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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K





(Mark One)


|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|- | ---------------------------------------------------------------

EXCHANGE ACT OF 1934


For the fiscal year ended March 31, 2002





OR





TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934


Commission File Number: 000-22125





DiamondCluster International, Inc.


(Exact name of registrant as specified in its charter)





Delaware

36-4069408(State or other jurisdiction ofincorporation or organization)

(I.R.S. EmployerIdentification No.)875 N. Michigan Avenue, Suite 3000Chicago, Illinois

60611(Address of Principal Executive Offices)

(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:





Class A 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  x    No  ̈





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.





As of May 31, 2002 there were 25,723,940 shares of Class A Common Stock and 6,290,424 shares of Class B Common Stock of the Registrant
outstanding. The aggregate market value of the Class A Common Stock of the Registrant held by non-affiliates was an estimated $189 million based upon the closing price of $7.94 per share on May 31, 2002. Affiliates held approximately 1.9 million
shares of Class A Common Stock as of May 31, 2002.





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 not 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, 2002





TABLE OF CONTENTS


PagePART IItem 1. Business

3Item 2. Properties

17Item 3. Legal Proceedings

17Item 4. Submission of Matters to a Vote of Security Holders

17PART IIItem 5. Market for Registrants Common Equity and Related Stockholder Matters

18Item 6. Selected Consolidated Financial Data

19Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

20Item 7A. Quantitative and Qualitative Disclosures About Market Risk Sensitive Instruments

29Item 8. Consolidated Financial Statements and Supplementary Data

29Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

30PART IIIItem 10. Directors and Executive Officers of the Registrant

30Item 11. Executive Compensation

30Item 12. Security Ownership of Certain Beneficial Owners and Management

30Item 13. Certain Relationships and Related Transactions

31PART IVItem 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K

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PART I





Item 1.    Business





Overview





DiamondCluster International, Inc. (DiamondCluster) is a premier global management consulting firm. We help leading organizations worldwide develop and implement
growth strategies, improve operations, and capitalize on technology. We work collaboratively with our clients, utilizing small teams of consultants with skills in strategy, technology and program management. This multidisciplinary approach that
contemplates business strategy and technology in tandem allows us to identify opportunities that traditional approaches may not identify. We work closely with our clients because we believe the most lasting and significant improvements occur when
the client is integrally involved in the change. The company goes to market by vertical industry, and currently serves clients through five vertical industry sectors: financial services, insurance and healthcare, telecommunications and energy,
consumer and industrial products and services, and the public sector. We operate globally under a single brand 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 $181.2 million of net revenues (before reimbursements of out of pocket expenses) from 156 clients in fiscal
year 2002 and at March 31, 2002 employed 843 consultants and had twelve offices in North America, Europe and Latin America. As of March 31, 2002, the company had offices in Barcelona, Boston, Chicago, Düsseldorf, Lisbon, London, Madrid,
Münich, New York, Paris, San Francisco 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 changes, economic cycles, new competition, consolidation, organizational restructurings, and new technologies. Managements are constantly assessing the potential impact of these changes on their
businesses, and try to distinguish fad from necessary change. Many of these changes are significant and impact entire organizations. Other changes impact only specific products or functional areas.





Among the most pervasive of these changes is technology. Recent technologies such as the Internet and wireless communications are
fundamentally changing the way business and industries operate. Because technology fundamentally affects how a company relates to its customers, suppliers, employees, investors and competitors, it is a focus at the highest levels of business
organizations, including the CEO and the board of directors. Large companies that have made significant investments in building their existing sales forces, marketing strategies, brands, supply and distribution systems, and data management systems
require new strategies to enable them to leverage these assets to take advantage of the power of these, and other, technologies.





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. In addition, we believe CEOs and senior managements today are not only faced with critical issues
regarding strategy and organization, but are also faced with critical issues regarding technology and its implementation. 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. In addition, time to market has become increasingly important and we believe that companies seek consultants that can not only identify
new approaches, but also have the resources to implement those changes in their organizations.




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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 make up the majority of the industry, are increasing their size and scope
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 for programming
services. These firms have put a good deal of pressure on the traditional information technology service providers for this type of business. And third, 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, operations and technology an increasingly valuable role for the foreseeable future.





As business and technology become increasingly complex, the market for the resultant consulting services grows. We believe that this increasing complexity also increases the importance of an objective advisor that is able to work
across strategy and technology, and remain vendor independent. International Data Corporation (IDC) estimates that the worldwide business and IT consulting market will grow at a compound annual growth rate of 13% from 1999-2004, reaching an
estimated $79 billion by the year 2004.





The DiamondCluster Solution and Competitive Strengths





We combine innovative strategic thinking, in-depth vertical industry expertise, a global presence, and a thorough understanding of
technology and its applications 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 profitably grow their businesses, improve the efficiency of their operations and manage their technology investments in line with their business strategy. Our ability to identify, prototype and scale business
solutions for our clients is predicated on the following attributes that we believe distinguish us from our competitors.





Objectivity. We provide our clients with objective advice in the areas of strategy, operations improvement and technology, including implementation. We believe that as 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 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 develop and implement growth strategies, improve operations, and capitalize on their technology investments. 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 subcontract third-party
sources to provide a complete solution. We believe this provides more value to our clients.





Single,
Multidisciplinary Teams.We work with our clients on their most challenging issues, from the earliest stages of study and assessment through the creation and implementation of a solution. We believe our approach of using single,
multidisciplinary teams that consist of experts in strategy, operations and technology provides our clients with a single team having the perspective and expertise not available from other consulting firms.





Strategic Industry Insight and Expertise.We focus on serving five vertical industry groups: financial services, consumer and
industrial products and services, telecommunications and energy, healthcare and insurance, 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.




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Global Perspective and Presence.We deliver our services worldwide through
our offices in North America, Europe and Latin America with one common brand and business model designed to allow us to deliver the expertise best matched for the client. 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, CMO, CIO). The company also has in place a number of programs that maintain these relationships
in between engagements (see Innovation and Research). These senior level relationships allow us to work across functional budgets (not just IT) and allow our work to track nearly coincidently with their businesses. 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. Consultants work with our 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 execute the implementation plan to achieve the results.





Ability to Quickly Evolve Our Offerings.The consulting industry is subject to changes in economic, business and technology cycles, which require a consulting firm to be very agile to remain relevant. Our approach of
identifying and scaling new service offerings enables us to quickly evaluate and change our service offerings to meet current market demands (see Our Services). In addition, our people are skilled in three enduring
competenciesstrategy, technology and program managementwhich 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. Through our various innovation programs (see Innovation and Research), 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 campuses and 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 independent partner to help them develop and implement growth
strategies, improve operations, or capitalize on technology. Our business model is designed to allow us to be an objective and trusted advisor who provides the highest value services to our 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.We believe that our continued success and growth require us to expand our base of highly skilled professionals. This emphasis on human resources begins with our recruitment




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of client-serving professionals from leading graduate and undergraduate campuses. 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. In addition, we seek to complement organic growth by hiring a select number of experienced
and talented professionals from industry and consulting.





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 and all geographies in the organization. We seek to promote our culture by exposing our professionals to all of
the various services that we provide 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 significant 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. Internal and external experts, as well as industry practitioners including the DiamondCluster Network provide intellectual capital to the company.





Leverage Assets from Business Combination With Cluster. There are significant growth opportunities from our business combination with Cluster. First, we have
leveraged our North American industry expertise to expand into industries beyond telecommunications, the former Clusters primary industry focus, in Europe and Latin America. Second, we have begun to leverage Clusters deep
telecommunications expertise, specifically in wireless communications, to further penetrate the North American telecommunications industry, which is generally recognized as being less advanced than in Europe. Third, we continue to develop a strong
technology capability in Europe and Latin America similar to the capability existing in North America.





Continue to Diversify Across Industries. We believe that diversifying our business across industries will allow the company to have steady growth through various economic, business and technology cycles. We currently serve
clients in five key industry groups: financial services, consumer and industrial products and services, telecommunications and energy, healthcare and insurance, and the public sector (a new industry in North America during fiscal year 2002). 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, to change and grow as our expertise and market demands evolve.





Expand Into Attractive New Geographies.While we currently have a global presence with offices in North America, Latin
America and in several European countries, we believe there remain growth opportunities for us to enter new markets. We believe that diversifying our business across geographies will allow the Company to have steady growth through various economic,
business and technology cycles. Increasing our exposure and access to global markets will enable us to provide additional services to our existing multinational clients and attract new clients from international markets. We continue to evaluate
other global markets that would complement our current business. During fiscal year 2002, we served clients in North America, Latin America, Europe, as well as Africa, India, Korea and Asia. We may choose to enter or expand into those markets
through organic growth or targeted acquisitions.





Market the DiamondCluster Brand.We intend to continue to
invest in the development and maintenance of our brand identity in the marketplace. During fiscal year 2002, we undertook a brand positioning study to better reflect our work with clients worldwide. 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 DiamondCluster, resulting in an increase in the number of new clients and recruitment opportunities.




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


Our Services





We provide services that help
leading organizations worldwide develop and implement growth strategies, improve operations, and capitalize on technology. 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 under a single brand 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 business strategy and
technology in tandem. In addition, our research centers, innovation programs, and DiamondCluster Fellows offer additional insight, experience and intellectual capital to support our multidisciplinary teams (see Innovation and Research).
We believe this approach creates the most lasting and powerful improvements for our clients.


LOGO





We have a process for creating new service offerings that identifies and
tests market opportunities through our ongoing innovation and research programs, 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 agile because we are not dependent upon a particular economic, business or technology cycle.





Our core skills in strategy, technology and program management are combined through our multidisciplinary approach to create service lines reflecting current needs in the market. We currently have
three services lines: Growth, Operations Improvement and Technology. Under each of these multidisciplinary service lines, we develop specific service offerings to meet specific client needs.





Service Lines and Service Offerings





While our
core business model and 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 and
input from our innovation and research programs, we continuously examine and monitor our business and combine our core skills into service offerings. Our service offerings change often to adapt to market demand. Under each of our three service
lines, are several service offerings.





ServiceLine:

Growth

Operations Improvement

TechnologyService Offerings:

  Market Penetration   New Growth   New Business Development

  Profit Improvement   Operations Strategy   Execution Excellence

  IT Assessment & Strategy   IT Portfolio Assessment & Strategy   Outsourcing Advisory   Architecture Assessment & Strategy   Technology Program Management




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Growth. Our growth service line is designed to help clients
identify, design and implement strategies to grow their business through both new and existing customers, and using both new and existing products and services. We currently have three growth service offerings.





Market Penetration. This service offering is designed to help clients amplify and extract value from existing products and
services, using existing customer relationships to grow revenue, increase marketing campaign effectiveness, up-sell and cross-sell to profitably capture a greater share of wallet and boost product line profitability. This is the lowest risk growth
alternative, and consists of work in customer relationship management, customer value management and multi-channel management.





New Growth. Our service offering for new growth examines how to grow a business by identifying new products, services and markets beyond the clients existing business. We work with our clients to quickly analyze key cost
and revenue drivers and generate fast-impact improvement ideas. This growth alternative generally has moderate risk and consists of work in new offering development, new market positioning, and strategic nerve analyses.





New Business Development. This service offering identifies innovative new products, channels and markets, and cost-effectively
tests them as a new growth alternative. We have a holistic approach to new business development and use a proven process to help clients establish new ventures and then measure their contribution to the organization. Among the growth options a
company has, this is the highest risk alternative. Work in this area includes corporate innovation strategies, corporate venturing services and venture-specific services.





Operations Improvement. Our operations improvement service line is designed to help clients implement operational improvements that not only cut costs, but
streamline the business. We currently have three operations improvement service offerings.





Profit
Improvement. This service offering is designed to rapidly identify and extract value through existing assets in order to achieve challenging financial targets within aggressive timeframes.





Operations Strategy. An operations strategy is based on innovative analysis-based deployment of new and existing company assets to achieve significant
operational improvements. This work will consist of efforts such as developing a customer-centric organization, providing outsourcing assessment, and creating effective supply chain strategies.





Execution Excellence. Working closely with our clients, we design and fine-tune an organization, function or process to deliver superior results by focusing on
the customer, the underlying structure and systems, and establishing accountability.





Technology. We
believe that technology should be managed like a business. Our technology service line delivers actionable recommendations to improve IT effectiveness, build a platform for future growth and deliver operational improvements. We also manage the
delivery of the value within our clients organizations. We currently have six technology service offerings.





IT Assessment & Strategy. We work with clients to create value by better aligning IT investments to corporate objectives. Operational effectiveness is improved by setting specific performance goals and a process to meet
them. Cost efficiency is attained through rigorous analyses and concrete actions. And, risk avoidance is maintained by uncovering potential exposures and identifying mitigation alternatives.





IT Portfolio Assessment & Strategy. Using quantitative and qualitative analysis, we work with our clients on a five-step process toward creating greater, more
visible returns on an organizations entire portfolio of IT investments.





Outsourcing Advisory. We
have a structured approach to outsourcing that guides a client through four key phases, resulting in concise, concrete deliverables and ensuring the success of the outsourcing effort.




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Architecture Assessment & Strategy. Managing and governing technology
architectures in large organizations is extremely complex. We work with our clients to help them define explicit linkages between the requirements of the business and technology portfolio and then devise a technology blueprint to generate a common
vision for technology across the organization.





Technology Program Management. We work with clients to
adapt a technology program management framework and processes to ensure that their IT project portfolio is anchored by benefits and costs, and is


managed through
accountability, experience and leadership.





Vertical Industries Served





The company goes to market by vertical industry, with service lines and service offerings within each industry. We currently serve clients through five vertical industry
sectors: financial services, insurance and healthcare, telecommunications and energy, consumer and industrial products and services, and the public sector.


LOGO





Financial Services. Our financial services industry sector 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 our clients with the issues they face in this sector today,
including the need to improve productivity, decimalization, growing revenues, value chain configuration, increasing competition and assessing various dynamic technologies. Clients in the financial services sector include Goldman Sachs, Bank of
America, Barclays, Bank One, American Express and HBOS plc. In fiscal year 2002, financial services clients represented 10% of net revenue.





