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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



(Mark One)



x

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

SECURITIES
EXCHANGE ACT OF 1934



As of and for the year
ended December 31, 2002



OR



 ̈

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

SECURITIES EXCHANGE ACT OF 1934



Commission File No. 0-28830



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Navigant Consulting, Inc.

(Exact name of
Registrant as specified in its charter)



|Delaware                        |  | 36-4094854         
|------------------------------- |  | -------------------
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | Identification No.)



615
North Wabash Avenue, Chicago, Illinois 60611

(Address of principal executive offices, including zip code)



(312) 573-5600

(Registrants telephone number, including area code)



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



|Title of each class                      |  | Name of each exchange on which registered
|---------------------------------------- |  | -----------------------------------------
|Common Stock, par value $0.001 per share |  | New York Stock Exchange                  
|Preferred Stock Purchase Rights          |  | New York Stock Exchange                  



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



None



Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months), 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 a definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. ̈



Indicate by check mark whether the Registrant is an
accelerated filer (as defined in Exchange Act Rule 12b-2).  YES  x    NO ̈



As of March 10, 2003, 42.8 million shares of the Registrants common stock, par value $.001 per share (Common Stock), were outstanding. The aggregate market value of shares of Common Stock held by non-affiliates,
based upon the closing sale price of the stock on the New York Stock Exchange on March 10, 2003, was approximately $235.4 million. The Registrants Proxy Statement for the Annual Meeting of Stockholders, scheduled to be held on April 24, 2003,
is incorporated by reference into Part III of this Annual Report on Form 10-K.



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##### Table of Contents

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

FORM 10-K

AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2002



TABLE OF CONTENTS



|         |  |                                                                                                 |  | Page
|-------- |  | ----------------------------------------------------------------------------------------------- |  | ----
|        
|PART I   |  |                                                                                                 |  |     
|Item 1.  |  | Business                                                                                        |  | 3   
|Item 2.  |  | Properties                                                                                      |  | 8   
|Item 3.  |  | Legal Proceedings                                                                               |  | 9   
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                             |  | 9   
|         |  | Executive Officers of the Registrant                                                            |  | 10  
|        
|PART II  |  |                                                                                                 |  |     
|Item 5.  |  | Market for Registrants Common Stock and Related Stockholder Matters                            |  | 11  
|Item 6.  |  | Selected Financial Data                                                                         |  | 13  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results ofOperations            |  | 14  
|Item 7A. |  | Quantitative and Qualitative Disclosure About Market Risk                                       |  | 26  
|Item 8.  |  | Consolidated Financial Statements and Supplemental Data                                         |  | 26  
|Item 9.  |  | Changes In and Disagreements with Independent Accountants on Accounting andFinancial Disclosure |  | 26  
|        
|PART III |  |                                                                                                 |  |     
|Item 10. |  | Directors and Executive Officers of the Registrant                                              |  | 26  
|Item 11. |  | Executive Compensation                                                                          |  | 26  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters   |  | 27  
|Item 13. |  | Certain Relationships and Related Transactions                                                  |  | 27  
|Item 14  |  | Controls and Procedures                                                                         |  | 27  
|        
|PART IV  |  |                                                                                                 |  |     
|Item 15. |  | Exhibits, Financial Statements and Reports on Form 8-K                                          |  | 27  
|         |  | Independent Accountants Report                                                                 |  | F-2 
|         |  | Consolidated Balance Sheets                                                                     |  | F-3 
|         |  | Consolidated Statements of Operations                                                           |  | F-4 
|         |  | Consolidated Statements of Stockholders Equity                                                 |  | F-5 
|         |  | Consolidated Statements of Cash Flows                                                           |  | F-6 
|         |  | Notes to Consolidated Financial Statements                                                      |  | F-7 





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##### Table of Contents

PART I



Statements included in this report are intended to be, and are hereby identified as, forward-looking
statements for purposes of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this report, including, without limitation, Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations. When used in this report, the words anticipate, believe, intend, estimate, expect, and similar expressions as they relate to the Company or its
management are intended to identify such forward-looking statements. The Company cautions readers that forward-looking statements, including without limitation those relating to the Companys future business prospects, revenues, working
capital, liquidity, and income are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to several important factors herein identified, among
others, and other risks and factors identified from time to time in the Companys reports filed with the SEC. The Company undertakes no obligation to publicly update or revise any forward-looking statements to reflect current or future events
or circumstances.



Item
1.Business.



General



Navigant Consulting, Inc. (the
Company or NCI) is a specialized, independent consulting firm providing litigation, financial, restructuring, strategic and operational consulting services to government agencies, legal counsel, and companies facing the
challenges of uncertainty, risk and distress. The Company focuses on industries undergoing substantial regulatory or structural change.



The Company is a Delaware corporation headquartered in Chicago, Illinois. The Companys executive office is located at 615 North
Wabash Avenue, Chicago, Illinois 60611. Its telephone number is (312) 573-5600. The Companys common stock is traded on the New York Stock Exchange under the symbol NCI.



Navigant is a service mark of Navigant International, Inc. NCI is not affiliated, associated, or
in any way connected with Navigant International, Inc. and NCIs use of Navigant is made under license from Navigant International, Inc.



(a) General Development of Business



The Company had its initial public offering in 1996. The Company had three subsequent public offerings, one in 1997 and two in 1998. From
1996 to 1999, the Company acquired twenty-four consulting firms. During 1999 and 2000, the Company replaced its management team and the new team, currently in office, subsequently implemented a major realignment of the Company. During 2000, the
Company completed three large strategic divestitures, which eliminated three former business segments: Economic & Policy Consulting, Strategic Consulting and IT Solutions. In addition, the Company shut down or sold a number of other businesses
that had been unprofitable or were not deemed complementary to its current business structure. During 2001 and 2002, the Company acquired two and five consulting firms, respectively, that were deemed complementary to its current businesses. The most
significant 2002 acquisition, Hunter & Associates Management Services, Inc. (Hunter), requires the Company to furnish pro forma financial information which has been included in the notes to consolidated financial statements.



The Companys current business structure
consists of two business segments: Financial & Claims Consulting and Energy & Water Consulting. Each business segment has direct responsibility and accountability for its decisions, costs and profits. The Companys consultants have the
autonomy and authority to seek, engage and complete assignments. This business model and the Companys experience, reputation and industry focus enable it to compete effectively in the business and professional services consulting marketplace.



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(b) Financial Information
about industry segments



Segment operating
revenues and segment operating profits (together with a reconciliation to operating income) attributable to each segment for each of the last three years are set forth in Note 4 in the notes of the Companys consolidated financial statements.



The relative percentages of operating revenue
attributable to each segment were as follows:



|                              |  | 2002 |   |  | 2001 |   |  | 2000 |  
|----------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|Financial & Claims Consulting |  | 71.2 | % |  | 63.1 | % |  | 61.8 | %
|Energy & Water Consulting     |  | 28.8 | % |  | 36.9 | % |  | 38.2 | %



The
relative percentages of operating profits attributable to each segment were as follows:



|                              |  | 2002 |   |  | 2001 |   |  | 2000 |  
|----------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|Financial & Claims Consulting |  | 87.5 | % |  | 58.1 | % |  | 65.7 | %
|Energy & Water Consulting     |  | 12.5 | % |  | 41.9 | % |  | 34.3 | %



Segment
operating profits as a percentage of segment revenue were as follows:



|                               |  | 2002 |   |  | 2001 |   |  | 2000 |  
|------------------------------ |  | ---- | - |  | ---- | - |  | ---- | -
|Financial & Claims Consulting  |  | 14.2 | % |  | 12.6 | % |  | 16.4 | %
|Energy & Water Consulting      |  | 5.0  | % |  | 15.5 | % |  | 13.9 | %
|Total segment operating profit |  | 11.5 | % |  | 13.6 | % |  | 15.4 | %



The
information presented above does not necessarily reflect the results of segment operations that would have occurred had the segments been stand-alone businesses. Certain operating expenses, which relate to general corporate costs, were allocated to
operating segments on the basis of core revenues. Certain operating expenses, which primarily relate to operating segments, have been excluded from the segment operating profit amounts, and are included in the costs not allocated to segments, for
comparative purposes.



(c) Narrative description of business



Overview



The Company markets its services directly to senior and
mid-level executives. A variety of business development and marketing channels are used to communicate directly with current and prospective clients, including on-site presentations, industry seminars and industry-specific articles. New engagements
are sought and won by the Companys senior and mid- level consultants. Future performance will continue to depend on the consultants ability to win new engagements.



A significant portion of new business arises from prior client engagements. In addition, the Company seeks to
leverage the client relationships in one business segment to cross sell existing services provided by the other segment. Clients frequently expand the scope of engagements during delivery to include follow-on complementary activities. Also, on-site
presence affords the Companys consultants the opportunity to become aware of, and to help define, additional project opportunities as they are identified.



The Company derives substantially all of its revenues from professional services. Over the last three years,
a substantial majority of the Companys revenues have been generated under hourly or daily rates billed on a time and expense basis. Clients are typically invoiced on a monthly basis, with revenue recognized as the services are provided. From
time to time, the Company earns incremental revenues, in addition to hourly or fixed fee billing, which are contingent on the attainment of certain contractual objectives, typically related to the closing of a sale of a clients assets. Such
incremental revenues are commonly referred to as success fees; they may cause significant variations in quarterly revenues and operating results if all other revenues and expenses during the quarters remain the same.



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The
Companys most significant expense is consulting services expense, which generally relates to costs associated with generating revenues, and includes consultant compensation and benefits, and direct project-related expenses. Consultant
compensation consists of salaries and performance bonuses. The consultants salaries, including bonuses, are competitive with industry standards. The performance bonuses are structured to reward improving business performance. The Company also
compensates certain employees through equity based programs. Direct project-related expenses consist of travel-related costs, independent subcontractor fees, and material costs. The direct project-related expenses are typically recoverable under the
terms of contracts and are billed to the clients. Project personnel are typically employed on a full-time basis, although independent subcontractors supplement project personnel as needed. Independent subcontractors are typically retained for
specific client engagements on a task-specific, per diem basis during the period their expertise or skills are required. Retaining subcontractors on a per-engagement basis provides the Company with greater flexibility in adjusting project personnel
levels in response to changes in demand for its services.



The Companys most significant overhead expenses include administrative compensation and benefits, and office related expenses. Administrative compensation includes payroll costs for corporate management and administrative
personnel, which are used to indirectly support client projects. Office related expenses include primarily office rent of the Companys 38 offices.



Service Offerings



The Company provides wide and varied service offerings to its broad client base. The Company considers the following to be the
Companys key service offerings: litigation support and investigative accounting services, claims management and analysis, corporate restructuring services, discovery services, financial and transaction advisory services, government
contracting, and operations advisory and management services.



Industry Sectors



The Company provides services to and focuses on industries undergoing substantial regulatory or structural change. The Companys service offerings are relevant to most industries and the public sector. However, the Company has
significant industry-specific knowledge and a robust client base in the construction, energy, financial services and healthcare industries. Additionally, the Company has a strong presence in the public sector, including federal, state and local
governmental agencies. The Company has a long history of work for defendants, insurers and reinsurers in the asbestos and other product liability fields. Many of the Companys engagements involve working in conjunction with the legal counsel of
our clients.



The Company will continue to
evaluate the industries that fit the Companys focus and may add additional industry sectors in the future.



Human Capital



As of December 31, 2002, the Company had 1,368 employees, including 1,015 billable consultants. Success depends in large part on
attracting, retaining and motivating talented, creative and experienced professionals at all levels. In connection with recruiting, the Company employs internal recruiters, retains executive search firms, and utilizes personal and business contacts
to recruit professionals with significant industry-specific consulting experience. Consultants are drawn from the industries the Company serves, accounting and other consulting organizations, and top rated colleges and universities. The Company
seeks to retain its consultants by offering competitive packages of base and incentive compensation, equity ownership and benefits.



Revenues are primarily generated from services performed by the Companys professional consultants. Future performance will continue
to depend, in large part, upon the Companys ability to attract and retain highly skilled professionals possessing appropriate skills.



Independent contractors supplement the Companys consultants on certain engagements. The Company believes that the practice of
retaining independent contractors on a per-engagement basis provides greater



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flexibility in adjusting professional personnel levels in response to changes in demand for the Companys professional services.



In addition to the employees and independent
contractors discussed above, the Company has acquired and seeks to acquire consulting businesses to both add highly skilled professionals and expand the services offered by the Company. Some of the acquired businesses were direct competitors to the
Company, while others had been retained as independent contractors to supplement certain engagements. The Company believes that the practice of acquiring consulting businesses to gain certain consultants and consulting capabilities strengthens its
marketability, market share and overall operating results.



In connection with certain consultants employment and compensation agreements from both recruitment and business acquisitions, the Company obtains non-solicitation covenants from senior and mid-level consultants. Most of these
covenants have restrictions, preventing solicitation of clients and employees, that extend generally 12 months beyond the employees termination date. The Company employs these contractual agreements to reduce the risk of attrition and to
safeguard the Companys existing clients and projects from departing employees.



In order to secure new non-solicitation agreements for those consultants hired before 2000 with current agreements that would have expired by year-end 2002, the Company successfully implemented and
executed, in the fourth quarter of 2002, a predominantly stock-based retention program, the Management Stock Purchase Program (MSPP), for key leaders in both of the Companys business segments, using the Companys existing
Long-Term Incentive Program authorization. (See Note 10 to the consolidated financial statements for additional information about the MSPP.).



The Company continually monitors and adjusts, if needed, the consultants total compensation, which includes salaries, annual cash
bonus, and other cash and equity incentives from certain Company programs, to ensure both that the consultants compensation is competitive within the industry and that the Company has the opportunity to achieve target profitability levels. The
Companys bill rates to clients are tiered in accordance with the experience and levels of the consulting staff. The Company monitors and adjusts, if needed, those bill rates according to the supply and demand of the then-current market
conditions within the various industry segments served by the Company.



Competition



The
market for consulting services is intensely competitive, highly fragmented and subject to rapid change. The market includes a large number of participants with a variety of skills and industry expertise, including general management consulting
firms, as well as the national accounting firms, and other local, regional, national and international firms. Many of these companies are global in scope and have greater personnel, financial, technical and marketing resources than the Company. The
Company believes that its experience, reputation, industry focus and range of services will enable it to compete effectively in the consulting marketplace.



(d) Other Matters



Concentration of Revenues



There were no clients that accounted for more than 10 percent of the Companys total revenues for the year ended December 31, 2002.
One client from the Energy & Water Consulting segment accounted for more than 5 percent of the Companys total revenues for the years ended December 31, 2002 and 2001. There were no clients that accounted for more than 5 percent of the
Companys total revenues for the year ended December 31, 2000. Revenues earned from the Companys top 20 clients amounted to 39 percent, 42 percent and 39 percent of total revenues for the years ended December 31, 2002, 2001 and 2000,
respectively. The existence and identity of the Companys largest clients may change from year to year.



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Business
Risks



In addition to other information
contained in this Annual Report on Form 10-K and in the documents incorporated by reference herein, the following risk factors should be considered carefully in evaluating the Company and its business. Such factors could have a significant impact on
the Companys business, operating results and financial condition.



The Company relies heavily on its consulting staff and management team. The Companys inability to retain highly skilled professionals, coupled with departures of a significant number of senior employees, could have a
material adverse effect on the Company.



The
Companys common stock price may fall and any investment in the Company may be materially affected. Any long-term decline in the common stock would impair the Companys ability to use equity-based compensation to attract, retain and
motivate key employees.



The Company uses
equity-based compensation as a portion of senior and mid-level consultants overall compensation package. Equity-based compensation is being used to help align the interests of its employees and stockholders, but complete alignment is difficult
to achieve. Compensation and retention related issues represent a continuing challenge for the Company.



Specialized systems and processes have been developed by the Company and provide a competitive advantage in servicing current clients and
obtaining new clients. This intellectual capital is the property of Navigant Consulting, Inc. and the unauthorized use could have a materially adverse impact on the Companys business. Additionally, many of the Companys service offerings
rely on technology that is subject to rapid change.



The Companys intellectual capital in certain service offering may be rendered obsolete due to new governmental regulation. A new governmental regulation could allow a competitor a significant advantage before the Company is
able to adapt to new updated service demands.



The Company must manage growth from both organically expanding services and the acquisitions of complementary consulting firms. This growth and integration of acquisitions may cause strain on our management team and our systems. The
strain on management from rapid growth or unsuccessful integration of these businesses could have a material adverse effect on the future profitability of the Company.



The Companys return of capital may not materialize on certain business acquisitions. The Company also
may pay a substantial premium on certain business acquisitions to remain competitive. The financing of these acquisitions through cash or common stock could impair liquidity or cause significant stock dilution.



The Companys engagements are usually relatively
short-term in comparison to its office-related expenses and other infrastructure commitments. The Companys inability to continually replace a significant portion of its current engagements would have an adverse effect on the Companys
ability to meet its current and future commitments.



The Company maintains a revolving line of credit agreement to help fund short-term and long-term cash requirements from normal operations. This agreement contains certain covenants requiring, among other things, a minimum level of
earnings. Poor performance of the Company could cause the Company to be in default of these existing covenants. Additionally, the Company cannot be certain that it will be able to raise capital or obtain debt financing to execute future acquisitions
or to meet required working capital needs.



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If the
financial condition of the Companys clients were to deteriorate resulting in an impairment of their ability to make payments, additional allowances for uncollectability would likely be required.



The professional reputation of the Company and its
professionals is critical to the Companys ability to successfully compete for new client engagements and attract or retain professionals. Any factors that damage our professional reputation could have a material adverse effect on the
Companys business.



The Company is subject
to the risk of professional liability. The Companys consultants engage in complex analyses in which the exercise of professional judgment is critical. If services are not performed to the clients satisfaction, the client may threaten or
bring a lawsuit against the Company, claiming the Company performed negligently or breached its obligation to the client. In certain cases there is a potential that persons other than clients may bring claims against the Company. A claim against the
Company could exceed the limits of the Companys insurance coverage and could damage the Companys reputation.



Legislative changes affecting our clients, our competitors, or our staff could have an impact on business. An example of this is the
Sarbanes-Oxley Act of 2002, which limits the services that public accounting firms are permitted to provide to their audit clients. The Company is not a public accounting firm and therefore is not subject to such restrictions. Changes to the
Sarbanes-Oxley Act or rules promulgated thereunder, as well as other legislation could have an impact on the Companys business.



International Operations



The Company has an international presence with offices in the United Kingdom and Canada. In addition, the Company has clients based in the
United States of America that have international operations. No country, other than the United States of America, accounted for more than 5 percent of the Companys total revenues for the three years ended December 31, 2002, 2001 and 2000.



Available Information



The Company maintains an Internet website at
http://www.navigantconsulting.com, that includes a hypertext link to a website maintained by a third-party, where the Companys Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those
reports are available without charge as soon as reasonably practicable following the time that they are filed with or furnished to the SEC.



Item 2.Properties.



The Company owns a 16,500 square foot building located in Chicago, Illinois, which is used as the Companys executive office. In addition to the executive office, the Company has 38 operating leases for office facilities in 34
cities worldwide. Additional space may be required as the business expands geographically, but the Company believes it will be able to obtain suitable space as needed. Principal offices are located in the following cities:



|Albany, New York          |  | Fairfield, Connecticut     |  | Pittsburgh, Pennsylvania 
|------------------------- |  | -------------------------- |  | -------------------------
|Atlanta, Georgia          |  | Glendale, California       |  | Princeton, New Jersey    
|Austin, Texas             |  | Houston, Texas             |  | Richmond, Virginia       
|Bakersfield, California   |  | London, United Kingdom     |  | Sacramento, California   
|Baltimore, Maryland       |  | Los Angeles, California    |  | San Francisco, California
|Boston, Massachusetts     |  | Mt. Laurel, New Jersey     |  | Tampa, Florida           
|Burlington, Massachusetts |  | Nashville, Tennessee       |  | Toronto, Canada          
|Chicago, Illinois         |  | New York, New York         |  | Vienna, Virginia         
|Dallas, Texas             |  | Philadelphia, Pennsylvania |  | Washington, D.C.         
|Denver, Colorado          |  | Phoenix, Arizona           |  | Wilmington, Delaware     



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Item
3.Legal Proceedings.



As previously disclosed, in August 2000, the Company agreed to settle for $23.0 million the consolidated shareholder class actions (the Consolidated Class Actions). The Companys contribution to the settlement was
$16.5 million, with the insurance companies contributing $6.5 million. The federal district court approved this settlement in March 2001. The Company subsequently recovered from one of its insurers an additional contribution of $4.0 million, which
it agreed to share with the class on a 50/50 basis, net of the Companys costs. All settlement funds were paid into escrow pending final resolution of appeals and distribution issues. In July 2002 the last pending appeal was resolved. In
February 2003, the federal district court entered an order authorizing the distribution of all settlement funds.



