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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|                                             |  |                                                                                             
|-------------------------------------------- |  | --------------------------------------------------------------------------------------------
|(Mark One)                                   |  |                                                                                             
|þ                                            |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended March 31,
    2004
|                                            
|or                                          
|                                            
|o                                            |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-22125



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DiamondCluster International, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                                         |  |                                         
|-------------------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                                                 |  | 36-4069408                              
|(State or other jurisdiction of
    incorporation or organization)                                       |  | (I.R.S. Employer
    Identification No.)
|                                                                                                        
|875 N. Michigan Avenue,
    Suite 3000
    Chicago, Illinois(Address of Principal Executive
    Offices) |  | 60611(Zip Code)                         

Registrants telephone number, including
area code: (312) 255-5000

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


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


Common Stock, par value $.001 per
share

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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.     Yes o          No þ

Indicate by check mark whether the Registrant is
an accelerated
filer.     Yes þ          No o

As of September 30, 2003 there were
33,716,210 shares of Common Stock of Registrant
outstanding. The aggregate market value of the Common Stock of
the Registrant held by non-affiliates as of September 30,
2003 was an estimated $202.1 million, computed based upon
the closing price of $6.84 per share on September 30,
2003.

As of May 31, 2004, there were
39,188,037 shares of Common Stock of the Registrant
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Annual Report on
Form 10-K incorporates by reference portions of the
Registrants definitive proxy statement, to be filed with
the Securities and Exchange Commission no later than
120 days after the close of its fiscal year; provided that
if such proxy statement is not filed with the Commission in such
120-day period, an amendment to this Form 10-K shall be
filed no later than the end of the 120-day period.



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DIAMONDCLUSTER INTERNATIONAL, INC.

Annual Report on Form 10-K for the Fiscal
Year Ended

March 31, 2004


TABLE OF CONTENTS

|                                          |  |                                                                                                        |  |      |    | 
|----------------------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                          |  |                                                                                                        |  | Page |   
|                                          |  |                                                                                                        |  |      |   
|PART I                                   
|Item 1.                                   |  | Business                                                                                               |  |      | 2  | 
|Item 2.                                   |  | Properties                                                                                             |  |      | 15 | 
|Item 3.                                   |  | Legal Proceedings                                                                                      |  |      | 15 | 
|Item 4.                                   |  | Submission of Matters to a
    Vote of Security Holders                                                |  |      | 15 | 
|                                         
|PART II                                  
|Item 5.                                   |  | Market for Registrants
    Common Equity and Related Stockholder Matters                              |  |      | 16 | 
|Item 6.                                   |  | Selected Consolidated
    Financial Data                                                               |  |      | 17 | 
|Item 7.                                   |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |  |      | 18 | 
|Item 7A.                                  |  | Quantitative and Qualitative
    Disclosures About Market Risk Sensitive Instruments                   |  |      | 31 | 
|Item 8.                                   |  | Consolidated Financial
    Statements and Supplementary Data                                           |  |      | 32 | 
|Item 9.                                   |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure               |  |      | 33 | 
|Item 9A.                                  |  | Controls and Procedures                                                                                |  |      | 33 | 
|                                         
|PART III                                 
|Item 10.                                  |  | Directors and Executive
    Officers of the Registrant                                                 |  |      | 33 | 
|Item 11.                                  |  | Executive Compensation                                                                                 |  |      | 34 | 
|Item 12.                                  |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |  |      | 34 | 
|Item 13.                                  |  | Certain Relationships and
    Related Transactions                                                     |  |      | 34 | 
|Item 14.                                  |  | Principal Accountant Fees
    and Services                                                             |  |      | 34 | 
|                                         
|PART IV                                  
|Item 15.                                  |  | Exhibits, Consolidated
    Financial Statement Schedules and Reports on Form 8-K                       |  |      | 35 | 
|Operating Agreement                      
|Code of Business Conduct and Ethics      
|Subsidiaries of the Registrant           
|Consent of Independent Public Accountants
|Certifications                           
|Certifications                           
|Certifications                           
|Certifications                           
|Certifications                           
|Certifications                           
|Risk Factors                             



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PART I

Available Information

DiamondCluster International, Inc.s
executive offices are located at Suite 3000, John Hancock
Center, 875 North Michigan Avenue, Chicago, Illinois 60611,
and our telephone number is (312) 255-5000. Our stock is
traded on the NASDAQ National Market under the symbol
DTPI. Our internet address is
http://www.diamondcluster.com. We make available free of charge
on the Investor Relations section of our website our Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and all amendments to those
reports as soon as reasonably practicable after such material is
electronically filed with the Securities and Exchange Commission
(the SEC). We also make available through our
website other reports filed with the SEC under the Exchange Act,
including our proxy statements and reports filed by officers and
directors under Section 16(a) of that Act, as well as our
Code of Business Conduct and Ethics. We do not intend for
information contained in our website to be part of this Annual
Report on Form 10-K.

In this Annual Report on Form 10-K, we use
the terms DiamondCluster, we, our
Company, the Company, our, and
us to refer to DiamondCluster International, Inc.
and its wholly-owned subsidiaries. All references to years,
unless otherwise noted, refer to our fiscal year, which ends
March 31.






|        |         
|------- | --------
|Item 1. | Business

Overview

DiamondCluster International, Inc.
(DiamondCluster) is a premier global management
consulting firm. We help leading organizations worldwide to
understand and leverage technology to realize value in their
businesses. Our firm offers clients skills in strategy,
technology and program management to help companies reduce
costs, incorporate flexibility into their businesses, address
changing regulations and markets, improve operations, and grow
their businesses. We combine innovative strategic thinking, deep
industry expertise and a thorough understanding of technology to
deliver successful business solutions. We work collaboratively
with our clients using small, multidisciplinary teams of
consultants because we believe the most lasting and significant
improvements occur when the client is integrally involved in the
change. Our approach of using multidisciplinary teams allows our
consultants to identify and design solutions that traditional
approaches, because of their sequential nature, may not
identify. We go to market by vertical industry and focus on
industries that are strategically dependent upon technology. We
currently serve clients in five vertical industries: financial
services, insurance, telecommunications, healthcare and the
public sector. We operate globally with offices in North
America, Europe and Latin America.

DiamondCluster was formed on November 28,
2000, when Diamond Technology Partners Incorporated acquired all
of the outstanding shares of Cluster Telecom BV
(Cluster). Cluster was a pan-European management
consulting firm specializing in wireless technology and digital
strategies. DiamondCluster generated $154.8 million of net
revenues (before reimbursements of out-of-pocket expenses) from
110 clients in fiscal year 2004 and at March 31, 2004,
employed 481 consultants and had nine offices in North
America, Europe and Latin America, including offices in
Barcelona, Chicago, Düsseldorf, Lisbon, London, Madrid,
Münich, Paris, and São Paulo.

Industry Background and Opportunity

Demand in the consulting industry is driven by
change. The business environment today is faced with significant
changes on a wide variety of fronts, including globalization,
regulatory requirements, economic cycles, new competition,
industry and market consolidation, organizational
restructurings, and new technologies. Management teams are
constantly assessing the potential impact of these changes on
their businesses. Many of these changes are significant and
impact entire organizations. Other changes impact specific
products or functional areas.

Among the most pervasive of these changes is
technology. Technology often fundamentally affects how a company
relates to its customers, suppliers, employees, investors and
competitors. As such, organizations

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invest significant resources in technology.
Consequently, technology is increasingly an area of focus among
the highest levels of business organizations, including the CEO
and the board of directors, as they look for new strategies that
enable them to leverage their existing assets while taking
advantage the opportunity and flexibility that technology can
afford their businesses.


Management teams turn to consultants for a number
of reasons, including the need for deep expertise in a specific
area, the need to do something in an accelerated timeframe, the
need to mitigate their risk, the need for an outside objective
perspective, or the need for someone outside the organization to
serve as an agent to implement major change within their
organizations. We believe that companies increasingly seek
outside consultants that can provide a combination of innovative
strategic analysis, in-depth vertical industry expertise and a
thorough understanding of technology and its applications to
design and, importantly, to implement a solution that will
improve their business.

While the fundamental reasons management teams
look to consultants for help have not changed in many decades,
we believe a structural change is taking place in the consulting
industry. First, the traditional information technology service
providers, which comprise a majority of the consulting industry,
are consolidating while also increasing their size and scope of
service offerings to include larger and more complex projects,
such as business process outsourcing. Second, there has been a
growing acceptance around the world of the offshore programming
firms, which offer a compelling economic alternative or
programming services. These firms have put a good deal of
pressure on the traditional information technology service
providers for this type of business. Finally, while the
traditional strategic consulting firms have recognized the need
to expand their traditional scope of services beyond strategy
and organization, they have been either reluctant or unable to
fully integrate technology and execution advisory services into
their firms. We believe these structural industry changes give
objective consultants with deep expertise in strategy,
technology and program management, an increasingly valuable role
for the foreseeable future.

As both business and technology become
increasingly complex, the market for consulting services grows.
We believe that this increasing complexity, coupled with
consolidation and other shifts in the consulting marketplace,
also increases the importance of an objective advisor that is
able to remain vendor independent. International Data
Corporation (IDC) estimates that the worldwide business
consulting and information technology (IT)
consulting services markets will reach $54.2 billion and
$32.2 billion, respectively, in 2006, based on an analysis
for the years 2001-2006.

Our Competitive Strengths

We combine innovative strategic thinking,
in-depth vertical industry expertise, a global presence, a
thorough understanding of technology and its applications, and
complex program management skills to deliver powerful business
solutions for our clients. We offer clients the range of
services of a traditional information technology service
provider, with the objective, advisory role of the traditional
strategic consulting firms. We help our clients use technology
to reduce costs, incorporate flexibility into their businesses,
address changing regulations and markets, improve operations,
and grow their businesses. We believe the following attributes
distinguish us from our competitors:

Objectivity.We
provide our clients with objective advice in the areas of
strategy, technology, and program management. We believe that
the increasing complexity of technology and the changing
structure within the consulting industry (see Industry
Background and Opportunity) increases the value to senior
management of an objective advisor, such as DiamondCluster. We
have intentionally avoided offering services or entering into
alliances that might bias our objectivity, such as selling or
reselling hardware or software, or offering programming services.

Collaborative Business
Model.Our business model dictates
that we work collaboratively with our clients. We believe this
approach is best because we believe the most lasting and
significant improvements occur when the client is integrally
involved in the change. We work with CEOs and senior leadership
teams of leading organizations worldwide to understand and
leverage technology in their businesses. This approach transfers
to the client critical knowledge and accountability that is
necessary to enact lasting and productive change. Our model is
designed to provide only the highest value services to our
clients. When needed, we

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subcontract third-party sources, including
offshore firms, to provide a complete solution. We believe this
provides more value to our clients.


Small, Multidisciplinary
Teams.We work with our clients from
the earliest stages of study and assessment through the creation
and implementation of a solution using small teams with skills
in strategy, technology and program management. We believe our
approach of using small, multidisciplinary teams provides our
clients with a common perspective and breadth of expertise not
available from other consulting firms.

Strategic Industry Insight and
Expertise.We focus on serving five
vertical industries: financial services, insurance,
telecommunications, healthcare, and the public sector. We
believe our vertical industry focus enables us to define and
deliver solutions that effectively address the market and
regulatory dynamics, and business opportunities facing our
clients.

Global Diversity and
Presence.We deliver our services
worldwide through our offices in North America, Europe and Latin
America. We believe that our global reach and knowledge,
combined with our understanding of local markets, provide us the
ability to deliver consistent, high-quality consulting services.

Senior-Level
Relationships.We sell our services to
c-level buyers within an organization (i.e.,CEO, COO, CFO, CIO, CMO). We also have in place a number of
programs that maintain these relationships in between
engagements (see Business Development). Our goal is
to become managements trusted advisor, with no bias
towards a particular technology or product.

Delivery of Results.DiamondCluster delivers tangible results, not just
recommendations. Our consultants work with client management to
develop a complete cost/benefit analysis, which focuses on
metrics such as shareholder value and return on invested
capital. DiamondCluster then works with the client to implement
the solution to achieve the results.

Ability to Quickly Evolve Our
Offerings.The consulting industry is
subject to changes in economic, business and technology cycles,
which requires a consulting firm to be very agile in order to
maintain the relevancy of its services to the market. Our
approach of identifying and scaling new service offerings
enables us to quickly evaluate and change our service offerings
to meet current market demands. Our people are skilled in three
enduring competencies  strategy, technology and
program management  that are independent of
particular economic, business and technology cycles.

Continuous
Innovation.We believe that an
enduring, high-quality consulting firm must have three basic
qualities: employ highly talented people, maintain a track
record of successful work, and have the ability to continuously
generate new and relevant intellectual capital. While a number
of consulting firms have talented people and strong client track
records, the ability to continuously generate new intellectual
capital is somewhat more elusive. DiamondCluster has put into
place a systematic way to continuously stay ahead of the
intellectual capital curve in order to deliver the most advanced
thinking to its clients.

Foster A Strong
Culture.The most important asset of a
consulting firm is its people. We have developed a strong and
enduring culture by recruiting primarily from leading graduate
and undergraduate universities, and have developed an
environment of continuous learning and innovation that helps to
retain our talented professionals (see Employees and
Culture). We are committed to the long-term growth and
development of each of our professionals.

Experienced and Motivated
Management.Our global management team
has an average of more than 20 years of experience. They
have experience managing consulting businesses through business,
economic and technology cycles, and have strong skills in
establishing and developing client relationships.

Our Growth Strategy

Our goal is to become the consultant of choice
for clients looking for an objective partner to help them
understand and leverage technology to reduce costs, incorporate
flexibility into their businesses, address changing regulations
and markets, improve operations, and grow their businesses. Our
business model is designed to allow us to be an objective and
trusted advisor who provides the highest value of services to our

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clients from strategy through implementation. We
believe our business model provides our company with a
fundamental differentiation because it requires a collaborative
approach with the client, utilizes multidisciplinary teams to
ensure the best solution, and effectively leverages the ongoing
stream of new intellectual capital into our organization. The
following strategies guide our actions as we grow our business:


Attract and Retain Skilled
Personnel.Our continued success and
growth will require us to expand our base of highly skilled
professionals. This emphasis on human resources begins with our
recruitment of client-serving professionals from leading
graduate and undergraduate universities, as well as from
industry and from other consulting firms. It continues through
the process of training, developing and promoting promising
professionals within DiamondCluster and culminates in the
sharing of equity in DiamondCluster as an acknowledgment of
merit, a means of retention and an alignment of interests.

Cultivate Our Multidisciplinary
Culture.In order to maintain a
differentiated service offering, we seek to develop and sustain
a business culture that is common across all disciplines in the
organization. We seek to promote our culture by exposing our
professionals to all of the various services that we provide
through training and practice, while further developing skills
in each professionals principal area of expertise.

Focus on, and Expand Relationships with Core
Clients.We develop strong, long-term
relationships with our clients that often lead to repeat
business and referrals. We achieve this by doing very
high-impact work and cultivating close relationships with CEOs
and senior leadership teams to facilitate the transition. The
access, contact and goodwill generated through our existing
client relationships afford us opportunities to provide
additional services and solutions.

Nurture and Promote Our Intellectual
Capital.We utilize our accumulated
knowledge and experience to provide relevant intellectual
capital to a given project and to develop innovative solutions
for our clients. We continuously seek to identify, disseminate
and incorporate new intellectual capital throughout our
organization to keep abreast of business and technology trends,
while creating repeatable frameworks that can be used to
implement solutions more effectively and efficiently. Internal
and external experts, as well as industry practitioners
including the DiamondCluster Fellows (see Business
Development  Capture Phase), provide
intellectual capital to the Company.

Continue to Diversify Across Geographies and
Industries.We believe that
diversifying our business across various geographies and
industries will allow the company to have steady growth through
economic, business and technology cycles. We currently serve
clients across the globe through nine offices in North America,
Europe and Latin America. We serve clients in five key
industries: financial services, insurance, telecommunications,
healthcare, and the public sector. We believe that our vertical
market focus provides a scalable structure for growth. We expect
the number of vertical markets we serve, as well as the services
we offer and geographies in which we work, to change and grow as
our expertise and market demands evolve.

Market Our Brand.We
intend to continue to invest in the development and maintenance
of our brand identity in the markets we serve. We will continue
to promote our name and credentials through publications,
seminars, speaking engagements, media and analyst relations, and
other efforts. We believe that building a brand image
facilitates both the lead generation process and the ability to
attract and retain the best people by raising awareness of our
firm, resulting in an increase in the number of new clients and
recruitment opportunities.

Enhance Our Operating
Efficiency.We have a continuous focus
on cost effectiveness and efficiency. We are committed to taking
advantage of technology in the areas of human resources,
training, recruiting, marketing, and financial and operations
management.

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Our Services

DiamondCluster provides services that help
leading organizations worldwide understand and leverage
technology to reduce costs, incorporate flexibility into their
businesses, address changing regulations and markets, improve
operations, and grow their businesses. We offer clients the
range of services of a traditional information technology
service provider, with the objective, advisory role of the
traditional strategic consulting firms. We operate globally with
offices in North America, Europe and Latin America. We sell our
services to c-level executives and their senior
leadership teams.

We have a business model that we believe is
preferred by clients, and a process for creating and quickly
bringing to market new service offerings. Our business model is
collaborative and multidisciplinary, providing better value to
clients through knowledge transfer and better solutions through
our unique perspective that contemplates strategy and technology
in tandem. We believe this approach creates the most lasting and
powerful improvements for our clients.

We have a process for creating new service
offerings that identifies and tests market opportunities,
refines the service offering, then scales the service offering
to bring it to market. We are able to do this by maintaining our
consultants core skills in strategy, technology and
program management, which enables us to be more agile because we
are not dependent upon a particular economic, business or
technology cycle.



| |                  
| | -----------------
| | Service Offerings

We offer services to help leading organizations
worldwide to understand and leverage technology to realize value
in their businesses. We deliver our services through small teams
with consultants skilled in strategy, technology and program
management. Generally, our services are designed to help
companies reduce costs, incorporate flexibility into their
businesses, address changing regulations and markets, improve
operations, and grow their businesses.

We go to market by vertical industry and focus on
industries that are strategically dependent on technology. While
our core skill competencies do not change significantly over
time, our service lines and service offerings are designed to
quickly adapt to client and market needs. By continuously
leveraging research from our target markets, we continuously
examine and monitor our business and combine our core skills
into relevant service offerings.

We deliver both vertical industry-specific
services, as well as broader based horizontal services that
apply across many industries. Our vertical services are designed
to address the most pressing industry-specific issues involving
technology that are facing executives in our targeted
industries. While the skills required to deliver these services
may be the same for each vertical (i.e., strategy, technology
and program management), deep knowledge of the industry is also
required. Our horizontal services, which also address
executives most pressing issues involving technology,
require similar skills across industries and tend to have more
repeatable

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processes that can be leveraged across a number
of different clients. Below is a representative list of current
vertical (industry-specific) and horizontal (cross-industry)
services:


LOGO

Vertical
Industries Served

We currently serve clients in five vertical
industries: financial services, insurance, telecommunications,
healthcare, and the public sector. The company also has an
incubator industry it calls Enterprise that
encompasses clients in industries outside of those formally
served.

Financial Services
Practice.Our financial services
industry practice provides services to capital markets firms,
retail brokerages, credit card issuers, credit card processors
and payment system operators, and full-service retail and
commercial banks. We help these financial services clients with
the issues they face today, including the need to manage large
technology and business transformations, improve productivity
through strategic sourcing, prepare for Basel II
implementation, grow revenues by developing enterprise-wide
payment strategies and multi-channel integration strategies, and
assess various leading technologies. Representative clients in
the financial services industry have included: Federal Reserve
Bank of Chicago; Goldman, Sachs & Co.; KeyBank National
Association; MasterCard International, LLC; and Visa
International Service Association. During fiscal year 2004,
financial services clients represented 30% of net revenues.

Insurance Practice.Our insurance practice provides
services to property and casualty insurance (personal and
commercial lines), life insurance, and reinsurance providers. We
help our insurance clients to create and implement
business-aligned technology strategies to drive higher
performance, optimize data and information systems to speed
decision making, reduce costs, support product development,
increase revenue by leveraging technology to improve channel
management, and design and execute market-differentiation
customer service strategies, Representative clients in the
insurance industry have included: Allstate Insurance Company;
Standard Insurance Company; and Royal Group, Inc. During fiscal
year 2004, insurance clients represented 17% of net revenues.

Telecommunications Practice.Our telecommunications industry
practice provides services to operators, vendors and content
providers in the equipment, wireless, cable and fixed line
markets. We assist our telecommunications clients with business
and marketing strategy, customer behavior insight, profit
improvement, wireless and broadband strategy and execution,
wireless bid and launch, convergence, and IT assessment and
strategy issues. Representative telecommunications clients have
included: Belgacom Mobile N.V./ S.A.; Deutsche Telekom, AG;
France Telecom, SA; Orange France, SA; Sprint PCS; and
Telefónica Móviles SA. During fiscal year 2004,
telecommunications clients represented 32% of net revenues.

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Healthcare Practice.Our healthcare industry practice provides services to large
healthcare payers, providers, medical equipment manufacturers,
and pharmaceutical companies. We help our healthcare clients
address some of their most important business issues including
medical and administrative costs reduction, post-merger
integration, value extraction, and legacy system
rationalization. Representative healthcare clients have
included: Aetna Life Insurance Company; Connecticut General Life
Insurance Company; Excellus Health Plan, Inc.; Blue Cross Blue
Shield of Massachusetts, Inc. During fiscal year 2004,
healthcare clients represented 8% of net revenues.

Public Sector
Practice.The public sector practice
provides services to U.S. local, state and federal
governments. Issues facing this sector today include management
and accountability of technology spending, demand for agencies
to become more citizen-centric by minimizing complexity and
improving responsiveness, and homeland security. Representative
clients in the public sector have included: Chicago Transit
Authority and The Regents of the University of California. We
first began offering services to the public sector in North
America during fiscal year 2002. During fiscal year 2004, public
sector clients represented 3% of net revenues.

Enterprise.The
Enterprise practice, a North American practice, is a
cross-industry practice. Its role is to identify, incubate
and scale new vertical practices. The Enterprise practice
currently focuses on marketing and customer-facing operations
for its clients. The Enterprise practice, previously called the
retail and distribution industry practice, have included clients
such as: American Greetings Corporation; Fisher Scientific
International; Deere & Company; and Lowes
Companies, Inc. During fiscal year 2004, the Enterprise practice
clients represented 10% of net revenues.

Business Development

We primarily sell our services to
c-level executives of national and multinational
businesses. Our fees our sourced from both operating budgets as
well as information technology budgets within our clients
organizations. Our partners (the term partner is an
internal designation only and does not refer to a partner of a
general or limited partnership; all partners are vice presidents
of the Company) are assigned to a vertical practice (see
Our Services: Vertical Industries Served). Each
vertical industry practice maintains a list of target prospects
and a senior partner is assigned revenue and profit contribution
responsibility for each practice.

Our business development process is designed to
efficiently attract the Companys best prospects, leverage
the firms strong track record of project successes and
references, and then hold them in a long-term, value-added
relationship. Across the various phases of the business
development process, programs are designed to build brand
recognition, create and provide for the placement of new
intellectual capital, promote industry practices, and develop
and deepen client relationships in a focused manner. The process
has four stages  Attract, Capture, Convert and
Retain  each with different objectives and programs
within each stage specifically designed to support these
objectives.

LOGO

Attract
Phase

Programs within the Attract phase of our business
development pipeline are designed to create awareness of
DiamondCluster and its capabilities. There are a number of
programs within the Attract phase including: media relations,
speeches, books, published viewpoints, surveys, and an Internet
website for the Company. These programs are built around
specific intellectual capital within our target industries, and
are very focused on executives within our target clients and
prospects.

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Books, surveys and published viewpoints provide
intellectual capital for our business development programs.
Books published by employees or Fellows in the past include:
Unleashing the Killer App: Digital Strategies for Market
Dominance, The Seven Steps to Nirvana: Strategic Insights into
eBusiness Transformation, and E-Learning: Strategies for
Delivering Knowledge in the Digital Age. Recent surveys
conducted by the Company, or in conjunction with an academic
institution, include: The 2004 Global IT Outsourcing
Study, IT Portfolio Management: Challenges and Best
Practices, The 2002 Global IT Outsourcing
Study. Recently published viewpoints produced by the
Company include: Telecom: Turnaround Program For Fixed
Operators, The Seven Deadly Sins of Customer Value
Management, Voice Pricing in a 3G World,
Enterprise Portals: Building Value Through Organizational
Knowledge, and Unified Communications: The Time Is
Now.

Capture
Phase

Capture programs are designed to create a
relationship with interested executives, while continuing to
showcase the Companys capabilities. We build relationships
directly through our partners, as well as collaboratively with
our DiamondCluster Fellows and Client Relationship Executives
(see below).

Exchange.The
Exchange is a series of executive learning forums that we
launched in February 1997. CEOs and other senior executives
within our target vertical industries are invited to participate
in the Exchange. We provide our paid subscription members with
innovative, leading-edge research to explore and understand the
strategic risks and opportunities of emerging technologies.
Exchange members meet three times a year to discuss current
issues and research findings, and their business implications.
During these meetings, we provide the members with the
opportunity to discuss their issues with DiamondCluster Fellows,
our partners and other business leaders. In fiscal year 2004, we
conducted three Exchange programs, entitled: The Global
Marketplace for Knowhow, The No-Nonsense Guide to
Technology Management, and Seven Strategies to
Manage Customer Migration.

Industry Meetings.From time to time, the firm will host
small groups of senior-level clients and prospects to explore
topical industry issues that leverage the firms service
offerings. These settings provide a very focused and personal
setting to build relationships and showcase our knowledge.

Client Relationship Executives.Client Relationship Executives, or
CREs, provide an alternative sales channel for
DiamondCluster. Our CREs are comprised of retired executives,
executives-in-transition and professional sales executives. The
program leverages these executives senior-level contacts
within our targeted vertical industries. The program is also
designed to enhance brand awareness of our capabilities among
industry sector senior executives. CREs do not directly
sell DiamondCluster services, but facilitate introductions to
industry buyers of consulting services. Our CREs have
non-exclusive contracts with the firm and are paid on
commission-only basis. At March 31, 2004, DiamondCluster
had 39 CREs globally, the majority of which are former
CEOs, COOs and CFOs.

DiamondCluster Fellows.The DiamondCluster Fellows are a group
currently comprised of 12 recognized business and technology
leaders associated with DiamondCluster. DiamondCluster Fellows
provide us with a set of skills that augment and enhance the
value that we can provide to our clients. DiamondCluster Fellows
provide a source of intellectual capital, introduce us to
prospective clients, author and contribute to industry
publications, serve as faculty to the Exchange, and participate
in client projects. DiamondCluster Fellows are contractually
committed to dedicate a certain number of days annually to
DiamondCluster to support marketing, sales, and client work.
DiamondCluster Fellows are compensated with a combination of
equity and per diem payments for services provided to us, or to
our clients, on our behalf.

As of March 31, 2004, DiamondCluster Fellows
include:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Vincent Barabbais the recently retired General
    Manager of Corporate Strategy and Knowledge Development of the
    General Motors Corporation. Mr. Barabba twice served as
    Director of the United States Bureau of the Census. He has
    served as U.S. Representative to the Population Commission
    of the United Nations. Mr. Barabba is the author of
    Meeting of the Minds, and co-author of Hearing the
    Voice of the Market and Decision Making Amid Turbulence, the
    Story of the 1980 Census.

