##### Table of Contents



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 September 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) 715-0200
(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 October 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                           
|                                                     | Item 4 Controls and Procedures                                                               
|PART II  OTHER INFORMATION                         
|                                                     | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                                     | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                          
|EXHIBIT 10.1                                        
|EXHIBIT 10.2                                        
|EXHIBIT 10.3                                        
|EXHIBIT 10.4                                        



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##### Table of Contents



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

INDEX

|                               |  |         |  |                                                                                              |  |         
|------------------------------ |  | ------- |  | -------------------------------------------------------------------------------------------- |  | --------
|                               |  |         |  |                                                                                              |  | Page No.
|                               |  |         |  |                                                                                              |  |         
|PART I.  FINANCIAL INFORMATION
|                              
|                               |  | Item 1. |  | Financial Statements                                                                         |  |         
|                              
|                               |  |         |  | Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001                   |  | 3       
|                              
|                               |  |         |  | Consolidated Statements of Operations for the
Three Months Ended September 30, 2002 and 2001 |  | 4       
|                              
|                               |  |         |  | Consolidated Statements of Operations for the
Nine Months Ended September 30, 2002 and 2001  |  | 5       
|                              
|                               |  |         |  | Consolidated Statements of Cash Flows for the
Nine Months Ended September 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      
|                              
|                               |  | Item 4. |  | Controls and Procedures                                                                      |  | 26      
|                              
|PART II.   OTHER INFORMATION  
|                              
|                               |  | Item 4. |  | Submission of Matters to a Vote of Security Holders                                          |  | 27      
|                              
|                              
|                               |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                             |  | 28      
|                              
|                               |  |         |  | Signatures                                                                                   |  | 29      



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##### Table of Contents






PART I   FINANCIAL INFORMATION







Item 1. Financial Statements

Nextera Enterprises, Inc.

Consolidated Balance Sheets
(In thousands, except share data)

|                                                                                                         |                                                                                                                                                                                                                              |   |               |          |              |   |         |          |  
|-------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------- | -------- | ------------ | - | ------- | -------- | -
|                                                                                                         |                                                                                                                                                                                                                              |   | September 30, |          | December 31,
|                                                                                                         |                                                                                                                                                                                                                              |   | 2002          |          | 2001        
|                                                                                                         |                                                                                                                                                                                                                              |   |               |          |             
|                                                                                                         |                                                                                                                                                                                                                              |   | (unaudited)   |          |              |   |        
|Assets                                                                                                   |                                                                                                                                                                                                                              |   |               |          |              |   |         |         
|Current assets:                                                                                          |                                                                                                                                                                                                                              |   |               |          |              |   |         |         
|                                                                                                         | Cash and cash equivalents                                                                                                                                                                                                    |   | $             | 1,520    |              |   | $       | 4,465    |  
|                                                                                                         | Restricted cash                                                                                                                                                                                                              |   |               | 2,090    |              |   |         |         |  
|                                                                                                         | Accounts receivable, net of allowance for doubtful accounts of
$2,748 and $2,976 at September 30, 2002 and December 31, 2001,
respectively                                                                                   |   |               | 25,218   |              |   |         | 19,526   |  
|                                                                                                         | Due from affiliates                                                                                                                                                                                                          |   |               |         |              |   |         | 65       |  
|                                                                                                         | Assets held for sale                                                                                                                                                                                                         |   |               |         |              |   |         | 11,509   |  
|                                                                                                         | Prepaid expenses and other current assets                                                                                                                                                                                    |   |               | 978      |              |   |         | 895      |  
|                                                                                                         |                                                                                                                                                                                                                              |   |               |          |              |   |         |         
|Total current assets                                                                                     |                                                                                                                                                                                                                              |   | 29,806        |          |              |   | 36,460  |         
|Property and equipment, net                                                                              |                                                                                                                                                                                                                              |   | 2,526         |          |              |   | 4,003   |         
|Intangible assets, net of accumulated amortization of $6,225 at
September 30, 2002 and December 31, 2001 |                                                                                                                                                                                                                              |   | 77,504        |          |              |   | 77,504  |         
|Other assets                                                                                             |                                                                                                                                                                                                                              |   | 1,701         |          |              |   | 3,215   |         
|                                                                                                         |                                                                                                                                                                                                                              |   |               |          |              |   |         |         
|Total assets                                                                                             |                                                                                                                                                                                                                              | $ | 111,537       |          |              | $ | 121,182 |         
|                                                                                                         |                                                                                                                                                                                                                              |   |               |          |              |   |         |         
|Liabilities and Stockholders Equity                                                                     |                                                                                                                                                                                                                              |   |               |          |              |   |         |         
|Current liabilities:                                                                                     |                                                                                                                                                                                                                              |   |               |          |              |   |         |         
|                                                                                                         | Accounts payable and accrued expenses                                                                                                                                                                                        |   | $             | 18,062   |              |   | $       | 22,744   |  
|                                                                                                         | Accrued restructuring costs, current portion                                                                                                                                                                                 |   |               | 1,190    |              |   |         | 1,738    |  
|                                                                                                         | Senior credit facility, current portion                                                                                                                                                                                      |   |               | 8,500    |              |   |         | 14,500   |  
|                                                                                                         | Due to affiliate                                                                                                                                                                                                             |   |               | 560      |              |   |         |         |  
|                                                                                                         | Current portion of long-term debt and capital lease obligations                                                                                                                                                              |   |               | 530      |              |   |         | 2,618    |  
|                                                                                                         |                                                                                                                                                                                                                              |   |               |          |              |   |         |         
|Total current liabilities                                                                                |                                                                                                                                                                                                                              |   | 28,842        |          |              |   | 41,600  |         
|Long-term debt and capital lease obligations                                                             |                                                                                                                                                                                                                              |   | 885           |          |              |   | 1,224   |         
|Senior credit facility, net of current portion                                                           |                                                                                                                                                                                                                              |   | 19,300        |          |              |   | 23,928  |         
|Debentures due to affiliates, including accrued interest                                                 |                                                                                                                                                                                                                              |   | 46,571        |          |              |   | 23,093  |         
|Accrued restructuring costs, net of current portion                                                      |                                                                                                                                                                                                                              |   | 869           |          |              |   | 4,404   |         
|Other long-term liabilities                                                                              |                                                                                                                                                                                                                              |   | 3,202         |          |              |   | 1,434   |         
|Stockholders equity:                                                                                    |                                                                                                                                                                                                                              |   |               |          |              |   |         |         
|                                                                                                         | Preferred Stock, $0.001 par value, 10,000,000 shares
authorized, 600,000 authorized shares designated Series A,
38,950 and 229,440 Series A issued and outstanding at September
30, 2002 and December 31, 2001, respectively |   |               | 3,895    |              |   |         | 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
September 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
September 30, 2002 and December 31, 2001                                                                     |   |               | 4        |              |   |         | 4        |  
|                                                                                                         | Additional paid-in capital                                                                                                                                                                                                   |   |               | 161,124  |              |   |         | 162,504  |  
|                                                                                                         | Treasury Stock, at cost, 228,303 shares Class A Common Stock
at December 31, 2001                                                                                                                                            |   |               |         |              |   |         | (294     | )
|                                                                                                         | Retained earnings (deficit)                                                                                                                                                                                                  |   |               | (152,976 | )            |   |         | (158,600 | )
|                                                                                                         | Accumulated other comprehensive income (loss)                                                                                                                                                                                |   |               | (211     | )            |   |         | (1,091   | )
|                                                                                                         |                                                                                                                                                                                                                              |   |               |          |              |   |         |         
|Total stockholders equity                                                                               |                                                                                                                                                                                                                              |   | 11,868        |          |              |   | 25,499  |         
|                                                                                                         |                                                                                                                                                                                                                              |   |               |          |              |   |         |         
|Total liabilities and stockholders equity                                                               |                                                                                                                                                                                                                              | $ | 111,537       |          |              | $ | 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
|                                                    |  | September 30      
|                                                    |  |                   
|                                                    |  | 2002               |        | 2001
|                                                    |  |                    |        |     
|Net revenues                                        |  | $                  | 19,353 |      |  | $ | 32,424  |  
|Cost of revenues                                    |  |                    | 11,543 |      |  |   | 20,871  |  
|                                                    |  |                    |        |      |  |   |         |  
|Gross profit                                        |  |                    | 7,810  |      |  |   | 11,553  |  
|Selling, general and administrative expenses        |  |                    | 4,415  |      |  |   | 9,339   |  
|Amortization expense                                |  |                    |       |      |  |   | 1,042   |  
|Goodwill Impairment                                 |  |                    |       |      |  |   | 38,323  |  
|Special charges/(credits)                           |  |                    |       |      |  |   | 8,804   |  
|                                                    |  |                    |        |      |  |   |         |  
|Income (loss) from operations                       |  |                    | 3,395  |      |  |   | (45,955 | )
|Interest expense, net                               |  |                    | (1,859 | )    |  |   | (2,449  | )
|Other expense                                       |  |                    |       |      |  |   | (5,966  | )
|                                                    |  |                    |        |      |  |   |         |  
|Income (loss) before income taxes                   |  |                    | 1,536  |      |  |   | (54,370 | )
|Provision for income taxes                          |  |                    |       |      |  |   | 99      |  
|                                                    |  |                    |        |      |  |   |         |  
|Net income (loss)                                   |  |                    | 1,536  |      |  |   | (54,469 | )
|Preferred stock dividends                           |  |                    | (477   | )    |  |   | (391    | )
|                                                    |  |                    |        |      |  |   |         |  
|Net income (loss) applicable to common stockholders |  | $                  | 1,059  |      |  | $ | (54,860 | )
|                                                    |  |                    |        |      |  |   |         |  
|Net income (loss) per common share, basic           |  | $                  | 0.03   |      |  | $ | (1.56   | )
|                                                    |  |                    |        |      |  |   |         |  
|Net income (loss) per common share, diluted         |  | $                  | 0.03   |      |  | $ | (1.56   | )
|                                                    |  |                    |        |      |  |   |         |  
|Weighted average common shares outstanding, basic   |  |                    | 35,756 |      |  |   | 35,269  |  
|                                                    |  |                    |        |      |  |   |         |  
|Weighted average common shares outstanding, diluted |  |                    | 38,849 |      |  |   | 35,269  |  
|                                                    |  |                    |        |      |  |   |         |  