In February 2003, the Company agreed to settle, without any admission of liability, a previously disclosed lawsuit entitled Klein v.
Navigant Consulting, Inc. et al. for a payment of $1.35 million. The plaintiff had opted out of the settlement of the Consolidated Shareholder Class Actions. There are no other opt out lawsuits remaining.



As previously disclosed, in October 2002, the Company filed a
complaint against two former employees in the United States District Court for the Northern District of Texas entitled, Navigant Consulting Inc. v. Wilkinson et al.In November 2002, the Company amended its complaint to add as a defendant a
third former employee, Sharon Taulman. The complaint, as amended, seeks to protect the Companys intellectual property rights in certain proprietary software and to enforce certain provisions of its former employees confidentiality and
non-solicitation agreements. The Company is seeking declaratory and injunctive relief, compensatory and punitive damages, and attorneys fees on various legal theories, including misappropriation of trade secrets, conversion, breach of
contract, and breach of fiduciary duties. The defendants have counter-claimed for defamation and for breach of contract based on the Companys refusal to permit the defendants to exercise certain employee stock options.



As previously disclosed, in November 2001, the Company was
informed that the Securities and Exchange Commission (SEC) has initiated a formal investigation, through the Chicago office of its Division of Enforcement, as to whether there may have been violations of the securities laws at the
Company during 1998 and 1999. The Company is cooperating fully with the SEC.



As previously disclosed, in November 2000, the Company was served with a lawsuit filed in the Circuit Court of Cook County, Illinois by two former officers, Steven J. Denari and Charles A. Demirjian.
The lawsuit named as defendants the Company, three of its directors, and its auditors, KPMG LLP. The lawsuit seeks compensatory and punitive damages from the defendants based on various legal theories, including defamation. The Company is defending
this lawsuit vigorously. In an independent action, the Company is pursuing collection of approximately $3.0 million plus interest from Mr. Demirjian, who borrowed money from the Company to purchase the Companys common stock and has, to date,
declined to repay the money borrowed.



From time
to time, the Company is party to various other lawsuits and claims in the ordinary course of business. While the outcome of those lawsuits or claims cannot be predicted with certainty, the Company does not believe that any of those lawsuits or
claims will have a material adverse effect on the Company.



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



Not Applicable.



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Executive Officers of the
Registrant



The following are the executive
officers of the Company as of March 10, 2003:



|Name                |  | Office                                              |  | Age
|------------------- |  | --------------------------------------------------- |  | ---
|William M. Goodyear |  | Chairman of Board and Chief Executive Officer       |  | 54 
|Ben W. Perks        |  | Executive Vice President andChief Financial Officer |  | 61 
|Philip P. Steptoe   |  | Vice President, General Counsel and Secretary       |  | 51 



William
M. Goodyear, 54, has served as Chairman of the Board and Chief Executive Officer of the Company since May 2000. He has served as a director since December 15, 1999. Prior to December 1999, he served as Chairman and Chief Executive Officer of Bank of
America, Illinois. From 1972 to 1999, Mr. Goodyear held a variety of assignments with Continental Bank, subsequently Bank of America, including corporate finance, corporate lending, trading and distribution. During this 28-year period, Mr. Goodyear
was stationed in London for 5 years (1986 to 1991) to manage Continental Banks European and Asian Operations. He was Vice Chairman and a member of the Board of Directors of Continental Bank prior to the 1994 merger between Continental Bank
Corporation and BankAmerica Corporation. He was President of the Bank of Americas Global Private Bank until January 1999. Mr. Goodyear received his Masters in Business Administration degree, with Honors, from the Amos Tuck School of Business
at Dartmouth College, and his Bachelors degree in Business Administration, with Honors, from the University of Notre Dame. He holds the Certified Public Accountant designation.



Ben W. Perks, 61, has served as Executive Vice President and Chief Financial Officer since May 2000. Prior to
joining the Company, Mr. Perks was a senior Chicago partner in the Financial Advisory Services Group with PricewaterhouseCoopers LLP. With PricewaterhouseCoopers and Price Waterhouse LLP, he had more than 32 years of professional services
experience, including 22 years as an audit and consulting partner, providing financial reporting, accounting, auditing, tax, economic and litigation consulting services to clients. Mr. Perks received his Professional Accounting Program degree from
Northwestern Universitys J.L. Kellogg Graduate School of Management, his Juris Doctor (law) degree and Masters in Business Administration degree from the University of Cincinnati, and his Bachelors degree from Denison University. He is a
Certified Public Accountant, a Certified Fraud Examiner, and a member of the American Institute of Certified Public Accountants and the American Bar Association.



Philip P. Steptoe, 51, has served as Vice President, General Counsel and Secretary since February 2000.
Previously, Mr. Steptoe was a partner with the national law firm of Sidley & Austin (now Sidley, Austin, Brown & Wood). Prior to joining Sidley in 1988, he was a partner in the Chicago law firm of Isham, Lincoln & Beale. During 1994 to
1995, he served for four months as Acting General Counsel for Orange and Rockland Utilities, Inc., a New York electric and gas utility. Mr. Steptoe earned his A.B. degree in Physics from Princeton University and his Juris Doctor (law) degree from
the University of Virginia.



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PART II



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



Market Information



The shares of common stock of the Company are traded on the New York Stock Exchange under the symbol NCI. The following table sets forth, for the periods indicated, the high and low closing
sale prices per share.



|               |  | High |      | Low
|-------------- |  | ---- | ---- | ---
|2002           |  |      |      |    
|Fourth quarter |  | $    | 6.09 |    
|Third quarter  |  | $    | 6.80 |    
|Second quarter |  | $    | 6.99 |    
|First quarter  |  | $    | 6.63 |    
|              
|2001           |  |      |      |    
|Fourth quarter |  | $    | 5.50 |    
|Third quarter  |  | $    | 7.52 |    
|Second quarter |  | $    | 8.20 |    
|First quarter  |  | $    | 7.15 |    



Holders



As of March 10, 2003, there were
approximately 450 holders of record of shares of common stock of the Company.



Distributions



The
Company has not paid any cash dividends since its organization and does not anticipate that it will make any such distributions in the foreseeable future.



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Sale of Unregistered
Securities



During the years ended December
31, 2000, 2001 and 2002, the Company has issued the following unregistered securities:



|Date               |  | Type of Securities |  | Number of Shares |  | Purchaser or Recipient                                |  | Consideration(a)                                                                 |  | Exemption Claimed
|------------------ |  | ------------------ |  | ---------------- |  | ------------------------------------------------------- |  | -------------------------------------------------------------------------------- |  | -----------------
|October 31, 2001   |  | Common Stock       |  | 136,500          |  | Former stockholder of Boston Management Resources, Inc. |  | All outstanding shares of Boston Management Resources, Inc.                      |  | Section 4(2)     
|                  
|May 24, 2002       |  | Common Stock       |  | 276,448          |  | Financial Analytics Consulting Group, LLC               |  | Substantially all of the assets of Financial Analytics Consulting Group, LLC     |  | Section 4(2)     
|                  
|June 19, 2002      |  | Common Stock       |  | 410,828          |  | Keevan Consulting Group, LLC                            |  | Substantially all of the assets of Keevan Consulting Group, LLC                  |  | Section 4(2)     
|                  
|July 10, 2002      |  | Common Stock       |  | 716,953          |  | Barrington Energy Partners, LLC                         |  | Substantially all of the assets of Barrington Energy Partners, LLC               |  | Section 4(2)     
|                  
|July 24, 2002      |  | Common Stock       |  | 91,408           |  | GCR, LLC                                                |  | Substantially all of the assets of GCR, LLC                                      |  | Section 4(2)     
|                  
|September 23, 2002 |  | Common Stock       |  | 1,464,547        |  | Hunter & Associates Management Services, Inc.           |  | Substantially all of the assets of Hunter & Associates Management Services, Inc. |  | Section 4(2)     

---

|(a) |  | Does not take into account additional cash or other consideration paid or payable as a part of the transactions.
|--- |  | ----------------------------------------------------------------------------------------------------------------



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Item
6.Selected Financial Data.



The following financial and operating data should be read in conjunction with the information set forth under Managements Discussion and Analysis of Financial Condition and Results of Operations and the
consolidated financial statements of the Company and related notes thereto appearing elsewhere in this report. The amounts are shown in thousands, except for per share data.



|                                                                     |  | For the years ended December 31, (1)
|-------------------------------------------------------------------- |  | ------------------------------------
|                                                                     |  | 2002                                
|Revenues                                                             |  |                                     
|Core revenues                                                        |  | $                                   
|Incremental revenues                                                 |  |                                     
|                                                                     |  |                                     
|Total revenues                                                       |  |                                     
|Operating expenses (credits):                                        |  |                                     
|Consulting services expense                                          |  |                                     
|General and administrative expenses                                  |  |                                     
|Depreciation expense                                                 |  |                                     
|Amortization expense                                                 |  |                                     
|Stock-based compensation expense                                     |  |                                     
|Restructuring costs and merger-related costs (credits)               |  |                                     
|Litigation and settlement provisions                                 |  |                                     
|VSRP cash compensation expense                                       |  |                                     
|                                                                     |  |                                     
|Operating income (loss) from continuing operations                   |  |                                     
|Other income (loss), net                                             |  |                                     
|                                                                     |  |                                     
|Income (loss) from continuing operations before income taxes         |  |                                     
|Income tax expense (benefit) (2)                                     |  |                                     
|                                                                     |  |                                     
|Net income (loss) from continuing operations                         |  |                                     
|                                                                     |  |                                     
|Income (loss) from discontinued operations, net of income taxes      |  |                                     
|Loss on dispositions of discontinued operations, net of income taxes |  |                                     
|                                                                     |  |                                     
|Net income (loss)                                                    |  | $                                   
|                                                                     |  |                                     
|Basic income (loss) per share:                                       |  |                                     
|Net income (loss) from continuing operations                         |  | $                                   
|Net income (loss) from discontinued operations                       |  | $                                   
|Loss on dispositions of discontinued operations                      |  | $                                   
|Net income (loss)                                                    |  | $                                   
|Shares used in computing net income (loss) per basic share           |  |                                     
|Diluted income (loss) per share:                                     |  |                                     
|Net income (loss) from continuing operations                         |  | $                                   
|Net income (loss) from discontinued operations                       |  | $                                   
|Loss on dispositions of discontinued operations                      |  | $                                   
|Net income (loss)                                                    |  | $                                   
|Shares used in computing net income (loss) per diluted share         |  |                                     
|                                                                     |  |                                     
|                                                                     |  | As of December 31,                  
|                                                                     |  | 2002                                
|Balance Sheet Data:                                                  |  |                                     
|Cash and cash equivalents                                            |  | $                                   
|Working capital                                                      |  | $                                   
|Total assets                                                         |  | $                                   
|Long-term debt, less current portion                                 |  | $                                   
|Total stockholders equity                                           |  | $                                   
|Cash dividends declared per common share                             |  |                                     

---

|(1) |  | The amounts above have been restated as described in Note 17 to the Consolidated Financial Statements. Certain business segments that have previously been presented
in revenues and expenses were discontinued in 2000 and were reclassified as discontinued operations. As a result, certain revenues and expenses for the years 1999 and 1998 have been reclassified to Loss from discontinued operations, net of
income taxes.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) |  | Certain operating subsidiaries previously were not subject to federal income taxation. The provision for income taxes for the year ended December 31, 1998 reflects a
one-time, non-cash charge of $7.2 million resulting from the conversion of a subsidiary of the Company from the modified cash basis to the accrual basis for tax purposes.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | In December 1997, the Company acquired two small businesses that were accounted for on a pooling of interests basis. In conjunction with the restructuring of the
Companys operations in the second quarter of 2000, these two entities were shut down. In late 2002, the Company determined that these acquisitions should have been recorded using the purchase accounting method. However, the impact of applying
such method of accounting is not material to the Companys financial statements, and revision of previously issued financial information is not required, in light of the following factors: (a) because the entities were shut down in 2000,
changes in financial information primarily would have affected amounts reported for discontinued operations in 1998 through 2000; (b) for all periods subsequent to the second quarter of 2000, there would be no impact on previously reported financial
information; (c) there will be no impact on future financial reporting.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



This Managements Discussion and Analysis of Financial Condition and Results of Operations relates to the Consolidated Financial
Statements included in this Annual Report on Form 10-K.



Overview



The Company is
a specialized, independent consulting firm providing litigation, financial, restructuring, strategic and operational consulting services to government agencies, legal counsel, and large companies facing the challenges of uncertainty, risk and
distress.



The Company derives substantially all
of its revenues from professional services. Over the last three years, a substantial majority of the Companys revenues have been generated under hourly or daily rates billed on a time and expense basis. Clients are typically invoiced on a
monthly basis, with revenue recognized as the services are provided. From time to time, the Company earns incremental revenues, in addition to hourly or fixed fee billing, which are contingent on the attainment of certain contractual objectives,
typically related to the closing of a sale of a clients assets. Such incremental revenues are commonly referred to as success fees; they may cause significant variations in quarterly revenues and operating results if all other
revenues and expenses during the quarters remain the same.



The Companys most significant expense is consulting services expense, which generally relates to costs associated with generating revenues, and includes consultant compensation and benefits, and direct project-related expenses.
Consultant compensation consists of salaries and performance bonuses. The consultants salaries, including bonuses, are competitive to industry standards. The performance bonuses are structured to reward higher business performance. The Company
also compensates certain employees through equity based programs. Direct project-related expenses consist of travel-related costs, independent subcontractor fees, and material costs. The direct project-related expenses are typically recoverable
under the terms of contracts and are billed to the clients. Consulting personnel are typically employed on a full-time basis, although independent subcontractors supplement consulting personnel as needed. Independent subcontractors are retained for
specific client engagements on a task-specific, per diem basis during the period their expertise or skills are required. Retaining subcontractors on a per-engagement basis provides the Company with greater flexibility in adjusting consulting
personnel levels in response to changes in demand for its services.



The Companys most significant overhead expenses include administrative compensation and benefits, and office related expenses. Administrative compensation includes payroll costs for corporate management and
administrative personnel, which are used to indirectly support projects. Office related expenses include primarily office rent of the Companys 38 offices.



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In addition,
the Company has several structured compensation and retention programs in which consultants compensation graduates at certain levels from cash compensation to stock-based compensation.



Critical Accounting Policies



The preparation of the financial statements requires
management to make estimates and assumptions that affect amounts reported therein. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes
the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements:



Revenue Recognition Policies



The Company recognizes revenues as the related professional services are provided. In connection with
recording revenues, estimates and assumptions are required in determining the expected conversion of the revenues to cash. From time to time, the Company also earns incremental revenues, commonly referred to as success fees, such as
based on the successful closing of the sale of a clients assets. These success fees amounts are generally contingent on a specific event, after which revenues are recognized on the percentage of completion method.



Determinations of Accounts Receivable Realization



The Company maintains allowances for
doubtful accounts for estimated losses based on the Companys review and assessment of its clients ability to make required payments, and the estimated realization, in cash, by the Company of amounts due from its clients. If the financial
condition of a client were to deteriorate resulting in an impairment of the clients ability to make payments, additional allowances might be required.



Valuation of Net Deferred Tax Assets



The Company has recorded net deferred tax assets as it expects to realize future tax benefits related to the utilization of these assets.
Although the Company has experienced net losses in recent years prior to 2002, no valuation allowance has been recorded related to these deferred tax assets because management believes that it is more likely than not that future taxable income will
be sufficient to realize the future tax benefits. Should the Company determine that it would not be able to realize all or part of its net deferred tax assets in the future, it would need to establish an allowance which would be recorded as a charge
to income in the period in which such determination is made.



Acquisitions and Divestitures



2002 Acquisitions:



Effective as of April 5, 2002, the Company acquired portions of Arthur D. Little, Inc.s assets for $6.1 million cash at closing. The acquisition consisted of two consulting units, with approximately 30 consulting and
administrative professionals that primarily serve the energy and public sector industries.



On May 24, 2002, the Company acquired the assets of Financial Analytics Consulting Group, LLC (FACG) for $6.3 million, which consisted of $4.5 million cash at closing and 0.3 million shares
of its common stock valued at $1.8 million at closing. In addition to the initial consideration, the purchase agreements for FACG provide for additional payments in cash over the two full calendar years after closing that are contingent on revenues
generated and the attainment of certain gross margin thresholds. Any additional payments related to this



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contingency will be accounted for as goodwill. FACG was formed in conjunction with a management buyout from Arthur Andersen, LLP and
consisted of 90 consulting and administrative professionals from five different Arthur Andersen practices. FACG was acquired primarily to augment the Companys litigation support and investigation services offerings.



On June 19, 2002, the Company acquired the assets of Keevan
Consulting, LLC (Keevan) for $7.2 million, which consisted of $4.0 million cash at closing, 0.4 million shares of its common stock valued at $2.7 million at closing, and $0.5 million cash payable in April 2003. In addition to the
initial consideration, the purchase agreement for Keevan provides for additional payments in cash and the Companys common stock over the two and one-half years from closing that are contingent on revenues generated and the attainment of
certain gross margin thresholds. Any additional payments related to this contingency will be accounted for as goodwill. Keevan was formed in conjunction with a management buyout from Arthur Andersen, LLP and consisted of 38 consulting and
administrative professionals. Keevan was acquired to enhance the Companys government contracts services offering.



On July 15, 2002, the Company acquired the assets of Barrington Energy Partners, LLC (Barrington Energy) for $11.1 million,
which consisted of $4.8 million cash at closing, 0.7 million shares of its common stock valued at $4.8 million at closing, and $1.5 million cash payable on the first anniversary of the closing date. In addition to the initial consideration, the
purchase agreement for Barrington Energy provides for additional payments in cash and the Companys common stock over the two and one-half years from closing that are contingent on the attainment of certain performance thresholds. Any
additional payments related to this contingency will be accounted for as goodwill. Barrington Energy consisted of eight senior-level professionals and six other staff whom complement the Companys energy industry sector and primarily provide
financial and transaction advisory service offerings. Barrington Energy Partners, LLC is not associated with the Companys 1999 acquisition of the Barrington Consulting Group, Inc.



Effective September 17, 2002, the Company acquired the assets of Hunter & Associates Management Services,
Inc. (Hunter) for $25.4 million, which consisted of $10.2 million cash at closing, 1.5 million shares of its common stock valued at $8.2 million at closing, $0.5 million cash payable on April 1, 2003, and $6.5 million in its common
stock payable in two equal installments on the first and second anniversary of the closing. If either seller or buyer elects, up to 67 percent of the $6.5 million deferred payment would be paid in cash and the remainder would be paid in the
Companys common stock. Accordingly, the Company accounted for this $6.5 million deferred payment obligation as 67 percent liabilities and 33 percent deferred stock issuance. In addition to the initial consideration, the purchase agreement for
Hunter provides for additional payments in cash and the Companys common stock over the three years following closing that are contingent on the attainment of certain performance targets. Any additional payments related to this contingency will
be accounted for as goodwill. Hunter consisted of 20 senior-level professionals and 40 additional staff that provide a comprehensive range of performance improvement services to hospitals and healthcare systems, including physician practices and
provider owner-managed care organizations. Hunter also provides interim executive-level management services as well as consulting services related to hospital restructurings. Hunter was acquired to significantly expand the Companys service
offerings within the healthcare industry.



All of
the Companys 2002 acquisitions have been accounted for by the purchase method of accounting for business combinations and, accordingly, the results of operations have been included in the consolidated financial statements since the dates of
acquisition.



2001 Acquisitions:



On March 1, 2001, the Company acquired the
assets of Barba-Arkhon International, Inc. (Barba-Arkhon) for $8.3 million, which consisted of $5.3 million cash at closing and $3.0 million notes payable, which bear interest at 6 percent due in two equal annual installments.
Barba-Arkhon provides project program management and claims analysis services for construction, governmental and institutional projects. Engagements include delay



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and disruption claims analysis for dispute resolution, damage valuation, litigation support and technical analysis for projects involving
transportation infrastructure, environmental and industrial facilities, power plants and commercial buildings.