Consumer and Industrial Products and Services. Our consumer and industrial products and services industry sector provides services to companies in the following segments: chemical,
transportation, electronics, food, retail/consumer, and hardware and software. We help our clients with the issues they face in this sector today, including reducing costs, growing revenue, mining customers, and managing the value chain. Clients in
the consumer and industrial products and services sector include Wendys, John Deere, Fisher Scientific International, Buhrmann, Volkswagen, Zebra Technologies, Lladro and American Greetings. In fiscal year 2002, consumer and industrial
products and services clients represented 23% of net revenue.





Insurance and Healthcare. Our insurance and
healthcare industry sector provides services to property and casualty insurance, life insurance, health insurance, large healthcare providers, biomedical companies, and business units of large pharmaceutical companies. We help our clients with the
issues they face in this sector today, including industry over-capacity, pressure to improve profit margins, integrating legacy systems, revenue generation and channel management, pricing pressure, commoditization of products, and shifting
demographics. Clients in the insurance and healthcare sector include Royal & SunAlliance, Cigna, CNA, Caremark, Tranquilidade, and Unum Providence. In fiscal year 2002, insurance and healthcare clients represented 19% of net revenue.





Telecommunications and Energy. Our telecommunications and energy industry sector provides services to
wireless operators and vendors, fixed line operators and vendors and energy providers. Issues facing this sector today include EBITDA improvement needs, wireless 2.5G and 3G strategy and execution, convergence, and deregulation. We help our clients
address these challenges through our offerings in customer value management, cost benchmarking, 3G and data strategies, convergence consulting, deregulation, and IT strategy and execution. Clients in the telecommunications and energy sector include
Sprint, Cincinnatti Bell, Deutsche Telekom, Orange, Telefonica, Belgacom and Duke Energy. In fiscal year 2002, telecommunications and energy clients represented 47% of net revenue. The majority of our telecommunications work is out of our European
and Latin American practice.




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Public Sector. Our public sector industry practice provides services to
U.S., local, state and federal governments. Issues facing this sector today include homeland security, management and accountability of technology spending, and demand for agencies to become more citizen-centric by minimizing complexity and
improving responsiveness. We help our clients address these challenges through our offerings in technology and strategy management, operations improvement, and organizational strategies. Clients in the public sector include Chicago Transit Authority
and Lawrence Livermore National Laboratory. We first began offering services to the public sector in North America during fiscal year 2002. Accordingly, during the fiscal year the public sector clients represented less than one percent of net
revenue.





Innovation and Research





Consulting firms are notably knowledge-intensive organizations. In the past, the existence of accumulated experience within a consulting firm was enough to attract and retain clients. Today,
information is more readily accessible and the useful life of new knowledge is shortening. In recognition of this trend, we have developed multiple programs, alliances and innovation centers to continuously identify, develop and disseminate
intellectual capital from individuals both within and outside DiamondCluster.





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.





As of March 31, 2002, there were three companies in our Strategic Alliance Program:





Strategic Alliance Company

DescriptionIntel

Intel is a supplier of chips, boards, systems, software, networking and communications equipment, and services that comprise the ingredients of
computer architecture and the Internet.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.





Key network alliances include BEA Systems, HP Openview, IBM
Corporation and Oracle.





DiamondCluster Network.The DiamondCluster Network is a group currently comprised
of 14 recognized business and technology leaders associated with DiamondCluster. Members of the DiamondCluster Network,




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whom we refer to as 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, Insight, and Catalyst workshops 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 stock options and per diem payments for services provided to us, or
to our clients on our behalf.





As of March 31, 2002, DiamondCluster Fellows include:





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 Wired magazine 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.





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).





James J. Duderstadtis President Emeritus of the University of Michigan. Mr. Duderstadt teaches and conducts research in the areas of science, mathematics and engineering, including work in
computer simulation, science policy, higher education, information technology, nuclear fission reactors, thermonuclear fusion, and high-powered lasers. He has served on and/or chaired numerous boards including the National Science Board, the Nuclear
Energy Research Advisory Committee of the Department of Energy, Unisys and CMS Energy.





Tim
Gallweyconsults in the area of learning in the business environment. Mr. Gallwey has worked with a number of major corporations to develop the coaching skills of their managers and to create work environments that support learning and peak
performance. His fifth and most recent book is, The Inner Game of Work(Random House, 2000).





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.





Alan C. Kay, Ph.D.is
president of Viewpoint Research Institute, Inc. and also a member of our Board of Directors. From 1996 to 2001, Dr. Kay was a Disney fellow and vice-president of research and development for Walt Disney Imagineering. Dr. Kay was also a founding
principal of the Xerox Palo Alto Research Center, chief scientist of Atari, Inc. and an Apple Computer fellow. Dr. Kay is credited with the conception of the laptop computer and the overlapping windows and icon interface that is used in almost all
personal computers today. He was also a contributor to the development of the Ethernet, laser printing, network client/servers, and the forerunner of the Macintosh computer. He contributed to the inventions of 3-D graphics and the ARPANet, now the
internet.




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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.





Heidi Masonis a managing director of The Bell-Mason Group and is a technology marketing consultant in Silicon
Valley specializing in new ventures. Ms. Mason is co-creator, with Gordon Bell, of the Bell-Mason Diagnostic and Venture Development System, a technology and methodology to assess strengths and weaknesses of high-tech, early stage ventures. She
recently co-authored, The Venture Imperative: A New Model for Corporate Innovation (Harvard Business School Press, 2002), with one of DiamondClusters consultants.





B. Joseph Pine IIis co-founder of Strategic Horizons LLP. Mr. Pine is co-author ofThe 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.





Mohanbir Sawhney is the Tribune
Professor of Electronic Commerce and Technology at Northwestern Universitys Kellogg Graduate School of Management, and a specialist in crafting marketing strategies in the fast-changing network economy. He has been awarded the Sydney Levy
award for excellence in teaching and named the 1998 Outstanding Professor of the Year at Kellogg. He recently authored The Seven Steps to Nirvana: Strategic Insights into eBusiness Transformation (McGraw-Hill, 2001).





James Spira is president and chief operating officer of American Greetings Corporation and the Chairman of
AmericanGreetings.com. He co-founded Cleveland Consulting Associates in 1974 (which was acquired by Computer Science Corp. in 1989) after spending several years with Ernst & Young and A.T. Kearney. Jim was also 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.





Innovation Centers.Our innovation centers provide labs where our people work with experts inside and outside our
organization to research and devise practical applications for various business and technology advances. We currently have two innovation centers to support our business:





Center for Market Leadership.The DiamondCluster Center for Market Leadership is designed to explore the principal drivers of market leadership. Its mission is to
help business and other organization leaders manage in todays radically different business, economic, and technology environments. Based in Boston, the center combines the global reach and deep industry experience of DiamondCluster
International with the groundbreaking research and strategic insights of Fred Wiersema, author of the popular business book,The New Market Leaders: Whos Winning and How in the Battle for Customers (The Free Press, June
2001).





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




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





Innovation Programs.Consulting firms are notably knowledge-intensive organizations. In the past, the existence of
accumulated experience within a consulting firm was enough to attract and retain clients. Today, information is more readily accessible and the useful life of new knowledge is shortening. In recognition of this trend, we have developed multiple
programs to continuously identify, develop and disseminate intellectual capital from individuals both within and outside DiamondCluster.





Context. Context is a business magazine we have published since November of 1997 covering the growing intersection of business and technology. Contextis circulated six times a year to approximately 40,000
readers. The magazine serves as a useful business development and marketing tool to communicate directly with our existing and prospective clients. Context also provides a means to further develop our employees points of view as
abstracted and generated from client engagement experiences.





Exchange.The Exchange is a series of
executive learning forums that we launched in February 1997. CEOs and other senior executives 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 Network members, our senior consultants and other business leaders.





Insight.Insight is a series of one-and-a-half day management learning sessions. Launched in late 1998, the sessions provide senior executives of our existing and prospective clients with the opportunity to explore the
strategic risks and opportunities of emerging technologies in a small and interactive environment. The forums are sponsored each year by leading technology firms, such as Intel Corporation in calendar 2002.





Catalyst. Catalyst workshops are one- or two-day sessions tailored to specific client situations. Launched in late 2000, Catalyst
workshops bring together DiamondCluster clients with DiamondCluster consultants and Fellows, in a collaborative setting to create the focus, tools and guidelines needed to define a projects key issues. These sessions are designed to showcase
the companys intellectual capital and focus and align the client management and project team around a common goal.





Books and Other Publications.We believe that books and other publications provide an important source of intellectual capital for our firm and our clients. DiamondCluster professionals and Fellows publish books from time to
time that provide depth in timely and relevant areas of business and technology. Books published by employees or Fellows include Unleashing the Killer App: Digital Strategies for Market Dominance(Harvard Business School Press, 1998),The
Seven Steps to Nirvana: Strategic Insights into eBusiness Transformation (McGraw-Hill, 2001), E-Learning: Strategies for Delivering Knowledge in the Digital Age(McGraw-Hill, 2001),and The Venture Imperative: A New Model for Corporate
Innovation(Harvard Business School Press, 2002).In addition, we publish electronic and physical newsletters to CEOs and senior managers, and our partners and DiamondCluster Network members are frequent speakers at business and
technology forums.





Sales and Marketing





Our senior partners manage our principal sales activities. They are responsible for building relationships with CEOs and senior leadership teams of existing and potential
clients and for formulating and executing our sales and marketing strategy. Our senior partners call on existing and potential clients, discuss potential engagements, negotiate the terms of engagements, and direct the staffing and execution of
consulting projects. The term partners is an internal designation only and does not refer to a partner of a general or limited partnership. All of our partners are vice presidents of the Company.




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We primarily sell our services to c-level executives of national and
multinational businesses. We believe that a majority of our fees are sourced from CEO and senior managements operating budgets as opposed to information technology budgets. We have divided our senior partners into vertical industry groups
focused on five industry sectors: financial services; insurance and healthcare, telecommunications and energy, consumer and industrial products and services; and the public sector. A senior partner who is assigned revenue and profit contribution
responsibility for the group leads the sales efforts in each group. Senior partners are assigned to clients and prospects, as opposed to projects, to maximize the value and services provided to each client. We seek projects within each group from
both new prospects and existing clients. Each vertical industry group maintains a current list of targeted prospects that are tracked on an ongoing basis by our senior management. Building on leads generated through our marketing and innovation
programs, senior partners pursue formal consulting engagements.





The primary focus of our marketing programs is to
generate leads through building relationships and educating client prospects about DiamondCluster. We have initiated a number of marketing programs designed to complement, encourage and accelerate client relationships. We build relationships both
directly and on a collaborative basis with DiamondCluster Network members and through relationships with certain third-party industry executives who we call client relationship executives. These executives are typically retired senior
executives with a wide network of contacts in a given industry. We currently have 27 client relationship executives.





Complementing the relationship-marketing programs are a variety of other business development and marketing techniques used to communicate directly with current and prospective clients, including publications, surveys, e-mail
newsletters, media and analyst relations, speeches and a homepage on the World Wide Web. Three of our more substantive marketing efforts include, 1) publishing the business magazine, Context; 2) hosting the Exchange and Insight, two
executive learning forums; and 3) publishing books and other regular newsletters. Each of these programs is designed to educate the market, demonstrate our intellectual capital, and create an ongoing dialogue with clients and prospects. See
Innovation and Research for a description of these efforts.





Employees and Culture





Employees. As of March 31, 2002, we had 1,121 employees. Of these employees, 843 were client-serving professionals and 278 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 simultaneously provide expertise in strategy, technology and program management is dependent
upon our ability to develop and sustain a business culture that is common across all disciplines, vertical industries, and geographies in the organization. DiamondClusters employees are talented and energetic professionals that come from a
multitude of professional backgrounds and over 45 nationalities. 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.
| | - | ----------------------------------------------------------------------------------------------------



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Recruiting. We believe our success will depend on our ability to continue
to attract, retain and motivate highly skilled employees to support our current operations and future growth. 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 significant number of our current employees were hired directly from other firms, a growing number of our associates are being hired annually from the leading
undergraduate and graduate business programs at universities in North America and Europe. Over time, we expect to hire a majority of our employees from these programs and, as a result, 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 and innovation centers, 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 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 those professional services firms able to offer equity-based instruments will be more successful in
attracting and retaining talented individuals to their organizations.





Our partners are eligible to receive an
annual bonus comprised of cash commensurate with their level of responsibility and based on our overall performance. Our partners are granted stock options upon being elected a partner. We grant additional equity in conjunction with movement through
the partner levels. Options that we issue to partners typically vest ratably over five years. Individuals below the partner level are awarded annual cash bonuses based on their performance and our overall performance. Our non-partners are granted
stock options at the time of hire and promotion. These options typically vest 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 firms that 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 firms that 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 vendors that 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.




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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. Changes 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 to help them address their most challenging business and technology issues 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.





Executive Officers of the Registrant





Our executive
officers are as follows:





Name

Age

PositionMelvyn E. Bergstein

60

Chairman of the Board of Directors and Chief Executive OfficerKarl E. Bupp

40

Chief Financial Officer and TreasurerMichael J. Connolly

40

President, Global SevicesAdam J. Gutstein

39

President, North America and DirectorWilliam R. McClayton

57

Senior Vice President, Finance and AdministrationJavier Rubio

41

President, Europe and Latin America and DirectorJohn J. Sviokla

44

Vice Chairman and Director





Melvyn E. Bergstein co-founded 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 Arthur Andersen & Co.s consulting division, 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.





Michael J. Connolly joined us in May 1995 as a partner and Vice President. Mr. Connolly is currently President, Global Services for DiamondCluster and was previously
President, Diamond Marketspace Solutions. Prior to joining Diamond, Mr. Connolly was an associate partner with Andersen Consulting, now Accenture.




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Adam J. Gutstein co-founded Diamond in January 1994 and has served as a
partner and Vice President since inception, and as a member of our board of directors since August 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. On November 28, 2000, Mr. Gutstein assumed the title of President, North 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 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 private audit clients, and led the firms Chicago-based global financial markets practice for ten years.





Javier Rubiobecame President, Europe and Latin America and a member of our board of directors in November 2000 when the Cluster
merger was completed. Mr. Rubio founded Cluster Consulting in 1993 and served as its Chairman of the Board of Directors and Chief Executive Officer. Prior to founding Cluster, Mr. Rubio held several senior positions with other consulting firms,
including seven years in various positions with the MAC Group (Gemini Consulting) and the Monitor Company.