See Notes to Consolidated Financial Statements

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Nextera Enterprises, Inc.

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

|                                                    |  |                   |        |      |  |   |          |  
|--------------------------------------------------- |  | ----------------- | ------ | ---- |  | - | -------- | -
|                                                    |  | Nine Months Ended
|                                                    |  | September 30     
|                                                    |  |                  
|                                                    |  | 2002              |        | 2001
|                                                    |  |                   |        |     
|Net revenues                                        |  | $                 | 58,368 |      |  | $ | 105,717  |  
|Cost of revenues                                    |  |                   | 35,120 |      |  |   | 70,530   |  
|                                                    |  |                   |        |      |  |   |          |  
|Gross profit                                        |  |                   | 23,248 |      |  |   | 35,187   |  
|Selling, general and administrative expenses        |  |                   | 13,412 |      |  |   | 35,365   |  
|Amortization expense                                |  |                   |       |      |  |   | 3,761    |  
|Goodwill Impairment                                 |  |                   |       |      |  |   | 64,973   |  
|Special charges/(credits)                           |  |                   | (740   | )    |  |   | 22,258   |  
|                                                    |  |                   |        |      |  |   |          |  
|Income (loss) from operations                       |  |                   | 10,576 |      |  |   | (91,170  | )
|Interest expense, net                               |  |                   | (4,852 | )    |  |   | (6,762   | )
|Other expense                                       |  |                   |       |      |  |   | (7,162   | )
|                                                    |  |                   |        |      |  |   |          |  
|Income (loss) before income taxes                   |  |                   | 5,724  |      |  |   | (105,094 | )
|Provision for income taxes                          |  |                   | 100    |      |  |   | 541      |  
|                                                    |  |                   |        |      |  |   |          |  
|Net income (loss)                                   |  |                   | 5,624  |      |  |   | (105,635 | )
|Preferred stock dividends                           |  |                   | (1,279 | )    |  |   | (1,448   | )
|                                                    |  |                   |        |      |  |   |          |  
|Net income (loss) applicable to common stockholders |  | $                 | 4,345  |      |  | $ | (107,083 | )
|                                                    |  |                   |        |      |  |   |          |  
|Net income (loss) per common share, basic           |  | $                 | 0.12   |      |  | $ | (3.07    | )
|                                                    |  |                   |        |      |  |   |          |  
|Net income (loss) per common share, diluted         |  | $                 | 0.10   |      |  | $ | (3.07    | )
|                                                    |  |                   |        |      |  |   |          |  
|Weighted average common shares outstanding, basic   |  |                   | 35,722 |      |  |   | 34,920   |  
|                                                    |  |                   |        |      |  |   |          |  
|Weighted average common shares outstanding, diluted |  |                   | 59,060 |      |  |   | 34,920   |  
|                                                    |  |                   |        |      |  |   |          |  

See Notes to Consolidated Financial Statements

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Nextera Enterprises, Inc.