9



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | John Perry Barlowis a writer and lecturer on the
    social, legal and economic issues arising on the border between
    the physical and virtual worlds. He is a contributing writer for
    Wiredmagazine and co-founder and Vice Chairman of the
    Electronic Frontier Foundation, an organization that promotes
    freedom of expression in digital media.                                                                                                                                                                                                                                                                   
|
| | Gordon Bellis a Senior Researcher with
    Microsoft Corporation and computer consultant-at-large.
    Mr. Bell spent 23 years at Digital Equipment Corp. as
    Vice President of Research and Development where he managed the
    development of the first time-sharing and mini-computers. He
    also led the development of Digital Equipments VAX.
    Additionally, Mr. Bell directed the National Science
    Foundations efforts in computing research.                                                                                                                                                                 
|
| | Dan Bricklinis Chief Technology Officer of
    Interland, Inc. the largest Web hosting and online services
    company dedicated to helping small and medium businesses achieve
    success by providing the knowledge, services and tools to build,
    manage and promote businesses. Mr. Bricklin is best known
    for co-developing VisiCalc, the first electronic spreadsheet,
    while he was a student at the Harvard Business School. VisiCalc
    is widely credited for fueling the rapid growth of the personal
    computer industry.                                                                                 
|
| | George Dayis
    a Geoffrey T. Boisi Professor, Professor of Marketing, and
    Director of the Mack Center for the Management of Technological
    Innovation at the Wharton School of the University of
    Pennsylvania. Mr. Day was previously the Executive Director
    of the Marketing Science Institute and has authored 14 books and
    125 articles in the areas of marketing, strategy development,
    organization change, and competitive strategies. His most recent
    books are Wharton on Managing Emerging Technologies(John
    Wiley & Sons, 2000) and The Market-Driven
    Organization(Free Press, 1999).
|
| | Steve Hindmanis Founder and Principal of
    SPHindman, LLC, a consulting firm. He has spent the past three
    decades devising strategies for start-up business, companies in
    difficult business situations, and those that need significant
    improvement in sales and profit growth. Previously he led the
    turnaround of a software start-up, launched his own software
    company, and worked as a consultant for McKinsey & Co.,
    a general manager in Boise Cascades housing division, and
    as a president of a small manufacturing concern.                                                               
|
| | Andrew
    Lippman, Ph.D.is an
    Associate Director and founding member of the Media Lab at the
    Massachusetts Institute of Technology. Mr. Lippman is the
    principal investigator of the Digital Life research program, a
    consortium of 45 companies and 15 faculties that
    researches the technical, social, and economic aspects of
    computing in everyday life. He has published widely and made
    over 100 presentations on digital entertainment, personal
    communications, and making the information highway entertaining
    and profitable.                                                        
|
| | Chunka Muiis
    a writer and consultant on business issues at the intersection
    of strategy and technology. Mr. Mui also chairs
    DiamondClusters Diamond Fellows advisory group.
    Mr. Mui is perhaps best known as the co-author of the best
    selling Unleashing the Killer App, which the New York
    Timescalled a practical and persuasive guide to
    the dramatic changes being wrought by technology. Mr. Mui
    was a Partner with DiamondCluster from 1996 to 2003.                                                                                                                                      
|
| | B. Joseph Pine IIis co-founder of Strategic
    Horizons LLP. Mr. Pine is co-author of The Experience
    Economy: Work is Theatre and Every Business a Stage(Harvard
    Business School Press, 1999). His earlier publication, Mass
    Customization: The New Frontier in Business Competition(Harvard Business School Press, 1993), received the 1995
    Shingo Prize for Excellence in Manufacturing Research.                                                                                                                                                                                                                
|
| | David P.
    Reed, Ph.D.is an information
    architect and independent entrepreneur who focuses on designing
    the information space in which people, groups and organizations
    operate. He was a senior scientist at Interval Research Corp.,
    Vice President and Chief Scientist for Lotus Development Corp.,
    and Vice President of Research and Development and Chief
    Scientist at Software Arts Inc.                                                                                                                                                                                                           
|
| | James Spirais former President and Chief
    Operating Officer of American Greetings Corporation. He
    co-founded Cleveland Consulting Associates in 1974 (which was
    acquired by Computer Science                                                                                                                                                                                                                                                                                                                                                                                                                             

10



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##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Corp. in 1989) after spending several years with
    Ernst & Young and A.T. Kearney. Jim was a Partner
    with DiamondCluster from 1995 to 1999.                                                                                                                                                                                         
|
| | Marvin
    Zonis, Ph.D.is a Professor
    of International Political Economy and Leadership at the
    University of Chicago Graduate School of Business. He is an
    expert and consultant on political risk and emerging markets,
    Mideast politics, the oil industry, and the foreign policies of
    Russia and the United States.



| |              
| | -------------
| | Convert Phase

Programs within this phase are designed to
convert target prospects into client relationships. The programs
in the Convert phase support our partners during the process of
identifying and discussing potential engagements, negotiating
the terms of engagements, and directing the staffing and
execution of consulting projects.

DiamondCluster Knowledge
Center.The DiamondCluster Knowledge
Center provides project teams with access to both internal and
external research and expertise on a variety of industry,
technology, economic and business topics on a global basis. The
Knowledge Center is also responsible for converting existing
project work into repeatable frameworks that can be leveraged
for future projects.

Intellectual Capital
Alliances.In an increasingly complex
business environment, intellectual capital alliances are
essential to delivering high-impact, innovative technology
solutions. Our Intellectual Capital Alliance program is designed
to provide DiamondClusters professionals and clients with
early access to market-leading hardware and software, as well as
to provide specialized services and training. DiamondCluster
builds strong relationships with selected companies to build its
intellectual capital and deliver the best solutions for its
clients with lower implementation risk and accelerated
speed-to-market.

Our Intellectual Capital Alliance program has two
components  Strategic Alliances and Network
Alliances. Strategic Alliance companies work with us to develop
industry points-of-view and white papers, co-sponsor
conferences, develop unified professional development programs
and pursue joint business opportunities. Network alliances are
designed to address solutions that are currently relevant to our
clients by supplying best of breed technologies and services.

All of our intellectual capital alliances are
non-exclusive agreements designed to deliver benefits to both
organizations through knowledge sharing and joint marketing.
DiamondCluster does not recognize revenue for work performed by
any alliance company, and there are no fees associated with
joining the Intellectual Capital Alliance program.

Key Network Alliance companies include
Embarcadero, Enamics, Hewlett-Packard, Intel, Oracle, and
Softwired. As of March 31, 2004, there were three companies
in our Strategic Alliance program:

|                           |  |                                                                                                                                                                                                                             
|-------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Strategic Alliance Company |  | Description                                                                                                                                                                                                                 
|                           |  |                                                                                                                                                                                                                             
|IBM                        |  | IBM strives to lead in the creation, development
    and manufacture of the industrys most advanced information
    technologies, including computer systems, networking systems,
    storage devices and microelectronics.
|Microsoft                  |  | Microsoft is the worldwide leader in software,
    services and Internet technologies for personal and business
    computing.                                                                                              
|Sun Microsystems           |  | Sun Microsystems is a leading provider of
    industrial-strength hardware, software and services that power
    the Internet.                                                                                              

Center for Technology
Innovation.The Center for Technology
Innovation, based in Chicago, serves as the proving ground for
our ideas. DiamondCluster professionals work with our Fellows
and other knowledge leaders to support and enable inventive
client work, and build our intellectual capital around emerging
technologies. A series of technology frameworks and tools are
developed and maintained at the Center for Technology
Innovation. These tools are designed to accelerate the delivery
of solutions through proven

11



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##### Table of Contents



processes, reusable templates, guides, and
technical papers. Our various strategic alliance companies
provide the hardware and software in the Center for Technology
Innovation.


Retain
Phase

Programs in the Retain phase are designed to help
our partners maintain ongoing relationships and offer former
clients ongoing value while allowing the Company to identify
opportunities for additional work.

Exchange.A
proactive effort is made to ensure that clients that are not in
an active consulting engagement continue to participate in the
Exchange, ensuring that the Company keeps them in a value-added
relationship.

Ongoing Communications.Past clients are kept on a list to
receive relevant intellectual capital from the Company,
including survey results, viewpoints, and reprints of relevant
articles.

Employees and Culture

Employees.As of
March 31, 2004, we had 652 employees. Of these
employees, 481 were client-serving professionals and
171 were management and administrative personnel comprising
intellectual capital development, marketing, human resources,
finance, accounting, legal, internal information systems, and
administrative support. The responsibilities of our partners
include client relationship development, business development,
client management, program management, thought leadership,
professional staff development, and mentoring. Our partners
typically have ten to twenty years or more of experience.

Culture.We believe
our ability to provide effective multidisciplinary teams is
dependent upon our ability to develop and sustain a business
culture that is common across all disciplines and vertical
industries in the organization. DiamondClusters employees
are talented and energetic professionals that come from a
multitude of professional backgrounds. DiamondCluster believes
that this fosters an exciting and diverse work environment.
Three primary elements comprise our culture:



| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | an environment that intellectually challenges our
    personnel through continuous training and innovative and
    high-impact client work;
|
| |  | consistent compensation and career paths across
    all disciplines and skill sets within DiamondCluster; and                              
|
| |  | participation by all of our employees in our
    continuing development and ownership of DiamondCluster.                                   

Recruiting.We
believe our long-term success will depend on our ability to
continue to attract, retain and motivate highly skilled
employees. We attribute our success in hiring these people to
our ability to provide individuals with high impact client
opportunities, multidisciplinary training and career
development, attractive long-term career advancement
opportunities, small teams and a collaborative approach to
consulting, and competitive compensation.

Although a number of our current employees were
hired directly from other firms, our long-term strategy is to
hire professionals annually from the leading undergraduate and
graduate business and technology programs at reputable
universities. Over time, we expect senior-level positions will
be predominantly filled from internal promotions.

Training and Professional
Development.Our training and
professional development programs help us to deliver
high-quality services to our clients, as well as to attract and
retain highly skilled professionals. We have developed programs
that ensure all individuals have the opportunity to develop
consulting, business and technology skills throughout their
careers. Leveraging our innovation programs, our professional
development programs reinforce our culture by exposing all
professionals to the various services we provide while further
developing deep skills in each professionals principal
area of expertise.

Compensation.Our
compensation programs have been structured to attract and retain
highly skilled professionals by offering competitive base
salaries coupled with annual cash bonus and equity-based
incentive

12



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##### Table of Contents



opportunities. We use equity-based instruments at
all levels within DiamondCluster to provide long-term wealth
creation opportunities and to retain individuals through
multi-year, long-term vesting provisions. We believe that
offering equity-based compensation packages will be more
successful in attracting and retaining talented individuals.


Our partners are eligible to receive an annual
bonus comprised of cash and equity commensurate with their level
of responsibility and based on our overall performance. Our
partners are granted equity upon being elected a partner. Equity
that we issue to partners typically vests ratably over five
years. Individuals below the partner level are awarded annual
bonuses comprised of cash and equity based on their performance
and the Companys overall performance. Our non-partners are
granted equity at the time of hire, which typically vests
ratably over four years.

Competition

We operate in a competitive and rapidly changing
global market and compete with a variety of organizations that
offer services similar to those that we offer. Our clients
generally retain us on a non-exclusive basis. We compete with a
number of different types of businesses, including:

Traditional management and strategy consulting
firmsthat focus on advising
managements on high-level corporate strategy. Many of the
traditional strategic consulting firms have recently added
services in information technology.

Systems integration and IT consulting firmsthat design and implement technology
solutions, including software installation, for departments and
enterprises. These firms have recently grown in size and scope
of services.

Information technology product and service
vendorsthat offer technical
consulting to support their own products. Many of these firms
have also developed various alliances with systems integration
and IT consulting firms to augment their own capabilities.

In addition, we also compete with the internal
strategy or technology departments of a client, as they may
choose to conduct the work internally.

Many of our competitors are substantially larger
than us and have significantly greater financial, technical and
marketing resources, greater name recognition and greater
revenues. Furthermore, we face the challenge of competing for
and retaining the best personnel available in the business
services market. Mergers or consolidations in our market may
create new, larger or better-capitalized competitors with
enhanced abilities to attract and retain professionals.

We believe that the principal criteria considered
by prospective clients when selecting a consulting firm include
skills and capabilities of consultants, scope of services,
service model approach, global presence, technical and industry
expertise, reputation and quality of past work, perceived value
and a results orientation.

We believe we are well positioned against these
competitors. Furthermore, we believe the current structural
changes in the consulting industry (see Industry
Background and Opportunity) increases the value to senior
management of an objective advisor with deep expertise in
strategy, operations and technology, including implementation.

13



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##### Table of Contents



Executive Officers of the Registrant

At present, our executive officers are as follows:

|                     |  |     |    |  |          |                                                                          
|-------------------- |  | --- | -- |  | -------- | -------------------------------------------------------------------------
|Name                 |  | Age |    |  | Position
|                     |  |     |    |  |         
|Melvyn E. Bergstein  |  |     | 62 |  |          | Chairman of the Board of Directors and Chief
    Executive Officer       
|Karl E. Bupp         |  |     | 42 |  |          | Chief Financial Officer and Treasurer                                    
|Adam J. Gutstein     |  |     | 41 |  |          | President, Managing Director  Europe
    and Latin America, and Director
|William R. McClayton |  |     | 59 |  |          | Chief Administrative Officer                                             
|Jay D. Norman        |  |     | 47 |  |          | Managing Director  North America                                        
|John J. Sviokla      |  |     | 46 |  |          | Vice Chairman and Director                                               

Melvyn E. Bergsteinco-founded Diamond Technology
Partners, Inc. (Diamond) in January 1994 and has
served as our Chairman and Chief Executive Officer since that
time. Mr. Bergstein has been a member of our board of
directors since January 1994. Prior to co-founding Diamond,
Mr. Bergstein held several senior executive positions with
Technology Solutions Company from 1991 to 1993. Prior to that
time, Mr. Bergstein held several senior positions with
other consulting firms, including twenty-one years in various
positions with Andersen Consulting, now Accenture.

Karl E. Buppco-founded Diamond and joined us
in April 1994 as Vice President of Financial Planning
responsible for our internal planning, analysis and treasury
functions. Since July 1998, Mr. Bupp has served as our
Chief Financial Officer and Treasurer. Prior to joining us,
Mr. Bupp was the Corporate Controller, and Director of
Planning and Treasury Services for Technology Solutions Company.
From 1985 to 1993, he held various financial management and
analyst positions with MCI Telecommunications Corporation.

Adam J. Gutsteinco-founded Diamond in January 1994
and became President in June 2004. He has served as director of
the Company since August of 1999. From July 1998 to April 2000,
Mr. Gutstein served as Chief Operating Officer responsible
for the client-serving operations including sales and delivery
of our services, revenue and profit contribution. From May 2000
through October 2000, Mr. Gutstein led our corporate
development efforts resulting in the successful acquisition of
Cluster Consulting in late 2000. From November 2000 through July
2003, Mr. Gutstein assumed the title of President, North
America, and in July 2003 became Managing Director of Europe and
Latin America. Prior to joining us, Mr. Gutstein was a Vice
President at Technology Solutions Company and a Manager with
Andersen Consulting, now Accenture.

William R. McClaytonjoined the Company in April 2001
as a Partner and Senior Vice President of Finance and
Administration responsible for finance, planning, legal, human
resources, investor relations, information technology, marketing
and facilities worldwide. Prior to joining DiamondCluster,
Mr. McClayton was a partner of Arthur Andersen LLP. During
his 35-year career at Arthur Andersen, Mr. McClayton served
public and privately held audit clients, and led the firms
Chicago-based global financial markets practice for ten years.

Jay D. Normanjoined the Company in January 2003
as Partner responsible for the financial services and insurance
practice area. In June 2004, he became Managing Director of
North America, responsible for responsible for the sales and
delivery of our North American services, revenue and profit
contribution. Prior to joining the Company, Mr. Norman was
a Partner at PricewaterhouseCoopers, leading their financial
services global e-business practice. His experience also
includes positions with McKinsey and Company, Inc. and Accenture.

John J. Svioklajoined the Company in September
1998 as a Partner and Vice President and became a member of our
board of directors in August 1999. Since April 1, 2000,
Dr. Sviokla has served as Vice Chairman. Prior to joining
us, Dr. Sviokla was a professor at the Harvard Business
School from October 1986 to August 1998. His pioneering work on
Marketspaceestablished Harvards first course on
electronic commerce, and he co-authored the seminal articles
Managing in the Marketspaceand Exploiting the Virtual
Value Chain,both appearing in the Harvard Business Review.
Dr. Sviokla has authored over 90 articles and

14



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##### Table of Contents



cases, has edited books, and has been a
consultant to large and small companies around the world. He has
been a guest professor at many universities including Kellogg,
MIT, The London Business School, the Melbourne Business School
and the Hong Kong Institute of Science and Technology.







|        |           
|------- | ----------
|Item 2. | Properties

Our international headquarters and principal
administrative, information systems, financial, accounting,
marketing, legal and human resources operations are located in
leased office space in Chicago, Illinois.

European and Latin American operations are based
in leased offices in Barcelona and Madrid, Spain;
Düsseldorf and Münich, Germany; Lisbon, Portugal;
London, UK; Paris, France; and São Paulo, Brazil.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

We are not party to any claims or actions that we
believe could have a material adverse effect on our results of
operations or financial position.






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

No matter was submitted to a vote of security
holders, through the solicitation of proxies or otherwise,
during the fourth quarter of fiscal 2004.

15



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##### Table of Contents






PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

The Common Stock is quoted on the Nasdaq National
Market under the symbol DTPI. The following table
sets forth for the periods indicated the high and low intraday
sales prices for our Common Stock.

|                                  |                |                 |   |       |     |  |   |      | 
|--------------------------------- | -------------- | --------------- | - | ----- | --- |  | - | ---- | 
|                                  |                |                
|                                  |                | Sales Price Per |  
|                                  |                | Share           |  
|                                  |                |                 |  
|                                  |                | High            |   |       | Low | 
|                                  |                |                 |   |       |     | 
|Fiscal year ended March 31, 2003: |                |                 |   |       |     |  |   |     
|                                  | First Quarter  |                 | $ | 13.65 |     |  | $ | 4.66 | 
|                                  | Second Quarter |                 |   | 5.97  |     |  |   | 2.01 | 
|                                  | Third Quarter  |                 |   | 3.84  |     |  |   | 2.25 | 
|                                  | Fourth Quarter |                 | $ | 3.40  |     |  | $ | 1.40 | 
|Fiscal year ended March 31, 2004: |                |                 |   |       |     |  |   |     
|                                  | First Quarter  |                 | $ | 3.89  |     |  | $ | 1.38 | 
|                                  | Second Quarter |                 |   | 7.38  |     |  |   | 3.50 | 
|                                  | Third Quarter  |                 |   | 10.46 |     |  |   | 6.56 | 
|                                  | Fourth Quarter |                 | $ | 12.00 |     |  | $ | 7.98 | 

On June 1, 2004, the closing price of Common
Stock was $9.63 per share. At such date, we had
approximately 7,000 holders of record of Common Stock.

Holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board
of Directors out of funds legally available therefore, subject
to any preferential dividend rights of outstanding Preferred
Stock, if any. To date, we have not paid any cash dividends on
our Common Stock and do not expect to declare or pay any cash or
other dividends in the foreseeable future. Our financing
arrangements currently do not prohibit us from declaring or
paying dividends or making other distributions on the Common
Stock.

The Companys Board of Directors authorized
the repurchase of up to six million shares of
DiamondClusters Common Stock as part of an existing stock
repurchase program, with one million shares authorized on
October 16, 1998, two million shares authorized on
March 1, 2001, and three million shares authorized on
June 24, 2002 for repurchase. During the fourth quarter of
2004, we repurchased 0.4 million shares of the
Companys Common Stock at an average price per share of
$10.32 in the following months:

|                                         |  |                                       |         |                        |                |   |                          |                          |  |  |                           |  |  |  |           | 
|---------------------------------------- |  | ------------------------------------- | ------- | ---------------------- | -------------- | - | ------------------------ | ------------------------ |  |  | ------------------------- |  |  |  | --------- | 
|                                         |  |                                      
|                                         |  | Issuer Purchases of Equity Securities |        
|                                         |  |                                       |        
|                                         |  |                                       |         | Total Number of Shares |                |   | Maximum Number of Shares |                         
|                                         |  | Total Number                          |         |                        | Average Price  |   |                          | Purchased as Part of     |  |  | That May Yet be Purchased | 
|Period                                   |  | of Shares Purchased                   |         |                        | Paid per Share |   |                          | Publicly Announced Plans |  |  | Under the Plan            | 
|                                         |  |                                       |         |                        |                |   |                          |                          |  |  |                           | 
|January 1, 2004  January 31,
    2004   |  |                                       |        |                        |                |   | $                       |                          |  |  |                          |  |  |  | 2,076,526 | 
|February 1, 2004 
    February 29, 2004 |  |                                       | 362,500 |                        |                | $ | 10.39                    |                          |  |  | 362,500                   |  |  |  | 1,714,026 | 
|March 1, 2004  March 31, 2004           |  |                                       | 50,000  |                        |                | $ | 9.80                     |                          |  |  | 50,000                    |  |  |  | 1,664,026 | 

16



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##### Table of Contents








|        |                                         
|------- | ----------------------------------------
|Item 6. | Selected Consolidated Financial
    Data

The selected consolidated financial data
presented below has been derived from our consolidated financial
statements. The data presented below should be read in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations, the
Consolidated Financial Statements and the notes thereto and
other financial information appearing elsewhere in this Annual
Report on Form 10-K.

|                                                                                       |                                                                                       |                                                  |        |         |         |   |         |         |         |   |          |         |         |      |          |         |         |   |        |         |         | 
|-------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------------ | ------ | ------- | ------- | - | ------- | ------- | ------- | - | -------- | ------- | ------- | ---- | -------- | ------- | ------- | - | ------ | ------- | ------- | 
|                                                                                       |                                                                                       |                                                 
|                                                                                       |                                                                                       | Year Ended March 31,                             |       
|                                                                                       |                                                                                       |                                                  |       
|                                                                                       |                                                                                       | 2000                                             |        |         | 2001    |   |         | 2002    |         |   | 2003     |         |         | 2004 |         
|                                                                                       |                                                                                       |                                                  |        |         |         |   |         |         |         |   |          |         |         |      |         
|                                                                                       |                                                                                       |                                                 
|                                                                                       |                                                                                       | (Amounts in thousands, except per share amounts) |       
|Statement of Operations Data(1):                                                       |                                                                                       |                                                  |        |         |         |   |         |         |         |   |          |         |         |      |          |         |         |   |        |        
|Revenue:                                                                               |                                                                                       |                                                  |        |         |         |   |         |         |         |   |          |         |         |      |          |         |         |   |        |        
|                                                                                       | Revenue before out-of-pocket expense
    reimbursements (net revenue)                 |                                                  | $      | 139,627 |         |   | $       | 266,536 |         |   | $        | 181,215 |         |      | $        | 132,974 |         |   | $      | 154,785 |        
|                                                                                       | Out-of-pocket expense reimbursements                                                  |                                                  |        | 28,379  |         |   |         | 40,864  |         |   |          | 21,745  |         |      |          | 19,331  |         |   |        | 22,329  |        
|                                                                                       |                                                                                       |                                                  |        |         |         |   |         |         |         |   |          |         |         |      |         
|                                                                                       |                                                                                       | Total revenue                                    |        |         | 168,006 |   |         |         | 307,400 |   |          |         | 202,960 |      |          |         | 152,305 |   |        |         | 177,114 | 
|                                                                                       |                                                                                       |                                                  |        |         |         |   |         |         |         |   |          |         |         |      |         
|Operating expenses:                                                                    |                                                                                       |                                                  |        |         |         |   |         |         |         |   |          |         |         |      |          |         |         |   |        |        
|                                                                                       | Project personnel and related expenses before
    out-of-pocket reimbursable expenses |                                                  |        | 75,747  |         |   |         | 141,980 |         |   |          | 132,627 |         |      |          | 109,085 |         |   |        | 102,429 |        
|                                                                                       | Out-of-pocket reimbursable expenses                                                   |                                                  |        | 28,379  |         |   |         | 40,864  |         |   |          | 21,745  |         |      |          | 19,331  |         |   |        | 22,329  |        
|                                                                                       |                                                                                       |                                                  |        |         |         |   |         |         |         |   |          |         |         |      |         
|                                                                                       |                                                                                       | Total project personnel and related expenses     |        |         | 104,126 |   |         |         | 182,844 |   |          |         | 154,372 |      |          |         | 128,416 |   |        |         | 124,758 | 
|                                                                                       | Professional development and recruiting                                               |                                                  |        | 13,199  |         |   |         | 26,673  |         |   |          | 10,834  |         |      |          | 4,134   |         |   |        | 4,288   |        
|                                                                                       | Marketing and sales                                                                   |                                                  |        | 7,325   |         |   |         | 13,431  |         |   |          | 7,136   |         |      |          | 3,865   |         |   |        | 2,836   |        
|                                                                                       | Management and administrative support                                                 |                                                  |        | 18,260  |         |   |         | 41,989  |         |   |          | 46,794  |         |      |          | 37,363  |         |   |        | 34,359  |        
|                                                                                       | Goodwill amortization                                                                 |                                                  |        | 493     |         |   |         | 21,928  |         |   |          | 61,850  |         |      |          |        |         |   |        |        |        
|                                                                                       | Noncash compensation                                                                  |                                                  |        |        |         |   |         | 18,187  |         |   |          | 52,305  |         |      |          | 53,078  |         |   |        | 12,692  |        
|                                                                                       | Restructuring charges                                                                 |                                                  |        |        |         |   |         |        |         |   |          | 15,542  |         |      |          | 29,266  |         |   |        | 3,975   |        
|                                                                                       | Impairment charge on long lived assets                                                |                                                  |        |        |         |   |         |        |         |   |          |        |         |      |          | 94,315  |         |   |        |        |        
|                                                                                       |                                                                                       |                                                  |        |         |         |   |         |         |         |   |          |         |         |      |         
|                                                                                       |                                                                                       | Total operating expenses                         |        |         | 143,403 |   |         |         | 305,052 |   |          |         | 348,833 |      |          |         | 350,437 |   |        |         | 182,908 | 
|                                                                                       |                                                                                       |                                                  |        |         |         |   |         |         |         |   |          |         |         |      |         
|Income (loss) from operations                                                          |                                                                                       |                                                  | 24,603 |         |         |   | 2,348   |         |         |   | (145,873 | )       |         |      | (198,132 | )       |         |   | (5,794 | )      
|                                                                                       |                                                                                       |                                                  |        |         |         |   |         |         |         |   |          |         |         |      |         
|                                                                                       | Interest income, net                                                                  |                                                  |        | 2,002   |         |   |         | 11,999  |         |   |          | 4,138   |         |      |          | 2,586   |         |   |        | 1,062   |        
|                                                                                       | Other expense                                                                         |                                                  |        |        |         |   |         | (8,714  | )       |   |          | (2,985  | )       |      |          | (2,442  | )       |   |        | (25     | )      
|                                                                                       |                                                                                       |                                                  |        |         |         |   |         |         |         |   |          |         |         |      |         
|                                                                                       |                                                                                       | Total other income, net                          |        |         | 2,002   |   |         |         | 3,285   |   |          |         | 1,153   |      |          |         | 144     |   |        |         | 1,037   | 
|                                                                                       |                                                                                       |                                                  |        |         |         |   |         |         |         |   |          |         |         |      |         
|Income (loss) before taxes and cumulative effect
    of change in accounting principle |                                                                                       |                                                  | 26,605 |         |         |   | 5,633   |         |         |   | (144,720 | )       |         |      | (197,988 | )       |         |   | (4,757 | )      
|Income tax expense (benefit)                                                           |                                                                                       |                                                  | 10,377 |         |         |   | 18,500  |         |         |   | (11,048  | )       |         |      | 21,209   |         |         |   | 654    |        
|                                                                                       |                                                                                       |                                                  |        |         |         |   |         |         |         |   |          |         |         |      |         
|Income (loss) before cumulative effect of change
    in accounting principle           |                                                                                       |                                                  | 16,228 |         |         |   | (12,867 | )       |         |   | (133,672 | )       |         |      | (219,197 | )       |         |   | (5,411 | )      
|Cumulative effect of change in accounting
    principle, net of income tax benefit     |                                                                                       |                                                  |       |         |         |   |        |         |         |   |         |         |         |      | (140,864 | )       |         |   |       |        
|                                                                                       |                                                                                       |                                                  |        |         |         |   |         |         |         |   |          |         |         |      |         
|Net income (loss)                                                                      |                                                                                       | $                                                | 16,228 |         |         | $ | (12,867 | )       |         | $ | (133,672 | )       |         | $    | (360,061 | )       |         | $ | (5,411 | )      
|                                                                                       |                                                                                       |                                                  |        |         |         |   |         |         |         |   |          |         |         |      |         
|Basic net income (loss) per share of common
    stock(2),(3)                           |                                                                                       | $                                                | 0.78   |         |         | $ | (0.49   | )       |         | $ | (4.34    | )       |         | $    | (11.41   | )       |         | $ | (0.17  | )      
|Diluted net income (loss) per share of common
    stock(2),(3)                         |                                                                                       | $                                                | 0.62   |         |         | $ | (0.49   | )       |         | $ | (4.34    | )       |         | $    | (11.41   | )       |         | $ | (0.17  | )      
|Shares used in computing basic net income (loss)
    per share of common stock(2)      |                                                                                       |                                                  | 20,807 |         |         |   | 26,448  |         |         |   | 30,813   |         |         |      | 31,548   |         |         |   | 32,710 |        
|Shares used in computing diluted net income
    (loss) per share of common stock(2)    |                                                                                       |                                                  | 25,984 |         |         |   | 26,448  |         |         |   | 30,813   |         |         |      | 31,548   |         |         |   | 32,710 |        

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|                    |                                           |                        |   |         |      |  |   |         |  |  |      |         |  |      |   |         |  |  |   |         | 
|------------------- | ----------------------------------------- | ---------------------- | - | ------- | ---- |  | - | ------- |  |  | ---- | ------- |  | ---- | - | ------- |  |  | - | ------- | 
|                    |                                           |                       
|                    |                                           | March 31,              |  
|                    |                                           |                        |  
|                    |                                           | 2000                   |   |         | 2001 |  |   | 2002    |  |  | 2003 |         |  | 2004 |  
|                    |                                           |                        |   |         |      |  |   |         |  |  |      |         |  |      |  
|                    |                                           |                       
|                    |                                           | (Dollars in thousands) |  
|Balance Sheet Data: |                                           |                        |   |         |      |  |   |         |  |  |      |         |  |      |   |         |  |  |   |        
|                    | Cash and cash equivalents                 |                        | $ | 182,945 |      |  | $ | 151,358 |  |  | $    | 96,773  |  |      | $ | 75,328  |  |  | $ | 81,304  | 
|                    | Working capital                           |                        |   | 183,967 |      |  |   | 132,501 |  |  |      | 103,564 |  |      |   | 67,326  |  |  |   | 79,585  | 
|                    | Total assets                              |                        |   | 249,410 |      |  |   | 522,256 |  |  |      | 401,176 |  |      |   | 109,491 |  |  |   | 122,667 | 
|                    | Long-term debt, including current portion |                        |   | 1,000   |      |  |   | 500     |  |  |      |        |  |      |   |        |  |  |   |        | 
|                    | Total stockholders equity(4)             |                        | $ | 218,318 |      |  | $ | 452,367 |  |  | $    | 375,098 |  |      | $ | 72,377  |  |  | $ | 80,787  | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On April 1, 2002, we adopted Statement of
    Financial Accounting Standards No. 142, Goodwill and
    Other Intangible Assets, and ceased amortizing goodwill.
    During the years ended March 31, 2002, 2001 and 2000, our
    operating results included $61.9 million,
    $21.9 million and $0.5 million, respectively, of
    goodwill amortization. In addition, certain amounts in
    previously issued financial statements have been reclassified to
    conform to the current year presentation. The reclassifications
    had no effect on the reported net income (loss).
|   
|(2) | See Note 2 of Notes to Consolidated
    Financial Statements for an explanation of the methods
    used to compute basic and diluted earnings (loss) per share data.                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(3) | In fiscal year 2003, the basic and diluted net
    loss per share of common stock included a net loss of $(4.47)
    per share due to the cumulative effect of change in accounting
    principle.                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(4) | We have never declared or paid cash dividends.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following information should be read in
conjunction with the information contained in the consolidated
financial statements and related notes included elsewhere in
this annual report.