John J. Sviokla joined us 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 Marketspace established Harvards first course on electronic commerce, and he co-authored the seminal articles Managing in the
Marketspace and Exploiting the Virtual Value Chain, both appearing in the Harvard Business Review. Dr. Sviokla has authored over 90 articles, cases, and 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. In North America, we also have leased offices in San Francisco, California; New
York, New York; and Boston, Massachusetts.





European and Latin American operations are based in Barcelona, Spain
and we have seven small leased offices in 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 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 2002.




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PART II





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





The Class A 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 sales prices for the Class A Common Stock.





Sales Price Per ShareHigh

LowFiscal year ended March 31, 2001:First Quarter

$
88.88

$
47.25Second Quarter


98.94


49.44Third Quarter


74.94


20.69Fourth Quarter

$
44.13

$
7.88Fiscal year ended March 31, 2002:First Quarter

$
18.75

$
7.50Second Quarter


12.50


9.44Third Quarter


14.27


7.60Fourth Quarter

$
16.34

$
10.21





On June 25, 2002, the closing price of Class A Common Stock was
$5.76 per share. At such date, we had approximately 7,500 holders of record of Class A 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. Under the terms of its credit agreement, the Company is required to maintain a minimum tangible net worth of $20 million.




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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 31,1998

1999

2000

2001


2002(Dollars in thousands, except per share amounts)Statement of Operations Data:Revenue:Revenue before out-of-pocket expense reimbursements (net revenue)

$
60,178

$
84,809

$
139,627

$
266,536


$
181,215Out-of-pocket expense reimbursements


8,152


11,811


28,379


40,864



21,745Total revenue


68,330


96,620


168,006


307,400



202,960Operating expenses:Project personnel and related expenses before out-of-pocket reimbursable expenses


33,428


45,695


75,747


141,980



132,627Out-of-pocket reimbursable expenses


8,152


11,811


28,379


40,864



21,745Total project personnel and related expenses


41,580


57,506


104,126


182,844



154,372Professional development and recruiting


6,155


9,448


13,199


26,673



10,834Marketing and sales


3,210


4,669


7,325


13,431



7,136Management and administrative support


8,602


11,298


18,260


41,989



46,794Goodwill amortization








493


21,928



61,850Noncash compensation











18,187



52,305Restructuring charge















15,542Total operating expenses


59,547


89,921


143,403


305,052



348,833Income (loss) from operations


8,783


13,699


24,603


2,348



(145,873
)Interest income, net


1,150


2,488


2,002


11,999



4,138Other expense











(8,714
)


(2,985
)Total other income, net


1,150


2,488


2,002


3,285



1,153Income (loss) before taxes


9,933


16,187


26,605


5,633



(144,720
)Income tax expense (benefit)


3,925


6,351


10,377


18,500



(11,048
)Net income (loss)

$
6,008

$
9,836

$
16,228

$
(12,867
)

$
(133,672
)Basic net income (loss) per share of commonstock (1)

$
0.34

$
0.49

$
0.78

$
(0.49
)

$
(4.34
)Diluted net income (loss) per share of common stock (1)

$
0.28

$
0.42

$
0.62

$
(0.49
)

$
(4.34
)Shares used in computing basic net income (loss) per share of common stock (1)


17,634


19,915


20,807


26,448



30,813Shares used in computing diluted net income (loss) per share of common stock (1)


21,258


23,346


25,984


26,448



30,813March 31,1998

1999

2000

2001


2002(Dollars in thousands)Balance Sheet Data:Cash and cash equivalents

$
31,437

$
47,698

$
182,945

$
151,358


$
96,773Working capital


26,236


46,872


183,967


132,501



103,564Total assets


40,352


67,086


249,410


522,256



401,176Long-term debt, including current portion








1,000


500



Total stockholders equity

$
28,767

$
53,301

$
218,318

$
452,367


$
375,098


---

|(1) | 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 develop and implement growth strategies, improve operations, and capitalize on technology. We work collaboratively with our clients,
utilizing teams of consultants with skills in strategy, technology and program management. During fiscal year 2002 we generated $181.2 million of net revenues (before reimbursements of out-of-pocket expenses) from 156 clients. As of March 31, 2002,
we employed 843 client-serving professionals and had twelve offices in North America, Europe and Latin America.





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 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.





In
November 2001, the FASB issued a Staff Announcement regarding the income statement classification of out-of-pocket expenses incurred and billed to clients for reimbursement. This announcement requires that out-of-pocket expenses incurred
and billed to clients for reimbursement be reflected in the income statement on a gross basis as both revenue and expense. Accordingly, we have adjusted revenue and project costs for all periods reported to include out-of-pocket expenses. We have
also adjusted revenue and project costs for all periods reported to include administrative charges billed to clients. Previously, these out-of-pocket expense reimbursements and administrative charges billed to clients were classified as a reduction
of project personnel and related expenses. This change in classification had no effect on current or previously reported net income (loss) or earnings (loss) per share.





Forward-Looking Statements





Statements contained anywhere
in this report that are not historical facts contain forward-looking statements including such statements identified by the words anticipate, believe, estimate, expect and similar terminology used with
respect to the Company and its management. These forward-looking statements are subject to risks and uncertainties which could cause the Companys actual results, performance and prospects to differ materially from those expressed in, or
implied by, the forward-looking statements. The forward-looking statements speak only as of the date hereof and the Company undertakes no obligation to revise or update them to reflect events or circumstances that arise in the future. Readers are
cautioned not to place undue reliance on forward-looking statements. For a statement of the Risk Factors that might adversely affect the Companys operating or financial results, see Exhibit 99.1 to this Annual Report on Form 10-K.





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




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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 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.





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 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. 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, 2002, our accounts receivable balance was $22.1 million, including unbilled accounts receivable of
$5.4 million, and net of allowance for doubtful accounts of $1.1 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, 2002, our deferred revenue balance was $0.9 million. 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.




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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 direct costs 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.





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 our 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, we recorded a restructuring charge related to specific actions we took to better align our cost infrastructure with our
near term revenue expectations. The charge included estimates of costs related to severance and other personnel-related expenses, as well as costs related to reductions in office space, the write-off of associated leasehold improvements, and the
establishment of accruals for other contractual commitments which are not expected to provide future benefit. We estimated these costs based upon our restructuring plan. Although we do not expect there to be significant changes to our plan, changes
may be necessary due to unanticipated events, and may result in revisions to previously recorded estimates. Such revisions will be reflected in the financial statements in the period they occur.





Valuation of Long-Lived Assets and Goodwill





In fiscal 2002, we amortized goodwill over its estimated period of benefit and assessed the carrying value of our long-lived assets and related goodwill whenever events or changes in circumstances indicated that the recorded
amount may not be recoverable, as required by Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.





Our goodwill was recognized in connection with acquisitions we made in fiscal 2000 and 2001. The majority of our goodwill
relates to our acquisition of Cluster Telecom BV, a pan-European consulting firm specializing in wireless technology and digital strategies, which occurred in November 2000. All of the skills we acquired in these transactions continue to be
important to our service delivery. Additionally, diversifying our business across geographies and expanding into new markets are key elements to our business strategy. Our ability to implement this portion of our strategy has been significantly
enhanced by Clusters strong presence in Europe and Latin America.





In applying existing accounting
literature related to the valuation and amortization of long-lived assets including goodwill, management must make estimates of the period of benefit or use of the assets and judgments about whether particular events or developing circumstances
indicate that the carrying value of the assets may not be recoverable.





We estimate the lives of our long-term
assets, including goodwill, at the time they are acquired based on their expected period of benefit or use. Factors we consider in establishing these lives include the nature of the asset, our prior experience with similar assets, and expected
future cash flows from use of the asset. We revise our estimates as appropriate to reflect our actual experience and to recognize the effects of obsolescence, competition and changes in economic conditions.




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We assess the recoverability of the carrying value of long-lived assets,
including goodwill, whenever events or circumstances suggest the balance might not be recovered. We use judgment to determine when such a review is necessary. We base our judgments, about whether an impairment review is required, on factors such as
our operating performance and our projections of future results, the importance of the acquired assets to our business strategy, industry or economic trends and our market capitalization relative to our net book value. Based on our assessment of
these factors, together with the recent timing of our acquisitions, and our judgment that the current downturn in our industry was not likely to be permanent, we concluded that no impairment review was required at March 31, 2002. Long-lived assets
and goodwill amounted to $251.0 million as of March 31, 2002.





If we had determined that an impairment review was
required, we would have measured any impairment based on estimated future cash flows expected to result from the use of the asset and its eventual disposition as required by SFAS 121.





In fiscal 2003, SFAS No. 142, Goodwill and Other Intangible Assets will be effective for the Company, and establishes new standards for accounting for and
assessing the impairment of goodwill. As a result, the Company will cease to amortize approximately $235.2 million of goodwill beginning on April 1, 2002 (approximately $61.9 million of amortization related to goodwill was recognized during fiscal
2002). In lieu of amortization, SFAS No. 142 requires us to perform an initial impairment review of goodwill as of April 1, 2002. Thereafter, we will be required to perform an impairment review at least annually and upon the identification of
certain indicators of possible impairment of value such as those outlined above. Under SFAS No. 142, goodwill impairment is assessed at the reporting unit level, using a discounted cash flow method.





We are in the process of evaluating the impact that the adoption of SFAS No. 142 will have on the Companys consolidated financial
statements. While we have not as yet completed the full evaluation of the carrying value of goodwill required by the new criteria under SFAS No. 142, we expect to record a non-cash cumulative effect charge of between $130 million and $150 million
during the first quarter of fiscal year 2003 to reduce the carrying value of goodwill to its implied fair value.





New Accounting
Policies





On July 20, 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141,
Business Combinations and No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Business combinations
accounted for as poolings-of-interests and initiated prior to June 30, 2001 are grandfathered. SFAS No. 142 replaces the requirement to amortize intangible assets with indefinite lives and goodwill with a requirement for an impairment test. SFAS No.
142 also requires an evaluation of intangible assets and their useful lives and a transitional impairment test for goodwill and certain intangible assets upon adoption. After transition, the impairment test will be performed annually. The Company
adopted SFAS No. 141 effective July 1, 2001. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, and must be applied as of the beginning of a fiscal year. The Company is in the process of evaluating the impact that the
adoption of SFAS No. 142 will have on the Companys consolidated financial statements, and expects to record a non-cash cumulative effect charge of between $130 million and $150 million during the first quarter of fiscal year 2003 related to
the adoption of SFAS No. 142.





In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment and Disposal of Long-Lived Assets.While SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,it retains many of the fundamental
provisions of that Statement. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company is in the process of evaluating the impact that adoption of SFAS No. 144 will have
on the Companys consolidated financial statements; however, the Company does not expect a material impact on the financial statements as a result of this adoption.




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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 31,2000


2001


2002Revenue:Revenue before out-of-pocket-expense reimbursements (net revenue)

100.0
%

100.0
%

100.0
%Out-of-pocket expense reimbursements

20.3


15.3


12.0Total revenue

120.3


115.3


112.0Operating Expenses:Project personnel and related expenses before out-of-pocket reimbursable expenses

54.3


53.3


73.2Out-of-pocket reimbursable expenses

20.3


15.3


12.0Total project personnel and related expenses

74.6


68.6


85.2Professional development and recruiting

9.4


10.0


6.0Marketing and sales

5.2


5.0


3.9Management and administrative support

13.1


15.8


25.8Goodwill amortization

0.4


8.2


34.1Noncash compensation




6.8


28.9Restructuring charge







8.6Total operating expenses

102.7


114.4


192.5Income (loss) from operations

17.6


0.9


(80.5
)Other income, net

1.4


1.2


0.6Income (loss) before taxes

19.0


2.1


(79.9
)Income tax expense (benefit)

7.4


6.9


(6.1
)Net income (loss)

11.6
%

(4.8
%)

(73.8
%)





Fiscal 2002 Compared to Fiscal 2001





Our net loss of $12.9 million during fiscal 2001 increased by $120.8 million resulting in a net loss of $133.7 million during fiscal 2002,
primarily due to increased amortization of goodwill and noncash compensation costs recorded in connection with the Cluster transaction that closed on November 28, 2000, a decrease in operating income before amortization of goodwill and noncash
compensation, and costs associated with the restructuring plan implemented in the quarter ended December 31, 2001.





Revenue before out-of-pocket expense reimbursements (net revenue) for fiscal 2002 was $181.2 million, down 32.0% compared with $266.5 million reported for fiscal 2001. Total revenue including out-of-pocket expense
reimbursements was $203.0 million for fiscal 2002, down 34.0% compared with $307.4 million reported for fiscal 2001.The decline in revenue in fiscal 2002 can be principally attributed to the weakness in the global economy, resulting in a decline in
current demand for the Companys services. The unstable economic conditions have also led to pricing pressures, a lengthening of the Companys sales cycles and reductions and deferrals of client expenditures for consulting services.
Clients served in fiscal 2002 declined to 156 as compared to 169 clients served in fiscal 2001. Revenue from new clients accounted for 17% of fiscal 2002 revenue as compared to 55% in fiscal 2001. Revenue from existing clients accounted for 83% of
total revenue in fiscal 2002 as compared to 45% in fiscal 2001.





Project personnel and related expenses before
out-of-pocket reimbursable expenses decreased $9.4 million, or 6.6%, to $132.6 million during fiscal 2002 as compared to $142.0 million reported for fiscal 2001. Project




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personnel and related expenses including out-of-pocket reimbursable expenses decreased $28.5 million, or 15.6%, to $154.4 million during fiscal 2002 as compared to fiscal 2001. The decrease in
project personnel and related expenses reflects savings resulting from the following cost reduction programs implemented throughout fiscal 2002. Beginning June 2001, we reduced salaries between 10% and 15% for most employees, and in August 2001, we
reduced salaries 65% for approximately 200 furloughed employees. During the quarters ended December 31, 2001 and March 31, 2002, we further reduced personnel as part of the Companys restructuring plan. Overall, we reduced our client-serving
professional staff from 1,141 at March 31, 2001 to 843 at March 31, 2002. As a percentage of net revenue, project personnel and related expenses before out-of-pocket reimbursable expenses increased from 53.3% to 73.2% during fiscal 2002 as compared
to fiscal 2001, due primarily to decreases in utilization of our client serving professionals. Similarily, project personnel and related expenses including out-of-pocket reimbursable expenses increased as a percentage of net revenue from 68.6% to
85.2% during fiscal 2002 as compared to fiscal 2001.