Consolidated Statements of Cash Flows
(In thousands, unaudited)

|                                                                                                   |                                             |                                       |         |                                |        |      |          |        |       |  
|-------------------------------------------------------------------------------------------------- | ------------------------------------------- | ------------------------------------- | ------- | ------------------------------ | ------ | ---- | -------- | ------ | ----- | -
|                                                                                                   |                                             |                                       |         | Nine Months Ended September 30
|                                                                                                   |                                             |                                       |         |                               
|                                                                                                   |                                             |                                       |         | 2002                           |        | 2001
|                                                                                                   |                                             |                                       |         |                                |        |     
|Operating activities                                                                               |                                             |                                       |         |                                |        |      |          |       
|Net income (loss)                                                                                  |                                             | $                                     | 5,624   |                                |        | $    | (105,635 | )     
|Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |                                             |                                       |         |                                |        |      |          |       
|                                                                                                   | Depreciation and amortization               |                                       |         | 1,366                          |        |      |          | 7,909  |      
|                                                                                                   | Goodwill write-off                          |                                       |         |                               |        |      |          | 64,973 |      
|                                                                                                   | Provision for bad debts                     |                                       |         |                                |        |      |          | 2,520  |      
|                                                                                                   | Write-off of Investments                    |                                       |         | 621                            |        |      |          | 7,162  |      
|                                                                                                   | Write-off of fixed assets                   |                                       |         | 375                            |        |      |          | 5,901  |      
|                                                                                                   | Gain on sale of business unit               |                                       |         | (621                           | )      |      |          |       |      
|                                                                                                   | Gain on reversal of restructuring charges   |                                       |         | (740                           | )      |      |          |       |      
|                                                                                                   | Interest paid-in-kind                       |                                       |         | 2,186                          |        |      |          | 1,143  |      
|                                                                                                   | Non-cash charges, other                     |                                       |         | 54                             |        |      |          | 1,540  |      
|                                                                                                   | Change in operating assets and liabilities: |                                       |         |                                |        |      |          |        |      
|                                                                                                   |                                             | Accounts receivable                   |         |                                | (5,692 | )    |          |        | 4,118 |  
|                                                                                                   |                                             | Due from affiliate                    |         |                                | 65     |      |          |        | (88   | )
|                                                                                                   |                                             | Prepaid expenses and other assets     |         |                                | 572    |      |          |        | 4,283 |  
|                                                                                                   |                                             | Accounts payable and accrued expenses |         |                                | (5,265 | )    |          |        | 3,873 |  
|                                                                                                   |                                             | Accrued restructuring costs           |         |                                | (2,722 | )    |          |        | 2,298 |  
|                                                                                                   |                                             | Other                                 |         |                                | 1,768  |      |          |        | 91    |  
|                                                                                                   |                                             |                                       |         |                                |        |      |          |       
|Net cash provided by (used in) operating activities                                                |                                             |                                       | (2,409  | )                              |        |      | 88       |       
|Investing activities                                                                               |                                             |                                       |         |                                |        |      |          |       
|Purchase of property and equipment                                                                 |                                             |                                       | (610    | )                              |        |      | (2,852   | )     
|Proceeds from sale of business                                                                     |                                             |                                       | 14,720  |                                |        |      |         |       
|Changes in restricted cash                                                                         |                                             |                                       | (2,090  | )                              |        |      |         |       
|                                                                                                   |                                             |                                       |         |                                |        |      |          |       
|Net cash provided by (used in) investing activities                                                |                                             |                                       | 12,020  |                                |        |      | (2,852   | )     
|Financing activities                                                                               |                                             |                                       |         |                                |        |      |          |       
|Proceeds from issuance of Class A Common Stock                                                     |                                             |                                       |        |                                |        |      | 100      |       
|Due from officers                                                                                  |                                             |                                       |        |                                |        |      | 30       |       
|Repayments under senior credit facility                                                            |                                             |                                       | (10,628 | )                              |        |      | (3,550   | )     
|Proceeds from debentures due to affiliates                                                         |                                             |                                       | 560     |                                |        |      | 7,500    |       
|Repurchases of Class A Common Stock                                                                |                                             |                                       |        |                                |        |      | (323     | )     
|Repayments of debt and capital lease obligations                                                   |                                             |                                       | (2,472  | )                              |        |      | (2,943   | )     
|Other                                                                                              |                                             |                                       |        |                                |        |      | (279     | )     
|                                                                                                   |                                             |                                       |         |                                |        |      |          |       
|Net cash provided by (used in) financing activities                                                |                                             |                                       | (12,540 | )                              |        |      | 535      |       
|Effects of exchange rates on cash and cash equivalents                                             |                                             |                                       | (16     | )                              |        |      | (518     | )     
|                                                                                                   |                                             |                                       |         |                                |        |      |          |       
|Net decrease in cash and cash equivalents                                                          |                                             |                                       | (2,945  | )                              |        |      | (2,747   | )     
|Cash and cash equivalents at beginning of period                                                   |                                             |                                       | 4,465   |                                |        |      | 4,322    |       
|                                                                                                   |                                             |                                       |         |                                |        |      |          |       
|Cash and cash equivalents at end of period                                                         |                                             | $                                     | 1,520   |                                |        | $    | 1,575    |       
|                                                                                                   |                                             |                                       |         |                                |        |      |          |       

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 nine-month periods ended September 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 (Senior Credit Facility), to finance working capital requirements related
to employment compensation that is primarily payable in early 2003. The terms
of the Senior Credit Facility require the Company to restrict such amounts on a
monthly basis based on earned bonus amounts so that a certain percentage of the
projected earned bonus is escrowed or paid by the end of 2002. At September
30, 2002, $2.1 million was escrowed to a restricted account for bonuses earned
and an additional $1.1 million was escrowed to a restricted account subsequent
to September 30, 2002 for bonuses earned through September 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 the Senior Credit Facility. Under an
event of default, the senior lenders would be able to exercise any remedy
available to them, including using all restricted cash in escrow to offset
amounts due under the Senior Credit Facility.

Reclassification

Certain reclassifications were made to the 2001
financial statements to make them consistent with the 2002 presentation.

Concentration of Credit Risk

The Company provides its services to customers in diversified industries,
primarily in the United States. The Company performs ongoing credit evaluations
of its customers and generally does not require collateral. The Company
maintains reserves for potential credit losses and such losses have been within
managements expectations. No customer accounted for more than 10% of net
revenues for the three and nine months ended September 30, 2002 and 2001.
One customer represented more than 5% of accounts receivable as of September
30, 2002.

7



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##### Table of Contents



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.

