |  | -------- | --- |  |  | - | ----- | 
|                                         |  | Utilized  
|                                         |  |           
|                                         |  |            |       |        |  |               |   |          |  |      |      |                |  |               |   |                  |  |            |        |   |  | Reserves |     |  |  |  
|                                         |  | Balance at |       | Q1     |  | Q2            |   |          |  |      |      |                |  |               |   | established with |  |            |        |  
|                                         |  | December   |       | 2002   |  | 2002          |   |          |  |      |      |                |  |               |   | the sale of      |  | Balance at
|                                         |  | 31, 2001   |       | charge |  | charge/credit |   | Non-Cash |  | Cash |      | business unit* |  | June 30, 2002
|                                         |  |            |       |        |  |               |   |          |  |      |      |                |  |              
|Severance                                |  | $          | 255   |        |  | $             |  |          |  | $    |     |                |  | $             |  |                  |  | $          | (255   | ) |  | $        |    |  |  | $ |      | 
|Facilities                               |  |            | 5,579 |        |  |               |  |          |  |      | (740 | )              |  |               |  |                  |  |            | (1,431 | ) |  |          | 285 |  |  |   | 3,693 | 
|Fixed Assets and
other asset
write-downs |  |            | 308   |        |  |               |  |          |  |      |     |                |  |               |  |                  |  |            | (391   | ) |  |          | 450 |  |  |   | 367   | 
|                                         |  |            |       |        |  |               |   |          |  |      |      |                |  |               |   |                  |  |            |        |   |  |          |     |  |  |   |       | 
|                                         |  | $          | 6,142 |        |  | $             |  |          |  | $    | (740 | )              |  | $             |  |                  |  | $          | (2,077 | ) |  | $        | 735 |  |  | $ | 4,060 | 
|                                         |  |            |       |        |  |               |   |          |  |      |      |                |  |               |   |                  |  |            |        |   |  |          |     |  |  |   |       | 



|* |  | In connection with the sale of the human capital consulting business
(see note 7), a portion of the proceeds received in excess of the net
assets acquired were used to establish restructuring reserves for
liabilities and obligations relating to the human capital business that
were not assumed by the buyer.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During the quarter ended June 30, 2002, the Company recorded a net reversal of
$0.7 million of previously recorded restructuring reserves due to the favorable
settlement of real estate rental obligations. The reversal had the effect of
increasing diluted earnings per share by $0.01 for the three and six-month
periods ended June 30, 2002. Of the $4.1 million of restructuring reserves
recorded at June 30, 2002, approximately $2.1 million of cash is expected to be
expended over the next twelve months, primarily related to real estate rental
obligations and lease commitments, and the remainder is expected to be paid
over the following two years.

During the quarter ended March 31, 2001, the Company undertook actions to
re-align and re-size the Companys cost structure, primarily within the
technology consulting business, as a result of softening market conditions and
reduced demand for technological services. As a result, the Company recorded
special charges totaling $5.4 million, consisting of $1.6 million for
severance, $0.6 million for the termination of certain Company initiatives,
$0.8 million related to the costs of exiting or reducing certain leased
premises, and $2.4 million related to certain employee incentives. The
headcount reductions included 48 consultants and 7 administrative personnel.

During the second quarter ended June 30, 2001, the Company recorded special
charges totaling $8.0 million, consisting of a $1.8 million severance charge
associated with a headcount reduction of 60 professional and support personnel,
primarily in the technology consulting services group; a $5.1 million charge to
provide for the expected costs of exiting or reducing certain leased premises
and an employee incentive-related expense of $1.1 million.

Interest Expense, Net.Interest expense, net decreased to $1.6 million
for the three months ended June 30, 2002 from $2.6 million for the three months
ended June 30, 2001. The decrease is primarily a result of lower outstanding
debt under the Companys senior credit facility and lower associated bank fees.

Other Expense. During the three months ended June 30, 2001, the Company
recorded Other Expense of $0.6 million associated with the write down to fair
market value of certain investments.

Income taxes. No federal tax expense was recorded for the three months
ended June 30, 2002 due to the existence of net operating loss carryforwards
from prior years which are fully reserved. The Company did record $0.1 million in state tax expense.
No benefit was recorded during the three months ended June 30, 2001 due to the
Companys uncertainty associated with utilizing its net operating losses.

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COMPARISON OF SIX MONTHS ENDED JUNE 30, 2002 AND SIX MONTHS ENDED
JUNE 30, 2001

Net Revenues. Net revenues decreased 46.8% to $39.0 million for the six
months ended June 30, 2002 from $73.3 million for the six months ended June 30,
2001. This decrease was primarily attributable to the sale of our human
capital consulting business in January 2002 and, to a lesser extent, to the
exiting of the technology consulting business in the second half of 2001. Net
revenues from our economic consulting business decreased $1.6 million from
$38.7 million in the six months ended June 30, 2001 due to lower utilization of
the professional staff due to the timing of project commencements and
completions.