On July 2, 2001, the Company acquired the common stock of Chambers Associates, Inc. (Chambers) for $2.7 million, which
consisted of $2.1 million cash at closing and $0.6 million cash due within 18 months of closing. The purchase agreement for Chambers also provides for additional payments through December 31, 2003 contingent on attainment of certain revenue targets.
Chambers provides public policy analysis, strategic planning and litigation support services to a wide range of clients. Engagements include economic and financial research to analyze the impact of current or proposed legislation or regulation;
advocacy support for certain health, tax, energy and environmental legislative issues; and analysis and estimation of claim values and expert testimony in product liability, medical malpractice, bankruptcy and other litigation cases. Chambers was
acquired to augment the services within its asbestos claims and mass tort litigation expertise. In addition, Chambers energy and environmental legislative expertise are expected to provide cross-selling opportunities to clients in the energy
industry.



The 2001 acquisitions have been
accounted for by the purchase method of accounting for business combinations and, accordingly, the results of operations have been included in the consolidated financial statements since the dates of acquisition.



2000 Acquisitions:



There were no acquisitions of businesses during 2000.



2000 Divestitures:



As part of a major realignment, the Company completed three
large strategic divestitures during 2000 (see Note 17 to the Consolidated Financial Statements). In addition, the Company shut down or sold a number of other subsidiaries that had been unprofitable or were not deemed complementary to its current
core operations.



In July 2000, the Company sold
the assets of GeoData Solutions, Inc. (GeoData) for $9.0 million in cash. As part of the disposition agreement, the Company retained all accounts receivable, which had a net realizable value of approximately $4.1 million at July 1, 2000.
In September 2000, the Company sold the assets of LECG, Inc. (LECG), for $45.0 million, principally in cash and notes receivable plus other contingent payments, to a team of senior LECG professionals in a management buy-out. Also in
September 2000, the assets of American Corporate Resources (ACR) were sold for $1.4 million in cash. In October 2000, the Company completed a nontaxable exchange of the stock of Strategic Decisions Group (SDG) for the
Companys common stock valued at the time of closing at approximately $6.2 million. In addition, the Company received $16.0 million in cash related to this transaction. The assets of Glaze Creek Partners LLC were included in the SDG
transaction.



In June 2000, the Company shut down
the operations of Triad International through employee terminations and sold certain Triad International assets to the remaining employees. The purchaser assumed certain liabilities in connection with this disposition. In consideration for the sale,
the Company is eligible to receive up to $4.0 million in contingent deferred payments over four years following the disposition date.



During the third and fourth quarters of 2000, the Company shut down the operations of Saraswati Systems Corporation (SSC), The
Vision Trust Marketing Group, LLC (VTM), Dowling and Associates, Inc. (Dowling) and Scope International, Inc. (Scope). During the fourth quarter of 2000, the Company decided to discontinue the operations of Brooks
International AB, Brooks International SARL and SPRL, and Brooks International Consulting OY. These operations were subsequently sold in the first quarter 2001 for nominal cash value and future contingent deferred payments. The Company has received
less than $0.1 million through December 31, 2002.



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##### Table of Contents



The
Companys statements of operations have been restated for the divestitures of LECG, SDG, GeoData, SSC, Dowling, Triad International, Inc., Brooks International AB, Brooks International SARL and SPRL, Brooks International Consulting OY, and
Glaze Creek Partners for all applicable periods presented. The revenues and expenses of these companies are included in Income (loss) from discontinued operations, net of income taxes for all periods presented after the dates of
acquisition and through the dates of disposal. The divestitures of Scope, VTM and ACR were not part of discontinued operations and their operating results are included in continuing operations for all periods since the dates of acquisition.



Results of Operations



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



|                                                                     |  | Years ended December 31, |  
|-------------------------------------------------------------------- |  | ------------------------ | -
|                                                                     |  | 2002                     |  
|Revenues:                                                            |  |                          |  
|Core revenues                                                        |  | 100.0                    | %
|Incremental revenues                                                 |  |                         |  
|                                                                     |  |                          |  
|Total revenues                                                       |  | 100.0                    | %
|Operating expenses (credits):                                        |  |                          |  
|Consulting services expense                                          |  | 65.4                     |  
|General and administrative expenses                                  |  | 23.5                     |  
|Depreciation expense                                                 |  | 3.0                      |  
|Amortization expense                                                 |  | 1.0                      |  
|Stock-based compensation expense                                     |  | 1.3                      |  
|Restructuring cost (credits)                                         |  | (0.2                     | )
|Litigation and settlement provisions                                 |  | 0.3                      |  
|VSRP cash compensation expense                                       |  |                         |  
|                                                                     |  |                          |  
|Operating income (loss) from continuing operations                   |  | 5.7                      |  
|Other income (loss), net                                             |  |                         |  
|                                                                     |  |                          |  
|Income (loss) from continuing operations before income taxes         |  | 5.7                      |  
|Income tax expense (benefit)                                         |  | 2.3                      |  
|                                                                     |  |                          |  
|Net income (loss) from continuing operations                         |  | 3.4                      |  
|                                                                     |  |                          |  
|Loss from discontinued operations, net of income taxes               |  |                         |  
|Loss on dispositions of discontinued operations, net of income taxes |  |                         |  
|                                                                     |  |                          |  
|Net income (loss)                                                    |  | 3.4                      | %
|                                                                     |  |                          |  



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Results of
Operations2002 compared to 2001



Revenues. Total revenues consist of core revenues and incremental revenues. Core revenues are primarily a function of billable hours, consultant headcount and billable project-related expenses, that are primarily billed on a
time and expense basis. Billable project-related expenses include travel costs, subcontractor services and materials recoverable under the terms of contracts. Incremental revenues are commonly referred to as success fee revenues, which are earned
contingent on the attainment of certain contractual objectives, typically related to the closing of a sale of a clients assets and are recorded on a percentage of completion basis. The Company typically engages in these types of engagements
with certain of its energy clients from time to time.



Core revenues generated in 2002 increased $33.4 million, or 14.9 percent, when compared to $224.6 million in 2001. Included in the core revenues increase were $6.4 million of revenues related to increased billable project-related
expenses. Excluding billable project related expense in 2002 and 2001, core revenues increased by $27.0 million, or 13.7 percent.



The Company has increased its employee base from a combination of new hires and business acquisitions. When comparing the year 2002 to
2001, the average number of consultants employed during the year was 7.6 percent higher, resulting in an increase in billable hours of 7.5 percent. The Company has maintained consistency in its bill rates and utilization rate, which averaged
approximately 66 percent in both years compared. These were the significant contributing factors that related to the increase in revenues in 2002.



Total revenues increased $22.4 million, or 9.5 percent, to $258.0 million in the year ended December 31, 2002, compared to $235.6 million
in 2001. Incremental revenues (success fees) totaled $11.0 million in 2001 and there were no incremental revenues in 2002.



Consulting Services Expense. Consulting services expense includes consultant compensation and benefits, direct project-related
expenses and client development expenses.



Consulting services expense increased $16.8 million, or 11.1 percent, to $168.8 million in the year ended December 31, 2002, compared to $152.0 million in 2001. The most significant reason for the increase in consulting services
expense were additional consultant compensation expense related to the higher headcount. The consulting services expense increase included an increase of $6.4 million in direct project-related expenses.



General and Administrative Expenses. General and
administrative expenses include facility-related costs, salaries and benefits of management and support personnel, allowances for doubtful accounts receivable, professional administrative services, and all other corporate support costs.



General and administrative expenses increased
$5.3 million, or 9.6 percent, to $60.7 million in the year ended December 31, 2002, compared to $55.4 million in 2001. The most significant increases were related to facility-related costs and administrative wages. Facility-related costs increased
to support the headcount growth and to support the geographic reach of the Company. The Company has 38 offices, which are used to support its employee base. Some of the offices currently used were added through acquisitions of businesses. The
Company believes it can consolidate certain offices and may choose not to renew certain leases in the future in order to reduce costs. Another reason for the increase in general and administrative expenses relates to professional services, primarily
legal fees and compensation-related consulting services. The Company expects these professional service expenses to decline in future years. General and administrative expenses, as a percentage of core revenues, declined over the years. As a
percentage of core revenues, general and administrative expenses were 25.3 percent, 24.7 percent and 23.5 percent for the years ended December 31, 2000, 2001, and 2002, respectively. The Company believes through optimal scaling that general and
administrative expenses can be reduced to a rate of 20 percent to 21 percent of core revenues.



Depreciation Expense. Depreciation expense includes depreciation of the costs of computer equipment, office furniture and equipment, software and leasehold improvements.



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Depreciation
expense increased $0.6 million to $7.7 million in the year ended December 31, 2002 compared to $7.1 million in 2001. The increase in depreciation expense is primarily attributed to depreciation recorded on new capital purchases consisting of
computer equipment and costs related to configuration of certain offices to accommodate newly acquired businesses.



Amortization Expense. Amortization expense includes amortization of the costs of goodwill and intangible assets, including customer
lists, covenants not-to-compete and trade name. In accordance with SFAS 142, which the Company adopted in 2002, goodwill is no longer subject to amortization beginning in 2002, but is subject to annual impairment testing.



Amortization expense decreased $3.3 million, to $2.4 million
in the year ended December 31, 2002, compared to $5.7 million in 2001. The decrease in amortization expense from 2002 to 2001 results from not having any goodwill amortization in 2002 because of the adoption of SFAS 142.



Stock-based Compensation Expense. Stock-based
compensation expense includes non-cash compensation expense related to restricted shares, restricted stock units, stock appreciation rights, exchanged stock options and VSRP stock options awarded to the Companys employees. Stock-based
compensation expense is recorded for the fixed compensation expense of restricted stock grants, in which expense is recorded on a straight-line basis over the vesting term for the market valuation amount at grant date. In addition, stock-based
compensation expense is recorded for certain Value Sharing Retention Program (VSRP) stock options, exchanged stock options and stock appreciation rights (variable accounting awards) that have been awarded to the
Companys employees and are subject to variable accounting treatment. Compensation expense (or credit) for the variable accounting awards is recorded, on a cumulative basis, for the increase (or decrease) in the Companys stock price above
the grant prices.



Stock-based compensation
expense decreased $0.4 million, or 10.8 percent, to $3.4 million in the year ended December 31, 2002 compared to 2001. The decrease in stock-based compensation expense is in part attributable to the Companys exchange of certain tendered
options subject to variable accounting for fixed compensation restricted shares. The exchange eliminated the variable accounting stock-based compensation expense associated with the tendered stock options and provides for a more predictable future
stock-based compensation expense.



Restructuring Costs (Credits). Restructuring costs (credits) include provisions for the costs of facility closings, space reduction, office consolidation and staff reduction incurred in the execution of the Companys
restructuring plan.



The Company recorded a $0.5
million restructuring credit to its operating results for the year ended December 31, 2002. During the year ended December 31, 2001, the Company recorded a $1.9 million charge for additional costs to be incurred. The Company reevaluated the time and
additional costs it expected to incur to secure tenants for the lease obligations based on the then current real estate market conditions.



Litigation and settlements provisions. Litigation and settlement provisions include amounts accrued, based on current information,
for costs estimated to settle certain litigation matters. The Company recorded an additional $0.8 million in litigation and settlement provisions in the year ended December 31, 2002 for certain previously disclosed litigation matters, accrued for in
2001. The Company recorded the provision to reflect the additional estimated costs in settling the litigation. The 2002 amount is in addition to amounts recorded in previous years and does not relate to any new litigation initiated in 2002. The
Company recorded $5.7 million in litigation and settlement provisions in the year ended December 31, 2001.



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VSRP Cash
Compensation Expense. VSRP cash compensation expense is the cash compensation component of the Value Sharing Retention Program. The cash component of the retention program included four installments totaling $18.8 million and the expense was
recorded on a straight-line basis starting on September 1, 2000 through September 1, 2001. As of December 31, 2001, the Company had no further obligation related to the VSRP cash compensation provision.



For the ended December 31, 2001, VSRP cash compensation
expense was $12.4 million. The Company did not have any VSRP cash compensation expense in 2002.



Income Tax Expense (Benefit). Income tax expense (benefit) includes federal, state and foreign income taxes provisions the Company is obligated to pay currently or, though deferred tax
provisions (benefit), in the future.



The Company
had an income tax expense of $5.9 million in the year ended December 31, 2002, which increased by $8.2 million when compared to the income tax benefit of $2.3 million for the year 2001. The increase in income taxes is primarily due to a turnaround
of the Companys operating results from a loss to income. Higher business profitably and lower restructuring, litigation and VSRP cash compensation expenses are the primary factors for the turnaround in the Companys operating results. The
Companys effective tax rate for the year 2002 was 40.0 percent, compared to a tax benefit rate of 30.1 percent in 2001.



Results of Operations2001 compared to 2000



Revenues. Revenues decreased $9.0 million, or 3.7 percent, to $235.6 million in the year ended December 31, 2001, from $244.6
million in 2000. The decrease in revenues was primarily attributed to lower direct project-related expense recoveries included in revenues totaling $8.4 million. Exclusive of direct project-related recoveries, revenues decreased by $0.6 million for
the year 2001 compared to 2000.



The Company
generated $3.1 million more incremental revenues in 2001 than 2000, totaling $11.0 million for the year. Incremental revenues, which are commonly referred to as success fees, are revenues earned, in addition to hourly or fixed fee billing, for the
closing of sales related agreements for energy clients. In February 2001, the Company managed a successful auction of a clients electric generating plants, which yielded incremental revenue to the Company of $9.0 million. In addition, the
Company recorded $2.0 million in incremental revenues from other transactions during 2001. Similar transactions occurred in 2000 with different clients, which yielded incremental revenues of $8.0 million.



Consulting Services Expense. Consulting services
expense decreased $6.7 million, or 4.2 percent, to $152.0 million in 2001 from $158.7 million in 2000. The decrease in consulting services expense is primarily attributed to the cost of direct project-related expenses. Excluding the lower cost
of direct project-related expenses in 2001, consulting services expense increased $1.5 million and the increase is primarily attributed to incentive costs associated with higher incremental revenue in 2001 compared to 2000. Included in consulting
services expense for 2001 and 2000 was expense relating to the Barrington purchase agreement.



General and Administrative Expenses. General and administrative expenses decreased $4.4 million, or 7.4 percent, to $55.4 million in 2001, from $59.8 million in 2000. The decrease of $4.4
million is primarily attributed to a decrease in administrative compensation and corporate professional fees. In May 2000, as a part of the restructuring plan, the Company streamlined its administrative support staff of its core operations, which
resulted in a 20 percent administrative headcount reduction. Administrative wages and incentives in total decreased $2.9 million from 2000 to 2001. Corporate professional fees decreased $2.1 million primarily due to the reduction of expenses
relating to legal, accounting and human resources costs. The Consolidated Class Actions litigation and other litigation were settled in August 2000 and July 2001, respectively. As these matters have been settled, the Company has significantly
reduced legal expenses when comparing 2001 to 2000.



21



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##### Table of Contents



Amortization Expense. For the year 2001, amortization expense increased $1.1 million to $5.7 million from $4.6 million in 2000. The increase was primarily due to the amortization of goodwill of Barba-Arkhon acquired on March
1, 2001. In accordance with SFAS 142, which the Company adopted in 2002, goodwill is no longer subject to amortization beginning in 2002 but subject to annual impairment testing.



Stock-based Compensation Expense. Stock-based compensation expense for the year ended December 31,
2001 was $3.8 million. In January 2001, the Company issued 1.9 million restricted shares with a market valuation based on the Companys stock price of $3.875, which was the closing market price on the grant date. The Company recorded $2.8
million in stock-based compensation related to these grants in 2001. Stock-based compensation of $0.9 million related to options subject to variable accounting. The Companys stock price was $5.50 at December 31, 2001, compared to $3.81 at
December 31, 2000, and was above the grant or exercise prices of the VSRP options then outstanding but below the grant or exercise prices of the exchanged options. Accordingly, compensation expense related to the valuation increase of the
outstanding VSRP options was recorded.



In 1999,
the Company determined, based in part on the absence of contemporaneous documentation, that 0.3 million nonqualified options issued to a total of sixteen individuals were issued at prices below fair market value. The aggregate dollar amount by
which the grant prices of the options differ from the market prices as of the dates for which the Company has independent evidence to support the issuance of the options was $4.1 million. The amount charged to expense has been amortized over
the relevant vesting periods. Accordingly, the Company recorded stock-based compensation expense, attributable to such options, of $0.1 million, and $0.5 million in 2001 and 2000, respectively. As of December 31, 2001, the Company fully
amortized the $4.1 million to stock-based compensation expense.



Restructuring Costs. In May 2000, the Company implemented a plan to restructure its operations. The restructuring of the Companys operations included streamlining its administrative staff, facility closings and
space reduction. Accordingly, the Company recorded restructuring costs of $10.2 million for the year ended December 31, 2000. During the year ended December 31, 2001, the Company recorded additional charges of $1.9 million related to updated
estimates on executing of the remainder of its restructuring plan.



Litigation and settlements. Litigation and Settlements costs totaled $5.7 million for the year ended December 31, 2001; a decrease of $10.8 million from the $16.5 million expense recorded in the year ended December
31, 2000. The Company was a defendant in the Consolidated Class Actions shareholder litigation, previously discussed, and other litigation during 2001 and 2000.



VSRP Cash Compensation Expense. For the year 2001, VSRP cash compensation expense was
$12.4 million, compared to $6.4 million in 2000. The increase in VSRP expense is related to the number of months to which the cash compensation expense was allocated during each year. The cash component of the retention program started on
September 1, 2000 and ended on the September 1, 2001. The Company paid the last three of four installments totaling $13.9 million in 2001 and the Company has no further obligation related to the VSRP cash compensation provision.



Other Income (Loss), Net. Other income improved $2.6
million to an income of $0.9 million income for the year ended December 31, 2001, from $1.7 million loss for the year ended December 31, 2000. A $1.7 million charge to reflect the impairment of former officers notes receivable was recorded in
2000. The Company had a higher average cash balance, net of line of credit borrowings, for year ended December 31, 2001 compared to the same period in 2000, which resulted in higher interest income and lower interest expense when comparing the
years.



Income Tax Expense (Benefit). The
Company had an income tax benefit of $2.3 million for the year ended December 31, 2001, which decreased by $3.9 million when compared to the income tax benefit of $6.2 million for the year 2000. This difference is primarily due to a lower operating
loss in 2001 compared to 2000, as a result of 2001 having lower litigation and settlement provisions and lower restructuring costs. The decrease in these expenses was partially offset by higher VSRP cash compensation and non-cash stock-based
compensation expense.



22



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Unaudited Quarterly Results



The following table sets forth certain
unaudited quarterly operating information. The unaudited quarterly operating data has been prepared on the same basis as the audited consolidated financial statements contained elsewhere in this Form 10-K. The data includes all normal recurring
adjustments necessary for the fair presentation of the information for the periods presented, when read in conjunction with the Companys Consolidated Financial Statements and related Notes thereto. Results for any quarter are not necessarily
indicative of results for the full year or for any future quarter. The amounts in the following table are in thousands, except for per share data.



|                                          |  | Quarters ended |       
|----------------------------------------- |  | -------------- | ------
|                                          |  | Mar. 31, 2001  |       
|Revenues:                                 |  |                |       
|Core revenues                             |  | $              | 53,902
|Incremental revenues                      |  |                | 8,975 
|                                          |  |                |       
|Total revenues                            |  |                | 62,877
|Operating expenses (credits):             |  |                |       
|Consulting services expense               |  |                | 39,533
|General and administrative expenses       |  |                | 14,001
|Depreciation expense                      |  |                | 1,577 
|Amortization expense                      |  |                | 1,270 
|Stock-based compensation expense (credit) |  |                | 2,418 
|Restructuring costs (credits)             |  |                |      
|Litigation and settlement provisions      |  |                |      
|VSRP cash compensation expense            |  |                | 4,752 
|                                          |  |                |       
|Operating income (loss)                   |  |                | (674  
|Other income (loss), net                  |  |                | 463   
|                                          |  |                |       
|Income (loss) before income taxes         |  |                | (211  
|Income tax expense (benefit)              |  |                | 437   
|                                          |  |                |       
|Net income (loss)                         |  | $              | (648  
|                                          |  |                |       
|Net income (loss), per diluted share(1)   |  | $              | (0.02 
|                                          |  |                |       
|Diluted shares                            |  |                | 38,441
|                                          |  |                |       

---

|(1) |  | The sum of quarterly earnings per diluted share does not equal annual amounts in 2001 and 2002 because of roundings and changes in the weighted average number of
shares.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Operating results
fluctuate from quarter to quarter as a result of a number of factors, including the significance of client engagements commenced and completed during a quarter, the number of business days in a quarter, employee hiring and utilization rates. The
timing of revenues varies from quarter to quarter due to factors such as the Companys revenue cycle, the ability of clients to terminate engagements without penalty, the size and scope of assignments, and general economic conditions. Because a
significant percentage of the Companys expenses are relatively fixed, a variation in the number of client assignments, or the timing of the initiation or the completion of client assignments, can cause significant variations in operating
results from quarter to quarter. Furthermore, the Companys stock price volatility may cause significant fluctuations in expenses and operating results as the Company measures the valuation of non-cash stock-based compensation for options
subject to variable accounting treatment from quarter to quarter.