Professional development and recruiting expenses decreased
$15.8 million to $10.8 million during fiscal 2002 as compared to fiscal 2001. This decrease primarily reflects decreases in our level of recruiting and recruiting staff and the cancellation of several firm wide meetings. As a percentage of net
revenues, these expenses decreased to 6.0% from 10.0% during the prior year.





Marketing and sales expenses
decreased $6.3 million to $7.1 million during fiscal 2002 as compared to fiscal 2001 as a result of decreased marketing activities. As a percentage of net revenues, these expenses decreased to 3.9% as compared to 5.0% during the prior year.





Management and administrative support expenses increased from $42.0 million to $46.8 million, or 11.4%, during
fiscal 2002 as compared to fiscal 2001 as a result of the full year cost of the addition of offices located in Barcelona, Boston, Düsseldorf, Lisbon, London, Madrid, Münich, Paris, and São Paolo resulting from the Cluster
transaction, and additional equipment and personnel necessary to support our increased consulting capacity. As a percentage of net revenues, these expenses increased from 15.8% to 25.8% due mainly to increased costs associated with the new offices,
coupled with reduced revenues.





Goodwill amortization increased $40.0 million from $21.9 million to $61.9 million
during fiscal 2002 as compared to fiscal 2001 due primarily to the full year effect of goodwill amortization resulting from acquisitions of Momentus Group Limited and Cluster which were completed in May and November 2000, respectively. As a
percentage of net revenues, these expenses increased from 8.2% to 34.1%.





Noncash compensation increased from
$18.2 during fiscal 2001 to $52.3 million during fiscal 2002. This is primarily the amortization of unearned compensation resulting from the issuance of stock options at prices below fair market value to Cluster employees as a result of the Cluster
acquisition. This unearned compensation will be earned over time contingent on the continued employment of these employees. As a percentage of net revenues, noncash compensation was 28.9%.





In the third quarter of fiscal 2002, the Company recorded a restructuring charge of $15.5 million based on an evaluation of competitive conditions in the global markets.
The Company completed an assessment of the infrastructure needed to support anticipated levels of business in fiscal 2003, and developed and implemented a restructuring plan designed to better align its cost structure and areas of operation with
current business requirements. The restructuring charge consisted of $10.8 million for workforce reductions, $3.1 million for the reduction of office space, and $1.6 million for the write-down of other depreciable assets and equipment leases. The
Company expects the restructuring will produce cost savings of $22 million on an annualized basis, of which approximately 68% relates to project personnel and related costs, and approximately 32% relates to other operating expenses.





Income from operations decreased from $2.3 million to a loss of $145.9 million during fiscal 2002 as compared to fiscal 2001
due primarily to the increased amortization of goodwill and noncash compensation,




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reduced revenue and the restructuring charge. EBITA, which consists of earnings from operations before amortization of goodwill and noncash compensation and the restructuring charge, decreased
from earnings of $42.5 million to a loss of $16.2 million during fiscal 2002 as compared to fiscal 2001. EBITA is not a measure of financial performance under U.S. generally accepted accounting principles. You should not consider it in isolation
from, or as a substitute for, net income or cash flow measures prepared in accordance with U.S. generally accepted accounting principles or as a measure of profitability or liquidity. Additionally our EBITA calculation may not be comparable to other
similarly titled measures of other companies. We have included EBITA as a supplemental disclosure because it may provide useful information regarding our ability to generate cash for operating and other corporate purposes.





Other income decreased $2.1 million from $3.3 million to $1.2 million during fiscal 2002 as compared to fiscal 2001, primarily due to a
decrease in cash balances throughout fiscal year 2002 resulting in a decrease in interest income of $7.9 million, which was partially offset by foreign exchange gains and a decrease in realized losses on equity investments. Realized losses on equity
investments decreased by $4.0 million from $8.6 million in fiscal 2001 to $4.6 million in fiscal 2002. As a percentage of net revenues, other income decreased from 1.2% to 0.6%.





Income taxes decreased from an expense of $18.5 million to a benefit of $11.0 million due principally to the loss incurred in the current year. The realization of this
benefit is dependent upon the Companys ability to generate taxable income in the future.





Fiscal 2001 Compared to Fiscal 2000





Our net income of $16.2 million during fiscal 2000 decreased $29.1 million resulting in a net loss of $12.9
million during fiscal 2001 primarily due to the amortization of goodwill and noncash compensation recorded in connection with the Cluster acquisition and an increase in the effective tax rate, partially offset by an increase in operating income
before amortization of goodwill and noncash compensation. The Cluster acquisition, the largest of our two acquisitions during fiscal 2001, closed on November 28, 2000 and Clusters results are included from that date.





Revenue before out-of-pocket expense reimbursements (net revenue) increased 90.9% to $266.5 million during fiscal 2001 as
compared to fiscal 2000. Total revenue including out-of-pocket expense reimbursements increased 83.0% to $307.4 million during fiscal 2001 as compared to fiscal 2000. The increase in our net revenue reflects an increase in the volume of services
delivered to new clients, continued services to our existing client base, continued growth of our Diamond Marketspace Solutions practice, as well as four acquisitions, two in fiscal year 2000 and two in fiscal year 2001. Revenue from new clients
accounted for 45% of the revenue while revenue to existing clients accounted for 55% of total revenue during fiscal 2001. We served 169 clients during fiscal 2001 as compared to 143 clients served during fiscal 2000.





Project personnel and related expenses before out-of-pocket reimbursable expenses increased $66.2 million, or 87.4%, to $142.0 million
during fiscal 2001 as compared to fiscal 2000. Project personnel and related expenses including out-of-pocket reimbursable expenses increased $78.7 million, or 75.6%, to $182.8 million during fiscal 2001 as compared to fiscal 2000. This increase is
due to increases in both the number and compensation of our client-serving professionals. We increased our client-serving professional staff from 452 at March 31, 2000 to 1,141 at March 31, 2001 as a result of the Cluster transaction and our
continued success in recruiting client-serving professionals. As a percentage of net revenue, project personnel and related expenses before out-of-pocket reimbursable expenses decreased from 54.3% to 53.3% during fiscal 2001 as compared to fiscal
2000, due primarily to the inclusion of the results of Clusters operations from November 28, 2000 to the end of the fiscal year. Similarily, project personnel and related expenses including out-of-pocket reimbursable expenses decreased as a
percentage of net revenue from 74.6% to 68.6% during fiscal 2001 as compared to fiscal 2000.




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Professional development and recruiting expenses increased $13.5 million to $26.7
million during fiscal 2001 as compared to fiscal 2000. This increase reflects our recruiting and training of a greater number of client-serving professionals and an associated increase in recruiting and training resources. As a percentage of net
revenues, these expenses increased to 10.0% from 9.4% during the prior year.





Marketing and sales expenses
increased $6.1 million to $13.4 million during fiscal 2001 as compared to fiscal 2000 as a result of increased spending for:





| |  | the publication of our magazine, Context, which transitioned from a quarterly publication to a bi-monthly publication and is now being marketed at
selected newsstands across the United States and distributed to senior executives in Europe;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  | the conduct and sponsorship of several Diamond Exchange, Insight and other seminars for prospective clients; and
| | - | ----------------------------------------------------------------------------------------------------------------




| |  | the hiring of additional marketing staff to further develop our corporate branding and marketing initiatives.
| | - | -------------------------------------------------------------------------------------------------------------




As a percentage of net revenues, these expenses decreased from 5.2% to 5.0% as a result of our improved operating leverage resulting from
our net revenue growth.





Management and administrative support expenses increased from $18.3 million to $42.0
million, or 130.0%, during fiscal 2001 as compared to fiscal 2000 as a result of the additional facilities, including the opening of the San Francisco office in the third quarter of fiscal 2000, the London office in the fourth quarter of fiscal
2000, the New York office during the third quarter of fiscal 2001, offices located in Barcelona, Boston, Düsseldorf, Lisbon, London, Madrid, Münich, Paris, and São Paolo resulting from the Cluster transaction, and additional
equipment and personnel necessary to support our growth and increased consulting capacity. As a percentage of net revenues, these expenses increased from 13.1% to 15.8% due mainly to increased costs associated with the new offices.





Goodwill amortization increased $21.4 million from $0.5 million to $21.9 million during fiscal 2001 as compared
to fiscal 2000 due primarily to the acquisitions of Momentus Group Limited and Cluster which were completed in May and November 2000, respectively. As a percentage of net revenues, these expenses increased from 0.4% to 8.2%.





Noncash compensation increased from zero during fiscal 2000 to $18.2 million during fiscal 2001. This is primarily the amortization of
unearned compensation resulting from the issuance of stock options at prices below fair market value to Cluster employees as a result of the Cluster acquisition. This unearned compensation will be earned over time contingent on the continued
employment of these employees. As a percentage of net revenues, noncash compensation was 6.8%.





Income from
operations decreased from $24.6 million to $2.3 million during fiscal 2001 as compared to fiscal 2000 due primarily to the amortization of goodwill and noncash compensation. EBITA, which consists of earnings from operations before amortization of
goodwill and noncash compensation, increased from $25.1 million to $42.5 million during fiscal 2001 as compared to the prior year. EBITA is not a measure of financial performance under U.S. generally accepted accounting principles. You should not
consider it in isolation from, or as a substitute for, net income or cash flow measures prepared in accordance with U.S. generally accepted accounting principles or as a measure of profitability or liquidity. Additionally our EBITA calculation may
not be comparable to other similarly titled measures of other companies. We have included EBITA as a supplemental disclosure because it may provide useful information regarding our ability to generate cash for operating and other corporate purposes.





Other income increased $1.3 million from $2.0 million to $3.3 million during fiscal 2001 as compared to fiscal
2000 primarily due to increased cash balances throughout fiscal year 2001 resulting in an increase in interest income of $10.0 million, which was partially offset by realized losses on equity investments of $8.6 million. As a percentage of net
revenues, other income decreased slightly from 1.4% to 1.2%.




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Income taxes increased from $10.4 million to $18.5 million due principally to the
portion of goodwill amortization and noncash compensation which is not deductible for income tax purposes.





Liquidity and Capital
Resources





We maintain a revolving line of credit 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 the LIBOR plus 1.75%. This line of credit has been reduced to account for letters of credit outstanding. As of March 31, 2002, we had approximately $9.2 million available under
this line of credit. The line of credit expires July 31, 2002. We expect to renew the $10 million line of credit, which would be secured by cash and certain accounts receivable.





Net cash used in operating activities was $46.0 million, which primarily included a net loss of $18.3 million after non-cash items (measured by adding back $115.4 million
of the following non-cash items to the consolidated net loss of $133.7 million: depreciation and amortization, goodwill amortization, non-cash compensation, deferred income taxes and the write-down of equity investments), and $27.4 million used for
working capital and other activities. Net cash used for working capital and other activities consisted mainly of the fiscal year 2001 bonuses, income taxes together with fiscal 2002 restructuring costs (e.g., severance and benefits) that were paid
out during fiscal 2002, offset by decreases in accounts receivable and prepaid expenses. Our billings for the quarter ended March 31, 2002 totaled $40.3 million. These amounts include VAT (which are not included in recognized revenue) and billings
to clients for reimbursable expenses. Cash used in investing activities was $10.8 million for fiscal 2002. Cash used in investing activities resulted primarily from purchases of property and equipment of $6.8 million, cash used in acquisitions of
$1.8 million and cash used for other assets of $2.2 million.





Cash provided by financing activities was $2.7
million for fiscal 2002. Cash provided by financing activities resulted primarily from the proceeds from DiamondClusters common stock issued during fiscal 2002 totaling $9.1 million, net of the repayment of a note for $0.5 million and the
repurchase of DiamondClusters common stock totaling $5.9 million in fiscal 2002. Our Board of Directors has authorized the repurchase of up to three million of DiamondClusters Class A 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, 2002, the number of shares purchased under this authorization
was 2.4 million shares at an aggregate cost of $46.7 million.





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.





In the quarter ended December 31, 2001, the Company incurred a restructuring charge of $15.5 million to adjust its operations
to levels more appropriate for current business requirements. The total cash outlay for the restructuring is expected to approximate $12.8 million. The remaining $2.7 million of restructuring costs consisted of non-cash charges primarily for
write-offs of leasehold improvements for the facilities being downsized, as well as the write-off of sign-on bonuses previously paid to terminated employees. As of March 31, 2002, $8.9 million of cash had been expended for this initiative, primarily
related to severance and related costs.




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The Company expects the restructuring will produce cost savings of $22 million on an annualized basis, of which approximately 68% relates to project personnel and related costs, and approximately
32% relates to other operating expenses.





We believe that our current cash balances, amounts available under our
existing lines of credit and cash flow from existing and future operations will be sufficient to fund our operating requirements at least through fiscal 2004. If necessary, 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, although 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 tied to the euro. These subsidiaries also incur most of their expenses in the local currency. 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.





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 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 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.





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, 2002 is not material in relation to our consolidated financial position, results of operations or cash flows. We have not used
derivative financial instruments 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 Consolidated Financial
Statement Schedules as a part of this report.




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





None.





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 not 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 forthcoming 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 as Item 4A of Part I of this Form 10-K as permitted by Instruction 3 to Item 401(b) of Regulation S-K. Information required by Item 405 of Regulation S-K will
be set forth in the forthcoming Proxy Statement under the heading Compliance with Section 16(a) of the Securities Exchange Act of 1934, which information is incorporated herein by reference.





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, 2002 (share amounts in thousands):





Plan Category

Number of securities to be issued upon exercise of outstanding options, warrants and rights

Weighted-average exercise price of outstanding options, warrants and rights

Number of securities remaining available for future issuance under equity compensation plans (excluding
securities reflected in column (a))( a )

( b )

( c )Equity compensation plans approved by security holders

26,266

$15.46

11,636
(1)Equity compensation plans not approved by security holders (2)

234

$11.31

116Total

26,500



11,752


---

|(1) | Includes 1,570,000 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 350,000 shares of Class A common stock, which may be issued
upon the exercise of stock options granted to outside advisors of the Company during the period commencing 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 350,000 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
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



30




---

##### Table of Contents

| | the average of the closing price on the Nasdaq Market System of the Class A 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 forthcoming 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 and the forthcoming Proxy Statement, which information is incorporated herein by
reference, or in an amendment to this Form 10-K.