Gross Profit. Gross profit decreased 34.7% to $15.4 million for the six
months ended June 30, 2002 from $23.6 million for the six months ended June 30,
2001. The decrease in gross profit was primarily due to the sale of the human
capital consulting group in January 2002. The human capital consulting group
gross profit decline in the first six months of 2002 from the first six months
of 2001 was $7.8 million. The gross profit of the economic consulting business
decreased from $15.8 million in the first six months of 2001 to $14.6 million
in the first six months of 2002, primarily due to lower net revenues in the
first six months of 2002. Gross margin as a percentage of sales increased to
39.2% for the six months ended June 30, 2002 from 32.2% for the six months
ended June 30, 2001. The increase in gross profit as a percentage of net
revenues was primarily attributed to the absence of the low gross margin from
the technology consulting business. The economic consulting business gross
profit as a percentage of net revenues declined to 39.3% for the six months
ended June 30, 2002 from 40.9% in the first six months of 2001 due to lower net
revenues in the 2002 period.

Selling, General and Administrative Expenses.Selling, general and
administrative expenses decreased 65.4% to $9.0 million for the six months
ended June 30, 2002 from $26.0 million for the six months ended June 30, 2001.
As a percentage of revenues, such expenses decreased to 23.0% for the six
months ended June 30, 2002 from 35.5% for the six months ended June 30, 2001.
The decrease is attributable to the following components: a decrease of $3.9
million in selling and marketing expense, primarily travel; a $3.9 decrease in
compensation, primarily relating to reduced support infrastructure due to the
exiting of the technology consulting business in the second half of 2001 and
the sale of the human capital consulting business in January 2002; a decrease
of $3.5 million in general office expense, primarily bad debt expense, legal
and audit expenses, and costs associated with equipment leases; a $4.6 million
decrease in facility cost, attributed to the exiting of certain leased
properties; and a $1.1 million decrease in development expenses, primarily
recruiting expenses associated with the technology and human capital consulting
businesses.

Goodwill Impairment. During the six months ended June 30, 2001, the
Company recorded a $26.7 million goodwill impairment charge substantially
related to the technology consulting business.

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Special Charges.The restructuring charges and their utilization as of
June 30, 2002 are summarized as follows (in thousands):

|                                         |  |            |       |        |  |               |   |          |  |      |      |                |  |               |   |                  |  |            |        |   |  |          |     |  |  |   |       | 
|---------------------------------------- |  | ---------- | ----- | ------ |  | ------------- | - | -------- |  | ---- | ---- | -------------- |  | ------------- | - | ---------------- |  | ---------- | ------ | - |  | -------- | --- |  |  | - | ----- | 
|                                         |  | Utilized  
|                                         |  |           
|                                         |  |            |       |        |  |               |   |          |  |      |      |                |  |               |   |                  |  |            |        |   |  | Reserves |     |  |  |  
|                                         |  | Balance at |       | Q1     |  | Q2            |   |          |  |      |      |                |  |               |   | established with |  |            |        |  
|                                         |  | December   |       | 2002   |  | 2002          |   |          |  |      |      |                |  |               |   | the sale of      |  | Balance at
|                                         |  | 31, 2001   |       | charge |  | charge/credit |   | Non-Cash |  | Cash |      | business unit* |  | June 30, 2002
|                                         |  |            |       |        |  |               |   |          |  |      |      |                |  |              
|Severance                                |  | $          | (255  | )      |  | $             |  |          |  | $    |     |                |  | $             |  |                  |  | $          | (255   | ) |  | $        |    |  |  | $ |      | 
|Facilities                               |  |            | 5,579 |        |  |               |  |          |  |      | (740 | )              |  |               |  |                  |  |            | (1,431 | ) |  |          | 285 |  |  |   | 3,693 | 
|Fixed Assets and
other asset
write-downs |  |            | 308   |        |  |               |  |          |  |      |     |                |  |               |  |                  |  |            | (391   | ) |  |          | 450 |  |  |   | 367   | 
|                                         |  |            |       |        |  |               |   |          |  |      |      |                |  |               |   |                  |  |            |        |   |  |          |     |  |  |   |       | 
|                                         |  | $          | 6,142 |        |  | $             |  |          |  | $    | (740 | )              |  | $             |  |                  |  | $          | (2,077 | ) |  | $        | 735 |  |  | $ | 4,060 | 
|                                         |  |            |       |        |  |               |   |          |  |      |      |                |  |               |   |                  |  |            |        |   |  |          |     |  |  |   |       | 



|* |  | In connection with the sale of the human capital consulting business
(see note 7), a portion of the proceeds received in excess of the net
assets acquired were used to establish restructuring reserves for
liabilities and obligations relating to the human capital business that
were not assumed by the buyer.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During the quarter ended June 30, 2002, the Company recorded a net reversal of
$0.7 million of previously recorded restructuring reserves due to the favorable
settlement of real estate rental obligations. The reversal had the effect of
increasing diluted earnings per share by $0.01 for the three and six-month
periods ended June 30, 2002. Of the $4.1 million of restructuring reserves
recorded at June 30, 2002, approximately $2.1 million of cash is expected to be
expended over the next twelve months, primarily related to real estate rental
obligations and lease commitments, and the remainder is expected to be paid
over the following two years.