Overview

We are a premier global management consulting
firm. We help leading organizations worldwide to understand and
leverage technology to reduce costs, incorporate flexibility
into their businesses, address changing regulations and markets,
improve operations, and grow their business. We work
collaboratively with our clients, utilizing small,
multidisciplinary teams of consultants because we believe the
most lasting and significant improvements occur when the client
is integrally involved in the change. During the fiscal year
ended March 31, 2004 we generated net revenue (before
reimbursements of out-of-pocket expenses) of $154.8 million
from 110 clients. At March 31, 2004, we employed 481
consultants and had nine offices in North America, Europe and
Latin America, which included Barcelona, Chicago,
Düsseldorf, Lisbon, London, Madrid, Münich, Paris, and
São Paulo.

Our revenue is driven by our ability to secure
new client engagements, maintain existing client engagements and
develop and implement solutions that add value to our clients.
Our revenue is comprised of professional fees for services
rendered to our clients plus reimbursement of out-of-pocket
expenses. Prior to the commencement of a client engagement, we
and our client agree on fees for services based upon the scope
of the project, our staffing requirements and the level of
client involvement. We recognize revenue as services are
performed in accordance with the terms of the client engagement
agreement. We bill our clients for these services on either a
monthly or semi-monthly basis in accordance with the terms of
the client engagement. Accordingly, we recognize amounts due
from our clients as the related services are rendered and
revenue is earned even though we may not be able to bill for
those services until a later date. Provisions are made based on
our experience for estimated uncollectible amounts. These
provisions, net of write-offs of accounts receivable, are
reflected in the allowance for doubtful accounts. We also set
aside a portion of the revenue from each client engagement to
cover the estimated costs that are likely to be incurred
subsequent to targeted project completion. This portion of the
project revenue is reflected in deferred revenue and is
calculated based on our historical experience. While we have
been required to make revisions to our clients estimated

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deliverables and to incur additional project
costs in some instances, to date there have been no such
revisions that have had a material adverse effect on our
operating results.


We generate revenue in many different countries
throughout the world and our revenues are denominated in
multiple currencies, including the U.S. dollar, the euro,
the British pound sterling and the Brazilian real. As such, our
revenues and expenses may be significantly impacted by
fluctuations in foreign currency exchange rates. The
strengthening of foreign currencies relative to the
U.S. dollar over the last several quarters has had a
favorable foreign currency translation impact on our
consolidated financial statements and increased our revenues.
For the fiscal year ended March 31, 2004, our net revenue
was $154.8 million, an increase of $21.8 million, or
16.4%, compared with the same period in the prior year. Assuming
constant foreign currency translation rates, net revenue for the
fiscal year ended March 31, 2004 would have increased
$12.4 million or 9%.

Our ability to generate revenue is affected by
the level of business activity of our clients, which in turn is
affected by the level of economic activity in the industries and
markets that they serve. A decline in the level of business
activity of our clients could have a material adverse effect on
our revenue and profit margin. During the two year period ending
in late fiscal 2003, our business had been negatively impacted
by weakened economic conditions, which had caused some clients
to reduce or defer their expenditures for consulting services.
We have implemented and will continue to implement cost-savings
initiatives to manage our expenses as a percentage of revenue as
appropriate.

The largest portion of our operating expenses
consists of project personnel and related expenses. Project
personnel expenses consist of payroll costs, variable
compensation, and related benefits associated with professional
staff. Other related expenses include travel, subcontracting,
third-party vendor payments and non-billable costs associated
with the delivery of services to our clients. We consider the
relationship between project personnel expenses and net revenue
to be an important measure of our operating performance. The
relationship between project personnel expenses and net revenue
is driven largely by the chargeability of our consultant base,
the prices we charge to our clients and the non-billable costs
associated with securing new client engagements and developing
new service offerings. The remainder of our recurring operating
expenses are comprised of expenses associated with the
development of our business and the support of our
client-serving professionals, such as professional development
and recruiting, marketing and sales, and management and
administrative support. Professional development and recruiting
expenses consist primarily of recruiting and training content
development and delivery costs. Marketing and sales expenses
consist primarily of the costs associated with the development
and maintenance of our marketing materials and programs.
Management and administrative support expenses consist primarily
of the costs associated with operations including finance,
information systems, human resources, facilities (including the
rent of office space), and other administrative support for
project personnel. As with revenues, the strengthening of
foreign currencies relative to the U.S. dollar over the
last several quarters has increased our expenses. The increase
of both revenues and expenses created as a result of foreign
currency translation results in an immaterial impact on net
income.

We regularly review our fees for services,
professional compensation and overhead costs to ensure that our
services and compensation are competitive within the industry,
and that our overhead costs are balanced with our revenue level.
In addition, we monitor the progress of client projects with
client senior management. We manage the activities of our
professionals by closely monitoring engagement schedules and
staffing requirements for new engagements. However, a rapid
decline in the demand for the professional services that we
provide could result in lower utilization of our professionals
than we planned. In addition, because most of our client
engagements are terminable by our clients without penalty, an
unanticipated termination of a client project could require us
to maintain underutilized employees. While professional staff
levels must be adjusted to reflect active engagements, we must
also maintain a sufficient number of senior professionals to
oversee existing client engagements and participate in our sales
efforts to secure new client assignments.

Disclosure Regarding Forward-Looking
Statements

This Annual Report on Form 10-K contains
forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of
the Exchange Act relating to our operations, results of

19



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operations and other matters that are based on
our current expectations, estimates and projections. Words such
as expects, intends, plans,
projects, believes,
estimates and similar expressions are used to
identify these forward-looking statements. These statements are
not guarantees of future performance and involve risks,
uncertainties and assumptions that are difficult to predict.
Forward-looking statements are based upon assumptions as to
future events that may not prove to be accurate. Actual outcomes
and results may differ materially from what is expressed or
forecast in these forward-looking statements. The reasons for
this include changes in general economic and political
conditions, including fluctuations in exchange rates, and the
following factors:




| |   |                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our results of operations are materially affected
    by economic conditions, levels of business activity and rates of
    change in the industries we serve.                                                                                         
|
| |  | Our profitability will suffer if we are not able
    to maintain our pricing and utilization rates and control our
    costs. A continuation of pricing pressures could result in
    permanent changes in pricing policies and delivery capabilities.
|
| |  | If we are unable to attract, retain and motivate
    employees, we will not be able to compete effectively and will
    not be able to grow our business.                                                                                             
|
| |  | We may face damage to our professional reputation
    or legal liability if our clients are not satisfied with our
    services.                                                                                                                      
|
| |  | Our global operations pose complex management,
    foreign currency, legal, tax and economic risks, which we may
    not adequately address.                                                                                                          
|
| |  | Our engagements with clients may not be
    profitable.                                                                                                                                                                                               
|
| |  | Our business will be negatively affected if we
    are not able to anticipate and keep pace with rapid changes in
    technology or if growth in the use of technology in business is
    not as rapid as in the past.                                
|
| |  | The consulting and technology markets are highly
    competitive. As a result, we may not be able to compete
    effectively if we cannot efficiently respond to market
    developments in a timely manner.                                          
|
| |  | Our quarterly revenues, operating results and
    profitability will vary from quarter to quarter, which may
    result in increased volatility of our share price.                                                                                   

For a more detailed discussion of these factors,
see Exhibit 99.1 to this Annual Report on Form 10-K
for the fiscal year ended March 31, 2004. We undertake no
obligation to update or revise any forward-looking statements.

Critical Accounting Policies and
Estimates

We prepare our consolidated financial statements
in conformity with accounting principles generally accepted in
the United States of America. As such, we are required to make
certain estimates, judgments and assumptions that we believe are
reasonable based upon the information available. These estimates
and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the periods
presented. The significant accounting policies which we believe
are the most critical to aid in fully understanding and
evaluating our reported financial results include the following:



| |                    
| | -------------------
| | Revenue Recognition

We earn revenues from a range of consulting
services, including helping organizations worldwide to leverage
technology to develop and implement growth strategies, improve
operations, and capitalize on technology. Our revenues are
comprised of professional fees for services rendered to our
clients plus reimbursement of out-of-pocket expenses. Prior to
the commencement of a client engagement, we and our client agree
on fees for services based upon the scope of the project, our
staffing requirements and the level of client involvement. We
recognize revenue as services are performed in accordance with
the terms of the client engagement.

20



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##### Table of Contents



Service revenue recognition inherently involves a
degree of estimation. Examples of important estimates in this
area include determining the level of effort required to execute
the project, calculating costs incurred and assessing our
progress toward project completion on an ongoing basis. We
believe that these are critical accounting estimates because
they can materially affect our revenues and earnings and require
us to make judgments about matters that are uncertain. We
utilize a number of management processes to monitor project
performance and revenue recognition including monthly reviews of
the progress of each project against plan, staff and resource
usage, service quality and client feedback. From time to time,
as part of our normal management process, circumstances are
identified that require us to revise our estimates of the
revenues to be realized on a project. In most cases, these
revisions relate to changes in the scope of the project, and do
not significantly impact the expected fees on a contract. To the
extent that a revised estimate affects revenue previously
recognized, we record the full effect of the revision in the
period when the underlying facts become known.



| |                                                         
| | --------------------------------------------------------
| | Allowance for Doubtful Accounts and
    Deferred Revenue

We earn our revenues by providing consulting
services to clients. We bill our clients for these services on
either a monthly or semi-monthly basis in accordance with the
terms of the client engagement. Accordingly, we recognize
amounts due from our clients as the related services are
rendered and revenue is earned even though we may not be able to
bill for those services until a later date. The terms of our
client engagements also require us to assume the risk of
non-collection of amounts billed to clients.

Management makes estimates of the amount of our
billed and unbilled accounts receivable that may not be
collected from clients. We believe the allowance for doubtful
accounts is a critical accounting estimate because it can
materially affect our operating results and requires us to make
judgments about matters that are uncertain. In making these
estimates, management specifically analyzes individual client
balances, the composition of the aging of accounts receivable,
historical bad debts, customer credit-worthiness and current
economic trends, and considers our overall experience with
estimating uncollectible amounts. We recognize the effect of
changes in our estimates, assumptions and assessments of the
factors impacting the collectibility of amounts due from
customers on an ongoing basis. As of March 31, 2004, our
accounts receivable balance was $23.2 million, including
unbilled accounts receivable of $1.6 million, and net of
allowance for doubtful accounts of $1.7 million. Unbilled
receivables represent revenues earned for services performed
that have not been billed. Unbilled receivables are typically
billed the following month.

Although we and our clients agree on the scope of
projects, expected deliverables and related fees in advance,
from time to time we have made revisions to the scope of work
and deliverables without making a corresponding adjustment to
the fees for the project. We refer to this as project
run-on as these revisions generally cause a project to
extend beyond its targeted completion. We monitor our actual
project run-on experience on an ongoing basis and perform
monthly reviews of projects in progress against plan. We provide
for project run-on costs based on our analysis of historical
experience. These provisions, net of actual costs incurred on
completed projects, are reflected in deferred revenue. As of
March 31, 2004, our deferred revenue balance was
$1.4 million. Also included in the deferred revenue balance
are $0.4 million of prepaid client fees related to
consulting services that the Company expects to earn in
subsequent periods. While we have been required to make
revisions to our clients estimated deliverables and to
incur additional project costs in some instances, to date there
have been no such revisions that have had a material adverse
effect on our operating results.



| |                   
| | ------------------
| | Operating Expenses

The largest portion of our operating expenses
consists of project personnel and related expenses. Project
personnel expenses consist of payroll costs and related benefits
associated with professional staff. Other related expenses
include travel, subcontracting, third-party vendor payments and
unbillable costs associated with the delivery of services to our
clients. The amount of these other direct costs can vary
substantially from period to period depending largely on
revenue. However, project personnel and related expenses are
relatively fixed in nature, and declines in revenue will often
result in reduced utilization of professional personnel and
lower operating margins.

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The remainder of our recurring operating expenses
are comprised of expenses associated with the development of our
business and the support of our client-serving professionals,
such as professional development and recruiting, marketing and
sales, and management and administrative support. Professional
development and recruiting expenses consist primarily of
recruiting and training content development and delivery costs.
Marketing and sales expenses consist primarily of the costs
associated with the development and maintenance of our marketing
materials and programs. Management and administrative support
expenses consist primarily of the costs associated with
operations, finance, information systems, facilities, including
the rent of office space, and other administrative support for
project personnel.

In December 2001, September 2002, December 2002
and June 2003 we recorded restructuring charges related to
specific actions we took to better align our cost infrastructure
with our near term revenue expectations. For the December 2001,
September 2002 and December 2002 restructuring charges, we
estimated these costs based upon our restructuring plans and
accounted for these plans in accordance with Emerging Issues
Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Benefits and
Other Costs to Exit an Activity (including Certain Costs
incurred in a Restructuring). For the June 2003
restructuring charge, we estimated these costs based upon our
restructuring plan and accounted for this plan in accordance
with Statement of Financial Accounting Standards
(SFAS) No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. The
restructuring charges and accruals required certain significant
estimates of costs related to severance and other
personnel-related expenses, as well as costs related to
reductions in office space and estimated sublease income to be
realized in the future, the write-off of associated leasehold
improvements, and the establishment of accruals for other
contractual commitments which are not expected to provide future
benefit. These estimates and assumptions are monitored on at
least a quarterly basis for changes in circumstances. Although
we do not expect there to be significant changes to our plans,
it is reasonably possible that such estimates could change in
the near term due to unanticipated events, resulting in
adjustments to the amounts recorded, and the effect could be
material. Such revisions will be reflected in the financial
statements in the period they occur.



| |                                                
| | -----------------------------------------------
| | Valuation of Long-Lived Assets and
    Goodwill

On April 1, 2002, we adopted
SFAS No. 142, Goodwill and Other Intangible
Assets. With the adoption of SFAS No. 142,
goodwill and other indefinite life intangible assets
(intangibles) are no longer subject to amortization,
rather, they are subject to an assessment for impairment
whenever events or circumstances indicate that impairment may
have occurred, but at least annually, by applying a fair value
based test. Under SFAS No. 142, goodwill impairment is
assessed at the reporting unit level, using a discounted cash
flow method. Prior to April 1, 2002, the Company amortized
goodwill and identifiable intangible assets on a straight-line
basis over their estimated useful lives not to exceed
40 years, and periodically reviewed the recoverability of
these assets based on the expected future undiscounted cash
flows.

Our goodwill was recognized in connection with
acquisitions we made in fiscal 2000 and 2001. The majority of
our goodwill related to our acquisition of Cluster
Telecom BV, a pan-European consulting firm specializing in
wireless technology and digital strategies, which occurred in
November 2000.

Under SFAS No. 142, goodwill impairment
is determined using a two-step process. The first step of the
goodwill impairment test is used to identify potential
impairment by comparing the fair value of a reporting unit with
its net book value (or carrying amount), including goodwill. If
the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is considered not to be impaired
and the second step of the impairment test is unnecessary. If
the carrying amount of a reporting unit exceeds its fair value,
the second step of the goodwill impairment test is performed to
measure the amount of impairment loss, if any. The second step
of the goodwill impairment test compares the implied fair value
of the reporting units goodwill with the carrying amount
of that goodwill. If the carrying amount of the reporting
units goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in an amount equal to
that excess. The implied fair value of goodwill is determined in
the same manner as the amount of goodwill recognized in a
business combination. That is, the fair value of the reporting
unit is allocated to all of the assets and liabilities of that
unit (including any unrecognized intangible assets) as if the
reporting unit had

22



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##### Table of Contents



been acquired in a business combination and the
fair value of the reporting unit was the purchase price paid to
acquire the reporting unit.


Determining the fair value of a reporting unit
under the first step of the goodwill impairment test and
determining the fair value of individual assets and liabilities
of a reporting unit (including unrecognized intangible assets)
under the second step of the goodwill impairment test requires
our management to make significant judgments, assumptions and
estimates. These estimates and assumptions could have a
significant impact on whether or not an impairment charge is
recognized and also the magnitude of any such charge. To assist
in the process of determining goodwill impairment, the Company
obtains appraisals from independent valuation firms. In addition
to the use of independent valuation firms, the Company performs
internal valuation analyses and considers other market
information that is publicly available. Estimates of fair value
are primarily determined using discounted cash flows. This
approach requires the use of significant estimates and
assumptions including projected future cash flows (including
timing), discount rate reflecting the risk inherent in future
cash flows and perpetual growth rate, among others.

During the first quarter of fiscal 2003, we
completed our initial impairment review following the guidance
in SFAS No. 142 and recorded a $140.9 million
non-cash pretax charge for the impairment of goodwill, all of
which was generated in the acquisition of Cluster Telecom BV.
The charge reflected overall market declines since the
acquisition was completed in November 2000, was non-operational
in nature and is reflected as a cumulative effect of an
accounting change in the accompanying consolidated financial
statements.

During the fourth quarter of fiscal 2003, we
performed the required annual impairment review for goodwill and
recorded an additional non-cash charge of $94.3 million,
which was recorded as a component of operating income (loss) in
the accompanying consolidated statement of operations. This
impairment charge was recognized to reduce the carrying value of
goodwill at our Europe and Latin America reporting unit
($84.3 million) and our North American reporting unit
($10.0 million). These charges reflect the units
lower than expected performance, including the continued decline
in the consulting market, and lower valuations in the consulting
industry primarily due to current market conditions and related
competitive pressures. The impairment charges are non-cash in
nature and do not affect the Companys liquidity. As a
result of the charges recognized during the year ended
March 31, 2003, the carrying value of our goodwill was
reduced to zero at March 31, 2003 and remained zero at
March 31, 2004.



| |                                     
| | ------------------------------------
| | Valuation of Deferred Tax
    Assets

In determining our current income tax provision
we assess temporary differences resulting from differing
treatments of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which
are recorded in our consolidated balance sheets. When we
maintain deferred tax assets we must assess the likelihood that
these assets will be recovered from future taxable income. To
the extent we believe recovery is not likely, we establish a
valuation allowance. We record an allowance to reduce the net
deferred tax asset to a value we believe will be recoverable by
future taxable income. We believe the accounting estimate
related to the valuation allowance is a critical accounting
estimate because it is highly susceptible to change from period
to period as it requires management to make assumptions about
the Companys future income over the life of the deferred
tax asset, and the impact of increasing or decreasing the
valuation allowance is potentially material to our results of
operations. Managements assumptions about future income
require significant judgment because actual income has
fluctuated in the past and may continue to do so.

In estimating future income, we use our internal
operating budgets and long-range planning projections. We
develop our budgets and long-range projections based on recent
results, trends, economic and industry forecasts influencing our
performance, our project pipeline, and other appropriate factors.

As of March 31, 2004, we had a full
valuation allowance against our deferred tax assets of
$67.0 million. If the realization of deferred tax assets in
the future is considered more likely than not, an adjustment to
the deferred tax assets would increase net income in the period
or periods such determination was made.

23



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##### Table of Contents



Results of Operations

The following table sets forth, for the periods
indicated, selected statements of operations data as a
percentage of net revenues:

|                                                                                       |                                                                                       |                                              |       |       |       |  |        |       |       |  |      |       |       | 
|-------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | -------------------------------------------- | ----- | ----- | ----- |  | ------ | ----- | ----- |  | ---- | ----- | ----- | 
|                                                                                       |                                                                                       |                                             
|                                                                                       |                                                                                       | Year Ended March 31,                         |      
|                                                                                       |                                                                                       |                                              |      
|                                                                                       |                                                                                       | 2002                                         |       |       | 2003  |  |        | 2004  |      
|                                                                                       |                                                                                       |                                              |       |       |       |  |        |       |      
|Revenue:                                                                               |                                                                                       |                                              |       |       |       |  |        |       |       |  |      |      
|                                                                                       | Revenue before out-of-pocket-expense
    reimbursements (net revenue)                 |                                              |       | 100.0 | %     |  |        | 100.0 | %     |  |      | 100.0 | %    
|                                                                                       | Out-of-pocket expense reimbursements                                                  |                                              |       | 12.0  |       |  |        | 14.5  |       |  |      | 14.4  |      
|                                                                                       |                                                                                       |                                              |       |       |       |  |        |       |      
|                                                                                       |                                                                                       | Total revenue                                |       |       | 112.0 |  |        |       | 114.5 |  |      |       | 114.4 | 
|Operating Expenses:                                                                    |                                                                                       |                                              |       |       |       |  |        |       |       |  |      |      
|                                                                                       | Project personnel and related expenses before
    out-of-pocket reimbursable expenses |                                              |       | 73.2  |       |  |        | 82.0  |       |  |      | 66.2  |      
|                                                                                       | Out-of-pocket reimbursable expenses                                                   |                                              |       | 12.0  |       |  |        | 14.5  |       |  |      | 14.4  |      
|                                                                                       |                                                                                       |                                              |       |       |       |  |        |       |      
|                                                                                       |                                                                                       | Total project personnel and related expenses |       |       | 85.2  |  |        |       | 96.5  |  |      |       | 80.6  | 
|                                                                                       | Professional development and recruiting                                               |                                              |       | 6.0   |       |  |        | 3.1   |       |  |      | 2.8   |      
|                                                                                       | Marketing and sales                                                                   |                                              |       | 3.9   |       |  |        | 2.9   |       |  |      | 1.8   |      
|                                                                                       | Management and administrative support                                                 |                                              |       | 25.8  |       |  |        | 28.1  |       |  |      | 22.2  |      
|                                                                                       | Goodwill amortization                                                                 |                                              |       | 34.1  |       |  |        |      |       |  |      |      |      
|                                                                                       | Noncash compensation                                                                  |                                              |       | 28.9  |       |  |        | 39.9  |       |  |      | 8.2   |      
|                                                                                       | Restructuring charges                                                                 |                                              |       | 8.6   |       |  |        | 22.0  |       |  |      | 2.6   |      
|                                                                                       | Impairment charge on long lived assets                                                |                                              |       |      |       |  |        | 71.0  |       |  |      |      |      
|                                                                                       |                                                                                       |                                              |       |       |       |  |        |       |      
|                                                                                       |                                                                                       | Total operating expenses                     |       |       | 192.5 |  |        |       | 263.5 |  |      |       | 118.2 | 
|                                                                                       |                                                                                       |                                              |       |       |       |  |        |       |      
|Income (loss) from operations                                                          |                                                                                       |                                              | (80.5 | )     |       |  | (149.0 | )     |       |  | (3.8 | )    
|Other income, net                                                                      |                                                                                       |                                              | 0.6   |       |       |  | 0.1    |       |       |  | 0.7  |      
|                                                                                       |                                                                                       |                                              |       |       |       |  |        |       |      
|Income (loss) before taxes and cumulative effect
    of change in accounting principle |                                                                                       |                                              | (79.9 | )     |       |  | (148.9 | )     |       |  | (3.1 | )    
|Income tax expense (benefit)                                                           |                                                                                       |                                              | (6.1  | )     |       |  | 16.0   |       |       |  | 0.4  |      
|                                                                                       |                                                                                       |                                              |       |       |       |  |        |       |      
|Loss before cumulative effect of change in
    accounting principle                    |                                                                                       |                                              | (73.8 | )     |       |  | (164.9 | )     |       |  | (3.5 | )    
|Cumulative effect of change in accounting
    principle, net of income tax benefit     |                                                                                       |                                              |      |       |       |  | (105.9 | )     |       |  |     |      
|                                                                                       |                                                                                       |                                              |       |       |       |  |        |       |      
|Net loss                                                                               |                                                                                       |                                              | (73.8 | )%    |       |  | (270.8 | )%    |       |  | (3.5 | )%   
|                                                                                       |                                                                                       |                                              |       |       |       |  |        |       |      

Revenue

During the two year period ending in late fiscal
year 2003, our Company had been negatively affected by the
weakened economic conditions in the geographic regions we serve.
This resulted in a decrease in demand for our services as
companies tempered their spending on consulting services. The
weakened economic conditions led to pricing pressures, a
lengthening of the Companys sales cycle and reductions
and/or deferrals of client expenditures for consulting services.
However, over the last year the environment for our services has
markedly improved. On a global basis, revenue before
out-of-pocket expense reimbursements increased to
$154.8 million during fiscal 2004 as compared to
$133.0 million during fiscal 2003. Total revenue, including
out-of-pocket expense reimbursements, increased 16.3% to
$177.1 million for fiscal 2004 compared with
$152.3 million reported for fiscal 2003. Our annualized
revenue per professional increased to $320 thousand during
fiscal 2004 compared to $194 thousand in fiscal 2003 due to
revenue growth and headcount reduction. We served
110 clients during fiscal 2004 as compared to 142 clients
during fiscal 2003. Revenue from new clients accounted for 17%
of revenue during fiscal 2004, compared to 22% during fiscal
2003. The term new

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clients is defined as clients that
generated revenue in the current period but were absent from the
prior period.


During fiscal 2003, revenue before out-of-pocket
expense reimbursements decreased to $133.0 million as
compared to $181.2 million during fiscal 2002. Total
revenue, including out-of-pocket expense reimbursements,
decreased 25.0% to $152.3 million for fiscal 2003 compared
with $203.0 million reported for fiscal 2002. The decline
in revenue in fiscal 2003 was principally attributed to the
weakness in the global economy, resulting in a decline in the
demand for the Companys services. We increased our
annualized revenue per professional during fiscal 2003 to
$194 thousand compared to $173 thousand in fiscal 2002
as a result of personnel reduction. Clients served in fiscal
2003 declined to 142 as compared to 156 clients served in
fiscal 2002. Revenue from new clients accounted for 22% of
revenue for fiscal 2003, compared to 17% for fiscal 2002.

Operating Expenses



| |                                           
| | ------------------------------------------
| | Project Personnel and Related
    Expenses

Project personnel and related expenses before
out-of-pocket reimbursable expenses decreased $6.7 million,
or 6.1%, to $102.4 million during fiscal 2004 as compared
to $109.1 million during fiscal 2003. The decrease in
project personnel and related expenses reflects savings
resulting from cost-reduction programs implemented throughout
fiscal years 2003 and 2004. During fiscal 2003 and 2004 we
reduced client-serving professionals as part of the
Companys restructuring plans. We reduced our
client-serving professional staff from 538 at March 31,
2003 to 481 at March 31, 2004. As a percentage of net
revenue, project personnel and related expenses before
out-of-pocket expense reimbursements decreased from 82.0% during
fiscal 2003 to 66.2% during fiscal 2004. Project personnel and
related expenses including out-of-pocket reimbursable expenses
decreased $3.7 million to $124.8 million during fiscal
2004 as compared with fiscal 2003. Our global utilization
increased from 55% during the fiscal year ended March 31,
2003 to 66% during the fiscal year ended March 31, 2004,
within our target range of 65% to 70%. Annualized voluntary
attrition remained flat in fiscal year 2004 compared to fiscal
year 2003 at 16%.

During fiscal 2003, project personnel and related
expenses before out-of-pocket reimbursable expenses decreased
$23.5 million, or 17.7%, to $109.1 million as compared
to $132.6 million reported for fiscal 2002. The decrease in
project personnel and related expenses reflects savings
resulting from cost reduction programs implemented during the
third quarter of fiscal 2002 and throughout fiscal 2003. During
the quarters ended December 31, 2001, September 30,
2002 and December 31, 2002, we reduced personnel as part of
the Companys restructuring plans. Overall, we reduced our
client-serving professional staff 36% from 843 at March 31,
2002 to 538 at March 31, 2003. As a percentage of net
revenue, project personnel and related expenses before
out-of-pocket reimbursable expenses increased from 73.2% in
fiscal 2002 to 82.0% during fiscal 2003, due primarily to a
decline in revenue and lower utilization of personnel. Project
personnel and related expenses including out-of-pocket
reimbursable expenses decreased $26.0 million to
$128.4 million during fiscal 2003 as compared with fiscal
2002.



| |                                            
| | -------------------------------------------
| | Professional Development and
    Recruiting

Professional development and recruiting expenses
increased $0.2 million to $4.3 million during fiscal
2004 as compared to fiscal 2003. The increase is primarily due
to the relaunch of hiring initiatives and increases in our level
of training conduct expenditures towards the end of fiscal year
2004.

During fiscal 2003, professional development and
recruiting expenses decreased $6.7 million to
$4.1 million as compared to fiscal 2002. This decrease
primarily reflected decreases in our level of recruiting
personnel and activities, and decreased training conduct
expenditures.

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##### Table of Contents





| |                    
| | -------------------
| | Marketing and Sales

Marketing and sales expenses decreased
$1.0 million to $2.8 million during fiscal 2004 as
compared to fiscal 2003. The decrease was the result of reduced
marketing activities including the discontinuation of Contextmagazine, the magazine we published from November 1997 until
December 2002.

During fiscal 2003, marketing and sales expenses
decreased $3.3 million to $3.9 million as compared to
fiscal 2002 as a result of decreased marketing activities
including the discontinuance of the publication of the
Contextmagazine.



| |                                          
| | -----------------------------------------
| | Management and Administrative
    Support

Management and administrative support expenses
decreased 8.0% to $34.4 million or 22.2% of net revenue
during fiscal 2004 as compared to fiscal year 2003. Management
and administrative support expenses include the rent expense
associated with our nine offices located in North America,
Europe and Latin America. The decreases in management and
administrative support expense is principally a result of our
cost reduction programs implemented in fiscal years 2003 and
2004, including the closing of the Boston, New York, and
San Francisco offices and the downsizing of certain offices
globally.