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 |        | Nine Months Ended
|                                                   |  | September 30       |        | September 30     
|                                                   |  |                    |        |                  
|                                                   |  | 2002               |        | 2001              |  | 2002 |         | 2001
|                                                   |  |                    |        |                   |  |      |         |     
|Basic net income (loss) per Common Share           |  |                    |        |                   |  |      |         |      |  |   |        |   |  |   |          |  
|Net income (loss)                                  |  | $                  | 1,536  |                   |  | $    | (54,469 | )    |  | $ | 5,624  |   |  | $ | (105,635 | )
|Preferred stock dividends                          |  |                    | (477   | )                 |  |      | (391    | )    |  |   | (1,279 | ) |  |   | (1,448   | )
|                                                   |  |                    |        |                   |  |      |         |      |  |   |        |   |  |   |          |  
|Net income (loss) available to common
stockholders |  | $                  | 1,059  |                   |  | $    | (54,860 | )    |  | $ | 4,345  |   |  | $ | (107,083 | )
|Weighted average common shares
outstandingbasic   |  |                    | 35,756 |                   |  |      | 35,269  |      |  |   | 35,722 |   |  |   | 34,920   |  
|                                                   |  |                    |        |                   |  |      |         |      |  |   |        |   |  |   |          |  
|Basic net income (loss) per common share           |  | $                  | 0.03   |                   |  | $    | (1.56   | )    |  | $ | 0.12   |   |  | $ | (3.07    | )
|                                                   |  |                    |        |                   |  |      |         |      |  |   |        |   |  |   |          |  
|Diluted net income (loss) per Common Share         |  |                    |        |                   |  |      |         |      |  |   |        |   |  |   |          |  
|Net income (loss)                                  |  | $                  | 1,536  |                   |  | $    | (54,469 | )    |  | $ | 5,624  |   |  | $ | (105,635 | )
|Preferred stock dividends                          |  |                    | (477   | )                 |  |      | (391    | )    |  |   |       |   |  |   | (1,448   | )
|                                                   |  |                    |        |                   |  |      |         |      |  |   |        |   |  |   |          |  
|Net income (loss) available to common
stockholders |  | $                  | 1,059  |                   |  | $    | (54,860 | )    |  | $ | 5,624  |   |  | $ | (107,083 | )
|Weighted average common shares
outstandingbasic   |  |                    | 35,756 |                   |  |      | 35,269  |      |  |   | 35,722 |   |  |   | 34,920   |  
|Dilutive effect of convertible preferred stock     |  |                    |       |                   |  |      |        |      |  |   | 21,038 |   |  |   |         |  
|Dilutive effect of options and warrants            |  |                    | 3,093  |                   |  |      |        |      |  |   | 2,300  |   |  |   |         |  
|                                                   |  |                    |        |                   |  |      |         |      |  |   |        |   |  |   |          |  
|Weighted average common shares
outstandingdiluted |  |                    | 38,849 |                   |  |      | 35,269  |      |  |   | 59,060 |   |  |   | 34,920   |  
|                                                   |  |                    |        |                   |  |      |         |      |  |   |        |   |  |   |          |  
|Diluted net income (loss) per common share         |  | $                  | 0.03   |                   |  | $    | (1.56   | )    |  | $ | 0.10   |   |  | $ | (3.07    | )
|                                                   |  |                    |        |                   |  |      |         |      |  |   |        |   |  |   |          |  

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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 third quarter of 2002 and 2001, the Companys comprehensive income
totaled $1.5 million and a comprehensive loss of $54.8 million, respectively.
For the nine months ended September 30, 2002 and 2001, the Companys
comprehensive income was $6.5 million and a comprehensive loss of $106.3
million.

Note 4. Senior Credit Facility and Debentures Due to Affiliates

Senior Credit Facility

The Company entered into its Senior Credit Facility on March 29, 2002, which
amended and restated the Companys existing credit agreement with its senior
lenders. Under the 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. Borrowings
under the facility will bear interest at the lenders base rate plus 2.0%, with
the potential for the interest rate to be reduced 100 basis points upon Nextera
achieving certain financial and operational milestones. In connection with the
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 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 Senior Credit Facility.
The 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. The Company is engaged in ongoing
discussions with the senior lenders with respect to its future liquidity
requirements, debenture subordination terms and related matters. As
of September 30, 2002, the Company was in compliance with the covenants contained in the
Senior Credit Facility.

Debentures due to affiliates

On July 23, 2002, the Company exchanged $20.0 million of outstanding Series A
Cumulative Convertible Preferred Stock for $21.3 million additional debentures
due to affiliates, which included $1.3 million of accrued interest.

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Note 5. Special Charges

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

|                                         |  |            |       |         |  |               |   |         |  |             |      |           |  |                |   |          |  |          |        |   |  |   |        |                  |  |            |     |  |  |   |       | 
|---------------------------------------- |  | ---------- | ----- | ------- |  | ------------- | - | ------- |  | ----------- | ---- | --------- |  | -------------- | - | -------- |  | -------- | ------ | - |  | - | ------ | ---------------- |  | ---------- | --- |  |  | - | ----- | 
|                                         |  |            |       |         |  |               |   |         |  |             |      |           |  |                |   |          |  | Utilized |        |   |  |   |        |                  |  |           
|                                         |  |            |       |         |  |               |   |         |  |             |      |           |  |                |   |          |  |          |        |   |  |   |        |                  |  |           
|                                         |  |            |       |         |  |               |   |         |  |             |      |           |  |                |   |          |  |          |        |   |  |   |        |                  |  | Reserves   |     |  |  |  
|                                         |  | Balance at |       |         |  |               |   |         |  |             |      |           |  |                |   |          |  |          |        |   |  |   |        | established with |  | Balance at
|                                         |  | December   |       | Q1 2002 |  | Q2 2002       |   | Q3 2002 |  | the sale of |      | September
|                                         |  | 31, 2001   |       | charge  |  | charge/credit |   | charge  |  | Non-Cash    |      | Cash      |  | business unit* |   | 30, 2002
|                                         |  |            |       |         |  |               |   |         |  |             |      |           |  |                |   |         
|Severance                                |  | $          | 255   |         |  | $             |  |         |  | $           |     |           |  | $              |  |          |  | $        |       |   |  | $ | (255   | )                |  | $          |    |  |  | $ |      | 
|Facilities                               |  |            | 5,579 |         |  |               |  |         |  |             | (740 | )         |  |                |  |          |  |          | (1,025 | ) |  |   | (2,158 | )                |  |            | 285 |  |  |   | 1,941 | 
|Fixed Assets and
other asset
write-downs |  |            | 308   |         |  |               |  |         |  |             |     |           |  |                |  |          |  |          | (120   | ) |  |   | (520   | )                |  |            | 450 |  |  |   | 118   | 
|                                         |  |            |       |         |  |               |   |         |  |             |      |           |  |                |   |          |  |          |        |   |  |   |        |                  |  |            |     |  |  |   |       | 
|                                         |  | $          | 6,142 |         |  | $             |  |         |  | $           | (740 | )         |  | $              |  |          |  | $        | (1,145 | ) |  | $ | (2,933 | )                |  | $          | 735 |  |  | $ | 2,059 | 
|                                         |  |            |       |         |  |               |   |         |  |             |      |           |  |                |   |          |  |          |        |   |  |   |        |                  |  |            |     |  |  |   |       | 

|* |  | 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.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Of the $2.1 million of restructuring reserves recorded at September 30, 2002,
approximately $1.2 million of cash is expected to be expended over the next
twelve months, primarily related to real estate rental obligations and lease
commitments, with the majority of the remainder expected to be paid over the
following two years.