Human Capital Resources



The Company had 1,015 consultants as of December 31, 2002, a net increase of 23 consultants since the beginning of year. The increase includes approximately 230 consultants from business acquisitions, which was offset by higher than
normal attrition principally related to the termination of personnel in underperforming practices.



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In the normal
course of business, the Company needs to retain highly skilled professionals, particularly those not bound by non-compete or non-solicitation agreements. Senior and mid-level consultants hired in 2000 and thereafter are subject to non-solicitation
covenants that are consistent with standard industry practices, which provide for non-solicitation arrangements that extend beyond the employees separation date.



In order to secure non-solicitation agreements for those consultants hired prior to 2000, the Company
successfully implemented and executed a predominantly stock-based retention program, the Management Stock Purchase Program (MSPP), for key leaders in both of the Companys business segments, using the Companys existing
Long-Term Incentive Program authorization. The program provides for individual purchases over five years of up to 2.3 million restricted stock units, including an accompanying match or grant of restricted stock units, as well as additional cash
compensation of up to $4.5 million over three years, in return for the adoption of industry standard non-solicitation agreements. See Note 10 to the Consolidated Financial Statements.



The Company continually monitors and adjusts, if needed, the consultants total compensation, which
includes salaries, annual cash bonus, and other cash and equity incentives from certain Company programs, to ensure both that the consultants compensation are competitive within the industry and that the Company maintains profitability levels.
The Companys bill rates are tiered in accordance with the experience and levels of the consulting staff. The Company monitors and adjusts, if needed, those bill rates according to the supply and demand of the then-current market conditions.



Within the Energy & Water business segment
during the first quarter of 2003, the Company is reducing headcount in order to eliminate excess consulting capacity. These actions are designed to improve the profitability of this business segment. The Company will continue to review personnel
requirements in order to balance staffing with future revenue expectations and may also eliminate unprofitable service offerings.



Liquidity and Capital Resources



Summary



The Company had $8.1 million in cash and cash equivalents at December 31, 2002, compared to $36.0 million at December 31, 2001. The
Companys cash equivalents were primarily limited to commercial paper or securities (rated A or better), with maturity dates of 90 days or less.



Working capital, the excess of current assets over current liabilities, was $25.9 million at December 31, 2002 compared to $53.6 million
at December 31, 2001. The decrease in working capital is primarily related to the use of cash to finance business acquisitions during the year ended December 31, 2002, and to pay for other acquisition-related obligations.



The Company calculates accounts receivable days sales
outstanding (DSO) on a gross basis by dividing the accounts receivable balance, net of deferred revenue credits, at the end of the quarter by daily net revenues. Daily net revenues are calculated by taking net quarter revenues divided by
90 days, approximately equal to the number of days in a quarter. Calculated as such, DSO was 77 days at December 31, 2002 compared to 80 days at December 31, 2001. The Company has a certain number of practices, some recently acquired, that bill and
collect in advance of services. The collection of these billings, and managements continued focus on collection efforts and on more timely billings, reduced the DSO at the 2002 year-end.



Cash Flow



For the year ended December 31, 2002, net cash provided by operating activities was $8.5 million.



Net cash used by investing activities for the
year ended December 31, 2002 was $41.8 million, primarily due to acquisition-related transactions. The Company paid $30.7 million in cash for businesses acquired during the year ended December 31, 2002. The Company paid $5.6 million related to
businesses acquired in prior years. In addition, the Company used $5.2 million for capital spending to support personnel and services and to configure certain offices to accommodate newly acquired businesses and other new hires.



Net cash provided by financing activities was $5.5 million in
2002. During the year ended December 31, 2002, the Company received cash, and related tax benefits, of $4.2 million from transactions related to stock



24



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##### Table of Contents

option exercises and employee stock purchases. The Company borrowed $6.5 million, net, from its line of credit facility and used
$5.2 million to purchase its common stock in 2002.



Debt,
Commitments and Capital



The Company
maintains an unsecured revolving line of credit agreement for $50.0 million, with the ability to increase the amount up to $75.0 million over the term of the agreement. A consortium between the LaSalle Bank, N.A., the Companys primary banker,
and US Bank agreed to extend and increase the revolving line of credit agreement. The revolving line of credit agreement expires on October 31, 2005 and the Company has the option to extend the agreement for an additional two years from the
expiration date. Borrowings under the revolving line of credit agreement bear interest based, at the Companys option, on either (1) the higher of the prime rate or the federal fund rate plus 0.5 percent, or (2) London Interbank Offered Rate
(LIBOR) plus 1.25 percent. The line of credit agreement was amended in November 2002 and contains similar covenants as the original agreement, which requires the Company to maintain a minimum level of earnings before interest, taxes,
depreciation and amortization. There were no other substantive changes in the terms and conditions in the amendment.



The Company was in compliance with the terms of the line of credit agreements then in place as of December 31, 2002 and 2001. As of
December 31, 2002, the Company had a $6.5 million balance outstanding under the line of credit agreement. The Company did not have a balance outstanding under the agreement at December 31, 2001.



The Company had $3.0 million in notes payable under the
Barba-Arkhon purchase agreement due in two equal annual installments on March 1, 2002 and 2003. The Company paid the first annual installment of $1.5 million on March 1, 2002. The second installment was due on March 1, 2003 and bore interest at
a 6 percent annual percentage rate payable on a quarterly basis. The Company paid the second installment in the first quarter 2003 and does not have any remaining purchase price obligations related to Barba-Arkhon.



As of December 31, 2002, the Company had a total of $13.5
million in deferred purchase price and contingent earnout obligations payable in cash and its common stock. The Company also had a $3.1 million cash obligation related to the MSPP agreements. As of December 31, 2002, the Company had no significant
commitments for capital expenditures, except for those related to rental expense under operating leases.



The Company believes that the current cash and cash equivalents, the future cash flows from operations and the line of credit facility
provide adequate cash to fund anticipated short-term and long-term cash needs from normal operations. In the event the Company was to make significant cash expenditures in the future for major acquisitions or other non-operating activities, the
Company might need additional debt or equity financing, as appropriate.



Contingencies



During the
next three years, the Company is subject to pay additional purchase price amounts that are part of the consideration for certain purchase agreements. The payments, if any, are contingent on the achievement of certain revenue and gross margin targets
reached by the consultants of the acquired businesses. The Company believes that it will have sufficient funds to satisfy obligations related to the contingent consideration. The Company expects to fund these contingent payments, if any, from the
cash generated from the operations of these acquired businesses.



25



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##### Table of Contents



Item
7A.Quantitative and Qualitative Disclosures About Market Risk.



The Companys primary exposure to market risks relates to changes in interest rates associated with its borrowings under the line of
credit, and its investment portfolio, classified as cash equivalents. The Companys general investment policy is to limit the risk of principal loss by limiting market and credit risks.



As of December 31, 2002, the Companys investments were
primarily limited to 'A' rated securities with maturity dates of 90 days or less. These financial instruments are subject to interest rate risk and will decline in value if interest rates rise. Because of the short periods to maturity of
these instruments, an increase in interest rates would not have a material effect on the Company financial position or operating results.



The Companys market risk associated with its line of credit relates to changes in interest rates. Borrowings under the new line of
credit agreement bear interest based, at the Companys option, on either (1) the higher of the prime rate or the federal fund rate plus 0.5 percent, or (2) London Interbank Offered Rate (LIBOR) plus 1.25 percent. Based on the line of
credit balance as of December 31, 2002, a substantial rise in interest rates would have an immaterial effect on the Companys financial position and operating results. The Company does not anticipate any material changes in interest rates in
the short-term future.



Other than the second
installment of the Barba-Arkhon notes payable (which was paid in full in the first quarter of 2003), the line of credit obligation, certain deferred purchase price obligations, and contingent earnout obligations discussed above, the Company does not
have any short-term debt, long-term debt, interest rate derivatives, forward exchange agreements, firmly committed foreign currency sales transactions, or derivative commodity instruments.



The Company operates in foreign countries which exposes it to market risk associated with foreign currency
exchange rate fluctuations; however, such risk is immaterial in relation to the Companys consolidated financial statements.



Item 8.Consolidated Financial Statements and Supplementary Data.



The Consolidated Financial Statements of the Company are this report as pages F-1 through F-33. An index to such information appears on page F- 1.



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



None.



PART III



Item 10.Directors and Executive Officers of the Registrant.



Information required in response to this Item is incorporated by reference from the Companys definitive proxy statement for the Companys Annual Meeting of Stockholders scheduled to be held
on April 24, 2003, which proxy statement will be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the Companys year ended December 31, 2002.



Item 11.Executive Compensation.



Information required in response to this Item is incorporated by reference from the Companys definitive proxy statement for the Companys Annual Meeting of Stockholders scheduled to be held on April 24, 2003, which proxy
statement will be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the Companys year ended December 31, 2002.



26



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##### Table of Contents



Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.



Information required in response to this Item is incorporated by reference from the Companys definitive proxy statement for the
Companys Annual Meeting of Stockholders scheduled to be held on April 24, 2003, which proxy statement will be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the Companys year ended December
31, 2002.



Information required with respect to
the securities authorized for issuance under the Companys equity compensation plans, including plans that have previously been approved by the Companys stockholders and plans that have not previously been approved by the Companys
stockholders, will be set forth in the Proxy Statement, and such information is incorporated by reference.



Item 13.Certain Relationships and Related Transactions.



Information required in response to this Item is incorporated by reference from the Companys definitive proxy statement for the Companys Annual Meeting of Stockholders scheduled to be held
on April 24, 2003, which proxy statement will be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the Companys year ended December 31, 2002.



Item 14.Controls and Procedures.



(a) Evaluation of disclosure controls and procedures. Within 90 days prior to the date of this annual report, the Company carried out an evaluation, under the supervision and with the participation of the Companys
management, including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Rule 12a-14(c) and 15d-14(c) of the
Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective in timely alerting them to material information
relating to the Companys required information to be included in its periodic SEC filings.



(b) Change in internal controls. There were no significant changes in the Companys internal controls or in other factors that could significantly affect these controls subsequent to the
date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken.



PART IV



Item 15.Exhibits, Financial Statements, Schedules and Reports on Form 8-K.



(a) The consolidated financial statements filed as part of this report are listed in the accompanying Index to Consolidated Financial
Statements. The Financial Statement Schedule filed as part of this report is listed below.



(b) The Company filed the following Current Reports on Form 8-K during the quarter ended December 31, 2002:



(1) A Form 8-K dated September 23, 2002 and filed on October 7, 2002 reporting under Item 2 of Form 8-K the acquisition of
substantially all of the assets of Hunter & Associates Management Services, Inc.



(2) A Form 8-K/A filed on December 9, 2002 amending the Form 8-K dated September 23, 2002 to add thereto the following
financial statements: Statement of Operations for the years ended December 31, 2001, 2000 and 1999, Balance Sheet as of December 31, 2001 and 2000, and Statement of Cash Flows for the years ended December 31, 2001, 2000 and 1999.



27



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(c) The
exhibits filed as part of this report are listed below:



a.Exhibits:



|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                            
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1         |  | Asset Purchase Agreement dated as of September 1, 2002 among the Company, Hunter & Associates Management Services,
Inc. and THG Investors, Inc. (12)                                                                                                                                                                                                                                                   
|3.1         |  | Amended and Restated Certificate of Incorporation of the Company (1)                                                                                                                                                                                                                                                                                                                                   
|3.2         |  | Amendment No. 1 to Amended and Restated Certificate of Incorporation of the Company (2)                                                                                                                                                                                                                                                                                                                
|3.3         |  | Amendment No. 2 to Amended and Restated Certificate of Incorporation of the Company (3)                                                                                                                                                                                                                                                                                                                
|3.4         |  | Amended and Restated By-Laws of the Company (4)                                                                                                                                                                                                                                                                                                                                                        
|4.2         |  | Rights Agreement dated as of December 15, 1999 between the Company and American Stock Transfer & Trust Company, as
Rights Agent, (which includes the form of Certificate of Designations setting forth the terms of the Series A Junior Participating Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights to Purchase
Preferred Stock as Exhibit C) (5)
|10.1+       |  | Long-Term Incentive Plan of the Company (6)                                                                                                                                                                                                                                                                                                                                                            
|10.2+       |  | 2001 Supplemental Equity Incentive Plan of the Company (7)                                                                                                                                                                                                                                                                                                                                             
|10.3+       |  | Employee Stock Purchase Plan of the Company (8)                                                                                                                                                                                                                                                                                                                                                        
|10.4+       |  | Amendment No. 1 Employee Stock Purchase Plan of the Company (9)                                                                                                                                                                                                                                                                                                                                        
|10.5+       |  | Amendment No. 2 Employee Stock Purchase Plan of the Company (9)                                                                                                                                                                                                                                                                                                                                        
|10.6+       |  | Amendment No. 3 Employee Stock Purchase Plan of the Company (10)                                                                                                                                                                                                                                                                                                                                       
|10.7+       |  | Amendment No. 4 Employee Stock Purchase Plan of the Company (10)                                                                                                                                                                                                                                                                                                                                       
|10.8+       |  | Amendment No. 5 Employee Stock Purchase Plan of the Company (6)                                                                                                                                                                                                                                                                                                                                        
|10.9+       |  | Letter Agreement dated February 1, 2000 between the Company and Phillip P. Steptoe (10)                                                                                                                                                                                                                                                                                                                
|10.10+*     |  | Employment Agreement dated January 1, 2003 between the Company and William M. Goodyear (11)                                                                                                                                                                                                                                                                                                            
|10.11+      |  | Employment Agreement and Amendment number 1 dated May 19, 2000 between the Company and Ben W. Perks
(6)                                                                                                                                                                                                                                                                                                
|21.1*       |  | Significant Subsidiaries of the Company                                                                                                                                                                                                                                                                                                                                                                
|23.1*       |  | Consent of KPMG LLP                                                                                                                                                                                                                                                                                                                                                                                    
|99.1*       |  | Certification of the Chief Executive Officer Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States
Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                       
|99.2*       |  | Certification of the Chief Financial Officer Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States
Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                       

---

|(1) |  | Incorporated by reference from the Companys Registration Statement on Form S-1 (Registration No. 333-9019) filed with the SEC on July 26, 1996.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Incorporated by reference from the Companys Registration Statement on Form S-3 (Registration No. 333-40489) filed with the SEC on November 18, 1997.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | Incorporated by reference from the Companys Form 8-A12B filed with the SEC on July 20, 1999.
|--- |  | ---------------------------------------------------------------------------------------------



|(4) |  | Incorporated by reference from the Companys Amendment No. 1 to Registration Statement on Form S-3 (Registration No. 333-40489) filed with the SEC on February
12, 1998.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) |  | Incorporated by reference from the Companys Current Report on Form 8-K dated December 15, 1999.
|--- |  | ------------------------------------------------------------------------------------------------



|(6) |  | Incorporated by reference from the Companys Annual Report on Form 10-K for the year ended December 31, 2000.
|--- |  | -------------------------------------------------------------------------------------------------------------



|(7) |  | Incorporated by reference from the Companys Registration Statement on Form S-8 (Registration No. 333-81680) filed with the SEC on January 30, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



|(8) |  | Incorporated by reference from the Companys Registration Statement on Form S-8 (Registration No. 333-53506) filed with the SEC on January 10, 2001.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



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|(9) |  | Incorporated by reference from the Companys Annual Report on Form 10-K for the year ended December 31, 1998.
|--- |  | -------------------------------------------------------------------------------------------------------------



|(10) |  | Incorporated by reference from the Companys Annual Report on Form 10-K or the year ended December 31, 1999.
|---- |  | ------------------------------------------------------------------------------------------------------------



|(11) |  | Incorporated by reference from the Companys Annual Report on Form 10-K for the year ended December 31, 2001.
|---- |  | -------------------------------------------------------------------------------------------------------------



|(12) |  | Incorporated by reference from the Companys Current Report on Form 8-K dated September 23, 2002.
|---- |  | -------------------------------------------------------------------------------------------------



|* |  | Indicates filed herewith.
|- |  | -------------------------



|+ |  | Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.
|- |  | -------------------------------------------------------------------------------------------------------------------------



d.Financial Statement Schedule:



Independent Accountants Report

Schedule II: Valuation and Qualifying Accounts





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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.



|                     |  |  |  | Navigant Consulting, Inc.
|-------------------- |  |  |  | -------------------------
|                    
|Date: March 13, 2003 |  |  |  |                          
|                    
|                     |  |  |  |                          
|                     |  |  |  |                          



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



|Signature                                     |  | Title                                                                                             |  | Date          
|--------------------------------------------- |  | ------------------------------------------------------------------------------------------------- |  | --------------
|                                             
|/s/    WILLIAM M.
GOODYEARWilliam M. Goodyear |  | Chairman and Chief Executive Officer and Director (Principal Executive
Officer)                   |  | March 13, 2003
|                                             
|/s/    BEN W.
PERKSBen W.
Perks               |  | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting
Officer) |  | March 13, 2003
|                                             
|/s/    THOMAS A.
GILDEHAUSThomas A.
Gildehaus |  | Director                                                                                          |  | March 13, 2003
|                                             
|/s/    VALERIE B.
JARRETTValerie B.
Jarrett   |  | Director                                                                                          |  | March 13, 2003
|                                             
|/s/    PETER B.
PONDPeter B.
Pond             |  | Director                                                                                          |  | March 13, 2003
|                                             
|/s/    SAMUEL K.
SKINNERSamuel K.
Skinner     |  | Director                                                                                          |  | March 13, 2003
|                                             
|/s/    JAMES R.
THOMPSONJames R. Thompson     |  | Director                                                                                          |  | March 13, 2003





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CERTIFICATIONS



I, William
M. Goodyear, Chairman and Chief Executive Officer of Navigant Consulting, Inc. (the Company), certify that:



|1. |  | I have reviewed this annual report on Form 10-K of the Company;
|-- |  | ---------------------------------------------------------------



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



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



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



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



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



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



|5. |  | The Companys other certifying officer and I have disclosed, based on our most recent evaluation, to the Companys independent accountants and the Audit
Committee of the Companys Board of Directors:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



|6. |  | The Companys other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Date:  March 13, 2003                                   
|--------------------------------------------------------
|                                                        
|/s/    WILLIAM M.
GOODYEAR                              
|William M. Goodyear Chairman and Chief Executive Officer







31



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##### Table of Contents



I, Ben W.
Perks, Executive Vice President and Chief Financial Officer of Navigant Consulting, Inc. (the Company), certify that:



|1. |  | I have reviewed this annual report on Form 10-K of the Company;
|-- |  | ---------------------------------------------------------------



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



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



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



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



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



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



|5. |  | The Companys other certifying officer and I have disclosed, based on our most recent evaluation, to the Companys independent accountants and the Audit
Committee of the Companys Board of Directors:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



|6. |  | The Companys other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Date:   March 13, 2003                                           
|-----------------------------------------------------------------
|                                                                 
|/s/    BEN W.
PERKS                                              
|Ben W. Perks Executive Vice President and Chief Financial Officer







32



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##### Table of Contents



INDEX TO THE
CONSOLIDATED FINANCIAL STATEMENTS



NAVIGANT CONSULTING, INC. AND SUBSIDIARIES



Audited Consolidated Financial Statements as of December 31, 2002 and 2001, and for each of the three years ended December 31, 2002. (page numbers to be updated)



|                                                                       |  | Page
|---------------------------------------------------------------------- |  | ----
|Report of Independent Accountants                                      |  | F-2 
|Consolidated Balance Sheets                                            |  | F-3 
|Consolidated Statements of Operations                                  |  | F-4 
|Consolidated Statements of Stockholders Equity                        |  | F-5 
|Consolidated Statements of Cash Flows                                  |  | F-6 
|Notes to Consolidated Financial Statements                             |  | F-7 
|1.    Description of Business                                          |  | F-7 
|2.    Summary of Significant Accounting Policies                       |  | F-7 
|3.    Acquisitions                                                     |  | F-9 
|4.    Segment Information                                              |  | F-11
|5.    Goodwill and Intangible Assets                                   |  | F-13
|6.    Recent Accounting Pronouncements                                 |  | F-15
|7.    Earnings per Share                                               |  | F-15
|8.    Stockholders Equity                                             |  | F-16
|9.    Stock-based Compensation Expense                                 |  | F-19
|10.    Long-Term Incentive Plan and Supplemental Equity Incentive Plan |  | F-20
|11.    Supplemental Consolidated Balance Sheet Information             |  | F-24
|12.    Supplemental Consolidated Cash Flow Information                 |  | F-26
|13.    Lease Commitments                                               |  | F-27
|14.    Bank Borrowings                                                 |  | F-27
|15.    Income Tax Expense (Benefit)                                    |  | F-28
|16.    Restructuring Costs (Credits)                                   |  | F-29
|17.    Discontinued Operations                                         |  | F-30
|18.    Employee Benefits and Supplemental Equity Incentive Plan        |  | F-32
|19.    Related Party Transactions                                      |  | F-32
|20.    Litigation and Settlement Provisions                            |  | F-32



F-1



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##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS



The
Board of Directors and Stockholders

Navigant Consulting, Inc.