During the quarter ended March 31, 2001, the Company undertook actions to
re-align and re-size the Companys cost structure, primarily within the
technology consulting business, as a result of softening market conditions and
reduced demand for technological services. As a result, the Company recorded
special charges totaling $5.4 million, consisting of $1.6 million for
severance, $0.6 million for the termination of certain Company initiatives,
$0.8 million related to the costs of exiting or reducing certain leased
premises, and $2.4 million related to certain employee incentives. The
headcount reductions included 48 consultants and 7 administrative personnel.

During the second quarter ended June 30, 2001, the Company recorded special
charges totaling $8.0 million, consisting of a $1.8 million severance charge
associated with a headcount reduction of 60 professional and support personnel,
primarily in the technology consulting services group; a $5.1 million charge to
provide for the expected costs of exiting or reducing certain leased premises
and an employee incentive-related expense of $1.1 million.

Interest Expense, Net. Interest expense, net decreased to $3.0 million
for the six months ended June 30, 2001 from $4.3 million for the six months
ended June 30, 2001. This decrease was primarily due to lower outstanding debt
under the Companys senior credit facility and lower associated
bank fees.

Other Expense. During the six months ended June 30, 2001, the Company
recorded Other Expense of $1.2 million associated with the write down to fair
market value of certain investments.

Income taxes. No federal tax expense was recorded for the six months
ended June 30, 2002 due to the existence of net operating loss carryforwards
from prior years which are fully reserved. The Company did record $0.1 million in state tax expense.
No benefit was recorded during the six months ended June 30, 2001 due to the
Companys uncertainty associated with utilizing its net operating losses.

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LIQUIDITY AND CAPITAL RESOURCES

Consolidated working capital deficit was $0.6 million on June 30, 2002,
compared to a working capital deficit of $5.1 million on December 31, 2001.
Included in working capital were cash and cash equivalents of $2.2 million and
$4.5 million on June 30, 2002 and December 31, 2001, respectively.

Net cash used in operating activities was $4.0 million for the six months ended
June 30, 2002. The primary components of net cash used in operating activities
was a decrease of $10.6 million in accounts payable and accrued expenses, due
primarily to bonus payments, and an increase of $1.7 million of accounts
receivable. These cash outflows were offset in part by net income of $4.1
million, an increase in other long-term liabilities of $1.8 million and
non-cash items relating to depreciation and interest paid-in-kind of $2.1
million.

Net cash provided by investing activities was $13.9 million for the six months
ended June 30, 2002, substantially representing proceeds received from the sale
of the human capital consulting business.

Net cash used in financing activities was $12.2 million for the six months
ended June 30, 2002. The primary components of net cash used in financing
activities were $9.8 million of repayments under the Companys senior credit
facility and $2.4 million of payments of other long-term debt and capital
leases obligations.

Effective March 29, 2002, the Company entered into an Amended and Restated
Credit Agreement (Senior Credit Facility) with the Companys Senior Lenders.
Under the new agreement, the Company agreed to permanently reduce the
borrowings outstanding under the facility by $6.5 million in 2002 and by $8.0
million in 2003. The amended Senior Credit Facility matures on January 2,
2004. Borrowings under the facility will bear interest at the lenders base
rate plus 2.0%, with the potential for the borrowing rate to be reduced 100
basis points upon achieving certain financial and operational milestones. In
connection with the amended Senior Credit Facility, the Company agreed to pay a
$0.9 million fee to the Senior Lenders over the next two years and issued the
Senior Lenders additional warrants to purchase 400,000 shares of the Companys
Class A Common Stock at an exercise price of $0.60 per share, exercisable at
the Senior Lenders sole discretion at any time prior to 18 months after
payment in full of all of the Companys obligations due under the amended
Senior Credit Facility. The Senior Lenders can elect in their sole discretion
to require the Company to redeem the warrants for a $0.2 million cash payment.
An affiliate of Knowledge Universe, an entity that indirectly controls Nextera,
has agreed to continue to guarantee $2.5 million of the Companys obligations
under the amended Senior Credit Facility. The amended Senior Credit Facility
contains covenants related to the maintenance of financial ratios, extending
employment agreements with certain key personnel (which begin to expire on
December 31, 2002) by January 1, 2003, operating restrictions, restrictions on
the payment of dividends, restrictions on cash and disposition of assets. The
covenants were based on the Companys operating plan for 2002 and 2003. As of
June 30, 2002, the Company is in compliance with all of its financial
covenants.