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 second quarter of 2002
and the nine-month period ended September 30, 2002.

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.

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During the 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.

During the quarter ended September 30, 2001, the Company recorded $8.8 million
of special charges for restructuring efforts. Included in this charge were
$1.1 million severance charge associated with headcount reductions in the
quarter; $3.5 million to provide for the expected costs of exiting or reducing
certain leased premises; a $4.0 million write-down of assets, substantially
fixed assets, and an employee incentive-related expense of $0.2 million.

Note 6. Other Expense

During the quarter ended September 30, 2002, the Company recorded an expense of
$0.6 million to write down an investment to fair value which was offset in
full by a $0.6 million gain relating to the reversal of reserves established as
part of the Companys sale of its human capital consulting business. During
the quarter ended September 30, 2001, the Company recorded Other Expense of
$6.0 million associated with the write down to fair market value of certain
investments. For the nine months ended September 30, 2001, the write down of
investments to fair market was $1.2 million.

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.

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 and an independent third party valuation, the
Company does not believe that the currently existing goodwill is impaired. At
September 30, 2002, total goodwill related to the Companys economic consulting
business was $77.5 million. Total goodwill amortization for the third quarter
2001 was $1.0 million and the total goodwill amortization for the nine months
ended September 30, 2001 was $3.8 million. The following unaudited schedule
reconciles net income (loss) per share amounts for the three and nine months
ended September 30, 2002 and September 30, 2001 adjusted for SFAS 142 (in
thousands, except per share data):

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|                                                     |                       |   |                    |      |                    |   |                    |       |                    |   |       |      |  |   |          |       |  
|---------------------------------------------------- | --------------------- | - | ------------------ | ---- | ------------------ | - | ------------------ | ----- | ------------------ | - | ----- | ---- |  | - | -------- | ----- | -
|                                                     |                       |   | Three Months Ended |      | Three Months Ended |   | Nine Months Ended  |       | Nine Months Ended 
|                                                     |                       |   | September 30, 2002 |      | September 30, 2001 |   | September 30, 2002 |       | September 30, 2001
|                                                     |                       |   |                    |      |                    |   |                    |       |                   
|Net income (loss) as reported                        |                       | $ | 1,536              |      |                    | $ | (54,469            | )     |                    | $ | 5,624 |      |  | $ | (105,635 | )    
|Add back: Goodwill amortization                      |                       |   |                   |      |                    |   | 1,042              |       |                    |   |      |      |  |   | 3,761    |      
|                                                     |                       |   |                    |      |                    |   |                    |       |                    |   |       |      |  |   |          |      
|Adjusted net income (loss)                           |                       | $ | 1,536              |      |                    | $ | (53,427            | )     |                    | $ | 5,624 |      |  | $ | (101,874 | )    
|                                                     |                       |   |                    |      |                    |   |                    |       |                    |   |       |      |  |   |          |      
|Basic earnings per common share:                     |                       |   |                    |      |                    |   |                    |       |                    |   |       |      |  |   |          |      
|                                                     | Net Income (loss)     |   | $                  | 0.03 |                    |   | $                  | (1.56 | )                  |   | $     | 0.12 |  |   | $        | (3.07 | )
|                                                     | Goodwill amortization |   |                    |     |                    |   |                    | 0.03  |                    |   |       |     |  |   |          | 0.11  |  
|                                                     |                       |   |                    |      |                    |   |                    |       |                    |   |       |      |  |   |          |      
|Adjusted net income (loss) per
common share, basis   |                       | $ | 0.03               |      |                    | $ | (1.53              | )     |                    | $ | 0.12  |      |  | $ | (2.96    | )    
|                                                     |                       |   |                    |      |                    |   |                    |       |                    |   |       |      |  |   |          |      
|Diluted earnings per common
share:                   |                       |   |                    |      |                    |   |                    |       |                    |   |       |      |  |   |          |      
|                                                     | Net Income (loss)     |   | $                  | 0.03 |                    |   | $                  | (1.56 | )                  |   | $     | 0.10 |  |   | $        | (3.07 | )
|                                                     | Goodwill amortization |   |                    |     |                    |   |                    | 0.03  |                    |   |       |     |  |   |          | 0.11  |  
|                                                     |                       |   |                    |      |                    |   |                    |       |                    |   |       |      |  |   |          |      
|Adjusted net income (loss) per
common share, diluted |                       | $ | 0.03               |      |                    | $ | (1.53              | )     |                    | $ | 0.10  |      |  | $ | (2.96    | )    
|                                                     |                       |   |                    |      |                    |   |                    |       |                    |   |       |      |  |   |          |      

Note 9. Income taxes

The Company recorded no federal income tax expense for the three and nine
months ended September 30, 2002 due to the availability of net operating loss
carryforwards from prior years which are fully reserved.

Note 10. Related Party Transactions

On September 30, 2002, the Company received a $560,000 short-term loan for
working capital purposes from an affiliate of its controlling stockholder.
This loan, together with interest at the rate of 6.75%, was repaid on October
28, 2002.

During the quarter ended September 30, 2002, the Company recorded a $0.6
million charge for the write down of an investment in an entity which is
affiliated with the Companys controlling stockholder.

Note 11. 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.

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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 leading economics consulting firms. For 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.

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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.

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

Net Revenues. Net revenues decreased $13.1 million, or 40.3%, to $19.4
million for the three months ended September 30, 2002 from $32.4 million for
the three months ended September 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 increased $0.5 million from $18.9 million in the quarter ended
September 30, 2001 to $19.4 million for the quarter ended September 30, 2002.