During fiscal 2003, management and administrative
support expenses decreased 20.1% to $37.4 million or 28.1%
of net revenue as compared to fiscal 2002 principally as a
result of our cost reduction programs, including the closing of
the New York office and the downsizing of other offices globally.



| |         
| | --------
| | Goodwill

Goodwill amortization decreased
$61.9 million to zero during fiscal 2003 as compared to
fiscal 2002 as a result of the Companys adoption of
SFAS No. 142 on April 1, 2002. As a percentage of
net revenues, these expenses decreased from 34.1% to zero.
Goodwill amortization remained at zero during fiscal 2004.



| |                     
| | --------------------
| | Noncash Compensation

Noncash compensation decreased from
$53.1 million or 39.9% of net revenue during fiscal 2003 to
$12.7 million or 8.2% of net revenue during fiscal 2004.
Noncash compensation expense had been primarily due to the
amortization of unearned compensation resulting from the
issuance of stock and stock options at prices below fair market
value to Cluster employees in connection with the Cluster
acquisition. Effective April 1, 2003, noncash compensation
also includes amortization of the fair value of employee stock
awards granted or modified after April 1, 2003 calculated
under the fair value method of SFAS 123, Accounting
for Stock Based Compensation. In both cases, stock-based
compensation is earned over the service period and is contingent
on the continued employment of these employees. The decrease in
noncash compensation is primarily due to stock option
cancellations as a result of forfeitures from terminated
employees. Reversal of amortization for previously recognized
expense for forfeitures increased $9.3 million in fiscal
2004 compared with fiscal 2003. In addition, $9.8 million
less expense was recorded in fiscal 2004 than fiscal 2003 due to
cancelled options, and $12.8 million less amortization was
recorded in fiscal 2004 than fiscal 2003 due to only a partial
year of amortization remaining on some restricted shares.
Finally, the decrease in noncash compensation is also
attributable to the non-recurring nature of the
$8.6 million of expense recognized during fiscal 2003
consisting of the remaining unamortized original intrinsic value
of certain non-vested stock options cancelled by the Company on
May 14, 2002, pursuant to an offer to employees (other than
senior officers) to surrender certain stock options previously
granted to them in exchange for a future grant of new options to
purchase the same class of shares.

During fiscal 2003, noncash compensation
increased to $53.1 million or 39.9% of net revenue from
$52.3 million or 28.9% of net revenue during fiscal 2002.
Noncash compensation expense in fiscal 2003 is primarily due to
the amortization of unearned compensation resulting from the
issuance of stock options at prices below fair market value to
Cluster employees in connection with the Cluster acquisition.
The unearned compensation will be earned over time contingent on
the continued employment of these employees. The increase in
noncash compensation expense is due to the recognition of
$8.6 million of additional expense

26



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##### Table of Contents



related to the remaining unamortized original
intrinsic value of certain non-vested stock options cancelled by
the Company.




| |                      
| | ---------------------
| | Restructuring Charges

Restructuring charge expense was
$4.0 million during fiscal 2004 compared to
$29.3 million during fiscal 2003. During fiscal 2003,
restructuring charge expense increased to $29.3 million
from $15.5 million during fiscal year 2002. During fiscal
years 2002, 2003 and early 2004, our Company suffered from a
decrease in global demand as we saw clients decrease their
spending on consulting services. As a result, management
implemented plans to restructure the Companys operating
infrastructure to better align it with the anticipated levels of
business during those times and beyond. We recorded four
separate restructuring charges during fiscal years 2002, 2003,
and 2004. The primary actions underlying these restructuring
charges included facilities downsizing, workforce reduction, and
fixed asset write-offs. We expected annualized savings from
these charges to be a combined $56 million to
$62 million. Refer to the notes to consolidated financial
statements for a detailed description of the activities
surrounding each of these restructuring charges.



| |                                           
| | ------------------------------------------
| | Impairment Charge on Long-Lived
    Assets

During the fourth quarter of fiscal 2003, the
Company conducted its annual assessment of the carrying value of
goodwill. As a result, the Company recorded an impairment charge
of $94.3 million to write-down the carrying value of
goodwill to zero. This impairment charge was recognized to
reduce the carrying value of goodwill at our Europe and Latin
America reporting unit ($84.3 million) and our North
American reporting unit ($10.0 million). These charges
reflect the units lower than expected performance,
including the continued decline in the consulting market, and
lower valuations in the consulting industry primarily due to
current market conditions and related competitive pressures. The
impairment charges are noncash in nature and do not affect the
Companys liquidity. As of March 31, 2003 and 2004,
the carrying amount of goodwill was zero.

Other Income (Expense)

Other income, net increased $0.9 million
from $0.1 million in fiscal 2003 to $1.0 million
during fiscal 2004. This increase is primarily due to increased
foreign exchange gains recorded in fiscal year 2004 partially
offset by a decrease in interest income as well as the
write-down of fixed assets in connection with the downsizing of
certain European offices.

During fiscal 2003, other income, net decreased
$1.1 million to $0.1 million from $1.2 million in
fiscal 2002, primarily due to a decrease in interest yields and
cash balances throughout fiscal year 2003 resulting in a
decrease in interest income of $1.5 million, which was
partially offset by foreign exchange gains.

Income Tax Expense

Income tax expense decreased from
$21.2 million during fiscal 2003 to $0.7 million
during fiscal 2004. The income tax expense recorded in fiscal
year 2004 was related to the income earned by certain foreign
subsidiaries in jurisdictions where we do not have tax loss
carryforwards. The income tax expense recorded in fiscal year
2003 was principally related to the $46.0 million increase
in the valuation allowance for deferred tax assets recognized by
the Company. We have deferred tax assets which have arisen
primarily as a result of operating losses incurred in fiscal
year 2002 and fiscal year 2003, as well as differences between
the tax bases of assets and liabilities and their related
amounts in the financial statements. SFAS No. 109,
Accounting for Income Taxes, requires the
establishment of a valuation allowance to reflect the likelihood
of realization of deferred tax assets. Management judgment is
required in determining any valuation allowance recorded against
the gross deferred tax assets. As of March 31, 2004, the
valuation allowance against deferred tax assets was
$67.0 million and covered the full amount of our net
federal, state and international deferred tax assets.

Income tax expense increased from an income tax
benefit of $11.0 million during fiscal 2002 to an income
tax expense of $21.2 million during fiscal 2003 due
principally to a non-cash charge of $46.0 million to
increase the valuation allowance against the net federal, state
and international deferred tax assets. As of

27



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##### Table of Contents



March 31, 2003, the valuation allowance
against deferred tax assets was $50.2 million and covered
the full amount of our net federal, state and international
deferred tax assets.


Cumulative Effect of Change in Accounting
Principle

During the quarter ended June 30, 2002, we
completed our initial impairment review in accordance with
SFAS No. 142 and recorded a $140.9 million
non-cash pretax charge for the impairment of goodwill, all of
which was generated in the acquisition of Cluster Telecom BV.
The charge reflected overall market declines since the
acquisition was completed in November 2000, and is reflected as
the cumulative effect of an accounting change in the
consolidated financial statements for 2003.

Liquidity and Capital Resources

The following table describes our liquidity and
financial position on March 31, 2003 and 2004:

|                                  |  |               |      |  |      |   |      | 
|--------------------------------- |  | ------------- | ---- |  | ---- | - | ---- | 
|                                  |  |              
|                                  |  | March 31,     |     
|                                  |  |               |     
|                                  |  | 2003          |      |  | 2004 |  
|                                  |  |               |      |  |      |  
|                                  |  |              
|                                  |  | (In millions) |     
|Working capital                   |  | $             | 67.3 |  |      | $ | 79.6 | 
|Cash and cash equivalents         |  |               | 75.3 |  |      |   | 81.3 | 
|Unutilized bank credit facilities |  |               | 9.1  |  |      |   | 9.2  | 
|Stockholders equity              |  | $             | 72.4 |  |      | $ | 80.8 | 

We maintain a revolving line of credit pursuant
to the terms of a secured credit agreement with a commercial
bank under which we may borrow up to $10.0 million at an
annual interest rate based on the prime rate or based on LIBOR
plus 1.50%, at our discretion. The line of credit is secured by
cash and certain accounts receivable of the Companys
wholly-owned subsidiary DiamondCluster International North
America, Inc. This line of credit is reduced, as necessary, to
account for letters of credit outstanding. As of March 31,
2004, there were no outstanding borrowings and we had
approximately $9.2 million available under this line of
credit.



| |                                        
| | ---------------------------------------
| | Cash Flow from Operating
    Activities

During the fiscal year ended March 31, 2004,
net cash provided by operating activities was $7.8 million.
This primarily resulted from the following activities:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The net loss was $5.4 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | The net loss includes noncash charges aggregating
    $22.1 million that must be excluded to arrive at cash flows
    from operating activities. The principal noncash charges are
    stock-based compensation ($12.7 million), the restructuring
    charges ($4.0 million), and depreciation and amortization
    ($4.7 million).                                                                                                                                                                                                                                                    
|
| |  | Cash outflows to reduce the restructuring accrual
    aggregated $8.8 million, including payments under
    contractual lease obligations and severance and related costs.                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Changes in assets and liabilities that result
    from operating activities are also considered in arriving at
    cash flows from operations. Cash flows from operating activities
    was reduced by $0.1 million as a result of increases in
    accounts receivable ($5.0 million) and prepaid expenses and
    other ($3.9 million), offset by the accrual of performance
    bonuses to be paid in early fiscal year 2005
    ($5.5 million), net of changes in accounts payable,
    deferred revenue, income taxes payable and other assets and
    liabilities of $3.3 million.

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##### Table of Contents



At March 31, 2004, we had the following
contractual obligations (amounts in thousands):

|                                                                   |       |                        |       |       |           |   |           |           |  |   |         |       |  |       |       |       |  |   |        |        | 
|------------------------------------------------------------------ | ----- | ---------------------- | ----- | ----- | --------- | - | --------- | --------- |  | - | ------- | ----- |  | ----- | ----- | ----- |  | - | ------ | ------ | 
|                                                                   |       |                       
|                                                                   |       | Payments Due By Period |      
|                                                                   |       |                        |      
|                                                                   |       | Less Than              |       |       |           |   | More Than |           |  |  
|                                                                   |       | One Year               |       |       | 1-3 Years |   |           | 3-5 Years |  |   | 5 Years |       |  | Total |      
|                                                                   |       |                        |       |       |           |   |           |           |  |   |         |       |  |       |      
|Operating leases                                                   |       | $                      | 3,202 |       |           | $ | 6,533     |           |  | $ | 5,796   |       |  | $     | 7,017 |       |  | $ | 22,548 |       
|Cash outlays for restructuring and other related
    activities(1) |       |                        | 3,016 |       |           |   | 3,549     |           |  |   | 1,634   |       |  |       | 931   |       |  |   | 9,130  |       
|Purchase obligations(2)                                            |       |                        | 1,701 |       |           |   | 87        |           |  |   |        |       |  |       |      |       |  |   | 1,788  |       
|                                                                   |       |                        |       |       |           |   |           |           |  |   |         |       |  |       |      
|                                                                   | Total |                        | $     | 7,919 |           |   | $         | 10,169    |  |   | $       | 7,430 |  |       | $     | 7,948 |  |   | $      | 33,466 | 
|                                                                   |       |                        |       |       |           |   |           |           |  |   |         |       |  |       |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Cash outlays for restructuring and other related
    activities include minimum future lease and related payments for
    excess facilities, net of estimated sublease income of
    $6.1 million under existing and expected sublease
    arrangements.                                                                                                                                                                                                                                                                                                                                        
|   
|(2) | Purchase obligations represent minimum
    commitments due to third parties, including subcontractor
    agreements, IT maintenance contracts in support of internal use
    software and hardware, lease commitments on company automobiles
    and other marketing and consulting contracts. Contracts for
    which our commitment is variable based on volumes, with no fixed
    minimum quantities, and contracts that can be cancelled without
    payment penalties, have been excluded. Amounts presented also
    exclude accounts payable and accrued expenses at March 31,
    2004.

Our billings for the three and twelve months
ended March 31, 2004 totaled $52.0 million and
$185.4 million, respectively, compared to
$32.7 million and $161.8 million for the three and
twelve months ended March 31, 2003, respectively. These
amounts include VAT (which are not included in recognized
revenue) and billings to clients for reimbursable expenses. Our
gross accounts receivable balance of $24.9 million at
March 31, 2004 represented 43 days of billings for the
quarter ended March 31, 2004. This compares to a gross
receivable balance of $17.9 million at March 31, 2003
representing 49 days of billings for the quarter ended
March 31, 2003.



| |                                        
| | ---------------------------------------
| | Cash Flow from Investing
    Activities

Cash used in investing activities was
$0.1 million for fiscal year 2004. Cash used in investing
activities resulted primarily from capital expenditures,
partially offset by cash provided from other assets resulting
from the collection of certain employee notes receivable.



| |                                        
| | ---------------------------------------
| | Cash Flow from Financing
    Activities

Cash used in financing activities was
$2.6 million for fiscal 2004 resulting from the repurchase
of DiamondCluster common stock in the amount of
$9.2 million, offset by $6.6 million in proceeds from
the issuance of common stock in connection with the Employee
Stock Purchase Plan and option exercises. The Board of Directors
(the Board) has authorized the repurchase of the
Companys common stock through open market transactions.
During fiscal 2004, we repurchased 0.9 million shares at an
average price of $9.75. As of March 31, 2004 the number of
shares available for repurchase under the Board authorization
was 1.7 million. Through March 31, 2004, the number of
shares purchased under this authorization was 4.3 million
shares at an aggregate cost of $61.1 million. Following is
a summary of the repurchase activity over the last three fiscal
years (amounts in thousands except average price data):

|     |       |                            |     |       |        |   |       |               |  |   |       |  | 
|---- | ----- | -------------------------- | --- | ----- | ------ | - | ----- | ------------- |  | - | ----- |  | 
|     |       |                           
|     |       | Repurchase of Common Stock |    
|     |       |                            |    
|     |       | Shares                     |     |       | Amount |   |       | Average Price | 
|     |       |                            |     |       |        |   |       |               | 
|2004 |       |                            | 944 |       |        | $ | 9,204 |               |  | $ | 9.75  | 
|2003 |       |                            | 968 |       |        |   | 5,242 |               |  |   | 5.42  | 
|2002 |       |                            | 408 |       |        |   | 5,934 |               |  | $ | 14.54 | 
|     |       |                            |     |       |        |   |       |               | 
|     | Total |                            |     | 2,320 |        |   | $     | 20,380        |  |   |       |  | 
|     |       |                            |     |       |        |   |       |               | 

29



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On September 23, 2003, the Board of
Directors and shareholders approved a plan of recapitalization,
thereby converting all Class A and B Common Stock to a new
class of capital stock called Common Stock, on a one-to-one
basis. The total authorized number of shares of Common Stock is
300,000,000 shares. This plan of recapitalization was based
on a detailed review of our system of corporate governance. The
Board considered the effect of the Sarbanes-Oxley Act and the
corporate governance standards being developed for listed
companies by the NASDAQ National Market. After a thorough
review, the Board concluded that a modification to the
Corporations Restated Certificate of Incorporation and
internal governance agreements should be made to assure
continued independence of a majority of the Board and the proper
functioning of the audit and other committees of the Board.

Because each outstanding share of Class B
Common Stock had five votes, the holders of the Class B
Common Stock could significantly influence all matters brought
to a vote of our stockholders. In addition, all of the holders
of our Class B Common Stock had granted proxies to our
Chief Executive Officer to vote their shares. Accordingly, the
Chief Executive Officer had the right to vote 100% of the
outstanding shares of Class B Common Stock. Our Board of
Directors had determined that it was no longer in our best
interest for our Chief Executive Officer to have such voting
control. The Board of Directors approved this plan of
recapitalization in order to bring our system of corporate
governance more in line with the governance of other public
companies. Implementation of this plan eliminated the voting
control then held by our Chief Executive Officer by reducing the
number of votes for employee shares and eliminating the CEO
proxy, although certain aspects of our internal governance
procedures remain under the Partners Operating Agreement,
as amended.

On May 2, 2002, we offered employees (other
than senior officers) a plan, approved by the Board of
Directors, which gave employees a choice to surrender certain
stock options previously granted to them in exchange for a
future grant of a smaller number of new options to purchase the
same class of shares, a majority of which would vest over a
three-year period. The original options were granted under
DiamondClusters 2000 Stock Option Plan and under
DiamondClusters 1998 Equity Incentive Plan. Employees who
accepted this offer were required to make an election with
respect to all covered options by May 14, 2002. In order to
receive the new options, the employees were required to remain
employed by DiamondCluster until November 15, 2002. The
exchange offer was not available to the members of the Board of
Directors or senior officers of DiamondCluster. A total of
4.3 million stock options were surrendered as part of this
plan. Certain of these options had intrinsic value at the
original grant date, the unvested portion of which had not been
amortized to noncash compensation expense at the date
surrendered. The voluntary surrender of these options resulted
in a noncash charge to compensation expense of $8.6 million
during the quarter ended June 30, 2002, relating to the
remaining unamortized compensation expense associated with these
surrendered options. On November 15, 2002, approximately
1.0 million new options were granted to employees who
remained employed by DiamondCluster. The exercise price for a
majority of the options granted on November 15, 2002 was
$0.76, or 25% of the fair market value of the Companys
common stock on that date.

On January 30, 2001, we offered our
employees (other than senior officers) a plan, approved by the
Board of Directors, which gave employees a choice to cancel
certain stock options granted to them in exchange for a future
grant of a lesser number of new options to purchase the same
class of shares, a majority of which would vest proportionately
over a four year period. The original options were granted under
DiamondClusters 2000 Stock Option Plan and under
DiamondClusters 1998 Equity Incentive Plan. Employees who
accepted the offer were required to make an election with
respect to all covered options by February 8, 2001. In
order to receive the new options, the employees were required to
remain employed by DiamondCluster until August 9, 2001. The
exchange offer was not available to the members of the Board of
Directors or senior officers of DiamondCluster. A total of
2.3 million stock options were cancelled as part of this
plan. On August 9, 2001, a total of 1.5 million of new
options were granted as part of this plan, which represented
between 75% and 100% of the original grant and had an exercise
price that was set on the grant date. The exercise price for a
majority of the options granted on August 9, 2001 was set
at fair market value.



| |        
| | -------
| | Summary

We believe that our current cash balances,
existing lines of credit, and cash flow from existing and future
operations will be sufficient to fund our operating requirements
at least through fiscal year 2006. If necessary,

30



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##### Table of Contents



we believe that additional bank credit would be
available to fund any additional operating and capital
requirements. In addition, we could consider seeking additional
public or private debt or equity financing to fund future growth
opportunities. However, there is no assurance that such
financing would be available to us on acceptable terms.







|         |                                                                                      
|-------- | -------------------------------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk Sensitive Instruments.

Foreign Currency Risk

International revenues are generated primarily
from our services in the respective countries by our foreign
subsidiaries and are typically denominated in the local currency
of each country, most of which are the euro. These subsidiaries
also incur most of their expenses in the local currency, most of
which are the euro. Accordingly, all foreign subsidiaries use
the local currency as their functional currency. Our
international business is subject to risks typical of an
international business, including, but not limited to, differing
economic conditions, changes in political climate, differing tax
structures, other regulations and restrictions and foreign
exchange rate volatility. Our future results could be materially
adversely impacted by changes in these or other factors.

The financial statements of our
non-U.S. businesses are typically denominated in the local
currency of the foreign subsidiary in order to centralize
foreign exchange risk with the parent company in the United
States. As a result, we are also exposed to foreign exchange
rate fluctuations as the financial results of foreign
subsidiaries are translated into U.S. dollars in
consolidation. As exchange rates fluctuate, these results, when
translated, may vary from expectations and adversely impact
overall expected results and profitability.

In the past, the Company has entered into
transactions to reduce the effect of foreign exchange
transaction gains and losses on recorded foreign currency
denominated assets and liabilities, and to reduce the effect of
foreign exchange translation gains and losses on the parent
companys net investment in its foreign subsidiaries. These
transactions involved the use of forward foreign exchange
contracts in certain European currencies. As of March 31,
2004, there were no open forward foreign exchange contracts
outstanding. A forward foreign exchange contract obligates the
Company to exchange predetermined amounts of specified foreign
currencies at specified exchange rates on specified dates or to
make an equivalent U.S. dollar payment equal to the value
of such exchange. As a result, increases or decreases in the
U.S. dollar value of the Companys foreign currency
transactions and investments in foreign subsidiaries are
partially offset by gains and losses on the forward contracts,
so as to mitigate the possibility of significant foreign
currency transaction and translation gains and losses. The
Company does not use foreign currency contracts for trading
purposes. The Company does not currently hedge anticipated
foreign currency-denominated revenues and expenses. All foreign
currency transactions and outstanding forward contracts are
marked-to-market on a monthly basis.

DiamondCluster has net investments in foreign
operations located throughout Europe and Latin America. In some
cases, the Company hedges its euro exposures through the use of
euro/U.S. dollar forward contracts in order to mitigate the
impact of foreign currency movements on the Companys
financial position. These contracts have been designated and
have qualified as hedging instruments of the foreign currency
exposure related to the Companys net investment in its
foreign operations. Accordingly, the net amount of gains or
losses on these forward foreign exchange contracts offset losses
and gains on the Companys exposure to foreign currency
movements related to its net investments in its foreign
operations and are reflected in the cumulative translation
adjustment account and included as a component of other
comprehensive income. At March 31, 2002, the Company had
one euro/U.S. dollar forward contract outstanding in the
notional principal amount of EUR 62.8 million. On
June 28, 2002, the Company settled its
euro/U.S. dollar forward contract for
EUR 62.8 million. As noted above, the Company entered
into this contract to mitigate the effect of an adverse movement
of foreign exchange rates. As a result of the weakening of the
U.S. dollar against the euro in the first quarter of fiscal
2003, the Company recorded a net loss on the forward exchange
contract of $7.4 million in the cumulative translation
adjustments account which was offset by the related gain on the
net investment in the foreign operations during the period.
During fiscal year 2004 and as of March 31, 2004, there
were no open euro/U.S. dollar or other forward contracts
outstanding.

31



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##### Table of Contents



Interest Rate Risk

The Company invests its cash in highly liquid
investments with original maturities of three months or less.
The interest rate risk associated with our investing activities
at March 31, 2004 is not material in relation to our
consolidated financial position, results of operations or cash
flows. We have not used derivative financial instruments in
fiscal year 2004 to alter the interest rate characteristics of
our investment holdings.






|        |                                                              
|------- | -------------------------------------------------------------
|Item 8. | Consolidated Financial Statements and
    Supplementary Data.

The information required by this item is
contained in the consolidated financial statements and schedules
set forth in Item 14(a) under the captions
Consolidated Financial Statements and Schedules as a
part of this report.

32



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##### Table of Contents








|        |                                                                                              
|------- | ---------------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements With
    Accountants on Accounting and Financial
    Disclosure.

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Evaluation of Controls and
Procedures

We maintain disclosure controls and procedures,
which we have designed to ensure that material information
related to the Company, including our consolidated subsidiaries,
is properly identified and evaluated on a regular basis and
disclosed in accordance with all applicable laws and
regulations. In response to recent legislation and proposed
regulations, we reviewed our disclosure controls and procedures.
We also established a disclosure committee which consists of
certain members of our senior management. The Chairman and Chief
Executive Officer, the Senior Vice President of Finance and
Administration and the Chief Financial Officer of DiamondCluster
International, Inc. (its principal executive officer and
principal financial officers, respectively) have concluded,
based on their evaluations as of the end of the period covered
by this Report, that the Companys disclosure controls and
procedures are effective to ensure that information required to
be disclosed by the Company in the reports filed or submitted by
it under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission
rules and forms, and include controls and procedures designed to
ensure that information required to be disclosed by the Company
in such reports is accumulated and communicated to the
Companys management as appropriate to allow timely
decisions regarding required disclosure.

Changes in Controls and Procedures

There were no significant changes in the
Companys internal controls, or in other factors that could
significantly affect these internal controls, subsequent to the
date of our most recent evaluation.




PART III

Part III of this Annual Report on
Form 10-K incorporates by reference portions of the
Registrants definitive proxy statement, to be filed with
the Securities and Exchange Commission no later than
120 days after the close of its fiscal year; provided that
if such proxy statement is not filed with the Commission in such
120-day period, an amendment to this Form 10-K shall be
filed no later than the end of the 120-day period.






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Information with respect to Directors of the
Company will be set forth in the Proxy Statement under the
heading Election of Directors, which information is
incorporated herein by reference, or in an amendment to this
Form 10-K. Information regarding the executive officers of
the Company is included in Part I of this Form 10-K as
permitted by Instruction 3 to Item 401(b) of
Regulation S-K. Information with respect to the members of
the audit committee will be set forth in the Proxy Statement
under the heading Audit Committee, which information
is incorporated herein by reference, or an amendment to this
Form 10-K. Information required by Item 405 of
Regulation S-K will be set forth in the Proxy Statement
under the heading Compliance with Section 16(a) of
the Securities Exchange Act of 1934, which information is
incorporated herein by reference, or in an amendment to this
Form 10-K.

The Company has adopted a Code of Business
Conduct and Ethics applicable to all employees, its Board of
Directors and vendors. The Code of Business Conduct and Ethics
is supplemented by a Code of Ethics for Senior Financial
Officers setting forth additional requirements applicable only
to the Companys senior officers (together with the Code of
Business Conduct and Ethics, the Code). A copy of
the Code is filed as Exhibit 14 to this Annual Report of
Form 10-K.

33



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##### Table of Contents








|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Information with respect to executive
compensation will be set forth in the Proxy Statement under the
heading Compensation of Executive Officers, which
information is incorporated herein by reference (except for the
Compensation Committee Report on Executive Compensation and the
Performance Graph), or in an amendment to this Form 10-K.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

The following table summarizes information about
the Companys equity incentive plans as of March 31,
2004 (share amounts in thousands):

|                                                                  |       |                  |        |        |                   |   |                         |                         |  |  |        |        | 
|----------------------------------------------------------------- | ----- | ---------------- | ------ | ------ | ----------------- | - | ----------------------- | ----------------------- |  |  | ------ | ------ | 
|                                                                  |       | Number of        |        |        |                   |   |                        
|                                                                  |       | securities to be |        |        |                   |   |                        
|                                                                  |       | issued upon      |        |        |                   |   | Number of securities    |                        
|                                                                  |       | exercise of      |        |        |                   |   | remaining available for |                        
|                                                                  |       | outstanding      |        |        |                   |   | future issuance under   |                        
|                                                                  |       | options and      |        |        | Weighted-average  |   |                         | equity compensation     | 
|                                                                  |       | vesting of       |        |        | exercise price of |   |                         | plans (excluding        | 
|                                                                  |       | restricted stock |        |        | outstanding       |   |                         | securities reflected in | 
|Plan Category                                                     |       | units            |        |        | options           |   |                         | column (a))             | 
|                                                                  |       |                  |        |        |                   |   |                         |                         | 
|                                                                  |       | (a)              |        |        | (b)               |   |                         | (c)                     | 
|Equity compensation plans approved by security
    holders        |       |                  | 13,014 |        |                   | $ | 11.30                   |                         |  |  | 21,995 | (1)   
|Equity compensation plans not approved by
    security holders(2) |       |                  | 147    |        |                   | $ | 12.71                   |                         |  |  | 306    |       
|                                                                  |       |                  |        |        |                   |   |                         |                         | 
|                                                                  | Total |                  |        | 13,161 |                   |   |                         |                         |  |  |        | 22,301 | 
|                                                                  |       |                  |        |        |                   |   |                         |                         | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 2,241,000 shares available for
    future issuance under the Companys Employee Stock Purchase
    Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(2) | The Advisors Stock Option Plan (the
    Advisors Plan) relates to a maximum of
    525,000 shares of Common Stock, which may be issued upon
    the exercise of stock options granted to outside advisors of the
    Company during the period February 26, 1997 through
    August 10, 1999. The terms of the Advisors Plan
    mirror the terms of the Companys 1998 Equity Incentive
    Plan previously adopted by the shareholders in all material
    respects, except that (i) the maximum number of shares
    available for issuance under the Advisors Plan is
    525,000 shares, and (ii) the eligible participants
    under the Advisors Plan are those outside consultants to
    the Company as the Plan Committee shall decide from time to
    time. The options issued under the Advisors Plan were
    granted at the fair market value on the grant date (calculated
    based on the average of the closing price on the Nasdaq Market
    System of the Common Stock for the ten trading days preceding
    the grant date). The options vest over periods ranging from 2 to
    4 years after the date of grant, and expire on dates
    ranging from 5 to 8 years after the date of grant.

Information with respect to security ownership of
certain beneficial owners and management will be set forth in
the Proxy Statement under the heading Beneficial Ownership
of Common Stock, which information is incorporated herein
by reference, or in an amendment to this Form 10-K.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

Information with respect to certain relationships
and related transactions will be set forth in the footnotes to
the consolidated financial statements included herein, and in
the Proxy Statement, which information is incorporated herein by
reference, or in an amendment to this Form 10-K.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

Information with respect to principal accountant
fees and services will be set forth in the Proxy Statement under
the heading Principal Accountant Fees and Services,
which information is incorporated herein by reference, or in an
amendment to this Form 10-K.

34



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##### Table of Contents






PART IV






|         |                                                                                  
|-------- | ---------------------------------------------------------------------------------
|Item 15. | Exhibits, Consolidated Financial Statement
    Schedules and Reports on Form 8-K.

(a) Consolidated Financial Statements and
Schedules



| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | (1) The consolidated financial statements
    and schedule listed in the index on page F-1 are filed as part
    of this Form 10-K.