There is no assurance that the Company will be able to meet all future
financial covenants or obtain extensions of the employment agreements of
certain key personnel by January 1, 2003. Failure to achieve either of the
above will place the Company in default of its bank covenants and could have a
material adverse effect on the financial position of the Company. Moreover, if
we are able to obtain extension of these employment contracts, the cost
associated with the extensions could have a material adverse impact on the
financial performance of the Company.

The terms of the Amended and Restated Credit Agreement require the Company to
restrict a portion of cash on a monthly basis based on the earned bonus amounts
so that a certain percentage of the projected earned bonus is escrowed or paid
by the end of year. Such restrictions on cash reduce the Companys liquidity.

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Factors That May Affect Our Future Performance

You should carefully consider the following risk factors in your evaluation of
our company. If any of the following risks actually occur it could materially
harm our business and impair the price of our stock.

We heavily depend on a small number of senior consulting executives and other
key personnel, and the loss of any of them may damage or result in the loss of
client relationships and cause our reputation to suffer.

Our success is highly dependent upon the efforts, abilities, business
generation capabilities and project execution skills of a small number of
senior consulting executives and other key personnel. This dependence is
particularly important to our business because personal relationships and
reputations are a critical element of obtaining and maintaining client
engagements. The loss of the services of any of these persons for any reason
could have a material adverse effect on our reputation and our ability to
secure and complete engagements. A number of our senior consulting executives
that are responsible for substantially all of our business are subject to
employment and/or non-compete agreements, some of which begin to expire on or
about December 31, 2002. We may not be able to retain these persons or to
attract suitable replacements or additional personnel if necessary. We
generally do not maintain key person life insurance coverage for our employees.

In addition, if any of these key employees joins a competitor or forms a
competing business, some of our clients might choose to use the services of
that competitor or new company. Further, in the event of the loss of any such
personnel, we may not be able to prevent the unauthorized disclosure or use of
our technical knowledge, practices or procedures by these personnel. As a
result, we might lose existing or potential clients.

Under our amended and restated Senior Credit Facility, by January 1, 2003, we
must obtain extensions of employment agreements of certain key employees
through December 31, 2004. Negotiations with certain of the key employees have
occurred and are continuing, but no agreement regarding the terms of any such
extension have been reached. Failure to extend the employment agreements
constitutes an event of default under the Senior Credit Facility and the Senior
Lenders would be entitled to exercise any remedy available to them, including
acceleration of amounts due. Such an occurrence would materially and adversely
affect our operations and financial condition. Moreover, if we are able to
obtain extension of these employment contracts, the cost associated with the
extensions could have a material adverse impact on the financial performance of
the Company.

If we fail to attract, retain and train skilled consultants, our reputation
will suffer and our revenues and operating profits could decline.

Because our business involves the delivery of professional services, our
success depends upon our ability to attract, retain, motivate and train highly
skilled consultants. If we fail to do so it could impair our ability to
effectively manage and complete our client projects and secure future client
engagements, and as a result our reputation could suffer and our future
revenues and operating profits could decline.

Even if we are able to retain our current consultants and expand the number of
our qualified consultants, the resources required to attract, retain, motivate
and train these consultants could adversely affect our operating profits.

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We may be unable to comply with certain covenants under our Senior Credit
Facility

The Company signed an amended and restated credit agreement in March 29, 2002.
Under the amended and restated Senior Credit Facility, the Company is required
to make an aggregate of $6.5 million and $8.0 million in principal payments in
2002 and 2003, respectively. The debt is due in full on January 2, 2004. The
Company is required to maintain certain financial covenants. Borrowings under
the facility will bear interest at the lenders base rate plus 2.0%, with the
potential for the borrowing rate to be reduced 100 basis points upon achieving
certain financial and operational milestones. If the Company fails to comply
with the financial covenants, the interest rate could increase 200 basis
points. Additionally, failure of the Company to maintain its financial
covenants, obtaining extensions of employment agreements with certain key
personnel (which begin to expire on December 31, 2002), or make all principal
and interest payments to the Senior Lenders as they become due and payable
would be events of default under the Senior Credit Facility and the Senior
Lenders would be entitled to exercise any remedy available to them, including a
possible acceleration of amounts due. Such an occurrence would materially and
adversely affect our operations and financial condition. Please see Part I,
Item 2  Liquidity and Capital Resources.