Gross Profit. Gross profit decreased 32.4% to $7.8 million for the three
months ended September 30, 2002 from $11.6 million for the three months ended
September 30, 2001. Gross profit as a percentage of net revenues increased to
40.4% for the three months ended September 30, 2002 from 35.6% for the three
months ended September 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 $3.8 million in the second quarter of 2001. The
gross profit of the economic consulting business increased from $7.5 million in
the third quarter of 2001 to $7.8 million in the third quarter of 2002,
primarily due to higher net revenues in the third 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 increased to 40.4% for the three months ended
September 30, 2002 from 39.9% in the third quarter of 2001, due to higher net
revenues in the 2002 period.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 52.7% to $4.4 million for the three months
ended September 30, 2002 from $9.3 million for the three months ended September
30, 2001. As a percentage of revenues, such expenses decreased to 22.8% for
the three months ended September 30, 2002 from 28.8% for the three months ended
September 30, 2001. The decrease is attributable to the following components: a
decrease of $0.7 million in selling and marketing expense; a $0.9 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
$1.2 million in general office expense, primarily bad debt expense, legal and
audit expenses, and costs associated with equipment leases; a $1.9 million
decrease in facility cost, attributed to the exiting of certain leased
properties; and a $0.2 million decrease in development expenses, primarily
recruiting expenses associated with the technology and human capital consulting
businesses.

Goodwill Impairment. During the three months ended September 30, 2001,
the Company recorded a $38.3 million goodwill impairment charge substantially
related to the human capital consulting business and, to a much lesser extent,
the technology consulting business.

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Special Charges. The restructuring charges and their utilization as of
and for the three months ended September 30, 2002 are summarized as follows (in thousands):

|                                         |  |                 |       |         |  |          |   |                      |  |          |        |   |  |   |      |   |  |   |       | 
|---------------------------------------- |  | --------------- | ----- | ------- |  | -------- | - | -------------------- |  | -------- | ------ | - |  | - | ---- | - |  | - | ----- | 
|                                         |  |                 |       |         |  |          |   |                      |  | Utilized |        |   |  |  
|                                         |  |                 |       |         |  |          |   |                      |  |          |        |   |  |  
|                                         |  | Balance at June |       | Q3 2002 |  |          |   | Balance at September
|                                         |  | 30, 2002        |       | charge  |  | Non-Cash |   | Cash                 |  | 30, 2002
|                                         |  |                 |       |         |  |          |   |                      |  |         
|Severance                                |  | $               |      |         |  | $        |  |                      |  | $        |       |   |  | $ |     |   |  | $ |      | 
|Facilities                               |  |                 | 3,693 |         |  |          |  |                      |  |          | (1,025 | ) |  |   | (727 | ) |  |   | 1,941 | 
|Fixed Assets and
other asset
write-downs |  |                 | 367   |         |  |          |  |                      |  |          | (120   | ) |  |   | (129 | ) |  |   | 118   | 
|                                         |  |                 |       |         |  |          |   |                      |  |          |        |   |  |   |      |   |  |   |       | 
|                                         |  | $               | 4,060 |         |  | $        |  |                      |  | $        | (1,145 | ) |  | $ | (856 | ) |  | $ | 2,059 | 
|                                         |  |                 |       |         |  |          |   |                      |  |          |        |   |  |   |      |   |  |   |       | 

Of the $2.1 million of restructuring reserves recorded at September 30, 2002,
approximately $1.2 million of cash is expected to be expended over the next
twelve months, primarily related to real estate rental obligations and lease
commitments, with the majority of the remainder expected to be paid over the
following two years.

During the quarter ended September 30, 2001, the Company recorded $8.8 million
of special charges for restructuring efforts. Included in this charge were
$1.1 million severance charge associated with headcount reductions in the
quarter; $3.5 million to provide for the expected costs of exiting or reducing
certain leased premises; a $4.0 million write-down of assets, substantially
fixed assets, and an employee incentive-related expense of $0.2 million.

Interest Expense, Net. Interest expense, net decreased to $1.9 million
for the three months ended September 30, 2002 from $2.4 million for the three
months ended September 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 quarter ended September 30, 2002, the Company
recorded an expense of $0.6 million to write down of an investment to fair
value which was offset in full by a $0.6 million gain relating to the reversal
of reserves established as part of the Companys sale of its human capital
consulting business. During the quarter ended September 30, 2001, the Company
recorded Other Expense of $6.0 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 September 30, 2002 due to the existence of net operating loss
carryforwards from prior years which are fully reserved. No federal tax
benefit was recorded during the three months ended September 30, 2001 due to
the Companys uncertainty associated with utilizing its net operating losses.
State tax expense of $0.1 million was recorded in the three month quarter
ending September 30, 2001.

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COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2002 AND NINE MONTHS ENDED
SEPTEMBER 30, 2001

Net Revenues. Net revenues decreased 44.8% to $58.4 million for the nine
months ended September 30, 2002 from $105.7 million for the nine months ended
September 30, 2001. This decrease was 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 $1.2 million to
$56.4 million in the nine months ended September 30, 2002 from $57.6 million in the
nine months ended September 30, 2001 due to lower utilization of the
professional staff resulting from the timing of project commencements and
completions.

Gross Profit. Gross profit decreased 33.9% to $23.2 million for the nine
months ended September 30, 2002 from $35.2 million for the nine months ended
September 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 nine months of 2002 from the
first nine months of 2001 was $11.6 million. The gross profit of the economic
consulting business decreased from $23.4 million in the first nine months of
2001 to $22.4 million in the first nine months of 2002, primarily due to lower
net revenues in the first nine months of 2002. Gross margin as a percentage of
sales increased to 39.8% for the nine months ended September 30, 2002 from
33.3% for the nine months ended September 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
39.7% for the nine months ended September 30, 2002 from 40.6% in the first nine
months of 2001 due to lower net revenues in the 2002 period.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 62.1% to $13.4 million for the nine months
ended September 30, 2002 from $35.4 million for the nine months ended September
30, 2001. As a percentage of revenues, such expenses decreased to 23.0% for
the nine months ended September 30, 2002 from 33.5% for the nine months ended
September 30, 2001. The decrease is attributable to the following components: a
decrease of $4.6 million in selling and marketing expense, primarily travel; a
$5.0 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 $4.6 million in general office expense, primarily
bad debt expense, legal and audit expenses, and costs associated with equipment
leases; a $6.6 million decrease in facility cost, attributed to the exiting of
certain leased properties; and a $1.2 million decrease in development expenses,
primarily recruiting expenses associated with the technology and human capital
consulting businesses.

Goodwill Impairment. During the nine months ended September 30, 2001, the
Company recorded a $64.9 million goodwill impairment charge related to the
human capital and technology consulting businesses.