All information for which provision is made in
the applicable accounting regulations of the Securities and
Exchange Commission is either included in the consolidated
financial statements or is not required under the related
instructions or are inapplicable, and therefore have been
omitted.



| |                  
| | -----------------
| | (2) see (1) above
|
| | (3) see (c) below

(b) Reports on Form 8-K



| |                                
| | -------------------------------
| | Form 8-K dated January 28, 2004

(c) Exhibits

The following is a list of exhibits required by
Item 601 of Regulation S-K filed as part of this
Form 10-K. Where so indicated by footnote, exhibits which
were previously filed are incorporated by reference. For
exhibits incorporated by reference, the location of the exhibit
in the previous filing is indicated in parentheses.

|        |        |  |             |                                                                                                                                                                                                                                                                 
|------- | ------ |  | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |  |            
|Number  |        |  | Description
|        |        |  |            
|        | 3.1(a) |  |             | Form of Restated Certificate of Incorporation of
    the Company (filed as Exhibit 3.1(a) to the Companys
    Form 8-A filed by the Company on October 21, 2003 (the
    Form 8A) and incorporated herein by reference).                                     
|        | 3.2    |  |             | Amended and Restated By-laws of the Company
    (filed as Exhibit 3.2 to the Form 8-A and incorporated
    herein by reference).                                                                                                                                
|        | 10.1   |  |             | Amended and Restated DiamondCluster
    International, Inc. 1998 Equity Incentive Plan (filed as
    Annex B to the Companys Definitive Proxy Statement on
    Schedule 14A dated July 11, 2001 (File
    No. 000-22125) and incorporated herein by reference).
|        | 10.2   |  |             | Form of Employment Agreement between each of the
    Named Officers and the Company (filed as Exhibit 10 to the
    Companys Registration Statement on Form S-1
    (No. 333-17785) and incorporated herein by reference).                                     
|        | 10.3*  |  |             | North America and United Kingdom Partners
    Operating Agreement dated as of November 13, 2003 among the
    Company and the partners of the Company, including Addendum
    No. 1 dated January 29, 2004.                                                    
|        | 14*    |  |             | Code of Business Conduct and Ethics.                                                                                                                                                                                                                            
|        | 21*    |  |             | Subsidiaries of the Registrant                                                                                                                                                                                                                                  
|        | 23*    |  |             | Consent of Independent Public Accountants.                                                                                                                                                                                                                      
|        | 24.1*  |  |             | Power of Attorney (included on signature page).                                                                                                                                                                                                                 
|        | 31.1*  |  |             | CEO Certifications Pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to section 302 of
    the Sarbanes-Oxley Act of 2002.                                                                                                                            
|        | 31.2*  |  |             | CEO Certifications Pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to section 302 of
    the Sarbanes-Oxley Act of 2002.                                                                                                                            
|        | 31.3*  |  |             | Senior Vice President, Finance and Administration
    Certifications Pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to section 302 of the Sarbanes-Oxley Act
    of 2002.                                                                          
|        | 32.1*  |  |             | CEO Certifications Pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                                                                            
|        | 32.2*  |  |             | CFO Certifications Pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                                                                            

35



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##### Table of Contents



|        |       |  |             |                                                                                                                                                                                       
|------- | ----- |  | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |            
|Number  |       |  | Description
|        |       |  |            
|        | 32.3* |  |             | Senior Vice President, Finance and Administration
    Certifications Pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to section 906 of the Sarbanes-Oxley Act
    of 2002.
|        | 99.1* |  |             | Risk Factors.                                                                                                                                                                         



---



|  |               
|- | --------------
|* | Filed herewith

36



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##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) 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.



| |                                   
| | ----------------------------------
| | DIAMONDCLUSTER INTERNATIONAL, INC.



| |     |                        
| | --- | -----------------------
| | By: | /s/ MELVYN E. BERGSTEIN

| |                                     
| | ------------------------------------
| | Melvyn E. Bergstein                 
| | Chairman and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
Melvyn E. Bergstein and William R. McClayton, and each of them,
his true and lawful attorneys-in-fact and agents, with full
power of substitution, for him and in his name, place and stead,
in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Annual Report on
Form 10-K, and to file the same, with all exhibits thereto
and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact
and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all
that each said attorneys-in-fact and agents, or his or their
substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed by the
following persons in the capacities and on the dates indicated.

|                                           |  |                                                                                        |  |      |              | 
|------------------------------------------ |  | -------------------------------------------------------------------------------------- |  | ---- | ------------ | 
|Signature                                  |  | Title                                                                                  |  | Date |             
|                                           |  |                                                                                        |  |      |             
|                                          
|/s/ MELVYN E. BERGSTEINMelvyn E. Bergstein |  | Chairman and Chief Executive Officer (Principal
    Executive Officer)                 |  |      | June 7, 2004 | 
|                                          
|/s/ KARL E. BUPPKarl E. Bupp               |  | Chief Financial Officer and Treasurer (Principal
    Financial and Accounting Officer) |  |      | June 7, 2004 | 
|                                          
|/s/ ADAM J. GUTSTEINAdam J. Gutstein       |  | President, Managing Director  Europe
    and Latin America, and Director              |  |      | June 7, 2004 | 
|                                          
|/s/ JOHN J. SVIOKLAJohn J. Sviokla         |  | Vice Chairman and Director                                                             |  |      | June 7, 2004 | 
|                                          
|/s/ EDWARD R. ANDERSONEdward R. Anderson   |  | Director                                                                               |  |      | June 7, 2004 | 
|                                          
|/s/ DONALD R. CALDWELLDonald R. Caldwell   |  | Director                                                                               |  |      | June 7, 2004 | 
|                                          
|/s/ MARK L. GORDONMark L.Gordon            |  | Director                                                                               |  |      | June 7, 2004 | 

37



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|                                                 |  |          |  |      |              | 
|------------------------------------------------ |  | -------- |  | ---- | ------------ | 
|Signature                                        |  | Title    |  | Date |             
|                                                 |  |          |  |      |             
|                                                
|/s/ ALAN C. KAYAlan C. Kay                       |  | Director |  |      | June 7, 2004 | 
|                                                
|/s/ MICHAEL E. MIKOLAJCZYKMichael E. Mikolajczyk |  | Director |  |      | June 7, 2004 | 
|                                                
|/s/ JAVIER RUBIOJavier Rubio                     |  | Director |  |      | June 7, 2004 | 
|                                                
|/s/ PAULINE A. SCHNEIDERPauline A. Schneider     |  | Director |  |      | June 7, 2004 | 
|                                                
|/s/ SAMUEL K. SKINNERSamuel K. Skinner           |  | Director |  |      | June 7, 2004 | 

38



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                   |                                                                                                                        |      |  |     | 
|---------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ---- |  | --- | 
|                                   |                                                                                                                        | Page | 
|                                   |                                                                                                                        |      | 
|Consolidated Financial Statements: |                                                                                                                        |      |  |    
|                                   | Independent Auditors Report                                                                                           |      |  | F-2 | 
|                                   | Consolidated Balance Sheets as of March 31,
    2003 and 2004                                                          |      |  | F-3 | 
|                                   | Consolidated Statements of Operations and
    Comprehensive Loss for the Years Ended March 31, 2002, 2003
    and 2004 |      |  | F-4 | 
|                                   | Consolidated Statements of Stockholders
    Equity for the Years Ended March 31, 2002, 2003 and 2004                  |      |  | F-5 | 
|                                   | Consolidated Statements of Cash Flows for the
    Years Ended March 31, 2002, 2003 and 2004                            |      |  | F-6 | 
|                                   | Notes to Consolidated Financial Statements                                                                             |      |  | F-7 | 
|Supplemental Financial Schedules:  |                                                                                                                        |      |  |    
|                                   | Independent Auditors Report                                                                                           |      |  | S-1 | 
|                                   | Schedule II  Valuation and
    Qualifying Accounts                                                                    |      |  | S-2 | 

F-1



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Stockholders and Board of Directors

DiamondCluster International, Inc.:


We have audited the accompanying consolidated
balance sheets of DiamondCluster International, Inc. and
subsidiaries (the Company) as of March 31, 2003 and 2004,
and the related consolidated statements of operations and
comprehensive loss, stockholders equity and cash flows for
each of the years in the three-year period ended March 31,
2004. These consolidated financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of DiamondCluster
International, Inc. and subsidiaries as of March 31, 2003
and 2004, and the results of their operations and their cash
flows for each of the years in the three-year period ended
March 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.

As described in Note 2 to the consolidated
financial statements, the Company changed its method of
accounting for stock based compensation effective April 1,
2003, and its method of accounting for goodwill as of
January 1, 2002.



| |             
| | ------------
| | /s/ KPMG LLP

Chicago, Illinois

April 25, 2004


F-2



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.



CONSOLIDATED BALANCE SHEETS


March 31, 2003 and 2004


|                                                                                                                             |                                                                                                                      |                                            |         |          |         |  |         |          |         | 
|---------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | -------- | ------- |  | ------- | -------- | ------- | 
|                                                                                                                             |                                                                                                                      | 2003                                       |         |          | 2004    | 
|                                                                                                                             |                                                                                                                      |                                            |         |          |         | 
|                                                                                                                             |                                                                                                                      |                                           
|                                                                                                                             |                                                                                                                      | (In thousands,                             |        
|                                                                                                                             |                                                                                                                      | except per share data)                     |        
|ASSETS                                                                                                                      
|Current assets:                                                                                                              |                                                                                                                      |                                            |         |          |         |  |         |         
|                                                                                                                             | Cash and cash equivalents                                                                                            |                                            | $       | 75,328   |         |  | $       | 81,304   |        
|                                                                                                                             | Accounts receivable, net of allowance of $1,597
    and $1,650 as of March 31, 2003 and 2004, respectively           |                                            |         | 16,314   |         |  |         | 23,219   |        
|                                                                                                                             | Income taxes receivable                                                                                              |                                            |         |         |         |  |         | 569      |        
|                                                                                                                             | Prepaid expenses                                                                                                     |                                            |         | 5,598    |         |  |         | 10,373   |        
|                                                                                                                             |                                                                                                                      |                                            |         |          |         | 
|Total current assets                                                                                                         |                                                                                                                      |                                            | 97,240  |          |         |  | 115,465 |         
|Computers, equipment, leasehold improvements and
    software, net                                                           |                                                                                                                      |                                            | 10,349  |          |         |  | 6,473   |         
|Other assets                                                                                                                 |                                                                                                                      |                                            | 1,902   |          |         |  | 729     |         
|                                                                                                                             |                                                                                                                      |                                            |         |          |         | 
|                                                                                                                             |                                                                                                                      | Total assets                               |         | $        | 109,491 |  |         | $        | 122,667 | 
|                                                                                                                             |                                                                                                                      |                                            |         |          |         | 
|                                                                                                                            
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                    
|Current liabilities:                                                                                                         |                                                                                                                      |                                            |         |          |         |  |         |         
|                                                                                                                             | Accounts payable                                                                                                     |                                            | $       | 4,193    |         |  | $       | 6,250    |        
|                                                                                                                             | Accrued compensation                                                                                                 |                                            |         |         |         |  |         | 5,749    |        
|                                                                                                                             | Deferred revenue                                                                                                     |                                            |         | 760      |         |  |         | 1,380    |        
|                                                                                                                             | Income taxes payable                                                                                                 |                                            |         | 730      |         |  |         |         |        
|                                                                                                                             | Restructuring accrual, current portion                                                                               |                                            |         | 7,134    |         |  |         | 3,528    |        
|                                                                                                                             | Other accrued liabilities                                                                                            |                                            |         | 17,097   |         |  |         | 18,973   |        
|                                                                                                                             |                                                                                                                      |                                            |         |          |         | 
|                                                                                                                             |                                                                                                                      | Total current liabilities                  |         |          | 29,914  |  |         |          | 35,880  | 
|                                                                                                                             | Restructuring accrual, less current portion                                                                          |                                            |         | 7,200    |         |  |         | 6,000    |        
|                                                                                                                             |                                                                                                                      |                                            |         |          |         | 
|                                                                                                                             |                                                                                                                      | Total liabilities                          |         |          | 37,114  |  |         |          | 41,880  | 
|                                                                                                                             |                                                                                                                      |                                            |         |          |         | 
|Stockholders equity:                                                                                                        |                                                                                                                      |                                            |         |          |         |  |         |         
|                                                                                                                             | Preferred Stock, $1.00 par value,
    2,000 shares authorized, no shares issued                                      |                                            |         |         |         |  |         |         |        
|                                                                                                                             | Common Stock, $0.001 par value,
    300,000 shares authorized, 38,683 shares issued as of
    March 31, 2004         |                                            |         |         |         |  |         | 39       |        
|                                                                                                                             | Class A Common Stock, $0.001 par value,
    200,000 shares authorized, 28,731 shares issued as of
    March 31, 2003 |                                            |         | 29       |         |  |         |         |        
|                                                                                                                             | Class B Common Stock, $0.001 par value,
    100,000 shares authorized, 6,493 shares issued as of
    March 31, 2003  |                                            |         | 6        |         |  |         |         |        
|                                                                                                                             | Additional paid-in capital                                                                                           |                                            |         | 644,302  |         |  |         | 624,682  |        
|                                                                                                                             | Unearned compensation                                                                                                |                                            |         | (47,330  | )       |  |         | (6,324   | )      
|                                                                                                                             | Notes receivable from sale of common stock                                                                           |                                            |         | (71      | )       |  |         |         |        
|                                                                                                                             | Accumulated other comprehensive income                                                                               |                                            |         | 1,294    |         |  |         | 2,858    |        
|                                                                                                                             | Accumulated deficit                                                                                                  |                                            |         | (473,921 | )       |  |         | (479,332 | )      
|                                                                                                                             |                                                                                                                      |                                            |         |          |         | 
|                                                                                                                             |                                                                                                                      |                                            | 124,309 |          |         |  | 141,923 |         
|Less: Common Stock in treasury, at cost,
    3,392 shares held at March 31, 2003 and
    4,336 shares held at March 31, 2004 |                                                                                                                      |                                            | (51,932 | )        |         |  | (61,136 | )       
|                                                                                                                             |                                                                                                                      |                                            |         |          |         | 
|                                                                                                                             |                                                                                                                      | Total stockholders equity                 |         |          | 72,377  |  |         |          | 80,787  | 
|                                                                                                                             |                                                                                                                      |                                            |         |          |         | 
|                                                                                                                             |                                                                                                                      | Total liabilities and stockholders equity |         | $        | 109,491 |  |         | $        | 122,667 | 
|                                                                                                                             |                                                                                                                      |                                            |         |          |         | 

See accompanying notes to consolidated financial
statements.

F-3



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS


Fiscal years ended March 31, 2002, 2003
and 2004


|                                                                                  |                                                                                       |                                              |          |          |         |   |          |          |         |   |        |         |         | 
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | -------------------------------------------- | -------- | -------- | ------- | - | -------- | -------- | ------- | - | ------ | ------- | ------- | 
|                                                                                  |                                                                                       | 2002                                         |          |          | 2003    |   |          | 2004     |        
|                                                                                  |                                                                                       |                                              |          |          |         |   |          |          |        
|                                                                                  |                                                                                       |                                             
|                                                                                  |                                                                                       | (In thousands, except per share data)        |         
|Revenue:                                                                          |                                                                                       |                                              |          |          |         |   |          |          |         |   |        |        
|                                                                                  | Revenue before out-of-pocket expense
    reimbursements (net revenue)                 |                                              | $        | 181,215  |         |   | $        | 132,974  |         |   | $      | 154,785 |        
|                                                                                  | Out-of-pocket expense reimbursements                                                  |                                              |          | 21,745   |         |   |          | 19,331   |         |   |        | 22,329  |        
|                                                                                  |                                                                                       |                                              |          |          |         |   |          |          |        
|                                                                                  |                                                                                       | Total revenue                                |          |          | 202,960 |   |          |          | 152,305 |   |        |         | 177,114 | 
|Operating expenses:                                                               |                                                                                       |                                              |          |          |         |   |          |          |         |   |        |        
|                                                                                  | Project personnel and related expenses before
    out-of-pocket reimbursable expenses |                                              |          | 132,627  |         |   |          | 109,085  |         |   |        | 102,429 |        
|                                                                                  | Out-of-pocket reimbursable expenses                                                   |                                              |          | 21,745   |         |   |          | 19,331   |         |   |        | 22,329  |        
|                                                                                  |                                                                                       |                                              |          |          |         |   |          |          |        
|                                                                                  |                                                                                       | Total project personnel and related expenses |          |          | 154,372 |   |          |          | 128,416 |   |        |         | 124,758 | 
|                                                                                  | Professional development and recruiting                                               |                                              |          | 10,834   |         |   |          | 4,134    |         |   |        | 4,288   |        
|                                                                                  | Marketing and sales                                                                   |                                              |          | 7,136    |         |   |          | 3,865    |         |   |        | 2,836   |        
|                                                                                  | Management and administrative support                                                 |                                              |          | 46,794   |         |   |          | 37,363   |         |   |        | 34,359  |        
|                                                                                  | Goodwill amortization                                                                 |                                              |          | 61,850   |         |   |          |         |         |   |        |        |        
|                                                                                  | Noncash compensation*                                                                 |                                              |          | 52,305   |         |   |          | 53,078   |         |   |        | 12,692  |        
|                                                                                  | Restructuring charges                                                                 |                                              |          | 15,542   |         |   |          | 29,266   |         |   |        | 3,975   |        
|                                                                                  | Impairment charge on long-lived assets                                                |                                              |          |         |         |   |          | 94,315   |         |   |        |        |        
|                                                                                  |                                                                                       |                                              |          |          |         |   |          |          |        
|                                                                                  |                                                                                       | Total operating expenses                     |          |          | 348,833 |   |          |          | 350,437 |   |        |         | 182,908 | 
|                                                                                  |                                                                                       |                                              |          |          |         |   |          |          |        
|                                                                                  | Loss from operations                                                                  |                                              |          | (145,873 | )       |   |          | (198,132 | )       |   |        | (5,794  | )      
|                                                                                  | Interest income                                                                       |                                              |          | 4,164    |         |   |          | 2,635    |         |   |        | 1,130   |        
|                                                                                  | Interest expense                                                                      |                                              |          | (26      | )       |   |          | (49      | )       |   |        | (68     | )      
|                                                                                  | Other expense, net                                                                    |                                              |          | (2,985   | )       |   |          | (2,442   | )       |   |        | (25     | )      
|                                                                                  |                                                                                       |                                              |          |          |         |   |          |          |        
|                                                                                  |                                                                                       | Total other income, net                      |          |          | 1,153   |   |          |          | 144     |   |        |         | 1,037   | 
|                                                                                  |                                                                                       |                                              |          |          |         |   |          |          |        
|Loss before taxes and cumulative effect of change
    in accounting principle     |                                                                                       |                                              | (144,720 | )        |         |   | (197,988 | )        |         |   | (4,757 | )      
|Income tax expense (benefit)                                                      |                                                                                       |                                              | (11,048  | )        |         |   | 21,209   |          |         |   | 654    |        
|                                                                                  |                                                                                       |                                              |          |          |         |   |          |          |        
|Loss before cumulative effect of change in
    accounting principle               |                                                                                       |                                              | (133,672 | )        |         |   | (219,197 | )        |         |   | (5,411 | )      
|Cumulative effect of change in accounting
    principle                           |                                                                                       |                                              |         |          |         |   | (140,864 | )        |         |   |       |        
|                                                                                  |                                                                                       |                                              |          |          |         |   |          |          |        
|Net loss                                                                          |                                                                                       |                                              | (133,672 | )        |         |   | (360,061 | )        |         |   | (5,411 | )      
|                                                                                  | Reclassification adjustment, net of income tax
    benefit of $232                    |                                              |          | 363      |         |   |          |         |         |   |        |        |        
|                                                                                  | Foreign currency translation adjustments                                              |                                              |          | (1,924   | )       |   |          | 4,104    |         |   |        | 1,127   |        
|                                                                                  | Unrealized gain on investment                                                         |                                              |          |         |         |   |          |         |         |   |        | 437     |        
|                                                                                  |                                                                                       |                                              |          |          |         |   |          |          |        
|Comprehensive loss                                                                |                                                                                       | $                                            | (135,233 | )        |         | $ | (355,957 | )        |         | $ | (3,847 | )      
|                                                                                  |                                                                                       |                                              |          |          |         |   |          |          |        
|Basic and diluted loss per share of common stock:                                 |                                                                                       |                                              |          |          |         |   |          |          |         |   |        |        
|Loss before cumulative effect of change in
    accounting principle               |                                                                                       | $                                            | (4.34    | )        |         | $ | (6.95    | )        |         | $ | (0.17  | )      
|Cumulative effect of change in accounting
    principle                           |                                                                                       |                                              |         |          |         |   | (4.47    | )        |         |   |       |        
|                                                                                  |                                                                                       |                                              |          |          |         |   |          |          |        
|Net loss                                                                          |                                                                                       | $                                            | (4.34    | )        |         | $ | (11.41   | )        |         | $ | (0.17  | )      
|                                                                                  |                                                                                       |                                              |          |          |         |   |          |          |        
|Shares used in computing basic and diluted net
    loss per share of common stock |                                                                                       |                                              | 30,813   |          |         |   | 31,548   |          |         |   | 32,710 |        
|                                                                                  |                                                                                       |                                              |          |          |         |   |          |          |        
|*Noncash compensation:                                                            |                                                                                       |                                              |          |          |         |   |          |          |         |   |        |        
|                                                                                  | Project personnel and related expenses                                                |                                              | $        | 51,352   |         |   | $        | 51,953   |         |   | $      | 11,625  |        
|                                                                                  | Professional development and recruiting                                               |                                              |          | 94       |         |   |          | 138      |         |   |        | 107     |        
|                                                                                  | Marketing and sales                                                                   |                                              |          | 88       |         |   |          | 227      |         |   |        | 112     |        
|                                                                                  | Management and administrative support                                                 |                                              |          | 771      |         |   |          | 760      |         |   |        | 848     |        
|                                                                                  |                                                                                       |                                              |          |          |         |   |          |          |        
|                                                                                  |                                                                                       | Total noncash compensation                   |          | $        | 52,305  |   |          | $        | 53,078  |   |        | $       | 12,692  | 
|                                                                                  |                                                                                       |                                              |          |          |         |   |          |          |        

See accompanying notes to consolidated financial
statements.

F-4



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.



CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY


Fiscal years ended March 31, 2002, 2003
and 2004


|                                                                           |  |                |     |   |         |   |    |        |  |            |         |            |  |              |              |   |        |          |             |           |  |   |               |   |  |        |          |   |               |   |         |   |  |   |        |   |  |   |          |  
|-------------------------------------------------------------------------- |  | -------------- | --- | - | ------- | - | -- | ------ |  | ---------- | ------- | ---------- |  | ------------ | ------------ | - | ------ | -------- | ----------- | --------- |  | - | ------------- | - |  | ------ | -------- | - | ------------- | - | ------- | - |  | - | ------ | - |  | - | -------- | -
|                                                                           |  |                |     |   |         |   |    |        |  |            |         | Notes      |  |              |              |   |        |          | Accumulated |           |  |  
|                                                                           |  |                |     |   |         |   |    |        |  |            |         | Receivable |  |              |              |   |        |          | Other       |           |  |  
|                                                                           |  | Class A        |     |   | Class B |   |    |        |  | Additional |         |            |  |              | from sale of |   |        | Retained |             |           |  |   | Comprehensive |   |  | Total  |         
|                                                                           |  | Common         |     |   | Common  |   |    | Common |  |            | Paid-In |            |  | Unearned     |              |   | Common |          |             | Earnings  |  |   | Treasury      |   |  | Income |          |   | Stockholders |  
|                                                                           |  | Stock          |     |   | Stock   |   |    | Stock  |  |            | Capital |            |  | Compensation |              |   | Stock  |          |             | (Deficit) |  |   | Stock         |   |  | (Loss) |          |   | Equity        |  
|                                                                           |  |                |     |   |         |   |    |        |  |            |         |            |  |              |              |   |        |          |             |           |  |   |               |   |  |        |          |   |               |  
|                                                                           |  |               
|                                                                           |  | (In thousands) |    
|Balance at March 31, 2001                                                  |  | $              | 24  |   |         | $ | 9  |        |  | $          |        |            |  | $            | 652,234      |   |        | $        | (177,375    | )         |  | $ | (332          | ) |  | $      | 19,812   |   |               | $ | (40,756 | ) |  | $ | (1,249 | ) |  | $ | 452,367  |  
|                                                                           |  |                |     |   |         |   |    |        |  |            |         |            |  |              |              |   |        |          |             |           |  |   |               |   |  |        |          |   |               |  
|Issuance, forfeiture and cancellation of stock                             |  |                |    |   |         |   | 1  |        |  |            |        |            |  |              | 5,274        |   |        |          | (4,707      | )         |  |   | 59            |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   | 627      |  
|Forfeiture and cancellation of stock options
    issued below market  net |  |                |    |   |         |   |   |        |  |            |        |            |  |              | (7,620       | ) |        |          | 8,437       |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   | 817      |  
|Noncash compensation                                                       |  |                |    |   |         |   |   |        |  |            |        |            |  |              |             |   |        |          | 52,305      |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   | 52,305   |  
|Exercise of stock options                                                  |  |                |    |   |         |   | 1  |        |  |            |        |            |  |              | 5,358        |   |        |          |            |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   | 5,359    |  
|Income tax benefit related to stock option
    exercises                   |  |                |    |   |         |   |   |        |  |            |        |            |  |              | 1,456        |   |        |          |            |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   | 1,456    |  
|Purchase of treasury stock                                                 |  |                |    |   |         |   |   |        |  |            |        |            |  |              |             |   |        |          |            |           |  |   |              |   |  |        |         |   |               |   | (5,934  | ) |  |   |       |   |  |   | (5,934   | )
|Conversion to Class A                                                      |  |                | 3   |   |         |   | (4 | )      |  |            |        |            |  |              |             |   |        |          |            |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   | (1       | )
|Repayment of notes                                                         |  |                |    |   |         |   |   |        |  |            |        |            |  |              |             |   |        |          |            |           |  |   | 193           |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   | 193      |  
|Employee stock purchase plan                                               |  |                |    |   |         |   |   |        |  |            |        |            |  |              | 3,142        |   |        |          |            |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   | 3,142    |  
|Unrealized gain on securities                                              |  |                |    |   |         |   |   |        |  |            |        |            |  |              |             |   |        |          |            |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   | 363    |   |  |   | 363      |  
|Translation adjustment                                                     |  |                |    |   |         |   |   |        |  |            |        |            |  |              |             |   |        |          |            |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   | (1,924 | ) |  |   | (1,924   | )
|Net loss                                                                   |  |                |    |   |         |   |   |        |  |            |        |            |  |              |             |   |        |          |            |           |  |   |              |   |  |        | (133,672 | ) |               |   |        |   |  |   |       |   |  |   | (133,672 | )
|                                                                           |  |                |     |   |         |   |    |        |  |            |         |            |  |              |              |   |        |          |             |           |  |   |               |   |  |        |          |   |               |  
|Balance at March 31, 2002                                                  |  | $              | 27  |   |         | $ | 7  |        |  | $          |        |            |  | $            | 659,844      |   |        | $        | (121,340    | )         |  | $ | (80           | ) |  | $      | (113,860 | ) |               | $ | (46,690 | ) |  | $ | (2,810 | ) |  | $ | 375,098  |  
|                                                                           |  |                |     |   |         |   |    |        |  |            |         |            |  |              |              |   |        |          |             |           |  |   |               |   |  |        |          |   |               |  
|Issuance, forfeiture and cancellation of stock                             |  |                |    |   |         |   | 1  |        |  |            |        |            |  |              | 751          |   |        |          | 352         |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   | 1,104    |  
|Forfeiture and cancellation of stock options
    issued below market  net |  |                |    |   |         |   |   |        |  |            |        |            |  |              | (20,986      | ) |        |          | 20,580      |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   | (406     | )
|Noncash compensation                                                       |  |                |    |   |         |   |   |        |  |            |        |            |  |              |             |   |        |          | 53,078      |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   | 53,078   |  
|Exercise of stock options                                                  |  |                |    |   |         |   |   |        |  |            |        |            |  |              | 2,343        |   |        |          |            |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   | 2,343    |  
|Income tax benefit related to stock option
    exercises                   |  |                |    |   |         |   |   |        |  |            |        |            |  |              | 333          |   |        |          |            |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   | 333      |  
|Purchase of treasury stock                                                 |  |                |    |   |         |   |   |        |  |            |        |            |  |              |             |   |        |          |            |           |  |   |              |   |  |        |         |   |               |   | (5,242  | ) |  |   |       |   |  |   | (5,242   | )
|Conversion to Class A                                                      |  |                | 2   |   |         |   | (2 | )      |  |            |        |            |  |              |             |   |        |          |            |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   |         |  
|Repayment of notes                                                         |  |                |    |   |         |   |   |        |  |            |        |            |  |              |             |   |        |          |            |           |  |   | 9             |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   | 9        |  
|Employee stock purchase plan                                               |  |                |    |   |         |   |   |        |  |            |        |            |  |              | 2,017        |   |        |          |            |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   | 2,017    |  
|Translation adjustment                                                     |  |                |    |   |         |   |   |        |  |            |        |            |  |              |             |   |        |          |            |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   | 4,104  |   |  |   | 4,104    |  
|Net loss                                                                   |  |                |    |   |         |   |   |        |  |            |        |            |  |              |             |   |        |          |            |           |  |   |              |   |  |        | (360,061 | ) |               |   |        |   |  |   |       |   |  |   | (360,061 | )
|                                                                           |  |                |     |   |         |   |    |        |  |            |         |            |  |              |              |   |        |          |             |           |  |   |               |   |  |        |          |   |               |  
|Balance at March 31, 2003                                                  |  | $              | 29  |   |         | $ | 6  |        |  | $          |        |            |  | $            | 644,302      |   |        | $        | (47,330     | )         |  | $ | (71           | ) |  | $      | (473,921 | ) |               | $ | (51,932 | ) |  | $ | 1,294  |   |  | $ | 72,377   |  
|                                                                           |  |                |     |   |         |   |    |        |  |            |         |            |  |              |              |   |        |          |             |           |  |   |               |   |  |        |          |   |               |  
|Issuance, forfeiture and cancellation of stock                             |  |                |    |   |         |   |   |        |  |            | 3       |            |  |              |             |   |        |          | 70          |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   | 73       |  
|Forfeiture and cancellation of stock options
    issued below market  net |  |                |    |   |         |   |   |        |  |            |        |            |  |              | (30,298      | ) |        |          | 32,391      |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   | 2,093    |  
|Noncash compensation                                                       |  |                |    |   |         |   |   |        |  |            |        |            |  |              | 4,147        |   |        |          | 8,545       |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   | 12,692   |  
|Exercise of stock options                                                  |  |                |    |   |         |   |   |        |  |            | 1       |            |  |              | 5,143        |   |        |          |            |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   | 5,144    |  
|Purchase of treasury stock                                                 |  |                |    |   |         |   |   |        |  |            |        |            |  |              |             |   |        |          |            |           |  |   |              |   |  |        |         |   |               |   | (9,204  | ) |  |   |       |   |  |   | (9,204   | )
|Conversion to one class common stock                                       |  |                | (29 | ) |         |   | (6 | )      |  |            | 35      |            |  |              |             |   |        |          |            |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   |         |  
|Repayment of notes                                                         |  |                |    |   |         |   |   |        |  |            |        |            |  |              |             |   |        |          |            |           |  |   | 71            |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   | 71       |  
|Employee stock purchase plan                                               |  |                |    |   |         |   |   |        |  |            |        |            |  |              | 1,388        |   |        |          |            |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   |       |   |  |   | 1,388    |  
|Unrealized gain on investment                                              |  |                |    |   |         |   |   |        |  |            |        |            |  |              |             |   |        |          |            |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   | 437    |   |  |   | 437      |  
|Translation adjustment                                                     |  |                |    |   |         |   |   |        |  |            |        |            |  |              |             |   |        |          |            |           |  |   |              |   |  |        |         |   |               |   |        |   |  |   | 1,127  |   |  |   | 1,127    |  
|Net loss                                                                   |  |                |    |   |         |   |   |        |  |            |        |            |  |              |             |   |        |          |            |           |  |   |              |   |  |        | (5,411   | ) |               |   |        |   |  |   |       |   |  |   | (5,411   | )
|                                                                           |  |                |     |   |         |   |    |        |  |            |         |            |  |              |              |   |        |          |             |           |  |   |               |   |  |        |          |   |               |  
|Balance at March 31, 2004                                                  |  | $              |    |   |         | $ |   |        |  | $          | 39      |            |  | $            | 624,682      |   |        | $        | (6,324      | )         |  | $ |              |   |  | $      | (479,332 | ) |               | $ | (61,136 | ) |  | $ | 2,858  |   |  | $ | 80,787   |  
|                                                                           |  |                |     |   |         |   |    |        |  |            |         |            |  |              |              |   |        |          |             |           |  |   |               |   |  |        |          |   |               |  

See accompanying notes to consolidated financial
statements.