High Levels of Debt Could Adversely Affect Our Business and Financial Condition

We have very high levels of debt in relation to the size of our business. As
of June 30, 2002, we had $28.6 million of outstanding indebtedness under our
Senior Credit Facility, $7.3 million of which was classified as a current
liability. In addition, as of June 30, 2002, we had $24.3 million of
outstanding indebtedness under debentures due to affiliates. We have also
approved the exchange of $20 million of outstanding Series A Preferred Stock
for additional debentures due to affiliates. The exchange will increase the indebtedness of
debentures due to affiliates to approximately $45.1 million, including
approximately $0.8 million of additional interest as part of the exchange
provision.

Our high leverage could have important consequences, including the following:



| |  |  | a substantial portion of our future cash flows from operations must
be dedicated to the servicing of our debt, thus reducing the funds
available for operations and investments;     
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to obtain additional financing may be impaired;                                                                                                                          
|
| |  |  | our leverage may reduce our ability to adjust rapidly to changing
market conditions and may make us more vulnerable to future downturns
in the general economy; and                  
|
| |  |  | high levels of debt may reduce the value of stockholders
investments in Nextera because debt holders have priority regarding our
assets in the event of a bankruptcy or liquidation.

We may not have sufficient future cash flows to meet our debt payments, and may
not be able to refinance any of our debt at maturity.

We face possible delisting from the Nasdaq SmallCap Market, which would result
in a limited public market for our Class A Common Stock.

There are several requirements for the continued listing of our Class A Common
Stock on the Nasdaq SmallCap Market including, but not limited to, a minimum
stock bid price of $1.00 per share. On February 14, 2002, we received
notification from the Nasdaq National Stock Market (Nasdaq) that we had failed
to maintain a minimum bid price of $1.00 for 30 consecutive days and would be
delisted from the Nasdaq National Market unless by May 15, 2002 we complied
with the minimum bid price requirement for at least 10 consecutive days. Prior
to May 15, 2002,
we submitted an application to trade on the Nasdaq SmallCap Market, and on June
3, 2002, we began trading on the Nasdaq SmallCap Market. The Nasdaq SmallCap
Market extended us a 180-day grace period to comply with the $1.00 minimum bid
price requirement, which is set to expire on August 13, 2002. Upon expiration
of this grace period, Nasdaq will conduct a review to evaluate whether we meet
other criteria for listing on the Nasdaq SmallCap Market and to determine if we
are entitled to an additional 180-day grace period through February 13, 2003.
We believe that we meet the criteria for this additional grace period. If we
are unable to satisfy the $1.00 minimum bid price requirement by February 13,
2003, our common stock will be subject to delisting by Nasdaq.

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In addition, due to the resignation of Richard Sandor for our board of
directors in July 2002, we have two remaining independent directors on our
board and audit committee. Nasdaq rules require that we have an audit
committee comprised solely of independent directors and having at least three
members. Nasdaq has granted us an extension through September 23, 2002 to
regain compliance with this rule.

If we fail to meet our clients expectations, we could damage our reputation
and have difficulty attracting new business.

Our client engagements often involve projects that are complex and critical to
the operation of a clients business. Our failure or inability to meet a
clients expectations, or the law firm that engaged us, in the performance of
our services could result in damage to our reputation, which could adversely
affect our ability to attract new business from that client or others. In
addition, if we fail to perform adequately on a project, a client could refuse
to pay or sue us for economic damages which could further damage our reputation
or cause a reduction in future revenues and operating profits.

We may not successfully compete with our competitors, which could result in
reduced revenues and operating profits.

The economic and business consulting industry has a large number of competitors
comprised of economic consulting firms, individual academics, other accounting
firm consulting practices, and general management consulting firms. We believe
the principal competitive factors in our industry are reputation, the
analytical ability of our professional staff, client service, and industry
expertise. We believe that we compete favorably with respect to these factors.
However, some of our competitors have greater financial and marketing resources
and greater name recognition than Lexecon. In addition, some of these
competitors have been operating for a longer period of time than has Lexecon
and have established long-term client relationships. We also face competition
in our efforts to recruit and retain professional staff. If Lexecon is not
successful in competition with its rivals, its future revenues and operating
profits could decline.

We have relied and may continue to rely on a limited number of clients and
industries for a significant portion of our revenues and, as a result, the loss
of or a significant reduction in work performed for any of them could result in
reduced revenues.

We have in the past derived, and may in the future derive, a significant
portion of our net revenues from a relatively limited number of clients. To the
extent that any client or industry uses less of our services or terminates its
relationship with us, our revenues could decline accordingly. Lexecons 10
largest clients in 2001 accounted for approximately 38% of its net revenues.
One client accounted for 17% of its net revenues in 2001. No client
represented greater than 10% of net revenues for six months ended June 30,
2002.