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Special Charges. The restructuring charges and
their utilization as of and for the nine months ended September 30, 2002 are summarized as follows (in thousands):

|                                         |  |            |       |         |  |               |   |         |  |             |      |           |  |                |   |          |  |          |        |   |  |   |        |                  |  |            |     |  |  |   |       | 
|---------------------------------------- |  | ---------- | ----- | ------- |  | ------------- | - | ------- |  | ----------- | ---- | --------- |  | -------------- | - | -------- |  | -------- | ------ | - |  | - | ------ | ---------------- |  | ---------- | --- |  |  | - | ----- | 
|                                         |  |            |       |         |  |               |   |         |  |             |      |           |  |                |   |          |  | Utilized |        |   |  |   |        |                  |  |           
|                                         |  |            |       |         |  |               |   |         |  |             |      |           |  |                |   |          |  |          |        |   |  |   |        |                  |  |           
|                                         |  |            |       |         |  |               |   |         |  |             |      |           |  |                |   |          |  |          |        |   |  |   |        |                  |  | Reserves   |     |  |  |  
|                                         |  | Balance at |       |         |  |               |   |         |  |             |      |           |  |                |   |          |  |          |        |   |  |   |        | established with |  | Balance at
|                                         |  | December   |       | Q1 2002 |  | Q2 2002       |   | Q3 2002 |  | the sale of |      | September
|                                         |  | 31, 2001   |       | charge  |  | charge/credit |   | charge  |  | Non-Cash    |      | Cash      |  | business unit* |   | 30, 2002
|                                         |  |            |       |         |  |               |   |         |  |             |      |           |  |                |   |         
|Severance                                |  | $          | 255   |         |  | $             |  |         |  | $           |     |           |  | $              |  |          |  | $        |       |   |  | $ | (255   | )                |  | $          |    |  |  | $ |      | 
|Facilities                               |  |            | 5,579 |         |  |               |  |         |  |             | (740 | )         |  |                |  |          |  |          | (1,025 | ) |  |   | (2,158 | )                |  |            | 285 |  |  |   | 1,941 | 
|Fixed Assets and
other asset
write-downs |  |            | 308   |         |  |               |  |         |  |             |     |           |  |                |  |          |  |          | (120   | ) |  |   | (520   | )                |  |            | 450 |  |  |   | 118   | 
|                                         |  |            |       |         |  |               |   |         |  |             |      |           |  |                |   |          |  |          |        |   |  |   |        |                  |  |            |     |  |  |   |       | 
|                                         |  | $          | 6,142 |         |  | $             |  |         |  | $           | (740 | )         |  | $              |  |          |  | $        | (1,145 | ) |  | $ | (2,933 | )                |  | $          | 735 |  |  | $ | 2,059 | 
|                                         |  |            |       |         |  |               |   |         |  |             |      |           |  |                |   |          |  |          |        |   |  |   |        |                  |  |            |     |  |  |   |       | 

|* |  | In connection with the sale of the human capital consulting business, 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.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Of the $2.1 million of restructuring reserves recorded at September 30, 2002,
approximately $1.2 million of cash is expected to be expended over the next
twelve months, primarily related to real estate rental obligations and lease
commitments, with the majority of the remainder expected to be paid over the
following two years.

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 second quarter of 2002
and the nine-month period ended September 30, 2002.

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 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.

During the quarter ended September 30, 2001, the Company recorded $8.8 million
of special charges for restructuring efforts. Included in this charge were
$1.1 million severance charge associated with headcount reductions in the
quarter; $3.5 million to provide for the expected costs of exiting or reducing
certain leased premises; a $4.0 million write-down of assets, substantially
fixed assets, and employee incentive-related expense of $0.2 million.

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Interest Expense, Net. Interest expense, net decreased to $4.9 million
for the nine months ended September 30, 2002 from $6.8 million for the nine
months ended September 30, 2001. This decrease was primarily due to lower
outstanding debt under the Companys senior credit facility coupled with lower
associated bank fees.

Other Expense. During the nine-months ended September 30, 2002, the
Company recorded an expense of $0.6 million to write down an investment to
fair value which was offset in full by a $0.6 million gain relating to the
reversal of reserves established as part of the Companys sale of its human
capital consulting business. During the nine months ended September 30, 2001,
the Company recorded Other Expense of $7.2 million associated with the write
down to fair market value of certain investments.

Income taxes. No federal tax expense was recorded for the nine months
ended September 30, 2002 due to the existence of net operating loss
carryforwards from prior years which have been fully reserved. The Company
recorded $0.1 million in state tax expense for the nine months ended September
30, 2002. No federal tax benefit was recorded during the nine months ended
September 30, 2001 due to the Companys uncertainty associated with utilizing
its net operating losses. State tax expense of $0.5 million was recorded for
the nine months ended September 30, 2001.

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LIQUIDITY AND CAPITAL RESOURCES

Consolidated working capital was $1.0 million on September 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 $1.5 million and $4.5 million
on September 30, 2002 and December 31, 2001, respectively.

Net cash used in operating activities was $2.4 million for the nine months
ended September 30, 2002. The primary components of net cash used in operating
activities was a decrease of $7.9 million in accounts payable and accrued
expenses, due primarily to bonus payments and restructuring payments, and an
increase of $5.7 million in accounts receivable. These cash outflows were
primarily offset in part by net income of $5.6 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 $3.6 million.

Net cash provided by investing activities was $12.0 million for the nine months
ended September 30, 2002, substantially representing proceeds of $14.7 million
received from the sale of the human capital consulting business offset by
restricted cash of $2.1 million and the purchase of fixed assets of $0.6
million.

Net cash used in financing activities was $12.5 million for the nine months
ended September 30, 2002. The primary components of net cash used in financing
activities were $10.6 million of repayments under the Companys Senior Credit
Facility and $2.5 million of payments of other debt and capital leases
obligations.

Effective March 29, 2002, the Company entered into the Senior Credit Facility
with the Companys senior lenders. Under the Senior Credit Facility, 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 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
interest rate to be reduced 100 basis points upon Nextera achieving certain
financial and operational milestones. In connection with the 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 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 Senior Credit Facility. The 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. The Company is engaged in ongoing discussions with the
senior lenders with respect to its future liquidity requirements, debenture
subordination terms and related matters. As of September 30, 2002, the Company
was in compliance with the covenants contained in the Senior Credit Facility.

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 condition of the Company.

The terms of the Senior Credit Facility require the Company to restrict a
portion of its cash on a monthly basis based on earned bonus amounts in order
that a certain percentage of projected earned bonus amounts is escrowed or paid
by the end of 2002. The escrowed funds may only be used by the
Company to pay specified bonuses and the restrictions on cash reduce the
Companys liquidity. At September 30, 2002, Nextera had $2.1 million of cash
subject to these escrow arrangements.