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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

Fiscal Years ended March 31, 2002, 2003
and 2004


|                                                        |                                                                                           |                                                                                                    |                              |          |         |         |         |          |        |         |        |        |        |        |  
|------------------------------------------------------- | ----------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ---------------------------- | -------- | ------- | ------- | ------- | -------- | ------ | ------- | ------ | ------ | ------ | ------ | -
|                                                        |                                                                                           | 2002                                                                                               |                              |          | 2003    |         |         | 2004     |       
|                                                        |                                                                                           |                                                                                                    |                              |          |         |         |         |          |       
|                                                        |                                                                                           |                                                                                                   
|                                                        |                                                                                           | (In thousands)                                                                                     |                             
|Cash flows from operating activities:                   |                                                                                           |                                                                                                    |                              |          |         |         |         |          |        |         |        |       
|                                                        | Loss before cumulative effect of change in
    accounting principle                       |                                                                                                    | $                            | (133,672 | )       |         | $       | (219,197 | )      |         | $      | (5,411 | )     
|                                                        | Adjustments to reconcile loss to net cash
    provided by (used in) operating activities: |                                                                                                    |                              |          |         |         |         |          |        |         |        |        |       
|                                                        |                                                                                           | Restructuring charges                                                                              |                              |          | 15,542  |         |         |          | 29,266 |         |        |        | 3,975  |       
|                                                        |                                                                                           | Depreciation and amortization                                                                      |                              |          | 7,156   |         |         |          | 5,766  |         |        |        | 4,702  |       
|                                                        |                                                                                           | Write-down of net book value of computers,
    equipment, leasehold improvements and software, net |                              |          |        |         |         |          | 2,071  |         |        |        | 774    |       
|                                                        |                                                                                           | Impairment charge on long-lived assets                                                             |                              |          |        |         |         |          | 94,315 |         |        |        |       |       
|                                                        |                                                                                           | Goodwill amortization                                                                              |                              |          | 61,850  |         |         |          |       |         |        |        |       |       
|                                                        |                                                                                           | Noncash compensation                                                                               |                              |          | 52,305  |         |         |          | 53,078 |         |        |        | 12,692 |       
|                                                        |                                                                                           | Deferred income taxes                                                                              |                              |          | (10,475 | )       |         |          | 22,536 |         |        |        |       |       
|                                                        |                                                                                           | Tax benefits from employee stock plans                                                             |                              |          | 1,456   |         |         |          | 333    |         |        |        |       |       
|                                                        |                                                                                           | Write-down of equity investments                                                                   |                              |          | 4,577   |         |         |          |       |         |        |        |       |       
|                                                        |                                                                                           | Other                                                                                              |                              |          | (1,846  | )       |         |          |       |         |        |        |       |       
|                                                        |                                                                                           | Changes in assets and liabilities, net of effects
    of acquisition:                              |                              |          |         |         |         |          |        |         |        |        |        |       
|                                                        |                                                                                           |                                                                                                    | Accounts receivable          |          |         | 10,369  |         |          |        | 8,205   |        |        |        | (4,951 | )
|                                                        |                                                                                           |                                                                                                    | Prepaid expenses and other   |          |         | 2,106   |         |          |        | 1,826   |        |        |        | (3,929 | )
|                                                        |                                                                                           |                                                                                                    | Accounts payable             |          |         | (521    | )       |          |        | (2,433  | )      |        |        | 1,085  |  
|                                                        |                                                                                           |                                                                                                    | Accrued compensation         |          |         | (28,336 | )       |          |        |        |        |        |        | 5,524  |  
|                                                        |                                                                                           |                                                                                                    | Restructuring accrual        |          |         | (11,579 | )       |          |        | (18,895 | )      |        |        | (8,800 | )
|                                                        |                                                                                           |                                                                                                    | Deferred revenue             |          |         | (1,791  | )       |          |        | (306    | )      |        |        | 634    |  
|                                                        |                                                                                           |                                                                                                    | Income taxes payable         |          |         | (12,318 | )       |          |        | 1,899   |        |        |        | (1,279 | )
|                                                        |                                                                                           |                                                                                                    | Other assets and liabilities |          |         | (837    | )       |          |        | (518    | )      |        |        | 2,822  |  
|                                                        |                                                                                           |                                                                                                    |                              |          |         |         |         |          |       
|Net cash provided by (used in) operating
    activities |                                                                                           |                                                                                                    | (46,014                      | )        |         |         | (22,054 | )        |        |         | 7,838  |       
|                                                        |                                                                                           |                                                                                                    |                              |          |         |         |         |          |       
|Cash flows from investing activities:                   |                                                                                           |                                                                                                    |                              |          |         |         |         |          |        |         |        |       
|                                                        | Capital expenditures, net                                                                 |                                                                                                    |                              | (6,817   | )       |         |         | (1,528   | )      |         |        | (935   | )     
|                                                        | Acquisition, net of cash acquired                                                         |                                                                                                    |                              | (1,781   | )       |         |         |         |        |         |        |       |       
|                                                        | Other assets                                                                              |                                                                                                    |                              | (2,205   | )       |         |         | 872      |        |         |        | 843    |       
|                                                        |                                                                                           |                                                                                                    |                              |          |         |         |         |          |       
|Net cash used in investing activities                   |                                                                                           |                                                                                                    | (10,803                      | )        |         |         | (656    | )        |        |         | (92    | )     
|                                                        |                                                                                           |                                                                                                    |                              |          |         |         |         |          |       
|Cash flows from financing activities:                   |                                                                                           |                                                                                                    |                              |          |         |         |         |          |        |         |        |       
|                                                        | Repayment of note                                                                         |                                                                                                    |                              | (500     | )       |         |         |         |        |         |        |       |       
|                                                        | Common stock issued                                                                       |                                                                                                    |                              | 9,137    |         |         |         | 5,067    |        |         |        | 6,609  |       
|                                                        | Purchase of treasury stock                                                                |                                                                                                    |                              | (5,934   | )       |         |         | (5,242   | )      |         |        | (9,204 | )     
|                                                        |                                                                                           |                                                                                                    |                              |          |         |         |         |          |       
|Net cash provided by (used in) financing
    activities |                                                                                           |                                                                                                    | 2,703                        |          |         |         | (175    | )        |        |         | (2,595 | )     
|                                                        |                                                                                           |                                                                                                    |                              |          |         |         |         |          |       
|Effect of exchange rate changes on cash                 |                                                                                           |                                                                                                    | (471                         | )        |         |         | 1,440   |          |        |         | 825    |       
|                                                        |                                                                                           |                                                                                                    |                              |          |         |         |         |          |       
|Net decrease in cash and cash equivalents               |                                                                                           |                                                                                                    | (54,585                      | )        |         |         | (21,445 | )        |        |         | 5,976  |       
|Cash and cash equivalents at beginning of year          |                                                                                           |                                                                                                    | 151,358                      |          |         |         | 96,773  |          |        |         | 75,328 |       
|                                                        |                                                                                           |                                                                                                    |                              |          |         |         |         |          |       
|Cash and cash equivalents at end of year                |                                                                                           | $                                                                                                  | 96,773                       |          |         | $       | 75,328  |          |        | $       | 81,304 |       
|                                                        |                                                                                           |                                                                                                    |                              |          |         |         |         |          |       
|Supplemental disclosure of cash flow information:       |                                                                                           |                                                                                                    |                              |          |         |         |         |          |        |         |        |       
|                                                        | Cash paid during the year for interest                                                    |                                                                                                    | $                            | 77       |         |         | $       | 221      |        |         | $      |       |       
|                                                        | Cash paid during the year for income taxes                                                |                                                                                                    | $                            | 7,296    |         |         | $       | 3,006    |        |         | $      | 3,127  |       

See accompanying notes to consolidated financial
statements.

F-6



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(1) Description of the Business and Basis
of Presentation

DiamondCluster International, Inc., including as
the context requires, its wholly-owned subsidiaries (the
Company or Diamond) is a premier global
management consulting firm that helps leading organizations
worldwide to understand and leverage technology to reduce costs,
incorporate flexibility into their businesses, address changing
regulations and markets, improve operations, and grow their
business. The Company works collaboratively with its clients,
utilizing small, multidisciplinary teams of consultants because
we believe the most lasting and significant improvements occur
when the client is integrally involved in the change. As of
March 31, 2004, the Company employed 481 client-serving
professionals and had nine offices in North America, Europe and
Latin America.

The consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America. Certain prior period
amounts have been reclassified to conform to current period
presentation.

(2) Summary of Significant Accounting
Policies

Principles of
Consolidation

The accompanying consolidated financial
statements include the accounts of the Company and its
majority-owned subsidiaries. All intercompany accounts and
balances have been eliminated in consolidation.

Foreign
Currency Translation

All assets and liabilities denominated in foreign
currencies are translated at the exchange rate on the balance
sheet date. Revenues, costs and expenses are translated at
average rates of exchange prevailing during the period.
Translation adjustments are deferred as a separate component of
stockholders equity. Gains and losses resulting from
foreign currency transactions are included in the results of
operations.

Revenue
Recognition

The Company earns revenues from a range of
consulting services, including helping organizations worldwide
to develop and implement growth strategies, improve operations,
and capitalize on technology. Revenues are comprised of
professional fees for services rendered to clients plus
reimbursement of out-of-pocket expenses. The Company bills
clients for services and expenses incurred either monthly or
semi-monthly in accordance with the terms of the client
engagement agreement. Prior to the commencement of a client
engagement, the Company and the client agree on fees for
services based upon the scope of the project, staffing
requirements and the level of client involvement. The Company
recognizes revenue as services are performed in accordance with
the terms of the client engagement. Unbilled receivables
represent revenues earned for services performed that have not
been billed as of the balance sheet date.

Allowance for
Doubtful Accounts and Deferred Revenue

Management makes estimates of the amount of
billed and unbilled accounts receivable that may not be
collected from clients. In making these estimates, management
specifically analyzes individual client balances, the
composition of the aging of accounts receivable, historical bad
debts, customer credit-worthiness and current economic trends,
and considers the Companys overall experience with
estimating uncollectible amounts. As of March 31, 2004, the
accounts receivable balance was $23.2 million, including
unbilled accounts receivable of $1.6 million, and net of
allowance for doubtful accounts of $1.7 million. Unbilled
accounts receivable are typically billed the following month.

Provisions are also made for estimated costs to
be incurred subsequent to targeted project completion. These
provisions are estimated based principally on historical
experience and a review of projects in progress

F-7



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and are reflected, net of actual costs incurred
on completed projects, in deferred revenue. Although from time
to time the Company has been required to make revisions to
clients estimated deliverables, to date there have been no
such revisions that have had a material effect on the
Companys operating results. The deferred revenue balance,
measured based on the gross amount of services to be rendered
subsequent to the targeted completion date, was
$1.4 million as of March 31, 2004. Also included in
the deferred revenue balance are $0.4 million of prepaid
client fees related to consulting services that the Company
expects to earn in subsequent periods.

Unearned
Compensation

The Company has adopted various stock incentive
and option plans that authorize the granting of qualified and
non-qualified stock options, stock appreciation rights
(SARs) and stock awards, including restricted stock
and restricted stock units, to officers and employees and
non-qualified stock options, SARs and stock awards to certain
persons who were not employees on the date of grant, including
certain non-employee members of the Board of Directors.

Unearned compensation represents certain
stock-based compensation that has not yet been earned, and is
reported within the stockholders equity section of the
consolidated balance sheet. Prior to April 1, 2003, the
Company chose to account for stock-based compensation arising
from fixed awards to officers and employees using the intrinsic
value method prescribed in Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued
to Employees, and related interpretations. Accordingly,
compensation cost of stock options (noncash
compensation) was measured as the excess, if any, of the
quoted market price of the Companys stock at the date of
the grant over the options exercise price, and was charged
to operations over the vesting period, which generally ranged
between two and five years. The Company applied
SFAS No. 123, Accounting for Stock Based
Compensation, in accounting for stock issued to
individuals or groups other than employees.

F-8



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Effective April 1, 2003, the Company adopted
the fair value-based recognition provisions of
SFAS No. 123 in accounting for stock awards to
officers and employees. The Company elected the prospective
method of transition as described in SFAS No. 148,
Accounting for Stock-based Compensation 
Transition and Disclosure, which applies the recognition
provisions to all employee awards granted, modified or settled
on or after April 1, 2003, in accounting for employee
stock-based compensation. Had compensation expense on options
granted prior to April 1, 2003 been determined based on the
fair value at the grant date consistent with the methodology
prescribed under SFAS No. 123, the Companys net
income (loss) and basic and diluted net earnings (loss) per
share would have been equal to the pro forma amounts indicated
below (in thousands):

|                                               |                                                                                                                                                     |                             |   |          |      |  |   |          |     |  |   |        |    
|---------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | - | -------- | ---- |  | - | -------- | --- |  | - | ------ | ---
|                                               |                                                                                                                                                     |                            
|                                               |                                                                                                                                                     | Fiscal Year Ended March 31, |  
|                                               |                                                                                                                                                     |                             |  
|                                               |                                                                                                                                                     | 2002                        |   |          | 2003 |  |   | 2004     |    
|                                               |                                                                                                                                                     |                             |   |          |      |  |   |          |    
|Net income (loss):                             |                                                                                                                                                     |                             |   |          |      |  |   |          |     |  |   |       
|                                               | As reported                                                                                                                                         |                             | $ | (133,672 | )    |  | $ | (360,061 | )   |  | $ | (5,411 | )  
|                                               | Add: Stock-based employee compensation expense
    included in reported net income, net of related tax effects                                      |                             |   | 52,305   |      |  |   | 53,843   | (1) |  |   | 12,777 | (1)
|                                               | Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                             |   | (127,749 | )    |  |   | (62,870  | )   |  |   | (5,316 | )  
|                                               |                                                                                                                                                     |                             |   |          |      |  |   |          |    
|                                               | Pro forma                                                                                                                                           |                             | $ | (209,116 | )    |  | $ | (369,088 | )   |  | $ | 2,050  |    
|                                               |                                                                                                                                                     |                             |   |          |      |  |   |          |    
|Basic and diluted net income (loss) per share: |                                                                                                                                                     |                             |   |          |      |  |   |          |     |  |   |       
|                                               | As reported                                                                                                                                         |                             | $ | (4.34    | )    |  | $ | (11.41   | )   |  | $ | (0.17  | )  
|                                               | Pro forma                                                                                                                                           |                             | $ | (6.79    | )    |  | $ | (11.70   | )   |  | $ | 0.06   | (2)



---



|    |                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In fiscal years 2003 and 2004, amount includes
    $0.8 million and $0.1 million, respectively, of
    compensation expense related to restricted stock that was
    recorded as part of the restructuring charge expense in the
    Consolidated Statements of Operations and Comprehensive Loss.
|   
|(2) | The pro forma basic and diluted net income (loss)
    per share is $0.06 per share for fiscal year 2004.                                                                                                                                                                                          



| |                          
| | -------------------------
| | Cash and Cash Equivalents

Cash equivalents are highly liquid investments
with original maturities of three months or less and are stated
at cost, which approximates fair value. Cash equivalents consist
of money market funds.



| |                  
| | -----------------
| | Long-Lived Assets

Computers and equipment, leasehold improvements
and software are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed by
applying the straight-line method over the estimated useful
lives of assets, which range from eighteen months to five years
for computers and equipment, the lesser of the lease term or the
life of the asset (generally five years) for leasehold
improvements and three to five years for software. Costs
capitalized for internally developed software include external
consulting fees and employee salaries. Related depreciation and
amortization expense was $7.2 million, $5.8 million
and $4.7 million for the years ended March 31, 2002,
2003 and 2004, respectively.



| |         
| | --------
| | Goodwill

Goodwill resulting from business acquisitions
represents the excess of purchase price over the fair value of
the net assets acquired. Prior to April 1, 2002, goodwill
was being amortized on a straight-line basis over useful

F-9



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

lives ranging between 5 and 25 years.
Accumulated amortization amounted to $22.4 million and
$84.3 million as of March 31, 2001 and 2002,
respectively. On April 1, 2002, the Company adopted
Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets.
With the adoption of SFAS No. 142, goodwill and other
indefinite life intangible assets (intangibles) are
no longer subject to amortization, rather they are subject to an
assessment for impairment whenever events or circumstances
indicate that impairment may have occurred, but at least
annually, by applying a fair value based test. Under
SFAS No. 142, goodwill impairment is assessed at the
reporting unit level, using a discounted cash flow method. The
Company completed its initial impairment test on goodwill using
the methodology described in SFAS No. 142 in the first
quarter of fiscal 2003, and conducted an annual assessment of
impairment based on fair value in accordance with the
requirements of SFAS No. 142 during the fourth quarter
of fiscal year 2003. In connection with the adoption of
SFAS No. 142 on April 1, 2002, the Company
recognized an impairment loss of $140.9 million as the
cumulative effect of a change in accounting principle. In
connection with the annual assessment during the fourth quarter
of fiscal year 2003, the Company recognized an additional
impairment loss of $94.3 million. The carrying value of
goodwill as of March 31, 2003 and 2004 was zero.

The following table sets forth an analysis of the
changes in the total carrying amount of goodwill for the fiscal
years ended March 31, 2002 and 2003 (in thousands). There
was no related activity in fiscal year 2004.

|                                           |  |   |          |  
|------------------------------------------ |  | - | -------- | -
|Balance as of April 1, 2001                |  | $ | 295,600  |  
|Goodwill acquired during the year          |  |   | 1,429    |  
|Goodwill amortized during the year         |  |   | (61,850  | )
|                                           |  |   |         
|Balance as of March 31, 2002               |  |   | 235,179  |  
|Goodwill amortized during the year         |  |   |         |  
|Impairment loss recognized during the year |  |   | (235,179 | )
|                                           |  |   |         
|Balance as of March 31, 2003               |  | $ |         |  
|                                           |  |   |         

The following table sets forth a reconciliation
of reported net loss to adjusted net loss for the fiscal year
ended March 31, 2002 assuming that the provision of
SFAS No. 142 related to goodwill amortization had been
applied in that year (in thousands):

|                                |  |                   |          |  
|------------------------------- |  | ----------------- | -------- | -
|                                |  | Fiscal Year Ended |         
|                                |  | March 31, 2002    |         
|                                |  |                   |         
|Reported net loss               |  | $                 | (133,672 | )
|Add back: Goodwill amortization |  |                   | 61,850   |  
|                                |  |                   |         
|Adjusted net loss               |  | $                 | (71,822  | )
|                                |  |                   |         
|Basic loss per share:           |  |                   |          |  
|Reported net loss               |  | $                 | (4.34    | )
|Goodwill amortization           |  |                   | 2.01     |  
|                                |  |                   |         
|Adjusted net loss               |  | $                 | (2.33    | )
|                                |  |                   |         
|Diluted loss per share:         |  |                   |          |  
|Reported net loss               |  | $                 | (4.34    | )
|Goodwill amortization           |  |                   | 2.01     |  
|                                |  |                   |         
|Adjusted net loss               |  | $                 | (2.33    | )
|                                |  |                   |         

F-10



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                        
| | ---------------------------------------
| | Accounting for Investment
    Interests

In the past, the Company has obtained
non-controlling equity ownership interests either for cash or as
compensation for services performed. Such equity interests do
not enable the Company to exercise significant influence over
the investees and are accounted for under the cost method unless
the securities have readily determinable fair values based on
quoted market prices. Securities for which the fair market value
is determinable are recorded under SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities. The Company classifies these securities as
available-for-sale. Unrealized gains and losses on these
investments are reported in comprehensive income or loss as
unrealized gain (loss) on securities, and
accumulated as a separate component of stockholders
equity, net of any related tax effect. Declines in value that
are judged to be other than temporary result in a reduction of
the carrying amount of the investment to fair value and the
recognition of an impairment charge in other income (expense).
As of March 31, 2004, the carrying value of such
investments was $0.4 million.



| |                           
| | --------------------------
| | Other Comprehensive Income

Other comprehensive income consists of unrealized
gains and losses on available-for-sale securities, net of the
related tax effect, and cumulative foreign currency translation
adjustments.



| |                                                  
| | -------------------------------------------------
| | Derivative Instruments and Hedging
    Activities

The Company has adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities and SFAS No. 138, Accounting
for Certain Derivative Instruments and Certain Hedging
Activities, an Amendment of SFAS 133, and related
amendments and interpretations. These standards require that all
derivative instruments be recorded on the balance sheet at their
respective fair values.

The Companys use of derivative instruments
has been limited to forward foreign currency contracts, which
have been used principally to hedge net investments in certain
foreign operations. All derivatives are recognized on the
balance sheet at their fair value. On the date a derivative
foreign currency contract is entered into, the Company
designates the derivative as either a foreign currency
fair-value or cash-flow hedge (foreign currency
hedge), or a hedge of a net investment in a foreign operation.
The Company documents the hedging relationship and its
risk-management objective and strategy for undertaking the
hedge, the hedging instrument, the item, the nature of the risk
being hedged, how the hedging instruments effectiveness in
offsetting the hedged risk will be assessed, and a description
of the method of measuring ineffectiveness. The Company also
formally assesses, both at the hedges inception and on an
ongoing basis, whether the derivatives that are used in hedging
transactions are effective in offsetting changes in fair values
or cash flows of hedged items. When it is determined that a
derivative is not highly effective as a hedge or that it has
ceased to be a highly effective hedge, the Company discontinues
hedge accounting prospectively.

Changes in the fair value of fair value and cash
flow hedging instruments are included in operations and
comprehensive income (loss) as appropriate. Amounts recorded in
comprehensive income (loss) are reclassified to operations in
the period the hedged item affects earnings. Changes in the fair
value of a derivative, to the extent effective as a hedge, that
is used as a hedge of a net investment in a foreign operation
are recorded in the cumulative translation adjustments account
within other comprehensive income.

The Company has entered into transactions to
reduce the effect of foreign exchange rate fluctuations on
recorded foreign currency denominated assets and liabilities,
and to mitigate the effect of such foreign exchange rate changes
on the parent companys net investment in its foreign
subsidiaries. These transactions involve the use of forward
foreign exchange contracts in certain European currencies. A
forward foreign exchange contract obligates the Company to
exchange predetermined amounts of specified foreign currencies
at specified exchange rates on specified dates or to make an
equivalent U.S. dollar payment equal to the value of such
exchange. As a result, increases or decreases in the
U.S. dollar value of the Companys foreign

F-11



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

currency transactions are partially offset by
gains and losses on the forward contracts, so as to mitigate the
possibility of significant foreign currency transaction and
translation gains and losses. The Company does not use foreign
currency contracts for trading purposes. The Company does not
currently hedge anticipated foreign currency-denominated
revenues and expenses. All foreign currency transactions and
outstanding forward contracts are marked-to-market on a monthly
basis. There were no open euro/ U.S. dollar or other
foreign currency contracts outstanding as of March 31, 2003
and 2004.



| |                              
| | -----------------------------
| | Concentrations of Credit Risk

Financial instruments that potentially subject
the Company to significant concentration of market or credit
risk consist principally of cash equivalent instruments,
investments and accounts receivable. The Company places its cash
balances with reputable financial institutions. Investments are
carried at cost or fair value, as appropriate, and are not
significant at March 31, 2004. Trade receivables
potentially subject the Company to credit risk. The Company
extends credit to its customers based upon an evaluation of the
customers financial condition and credit history and
generally does not require collateral. The Company has
historically incurred minimal credit losses. The Company did not
have any clients that individually accounted for greater than
10% of its net revenues for the years ended March 31, 2002
and 2003 and had one client that accounted for 11% of revenues
for the year ended March 31, 2004. The Company had no
clients with outstanding balances that accounted for greater
than 10% of accounts receivable as of March 31, 2004.



| |             
| | ------------
| | Income Taxes

The Company accounts for income taxes using the
asset and the liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be reversed or settled.



| |                   
| | ------------------
| | Net Loss Per Share

Basic net loss per share is computed using the
weighted average number of common shares outstanding. Diluted
net loss per share is computed using the weighted average number
of common shares outstanding and, where dilutive, the assumed
exercise of stock options and vesting of restricted stock and
restricted stock units (using the treasury stock method).
Following is a reconciliation of the shares (in thousands) used
in computing basic and diluted net loss per share for the fiscal
years ended March 31, 2002, 2003 and 2004:

|                                                                                    |  |                             |        |  |      |  |        |      |  |  |        | 
|----------------------------------------------------------------------------------- |  | --------------------------- | ------ |  | ---- |  | ------ | ---- |  |  | ------ | 
|                                                                                    |  |                            
|                                                                                    |  | Fiscal Year Ended March 31, |       
|                                                                                    |  |                             |       
|                                                                                    |  | 2002                        |        |  | 2003 |  |        | 2004 | 
|                                                                                    |  |                             |        |  |      |  |        |      | 
|Shares used in computing basic net loss per share                                   |  |                             | 30,813 |  |      |  | 31,548 |      |  |  | 32,710 | 
|Dilutive effect of stock options                                                    |  |                             |       |  |      |  |       |      |  |  |       | 
|                                                                                    |  |                             |        |  |      |  |        |      | 
|Shares used in computing diluted net loss per
    share                             |  |                             | 30,813 |  |      |  | 31,548 |      |  |  | 32,710 | 
|                                                                                    |  |                             |        |  |      |  |        |      | 
|Antidilutive securities not included in dilutive
    net loss per share calculation |  |                             | 26,266 |  |      |  | 17,161 |      |  |  | 12,282 | 
|                                                                                    |  |                             |        |  |      |  |        |      | 
|Dilutive securities not included in dilutive net
    loss per share due to loss     |  |                             | 2,488  |  |      |  | 451    |      |  |  | 1,496  | 
|                                                                                    |  |                             |        |  |      |  |        |      | 

F-12



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                      
| | ---------------------
| | Financial Instruments

The fair value of the Companys financial
instruments approximates their carrying value.



| |                 
| | ----------------
| | Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and
liabilities, and the amounts of revenues and expenses during the
period. Actual results could differ from those estimates.



|    |                        
|--- | -----------------------
|(3) | New Accounting Policies

In December 2003, the Financial Accounting
Standards Board, (FASB) issued a revised
Interpretation No. 46, Consolidation of Variable
Interest Entities (Interpretation 46R),
which addresses how a business enterprise should evaluate
whether it has a controlling financial interest in an entity
through means other than voting rights and accordingly, should
consolidate the entity. Interpretation 46R replaces
Interpretation No. 46, Consolidation of Variable
Interest Entities, which was issued in January 2003. The
Company will be required to apply Interpretation 46R to
interests in variable interest entities (VIE)
created after December 31, 2003. For variable interests in
VIEs created before January 1, 2004, the interpretation
will be applied beginning on January 1, 2005. For any VIEs
that must be consolidated under Interpretation 46R that were
created before January 1, 2004, the assets, liabilities and
noncontrolling interests of the VIE initially would be measured
at their carrying amounts with any difference between the net
amount added to the balance sheet and any previously recognized
interest being recognized as the cumulative effect of an
accounting change. If determining the carrying amounts is not
practicable, fair value at the date Interpretation 46R
first applies may be used to measure the assets, liabilities and
noncontrolling interest of the VIE. The adoption of
Interpretation 46 is not expected to have a material impact
on the Companys financial statements.