We have audited the accompanying consolidated balance sheets of Navigant Consulting, Inc. and subsidiaries as
of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders equity and cash flows for each of the years in the three year period ended December 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 consolidated financial position of Navigant Consulting, Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and
their cash flows for each of the years in the three year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.



As discussed in note 2 of the notes to the consolidated financial statements, in the year ended December 31,
2002, the Company changed its method of accounting for goodwill.



/s/    KPMG LLP



Chicago,
Illinois

February 7, 2003





F-2



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##### Table of Contents

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)



|                                                                                                     |  | December 31, 2002 |          |   | December 31, 2001 |  
|---------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ----------------- | -
|ASSETS                                                                                               |  |                   |          |   |                   |  
|Current assets:                                                                                      |  |                   |          |   |                   |  
|Cash and cash equivalents                                                                            |  | $                 | 8,109    |   |                   | $
|Accounts receivable, net                                                                             |  |                   | 61,693   |   |                   |  
|Prepaid expenses and other current assets                                                            |  |                   | 3,998    |   |                   |  
|Deferred income taxes                                                                                |  |                   | 4,601    |   |                   |  
|                                                                                                     |  |                   |          |   |                   |  
|Total current assets                                                                                 |  |                   | 78,401   |   |                   |  
|Property and equipment, net                                                                          |  |                   | 18,124   |   |                   |  
|Goodwill and intangible assets, net                                                                  |  |                   | 97,372   |   |                   |  
|Deferred income taxes                                                                                |  |                   | 3,645    |   |                   |  
|Other assets                                                                                         |  |                   | 3,662    |   |                   |  
|                                                                                                     |  |                   |          |   |                   |  
|Total assets                                                                                         |  | $                 | 201,204  |   |                   | $
|                                                                                                     |  |                   |          |   |                   |  
|LIABILITIES AND STOCKHOLDERS
EQUITY                                                                 |  |                   |          |   |                   |  
|Current liabilities:                                                                                 |  |                   |          |   |                   |  
|Bank borrowings                                                                                      |  | $                 | 6,500    |   |                   | $
|Accounts payable and accrued liabilities                                                             |  |                   | 10,621   |   |                   |  
|Accrued compensation                                                                                 |  |                   | 11,995   |   |                   |  
|Income tax payable                                                                                   |  |                   | 6,705    |   |                   |  
|Other current liabilities                                                                            |  |                   | 16,670   |   |                   |  
|                                                                                                     |  |                   |          |   |                   |  
|Total current liabilities                                                                            |  |                   | 52,491   |   |                   |  
|Other non-current liabilities                                                                        |  |                   | 4,418    |   |                   |  
|                                                                                                     |  |                   |          |   |                   |  
|Total liabilities                                                                                    |  |                   | 56,909   |   |                   |  
|Stockholders' equity:                                                                                |  |                   |          |   |                   |  
|Preferred stock, $.001 par value per share; 3,000 shares authorized; no shares issued or
outstanding |  |                   |         |   |                   |  
|Common stock, $.001 par value per share; 75,000 shares authorized; 42,084
and                        |  |                   |          |   |                   |  
|38,700 shares issued and outstanding at December 31, 2002 and 2001,
respectively                     |  |                   | 47       |   |                   |  
|Additional paid-in capital                                                                           |  |                   | 372,012  |   |                   |  
|Deferred stock issuance                                                                              |  |                   | 3,209    |   |                   |  
|Restricted stock units outstanding                                                                   |  |                   | 4,439    |   |                   |  
|Deferred compensationrestricted stock                                                               |  |                   | (9,152   | ) |                   |  
|Treasury stock                                                                                       |  |                   | (65,803  | ) |                   |  
|Accumulated deficit                                                                                  |  |                   | (160,353 | ) |                   |  
|Accumulated other comprehensive loss                                                                 |  |                   | (104     | ) |                   |  
|                                                                                                     |  |                   |          |   |                   |  
|Total stockholders' equity                                                                           |  |                   | 144,295  |   |                   |  
|                                                                                                     |  |                   |          |   |                   |  
|Total liabilities and stockholders' equity                                                           |  | $                 | 201,204  |   |                   | $
|                                                                                                     |  |                   |          |   |                   |  



See
accompanying notes to the consolidated financial statements.



F-3



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##### Table of Contents

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)



|                                                                     |  | For the years ended December 31, |        
|-------------------------------------------------------------------- |  | -------------------------------- | -------
|                                                                     |  | 2002                             |        
|Revenues:                                                            |  |                                  |        
|Core revenues                                                        |  | $                                | 258,020
|Incremental revenues                                                 |  |                                  |       
|                                                                     |  |                                  |        
|Total revenues                                                       |  |                                  | 258,020
|Operating expenses (credits):                                        |  |                                  |        
|Consulting services expense                                          |  |                                  | 168,836
|General and administrative expenses                                  |  |                                  | 60,721 
|Depreciation expense                                                 |  |                                  | 7,651  
|Amortization expense                                                 |  |                                  | 2,373  
|Stock-based compensation expense                                     |  |                                  | 3,401  
|Restructuring costs (credits)                                        |  |                                  | (500   
|Litigation and settlement provisions                                 |  |                                  | 750    
|VSRP cash compensation expense                                       |  |                                  |       
|                                                                     |  |                                  |        
|Operating income (loss) from continuing operations                   |  |                                  | 14,788 
|Other income (loss), net                                             |  |                                  | (19    
|                                                                     |  |                                  |        
|Income (loss) from continuing operations before income taxes         |  |                                  | 14,769 
|Income tax expense (benefit)                                         |  |                                  | 5,908  
|                                                                     |  |                                  |        
|Net income (loss) from continuing operations                         |  |                                  | 8,861  
|                                                                     |  |                                  |        
|Loss from discontinued operations, net of income taxes               |  |                                  |       
|Loss on dispositions of discontinued operations, net of income taxes |  |                                  |       
|                                                                     |  |                                  |        
|Net income (loss)                                                    |  | $                                | 8,861  
|                                                                     |  |                                  |        
|Basic income (loss) per share:                                       |  |                                  |        
|Net income (loss) from continuing operations                         |  | $                                | 0.22   
|Loss from discontinued operations, net of income taxes               |  | $                                |       
|Loss on dispositions of discontinued operations, net of income taxes |  | $                                |       
|Net income (loss) per basic share                                    |  | $                                | 0.22   
|Shares used in computing net income (loss) per basic share           |  |                                  | 40,350 
|Diluted income (loss) per share:                                     |  |                                  |        
|Net income (loss) from continuing operations                         |  | $                                | 0.21   
|Loss from discontinued operations, net of income taxes               |  | $                                |       
|Loss on dispositions of discontinued operations, net of income taxes |  | $                                |       
|Net income (loss) per basic share                                    |  | $                                | 0.21   
|Shares used in computing net income (loss) per diluted share         |  |                                  | 42,670 



See
accompanying notes to the consolidated financial statements.



F-4



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##### Table of Contents



NAVIGANT
CONSULTING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands)



|                                                            |  | Preferred Stock Shares |  | Common Stock Shares |  | Treasury Stock Shares |   |  | Preferred Stock Par Value |  | Common Stock Par Value |    | Additional Paid-In Capital |   | Deferred Stock Issuance |  | Restricted Stock Units Outstanding |       | Deferred Compen-sationRestrictedStock |   |       | Treasury Stock Cost |   |        | Notes Receivable from Former Officers |  |   | Accumu-lated Other Compre-hensive Income |   |  | Retained Earnings (Accumu-lated Deficit) |        |   | Total Stock-holders' Equity |  
|----------------------------------------------------------- |  | ---------------------- |  | ------------------- |  | --------------------- | - |  | ------------------------- |  | ---------------------- | -- | -------------------------- | - | ----------------------- |  | ---------------------------------- | ----- | ------------------------------------- | - | ----- | ------------------- | - | ------ | ------------------------------------- |  | - | ---------------------------------------- | - |  | ---------------------------------------- | ------ | - | --------------------------- | -
|Balance at December 31, 1999                                |  |                       |  | 43,128              |  | (2,086                | ) |  |                          |  | $                      | 43 |                            | $ | 340,528                 |  | $                                  |      |                                       | $ |      |                     | $ |       |                                       |  | $ | (52,811                                  | ) |  | $                                        | (2,583 | ) |                             | $
|Comprehensive income (loss)                                 |  |                        |  |                     |  |                       |   |  |                           |  |                        |    |                            |   |                         |  |                                    |       |                                       |   |       |                     |   |        |                                       |  |   |                                          |   |  |                                          |        |   |                             |  
|Issuance of common stock                                    |  |                       |  | 305                 |  |                       |   |  |                          |  |                        |   |                            |   | 2,320                   |  |                                    |      |                                       |   |      |                     |   |       |                                       |  |   |                                         |   |  |                                          |       |   |                             |  
|Purchase of treasury stock                                  |  |                       |  |                    |  | (1,310                | ) |  |                          |  |                        |   |                            |   |                        |  |                                    |      |                                       |   |      |                     |   |       |                                       |  |   | (4,555                                   | ) |  |                                          | 920    |   |                             |  
|Nontaxable stock exchangedisposition of business           |  |                       |  |                    |  | (1,593                | ) |  |                          |  |                        |   |                            |   |                        |  |                                    |      |                                       |   |      |                     |   |       |                                       |  |   | (6,175                                   | ) |  |                                          |       |   |                             |  
|Stock-based compensation expensestock options              |  |                       |  |                    |  |                      |   |  |                          |  |                        |   |                            |   | 492                     |  |                                    |      |                                       |   |      |                     |   |       |                                       |  |   |                                         |   |  |                                          |       |   |                             |  
|Impairment of notes receivable from former officers         |  |                       |  |                    |  |                      |   |  |                          |  |                        |   |                            |   |                        |  |                                    |      |                                       |   |      |                     |   |       |                                       |  |   |                                         |   |  |                                          | 1,663  |   |                             |  
|                                                            |  |                        |  |                     |  |                       |   |  |                           |  |                        |    |                            |   |                         |  |                                    |       |                                       |   |       |                     |   |        |                                       |  |   |                                          |   |  |                                          |        |   |                             |  
|Balance at December 31, 2000                                |  |                       |  | 43,433              |  | (4,989                | ) |  |                          |  |                        | 43 |                            |   | 343,340                 |  |                                    |      |                                       |   |      |                     |   |       |                                       |  |   | (63,541                                  | ) |  |                                          |       |   |                             |  
|Comprehensive income (loss)                                 |  |                       |  |                    |  |                      |   |  |                          |  |                        |   |                            |   |                        |  |                                    |      |                                       |   |      |                     |   |       |                                       |  |   |                                         |   |  |                                          |       |   |                             |  
|Issuance of common stock                                    |  |                       |  | 401                 |  |                      |   |  |                          |  |                        | 1  |                            |   | 1,677                   |  |                                    |      |                                       |   |      |                     |   |       |                                       |  |   |                                         |   |  |                                          |       |   |                             |  
|Issuance of restricted stock, net of forfeitures            |  |                       |  | 624                 |  |                      |   |  |                          |  |                        |   |                            |   | 7,277                   |  |                                    |      |                                       |   |      |                     |   | (7,277 | )                                     |  |   |                                         |   |  |                                          |       |   |                             |  
|Purchase of treasury stock                                  |  |                       |  |                    |  | (769                  | ) |  |                          |  |                        |   |                            |   |                        |  |                                    |      |                                       |   |      |                     |   |       |                                       |  |   | (3,853                                   | ) |  |                                          |       |   |                             |  
|Stock-based compensation expensestock options              |  |                       |  |                    |  |                      |   |  |                          |  |                        |   |                            |   | 940                     |  |                                    |      |                                       |   |      |                     |   |       |                                       |  |   |                                         |   |  |                                          |       |   |                             |  
|Stock-based compensation expenserestricted stock and units |  |                       |  |                    |  |                      |   |  |                          |  |                        |   |                            |   |                        |  |                                    |      |                                       |   |      |                     |   | 2,773  |                                       |  |   |                                         |   |  |                                          |       |   |                             |  
|                                                            |  |                        |  |                     |  |                       |   |  |                           |  |                        |    |                            |   |                         |  |                                    |       |                                       |   |       |                     |   |        |                                       |  |   |                                          |   |  |                                          |        |   |                             |  
|Balance at December 31, 2001                                |  |                       |  | 44,458              |  | (5,758                | ) |  |                          |  |                        | 44 |                            |   | 353,234                 |  |                                    |      |                                       |   |      |                     |   | (4,504 | )                                     |  |   | (67,394                                  | ) |  |                                          |       |   |                             |  
|Comprehensive income (loss)                                 |  |                        |  |                    |  |                      |   |  |                          |  |                        |   |                            |   |                        |  |                                    |      |                                       |   |      |                     |   |       |                                       |  |   |                                         |   |  |                                          |       |   |                             |  
|Issuance of common stock related to business combinations   |  |                       |  | 1,556               |  | 1,404                 |   |  |                          |  |                        | 2  |                            |   | 11,467                  |  |                                    | 3,077 |                                       |   |      |                     |   |       |                                       |  |   | 6,630                                    |   |  |                                          |       |   |                             |  
|Other issuances of common stock                             |  |                       |  | 827                 |  | 39                    |   |  |                          |  |                        | 1  |                            |   | 4,064                   |  |                                    |      |                                       |   |      |                     |   |       |                                       |  |   | 140                                      |   |  |                                          |       |   |                             |  
|Issuance of restricted stock, net of forfeitures            |  |                       |  | 479                 |  |                      |   |  |                          |  |                        |   |                            |   | 2,745                   |  |                                    |      |                                       |   |      |                     |   | (4,077 | )                                     |  |   |                                         |   |  |                                          |       |   |                             |  
|Grant of restricted stock units                             |  |                       |  |                     |  |                      |   |  |                          |  |                        |   |                            |   |                         |  |                                    |      |                                       |   | 4,439 |                     |   | (4,439 | )                                     |  |   |                                         |   |  |                                          |       |   |                             |  
|Purchase of treasury stock                                  |  |                       |  |                     |  | (922                  | ) |  |                          |  |                        |   |                            |   |                         |  |                                    |      |                                       |   |      |                     |   |       |                                       |  |   | (5,179                                   | ) |  |                                          |       |   |                             |  
|Stock-based compensation expensestock options              |  |                       |  |                     |  |                       |   |  |                          |  |                        |   |                            |   | 502                     |  |                                    |      |                                       |   |      |                     |   |       |                                       |  |   |                                         |   |  |                                          |       |   |                             |  
|Stock-based compensation expenserestricted stock and units |  |                       |  |                     |  |                       |   |  |                          |  |                        |   |                            |   |                         |  |                                    | 132   |                                       |   |       |                     |   | 3,868  |                                       |  |   |                                         |   |  |                                          |       |   |                             |  
|                                                            |  |                        |  |                     |  |                       |   |  |                           |  |                        |    |                            |   |                         |  |                                    |       |                                       |   |       |                     |   |        |                                       |  |   |                                          |   |  |                                          |        |   |                             |  
|Balance at December 31, 2002                                |  |                       |  | 47,320              |  | (5,237                | ) |  |                          |  | $                      | 47 |                            | $ | 372,012                 |  | $                                  | 3,209 |                                       | $ | 4,439 |                     | $ | (9,152 | )                                     |  | $ | (65,803                                  | ) |  | $                                        |       |   |                             | $
|                                                            |  |                        |  |                     |  |                       |   |  |                           |  |                        |    |                            |   |                         |  |                                    |       |                                       |   |       |                     |   |        |                                       |  |   |                                          |   |  |                                          |        |   |                             |  



See
accompanying notes to the consolidated financial statements.



F-5



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##### Table of Contents

NAVIGANT CONSULTING, INC AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                                                                          |  | Years ended December 31, |        
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | -------
|                                                                                                                                          |  | 2002                     |        
|Cash flows from operating activities:                                                                                                     |  |                          |        
|Net income (loss)                                                                                                                         |  | $                        | 8,861  
|Adjustments to reconcile net income (loss) to net cash provided by (used in) continuing
activities, net of acquisitions and dispositions: |  |                          |        
|Loss from discontinued operations, net of income taxes                                                                                    |  |                          |       
|Loss on dispositions of discontinued operations, net of income taxes                                                                      |  |                          |       
|Depreciation expense                                                                                                                      |  |                          | 7,651  
|Amortization expense                                                                                                                      |  |                          | 2,373  
|Stock-based compensation expense                                                                                                          |  |                          | 3,250  
|Payments to Consultants on non-solicitation agreements                                                                                   |  |                          | (1,363 
|Amortization of consultants non-solicitation agreements                                                                                  |  |                          | 279    
|Impairment of former officers notes, net                                                                                                 |  |                          |       
|Provision for bad debts                                                                                                                   |  |                          | 4,643  
|Deferred income taxes                                                                                                                     |  |                          | (191   
|Other, net                                                                                                                                |  |                          | 212    
|Changes in assets and liabilities:                                                                                                        |  |                          |        
|Accounts receivable                                                                                                                       |  |                          | (10,484
|Prepaid expenses and other current assets                                                                                                 |  |                          | 2,266  
|Accounts payable and accrued liabilities                                                                                                  |  |                          | (2,854 
|Accrued compensation-related costs                                                                                                        |  |                          | (2,982 
|Income taxes payable                                                                                                                      |  |                          | (1,485 
|Other current liabilities                                                                                                                 |  |                          | (1,716 
|                                                                                                                                          |  |                          |        
|Net cash provided by (used in) operating activities of:                                                                                   |  |                          |        
|Continuing operations                                                                                                                     |  |                          | 8,460  
|Discontinued operations                                                                                                                   |  |                          |       
|                                                                                                                                          |  |                          |        
|Net cash provided by (used in) operating activities                                                                                       |  |                          | 8,460  
|                                                                                                                                          |  |                          |        
|Cash flows from investing activities:                                                                                                     |  |                          |        
|Purchases of property and equipment                                                                                                       |  |                          | (5,242 
|Acquisitions of businesses, net of cash acquired                                                                                          |  |                          | (32,740
|Payment of contingent acquisition liabilities                                                                                             |  |                          | (2,146 
|Payment of notes payable related to acquisition                                                                                           |  |                          | (1,500 
|Payment of acquisition liabilities                                                                                                        |  |                          |       
|Divestitures of businesses, net of cash                                                                                                   |  |                          |       
|Other, net                                                                                                                                |  |                          | (201   
|                                                                                                                                          |  |                          |        
|Net cash provided by (used in) investing activities of:                                                                                   |  |                          |        
|Continuing operations                                                                                                                     |  |                          | (41,829
|Discontinued operations                                                                                                                   |  |                          |       
|                                                                                                                                          |  |                          |        
|Net cash provided by (used in) investing activities                                                                                       |  |                          | (41,829
|                                                                                                                                          |  |                          |        
|Cash flows from financing activities:                                                                                                     |  |                          |        
|Issuance of common stock                                                                                                                  |  |                          | 4,207  
|Stock repurchases                                                                                                                         |  |                          | (5,179 
|Borrowings from (repayments to) bank                                                                                                      |  |                          | 6,500  
|Other, net                                                                                                                                |  |                          |       
|                                                                                                                                          |  |                          |        
|Net cash provided by (used in) financing activities                                                                                       |  |                          | 5,528  
|                                                                                                                                          |  |                          |        
|Net increase (decrease) in cash and cash equivalents                                                                                      |  |                          | (27,841
|Cash and cash equivalents at beginning of the year                                                                                        |  |                          | 35,950 
|                                                                                                                                          |  |                          |        
|Cash and cash equivalents at end of the year                                                                                              |  | $                        | 8,109  
|                                                                                                                                          |  |                          |        



See
accompanying notes to the consolidated financial statements.