PART IV





Item 14.    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 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





Reports on Form
8-K were dated October 9, 2001, October 24, 2001 and January 31, 2002.





A report on Form 8-K/A was filed on April
12, 2001 as an amendment to the report on Form 8-K that was originally filed on September 11, 2000 to reflect the information required by Item 7.





(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


Description3.1
(a)**

Restated Certificate of Incorporation of the Company.3.1
(b)

Form of Certificate of Amendment to Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1(b) to the Companys Registration
Statement on Form S-4 (File No. 333-47830) and incorporated herein by reference).3.1
(c)

Certificate of Amendment to Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1(a) to the Form 10-Q for the Quarter ended June 30,
2001 and incorporated herein by reference).3.2
**

Amended and Restated By-laws of the Company.




31




---

##### Table of Contents

Exhibit Number


Description10.1
**

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.10.7
**

Amended and Restated Voting and Stock Restriction Agreement dated as of April 1, 1996 among the Company, Technology Leaders L.P., Technology Leaders Offshore
C. V., CIP Capital L.P., Safeguard Scientifics (Delaware), Inc. and certain of the shareholders of the Company.10.8
*

Amended and Restated Partners Operating Agreement dated as of November 16, 2001 among the Company and the partners of the Company.21
*

Subsidiaries of the Registrant.23
*

Consent of Independent Public Accountants.24.1
*

Power of Attorney (included on signature page).99.1
*

Risk Factors.


---

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

|** | Incorporated by reference to the corresponding exhibits filed with the Companys Registration Statement on Form S-1 (No. 333-17785)
|-- | -----------------------------------------------------------------------------------------------------------------------------------



32




---

##### 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./S/    MELVYN E.
BERGSTEINBy:Melvyn E. BergsteinChairman 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.
BERGSTEIN Melvyn E. Bergstein

Chairman and Chief Executive Officer (Principal Executive Officer)

June 25, 2002/S/    KARL E.
BUPP Karl E. Bupp

Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

June 25, 2002/S/    ADAM J.
GUTSTEIN Adam J. Gutstein

President, North America and Director

June 25, 2002/S/    JAVIER
RUBIO Javier Rubio

President, Europe and Latin America and Director

June 25, 2002/S/    JOHN J.
SVIOKLA John J. Sviokla

Vice Chairman and Director

June 25, 2002/S/    EDWARD R.
ANDERSON Edward R. Anderson

Director

June 25, 2002/S/    DONALD R.
CALDWELL Donald R. Caldwell

Director

June 25, 2002




33




---

##### Table of Contents

Signature

Title

Date/S/    MARK
L.GORDON Mark L. Gordon

Director

June 25, 2002/S/    ALAN C.
KAY Alan C. Kay

Director

June 25, 2002/S/    JOHN D.
LOEWENBERG John D. Loewenberg

Director

June 25, 2002/S/    MICHAEL E.
MIKOLAJCZYK Michael E. Mikolajczyk

Director

June 25, 2002/S/    CHRISTOPHER J.
MOFFITT Christopher J. Moffitt

Director

June 25, 2002/S/    PEDRO
NUENO Pedro Nueno

Director

June 25, 2002/S/    ARNOLD R.
WEBER Arnold R. Weber

Director

June 25, 2002




34




---

##### Table of Contents

DIAMONDCLUSTER INTERNATIONAL, INC.





INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





PageConsolidated Financial Statements:Independent Auditors Report

F-2Consolidated Balance Sheets as of March 31, 2001 and 2002

F-3Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended March 31, 2000, 2001 and 2002

F-4Consolidated Statements of Stockholders Equity for the Years Ended March 31, 2000, 2001 and 2002

F-5Consolidated Statements of Cash Flows for the Years Ended March 31, 2000, 2001 and 2002

F-6Notes to Consolidated Financial Statements

F-7Supplemental Financial Schedules:Independent Auditors Report

S-1Schedule IIValuation and Qualifying Accounts

S-2




F-1




---

##### 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 as of March 31, 2001 and 2002, and the related consolidated statements of operations and comprehensive income (loss), stockholders equity and cash
flows for each of the years in the three-year period ended March 31, 2002. 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 auditing standards generally accepted
in the United States of America. 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, 2001 and 2002, and the results of their operations and their
cash flows for each of the years in the three-year period ended March 31, 2002, in conformity with accounting principles generally accepted in the United States of America.





/s/    KPMG LLP





Chicago, Illinois


May 2, 2002, except as to Note 19


which is as of June 24, 2002




F-2




---

##### Table of Contents

DIAMONDCLUSTER INTERNATIONAL, INC.





CONSOLIDATED BALANCE SHEETS





March 31, 2001 and 2002


(In thousands, except per share data)





2001


2002ASSETSCurrent assets:Cash and cash equivalents

$
151,358


$
96,773Accounts receivable, net of allowance of $2,028 and $1,089 as of March 31, 2001 and 2002, respectively


32,879



22,131Income taxes receivable






1,321Prepaid expenses and short-term deferred taxes


18,153



9,417Total current assets


202,390



129,642Computers, equipment, leasehold improvements and software, net


16,182



15,789Other assets and long-term deferred taxes


8,084



20,566Goodwill, net


295,600



235,179Total assets

$
522,256


$
401,176LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
7,824


$
6,277Note payable, current portion


500



Accrued compensation


28,336



Deferred revenue


2,684



893Taxes payable


11,027



Other accrued liabilities


19,518



18,908Total current liabilities


69,889



26,078Stockholders equity:Preferred Stock, $1.00 par value, 2,000 shares authorized, no shares issued






Class A Common Stock, $.001 par value, 100,000 shares authorized, 23,659 and 27,497 shares issued as of March 31, 2001
and 2002, respectively


24



27Class B Common Stock, $.001 par value, 20,000 shares authorized, 8,752 and 6,562 shares issued as of March 31, 2001 and
2002, respectively


9



7Additional paid-in capital


652,234



659,844Unearned compensation


(177,375
)


(121,340
)Notes receivable from sale of common stock


(332
)


(80
)Accumulated other comprehensive income


(1,249
)


(2,810
)Retained earnings (accumulated deficit)


19,812



(113,860
)493,123



421,788Less Common Stock in treasury, at cost, 2,016 shares held atMarch 31, 2001 and 2,424 shares held at March 31,
2002


40,756



46,690Total stockholders equity


452,367



375,098Total liabilities and stockholders equity

$
522,256


$
401,176








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 INCOME (LOSS)





Fiscal years ended
March 31, 2000, 2001 and 2002


(In thousands, except per share data)





2000


2001


2002Revenue:Revenue before out-of-pocket expense reimbursements (net revenue)

$
139,627


$
266,536


$
181,215Out-of-pocket expense reimbursements


28,379



40,864



21,745Total revenue


168,006



307,400



202,960Operating expenses:Project personnel and related expenses before out-of-pocket reimbursable expenses


75,747



141,980



132,627Out-of-pocket reimbursable expenses


28,379



40,864



21,745Total project personnel and related expenses


104,126



182,844



154,372Professional development and recruiting


13,199



26,673



10,834Marketing and sales


7,325



13,431



7,136Management and administrative support


18,260



41,989



46,794Goodwill amortization


493



21,928



61,850Noncash compensation*






18,187



52,305Restructuring charge










15,542Total operating expenses


143,403



305,052



348,833Income (loss) from operations


24,603



2,348



(145,873
)Interest income


2,099



12,055



4,164Interest expense


(97
)


(56
)


(26
)Other expense, net






(8,714
)


(2,985
)Total other income, net


2,002



3,285



1,153Income (loss) before taxes


26,605



5,633



(144,720
)Income tax expense (benefit)


10,377



18,500



(11,048
)Net income (loss)


16,228



(12,867
)


(133,672
)Unrealized gain (loss) from securities, net of income tax expense of $344 and income tax benefit of $232 for the fiscal
years ended2000 and 2001, respectively


539



(363
)


Reclassification adjustment, net of income tax expense of $344and income tax benefit of $232 for the fiscal years
ended2001 and 2002, respectively






(539
)


363Foreign currency translation adjustments






(886
)


(1,924
)Comprehensive income (loss)

$
16,767


$
(14,655
)

$
(135,233
)Basic net income (loss) per share of common stock

$
0.78


$
(0.49
)

$
(4.34
)Diluted net income (loss) per share of common stock

$
0.62


$
(0.49
)

$
(4.34
)Shares used in computing basic net income (loss) per share of common stock


20,807



26,448



30,813Shares used in computing diluted net income (loss) per share of common stock


25,984



26,448



30,813* Noncash compensation:Project personnel and related expenses

$



$
17,930


$
51,352Professional development and recruiting






29



94Marketing and sales






14



88Management and administrative support






214



771Total noncash compensation

$



$
18,187


$
52,305





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, 2000,
2001 and 2002


(In thousands)





Class A Common Stock

Class B Common Stock


Additional Paid-in Capital


Unearned Compensation


Notes Receivable from sale of Common Stock


Retained Earnings (Deficit)


Treasury Stock


Accumulated Other Comprehensive Income (Loss)


Total Stockholders EquityBalance at March 31, 1999

$
15

$
5


$
42,146


$



$
(32
)

$
16,451


$
(5,284
)

$



$
53,301Issuance of stock


2






118,741







(668
)














118,075Exercise of warrants









243























243Exercise of stock options


1


2



8,638























8,641Income tax benefit related to stock option exercises









23,730























23,730Purchase of treasury stock









(174
)














(4,781
)






(4,955
)Conversion to Class A


4


(4
)


























Repayment of notes

















468















468Employee stock purchase plan









2,048























2,048Unrealized gain on securities





























539



539Net income





















16,228











16,228Balance at March 31, 2000

$
22

$
3


$
195,372


$



$
(232
)

$
32,679


$
(10,065
)

$
539


$
218,318Issuance of stock





6



246,867







(543
)














246,330Issuance of stock options below marketnet









190,062



(195,562
)


















(5,500
)Noncash compensation













18,187



















18,187Exercise of stock options


1


1



7,661























7,663Income tax benefit related to stock option exercises









7,910























7,910Purchase of treasury stock

























(30,691
)






(30,691
)Conversion to Class A


1


(1
)


























Repayment of notes

















443















443Employee stock purchase plan









4,362























4,362Unrealized loss on securities





























(902
)


(902
)Translation adjustment





























(886
)


(886
)Net loss





















(12,867
)










(12,867
)Balance at March 31, 2001

$
24

$
9


$
652,234


$
(177,375
)

$
(332
)

$
19,812


$
(40,756
)

$
(1,249
)

$
452,367Issuance of stock





1



5,274



(4,707
)


59















627Issuance of stock options below marketnet









(7,620
)


8,437



















817Noncash compensation













52,305



















52,305Exercise of stock options





1



5,358























5,359Income tax benefit related to stock option exercises









1,456























1,456Purchase of treasury stock

























(5,934
)






(5,934
)Conversion to Class A


3


(4
)


























(1
)Repayment of notes

















193















193Employee stock purchase plan









3,142























3,142Unrealized gain on securities





























363



363Translation 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





See accompanying notes to consolidated financial statements.




F-5




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##### Table of Contents

DIAMONDCLUSTER INTERNATIONAL, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS





Fiscal Years ended March 31, 2000, 2001 and 2002


(In thousands)





2000


2001


2002Cash flows from operating activitiesNet income (loss)

$
16,228


$
(12,867
)

$
(133,672
)Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation and amortization


3,533



6,333



7,156Goodwill amortization


493



21,928



61,850Noncash compensation






18,187



52,305Deferred income taxes


(4,341
)


(4,282
)


(10,475
)Tax benefits from employee stock plans


23,730



7,921



1,456Write-down of equity investments






8,555



4,577Other










(1,846
)Changes in assets and liabilities, net of effects of acquisitions:Accounts receivable


1,844



5,028



10,369Prepaid expenses and other


(14,417
)


10,042



2,106Accounts payable


1,963



(1,739
)


(521
)Accrued compensation


3,896



14,117



(28,336
)Deferred revenue


2,920



(944
)


(1,791
)Income taxes payable






5,527



(12,318
)Other assets and liabilities


(557
)


(12,162
)


3,126Net cash provided by (used in) operating activities


35,292



65,644



(46,014
)Cash flows from investing activities:Capital expenditures, net


(7,871
)


(9,258
)


(6,817
)Acquisitions, net of cash acquired


(5,328
)


(54,174
)


(1,781
)Other assets


(7,190
)


(2,500
)


(2,205
)Net cash used in investing activities


(20,389
)


(65,932
)


(10,803
)Cash flows from financing activities:Repayment of note






(12,484
)


(500
)Stock issuance costs


(582
)






Common stock issued


125,881



12,484



9,137Purchase of treasury stock


(4,955
)


(30,691
)


(5,934
)Net cash provided by (used in) financing activities


120,344



(30,691
)


2,703Effect of exchange rate changes on cash






(608
)


(471
)Net increase (decrease) in cash and cash equivalents


135,247



(31,587
)


(54,585
)Cash and cash equivalents at beginning of year


47,698



182,945



151,358Cash and cash equivalents at end of year

$
182,945


$
151,358


$
96,773Supplemental disclosure of cash flow information:Cash paid during the year for interest

$
25


$
25


$
77Cash paid during the year for income taxes


5,821



316



7,296Supplemental disclosure for noncash investing and financing activities:Issuance of common stock for notes

$
668


$
543


$
Issuance of acquisition note payable


1,000










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. (the Company or Diamond) is a premier global
management-consulting firm that helps leading organizations worldwide develop and implement growth strategies, improve operations, and capitalize on technology. The Company works collaboratively with its clients, utilizing teams of consultants with
skills in strategy, technology and program management. As of March 31, 2002, the Company employed 843 client-serving professionals and had twelve 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. 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.





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, 2002, the accounts receivable balance was $22.1 million, including unbilled accounts receivable of $5.4 million, and net of allowance for doubtful accounts of $1.1 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 and are




F-7




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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




reflected, net of actual costs incurred on completed projects, in deferred revenue. The deferred revenue balance, measured based on the cost of services to be rendered subsequent to the targeted
completion date, was $0.9 million as of March 31, 2002. Measurement of this amount on a gross basis would not be materially different than that reported. 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.