In May 2003, the FASB issued
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities.
SFAS No. 149 amends and clarifies financial accounting
and reporting for derivative instruments by requiring that
contracts with comparable characteristics be accounted for
similarly. The provisions of SFAS No. 149 are
effective for contracts entered into or modified after
June 30, 2003, and hedging relationships designated after
June 30, 2003. As of March 31, 2004 and during the
twelve months then ended, the Company did not have any
derivative instruments or hedging activities outstanding and as
such, the adoption of SFAS No. 149 did not have a
material impact on the financial condition or operating results
of the Company.

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 establishes standards for
classifying and measuring as liabilities certain financial
instruments that have characteristics of both liabilities and
equity. This statement is effective for all financial
instruments created, entered into or modified after May 31,
2003, and is otherwise effective at the beginning of the first
interim period beginning after June 15, 2003. There was no
impact on the financial condition or operating results of the
Company from the adoption of SFAS No. 150.

In December 2003, the Staff of the Securities and
Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 104 (SAB 104), Revenue
Recognition, which supersedes SAB 101, Revenue
Recognition in Financial Statements. SAB 104s
primary purpose is to rescind the accounting guidance contained
in SAB 101 related to multiple-element revenue arrangements
that was superseded as a result of the issuance of Emerging
Issues Task Force (EITF) Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables. Additionally, SAB 104 rescinds the
SECs related Revenue Recognition in Financial
Statements  Frequently Asked Questions and
Answers issued with SAB 101 that had been codified in
SEC Topic 13, Revenue Recognition. While the wording
of SAB 104 has changed to reflect the

F-13



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged
by the issuance of SAB 104, which was effective upon
issuance. The Company adopted the provisions of SAB 104 in
the third quarter of fiscal year 2004. The Companys
adoption of SAB 104 did not have a material effect on its
financial position or results of operations for the fiscal year
ended March 31, 2004.



|    |                      
|--- | ---------------------
|(4) | Restructuring Charges

As a result of managements plan to better
align the Companys operating infrastructure with
anticipated levels of business in fiscal 2004 and beyond, the
Company restructured its workforce and operations in fiscal
years 2002, 2003 and 2004.



| |                                           
| | ------------------------------------------
| | Fiscal Year 2004 Restructuring
    Charges

In the first quarter of fiscal year 2004, the
Company recorded restructuring charge expense of
$4.2 million, $2.5 million of which was related to a
restructuring plan implemented in June 2003 and
$1.7 million of which was recorded as an adjustment to the
restructuring charge recorded in September 2002 to reflect a
change in estimate of future sublease income for a contractual
lease obligation related to office space reductions. In
connection with the restructuring plan implemented in June 2003,
the Company recorded a restructuring charge of $2.5 million
($1.5 million on an after-tax basis, or $0.05 per
share), consisting solely of severance and related expenses. The
principal actions in the June 2003 restructuring plan included
workforce reductions in the Europe and Latin America region,
resulting in the termination of approximately 30 employees,
none of whom were still employed by the Company as of
March 31, 2004. Of the total employees severed, 40% were
project personnel and 60% were operational personnel.

The total cash outlay for the restructuring
announced in June 2003 is expected to approximate
$2.3 million. The remaining $0.2 million of
restructuring costs consist of non-cash charges related to
equity grants issued in connection with certain severance
agreements. In March 2004, the Company adjusted the remaining
restructuring accrual balance for $0.1 million which
represents the excess of the accrual estimate over actual
expense. As of March 31, 2004, approximately
$2.3 million of cash had been expended for severance and
related costs in connection with this initiative.



| |                                           
| | ------------------------------------------
| | Fiscal Year 2003 Restructuring
    Charges

In connection with the restructuring plan
implemented in December 2002, the Company recorded a
restructuring charge of $8.4 million ($5.4 million on
an after-tax basis, or $0.17 per share). The
$8.4 million charge consisted of $7.8 million for
severance and related expenses, $0.4 million related to
office space reductions and $0.2 million for the write-off
of various depreciable assets. The principal actions in the
December 2002 restructuring plan included workforce reductions,
resulting in the termination of approximately
115 employees, none of whom were still employed by the
Company as of March 31, 2004. Of the total employees
severed, 79% were project personnel and 21% were operational
personnel.

The total cash outlay for the restructuring
announced in December 2002 is expected to approximate
$7.5 million. The remaining $0.9 million of
restructuring costs consists of non-cash charges primarily
related to non-cash severance items and the write-down of
certain assets to their estimated net realizable value. In March
2004, the Company adjusted the remaining restructuring accrual
balance for $0.2 million which represents the excess of the
accrual estimate over actual expense. As of March 31, 2004,
approximately $7.4 million of cash had been expended for
this initiative, primarily related to severance and related
costs.

In connection with the restructuring plan
implemented in September 2002, the Company recorded a
restructuring charge of $20.5 million ($12.8 million
on an after-tax basis or $0.41 per share). In June 2003,
the Company adjusted this charge and recognized
$1.7 million of additional expense to reflect a change in
the estimate of future sublease income related to contractual
lease obligations, bringing the total restructuring

F-14



---



##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

charge to $22.2 million ($14.5 million
on an after-tax basis). The $22.2 million charge consisted
of $13.8 million for contractual commitments related to
office space reductions, $5.7 million for severance and
related expenses and $2.7 million for the write-off of
various depreciable assets and the termination of certain
equipment leases. The principal actions in the September 2002
restructuring plan involved office space reductions, which
included further consolidation of office space in multiple
offices globally. Estimated costs for the reduction in physical
office space are comprised of contractual rental commitments for
office space vacated, attorney fees and related costs to sublet
the office space, offset by estimated sub-lease rental income.
The restructuring plan also included workforce reductions,
resulting in the termination of approximately 90 employees,
none of whom were still employed by the Company as of
March 31, 2004. Of the total employees severed, 60% were
project personnel and 40% were operational personnel. Also
included in the restructuring plan were the costs associated
with the termination of certain equipment leases and costs
related to the write-down of other assets to their estimated net
realizable value.

The total cash outlay for the restructuring
announced in September 2002 is expected to approximate
$19.7 million (after the adjustment to reflect the revised
estimate of sublease rental income described above). The
remaining $2.5 million of restructuring costs consist of
non-cash charges primarily for the write-down of certain assets
to their estimated net realizable value, as well as the
write-off of sign-on bonuses previously paid to terminated
employees. As of March 31, 2004, $11.3 million of cash
had been expended for this initiative, primarily related to
severance and related costs.



| |                                           
| | ------------------------------------------
| | Fiscal Year 2002 Restructuring
    Charges

In connection with the restructuring plan
announced in December 2001, the Company recorded a restructuring
charge of $15.5 million ($9.5 million on an after-tax
basis, or $0.31 per share). In September 2002, the Company
adjusted this charge and recognized $0.4 million of
additional expense due primarily to a change in estimate related
to the cost of terminating an equipment lease, bringing the
total restructuring charge to $15.9 million
($9.7 million on an after-tax basis). The
$15.9 million charge consisted of $10.8 million for
severance and related expenses, $3.1 million for
contractual commitments and leasehold improvements related to
office space reductions, and $2.0 million for other
depreciable assets and certain equipment leases. The principal
actions in the December 2001 restructuring plan involved
workforce reductions, including the discontinuation of certain
business activities within the Diamond Marketspace Solutions
group which helped build and operate e-business ventures for
Diamonds clients. The restructuring plan included the
termination of approximately 300 employees, none of whom
remained employed by the Company as of March 31, 2004. Of
the total employees severed, 90% were project personnel and 10%
were operational personnel. In addition, the restructuring plan
included office space reductions in San Francisco, New York
and Chicago. Estimated costs related to the reduction of office
space comprise contractual rental commitments for office space
being vacated and certain equipment leases, as well as costs
associated with the write-off of leasehold improvements and
write-down of other assets to their estimated net realizable
value.

The total cash outlay for the restructuring
announced in December 2001 is expected to approximate
$13.2 million. The remaining $2.7 million of
restructuring costs consist of non-cash charges primarily for
the write-off of leasehold improvements and other related costs
for the facilities being downsized, as well as the write-off of
sign-on bonuses previously paid to terminated employees. As of
March 31, 2004, $13.0 million of cash had been
expended for this initiative, primarily related to severance and
related costs.

F-15



---



##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The major components of the restructuring charges
are summarized as follows (amounts in thousands):

|                                                                                          |  |                                                    |        |  |                   |   |     |               |  |   |           |  |  |          |       |  |             |   |       |         |  |   |         |   |  |      |       |  |          |   |     |             |  |   |           |  |  |   |       |  |  |   |     |  |  |   |       | 
|----------------------------------------------------------------------------------------- |  | -------------------------------------------------- | ------ |  | ----------------- | - | --- | ------------- |  | - | --------- |  |  | -------- | ----- |  | ----------- | - | ----- | ------- |  | - | ------- | - |  | ---- | ----- |  | -------- | - | --- | ----------- |  | - | --------- |  |  | - | ----- |  |  | - | --- |  |  | - | ----- | 
|                                                                                          |  |                                                    |        |  |                   |   |     |              
|                                                                                          |  | Restructuring Charge Accrual For the Quarter Ended |        |  | Accrual Reduction |   |     | Other         |  |   |          
|                                                                                          |  |                                                    |        |  |                   |   |     |               |  |   | Remaining | 
|                                                                                          |  |                                                    |        |  |                   |   |     |               |  |   |           |  |  | Accrual  |      
|                                                                                          |  | December 2001                                      |        |  | September 2002    |   |     | December 2002 |  |   | June 2003 |  |  | Utilized |       |  | Currency    |   |       | Balance | 
|                                                                                          |  |                                                    |        |  |                   |   |     |               |  |   |           |  |  |          |       |  | Translation |   |       | as of   | 
|Description                                                                               |  | Charge                                             |        |  | Adj (1)           |   |     | Charge        |  |   | Adj (2)   |  |  | Charge   |       |  | Adj (3)     |   |       | Charge  |  |   | Adj (3) |   |  | Cash |       |  | Non-cash |   |     | Adjustments |  |   | 3/31/2004 | 
|                                                                                          |  |                                                    |        |  |                   |   |     |               |  |   |           |  |  |          |       |  |             |   |       |         |  |   |         |   |  |      |       |  |          |   |     |             |  |   |           | 
|Severance and related costs                                                               |  | $                                                  | 10,847 |  |                   | $ | 53  |               |  | $ | 5,638     |  |  | $        |      |  |             | $ | 7,761 |         |  | $ | (89     | ) |  | $    | 2,497 |  |          | $ | (43 | )           |  | $ | 24,195    |  |  | $ | 2,512 |  |  | $ | 43  |  |  | $ |      | 
|Contractual commitments and leasehold
    improvements related to office space reductions |  |                                                    | 3,089  |  |                   |   | (28 | )             |  |   | 12,105    |  |  |          | 1,736 |  |             |   | 397   |         |  |   | (91     | ) |  |      |      |  |          |   | (35 | )           |  |   | 7,293     |  |  |   | 1,452 |  |  |   | 758 |  |  |   | 9,186 | 
|Write-off of property, plant, equipment and leases                                        |  |                                                    | 1,606  |  |                   |   | 375 |               |  |   | 2,714     |  |  |          |      |  |             |   | 251   |         |  |   |        |   |  |      |      |  |          |   |    |             |  |   | 2,488     |  |  |   | 2,116 |  |  |   |    |  |  |   | 342   | 
|                                                                                          |  |                                                    |        |  |                   |   |     |               |  |   |           |  |  |          |       |  |             |   |       |         |  |   |         |   |  |      |       |  |          |   |     |             |  |   |           | 
|                                                                                          |  | $                                                  | 15,542 |  |                   | $ | 400 |               |  | $ | 20,457    |  |  | $        | 1,736 |  |             | $ | 8,409 |         |  | $ | (180    | ) |  | $    | 2,497 |  |          | $ | (78 | )           |  | $ | 33,976    |  |  | $ | 6,080 |  |  | $ | 801 |  |  | $ | 9,528 | 
|                                                                                          |  |                                                    |        |  |                   |   |     |               |  |   |           |  |  |          |       |  |             |   |       |         |  |   |         |   |  |      |       |  |          |   |     |             |  |   |           | 



---



|    |                                           
|--- | ------------------------------------------
|(1) | Adjustment was recorded in September 2002.
|   
|(2) | Adjustment was recorded in June 2003.     
|   
|(3) | Adjustment was recorded in March 2004.    

These restructuring charges and accruals required
certain significant estimates and assumptions, including
estimates of sub-lease rental income to be realized in the
future. These estimates and assumptions are monitored on at
least a quarterly basis for changes in circumstances. It is
reasonably possible that such estimates could change in the near
term resulting in additional adjustments to the amounts
recorded, and the effect could be material.



|    |                                                                   
|--- | ------------------------------------------------------------------
|(5) | Computers, Equipment, Leasehold Improvements
    and Software, Net

Computers, equipment, leasehold improvements and
software, net at March 31, 2003 and 2004 are summarized as
follows (amounts in thousands):

|                                               |  |      |         |   |      |   |         |  
|---------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                               |  | 2003 |         |   | 2004 |  
|                                               |  |      |         |   |      |  
|Computers and equipment                        |  | $    | 15,396  |   |      | $ | 15,577  |  
|Leasehold improvements                         |  |      | 6,800   |   |      |   | 6,715   |  
|Software                                       |  |      | 11,504  |   |      |   | 11,700  |  
|                                               |  |      |         |   |      |  
|                                               |  |      | 33,700  |   |      |   | 33,992  |  
|Less accumulated depreciation and amortization |  |      | (23,351 | ) |      |   | (27,519 | )
|                                               |  |      |         |   |      |  
|                                               |  | $    | 10,349  |   |      | $ | 6,473   |  
|                                               |  |      |         |   |      |  



|    |                          
|--- | -------------------------
|(6) | Other Accrued Liabilities

Other accrued liabilities at March 31, 2003
and 2004 are summarized as follows (amounts in thousands):

|                            |       |      |       |        |      |   |        |        | 
|--------------------------- | ----- | ---- | ----- | ------ | ---- | - | ------ | ------ | 
|                            |       | 2003 |       |        | 2004 |  
|                            |       |      |       |        |      |  
|Social Security tax accrual |       | $    | 2,481 |        |      | $ | 606    |       
|VAT taxes payable           |       |      | 2,833 |        |      |   | 6,626  |       
|Other taxes payable         |       |      | 2,748 |        |      |   | 1,505  |       
|Other accrued liabilities   |       |      | 9,035 |        |      |   | 10,236 |       
|                            |       |      |       |        |      |  
|                            | Total |      | $     | 17,097 |      |   | $      | 18,973 | 
|                            |       |      |       |        |      |  

F-16



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |            
|--- | -----------
|(7) | Commitments

The Company leases office space and equipment
under various non-cancelable operating leases. As of
March 31, 2004, the minimum future lease payments under
operating leases with non-cancelable terms in excess of one year
net of estimated sublease income of $6.1 million under
existing and expected sublease arrangements are as follows
(amounts in thousands):

|                      |  |   |        | 
|--------------------- |  | - | ------ | 
|Year ending March 31, |  |  
|                      |  |  
|2005                  |  | $ | 6,218  | 
|2006                  |  |   | 5,476  | 
|2007                  |  |   | 4,606  | 
|2008                  |  |   | 3,284  | 
|2009                  |  |   | 4,146  | 
|Thereafter            |  |   | 7,948  | 
|                      |  |   |       
|                      |  | $ | 31,678 | 
|                      |  |   |       

Rent expense under operating leases amounted to
$10.9 million, $11.1 million and $7.6 million for
the years ended March 31, 2002, 2003 and 2004, respectively.

The Company is party to standby letters of credit
in support of the minimum future lease payments under leases for
permanent office space and office furniture amounting to
$1.7 million as of March 31, 2004. These letter of
credit obligations decline annually during the lease terms.



|    |               
|--- | --------------
|(8) | Line of Credit

The Company maintains a revolving line of credit
pursuant to the terms of a secured credit agreement with a
commercial bank. Under this agreement, the Company may borrow up
to $10.0 million at an annual interest rate based on the
prime rate or based on LIBOR plus 1.5%, at our discretion. The
line of credit is secured by cash and certain accounts
receivable of the Companys wholly-owned subsidiary
DiamondCluster International North America, Inc. Under the terms
of the credit agreement, the Company is required to maintain a
minimum tangible net worth of $20 million. This line of
credit is reduced, as necessary, to account for letters of
credit outstanding. As of March 31, 2004, the Company had
approximately $9.2 million available under this line of
credit. The line of credit expires on July 31, 2004. The
Company expects to renew the line of credit under similar terms
at that time.



|    |                     
|--- | --------------------
|(9) | Stockholders Equity



| |                                            
| | -------------------------------------------
| | Conversion To One Class of Common
    Stock

On September 23, 2003, the Company effected
a recapitalization by which all of its outstanding shares of
Class A common stock and Class B common stock were
converted on a one-for-one basis into shares of a single, newly
created class of common stock, called Common Stock.
SFAS No. 123 requires an expense to be recognized for
modifications to options which make them more valuable. The
Company determined that the options held for Class A common
stock became more valuable with the conversion to one class of
common stock due to the increase in voting power, while options
for Class B common stock decreased in value due to the loss
in voting power. There were no other modifications to the
underlying stock. Accordingly, the Company recorded a noncash
compensation expense of $0.2 million in 2004 under
SFAS No. 123 for the modification to options for
Class A common stock.

F-17



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                  
| | -----------------
| | Stock Repurchases

The Companys Board of Directors has
authorized the repurchase of up to six million shares of
DiamondClusters Common Stock as part of an existing stock
repurchase program. These repurchases were authorized to be made
in the open market or in privately negotiated transactions with
the timing and volume dependent upon market conditions. At
March 31, 2004, the number of shares purchased under this
authorization was 4.3 million shares at an aggregate cost
of $61.1 million. Following is a summary of the repurchase
activity over the last two fiscal years (amounts in thousands
except average price data):

Repurchase of Common Stock

|      |  |        |       |  |        |   |        |               |  |   |      | 
|----- |  | ------ | ----- |  | ------ | - | ------ | ------------- |  | - | ---- | 
|      |  | Shares |       |  | Amount |   |        | Average Price | 
|      |  |        |       |  |        |   |        |               | 
|2004  |  |        | 944   |  |        | $ | 9,204  |               |  | $ | 9.75 | 
|2003  |  |        | 968   |  |        |   | 5,242  |               |  | $ | 5.42 | 
|      |  |        |       |  |        |   |        |               | 
|Total |  |        | 1,912 |  |        | $ | 14,446 |               |  |   |      | 
|      |  |        |       |  |        |   |        |               | 

F-18



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Following is a reconciliation for the common and
treasury stock activity for the fiscal years ended
March 31, 2002, 2003 and 2004 (in thousands):

|                          |              |        |        |         |                  |  |         |         |   |  |        |        |   |         |        |  |         |  |        |        |   |  |          |       |   |  |      |      |   |  |        |   | 
|------------------------- | ------------ | ------ | ------ | ------- | ---------------- |  | ------- | ------- | - |  | ------ | ------ | - | ------- | ------ |  | ------- |  | ------ | ------ | - |  | -------- | ----- | - |  | ---- | ---- | - |  | ------ | - | 
|                          |              |        |        |        
|                          |              | Issued |        |         | Held in Treasury | 
|                          |              |        |        |         |                  | 
|                          |              |        |        | Class A |                  |  | Class B |         |   |  |        |        |   | Class A |        |  | Class B |  |        |       
|                          |              | Common |        |         | Common           |  |         | Common  |   |  | Total  |        |   | Common  |        |  | Common  |  |        | Common |   |  | Total    |      
|                          |              | Stock  |        |         | Stock            |  |         | Stock   |   |  | Issued |        |   | Stock   |        |  | Stock   |  |        | Stock  |   |  | Treasury |      
|                          |              |        |        |         |                  |  |         |         |   |  |        |        |   |         |        |  |         |  |        |        |   |  |          |      
|Balance at March 31, 2001 |              |        |       |         |                  |  | 23,659  |         |   |  | 8,752  |        |   |         | 32,411 |  |         |  |       |        |   |  | (2,016   | )     |   |  |     |      |   |  | (2,016 | )
|                          |              |        |        |         |                  |  |         |         |   |  |        |        |   |         |        |  |         |  |        |        |   |  |          |      
|Issued                    |              |        |        |         |                  |  |         |         |   |  |        |        |   |         |        |  |         |  |        |        |   |  |          |       |   |  |      |      |   |  |        |  
|                          | Equity Plans |        |        |        |                  |  |         | 213     |   |  |        | 1,429  |   |         |        |  |         |  |        |       |   |  |          |      |   |  |      |     |   |  |        |   | 
|                          | Acquisitions |        |        |        |                  |  |         | 20      |   |  |        |       |   |         |        |  |         |  |        |        |   |  |          |       |   |  |      |      |   |  |        |   | 
|                          | Conversion   |        |        |        |                  |  |         | 3,614   |   |  |        | (3,614 | ) |         |        |  |         |  |        |       |   |  |          |      |   |  |      |     |   |  |        |   | 
|Treasury Stock            |              |        |        |         |                  |  |         |         |   |  |        |        |   |         |        |  |         |  |        |        |   |  |          |       |   |  |      |      |   |  |        |  
|                          | Acquisition  |        |        |        |                  |  |         |        |   |  |        |       |   |         |        |  |         |  |        |       |   |  |          | (104  | ) |  |      | (318 | ) |  |        |   | 
|                          | Retirement   |        |        |        |                  |  |         | (9      | ) |  |        | (5     | ) |         |        |  |         |  |        |       |   |  |          | 9     |   |  |      | 5    |   |  |        |   | 
|                          |              |        |        |         |                  |  |         |         |   |  |        |        |   |         |        |  |         |  |        |        |   |  |          |      
|Balance at March 31, 2002 |              |        |       |         |                  |  | 27,497  |         |   |  | 6,562  |        |   |         | 34,059 |  |         |  |       |        |   |  | (2,111   | )     |   |  | (313 | )    |   |  | (2,424 | )
|                          |              |        |        |         |                  |  |         |         |   |  |        |        |   |         |        |  |         |  |        |        |   |  |          |      
|Issued                    |              |        |        |         |                  |  |         |         |   |  |        |        |   |         |        |  |         |  |        |        |   |  |          |       |   |  |      |      |   |  |        |  
|                          | Equity Plans |        |        |        |                  |  |         | 95      |   |  |        | 1,071  |   |         |        |  |         |  |        |       |   |  |          |      |   |  |      |     |   |  |        |   | 
|                          | Acquisitions |        |        |        |                  |  |         | 2       |   |  |        |       |   |         |        |  |         |  |        |        |   |  |          |       |   |  |      |      |   |  |        |   | 
|                          | Conversion   |        |        |        |                  |  |         | 1,139   |   |  |        | (1,139 | ) |         |        |  |         |  |        |       |   |  |          |      |   |  |      |     |   |  |        |   | 
|Treasury Stock            |              |        |        |         |                  |  |         |         |   |  |        |        |   |         |        |  |         |  |        |        |   |  |          |       |   |  |      |      |   |  |        |  
|                          | Acquisition  |        |        |        |                  |  |         |        |   |  |        |       |   |         |        |  |         |  |        |       |   |  |          | (970  | ) |  |      | (1   | ) |  |        |   | 
|                          | Retirement   |        |        |        |                  |  |         | (2      | ) |  |        | (1     | ) |         |        |  |         |  |        |       |   |  |          | 2     |   |  |      | 1    |   |  |        |   | 
|                          |              |        |        |         |                  |  |         |         |   |  |        |        |   |         |        |  |         |  |        |        |   |  |          |      
|Balance at March 31, 2003 |              |        |       |         |                  |  | 28,731  |         |   |  | 6,493  |        |   |         | 35,224 |  |         |  |       |        |   |  | (3,079   | )     |   |  | (313 | )    |   |  | (3,392 | )
|                          |              |        |        |         |                  |  |         |         |   |  |        |        |   |         |        |  |         |  |        |        |   |  |          |      
|Issued                    |              |        |        |         |                  |  |         |         |   |  |        |        |   |         |        |  |         |  |        |        |   |  |          |       |   |  |      |      |   |  |        |  
|                          | Equity Plans |        |        | 1,575   |                  |  |         | 190     |   |  |        | 1,695  |   |         |        |  |         |  |        |       |   |  |          |      |   |  |      |     |   |  |        |   | 
|                          | Conversion   |        |        | 37,109  |                  |  |         | (28,921 | ) |  |        | (8,188 | ) |         |        |  |         |  |        |       |   |  |          |      |   |  |      |     |   |  |        |   | 
|Treasury Stock            |              |        |        |         |                  |  |         |         |   |  |        |        |   |         |        |  |         |  |        |        |   |  |          |       |   |  |      |      |   |  |        |  
|                          | Acquisition  |        |        |        |                  |  |         |        |   |  |        |       |   |         |        |  |         |  |        | (945   | ) |  |          |      |   |  |      |     |   |  |        |   | 
|                          | Retirement   |        |        | (1      | )                |  |         |        |   |  |        |       |   |         |        |  |         |  |        | 1      |   |  |          |      |   |  |      |     |   |  |        |   | 
|                          | Conversion   |        |        |        |                  |  |         |        |   |  |        |       |   |         |        |  |         |  |        | (3,392 | ) |  |          | 3,079 |   |  |      | 313  |   |  |        |   | 
|                          |              |        |        |         |                  |  |         |         |   |  |        |        |   |         |        |  |         |  |        |        |   |  |          |      
|Balance at March 31, 2004 |              |        | 38,683 |         |                  |  |        |         |   |  |       |        |   |         | 38,683 |  |         |  | (4,336 | )      |   |  |         |       |   |  |     |      |   |  | (4,336 | )
|                          |              |        |        |         |                  |  |         |         |   |  |        |        |   |         |        |  |         |  |        |        |   |  |          |      



| |                                     
| | ------------------------------------
| | Stockholder Rights Plan
    Adoption

On September 23, 2003, the Board of
Directors approved the adoption of a Stockholder Rights Plan
(the Plan). Under the Plan, the Company issued a
dividend of one preferred stock purchase right (a
Right) for each share of common stock of the Company
held by stockholders of record at the close of business on
October 15, 2003. New Rights will accompany any new shares
of common stock the Company issues after October 15, 2003
until the expiration date for the Rights. Each Right initially
entitles stockholders to purchase a fractional share of the
Companys Series A Junior Participating Preferred
Stock for $32.50. The Rights are not exercisable, however, until
the occurrence of certain events, including the commencement of
a tender offer or acquisition of 15 percent or more of the
Companys common stock. The Rights are redeemable at
$0.01 per Right at anytime prior to a triggering event at
the option of the Board of Directors. The Rights will expire on
October 15, 2013.

F-19



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan

In September 2003, the Companys Board of
Directors adopted and the Companys shareholders
subsequently approved the Amended and Restated Employee Stock
Purchase Plan. The Amended and Restated Employee Stock Purchase
Plan is designed to qualify for certain income tax benefits for
employees under section 423 of the Internal Revenue Code
and contains 4.4 million shares of Common Stock. The plan
allows qualifying employees to purchase Common Stock each
quarter, at 85% of the lesser of the fair market value of the
Common Stock on the individuals enrollment date or the
purchase date. The amount each employee can purchase is limited
to the lesser of (i) 10% of pay or (ii) $6,250 of
stock value in any three month period. At March 31, 2004,
approximately 2.2 million shares are still available for
future issuance under this plan.



| |                            
| | ---------------------------
| | Stock Option Rehabilitation

On May 2, 2002, the Company offered
employees (other than senior officers) a plan, approved by the
Board of Directors, which gave employees a choice to surrender
certain stock options previously granted to them in exchange for
a future grant of a smaller number of new options to purchase
the same class of shares, a majority of which would vest over a
three-year period. The original options were granted under
DiamondClusters 2000 Stock Option Plan (2000 Plan) and
under DiamondClusters 1998 Equity Incentive Plan.
Employees who accepted this offer were required to make an
election with respect to all covered options by May 14,
2002. In order to receive the new options, the employees were
required to remain employed by DiamondCluster until
November 15, 2002. The exchange offer was not available to
the members of the Board of Directors or senior officers of
DiamondCluster. A total of 4.3 million stock options were
surrendered as a part of this plan. Certain of these options had
intrinsic value at the original grant date, the unvested portion
of which had not been amortized to noncash compensation expense
at the date surrendered. The voluntary surrender of these
options resulted in a non-cash charge to compensation expense of
$8.6 million during the quarter ended June 30, 2002,
consisting of the remaining unamortized compensation expense
related to these surrendered options. On November 15, 2002,
approximately 1.0 million new options were granted to
employees who remained employed by DiamondCluster. The exercise
price for a majority of the options granted on November 15,
2002 was $0.76, or 25% of the fair market value of the
Companys common stock on that date.

On January 30, 2001, the Company offered
employees (other than senior officers) a plan, approved by the
Board of Directors, which gave employees a choice to cancel
certain stock options previously granted to them in exchange for
a future grant of a lesser number of new options to purchase the
same class of shares, a majority of which would vest
proportionately over a four year period. The original options
were granted under the 2000 Plan and under the 1998 Equity
Incentive Plan. Employees who accepted the offer were required
to make an election with respect to all covered options by
February 8, 2001. In order to receive the new options, the
employees were required to remain employed by DiamondCluster
until August 9, 2001. The exchange offer was not available
to the members of the Board of Directors or senior officers of
DiamondCluster. A total of 2.3 million stock options were
cancelled as part of this plan. On August 9, 2001, a total
of 1.5 million of new options were granted, which
represented between 75% and 100% of the original grant and had
an exercise price that was set on the grant date. The exercise
price for a majority of the options granted on August 9,
2001 was set at fair market value.



| |              
| | -------------
| | Stock Options

The Company has adopted various stock incentive
and option plans that authorize the granting of qualified and
non-qualified stock options, stock appreciation rights
(SARs) and stock awards to officers and employees
and non-qualified stock options, SARs and stock awards to
certain persons who were not employees on the date of grant,
including certain non-employee members of the Board of
Directors. Under the 2000 Plan,

F-20



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

8.5 million shares were authorized for
grant, and at March 31, 2004, approximately
6.2 million shares are still available for future grant.
Under the 1998 Equity Incentive Plan (collectively, the
Stock Option Plans or Plans),
28.0 million shares were authorized for grant, and at
March 31, 2004, approximately 13.5 million shares were
still available for future grant. All such options are for
shares of common stock.