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##### Table of Contents



NAVIGANT
CONSULTING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.    DESCRIPTION OF BUSINESS



Navigant Consulting, Inc. (the Company) is a specialized, independent consulting firm providing litigation, financial, restructuring, strategic and operational consulting services to government agencies, legal
counsel and large companies facing the challenges of uncertainty, risk and distress. The Company focuses on industries undergoing substantial regulatory or structural change.



The Company is headquartered in Chicago, Illinois and has offices in various cities primarily within the
United States, Canada and the United Kingdom.



2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Principles of Consolidation



The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation.



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 amounts reported in the consolidated financial statements and the related notes. Actual results could
differ from those estimates and may impact future results of operations and cash flows.



Reclassifications



Certain amounts in prior years consolidated financial statements have been reclassified to conform to the current years presentation.



Cash and Cash Equivalents



Cash equivalents are comprised of highly liquid instruments with original maturity dates of 90 days or less.



Fair Value of Financial Instruments



The Company considers the recorded value of
its financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, bank borrowings, and accounts payable, to approximate the fair value of the respective assets and liabilities at December 31, 2002 and
2001.



Property and Equipment



Property and equipment are recorded at
cost. Depreciation is computed using the straight-line method based on the estimated useful lives of three to seven years for furniture, fixtures and equipment, three years for software, and forty years for buildings. Amortization of leasehold
improvements is computed over the shorter of the remaining lease term or the estimated useful life of the asset.



Goodwill and Intangible Assets



Intangible assets consist of identifiable intangibles and goodwill. Identifiable intangible assets other than goodwill include customer
lists, non-compete agreements and trade names. Intangible assets are being amortized on the straight-line method based on the estimated useful lives, ranging from three months to seven years.



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NAVIGANT CONSULTING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)



Prior to the adoption of SFAS 142 in 2002, goodwill was amortized on the straight-line
method over seven years for businesses acquired prior to July 1, 2001. The Company did not record goodwill amortization in 2002. In 2001, goodwill was not amortized for an acquisition subsequent to June 30, 2001, in accordance with SFAS 142.



Revenue Recognition



The Company recognizes revenues as the related professional
services are provided, generally on a time and expense basis. Certain contracts are accounted for on the percentage of completion method, whereby revenues are recognized based upon costs incurred in relation to total estimated costs at completion. A
provision is made for the entire amount of estimated losses, if any, at the time when they are known.



Stock-Based Compensation



The Company accounts for stock-based compensation using the intrinsic value-based method as prescribed under Accounting Principles Board
Opinion No. 25 Accounting for Stock Issued to Employees and related interpretations.



The Company applies APB Opinion 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized
for those option grants where the exercise price is equal to the fair market value at the date of grant. The Company would have incurred compensation expense had compensation cost for the plan been determined based on the fair value at the grant
dates for awards under the plan consistent with the method of SFAS No. 123, Accounting for Stock-Based Compensation. Under this methodology, the Company would have recorded additional compensation expense, net of related income taxes, of
$0.5 million, $1.0 million, and $12.1 million for the years ended December 31, 2002, 2001, and 2000, respectively. The following shows a reconciliation of the pro forma net operating results of continuing operations had the Company accounting for
its stock option using SFAS 123.



|                                                                                  |  | 2002 |       |   | 2001 |   |        | 2000 | 
|--------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ------ | ---- | 
|Net income (loss) from continuing operations                                      |  | $    | 8,861 |   |      | $ | (5,311 | )    | 
|Adjustment for compensation expense of stock options accounted for under SFAS
123 |  |      | (460  | ) |      |   | (1,034 | )    | 
|                                                                                  |  |      |       |   |      |   |        |      | 
|Adjusted net income (loss) from continuing operations                             |  | $    | 8,401 |   |      | $ | (6,345 | )    | 
|                                                                                  |  |      |       |   |      |   |        |      | 
|Basic earnings per share:                                                         |  |      |       |   |      |   |        |      | 
|Net income (loss) from continuing operations                                      |  | $    | 0.22  |   |      | $ | (0.14  | )    | 
|Adjustment for compensation expense of stock options accounted for under SFAS
123 |  |      | (0.01 | ) |      |   | (0.03  | )    | 
|                                                                                  |  |      |       |   |      |   |        |      | 
|Adjusted basic net income (loss) from continuing operations per share             |  | $    | 0.21  |   |      | $ | (0.17  | )    | 
|                                                                                  |  |      |       |   |      |   |        |      | 
|Diluted earnings per share:                                                       |  |      |       |   |      |   |        |      | 
|Net income (loss) from continuing operations                                      |  | $    | 0.21  |   |      | $ | (0.14  | )    | 
|Adjustment for compensation expense of stock options accounted for under SFAS
123 |  |      | (0.01 | ) |      |   | (0.03  | )    | 
|                                                                                  |  |      |       |   |      |   |        |      | 
|Adjusted basic net income (loss) from continuing operations per share             |  | $    | 0.20  |   |      | $ | (0.17  | )    | 
|                                                                                  |  |      |       |   |      |   |        |      | 



The
weighted average fair value of options granted in 2002, 2001 and 2000 was $2.95, $2.91, and $2.77, respectively. For purposes of calculating compensation cost under SFAS No. 123, the fair value of each option



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##### Table of Contents

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)



grant is estimated as of the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used
in the model for grants made in 2002, 2001 and 2000:



|                                      |  | 2002 |  | 2001 |  | 2000
|------------------------------------- |  | ---- |  | ---- |  | ----
|Expected volatility                   |  | 62%  |  | 80%  |  | 92% 
|Risk free interest rate               |  | 4.5% |  | 5.0% |  | 5.2%
|Dividend yield                        |  | 0%   |  | 0%   |  | 0%  
|Contractual or expected lives (years) |  | 7.2  |  | 9.6  |  | 6.8 



Income Taxes



Income
taxes are accounted for in accordance with the asset and 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 recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.



Foreign Currency Translation



The balance sheets of the Companys foreign subsidiaries are translated into U.S. dollars using the period-end exchange rate, and
revenue and expenses are translated using the average exchange rate for each period. The resulting translation gains or losses are recorded in stockholders equity as a component of other comprehensive income.



Comprehensive Income (Loss)



Comprehensive income consists of net income (loss),
unrealized gains on marketable securities, net of income taxes, and foreign currency translation adjustments. It is presented in the consolidated statements of stockholders equity.



The Companys comprehensive income for the year ended December 31, 2002 includes $0.1 million of foreign
currency translation losses.



3.    ACQUISITIONS



2002 Acquisitions:



Effective as of April 5, 2002, the Company acquired portions of Arthur D. Little, Inc.s assets for $6.1 million cash at closing. The acquisition consisted of two consulting units, with approximately 30 consulting and
administrative professionals that serve the energy industry.



On May 24, 2002, the Company acquired the assets of Financial Analytics Consulting Group, LLC (FACG) for $6.3 million, which included $4.5 million cash at closing and 0.3 million shares of its common stock valued at $1.8
million at closing. In addition to the initial consideration value, the purchase agreements for FACG provide for additional payments in cash over the next two calendar years that are contingent on revenues generated and the attainment of certain
gross margin targets. Any additional payments related to this contingency will be accounted for as goodwill. FACG was formed in conjunction with a management buyout from Arthur Andersen, LLP and consisted of 90 consulting and administrative
professionals from five different Arthur



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NAVIGANT CONSULTING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)



Andersen practices. FACG has been acquired primarily to augment the Companys litigation support and investigation services offerings.



On June 19, 2002, the Company acquired the
assets of Keevan Consulting, LLC (Keevan) for $7.2 million, which included $4.0 million cash at closing, 0.4 million shares of its common stock valued at $2.7 million at closing, and $0.5 million cash payable in April 2003. In
addition to the initial consideration value, the purchase agreement for Keevan provides for additional payments in cash and the Companys common stock over the next two and one half years from closing that are contingent on revenues generated
and the attainment of certain gross margin targets. Any additional payments related to this contingency will be accounted for as goodwill. Keevan was formed in conjunction with a management buyout from Arthur Andersen, LLP and consisted of 38
consulting and administrative professionals. Keevan was acquired to enhance the government contracts service offering.



On July 15, 2002, the Company acquired the assets of Barrington Energy Partners, LLC (Barrington Energy) for $11.1 million,
which included $4.8 million cash at closing, 0.7 million shares of its common stock valued at $4.8 million at closing, and $1.5 million cash payable on the first anniversary of the closing date. In addition to the initial consideration value, the
purchase agreement for Barrington Energy provides for additional payments in cash and the Companys common stock over the next two and one half years from closing that are contingent on the attainment of certain performance targets. Any
additional payments related to this contingency will be accounted for as goodwill. Barrington Energy consisted of eight senior-level professionals and six other staff who complement the Companys energy industry sector and primarily provide
financial and transaction advising service offerings. Barrington Energy Partners, LLC is not associated with the Companys 1999 acquisition of the Barrington Consulting Group, Inc.



Effective September 17, 2002, the Company acquired the assets of Hunter & Associates Management Services,
Inc. (Hunter) for $25.4 million, which included $10.2 million cash at closing, 1.5 million shares of its common stock valued at $8.2 million at closing, $0.5 million cash payable on April 1, 2003, and $6.5 million in its common
stock payable in two equal installments on the first and second anniversary of the closing. If either seller or buyer elects, up to 67 percent of the $6.5 million deferred payment commitment is payable in cash and the remainder is payable in the
Companys common stock. Accordingly, the Company accounted for this $6.5 million deferred payment obligation as 67 percent liabilities and 33 percent deferred stock issuance. In addition to the initial consideration value, the purchase
agreement for Hunter provides for additional payments in cash and the Companys common stock over the three years following closing that are contingent on the attainment of certain performance targets. Any additional payments related to this
contingency will be accounted for as goodwill. Hunter consisted of 20 senior-level professionals and 40 additional staff that provide a comprehensive range of performance improvement services to hospitals and health care systems, including physician
practices, faculty practice plans, and provider owner-managed care organizations. Hunter also provides interim executive-level management services as well as consulting services related to hospital restructuring. Hunter was acquired to significantly
expand the Companys service offerings within the healthcare industry and is reflected in the Financial & Claims Consulting segment.



All of the 2002 acquisitions have been accounted for by the purchase method of accounting for business combinations and, accordingly, the
results of operations have been included in the consolidated financial statements since the dates of acquisition.



Pro Forma Information



The following unaudited pro forma financial information presents the combined financial information as if the acquisition of Hunter had
been effective as of January 1, 2001. The pro forma financial information (shown



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NAVIGANT CONSULTING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)



in thousands) includes adjustments to record amortization of goodwill in 2001 (but not in 2002 due to the cessation of goodwill amortization
in accordance with SFAS 142), to record the amortization of other intangibles and to record income tax effects as if Hunter had been included in the Companys income tax returns:



|                                               |  | Years ended December 31, |        
|---------------------------------------------- |  | ------------------------ | -------
|                                               |  | 2002                     |        
|Revenues:                                      |  |                          |        
|Core revenues:                                 |  |                          |        
|Financial & Claims Consulting                  |  | $                        | 203,171
|Energy & Water Consulting                      |  |                          | 74,373 
|                                               |  |                          |        
|Total core revenues                            |  |                          | 277,544
|Incremental revenuesEnergy & Water Consulting |  |                          |       
|                                               |  |                          |        
|Total combined segment revenues                |  | $                        | 277,544
|                                               |  |                          |        
|Net Income (loss)                              |  | $                        | 11,446 
|                                               |  |                          |        
|Basic income (loss) per share                  |  | $                        | 0.28   
|Diluted income (loss) per share                |  | $                        | 0.27   



2001
Acquisitions:



On March 1, 2001, the Company
acquired the assets of Barba-Arkhon International, Inc. (Barba-Arkhon) for $8.3 million, which consisted of $5.3 million cash at closing and $3.0 million notes payable, which bear interest at 6 percent due in two equal annual
installments. Barba-Arkhon provides project program management and claims analysis services for construction, governmental and institutional projects. Engagements include delay and disruption claims analysis for dispute resolution, damage valuation,
litigation support and technical analysis for projects involving transportation infrastructure, environmental and industrial facilities, power plants and commercial buildings.



On July 2, 2001, the Company acquired the common stock of Chambers Associates, Inc. (Chambers)
for $2.7 million, which consisted of $2.1 million cash at closing and $0.6 million cash due within 18 months of closing. The purchase agreement for Chambers also provides for additional payments through December 31, 2003 contingent on
attainment of certain revenue targets. Chambers provides public policy analysis, strategic planning and litigation support services to a wide range of clients. Engagements include economic and financial research to analyze the impact of current or
proposed legislation or regulation; advocacy support for certain health, tax, energy and environmental legislative issues; and analysis and estimation of claim values and expert testimony in product liability, medical malpractice, bankruptcy and
other litigation cases. Chambers was acquired to augment the services with its asbestos claims and mass tort litigation expertise. In addition, Chambers energy and environmental legislative expertise are expected to provide cross-selling
opportunities to clients in the energy industry.



Both of the 2001 acquisitions have been accounted for by the purchase method of accounting for business combinations and, accordingly, the results of operations have been included in the consolidated financial statements since the
dates of acquisition.



2000 Acquisitions:



There were no acquisitions of businesses
during 2000.



4.    SEGMENT INFORMATION



The Company is comprised of two business
segments: Financial & Claims Consulting and Energy & Water Consulting.



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NAVIGANT CONSULTING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)





The
Financial & Claims Consulting business segment provides consulting and advisory services to clients facing the challenges of dispute, litigation, bankruptcy, regulation and change. Its services include analyzing complex accounting, finance,
economic, operations and information management issues.



The Energy & Water business segment provides a wide range of management consulting services to companies facing the challenges of the deregulating energy and water industries. Its services include strategy development, financial
transaction support, operations support, regulatory advisement and technical analysis.



The Company evaluates segment performance and allocates resources based upon revenues and operating results. The basis of measurement of segment operating results is consistent among the periods.
Transactions between segments have been eliminated. Information on the segment operations for the years ended December 31, 2002, 2001 and 2000 have been summarized as follows (shown in thousands):



|                                                                                    |  | 2002 |         |   | 2001 |   |         | 2000 | 
|----------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- | 
|Revenues:                                                                           |  |      |         |   |      |   |         |      | 
|Core revenues:                                                                      |  |      |         |   |      |   |         |      | 
|Financial & Claims Consulting                                                       |  | $    | 183,647 |   |      | $ | 148,563 |      | 
|Energy & Water Consulting                                                           |  |      | 74,373  |   |      |   | 75,989  |      | 
|                                                                                    |  |      |         |   |      |   |         |      | 
|Total core revenues                                                                 |  |      | 258,020 |   |      |   | 224,552 |      | 
|Incremental revenuesEnergy & Water Consulting                                      |  |      |        |   |      |   | 11,028  |      | 
|                                                                                    |  |      |         |   |      |   |         |      | 
|Total combined segment revenues                                                     |  | $    | 258,020 |   |      | $ | 235,580 |      | 
|                                                                                    |  |      |         |   |      |   |         |      | 
|Operating profit:                                                                   |  |      |         |   |      |   |         |      | 
|Financial & Claims Consulting                                                       |  | $    | 26,068  |   |      | $ | 18,682  |      | 
|Energy & Water Consulting                                                           |  |      | 3,712   |   |      |   | 13,467  |      | 
|                                                                                    |  |      |         |   |      |   |         |      | 
|Total combined segment operating profit                                             |  | $    | 29,780  |   |      | $ | 32,149  |      | 
|                                                                                    |  |      |         |   |      |   |         |      | 
|Operating
Profit and Statement of Operations reconciliation:                        |  |      |         |   |      |   |         |      | 
|Unallocated:                                                                        |  |      |         |   |      |   |         |      | 
|Depreciation expense                                                                |  | $    | 7,651   |   |      | $ | 7,118   |      | 
|Amortization expense                                                                |  |      | 2,373   |   |      |   | 5,700   |      | 
|Stock-based compensation expense                                                    |  |      | 3,401   |   |      |   | 3,812   |      | 
|Restructuring costs (credits)                                                       |  |      | (500    | ) |      |   | 1,900   |      | 
|Litigation and settlement provisions                                                |  |      | 750     |   |      |   | 5,700   |      | 
|Acquisition/integration costs                                                       |  |      | 1,317   |   |      |   |        |      | 
|VSRP cash compensation expense                                                      |  |      |        |   |      |   | 12,399  |      | 
|Acquisition-related compensation expense                                            |  |      |        |   |      |   | 3,609   |      | 
|Non-recurring general and administrative expenses                                   |  |      |        |   |      |   | 380     |      | 
|General and administrative expenses previously allocable to discontinued
operations |  |      |        |   |      |   |        |      | 
|Other expense (income)                                                              |  |      | 19      |   |      |   | (874    | )    | 
|                                                                                    |  |      |         |   |      |   |         |      | 
|Total unallocated expenses, net                                                     |  |      | 15,011  |   |      |   | 39,744  |      | 
|                                                                                    |  |      |         |   |      |   |         |      | 
|Income (loss) from continuing operations before income tax expense                  |  | $    | 14,769  |   |      | $ | (7,595  | )    | 
|                                                                                    |  |      |         |   |      |   |         |      | 



The
information presented does not necessarily reflect the results of segment operations that would have occurred had the segments been stand-alone businesses.





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NAVIGANT CONSULTING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)



Certain operating expenses, which relate to general corporate costs, were allocated to
operating segments on the basis of core revenues. Certain operating expenses, which primarily relate to operating segments, have been excluded from the segment operating profit amounts, and included in the costs not allocated to segments, for
comparative purposes.



For the year ended
December 31, 2002, the Company incurred $1.3 million of costs related to the strategic review and integration of certain business acquisitions, which were not allocated to either operating segment. For the year ended December 31, 2001, the Company
incurred $0.4 million of personnel related costs, which were not allocated to either operating segment. For the year ended December 31, 2000, the Company incurred $3.3 million of non-recurring legal, infrastructure-related computer costs and
personnel related costs, which were not allocated to any operating segment.



Accounting for the results of discontinued operations cannot include allocations of general and administrative costs that are not identifiable to discontinued operations. Accordingly, those costs are
unallocated reconciling amounts, which amounted to $2.5 million in 2000.



The Company records accounts receivable, net (See Note 11 to the Consolidated Financial Statements) and goodwill and intangible assets (See Note 5 to the Consolidated Financial Statements) on a segment basis. Other balance
sheet amounts are not available on a segment basis.



5.    GOODWILL AND INTANGIBLE ASSETS



As of December 31, goodwill and other intangible assets consisted of (shown in thousands):



|                                    |  | 2002 |        |   | 2001 |  
|----------------------------------- |  | ---- | ------ | - | ---- | -
|Goodwill                            |  | $    | 99,593 |   |      | $
|Lessaccumulated amortization       |  |      | (5,425 | ) |      |  
|                                    |  |      |        |   |      |  
|Goodwill, net                       |  |      | 94,168 |   |      |  
|Intangible assets:                  |  |      |        |   |      |  
|Customer lists                      |  |      | 4,470  |   |      |  
|Non-compete agreements              |  |      | 5,200  |   |      |  
|Trade name                          |  |      | 400    |   |      |  
|Other                               |  |      | 1,055  |   |      |  
|                                    |  |      |        |   |      |  
|Intangible assets, at cost          |  |      | 11,125 |   |      |  
|Less: accumulated amortization      |  |      | (7,921 | ) |      |  
|                                    |  |      |        |   |      |  
|Intangible assets, net              |  |      | 3,204  |   |      |  
|                                    |  |      |        |   |      |  
|Goodwill and intangible assets, net |  | $    | 97,372 |   |      | $
|                                    |  |      |        |   |      |  



In
accordance with SFAS 142, the Company evaluated the goodwill assigned to each reporting unit for impairment, using the discounted cash flow valuation method. The Company concluded that there was no indication of goodwill impairment for either of the
two reporting units. If indicators of impairment are deemed to be present, and future cash flows are not expected to be sufficient to recover the assets carrying amounts, an impairment loss would be charged to expense in the period identified.



The Company made certain reclassifications of
balances between goodwill and intangible assets. In accordance with SFAS 141, the Company reclassified the amounts previously allocated to employee workforce



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NAVIGANT CONSULTING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)



from intangible assets to goodwill. Previously, the Company amortized goodwill and intangible assets at a composite rate of seven years. The
Company recalculated the accumulated amortization of goodwill and intangible assets using the specific amortization rates per class. Accordingly, the Company reclassified the specific accumulated amortization balances at December 31, 2001 for
goodwill and intangible assets.



The Company
reviewed the intangible assets net book values and estimated useful lives by class. As of December 31, 2002, there was no impairment related to the intangible assets. The Company will amortize the remaining net book values of intangible assets
over their remaining useful lives.