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, and are five years for leasehold improvements and three years for software. Costs capitalized for internally developed software include external consulting fees and employee salaries. Related depreciation
and amortization expense was $3,533,000, $6,333,000 and $7,156,000 for the years ended March 31, 2000, 2001 and 2002, respectively.





Goodwill





Goodwill resulting from business acquisitions represents the excess of
purchase price over the fair value of the net assets acquired and is being amortized on a straight-line basis over useful lives ranging between 5 and 25 years. Accumulated amortization amounted to $22,421,000 and $84,271,000 as of March 31, 2001 and
2002, respectively. The Company re-evaluates the recoverability of the carrying value of goodwill and other intangibles based on undiscounted operating cash flows whenever significant events or changes occur which might impair recovery of recorded
asset costs.





Accounting for Investment Interests





Occasionally, the Company may obtain non-controlling equity ownership interests either for cash or as compensation for services performed. Equity securities are
accounted for under the cost method of accounting unless these 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 securities. 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 are reported in other income
(expense). As of March 31, 2002 the carrying value of such investments was zero.





Unearned Compensation





Unearned compensation represents stock-based compensation that has not yet been earned, and is reported as
unearned compensation within the stockholders equity section of the consolidated balance sheet. The Company has chosen to account for the stock-based compensation using the intrinsic value method prescribed in




F-8




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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation cost of stock options (non-cash
compensation) is measured as the excess, if any, of the quoted market price of the Companys stock at the date of the grant over the options exercise price, and is charged to operations over the vesting period, which generally ranges
between two and five years.





Other Comprehensive Income





Other comprehensive income represents 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





In June 1998 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Certain Hedging Activities. In June 2000 the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment
of SFAS 133. SFAS No. 133 and SFAS No. 138 require that all derivative instruments be recorded on the balance sheet at their respective fair values. SFAS No. 133 and SFAS No. 138 are effective for all fiscal years beginning after June 30,
2000; the Company adopted SFAS No. 133 and SFAS  No. 138 on April 1, 2001.





All derivatives are recognized on
the balance sheet at their fair value. On the date the derivative contract is entered into, the Company designates the derivative as either a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment
(fair value hedge), a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge), 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 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 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.





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 high quality financial institutions. Investments are carried at cost or fair value, as appropriate, and are not significant at March 31, 2002. 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




F-9




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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




condition and credit history and generally does not require collateral. The Company has historically incurred minimal credit losses. The Company had one customer that accounted for 14% and 12% of
revenues for the years ended March 31, 2000 and 2001, respectively, and did not have any clients that individually accounted for greater than 10% of its net revenues for the year ended March 31, 2002. The Company had one customer that accounted for
12% of accounts receivable at March 31, 2002.





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 Income Per Share





Basic net income per share is computed using the weighted average number of common shares outstanding.
Diluted net income per share is computed using the weighted average number of common shares outstanding and the assumed exercise of stock options and warrants (using the treasury stock method). Following is a reconciliation of the shares (in
thousands) used in computing basic and diluted net income per share for the fiscal years ended March 31, 2000, 2001 and 2002:





2000

2001

2002Shares used in computing basic net income per share

20,807

26,448

30,813Dilutive effect of stock options and warrants

5,177



Shares used in computing diluted net income per share

25,984

26,448

30,813Antidilutive securities not included in dilutive net income per share calculation

103

18,206

26,266





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 revenues and expenses during the period reported. Actual results could differ from those estimates.





(3) New Accounting Policies





On July 20, 2001, the
Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations and No. 142, Goodwill and Other Intangible Assets.SFAS No. 141 requires all business combinations initiated after June 30,
2001 to be accounted for using the purchase method. Business combinations accounted for as poolings-of-interests and initiated prior to June 30, 2001 are grandfathered. SFAS No. 142 replaces the requirement to amortize intangible assets with
indefinite lives and goodwill with a requirement for an impairment test. SFAS No. 142 also requires an evaluation of intangible assets and their useful lives and a




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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




transitional impairment test for goodwill and certain intangible assets upon adoption. After transition, the impairment test will be performed annually. The Company adopted SFAS No. 141 effective
July 1, 2001. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, and must be applied as of the beginning of a fiscal year. The Company is in the process of evaluating the impact that adoption of SFAS No. 142 will have on
the Companys consolidated financial statements, and expects to record a non-cash cumulative effect charge of between $130 million and $150 million during the first quarter of fiscal year 2003 related to the adoption of SFAS No. 142.





In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment and Disposal of Long-Lived
Assets. While SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of that Statement. SFAS
No. 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company is in the process of evaluating the impact that adoption of SFAS No. 144 will have on the Companys consolidated
financial statements; however, the Company does not expect a material impact on the financial statements as a result of this adoption.





(4) Reclassifications





In November 2001, the FASB issued a Staff Announcement regarding the
income statement classification of out-of-pocket expenses incurred and billed to clients for reimbursement. This announcement requires that out-of-pocket expenses incurred and billed to clients for reimbursement be reflected in the
income statement on a gross basis as both revenue and expense. Accordingly, the Company adjusted revenue and project costs for all periods reported to include out-of-pocket expense reimbursements. In addition, the Company adjusted revenue and
project costs for all periods reported to include administrative charges billed to clients. Previously, these out-of-pocket expense reimbursements and administrative charges were classified as a reduction of project personnel and related expenses.
This change in classification had no effect on current or previously reported net income (loss) or earnings (loss) per share.





(5)
Restructuring Charge





In the third quarter of fiscal 2002, the Company recorded a restructuring charge
comprised of severance and other personnel-related costs, and costs associated with reductions in office space and the write-off of associated leasehold improvements. This charge was recorded based on general economic conditions and an evaluation of
competitive conditions in the global marketplace, and included an assessment of the infrastructure needed to support anticipated levels of business in fiscal 2003. Based upon this review, the Company recorded a restructuring charge of $15.5 million
($9.5 million on an after tax basis), or $0.31 per share, to recognize the costs associated with planned reductions in personnel and facilities.





The principal actions in the restructuring plan involved workforce reductions, including the discontinuation of certain business activities within the Diamond Marketspace Solutions group. The
restructuring plan includes the termination of approximately 300 employees. In addition, the restructuring plan includes 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, in addition to 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 $12.8 million.
The remaining $2.7 million of restructuring costs consists of non-cash charges primarily for write-offs of




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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




leasehold improvements for the facilities being downsized and other related assets, as well as the write-off of sign-on bonuses previously paid to terminated employees. As of March 31, 2002, $8.9
million of cash had been expended for this initiative, primarily related to severance and related costs.





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





UtilizedDescription

Original Charge

Cash

Non-Cash

Balance 3/31/02Severance and related costs

$
10,847

$
8,316

$
1,393

$
1,138Contractual commitments and leasehold improvements related to office space reductions


3,089


199


1,326


1,564Write-off of property, plant, equipment and equipment leases


1,606


345





1,261$
15,542

$
8,860

$
2,719

$
3,963





(6) Computers, Equipment, Leasehold Improvements and Software, Net





Computers, equipment, leasehold improvements and software, net at March 31, 2001 and 2002 are summarized as follows (amounts in
thousands):





2001


2002Computers and equipment

$
15,936


$
16,702Leasehold improvements


7,569



7,304Software


6,299



11,32329,804



35,329Less accumulated depreciation and amortization


(13,622
)


(19,540
)$
16,182


$
15,789





(7) Other Assets and Long-Term Deferred Taxes





Other assets and long-term deferred taxes at March 31, 2001and 2002 are summarized as follows (amounts in thousands):





2001

2002Investment in public companies

$
1,481

$
Investment in non-public companies


2,500


Deferred income taxeslong term





16,818Notes receivable from employees





2,205Other assets


4,103


1,543Total

$
8,084

$
20,566





(8) Other Accrued Liabilities





Other accrued liabilities at March 31, 2001 and 2002 are summarized as follows (amounts in thousands):





2001

2002Social Security accrual

$
6,559

$
4,047Restructuring accrual





3,963Other accrued liabilities


12,959


10,898Total

$
19,518

$
18,908




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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







(9) Commitments





The Company leases office space and equipment under various operating leases. As of March 31, 2002, the minimum future lease payments under operating leases with
noncancelable terms in excess of one year are as follows (amounts in thousands):





Year ending March 31,2003

$
8,8482004


7,1412005


5,8172006


5,0162007


5,040Thereafter


13,810$
45,672





Rent expense under operating leases amounted to $2,428,000,
$9,580,000 and $10,912,000 for the years ended March 31, 2000, 2001 and 2002, 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 $822,000 as of March 31, 2002, declining annually during the lease terms.





(10) Line of Credit





The Company has available an unsecured line of credit of $10,000,000 with a commercial bank that has been reduced by four letters of credit outstanding as of March 31, 2002 totaling $822,000. At March 31, 2002, all remaining amounts
under this line of credit were available to the Company at the banks prime rate or LIBOR plus 1.75%. The line of credit expires on July 31, 2002. The Company expects to renew the $10 million line of credit, which would be secured by cash and
certain receivables.





(11) Stockholders Equity





Our Board of Directors has authorized the repurchase of up to three million of DiamondClusters Class A 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, 2002, the number of shares purchased under this authorization was 2.4
million shares at an aggregate cost of $46.7 million.





In August 2001, the Companys Board of Directors
adopted and the Companys shareholders subsequently approved the Restated and Amended Employee Stock Purchase Plan. The Restated and Amended Employee Stock Purchase Plan is designed to qualify for certain income tax benefits for employees under
the section 423 of the Internal Revenue Code and contains 2.4 million shares of Class B Common Stock. The plan allows qualifying employees to purchase Class B Common Stock each quarter, at 85% of the lesser of the fair market value of the Class A
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, 2002, approximately
1.6 million shares are still available for future issuance under this plan.





In March 2000, the Company completed
an offering and sold 1,500,000 shares of Class A Common Stock at a price of $80.13 per share. The Company realized approximately $114.0 million in connection with the sale, net




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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




of payment of the underwriters commissions and other expenses of the offering. In the offering an additional 2,266,250 shares were sold by selling stockholders.





Class A Common Stock is entitled to one vote per share and Class B Common Stock is entitled to five votes per share on all matters
submitted to the vote of holders of common stock. Class B Common Stock may only be owned beneficially or of record by (i) employees of the Company, (ii) a company, partnership or trust controlled by an employee or (iii) the Company.





Stock Option Rehab





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
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, 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 to officers and employees and non-qualified stock options to certain persons who were not employees on the date of grant and certain non-employee members of the Board of Directors. Under the DiamondCluster 2000 Stock
Option Plan (the 2000 Plan), 8.5 million shares were authorized for grant, and at March 31, 2002, approximately 1.2 million shares are still available for future grant. Under the DiamondCluster 1998 Equity Incentive Plan (collectively,
the Stock Option Plans or Plans), 41.4 million shares were authorized for grant, and at March 31, 2002, approximately 8.9 million shares were still available for future grant. All such options are for Class B 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 Class A 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, respectively, and expire on the seventh anniversary of the date of grant. 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 on the sixth anniversary of the date of grant. 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.





During fiscal 2002, the Company granted options to purchase 12.3 million shares of Class B Common Stock. A portion of such options were
granted in connection with the Companys efforts to contain costs and




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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




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 rehab program discussed above. In addition, the annual fiscal 2003 grant of options totaling 3.3 million shares was accelerated to November 2001 from April 2002.





During fiscal 2001, options to purchase 7.5 million shares of Class B Common Stock were granted to employees of Cluster in connection with the Cluster business combination.





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





Shares Under Option


Range of Prices

Weighted- Average Exercise PricePer ShareBalances, March 31, 1999

6,162


$  0.81 to  $18.27

$
6.20Granted

4,991


13.53 to    92.55


22.44Exercised

(1,904
)

0.81 to    20.87


4.57Canceled

(879
)

0.81 to    28.17


10.15Balances, March 31, 2000

8,370


$  0.81 to  $92.55

$
15.83Granted

14,157


5.24 to    92.90


28.63Exercised

(1,045
)

0.81 to    31.00


7.27Canceled

(3,276
)

7.75 to    92.90


51.49Balances, March 31, 2001

18,206


$  0.81 to  $89.95

$
19.98Granted

12,258


4.56 to    16.99


9.87Exercised

(840
)

1.21 to    15.23


6.85Canceled

(3,358
)

2.12 to    92.90


24.06Balances, March 31, 2002

26,266


$  0.81 to  $87.60

$
15.46





At March 31, 2000, 2001 and 2002, 625,800, 1,423,200 and 6,389,000
options were exercisable, respectively, under the Plans.





The following table summarizes information about stock
options under the Plans at March 31, 2002 (share amounts in thousands):


Options Outstanding

Options ExercisableRange of Exercise Prices

Options Outstanding at 3/31/02

Weighted- Average Remaining Contractual Life

Weighted- Average Exercise Price

Options Exercisable at 3/31/02

Weighted- Average Exercise Price$
0.81 to $8.79

5,545

4.62

$
8.01

1,820

$
6.818.83 to 9.27

4,884

5.54


9.26

189


9.059.28 to 10.82

5,457

4.62


10.44

1,083


10.6410.87 to 25.61

5,286

5.04


16.79

1,946


17.7026.37 to 87.60

5,094

4.88


33.53

1,351


32.00$
0.81 to $87.60

26,266

4.93

$
15.46

6,389

$
16.17





The Company applies Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock Based Compensation, in accounting for stock issued to individuals or groups other than employees. The Company applies Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to




F-15




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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




Employees, and related interpretations in accounting for stock issued to employees. Had compensation expense on these options been determined based on the fair value at the grant date for
awards under these plans consistent with the methodology prescribed under SFAS No. 123, the Companys net income (loss) and diluted earnings per share would have been reduced to the pro forma amounts indicated below:





2000

2001


2002Net income (loss)As reported

$
16,228

$
(12,867
)

$
(133,672
)Pro forma


5,055


(50,248
)

$
(209,116
)Diluted net income (loss) per shareAs reported

$
0.62

$
(0.49
)

$
(4.34
)Pro forma


0.19


(1.90
)


(6.79
)





The weighted-average fair value of the options granted under the
Stock Option Plans in 2000, 2001 and 2002, calculated using the Black-Scholes pricing model, was $10.42, $26.88 and $6.36, respectively. The following assumptions were used in the Black-Scholes pricing model for options granted in 2000, 2001 and
2002: dividend yield of 0.0 percent for each year; estimated volatility of 60% in 2000, 89% in 2001, and 84% in 2002; risk-free interest rates ranging from 2.8% to 6.3%; and an expected life of 0.5 to 6 years.