The volume of work we perform for a specific client is likely to vary from year
to year, and a significant client in one year may not use our services in
another year. Further, the failure to collect a large account receivable from
any of these clients could result in significant financial exposure. In
addition, any economic conditions or other factors adversely affecting any of
the industries or any increase in the size or number of competitors within the
industries we service could cause our revenues to decline.

Nextera Enterprises Holdings owns 67.2% of our voting stock and can control
matters submitted to our stockholders and its interests may be different from
yours.

Nextera Enterprises Holdings owns 8,810,000 shares of Class A Common Stock and
3,844,200 shares of Class B Common Stock, which together represent
approximately 67.2% of the voting power of our outstanding common stock. The
Class A Common Stock entitles its holders to one vote per share, and the Class
B Common Stock entitles its holders to ten votes per share, on all matters
submitted to a vote of our stockholders, including the election of the members
of the Board of Directors. Accordingly, Nextera Enterprises Holdings will be
able to determine the disposition of all matters submitted to a vote of our
stockholders, including mergers, transactions involving a change in control and
other corporate transactions and the terms thereof. In addition, Nextera
Enterprises Holdings will be able to elect all of our directors, except for one
director to be elected in accordance with the terms of a stockholders
agreement. This control by Nextera Enterprises Holdings could materially
adversely affect the market price of the Class A Common Stock or delay or
prevent a change in control of our company.

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Nextera Enterprises Holdings is indirectly controlled by Knowledge Universe,
Inc. Knowledge Universe, Inc. was formed by Lawrence J. Ellison, Michael R.
Milken and Lowell J. Milken to build, through a combination of internal
development and acquisitions, leading companies in a broad range of areas
relating to career management, technology and education and the improvement of
individual and corporate performance. Knowledge Universe, Inc. may form, invest
in or acquire other businesses which are involved in these and related areas,
among others, which businesses may be operated under the control of Knowledge
Universe, Inc. independently of us. Potential conflicts of interest between
Knowledge Universe and us may arise and may not be resolved in our favor. These
potential conflicts of interest include competitive business activities,
indemnity arrangements, registration rights, sales or distributions by Nextera
Enterprises Holdings of our Class A and Class B Common Stock and the exercise
by Nextera Enterprises Holdings of its ability to control our management and
affairs. This control and the potential conflicts of interest it creates could
limit our future independence and harm our reputation.

We were formed in February 1997 by entities which were under the direct or
indirect control of Lawrence J. Ellison, Michael R. Milken and Lowell J.
Milken. After our formation, ownership of our common stock originally held by
our founding entities was transferred to Nextera Enterprises Holdings. Lawrence
J. Ellison, Michael R. Milken and Lowell J. Milken may each be deemed to have
the power to control Knowledge Universe, Inc. As a result, Lawrence J. Ellison,
Michael R. Milken and Lowell J. Milken may each be deemed to have the power to
direct the voting and disposition of, and to share beneficial ownership of, any
shares of common stock owned by Nextera Enterprises Holdings. On February 24,
1998, without admitting or denying any liability, Michael R. Milken consented
to the entry of a final judgment in the U.S. District Court for the Southern
District of New York in Securities and Exchange Commission v. Michael R. Milken
et al., which judgment was entered on February 26, 1998, restraining and
enjoining Michael R. Milken from associating with any broker, dealer,
investment advisor, investment company, or municipal securities dealer and from
violating Section 15(a) of the Exchange Act.

We may not be able to obtain the additional capital necessary for us to carry
out our business strategy, which could hinder our growth. In addition, the
terms of any additional capital may be unfavorable to us or our stockholders.

For us to expand or to pursue other business opportunities, we would likely
require access to capital. We may require additional financing in amounts that
we cannot determine at this time. If our plans or assumptions change or are
inaccurate, we may be required to seek capital sooner than anticipated. We may
need to raise funds through public or private debt or equity financings.

If funds are raised through the issuance of equity securities, the percentage
ownership of our then-current stockholders may be reduced and the holders of
new equity securities may have rights, preferences or privileges senior to
those of the holders of our common stock. If additional funds are raised
through a bank credit facility or the issuance of debt securities, the holder
of this indebtedness would have rights senior to the rights of the holders of
our common stock and the terms of this indebtedness could impose restrictions
on our operations. If we need to raise additional funds, we may not be able to
do so on terms favorable to us, or at all. If we cannot raise adequate funds on
acceptable terms, we may be unable to continue to fund our operations.

Our quarterly revenues and operating results have varied significantly and, if
they continue to do so, the market price of our stock could decline.

Our operating results have varied significantly from quarter to quarter and may
continue to do so in the future. Our quarterly financial results could be
impacted significantly by the timing, mix and number of active client projects
commenced and completed during a quarter, the variations in utilization rates
and average billing rates for our consultants and the accuracy of our estimates
of resources required to complete our ongoing projects. Our operating expenses
are based on anticipated revenue levels in the short-term, are relatively
fixed, and are incurred throughout the quarter. As a result, if expected
revenues are not realized as anticipated, our quarterly financial results could
be materially harmed.