The changes
in carrying balances of goodwill and intangible assets by reporting segment during the year ended December 31, 2002 are as follows (shown in thousands):



|                                                        |  | Financial & Claims Consulting |        |   | Energy & Water Consulting |   |        | Total | 
|------------------------------------------------------- |  | ----------------------------- | ------ | - | ------------------------- | - | ------ | ----- | 
|Balance as of January 1, 2002Goodwill                  |  | $                             | 30,631 |   |                           | $ | 702    |       | 
|Balance as of January 1, 2002Intangibles               |  |                               | 3,983  |   |                           |   | 139    |       | 
|                                                        |  |                               |        |   |                           |   |        |       | 
|Balance as of January 1, 2002Total                     |  |                               | 34,614 |   |                           |   | 841    |       | 
|Goodwill acquired during year                           |  |                               | 45,282 |   |                           |   | 17,104 |       | 
|Intangible assets acquired during year                  |  |                               | 900    |   |                           |   |       |       | 
|Reclassification of goodwill from non-current assets    |  |                               |       |   |                           |   | 449    |       | 
|Reclassification of intangibles from non-current assets |  |                               | 416    |   |                           |   | 139    |       | 
|Lessamortization expense                               |  |                               | (2,296 | ) |                           |   | (77    | )     | 
|                                                        |  |                               |        |   |                           |   |        |       | 
|Balance as of December 31, 2002Total                   |  | $                             | 78,916 |   |                           | $ | 18,456 |       | 
|                                                        |  |                               |        |   |                           |   |        |       | 
|Goodwill and intangible assets:                         |  |                               |        |   |                           |   |        |       | 
|Goodwill, net                                           |  | $                             | 75,913 |   |                           | $ | 18,255 |       | 
|Intangible assets, net                                  |  |                               | 3,003  |   |                           |   | 201    |       | 
|                                                        |  |                               |        |   |                           |   |        |       | 
|Balance as of December 31, 2002Total                   |  | $                             | 78,916 |   |                           | $ | 18,456 |       | 
|                                                        |  |                               |        |   |                           |   |        |       | 



During
the year ended December 31, 2002, the excess of the costs over the net assets of businesses acquired was $63.3 million, of which $62.4 million has been identified as goodwill. The Hunter acquisition, which occurred in September 2002, included $24.0
million in goodwill and $0.9 million in other intangibles. The purchase price allocation of goodwill and intangible assets for the Hunter acquisition was based upon an appraisal, as were the related estimated useful lives. The composite of the
Barrington Energy, Keevan, FACG, ADL and other acquisition-related payments included $38.4 million in goodwill. The allocation of goodwill and intangible assets for these acquisition-related payments was based on managements judgment, as were
the related estimated useful lives.



In
connection with the acquisition of businesses acquired during the year ended December 31, 2002, the Company obtained non-competition and non-solicitation agreements from senior consultants as part of the consultants employment agreements. For
purchase price allocation purposes, the value of these non-competition and non-solicitation agreements is immaterial. The retention of these senior consultants has been reasonably assured given their importance in achieving the contingency earn-out
provisions of the purchase agreements. The contingency earn-out payments, if any, will be accounted for as goodwill when earned.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)





Total
amortization expense for the year ended December 31, 2002 was $2.3 million. Below is the estimated annual aggregate amortization expense of intangible assets for each of the five succeeding years and thereafter from December 31, 2002 based on
intangible assets at December 31, 2002 (shown in thousands):



|Year ending December 31, |  | Amount
|------------------------ |  | ------
|2003                     |  | $     
|2004                     |  |       
|2005                     |  |       
|2006                     |  |       
|2007                     |  |       
|Thereafter               |  |       
|                         |  |       
|Total                    |  | $     
|                         |  |       



NOTE
6.    RECENT ACCOUNTING PRONOUNCEMENTS



As of January 1, 2002, the Company in accordance with SFAS 142 ceased the amortization of goodwill. Under SFAS 142, goodwill and certain other intangible assets deemed to have indefinite lives are no longer amortized, but subject to
annual impairment tests. Other intangible assets with definite lives will continue to be amortized over their useful lives. The following unaudited financial information presents the combined results of continuing operations for the years ended
December 31, 2002, 2001 and 2000 after the elimination of goodwill amortization expense, net of related income taxes (shown in thousands, except per share amounts):



|                                                                        |  | 2002 |       | 2001 |   |        | 2000 | 
|----------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ------ | ---- | 
|Net income (loss) from continuing operations                            |  | $    | 8,861 |      | $ | (5,311 | )    | 
|Elimination of goodwill amortization expense, net of income taxes       |  |      |      |      |   | 2,479  |      | 
|                                                                        |  |      |       |      |   |        |      | 
|Adjusted net income (loss) from continuing operations                   |  | $    | 8,861 |      | $ | (2,832 | )    | 
|                                                                        |  |      |       |      |   |        |      | 
|Basic earnings per share:                                               |  |      |       |      |   |        |      | 
|Net income (loss) from continuing operations                            |  | $    | 0.22  |      | $ | (0.14  | )    | 
|Elimination of goodwill amortization expense, net of income taxes       |  |      |      |      |   | 0.07   |      | 
|                                                                        |  |      |       |      |   |        |      | 
|Adjusted basic net income (loss) from continuing operations per share   |  | $    | 0.22  |      | $ | (0.07  | )    | 
|                                                                        |  |      |       |      |   |        |      | 
|Diluted earnings per share:                                             |  |      |       |      |   |        |      | 
|Net income (loss) from continuing operations                            |  | $    | 0.21  |      | $ | (0.14  | )    | 
|Elimination of goodwill amortization expense, net of income taxes       |  |      |      |      |   | 0.07   |      | 
|                                                                        |  |      |       |      |   |        |      | 
|Adjusted diluted net income (loss) from continuing operations per share |  | $    | 0.21  |      | $ | (0.07  | )    | 
|                                                                        |  |      |       |      |   |        |      | 



7.    EARNINGS PER SHARE (EPS)



Basic income (loss) per share (EPS) is computed by dividing income (loss) by the basic shares. Basic shares are the total of the common shares outstanding and the equivalent shares from obligations
presumed payable in common stock, both weighted for the average of days outstanding for the period. Basic shares exclude the dilutive effect of common shares that could potentially be issued due to the exercise of stock options, vesting of
restricted shares, or satisfaction of necessary conditions for contingently issuable shares. Diluted EPS is computed by dividing income (loss) by the diluted shares, which are the total of the basic shares outstanding and all potentially issuable
shares, weighted for the average days outstanding for the period.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)





For the
years ended December 31, the components of basic and diluted shares (weighted for the average days outstanding for the periods) are as follows (shown in thousands):



|                                                   |  | 2002   |  | 2001   |  | 2000  
|-------------------------------------------------- |  | ------ |  | ------ |  | ------
|Common shares outstanding                          |  | 40,247 |  | 38,439 |  | 40,895
|Business combination obligations payable in shares |  | 103    |  |       |  |      
|                                                   |  |        |  |        |  |       
|Basic shares                                       |  | 40,350 |  | 38,439 |  | 40,895
|Employee stock options and restricted shares       |  | 2,022  |  |       |  |      
|Equivalent shares of restricted stock units        |  | 271    |  |       |  |      
|Contingently issuable shares                       |  | 27     |  |       |  |      
|                                                   |  |        |  |        |  |       
|Diluted shares                                     |  | 42,670 |  | 38,439 |  | 40,895
|                                                   |  |        |  |        |  |       



For the
years ended December 31, 2001 and 2000, the Company incurred a net loss in each of the respective years; therefore, potentially issuable shares were excluded in the calculation of the diluted share amounts because the effect of these shares was
anti-dilutive for the respective periods. The weighted average effect of shares excluded from diluted share amounts for the years December 31, 2001 and 2000 were 2.6 million and 0.03 million, respectively, and related to employee stock options.



The Company is obligated to issue the equivalent
of 0.4 million shares of its common stock as a result of the Hunter purchase, which is based on the $2.1 million obligation and the average market price of the common stock from acquisition date to December 31, 2002. The weighted average of these
shares for the year ended December 31, 2002 was 0.1 million and is included in the basic earnings per share calculation.



The Company issued 1.9 million restricted shares of common stock in January 2001 in conjunction with the Value Sharing Retention Program,
and then in November 2002 issued 0.8 million restricted shares of common stock, as part of an exchange for stock options subject to variable accounting treatment. As of December 31, 2002, 0.5 million shares of the January 2001 grant and 0.8 million
shares of the November 2002 grant, for a total of 1.3 million shares, were still unvested and outstanding. These unvested restricted shares have voting rights but are excluded from the basic earnings per share calculation until vesting occurs; these
shares are 100 percent dilutive and are included in the diluted earnings per share calculation based on a weighted average days outstanding.



The Company issued 1.6 million restricted stock units in October and November of 2002. The restricted stock units are treated as an
equivalent to restricted shares in the diluted earnings per share calculation.



As part of earnout provisions for certain purchase price acquisition agreements, the Company will settle, through the issuance of its common stock, a portion of its obligations. As of December 31,
2002, the equivalent shares to be issued is 0.2 million and is based on the average market price of the Companys stock from the dates the necessary conditions have been satisfied to December 31, 2002.



8.    STOCKHOLDERS EQUITY



Issuance of Common StockBusiness Combinations



In connection with the businesses acquired
in 2002, the Company issued a total of 3.0 million shares of common stock with an aggregate value of $18.1 million.





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)



Treasury Stock Transactions



In October 2000, the Board of Directors increased the
Companys stock repurchase authorization from 3.0 million shares to up to 5.0 million shares of the Companys common stock, approximately 13 percent of the Companys then outstanding shares.



In December 2000, the Company repurchased 1.1 million shares
for $3.6 million. During 2001, the Company repurchased 0.8 million shares for $3.9 million. During 2002, the Company repurchased 0.9 million shares for $5.2 million. As of December 31, 2002, the Company has 2.2 million of 5.0 million shares
remaining under its stock repurchases authorization.



The Company, with the Boards approval, had several other stock repurchases in connection with certain exchange transactions. In October 2000, the Company completed a nontaxable exchange of the stock of SDG for 1.6 million of
the Companys shares, valued at approximately $6.2 million (see Note 17, Discontinued Operations). In December 2000, the Company obtained 0.2 million shares, valued at $0.9 million, for partial repayments of former officers notes
receivable. See also Former Officers Notes Receivable in Note 8, following herein.



Restricted Shares



In January 2001, the Company issued 1.9 million restricted shares with a market valuation based on the Companys stock price of
$3.875, which was the closing market price on the grant date. These restricted shares vest 33 percent per year from September 1, 2001 to September 1, 2003. The Company records stock-based compensation expense for these restricted shares on a
straight-line basis over the vesting term starting in January 2001. The total stock-based compensation related to these restricted shares is expected to be $6.1 million, subject to vesting. For the years ended December 31, 2002 and 2001, the Company
recorded $1.8 million and $2.7 million, respectively, in stock-based compensation related to these restricted shares. As of December 31, 2002, the Company had 0.5 million restricted shares outstanding that had not vested, 1.1 million restricted
shares that vested in 2001 and 2002, and the remaining 0.3 million shares that have been forfeited since January 2001.



In November 2002, the Company issued 0.8 million restricted shares of common stock, as part of an exchange for 1.1 million stock options
subject to variable accounting treatment. The exchange eliminated the variable accounting stock-based compensation expense associated with the tendered stock options. The Company records stock-based compensation expense for these restricted shares
on a straight-line basis over the vesting term starting in November 2002. The grants consist of 0.4 million restricted shares to be vested through November 2003 and 0.4 million restricted shares to be vested 33 percent per year on the anniversaries
of the November 2002 grant date. The total stock-based compensation expense related to these restricted shares is expected to be $4.0 million, subject to vesting, which is based on the then market valuation of the Companys stock price of
$5.28, the closing market price on the grant date. For the year ended December 31, 2002, the Company recorded $0.4 million, in total, for these restricted shares.



In December 2002, 0.3 million shares were issued with a market valuation based on the Companys stock
price of $6.05, which was the closing market price on the grant date. The Company records stock-based compensation expense for these restricted shares on a straight-line basis over the six-year vesting term starting in December 2002. There are
certain Company performance targets that could cause the Companys Board of Directors to vote to accelerate the vesting period for 25 percent of the issued shares annually.



Restricted Stock Units Outstanding



The Company issued 1.6 million restricted stock units in October and November of 2002. The issuances of
restricted stock units had an aggregate market valuation of $8.1 million based on the Companys stock price at



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)



the grant dates. Accordingly, the Company will record stock-based compensation over the vesting term on a straight-line basis. The restricted
stock units are to be treated as an equivalent to restricted shares of the Companys common stock and included in stock-based compensation expense and the diluted earnings per share calculation. See Note 10, Long Term Incentive Plan,
Management Stock Purchase Plan (MSPP).



Deferred Stock Issuance



As part of the purchase price for the Hunter acquisition, the Company has a $6.5 million payment payable in two equal installments on the first and second anniversary of the closing. If either seller or buyer elects, the $6.5 million
deferred payment obligation is payable in cash up to 67 percent with the remainder payable in the Companys common stock. Accordingly, the Company accounted for this $6.5 million deferred payment as $4.4 million in liabilities and $2.1 million
in deferred stock issuance under the assumption that 67 percent of the obligation would be settled in cash. In addition to the common stock payment obligation related to Hunter, the Company has a $0.9 million obligation payable in the Companys
common stock related to the contingent earnout provisions of certain acquisition agreements. These stock obligation issuances are due in the year 2003.



Employee Stock Purchase Plan



During 1996, the Company implemented a plan that permits employees to purchase shares of the Companys common stock each quarter at
85 percent of the market value. The market value of shares purchased for this purpose is determined to be the lower of the closing market price on the first and last day of each calendar quarter. This plan was authorized to sell 450,000 shares. The
Company sold 450,000 shares under the original Plan through November 30, 2000. On November 30, 2000, the Employee Stock Purchase Plan was amended to, among other things, increase the total number of shares authorized to be sold from 450,000 shares
to 750,000 shares. The amendment also provided for subsequent annual increases of the total authorized shares by the lesser of 500,000 shares or 1.2 percent of the Companys then outstanding shares. As of December 31, 2002, the Company was
authorized to sell was 1,214,399 shares. During 2002 and 2001, the Company sold 124,000 and 76,000 shares, respectively, under the plan.



Former Officers Notes Receivable



As of December 31, 1999, the Company held notes receivable from three former Company officers with an aggregate principal balance of $7.9
million. The notes receivable arose from transactions whereby these individuals borrowed money from the Company to purchase a total of 200,000 shares of the Companys common stock from third parties, and 37,500 shares of common stock from the
Company. The notes receivables were accompanied by pledge agreements, which pledged the shares as collateral security for repayment of the notes. The borrowers subsequently either challenged the enforceability of the note agreements or declined to
confirm their intention to comply with the terms of the notes. The Company accrued a loss contingency at December 31, 1999 in the amount of $5.3 million, representing the difference between the principal amount of the notes receivable and the value
of the shares held by the Company as collateral. The $5.3 million was included as a non-operating charge within other expense in the consolidated statement of operations. During the year ended December 31, 2000, the Company recorded an additional
$1.7 million to reflect further impairment of the market value of the former officers loans. In December 2000, the Company reached a settlement with one debtor, obtained the 237,500 shares, valued at $0.9 million, and retired the shares in
treasury. The second debtor has declared bankruptcy in 2002. The Company is pursuing collection of approximately $3.0 million, plus interest, from the third debtor, Charles A. Demirjian.



Stockholder Rights Plan



On December 15, 1999 (Distribution Date), the Companys Board of Directors adopted a
Stockholders Rights Plan (the Rights Plan) and declared a dividend distribution of one Right (a Right) for each



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)



outstanding share of common stock, to stockholders of record at the close of business on December 27, 1999. Each Right will entitle its
holder, under certain circumstances described in the Rights Agreement, to purchase from the Company one one-thousandth of a share of its Series A Junior Participating Preferred Stock, $.001 par value, (the Series A Preferred Stock), at
an exercise price of $75 per Right, subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement (the Rights Agreement) between the Company and American Stock Transfer & Trust Company, as Rights
Agent.



Until the Distribution Date under the
Rights Agreement, the surrender or transfer of any shares of common stock outstanding will also constitute the surrender of transfer of the Rights associated with such shares. The Rights are not exercisable until the Distribution Date and will
expire at the close of business on December 15, 2009, unless earlier redeemed or exchanged by the Company. The Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right (subject to adjustment and payable in cash, common
stock or other consideration deemed appropriate by the Companys Board of Directors) at any time until ten days following the Stock Acquisition Date under the Rights Agreement. Immediately upon the action of the Companys Board of
Directors authorizing any redemption, the Rights will terminate and the only right of the holders of Rights will be to receive the redemption price. Until a Right is exercised, its holder, as such, will have no rights as a stockholder of the
Company, including, without limitation, the right to vote or to receive dividends.



Other Issuances of Common Stock



All other issuances of common stock during the years 2000 through 2002 were related to business combinations and exercised stock options.



9.    STOCK-BASED COMPENSATION EXPENSE



Stock-based compensation expense is recorded for the fixed
compensation expense of restricted stock awards, in which expense is recorded on a straight-line basis over the vesting term for the valuation amount at grant date. In addition, stock-based compensation expense is recorded for certain Value Sharing
Retention Program (VSRP) stock options, exchanged stock options and stock appreciation rights (variable accounting awards) that have been awarded to the Companys employees and are subject to variable accounting
treatment. Compensation expense (or credit) for these variable accounting awards is recorded, on a cumulative basis, for the increase (or decrease) in the Companys stock price above the grant prices.



Total stock-based compensation expense consisted of the
following (shown in thousands):





|                                       |  | 2002 |       | 2001 |   | 2000 
|-------------------------------------- |  | ---- | ----- | ---- | - | -----
|Restricted shares                      |  | $    | 2,259 |      | $ | 2,773
|Restricted stock units                 |  |      | 409   |      |   |     
|VSRP stock options                     |  |      | 383   |      |   | 864  
|Exchanged stock options                |  |      | 119   |      |   | 4    
|Stock appreciation rights              |  |      | 80    |      |   | 100  
|Other                                  |  |      | 151   |      |   | 71   
|                                       |  |      |       |      |   |      
|Total stock-based compensation expense |  | $    | 3,401 |      | $ | 3,812
|                                       |  |      |       |      |   |      



The year
ending stock prices used to compute the market valuation adjustment for variable accounting stock awards were $5.90, $5.50 and $3.81 for the years ended December 31, 2002, 2001 and 2000, respectively.





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)



The following table summarizes the stock-based compensation expense for the years
ended December 31, 2002, 2001 and 2000 recorded for the Companys consultants and administrative support personnel (shown in thousands):



|                                       |  | 2002 |       | 2001 |   | 2000 
|-------------------------------------- |  | ---- | ----- | ---- | - | -----
|Consultants                            |  | $    | 2,843 |      | $ | 3,238
|Administrative support personnel       |  |      | 558   |      |   | 574  
|                                       |  |      |       |      |   |      
|Total stock-based compensation expense |  | $    | 3,401 |      | $ | 3,812
|                                       |  |      |       |      |   |      





Below is the estimated annual aggregate stock-based compensation for each of the five succeeding years and thereafter from December 31,
2002 (shown in thousands):



|Year ending December 31, |  | Amount
|------------------------ |  | ------
|2003                     |  | $     
|2004                     |  |       
|2005                     |  |       
|2006                     |  |       
|2007                     |  |       
|Thereafter               |  |       
|                         |  |       
|Total                    |  | $     
|                         |  |       



The
above table is based on the total count of restricted shares and restricted stock units as of December 31, 2002 and does not include any reduction in expenses for possible forfeitures. Some shares are subject to accelerated vesting due to certain
business performance events, thereby causing the fixed amounts to be expensed in periods earlier than estimated. New grants, forfeitures or accelerated vesting could change amounts significantly. As of December 31, 2002, the Company had 0.5 million
shares subject to variable accounting and the estimated expense for the years presented was not provided in the table above.



10.    LONG-TERM INCENTIVE PLAN AND SUPPLEMENTAL EQUITY INCENTIVE PLAN



Summary



On June 30, 1996, the Company adopted a Long-Term Incentive
Plan (LTIP) that provides for common stock, common stock-based and other performance incentives to employees, consultants, directors, advisors and independent contractors of the Company. The Long-Term Incentive Plan, as amended, was
re-approved by a vote of the Companys stockholders in 1999. The Long-Term Incentive Plan provides for a total available option pool equivalent to 25 percent of the issued and outstanding common stock.