(12) Income Taxes





The provision (benefit) for income taxes for fiscal years ended March 31, 2000, 2001 and 2002 consisted of the following (in thousands):





2000


2001


2002Current:Federal

$
10,070


$
11,588


($
3,885
)State


1,729



3,423



(464
)Foreign






6,131



3,77611,799



21,142



(573
)Deferred


(1,422
)


(2,642
)


(10,475
)$
10,377


$
18,500


($
11,048
)





The total tax provision differs from the amount computed by
applying the federal statutory income tax rate of 35 percent for 2000 and 34 percent for 2001 and 2002 to income before income taxes for the following reasons (in thousands):





2000

2001

2002Federal income taxes at statutory rate

$
9,311

$
1,916

($
49,205
)Effect of non-deductible goodwill and noncash compensation





13,533


37,465Effect of other permanent differences


333


809


166State income taxes, net of federal benefit


733


1,600


(2,457
)Change in valuation allowance of deferred tax assets








3,924Foreign tax rate differential





642


(941
)$
10,377

$
18,500

($
11,048
)




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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The tax effects of the temporary differences that give rise to the
deferred tax assets and liabilities at


March 31, 2001 and 2002 are presented below (in thousands):





2001

2002Deferred tax assets attributable to:Net operating loss carryforward

$
706

$
13,055Foreign tax credit carryforward





3,084Reserves and allowances


3,142


4,704Accrued bonuses


3,583


Accrued recruiting


211


Depreciation


1,054


350Capital loss carryforward


1,477


3,351Total gross deferred tax assets


10,173


24,544Less valuation allowance





(4,221
)Net deferred tax assets


10,173


20,323Deferred tax liabilities attributable to:Unrealized foreign exchange gain


98


GoodwillOmnitech


160


248Other


324


241Total deferred tax liabilities


582


489Net deferred income taxes

$
9,591

$
19,834





The valuation allowance for deferred tax assets as of March 31,
2002 was $4.2 million and was related to certain foreign net operating loss carryforwards and capital loss carryforwards. The net change in the total valuation allowance for the year ended March 31, 2002 was an increase of $4.2 million.





Management believes it is more likely than not that the net deferred tax assets will be realized in the future.





As of March 31, 2002, the Company has net operating loss carryfowards for federal income tax purposes of
approximately $21 million, which are available to offset future federal taxable income through 2022. The Company also has net operating loss carryforwards for state income tax purposes of approximately $60 million, which may be used to offset future
state taxable income. The expiration of these loss carryforwards ranges between four and twenty years. In addition, the Company also has foreign net operating loss carryforwards of approximately $15 million, of which approximately $5 million expire
in 2012, and the remainder may be carried forward indefinitely. The Company has foreign tax credit carryforwards of approximately $3 million, which expire in 2007.





(13) 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.




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##### Table of Contents



DIAMONDCLUSTER INTERNATIONAL, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







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):





March 31, 2001

March 31, 2002Net Revenues:North America

$
223,890

$
103,098Europe


34,650


59,036All Other Countries


7,996


19,081Total net revenues

$
266,536

$
181,215Long-lived assets:North America

$
312,945

$
248,023Europe


5,795


5,343All Other Countries


1,126


1,351Total long-lived assets

$
319,866

$
254,717





The segregation of revenue by geographic region is based upon the
location of the legal entity performing the services. Prior to fiscal 2001, all revenue was generated in North America.





(14) Benefit
Plans





401(k) Plan





The Company has a defined contribution plan covering substantially all of its 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.





(15) Business Combinations





On November 28, 2000, the Company acquired Cluster Telecom B.V. (Cluster), a pan-European management consulting
firm specializing in wireless technology, internet and digital strategies. Under the terms of the agreement, the Company paid $494.2 million, consisting of $44 million in cash and an aggregate of 6.3 million shares of the Companys Class B
Common Stock and 7.5 million options to purchase shares of the Companys Class B Common Stock. In connection with the acquisition, the Company changed its name from Diamond Technology Partners Incorporated to DiamondCluster International, Inc.
At March 31, 2002, the excess of net assets acquired (Goodwill) recorded for the Cluster acquisition was approximately $301.4 million. Additionally, the Company recorded unearned compensation in connection with this acquisition.





In May 2000, the Company acquired Momentus Group Limited (Momentus), a London-based e-business
consulting company. Under the terms of the acquisition agreement, the Company paid $5.7 million, consisting of approximately $2.9 million in cash and 44,252 shares of the Companys Class A Common Stock. Additionally, Momentus shareholders
received 35,985 shares of the Companys Class A Common Stock during fiscal year 2002 related to the achievement of certain performance measures. At March 31, 2002, goodwill recorded for the Momentus acquisition was approximately $5.9 million.





In October 1999, the Company acquired Leverage Information Systems, Inc., (Leverage), a San Francisco
based systems architecture and development company specializing in the building of complex web sites and




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DIAMONDCLUSTER INTERNATIONAL, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




intranets. Under the terms of the acquisition, the Company paid $3.4 million, consisting of $1.0 million in cash and 97,500 shares of the Companys Class A Common Stock. At March 31, 2002,
goodwill recorded for the Leverage acquisition was approximately $3.3 million.





In April 1999, the Company
acquired OmniTech Consulting Group, Inc. (Omnitech), a Chicago-based change management firm specializing in web-based and other multimedia corporate learning. Under the terms of the acquisition agreement, the Company paid $9.0 million,
consisting of $6.0 million in cash (which included an annual earn-out of $1.0 million for each of the years ended March 31, 2000 and March 31, 2001 for the achievement of certain performance measures), a $1.0 million note (which has been fully paid)
and 173,461 shares of the Companys Class A Common Stock. At March 31, 2002, goodwill recorded for the Omnitech acquisition was approximately $8.8 million.





The acquisitions were accounted for under the purchase method of accounting and, accordingly, the operating results of OmniTech, Leverage, Momentus and Cluster have been included in the Companys
consolidated financial statements since the dates of the acquisitions. The amount of goodwill recorded for OmniTech, Leverage, Momentus and Cluster approximated $319.4 million, and is being amortized on a straight-line basis over useful lives
ranging between 5 and 25 years. Amortization of goodwill was $493,000, $21,928,000 and $61,850,000 for the years ended March 31, 2000, 2001 and 2002, respectively.





The following summarized pro forma financial information for the year ended March 31, 2001 assumes the Momentus and Cluster acquisitions occurred as of April 1, 2000:





2001Revenue before out-of-pocket-expense reimbursements (net revenue)

$327,203Total revenue (including out-of-pocket expense reimbursements)

$375,722Net loss

$ (75,484)Net loss per share:basic and diluted

$      (2.36)





These amounts are based upon certain assumptions and estimates, and
do not necessarily represent results that would have occurred if the acquisitions had taken place on the basis assumed above, nor are they indicative of the results of future combined operations.





(16) Foreign Exchange Risk Management





Objectives and Context





DiamondCluster operates internationally; therefore, its earnings,
cash flows, and financial position are exposed to foreign currency risk from foreign currency-denominated receivables and payables, forecasted service transactions, as well as net investments in certain foreign operations. These items are
denominated in various foreign currencies, including the euro, the pound sterling, the Brazilian real, and the Swedish krone.





Management believes it is prudent to minimize the variability caused by foreign currency risk. 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




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DIAMONDCLUSTER INTERNATIONAL, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




monitors foreign currency risk and the use of derivative instruments. DiamondCluster 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 the respective countries and are typically denominated in the local currency of each country, most of which are tied to 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 risk from foreign currency-denominated receivables and payables or forecasted service transactions.





DiamondCluster has net investments in foreign operations located throughout Europe and South America. In order to mitigate the impact of foreign currency movements on the
Companys financial position, DiamondCluster 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 for hedges of the foreign currency
exposure of the Companys net investment in its foreign operations. The net amount of gains or losses are included in the cumulative translation adjustments account within other comprehensive income. During fiscal 2002, the Company recorded a
net loss of $0.5 million in the cumulative translation adjustments account, representing the change in the fair value of its forward contracts. The notional principal amount of the Companys outstanding euro/U.S. dollar forward contract was EUR
62.8 million at March 31, 2002.





(17) 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 year ended March 31, 2002, in accordance with this policy, the Company reimbursed two executive
officers of the Company $644,000 for business-related travel on airplanes they each indirectly own.





(18) Quarterly Financial
Information (Unaudited)





The following table presents the unaudited quarterly financial information for fiscal
2001 and 2002 (in thousands, except per share amounts):





Quarter EndedJune 30

Sept 30

Dec 31


Mar 31Year Ended March 31, 2001Revenue before out-of-pocket expense reimbursements (net revenue)

$
54,275

$
61,958

$
75,439


$
74,864Total revenue (including out-of- pocket expense reimbursements)


65,369


71,702


84,168



86,161Income (loss) from operations


9,126


10,400


2,639



(19,817
)Income (loss) before taxes


11,849


13,682


5,119



(25,017
)Net income (loss)


7,228


8,346


(1,168
)


(27,273
)Basic earnings (loss) per share

$
0.30

$
0.34

$
(0.04
)

$
(0.89
)Diluted earnings (loss) per share

$
0.24

$
0.28

$
(0.04
)

$
(0.89
)




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DIAMONDCLUSTER INTERNATIONAL, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


Quarter EndedJune 30


Sept 30


Dec 31


Mar 31Year Ended March 31, 2002Revenue before out-of-pocket expense reimbursements (net revenue)

$
58,185


$
50,756


$
36,159


$
36,115Total revenue (including out-of- pocket expense reimbursements)


65,708



56,765



40,396



40,091Loss from operations


(29,142
)


(29,520
)


(54,041
)


(33,170
)Loss before taxes


(29,563
)


(29,885
)


(52,688
)


(32,584
)Net loss


(30,448
)


(28,187
)


(43,108
)


(31,929
)Basic loss per share

$
(1.00
)

$
(0.92
)

$
(1.39
)

$
(1.02
)Diluted loss per share

$
(1.00
)

$
(0.92
)

$
(1.39
)

$
(1.02
)





(19) Subsequent Events





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 cancel certain stock
options previously granted to them in exchange for a future grant 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 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 are 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 cancelled as a part of this
plan. On November 15, 2002, approximately 1.0 million new options are expected to be granted to employees who remain employed by DiamondCluster. The exercise price for a majority of the options to be granted on November 15, 2002 will be at 25% of
fair market value on that date.





On June 24, 2002, the Companys Board of Directors increased the number of
shares authorized to be repurchased under its existing stock repurchase program by 3.0 million shares to up to 6.0 million shares. As of June 24, 2002, shares remaining available for repurchase under the program totalled 3.2 million shares.




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INDEPENDENT AUDITORS REPORT





The Board of Directors


DiamondCluster International, Inc.:





We have audited the accompanying consolidated
balance sheets of DiamondCluster International, Inc. and subsidiaries as of March 31, 2001 and 2002, and the related consolidated statements of operations and comprehensive income (loss), stockholders equity and cash flows for each of the
years in the three-year period ended March 31, 2002. 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


May 2, 2002




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DIAMONDCLUSTER INTERNATIONAL, INC.





SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS





(Amounts in thousands)





Column A

Column B

Column C

Column D

Column EDescription

Balance at Beginning of Period

Charged to Costs and Expenses

Deduction

Balance at End of PeriodFor the Year Ended March 31, 2002:Deducted from accounts receivable for uncollectible accounts

$
2,028

$
1,810

$
2,749

$
1,089For the Year Ended March 31, 2001:Deducted from accounts receivable for uncollectible accounts

$
1,279

$
9,293

$
8,544

$
2,028For the Year Ended March 31, 2000:Deducted from accounts receivable for uncollectible accounts

$
419

$
3,020

$
2,160

$
1,279




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EXHIBIT 99.1





RISK FACTORS





You should carefully consider the risks described below. The risks
described are not the only ones we face. Any of the following risks could have a material adverse effect on our business, financial condition and operating results. You should also refer to the other information contained in this report, including
our financial statements and the related notes.





A Significant or Prolonged Economic Downturn Could Have a Material Adverse Effect on
Our Results of Operations





Our results of operations are 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 revenues and profit margin.
Current economic conditions have caused some clients to reduce or defer their expenditures for consulting services. This has caused a reduction in our growth rate in the fiscal year ended March 31, 2002 as compared with the fiscal year ended 2001.
Net revenues (before out-of-pocket expense reimbursements) for the fiscal year ended 2002 decreased by 32% from the fiscal year ended 2001. We have implemented and will continue to implement cost-savings initiatives to manage our expenses as a
percentage of revenues. However, current and future cost-management initiatives may not be sufficient to maintain our margins if the current challenging economic environment continues for several quarters.





Our Quarterly Operating Results Will Vary from Quarter to Quarter, Which May Result in Increased Volatility of Our Share Price





We have experienced, and may in the future continue to experience, fluctuations in our quarterly operating results. These fluctuations
could reduce the market price of our Common Stock.





Factors that may cause our quarterly operating results to vary
include:





| |  | the business decisions of our clients regarding the use of our services;
| | - | ------------------------------------------------------------------------




| |  | the timing of projects and their termination;
| | - | ---------------------------------------------




| |  | the timing of revenue or income;
| | - | --------------------------------




| |  | our ability to transition employees quickly from completed projects to new engagements;
| | - | ---------------------------------------------------------------------------------------




| |  | the introduction of new products or services by us or our competitors;
| | - | ----------------------------------------------------------------------




| |  | changes in our pricing policies or those of our competitors;
| | - | ------------------------------------------------------------




| |  | our ability to manage costs, including personnel costs and support services costs; and
| | - | --------------------------------------------------------------------------------------




| |  | global economic and political conditions and related risks, including acts of terrorism.
| | - | ----------------------------------------------------------------------------------------




The timing of revenues is difficult to forecast because our sales cycle is relatively long and our services are affected by both the financial condition and
management decisions of our clients and general economic conditions. A high percentage of our expenses are relatively fixed at the beginning of any period. Because our general policy is not to adjust our staffing levels based upon what we view as
short-term circumstances, a variation in the timing, initiation or completion of client assignments, particularly at or near the end of any quarter, can cause significant variations in operating results from quarter to quarter and could result in
losses for any particular period.