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Our engagements may result in professional liability

Our services typically involve difficult analytical assignments and carry risks
of professional and other liability. Many of our engagements involve matters
that could have a severe impact on the clients business, cause the client to
lose significant amounts of money, or prevent the client from pursuing
desirable business opportunities. Accordingly, if a client is dissatisfied
with our performance, the client could threaten or bring litigation in order to
recover damages or to contest its obligation to pay our fees. Litigation
alleging that we performed negligently or otherwise breached our obligations to
the client could expose us to significant liabilities and tarnish our
reputation. These liabilities could harm our business.

We have a history of losses

Since our inception in February 1997, we have incurred, on an historical basis,
net losses of $3.0 million and $17.2 million for the years ended December 31,
1997 and 1998, net income of $3.1 million for the year ended December 31, 1999
and net losses of $24.0 million and $117.5 million for the years ended December
31, 2000 and 2001.

As a result, even though Lexecon has a history of operating profitability since
being acquired by Nextera Enterprises, it is possible that we may not obtain
net income in the future.

Government regulation and legal uncertainty relating to our markets could
result in decreased demand for our services, increased costs or otherwise harm
our business causing a reduction in revenues.

We derive substantially all of our net revenues from economic and litigation
consulting services related to antitrust matters, public policy and regulatory
matters, mergers and acquisitions and other securities matters. A substantial
portion of these net revenues were derived from engagements relating to United
States antitrust and securities laws. Changes in these laws, changes in
judicial interpretations of these laws or less vigorous enforcement of these
laws by the United States Department of Justice, the United States Federal
Trade Commission or other federal agencies as a result of changes in
philosophy, political decisions, priorities or other reasons could materially
reduce the magnitude, scope, number or duration of engagements available to us
in these areas.

In addition, adverse changes in general economic conditions or conditions
influencing merger and acquisition activity could have an adverse impact on
engagements in which we assist clients in connection with these types of
transactions. Any reductions in the number of our securities, antitrust and
mergers and acquisitions consulting engagements could cause a reduction in our
revenues.

If a large client project or a significant number of other client projects are
terminated or reduced, we may have a large number of employees who are not
generating revenue.

Our clients engage us on a project-by-project basis, primarily without a
written contract, and a client can generally terminate an engagement with
little or no notice to us and without penalty. When a client defers, modifies
or cancels a project, we must be able to rapidly deploy our consultants to
other projects in order to minimize the underutilization of our employees. In
addition, our operating expenses are relatively fixed and cannot be reduced on
short notice to compensate for unanticipated variations in the number or size
of projects in progress. Thus, any termination, significant reduction or
modification of our business relationships with any of our significant clients
or with a number of smaller clients would have an adverse impact on our ability
to generate revenue. As a result, we believe that the number of our clients or
the number and size of our existing projects may not be reliable indicators or
measures of future net revenues.

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Potential conflicts of interests reduce the number of both potential clients
and engagements.

We provide economic and litigation consulting services primarily in connection
with significant or complex transactions, disputes or other matters that are
usually adversarial or that involve sensitive client information. Our
engagement by a client to provide such services frequently precludes us from
accepting engagements with other entities involved in the same matter. In
addition, we may decide to decline engagements due to clients expectations of
loyalty, perceived conflicts of interests or other reasons. Accordingly, the
number of both potential clients and potential engagements is limited,
particularly in the economic consulting and litigation services markets.

Potential write-off of goodwill and other intangible assets relating to
personnel could reduce our operating results.

As of June 30, 2002, our intangible assets, net of accumulated amortization,
were approximately $77.5 million. Intangible assets at June 30, 2002, net of
accumulated amortization, included $77.0 million of goodwill and $0.5 million
for intangibles relating to personnel. Intangible assets had been amortized by
us on a straight-line basis principally over 40 years for goodwill and over
five years for intangibles relating to personnel. We ceased amortizing
goodwill and intangible assets relating to personnel commencing January 1, 2002
in accordance with Statements of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets,

In accordance with accounting guidelines, we periodically evaluate the
recoverability of goodwill when indications of possible impairment are present
by reviewing the anticipated undiscounted future cash flows from operations and
comparing such cash flows to the carrying value of the associated goodwill. If
goodwill becomes impaired, we will be required to write down the carrying value
of the goodwill and incur a related charge to our operations. A write down of
goodwill would result in a reduction in our net income.

Our stock price may be volatile and you could lose all or part of your
investment.