The Stock Option Plans provide that fair market
value will be determined based on the average of the closing
price of a share of common stock on the NASDAQ Stock Market
System for the ten trading days immediately preceding the date
of grant. Options granted under the 1998 Equity Incentive Plan
must have an exercise price at or above the fair market value on
the date of grant. Options granted under the 2000 Plan can have
an exercise price that is below the fair market value on the
date of grant. Options have been granted to officers which vest
incrementally, in varying percentages, on the first through
fifth anniversaries of the date of grant, and expire either on
the seventh anniversary of the date of grant or six months after
the fifth anniversary of the date of grant for more recent
grants. Options have been granted to non-officer employees which
fully vest either upon the third anniversary of the date of
grant and expire on the fifth anniversary of the date of grant,
or which vest ratably over four years and expire either on the
sixth anniversary of the date of grant or six months after the
fourth anniversary of the date of grant for more recent grants.
Options were also granted to employees at various times which
vest over periods ranging from 18 months to 3 years
from the date of grant, and which expire on the fifth
anniversary of the date of grant. Non-qualified stock options
vest over periods ranging from immediately to five years. The
Company allocates the cost of compensatory stock options granted
under APB No. 25 over the vesting period using the
straight-line method. Options granted since the adoption of
SFAS No. 123 are expensed pursuant to FIN No. 28,
Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans.

During fiscal 2004, the Company granted options
to purchase 0.4 million shares of Common Stock. These
options were granted to certain employees as part of the review
process or to new employees who joined the Company as part of
their compensation package.

During fiscal 2003, the Company granted options
to purchase 2.7 million shares of Common Stock.
Approximately 0.7 million of these options were granted in
connection with the stock option rehabilitation program
discussed above.

During fiscal 2002, the Company granted options
to purchase 12.3 million shares of Common Stock. A
portion of such options were granted in connection with the
Companys efforts to contain costs and conserve cash. Stock
options were granted to certain employees in lieu of cash
bonuses and as an incentive to accept salary decreases. During
fiscal 2002, 1.6 million options were granted in connection
with the stock option rehabilitation program discussed above.

F-21



---



##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the stock option
transactions, both incentive and non-qualified, pursuant to the
Plans (share amounts in thousands):

|                         |           |        |        |         |                 |           |                 |                |  |   |       |       | 
|------------------------ | --------- | ------ | ------ | ------- | --------------- | --------- | --------------- | -------------- |  | - | ----- | ----- | 
|                         |           |        |        |         |                 | Weighted- |                
|                         |           | Shares |        |         |                 |           | Average         |               
|                         |           | Under  |        |         |                 |           | Exercise Price  |               
|                         |           | Option |        |         | Range of Prices |           |                 | Per Share      | 
|                         |           |        |        |         |                 |           |                 |                | 
|Balances, March 31, 2001 |           |        | 18,206 |         |                 |           | $0.81 to $89.95 |                |  | $ | 19.98 |      
|                         | Granted   |        |        | 12,258  |                 |           |                 | 4.56 to  16.99 |  |   |       | 9.87  | 
|                         | Exercised |        |        | (840    | )               |           |                 | 1.21 to  15.23 |  |   |       | 6.85  | 
|                         | Forfeited |        |        | (3,358  | )               |           |                 | 2.12 to  92.90 |  |   |       | 24.06 | 
|                         |           |        |        |         |                 |           |                 |                | 
|Balances, March 31, 2002 |           |        | 26,266 |         |                 |           | $0.81 to $87.60 |                |  | $ | 15.46 |      
|                         | Granted   |        |        | 2,730   |                 |           |                 | 0.56 to  13.02 |  |   |       | 5.25  | 
|                         | Exercised |        |        | (325    | )               |           |                 | 0.58 to  11.41 |  |   |       | 5.94  | 
|                         | Forfeited |        |        | (11,510 | )               |           |                 | 0.56 to  87.60 |  |   |       | 19.35 | 
|                         |           |        |        |         |                 |           |                 |                | 
|Balances, March 31, 2003 |           |        | 17,161 |         |                 |           | $0.76 to $60.35 |                |  | $ | 11.36 |      
|                         | Granted   |        |        | 368     |                 |           |                 | 1.57 to  10.67 |  |   |       | 5.49  | 
|                         | Exercised |        |        | (1,029  | )               |           |                 | 0.76 to  10.82 |  |   |       | 5.00  | 
|                         | Forfeited |        |        | (4,774  | )               |           |                 | 0.76 to  60.35 |  |   |       | 12.63 | 
|                         |           |        |        |         |                 |           |                 |                | 
|Balances, March 31, 2004 |           |        | 11,726 |         |                 |           | $0.76 to $32.86 |                |  | $ | 11.32 |      
|                         |           |        |        |         |                 |           |                 |                | 

At March 31, 2002, 2003 and 2004,
6.4 million, 7.5 million and 7.2 million options
were exercisable, respectively, under the Plans.

The following table summarizes information about
stock options under the Plans at March 31, 2004:

|                         |  |             |                     |  |                  |  |      |                  |  |         |             |  |  |                  |           |  |  |   |       | 
|------------------------ |  | ----------- | ------------------- |  | ---------------- |  | ---- | ---------------- |  | ------- | ----------- |  |  | ---------------- | --------- |  |  | - | ----- | 
|                         |  |            
|Options Outstanding      |  |             | Options Exercisable | 
|                         |  |             |                     | 
|                         |  | Weighted-   |                     |  |                  |  |     
|                         |  | Options     |                     |  | Average          |  |      |                  |  | Options |             |  | 
|                         |  | Outstanding |                     |  | Remaining        |  |      | Weighted-Average |  |         | Exercisable |  |  | Weighted-Average |          
|Range of Exercise Prices |  | at 3/31/04  |                     |  | Contractual Life |  |      | Exercise Price   |  |         | at 3/31/04  |  |  | Exercise Price   |          
|                         |  |             |                     |  |                  |  |      |                  |  |         |             |  |  |                  |          
|$0.76 to $7.06           |  |             | 1,498,333           |  |                  |  | 3.77 |                  |  | $       | 3.26        |  |  |                  | 345,160   |  |  | $ | 2.64  | 
|7.75 to 8.79             |  |             | 1,370,995           |  |                  |  | 2.98 |                  |  |         | 8.44        |  |  |                  | 950,890   |  |  |   | 8.30  | 
|8.93 to 10.22            |  |             | 3,437,025           |  |                  |  | 3.76 |                  |  |         | 9.53        |  |  |                  | 1,700,961 |  |  |   | 9.50  | 
|10.23 to 12.95           |  |             | 2,205,858           |  |                  |  | 2.36 |                  |  |         | 10.71       |  |  |                  | 1,594,885 |  |  |   | 10.68 | 
|13.02 to 15.97           |  |             | 1,683,475           |  |                  |  | 2.08 |                  |  |         | 13.57       |  |  |                  | 1,318,648 |  |  |   | 13.62 | 
|16.23 to 27.99           |  |             | 911,095             |  |                  |  | 4.04 |                  |  |         | 21.48       |  |  |                  | 859,033   |  |  |   | 21.28 | 
|28.10 to 32.86           |  |             | 618,949             |  |                  |  | 3.18 |                  |  |         | 28.36       |  |  |                  | 452,259   |  |  |   | 28.46 | 
|                         |  |             |                     |  |                  |  |      |                  |  |         |             |  |  |                  |          
|$0.76 to $32.86          |  |             | 11,725,730          |  |                  |  | 3.16 |                  |  | $       | 11.32       |  |  |                  | 7,221,836 |  |  | $ | 12.62 | 
|                         |  |             |                     |  |                  |  |      |                  |  |         |             |  |  |                  |          

The weighted-average fair value of the options
granted under the Stock Option Plans in 2002, 2003 and 2004,
calculated using the Black-Scholes option pricing model, was
$6.36, $3.29 and $2.76 respectively. The

F-22



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

following assumptions were used in the
Black-Scholes pricing model for options granted in 2002, 2003
and 2004:

|                      |  |      |              |  |      |  |              |      |  |  |              | 
|--------------------- |  | ---- | ------------ |  | ---- |  | ------------ | ---- |  |  | ------------ | 
|                      |  | 2002 |              |  | 2003 |  |              | 2004 | 
|                      |  |      |              |  |      |  |              |      | 
|Expected life (years) |  |      | 0.5 to 4.0   |  |      |  | 0.1 to 4.4   |      |  |  | 0.5 to 5.5   | 
|Interest rate         |  |      | 2.8% to 4.4% |  |      |  | 1.3% to 4.6% |      |  |  | 1.5% to 2.5% | 
|Volatility            |  |      | 84%          |  |      |  | 82%          |      |  |  | 68%          | 
|Dividend yield        |  |      |             |  |      |  |             |      |  |  |             | 



| |                                                               
| | --------------------------------------------------------------
| | Restricted Stock and Restricted Stock Units
    (Stock Awards)

During fiscal year 2004, the Company granted
Stock Awards to officers, employees, certain individuals who
were not employees of the Company, and certain non-employee
members of the Board of Directors. These Stock Awards are
granted at no cost to the individual. They are subject to
vesting terms at which point the Common Stock is issued if the
individual holds a restricted stock unit, or the restrictions
from sale of the Common Stock lapse if the individual holds
restricted stock. The Company allocates the cost of stock awards
on a straight-line basis over the vesting period. During fiscal
2004, the Company issued 3.3 million stock awards, the
majority of which were issued to employees as part of the fiscal
year 2003 review process.

The following table summarizes information about
stock awards at March 31, 2004 (share amounts in thousands):

|                          |                                                 |          |       |       |  
|------------------------- | ----------------------------------------------- | -------- | ----- | ----- | -
|                          |                                                 | Unvested |      
|                          |                                                 | Stock    |      
|                          |                                                 | Awards   |      
|                          |                                                 |          |      
|Balance at March 31, 2003 |                                                 |          | 116   |      
|                          | Granted at weighted average fair value of $4.03 |          |       | 3,267 |  
|                          | Vested                                          |          |       | (586  | )
|                          | Forfeited                                       |          |       | (241  | )
|                          |                                                 |          |      
|Balance at March 31, 2004 |                                                 |          | 2,556 |      
|                          |                                                 |          |      



|     |             
|---- | ------------
|(10) | Income Taxes

The provision (benefit) for income taxes for the
fiscal years ended March 31, 2002, 2003 and 2004 consisted
of the following (in thousands):

|          |         |      |         |        |      |   |        |        |  |   |     |       |  
|--------- | ------- | ---- | ------- | ------ | ---- | - | ------ | ------ |  | - | --- | ----- | -
|          |         | 2002 |         |        | 2003 |   |        | 2004   | 
|          |         |      |         |        |      |   |        |        | 
|Current:  |         |      |         |        |      |   |        |        |  |   |     |      
|          | Federal |      | $       | (3,885 | )    |   | $      | 503    |  |   | $   | (845  | )
|          | State   |      |         | (464   | )    |   |        |       |  |   |     | 37    |  
|          | Foreign |      |         | 3,776  |      |   |        | 570    |  |   |     | 1,462 |  
|          |         |      |         |        |      |   |        |        | 
|          |         | $    | (573    | )      |      | $ | 1,073  |        |  | $ | 654 |      
|Deferred: |         |      |         |        |      |   |        |        |  |   |     |      
|          | Federal |      |         | (5,636 | )    |   |        | 11,242 |  |   |     |      |  
|          | State   |      |         | (3,260 | )    |   |        | 5,689  |  |   |     |      |  
|          | Foreign |      |         | (1,579 | )    |   |        | 3,205  |  |   |     |      |  
|          |         |      |         |        |      |   |        |        | 
|          |         | $    | (10,475 | )      |      | $ | 20,136 |        |  | $ |    |      
|          |         |      |         |        |      |   |        |        | 
|          |         | $    | (11,048 | )      |      | $ | 21,209 |        |  | $ | 654 |      
|          |         |      |         |        |      |   |        |        | 

F-23



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The income tax benefit of the employee stock
option compensation expense for tax purposes in excess of
amounts recognized for financial reporting purposes credited to
additional paid-in-capital was $1.5 million and
$0.3 million for 2002 and 2003 respectively. No amount was
credited to additional paid-in-capital for 2004.

The total tax provision (benefit) differs from
the amount computed by applying the federal statutory income tax
rate of 34 percent for 2002, 2003 and 2004 to income before
taxes and cumulative effect of change in accounting principle
for the following reasons (in thousands):

|                                                                                       |  |      |         |   |      |   |          |      |  |   |         |  
|-------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                                       |  | 2002 |         |   | 2003 |   |          | 2004 | 
|                                                                                       |  |      |         |   |      |   |          |      | 
|Federal income taxes (benefit) at statutory rate                                       |  | $    | (49,205 | ) |      | $ | (115,209 | )    |  | $ | (1,617  | )
|Effect of non-deductible goodwill
    amortization/impairment and noncash compensation |  |      | 37,465  |   |      |   | 94,400   |      |  |   | 2,073   |  
|Effect of investment in subsidiary write-down                                          |  |      |        |   |      |   |         |      |  |   | (12,552 | )
|Effect of other permanent differences                                                  |  |      | 166     |   |      |   | (4,098   | )    |  |   | 366     |  
|State income taxes, net of federal effect                                              |  |      | (2,457  | ) |      |   |         |      |  |   | 24      |  
|Foreign tax rate differential                                                          |  |      | (941    | ) |      |   | 103      |      |  |   | (4,434  | )
|Change in valuation allowance for deferred tax
    assets                              |  |      | 3,924   |   |      |   | 46,013   |      |  |   | 16,794  |  
|                                                                                       |  |      |         |   |      |   |          |      | 
|                                                                                       |  | $    | (11,048 | ) |      | $ | 21,209   |      |  | $ | 654     |  
|                                                                                       |  |      |         |   |      |   |          |      | 

The tax effects of the temporary differences that
give rise to the deferred tax assets and liabilities at
March 31, 2003 and 2004 are presented below (in thousands):

|                                          |                                 |                                 |   |        |         |   |   |        |         |  
|----------------------------------------- | ------------------------------- | ------------------------------- | - | ------ | ------- | - | - | ------ | ------- | -
|                                          |                                 | 2003                            |   |        | 2004    |  
|                                          |                                 |                                 |   |        |         |  
|Deferred tax assets attributable to:      |                                 |                                 |   |        |         |   |   |       
|                                          | Net operating loss carryforward |                                 | $ | 33,052 |         |   | $ | 51,569 |        
|                                          | Foreign tax credit carryforward |                                 |   | 4,402  |         |   |   | 4,416  |        
|                                          | Reserves and allowances         |                                 |   | 6,832  |         |   |   | 5,857  |        
|                                          | Goodwill                        |                                 |   | 2,546  |         |   |   | 2,315  |        
|                                          | Depreciation                    |                                 |   | 407    |         |   |   | 675    |        
|                                          | Capital loss carryforward       |                                 |   | 3,305  |         |   |   | 3,305  |        
|                                          |                                 |                                 |   |        |         |  
|                                          |                                 | Total gross deferred tax assets |   |        | 50,544  |   |   |        | 68,137  |  
|                                          |                                 | Less valuation allowance        |   |        | (50,235 | ) |   |        | (67,029 | )
|                                          |                                 |                                 |   |        |         |  
|                                          |                                 | Net deferred tax assets         |   |        | 309     |   |   |        | 1,108   |  
|Deferred tax liabilities attributable to: |                                 |                                 |   |        |         |   |   |       
|                                          | Other                           |                                 |   | 309    |         |   |   | 1,108  |        
|                                          |                                 |                                 |   |        |         |  
|                                          |                                 | Total deferred tax liabilities  |   |        | 309     |   |   |        | 1,108   |  
|                                          |                                 |                                 |   |        |         |  
|Net deferred income taxes                 |                                 | $                               |  |        |         | $ |  |       
|                                          |                                 |                                 |   |        |         |  

During 2003, the Company recorded a non-cash
charge of $46.0 million to increase the valuation allowance
against net Federal, state and foreign deferred tax assets. The
valuation allowance was recorded in accordance with the
provisions of SFAS No. 109, Accounting for
Income Taxes, which requires an assessment of both
negative and positive evidence when determining the need for a
valuation allowance. Management concluded that the
Companys losses in recent periods represented sufficient
negative evidence to require a full valuation allowance against
its net Federal, state and foreign deferred tax assets under
SFAS No. 109. As of March 31, 2004, the Company
has a full valuation allowance on its net deferred tax assets.

F-24



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As of March 31, 2004, the Company has net
operating loss carryfowards for federal income tax purposes of
approximately $42.6 million, which are available to offset
future federal taxable income through 2023. The Company also has
net operating loss carryforwards for state income tax purposes
of approximately $75.3 million, which may be used to offset
future state taxable income. The expiration of these loss
carryforwards ranges between one and nineteen years. In
addition, the Company has foreign net operating loss
carryforwards of approximately $97.6 million, of which
approximately $82.0 million expire through 2019, and the
remainder may be carried forward indefinitely. The Company has
foreign tax credit carryforwards of approximately
$4.4 million, $3.0 million of which expire in 2007 and
the remainder expiring through 2011.

The Company made net cash payments for income
taxes in 2002, 2003 and 2004 of $7.3 million,
$3.0 million and $3.1 million, respectively.



|     |                
|---- | ---------------
|(11) | Geographic Data

The Company operates only in one segment,
providing consulting services. Even though the Company has
different legal entities operating in various countries, its
operations and management are performed on a global basis.

Data for the geographic regions in which the
Company operates is presented below for the periods presented in
the consolidated statements of operations and the consolidated
balance sheets (in thousands):

|                                    |                     |                         |   |         |         |  |   |        |         |  |   |        |         | 
|----------------------------------- | ------------------- | ----------------------- | - | ------- | ------- |  | - | ------ | ------- |  | - | ------ | ------- | 
|                                    |                     | 2002                    |   |         | 2003    |  |   | 2004   |        
|                                    |                     |                         |   |         |         |  |   |        |        
|Net revenues:                       |                     |                         |   |         |         |  |   |        |         |  |   |       
|                                    | North America       |                         | $ | 103,098 |         |  | $ | 79,278 |         |  | $ | 93,602 |        
|                                    | Europe              |                         |   | 59,036  |         |  |   | 50,017 |         |  |   | 58,861 |        
|                                    | All other countries |                         |   | 19,081  |         |  |   | 3,679  |         |  |   | 2,322  |        
|                                    |                     |                         |   |         |         |  |   |        |        
|                                    |                     | Total net revenues      |   | $       | 181,215 |  |   | $      | 132,974 |  |   | $      | 154,785 | 
|                                    |                     |                         |   |         |         |  |   |        |        
|Long-lived assets (as of March 31): |                     |                         |   |         |         |  |   |        |         |  |   |       
|                                    | North America       |                         | $ | 22,884  |         |  | $ | 7,920  |         |  | $ | 4,271  |        
|                                    | Europe              |                         |   | 230,482 |         |  |   | 3,895  |         |  |   | 2,682  |        
|                                    | All other countries |                         |   | 1,351   |         |  |   | 436    |         |  |   | 249    |        
|                                    |                     |                         |   |         |         |  |   |        |        
|                                    |                     | Total long-lived assets |   | $       | 254,717 |  |   | $      | 12,251  |  |   | $      | 7,202   | 
|                                    |                     |                         |   |         |         |  |   |        |        

The segregation of revenue by geographic region
is based upon the location of the legal entity performing the
services.



|     |              
|---- | -------------
|(12) | Benefit Plans



| |            
| | -----------
| | 401(k) Plan

The Company has a defined contribution plan
covering all of its North American employees. This plan is
qualified under Section 401(k) of the Internal Revenue Code
of 1986. The Company may elect to make contributions to this
plan but to date has not done so.



|     |                                 
|---- | --------------------------------
|(13) | Foreign Exchange Risk Management



| |                       
| | ----------------------
| | Objectives and Context

The Company operates internationally; therefore
its earnings, cash flows and financial position are exposed to
foreign currency risk from foreign currency-denominated
receivables and payables, forecasted

F-25



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

service transactions, and net investments in
certain foreign operations. These items are denominated in
various foreign currencies, including the euro, the British
pound sterling and the Brazilian real.

Management believes it is prudent to minimize the
variability caused by foreign currency fluctuations. Management
attempts to minimize foreign currency risk by pricing contracts
in the respective local countrys functional currency and
by using derivative instruments when necessary. The
Companys financial management continually monitors foreign
currency fluctuations and the use of derivative instruments. The
Company does not use derivative instruments for purposes other
than hedging net investments in foreign subsidiaries.



| |           
| | ----------
| | Strategies

International revenues are generated primarily
from sales of services in various countries and are typically
denominated in the local currency of each country, most of which
now use the euro. The Companys foreign subsidiaries also
incur most of their expenses in the local currency. Accordingly,
all foreign subsidiaries use the local currency as their
functional currency. As a result, management does not believe
that its financial position is significantly exposed to foreign
currency fluctuations from foreign currency-denominated
receivables and payables or forecasted service transactions.

DiamondCluster has net investments in foreign
operations located throughout Europe and Latin America. In order
to mitigate the impact of foreign currency movements on the
Companys financial position, in some cases the Company
hedges its euro exposures through the use of euro/
U.S. dollar forward contracts. These contracts have been
designated and have qualified as hedging instruments of the
foreign currency exposure related to the Companys net
investment in its foreign operations. Accordingly, the net
amount of gains or losses on these forward foreign exchange
contracts offset losses and gains on the Companys exposure
to foreign currency movements related to its net investments in
its foreign operations and are reflected in the cumulative
translation adjustment account and included as a component of
other comprehensive income (loss). At March 31, 2002, the
Company had one euro/U.S. dollar forward contract
outstanding in the notional principal amount of
EUR 62.8 million. On June 28, 2002, the Company
settled its euro/U.S. dollar forward contract for
EUR 62.8 million. As noted above, the Company entered
into this contract to mitigate the effect of an adverse movement
of foreign exchange rates. As a result of the weakening of the
U.S. dollar against the euro in the first quarter of fiscal
2003, the Company recorded a net loss on the forward exchange
contract of $7.4 million in the cumulative translation
adjustments account which was offset by the related gain on the
net investment in the foreign operations during the period. As
of March 31, 2004 and 2003, there were no open
euro/U.S. dollar or other foreign currency contracts
outstanding.



|     |                           
|---- | --------------------------
|(14) | Related Party Transactions

It is the Companys policy to reimburse the
business use of private airplanes in connection with Company
business in order to minimize the time spent by employees
traveling to client sites, provided the cost of such travel is
at or below prevailing market rates for private or chartered
aircrafts. During the fiscal year ended March 31, 2004, in
accordance with this policy, the Company reimbursed the chief
executive officer of the Company $200 thousand for
business-related travel on an airplane he owned.

F-26



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|     |                                                
|---- | -----------------------------------------------
|(15) | Quarterly Financial Information
    (Unaudited)

The following table presents the unaudited
quarterly financial information for fiscal 2003 and 2004 (in
thousands, except per share amounts):

|                                                                                         |  |               |          |   |         |   |         |        |  |   |         |   |  |   |          |  
|---------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ------- | - | ------- | ------ |  | - | ------- | - |  | - | -------- | -
|                                                                                         |  |              
|                                                                                         |  | Quarter Ended |         
|                                                                                         |  |               |         
|                                                                                         |  | June 30       |          |   | Sept 30 |   |         | Dec 31 |  |   | Mar 31  |  
|                                                                                         |  |               |          |   |         |   |         |        |  |   |         |  
|Year Ended March 31, 2003                                                                |  |               |          |   |         |   |         |        |  |   |         |   |  |   |          |  
|Revenue before out-of-pocket expense
    reimbursements (net revenue)                    |  | $             | 38,327   |   |         | $ | 38,107  |        |  | $ | 30,077  |   |  | $ | 26,463   |  
|Total revenue (including out-of-pocket expense
    reimbursements)                       |  |               | 43,793   |   |         |   | 44,692  |        |  |   | 33,528  |   |  |   | 30,292   |  
|Loss from operations                                                                     |  |               | (26,510  | ) |         |   | (35,056 | )      |  |   | (25,792 | ) |  |   | (110,774 | )
|Loss before income taxes and the cumulative
    effect of change in accounting principle |  |               | (26,809  | ) |         |   | (35,132 | )      |  |   | (25,455 | ) |  |   | (110,592 | )
|Cumulative effect of change in accounting
    principle                                  |  |               | (140,864 | ) |         |   |        |        |  |   |        |   |  |   |         |  
|Net loss                                                                                 |  |               | (165,758 | ) |         |   | (27,755 | )      |  |   | (20,917 | ) |  |   | (145,631 | )
|Basic loss per share                                                                     |  | $             | (5.21    | ) |         | $ | (0.89   | )      |  | $ | (0.67   | ) |  | $ | (4.59    | )
|Diluted loss per share                                                                   |  | $             | (5.21    | ) |         | $ | (0.89   | )      |  | $ | (0.67   | ) |  | $ | (4.59    | )
|                                                                                        
|Year Ended March 31, 2004                                                                |  |               |          |   |         |   |         |        |  |   |         |   |  |   |          |  
|Revenue before out-of-pocket expense
    reimbursements (net revenue)                    |  | $             | 34,030   |   |         | $ | 38,213  |        |  | $ | 39,510  |   |  | $ | 43,032   |  
|Total revenue (including out-of-pocket expense
    reimbursements)                       |  |               | 39,217   |   |         |   | 43,366  |        |  |   | 44,790  |   |  |   | 49,741   |  
|Income (loss) from operations                                                            |  |               | (9,944   | ) |         |   | 738     |        |  |   | 1,061   |   |  |   | 2,351    |  
|Income (loss) before income taxes                                                        |  |               | (9,542   | ) |         |   | 951     |        |  |   | 1,350   |   |  |   | 2,484    |  
|Net income (loss)                                                                        |  |               | (10,053  | ) |         |   | 461     |        |  |   | 980     |   |  |   | 3,201    |  
|Basic income (loss) per share                                                            |  | $             | (0.31    | ) |         | $ | 0.01    |        |  | $ | 0.03    |   |  | $ | 0.10     |  
|Diluted income (loss) per share                                                          |  | $             | (0.31    | ) |         | $ | 0.01    |        |  | $ | 0.03    |   |  | $ | 0.09     |  

Quarterly income (loss) per share amounts are
calculated independently and may not sum to the full year totals
due to rounding and changes in shares outstanding.

F-27



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##### Table of Contents





INDEPENDENT AUDITORS REPORT


The Stockholders Board of Directors

DiamondCluster International, Inc.:


We have audited the accompanying consolidated
balance sheets of DiamondCluster International, Inc. and
subsidiaries as of March 31, 2003 and 2004, and the related
consolidated statements of operations and comprehensive loss,
stockholders equity and cash flows for each of the years
in the three-year period ended March 31, 2004. In
connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial
statement schedule. This financial statement schedule is the
responsibility of the Companys management. Our
responsibility is to express an opinion on the schedule based on
our audits.

In our opinion, such financial statement
schedule, when considered in relation to the consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.



| |             
| | ------------
| | /s/ KPMG LLP

Chicago, Illinois

April 25, 2004


S-1



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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.



SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS


|                                   |                                                                  |                        |   |       |            |  |   |            |  |            |          |       |  |  |   |       | 
|---------------------------------- | ---------------------------------------------------------------- | ---------------------- | - | ----- | ---------- |  | - | ---------- |  | ---------- | -------- | ----- |  |  | - | ----- | 
|Column A                           |                                                                  | Column B               |   |       | Column C   |  |   | Column D   |  |            | Column E |      
|                                   |                                                                  |                        |   |       |            |  |   |            |  |            |          |      
|                                   |                                                                  | Balance at             |   |       | Charged to |  |   |            |  | Balance at |         
|                                   |                                                                  | Beginning              |   |       | Costs and  |  |   |            |  | End of     |         
|Description                        |                                                                  | of Period              |   |       | Expenses   |  |   | Deductions |  |            | Period   |      
|                                   |                                                                  |                        |   |       |            |  |   |            |  |            |          |      
|                                   |                                                                  |                       
|                                   |                                                                  | (Amounts in thousands) |  
|For the Year Ended March 31, 2004: |                                                                  |                        |   |       |            |  |   |            |  |            |          |       |  |  |   |      
|                                   | Deducted from accounts receivable for
    uncollectible accounts |                        | $ | 1,597 |            |  | $ | 413        |  |            | $        | 360   |  |  | $ | 1,650 | 
|For the Year Ended March 31, 2003: |                                                                  |                        |   |       |            |  |   |            |  |            |          |       |  |  |   |      
|                                   | Deducted from accounts receivable for
    uncollectible accounts |                        | $ | 1,089 |            |  | $ | 3,324      |  |            | $        | 2,816 |  |  | $ | 1,597 | 
|For the Year Ended March 31, 2002: |                                                                  |                        |   |       |            |  |   |            |  |            |          |       |  |  |   |      
|                                   | Deducted from accounts receivable for
    uncollectible accounts |                        | $ | 2,028 |            |  | $ | 1,810      |  |            | $        | 2,749 |  |  | $ | 1,089 | 

See accompanying independent auditors
report.

S-2