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Our Profitability Will Suffer if We Are Not Able to Maintain Our Pricing and Utilization Rates and
Control Our Costs





Our profit margin, and therefore our profitability, is largely a function of the rates we
are able to recover for our services and the utilization rate, or chargeability, of our professionals. Accordingly, if we are not able to maintain the pricing for our services or an appropriate utilization rate for our professionals and
correspondingly reduce our costs, we will not be able to sustain our profit margin and our profitability will suffer. We are currently experiencing pressure on our pricing as a result of the challenging economic environment. The rates we are able to
recover for our services are affected by a number of factors, including:





| |  | our clients perception of our ability to add value through our services;
| | - | -------------------------------------------------------------------------




| |  | competition;
| | - | ------------




| |  | introduction of new services or products by us or our competitors;
| | - | ------------------------------------------------------------------




| |  | pricing policies of our competitors; and
| | - | ----------------------------------------




| |  | general economic conditions.
| | - | ----------------------------




Our utilization rates are also affected by a number of factors, including:





| |  | seasonal trends, primarily as a result of our hiring cycle and holiday and summer vacations (particularly in Europe);
| | - | ---------------------------------------------------------------------------------------------------------------------




| |  | our ability to transition employees from completed projects to new engagements; and
| | - | -----------------------------------------------------------------------------------




| |  | our ability to forecast demand for our services and thereby maintain an appropriate headcount in the appropriate areas of our workforce
| | - | ---------------------------------------------------------------------------------------------------------------------------------------




Our profitability is also a function of our ability to control our costs and improve our efficiency. Current and future cost
reduction initiatives may not be sufficient to maintain our margins if the current challenging economic environment continues for several quarters.





Our Global Operations Pose Complex Management, Foreign Currency, Legal, Tax and Economic Risks, Which We May Not Adequately Address





We conduct business in a number of countries around the world. In fiscal 2002, approximately 57% of our revenues were attributable to activities in North America, 33% of our revenues were attributable
to our activities in Europe, and 10% of our revenues were attributable to our activities in the Latin America and Asia/Pacific regions. As a result, we are subject to a number of risks, including:





| |  | the burdens of complying with a wide variety of national and local laws;
| | - | ------------------------------------------------------------------------




| |  | multiple and possibly overlapping and conflicting tax laws;
| | - | -----------------------------------------------------------




| |  | successful conversion to global operating and financial systems;
| | - | ----------------------------------------------------------------




| |  | coordinating geographically separated organizations;
| | - | ----------------------------------------------------




| |  | restrictions on the movement of cash;
| | - | -------------------------------------




| |  | the absence in some jurisdictions of effective laws to protect our intellectual property rights;
| | - | ------------------------------------------------------------------------------------------------




| |  | political instability;
| | - | ----------------------




| |  | currency fluctuations;
| | - | ----------------------




| |  | longer payment cycles;
| | - | ----------------------




| |  | restrictions on the import and export of certain technologies;
| | - | --------------------------------------------------------------



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| |  | price controls or restrictions on exchange of foreign currencies; and
| | - | ---------------------------------------------------------------------




| |  | trade barriers.
| | - | ---------------




Our
Revenues Could Be Adversely Affected by the Loss of a Significant Client or the Failure to Collect a Large Account Receivable





We have in the past derived, and may in the future derive, a significant portion of our revenues from a relatively limited number of major clients. From quarter to quarter, revenues from one or more individual clients may exceed 10%
of our revenues for the quarter. However, during fiscal 2002, DiamondCluster did not have any clients that individually accounted for greater than 10% of its net revenues. If we lose any major clients or any of our clients cancel or significantly
reduce a large projects scope, we would lose a significant amount of revenue. In addition, if we fail to collect a large account receivable, we could be subject to significant financial exposure.





The Absence of Long-Term Contracts With Our Clients Reduces the Predictability of Our Revenues





Our clients are generally able to reduce or cancel their use of our professional services without penalty and, in some circumstances, with little notice. As a result, we
believe that the number of clients or the number and size of our existing projects are not reliable indicators or measures of future revenue. We have in the past provided, and are likely in the future to provide, services to clients without
long-term agreements. When a client defers, modifies or cancels a project, there is no assurance that we will be able to rapidly redeploy our professionals to other projects in order to minimize the underutilization of employees and the resulting
adverse impact on operating results. We may not be able to replace cancelled or reduced contracts with new business with the result that our revenues and profits may decline.





Failure to Meet Client Expectations Could Result in Losses and Negative Publicity





A failure or inability by us or one of our subcontractors to meet a clients expectations could damage our reputation and adversely affect our ability to attract new business and result in delayed or lost revenues. Our
client engagements involve the creation, implementation and maintenance of business systems and other applications that can be critical to our clients businesses. We may be sued or unable to collect accounts receivable if a client is not
satisfied with our service.





Our client contracts may not protect us from liability for damages in the event that
we are sued. In addition, our general liability insurance coverage may not continue to be available on reasonable terms or in sufficient amounts. The successful assertion of any large claim against us or the failure by us to collect a large account
receivable could result in significant financial exposure to us.





An Inability to Keep Pace with Rapidly Changing Technology May
Impair Our Ability to Remain Competitive





Our failure to develop business and technology consulting services
that keep pace with continuing changes in technology, evolving industry standards, information technology and client preferences will result in decreased demand for our services. Among our challenges in this area are the need to:





| |  | continue to develop our strategic and technical experience;
| | - | -----------------------------------------------------------




| |  | develop new services that meet changing client needs; and
| | - | ---------------------------------------------------------




| |  | effectively use leading technologies.
| | - | -------------------------------------




We may not be able to meet these objectives on a timely or successful basis.




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Competition in Our Industry is Intense and Could Harm Our Business





Increased competition in our industry could result in price reductions, reduced gross margins or loss of market share, any of which could
seriously harm our business. The business and technology consulting services market which includes a large number of participants, is subject to rapid technological changes and is highly competitive. We compete with a number of companies that have
significantly greater financial, technical and marketing resources, greater name recognition, and greater revenues than ours. We believe that the principal competitive factors in our industry include:





| |  | diagnostic capabilities;
| | - | ------------------------




| |  | effectiveness of strategic business models;
| | - | -------------------------------------------




| |  | scope of services;
| | - | ------------------




| |  | service delivery approach;
| | - | --------------------------




| |  | technical and industry expertise;
| | - | ---------------------------------




| |  | perceived value; and
| | - | --------------------




| |  | results orientation.
| | - | --------------------




We
believe that our ability to compete also depends in part on a number of competitive factors outside of our control, including the ability of our competitors to hire, retain and motivate senior consultants, the price at which others offer comparable
services, and the extent of our competitors responsiveness to client needs. We may not be able to compete successfully with our competitors in the future.





In addition, there are relatively low barriers to entry in our industry. We do not own any patented technology that inhibits competitors from entering that market or providing services similar to ours.
As a result, new and unknown market entrants could pose a threat to our business.





If We Are Unable to Protect Our Intellectual
Property Rights or If We Infringe Upon the Intellectual Property Rights of Others Our Business May Be Harmed





Failure to secure or maintain protection of our intellectual property could adversely affect our ability to service our clients and generate revenue. We rely on a combination of non-disclosure and other contractual agreements and
copyright and trademark laws to protect our proprietary rights. We enter into confidentiality agreements with our employees, require that our clients enter into such agreements, and limit access to and distribution of our proprietary information.
However, these efforts may be insufficient to prevent misappropriation of our proprietary information or detect unauthorized use of our intellectual property rights.





Ownership of intellectual property developed during our client engagements is the subject of negotiation and is frequently assigned to the client upon payment for our
services. We generally retain the right to use any intellectual property that is developed during a client engagement that is of general applicability and is not specific to the clients project. Issues relating to the ownership of and rights
to use intellectual property developed during the course of a client engagement can be complicated. Clients may demand assignment of ownership or restrictions on our use of the work product. In addition, disputes may arise that affect our ability to
resell or reuse intellectual property. We may have to pay economic damages in these disputes which could adversely affect our business.





Currency Exchange Rate Fluctuations Could Adversely Affect Our Results of Operations





Approximately 43% of DiamondClusters revenue for the fiscal year ended March 31, 2002 was derived from operations outside North America. The results of operations for DiamondCluster in the future could be significantly affected
by factors associated with international operations, such as changes in foreign currency




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exchange rates and uncertainties relative to regional economic or political circumstances, as well as by other risks sometimes associated with international operations. Since the revenue and
expenses of DiamondClusters foreign operations will generally be denominated in local currencies, exchange rate fluctuations between such local currencies and the U.S. dollar subject us to currency translation risk with respect to the reported
results of our foreign operations. As exchange rates fluctuate, these results when translated, may vary from expectations and adversely impact overall expected results and profitability. Also, we may be subject to foreign currency translation risks
when transactions are denominated in a currency other than the currency in which we incur expenses related to such transactions. There can be no assurance that we will not experience fluctuations in financial results from our operations outside the
United States as a result of foreign currency fluctuations, and there can be no assurance that we will be able to reduce contractually or otherwise favorably the currency translation risk associated with our operations.





We Must Build Recognition and Client Acceptance of Our Name





DiamondCluster has invested significant efforts in building recognition and client acceptance of its name. We believe that market acceptance of the name DiamondCluster International, Inc. is an
important aspect of our efforts to retain and attract clients.





Promoting and maintaining name recognition depends
largely on the success of our marketing efforts and the ability of DiamondCluster to provide high quality, reliable and cost-effective services. These efforts will require significant expenses, which will affect our results of operations. Client
dissatisfaction with Company performance could diminish the value of our brand.





Our Chief Executive Officer Controls a Significant
Portion of the Voting Rights Which Limits Your Ability to Influence Corporate Matters





Our Chief Executive
Officer controls a significant portion of our voting stock. All of the holders of our Class B Common Stock have granted proxies to our Chief Executive Officer to vote their shares. As of March 31, 2002, our current Chief Executive Officer controls,
individually or by proxy, approximately 56% of the voting rights of our outstanding Common Stock. As a result, he will have the voting power to significantly influence the election of our board of directors and to affect all matters requiring
stockholder approval. In addition, an agreement among DiamondCluster and our partners requires that our Chief Executive Officer be selected from our partners. This significantly limits the number of qualified persons that may be considered for that
office. As a result, we may not be successful in attracting future persons who are qualified to serve as our Chief Executive Officer.





The Failure to Integrate or Negotiate Successfully Any Future Acquisitions Could Harm Our Business and Operating Results





If we acquire businesses in the future and are unable to integrate successfully these businesses, it could harm our business and operating results. In order to remain competitive or to expand our
business, we may find it necessary or desirable to acquire other businesses, products or technologies. We may be unable to identify appropriate acquisition candidates. If we identify an appropriate acquisition candidate, we may not be able to
negotiate the terms of the acquisition successfully, to finance the acquisition or to integrate the acquired businesses, products or technologies into our existing business and operations. Further, completing a potential acquisition and integrating
an acquired business may strain our resources and require significant management time. In addition, we may revalue or writedown the value of goodwill and other intangible assets in connection with past or future acquisitions which would harm our
operating results.





The Price for Our Common Stock Has Been Volatile and Unpredictable





The price for our Class A Common Stock has been volatile. Our Class A Common Stock has been listed on the NASDAQ National Market since
February 1997. The closing market price of the Class A Common Stock has




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experienced variations, and since January 1, 1999, our high and low sales price has ranged from a high of $106.00 to a low of $4.67 as of June 21, 2002. The market price of our Class A Common
Stock may experience fluctuations in the future for a variety of reasons. These include:





| |  | negative news about other publicly traded companies in our industry;
| | - | --------------------------------------------------------------------




| |  | general economic or stock market conditions unrelated to our operating performance;
| | - | -----------------------------------------------------------------------------------




| |  | quarterly variations in our operating results;
| | - | ----------------------------------------------




| |  | changes in earnings estimates by analysts;
| | - | ------------------------------------------




| |  | announcements of new contracts or service offerings by us or our competitors;
| | - | -----------------------------------------------------------------------------




| |  | financial performance of the Company; and
| | - | -----------------------------------------




| |  | other events or factors.
| | - | ------------------------




In addition, the stock market in recent years has experienced significant price and volume fluctuations which have affected the market prices of technology related companies. These fluctuations may continue to occur and
disproportionately impact our stock price.





We May Need to Raise Additional Capital in the Future Which May Not Be Available





We may not be able to raise capital in the future to meet our liquidity needs and finance our operations and
future growth. We were not profitable in the last six quarters and we may not be profitable in the future. We believe that existing cash resources, the amounts available under our revolving line of credit and cash generated from operations will be
sufficient to satisfy our operating cash needs at least through fiscal 2003. Any future decreases in our operating income, cash flow, or stockholders equity may impair our future ability to raise additional funds to finance operations. As a
result, we may not be able to maintain adequate liquidity to support our operations.





Future Sales of Our Common Stock in the Public
Market Could Cause the Price of Our Stock to Decline





In the future, our stockholders could sell substantial
amounts of our common stock in the public market which could cause our market price to decline. A substantial number of outstanding shares of common stock and shares of our common stock issuable upon exercise of outstanding stock options and
warrants will become eligible for future sale in the public market at various times. An increase in the number of shares of our common stock in the public market could adversely affect prevailing market prices and could impair our future ability to
raise capital through the sale of our equity securities.





Our Charter Documents and Delaware Law May Discourage an Acquisition of
DiamondCluster





Provisions of our certificate of incorporation, by-laws, and Delaware law could make it more
difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. We may issue shares of preferred stock in the future without stockholder approval and upon such terms as our board of directors may determine. Our
issuance of this preferred stock could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding stock and potentially prevent the payment of a premium to
stockholders in an acquisition. Our charter and by-laws also provide that special stockholders meetings may be called only by our Chairman of the board of directors, by our Secretary at the direction of our board of directors, or by stockholders
holding at least 30% of the voting power of the issued and outstanding shares of outstanding common stock, with the result that any third-party takeover not supported by the board of directors could be subject to significant delays and difficulties.
In addition, our board of directors is divided into three classes, each of which serves for a staggered three-year term, which may make it more difficult for a third party to gain control of our board of directors.




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We Do Not Intend to Pay Dividends





We have never 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.




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