We expect that the market price of our common stock will be volatile. Stock
prices in our and similar industries have risen and fallen in response to a
variety of factors, including:



| |  |  | quarter-to-quarter variations in operating results;                                  
| | - |  | -------------------------------------------------------------------------------------
|
| |  |  | entering into, or failing to enter into or renew, a material contract or order;      
|
| |  |  | acquisitions of, or strategic alliances among, companies within our industry;        
|
| |  |  | changes in investor perceptions of the acceptance or profitability of consulting; and
|
| |  |  | market conditions in the industry and the economy as a whole.                        

The market price for our common stock may also be affected by our ability to
meet investors or securities analysts expectations. Any failure to meet these
expectations, even slightly, may result in a material decline in the market
price of our common stock. In addition, the stock market is subject to extreme
price and volume fluctuations. This volatility has had a significant effect on
the market prices of securities issued by many companies for reasons unrelated
to the operating performance of these companies. In the past, following periods
of volatility in the market price of a companys securities, securities class
action litigation has often been instituted against that company. If similar
litigation were instituted against us, it could result in substantial costs and
a diversion of our managements attention and resources.

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Provisions in our charter documents and Delaware law may delay or prevent an
acquisition of us, which could decrease the value of our common stock

Provisions of our certificate of incorporation and bylaws and provisions of
Delaware law could delay, defer or prevent an acquisition or change of control
of us or otherwise decrease the price of our common stock. These provisions
include:



| |  |  | authorizing our board of directors to issue additional preferred stock;                                                                                                               
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | prohibiting cumulative voting in the election of directors;                                                                                                                           
|
| |  |  | limiting the persons who may call special meetings of stockholders;                                                                                                                   
|
| |  |  | prohibiting stockholder actions by written consent; and                                                                                                                               
|
| |  |  | establishing advance notice requirements for nominations for
election to the board of directors or for proposing matters that can be
acted on by stockholders at stockholder meetings.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

The Company is exposed to changes in interest rates primarily from our senior
credit facility. We do not currently use interest rate derivative instruments
to manage exposure to interest rate changes. A hypothetical 100 basis point
adverse move in interest rates along the interest rate yield curve would not
have a material adverse effect on interest sensitive financial instruments at
June 30, 2002.

Foreign Currency Risk

Currently, substantially all of the Companys sales and expenses are
denominated in U.S. dollars and as a result we have not experienced significant
foreign exchange gains and losses to date.

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PART II  OTHER INFORMATION




Item 1. Legal Proceedings.

In April 2002, Intercontinental Fund II 343 Congress Street
(Intercontinental) filed a lawsuit against the Company in the Commonwealth of
Massachusetts Trial Court alleging that the Company was in default for failure
to pay rent under a ten-year lease for the Companys prior corporate
headquarters located at 343 Congress Street, Boston, Massachusetts.
Intercontinental sought relief in the amount of $4,366,180.61, which consisted
of back rent, reletting costs, operating expenses and the excess of present
value over fair market value for the remainder of the lease. On July 19, 2002,
Intercontinental and the Company entered into a lease termination agreement
whereby in exchange for mutual releases of all claims, liabilities and
obligations arising under the lease, the Company agreed to pay Intercontinental
$2.0 million in cash through April 2003, $0.6 million of which was paid in June
2002, and grant Intercontinental warrants to purchase one million shares of the
Companys Class A Common Stock at an exercise price of $0.20 per share,
exercisable at Intercontinentals sole discretion at any time prior to December
31, 2004. Intercontinental can elect in their sole discretion to require the
Company to redeem the warrants for a $0.65 million cash payment.




Item 6. Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits                                                                                            
| | --- |  | ----------------------------------------------------------------------------------------------------
|
| | 4.5 |  | Letter Agreement between Knowledge Universe, Inc. and Nextera
Enterprises, Inc. dated March 29, 2002
|
| | 4.6 |  | Letter Agreement between Knowledge Universe, Inc. and Nextera
Enterprises, Inc. dated June 14, 2002 
|
| | (b) |  | Reports on Form 8-K                                                                                 

The Company did not file any reports on Form 8-K during the three months ended
June 30, 2002.

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SIGNATURES

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



| | NEXTERA ENTERPRISES, INC.
(Registrant)
| | --------------------------------------



|                      |  |                                                                                                              
|--------------------- |  | -------------------------------------------------------------------------------------------------------------
|Date: August 14, 2002 |  | By: /s/ David M. Schneider                                                                                   
|                      |  |                                                                                                              
|                      |  | David M. Schneider
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
|                     
|                     
|                      |  | NEXTERA ENTERPRISES, INC.
(Registrant)                                                                       
|                     
|                     
|Date: August 14, 2002 |  | By: /s/ Michael P. Muldowney                                                                                 
|                      |  |                                                                                                              
|                      |  | Michael P. Muldowney
Chief Financial Officer
(Principal Financial and Accounting Officer)                    

28