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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 business and 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 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
extensions of these employment contracts, the cost associated with the
extensions could have a material adverse impact on the financial condition 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 entered into the Senior Credit Facility on March 29, 2002, which
amended and restated the Companys existing credit agreement with its senior
lenders. Under the 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. Additionally,
the Company is required to comply with certain financial and operational
covenants. Borrowings under the Senior Credit Facility will bear interest at
the lenders base rate plus 2.0%, with the potential for the interest rate to
be reduced 100 basis points upon Nextera achieving certain financial and
operational milestones. If the Company fails to comply with the covenants
contained in the Senior Credit Facility, the interest rate could increase
200 basis points. Additionally, failure of the Company to comply with such
covenants, to obtain extensions of employment agreements with certain key
personnel (which begin to expire on December 31, 2002), or to 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 acceleration of all amounts outstanding under the Senior Credit
Facility and related costs and expenses. 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 September 30, 2002, we had $27.8 million of outstanding indebtedness under
our Senior Credit Facility, $8.5 million of which was classified as a current
liability. In addition, as of September 30, 2002, we had $46.6 million of
outstanding indebtedness under debentures payable to affiliates.

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 expired on August
13, 2002. We received a further 180-day grace period to comply with the $1.00
minimum bid price requirement from the Nasdaq SmallCap Market, which extension
will expire on February 13, 2003. 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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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 nine months ended September
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. Although we have achieved net income in the first nine
months of 2002, there can be no assurances that we will obtain or sustain
profitability 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.

Loss of or limitations on our
net operating loss carryforward.

The Company has a substantial net operating loss carryforward that
may be used in the future to reduce the Company's federal tax liability.
The Company established a full valuation allowance against the net
operating loss carryforward, along with all other
deferred tax assets to reflect the uncertainty of the recoverability
of this asset.  The utilization of this asset in the future is
dependent upon the Company having positive earnings.  Furthermore,
the likelihood of an annual limitation on our ability to utilize
our net operating loss carryforward to offset future U.S. federal
taxable income is increased by (i) the issuance of certain convertible
preferred stock, options, warrants or other securities exercisable
for common stock, (ii) changes in our equity ownership occurring
in the last three years and (iii) potential future changes in
our equity ownership.  The amount of an annual limitation can vary
significantly based on certain factors existing at the date of
the ownership change.  If such limitations were imposed, they
could have a material adverse impact on our results of
operations and cash flows.

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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 September 30, 2002, our intangible assets, net of accumulated
amortization, were approximately $77.5 million. Intangible assets at September
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.

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
September 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.




Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Companys Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such information is
accumulated and communicated to the Companys management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.

Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Companys
management, including the Companys Chief Executive Officer and the Companys
Chief Financial Officer, of the effectiveness of the design and operation of
the Companys disclosure controls and procedures. Based on the foregoing, the
Companys Chief Executive Officer and Chief Financial Officer concluded that
the Companys disclosure controls and procedures were effective.

There have been no significant changes in the Companys internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation.

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PART II  OTHER INFORMATION




Item 4. Submission of Matters to a Vote of Security Holders

On June 13, 2002, an annual meeting of the stockholders of Nextera was held in
Cambridge, Massachusetts. At the meeting, each director that was a member of
the Board of Directors immediately prior to the Annual Meeting was re-elected.
The matters voted upon and the votes cast at the annual meeting were as
follows:

|                      |  |           |            |                |  |  |         | 
|--------------------- |  | --------- | ---------- | -------------- |  |  | ------- | 
|Election of Directors |  | Votes For |            | Votes Withheld
|                      |  |           |            |               
|Gregory J. Clark      |  |           | 61,807,577 |                |  |  | 172,093 | 
|Ralph Finerman        |  |           | 61,806,319 |                |  |  | 173,351 | 
|Steven B. Fink        |  |           | 61,615,478 |                |  |  | 364,192 | 
|Keith D. Grinstein    |  |           | 61,343,686 |                |  |  | 635,984 | 
|Stanley E. Maron      |  |           | 61,804,227 |                |  |  | 175,443 | 
|Richard V. Sandler    |  |           | 61,708,133 |                |  |  | 271,537 | 
|Richard L. Sandor     |  |           | 61,423,497 |                |  |  | 556,173 | 
|David Schneider       |  |           | 61,308,030 |                |  |  | 671,640 | 
|Karl L. Sussman       |  |           | 61,808,516 |                |  |  | 171,154 | 

|                         |  |                                                                                                                                                                                                                                           |         |  |             |  |           |           |         |  |  |        |   | 
|------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- |  | ----------- |  | --------- | --------- | ------- |  |  | ------ | - | 
|                         |  |                                                                                                                                                                                                                                           |         |  |             |  | Votes     |           |         |  |  | Broker |  
|Other Matters Voted Upon |  | For                                                                                                                                                                                                                                       | Against |  | Abstentions |  |           | Non-Votes
|                         |  |                                                                                                                                                                                                                                           |         | 
|1.                       |  | Approval of an amendment and
restatement of the Amended and
Restated 1998 Equity
Participation Plan of Nextera
Enterprises, Inc. to increase
the total number of shares
authorized for issuance
thereunder from 19,000,000 to
38,000,000. |         |  | 49,933,789  |  | 2,085,789 |           | 123,683 |  |  |        | 0 | 
|                        
|2.                       |  | Ratification of the selection
of Ernst & Young LLP as the
independent auditors for the
fiscal year ending December 31,
2002.                                                                                                              |         |  | 61,487,578  |  | 87,376    |           | 404,716 |  |  |        | 0 | 

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Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

10.1 Funding Agreement dated as of September 27, 2002 among Nextera
Enterprises, Inc., Fleet National Bank, Bank of America, N.A. and Knowledge
Enterprises, Inc.

10.2 Exchange Debenture of Nextera Enterprises, Inc. in the principal
amount of $21,292,550.00 dated as of July 23, 2002.

10.3 Guarantee and Security Agreement dated as of July 23, 2002 among
Nextera Enterprises, Inc., Knowledge Universe, Inc. and the entities listed on
the signature pages thereto.

10.4 Subordination Agreement dated as of July 23, 2002 among Nextera
Enterprises, Inc., Knowledge Universe, Inc. and Knowledge Universe Capital Co.,
LLC.

(b)  Reports on Form 8-K

On August 14, 2002, the Company filed a report on Form 8-K disclosing the
certification of the Form 10-Q by the Companys Chief Executive Officer and
Chief Financial Officer for the quarterly period ending June 30, 2002.






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

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I, David M. Schneider, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Nextera Enterprises,
Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6. The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | By:   /s/   David M. Schneider
        Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)

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I, Michael P. Muldowney, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Nextera Enterprises,
Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6. The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | By:   /s/   Michael P. MuldowneyChief Financial Officer
(Principal Financial and Accounting Officer)

30