In November 2001, the Company adopted a Supplemental Equity
Incentive Plan (SEIP) to retain and recruit certain middle and senior-level employees and to optimize shareholder value. The SEIP only allows nonqualified stock options. The SEIP did not require shareholder approval; therefore, it was
not voted on or approved by the Companys stockholders.



Stock options and other forms of equity compensation are an important component of the compensation offered by the Company and promote long-term retention of its key employees, motivate high levels of performance and recognize
contributions to the success of the Company.





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)



July 2000 Exchange of Options



In July 2000, the Company completed an employee stock option
exchange that was offered to all then current employees, other than executive management, for employee retention purposes. Employees tendered 6.4 million options, with an average exercise price of approximately $28 per share. These employees
were granted 2.7 million options in exchange for the tendered options. The number of new options granted each employee was based on, among other factors, a formula that considered the exercise prices of the tendered options. The new options had an
exercise price of $5.9375, which was $1.00 above the market price as of the tender date. The new options vest 10 percent each quarter, beginning March 31, 2001. As of December 31, 2002, approximately 0.1 million options outstanding are subject
to variable accounting in which stock-based compensation expense is recorded for the valuation increase of the closing market price above the exercise price. At December 31, 2002, the closing market price was below the exercise prices of the
options; therefore, there was no stock-based compensation expense related to the options outstanding for the year ended December 31, 2002.



Value Sharing Retention Program



In August 2000, the Company adopted a comprehensive monetary and equity incentive program (the Value Sharing Retention
ProgramVSRP) to retain certain senior-level employees. This feature covered approximately 30 percent of the employee population. The Company obtained new non-compete covenants and extensions of current non-compete covenants for the
majority of the participants under this incentive value sharing retention program. The program provided for maximum incentives of approximately $20.0 million in cash, 2.1 million restricted shares, and 4.8 million options, subject to vesting. The
cash and equity incentives vest in stages over a 4 1⁄2 year period.



The cash incentives vested over a 12-month period, commencing on September 1, 2000. The retention program scheduled cash payments of four equal installments beginning December 1, 2000 and continuing every three months to
September 1, 2001. As of September 1, 2001, the Company paid all four scheduled installments totaling $18.8 million and does not have any additional obligations under this provision of the program.



On September 1, 2000, the Company granted 4.8 million stock
options at an exercise price of $3.9375, which was the closing market price on the grant date. The option grants vest 10 percent on the date of grant and 5 percent per quarter thereafter through March 2004. As of December 31, 2002,
approximately 0.2 million shares of these stock options outstanding were subject to variable accounting, in which stock-based compensation expense has been recorded.



In January 2001, the Company issued 1.9 million restricted shares with a market valuation based on the
Companys stock price of $3.875, which was the closing market price on the grant date. These restricted shares vest 331/3percent per year from September 1, 2001 to September 1, 2003. The Company records stock-based compensation expense for these restricted shares on a straight-line basis over the vesting term starting in January 2001. The total
stock-based compensation related to these restricted shares is expected to be $6.1 million, subject to vesting. For the years ended December 31, 2002 and 2001, the Company recorded $1.8 million and $2.7 million, respectively, in
stock-based compensation related to these restricted shares. As of December 31, 2002, the Company had 0.5 million restricted shares outstanding that had not yet vested, 1.1 million restricted shares were vested in 2001 and 2002, and the
remaining 0.3 million shares have been forfeited since January 2001.



Annual Equity Incentive Program (AEIP)



In November 2001, the Company adopted an Annual Equity Incentive Program (AEIP). The AEIP provides for annual grants of stock options to key employees, commensurate with individual,
business segment



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)



and Company performance. As part of this program, 1.1 million options were issued with a grant price of $3.73, which was the closing market
price on the date of the grant. The stock options vest 50 percent on February 1, 2002 and 50 percent on November 19, 2002. Future annual equity grants will vest 10 percent on the date of grant and 18 percent per year over five years from the date of
grant. The Company can accelerate vesting up to three years based on operating performance.



Restricted Stock Exchanged for Stock Options



In October 2002, the Company offered its eligible employees the opportunity to voluntarily exchange certain outstanding incentive and
nonqualified stock options for restricted shares of the Companys common stock. In November 2002, the Company issued 0.8 million restricted shares of common stock, as part of the exchange for 1.1 million stock options subject to variable
accounting treatment. The exchange eliminated the variable accounting stock-based compensation expense associated with the tendered stock options. The Company records stock-based compensation expense for these restricted shares on a straight-line
basis over the vesting term starting in November 2002. The grants consist of 0.4 million restricted shares, in exchange for 0.5 million options, to be vested in November 2003 and 0.4 million restricted shares, in exchange for 0.6 million VSRP
options, to be vested 33 percent per year on the anniversaries of the November 2002 grant date. The total stock-based compensation expense related to these restricted shares is expected to be $4.0 million, subject to vesting, which is based on the
then market valuation of the Companys stock price of $5.28, which was the closing market price on the grant date. For the year ended December 31, 2002, the Company recorded $0.4 million of stock-base compensation expense, in total, for
these restricted shares.



Also in October 2002,
the Company offered its eligible employees the opportunity to sell to the Company certain nonqualified stock options, which had exercise prices significantly above the then-current market price of the Companys common stock. The purchase price
the Company offered was based on, among other factors, the exercise prices of such options and the purchase was priced at amounts equal to or less than $1.50 per option. The Company purchased 0.1 million non-qualified stock options for $0.2 million
and recorded the expense to stock-based compensation expense for the year ended December 31, 2002.



Management Stock Purchase Program (MSPP)



In order to secure new non-solicitation agreements for those consultants who have agreements that expired in November 2002 or shortly
thereafter, the Company successfully implemented and executed a predominantly stock-based retention program, Management Stock Purchase Program (MSPP), for key leaders in both of the Companys business segments, using the
Companys existing Long-Term Incentive Program authorization. The program provides for individual purchases over five years of up to 2.3 million restricted stock units, including an accompanying match or grant of restricted stock units, as well
as additional cash compensation of up to $4.5 million over three years in 25 percent installments, in return for the adoption of industry standard non-solicitation agreements. The issuances of restricted stock units had an aggregate market
valuation of $8.1 million based on the Companys stock price at the grant dates. The Company will record stock-based compensation over the vesting term on a straight-line basis. The restricted stock units are to be treated as an equivalent to
restricted shares of the Companys common stock and included in stock-based compensation expense and the diluted earnings per share calculation.



Purchases of restricted stock units by the consultants, including the accompanying match of restricted stock units by the Company, will
occur over 56 months, in 20 percent installments, with purchase dates extending to July 1, 2007. The restricted stock units that were awarded, also to secure new non-solicitation agreements, vest in 331/3percent installment over 32 months from grant dates to July 1, 2005. The MSPP contains certain provisions,



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)



which subject these restricted shares to accelerated vesting upon attainment of certain business performance measures, which could cause the
fixed amounts to be expensed on an accelerated basis. The Company expects to record the cash compensation to consulting services expense over 32 months from the grant dates to July 1, 2005. The Company paid the first of the four installments
totaling $1.4 million, in aggregate, in November 2002.



The new non-solicitation agreements signed in exchange for participation in the MSPP included 12 months post-employment restrictions.



The Management Stock Purchase Program will supersede the AEIP for a three-year period. The MSPP did not require stockholder approval;
therefore, it was not voted on or approved by the Companys stockholders.



Other Option Grants



The Company granted a total of 0.7 million stock options during 2002, all under its existing LTIP authority. The Company granted a total of 1.9 million options during 2001, which includes the 1.1
million granted under the AEIP. In connection with the acquisitions, principally of Barba-Arkhon and Chambers, the Company issued 0.3 million options with grant prices at the closing market price on the acquisition dates. The remaining options
granted were related to new hires and performance awards.



Other Information



In
1999, the Company determined, based in part on the absence of contemporaneous documentation, that 0.3 million nonqualified options issued to a total of sixteen individuals were issued at prices below fair market value. The aggregate dollar
amount by which the grant prices of the options differ from the market prices as of the dates for which the Company has independent evidence to support the issuance of the options was $4.1 million. The amount charged to expense has been
amortized over the relevant vesting periods. Accordingly, the Company recorded stock-based compensation expense, attributable to such options, of $0.1 million and $0.5 million in 2001 and 2000, respectively. As of December 31, 2001, the Company
fully amortized the $4.1 million to stock-based compensation expense.



Options Outstanding



As of December 31, 2002, the Company had 5.9 million options outstanding at a weighted average exercise price of $5.42 per share. As of December 31, 2002, 3.4 million options were exercisable at a
weighted average exercise price of $5.69 per share.



The following table summarizes stock option activity for the years ended December 31, 2002, 2001 and 2000:



|                                         |  | 2002                    |   | 2001 |                                 | 2000
|---------------------------------------- |  | ----------------------- | - | ---- | ------------------------------- | ----
|                                         |  | Number of shares (000s) |   |      | Weighted average exercise price |     
|Options outstanding at beginning of year |  | 8,550                   |   |      | $                               | 5.90
|Granted                                  |  | 660                     |   |      |                                 | 6.14
|Exercised                                |  | (742                    | ) |      |                                 | 4.36
|Forfeited or exchanged                   |  | (2,608                  | ) |      |                                 | 7.46
|                                         |  |                         |   |      |                                 |     
|Options outstanding at end of year       |  | 5,860                   |   |      | $                               | 5.42
|                                         |  |                         |   |      |                                 |     
|Options exercisable at year end          |  | 3,352                   |   |      | $                               | 5.69
|                                         |  |                         |   |      |                                 |     





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##### Table of Contents

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)



The following table summarizes information regarding stock options outstanding at
December 31, 2002 and 2001:



|                         |  | 2002                      |  | 2001                           
|------------------------ |  | ------------------------- |  | -------------------------------
|Range of exercise prices |  | Outstanding Shares (000s) |  | Weighted average exercise price
|$ 0.00 to $ 3.74         |  | 1,082                     |  | $                              
|$ 3.75 to $ 4.99         |  | 2,907                     |  |                                
|$ 5.00 to $ 7.49         |  | 1,435                     |  |                                
|$ 7.50 to $ 9.99         |  | 186                       |  |                                
|$10.00 and above         |  | 250                       |  |                                
|                         |  |                           |  |                                
|Total                    |  | 5,860                     |  | $                              
|                         |  |                           |  |                                



The
following table summarizes information regarding stock options exercisable at December 31, 2002:



|Range of exercise prices |  | Outstanding Shares (000s) |  | Weighted average exercise price
|------------------------ |  | ------------------------- |  | -------------------------------
|$ 0.00 to $ 3.74         |  | 1,030                     |  | $                              
|$ 3.75 to $ 4.99         |  | 1,443                     |  |                                
|$ 5.00 to $ 7.49         |  | 538                       |  |                                
|$ 7.50 to $ 9.99         |  | 110                       |  |                                
|$10.00 and above         |  | 231                       |  |                                
|                         |  |                           |  |                                
|Total                    |  | 3,352                     |  | $                              
|                         |  |                           |  |                                





The following table summaries the information regarding outstanding stock options by each plan the Company had as of December 31, 2002 to
show the distribution of equity compensation plans approved and not approved by the Companys stockholders:



|      |  | Outstanding Shares (000s) |  | Weighted average exercise price |      | Shares remaining available for future issuances (000s)
|----- |  | ------------------------- |  | ------------------------------- | ---- | ------------------------------------------------------
|LTIP  |  | 5,502                     |  | $                               | 5.52 |                                                       
|SEIP  |  | 358                       |  | $                               | 3.96 |                                                       
|      |  |                           |  |                                 |      |                                                       
|Total |  | 5,860                     |  | $                               | 5.42 |                                                       
|      |  |                           |  |                                 |      |                                                       



11.    SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION



Accounts Receivable:



The components of accounts receivable as of December 31 were as follows (shown in thousands):



|                                     |  | 2002 |        |   | 2001 |  
|------------------------------------ |  | ---- | ------ | - | ---- | -
|Billed amounts                       |  | $    | 51,978 |   |      | $
|Engagements in process               |  |      | 18,905 |   |      |  
|Allowance for uncollectible accounts |  |      | (9,190 | ) |      |  
|                                     |  |      |        |   |      |  
|                                     |  | $    | 61,693 |   |      | $
|                                     |  |      |        |   |      |  



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##### Table of Contents



Engagements in
process represent balances accrued by the Company for services that have been performed and earned but have not been billed to the customer. Billings are generally done on a monthly basis for the prior months services.



Below are the components of accounts receivable as of December
31, by segment (shown in thousands):



|                                     |  | 2002 |        |   | 2001 |  
|------------------------------------ |  | ---- | ------ | - | ---- | -
|Financial & Claims Consulting:       |  |      |        |   |      |  
|Billed amounts                       |  | $    | 36,073 |   |      | $
|Engagements in process               |  |      | 15,533 |   |      |  
|Allowance for uncollectible accounts |  |      | (6,543 | ) |      |  
|                                     |  |      |        |   |      |  
|                                     |  |      | 45,063 |   |      |  
|                                     |  |      |        |   |      |  
|Energy & Water Consulting:           |  |      |        |   |      |  
|Billed amounts                       |  | $    | 15,905 |   |      | $
|Engagements in process               |  |      | 3,372  |   |      |  
|Allowance for uncollectible accounts |  |      | (2,647 | ) |      |  
|                                     |  |      |        |   |      |  
|                                     |  |      | 16,630 |   |      |  
|                                     |  |      |        |   |      |  
|Combined total                       |  | $    | 61,693 |   |      | $
|                                     |  |      |        |   |      |  



Property and
Equipment:



Property and equipment as of
December 31 consisted of (shown in thousands):



|                                                |  | 2002 |         |   | 2001 |  
|----------------------------------------------- |  | ---- | ------- | - | ---- | -
|Land and buildings                              |  | $    | 3,497   |   |      | $
|Furniture, fixtures and equipment               |  |      | 35,641  |   |      |  
|Software                                        |  |      | 7,808   |   |      |  
|Leasehold improvements                          |  |      | 8,602   |   |      |  
|                                                |  |      |         |   |      |  
|                                                |  |      | 55,548  |   |      |  
|Less: accumulated depreciation and amortization |  |      | (37,424 | ) |      |  
|                                                |  |      |         |   |      |  
|Property and equipment, net                     |  | $    | 18,124  |   |      | $
|                                                |  |      |         |   |      |  





The Company recorded $7.7 million in depreciation expense for the year ended December 31, 2002. During the year ended December 31, 2002,
the Company disposed of $1.9 million in property and equipment in cost with an accumulated depreciation balance of $1.2 million, which included a $0.5 million net write-down of leasehold improvements for the closing of certain offices already
anticipated for in the Companys restructuring plan.



Other Current Liabilities:



The components of other current liabilities as of December 31 were as follows (shown in thousands):



|                                    |  | 2002 |        | 2001
|----------------------------------- |  | ---- | ------ | ----
|Acquisition earnout obligations     |  | $    | 3,400  |     
|Deferred rent                       |  |      | 1,989  |     
|Notes payablecurrent               |  |      | 1,500  |     
|Deferred purchase price obligations |  |      | 4,878  |     
|Deferred revenue credits            |  |      | 1,861  |     
|Other liabilities                   |  |      | 3,042  |     
|                                    |  |      |        |     
|                                    |  | $    | 16,670 |     
|                                    |  |      |        |     





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##### Table of Contents

Acquisition earnout obligations relate to payments due under certain purchase agreements;
they became payable upon the achievement of specified financial objectives. The $2.1 million balance at December 31, 2001 was paid March 1, 2002. The $3.4 million balance at December 31, 2002 is anticipated to be paid during the first six months of
2003.



The notes payablecurrent relate to
installments under the Barba-Arkhon acquisition agreement. The final payment was due March 1, 2003 and was paid during the first quarter 2003.



12.    SUPPLEMENTAL CASH FLOW INFORMATION



2002 Non-Cash Transactions



The Company entered into deferred cash payment commitments as part of the purchase price for certain
acquisitions. These deferred cash payments consist of $1.5 million for the Barrington Energy acquisition, $0.5 million for the Keevan acquisition, and $0.5 million for the Hunter acquisition. In addition, as part of the purchase price for the
Hunter acquisition, the Company entered into a $6.5 million deferred payment obligation payable in the Companys common stock, or cash up to 67 percent of the obligation. Accordingly, the Company accounted for this deferred payment as 67
percent liabilities and 33 percent deferred stock issuance. The Company issued a total of 2.9 million shares of its common stock, valued at $17.5 million in conjunction with the purchases of Keevan, FACG, Barrington Energy and Hunter. (See Note 3,
Acquisitions).



During the year ended
December 31, 2002, the Company recorded, in aggregate, $4.3 million of goodwill with contingent earnout liabilities and stock obligations for earnout provisions met under provisions of certain purchase agreements. The Company also incurred $0.4
million of future payment obligations for the purchase of computer software. For the year ended December 31, 2002, the Company recorded $2.7 million for deferred compensation related to restricted shares and restricted stock units.



2001 Non-Cash Transactions



As of December 31, 2001, the Company recorded goodwill and
contingent earnout liabilities of $2.1 million as a result of the attainment of certain revenue and gross margin targets under the provisions of the PENTA purchase agreement. The Company issued $3.0 million in notes payable to supplement the
financing of the Barba-Arkhon acquisition. The Company entered into a commitment for a deferred cash payment of $0.6 million related to the purchase price in the Chamber acquisition. (See Note 3, Acquisitions). The Company financed the
purchase of new computer equipment and incurred $0.7 million of capital lease obligations. The Company recorded $2.8 million for deferred compensation related to restricted stock.



2000 Non-Cash Transactions



As of December 31, 2000, the Company recorded goodwill and contingent earnout liabilities of $2.0 million as
a result of the attainment of certain revenue and gross margin targets under the provisions of the PENTA purchase agreement. In October 2000, the Company exchanged SDG stock for 1.6 million shares of the Companys stock, valued at $6.2 million,
in conjunction with the sale of SDG (see Note 17, Discontinued Operations).



Other Information



Total interest paid during the years ended December 31, 2002, 2001 and 2000 was $0.8 million, $0.4 million, and $0.7 million, respectively. Total income taxes paid during the years ended December 31, 2002, 2001 and 2000
were $7.8 million, $3.3 million, and $6.2 million, respectively.



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##### Table of Contents



13.    LEASE COMMITMENTS



The Company leases its office facilities and certain equipment under operating lease arrangements that expire at various dates through 2012. The Company leases office facilities under noncancelable operating leases that
include fixed or minimum payments plus, in some cases, scheduled base rent increases over the terms of the leases and additional rents based on the Consumer Price Index. Certain leases provide for monthly payments of real estate taxes, insurance and
other operating expenses applicable to the property. In addition, the Company leases equipment under noncancelable operating leases.



Future minimum annual lease payments (shown in thousands) for the years subsequent to 2002 and in the aggregate are as follows:



|Year ending December 31, |  | Amount
|------------------------ |  | ------
|2003                     |  | $     
|2004                     |  |       
|2005                     |  |       
|2006                     |  |       
|2007                     |  |       
|Thereafter               |  |       
|                         |  |       
|                         |  | $     
|                         |  |       



In
addition, the Company has other lease commitments for the years subsequent to 2002, totaling in the aggregate $5.7 million. As part of the restructuring plan, the Company decided to terminate or sublease such leases and has reserved for the
associated net costs within the facilities closings reserve. See Note 16 Restructuring Costs (Credits).



Rent expense for operating leases was $14.5 million, $12.1 million, and $11.3 million for the years ended December 31, 2002, 2001 and
2000, respectively.



14.    BANK
BORROWINGS



The Company maintains an
unsecured revolving line of credit agreement for $50.0 million, with the ability to increase the amount up to $75.0 million over the term of the agreement. A consortium between the LaSalle Bank, N.A., the Companys primary banker, and US Bank
agreed to finance the revolving line of credit agreement. The revolving line of credit agreement expires on October 31, 2005 and the Company has the option to extend it for an additional two years from the expiration date. Borrowings under the
revolving line of credit agreement bear interest based, at the Companys option, on either (1) the higher of the prime rate or the federal fund rate plus 0.5 percent, or (2) London Interbank Offered Rate (LIBOR) plus 1.25 percent. The line of
credit agreement was amended in November 2002 and contains similar covenants as the original agreement, which requires the Company to maintain a minimum level of earnings before interest, taxes, depreciation and amortization. There were no other
substantive changes in the terms and conditions in the amendment.



The Company was in compliance with the terms of the agreements, then in place, as of December 31, 2002 and 2001. As of December 31, 2002, the Company had a $6.5 million balance outstanding under the line of credit agreement;
the interest rate on such bank borrowings was 2.66 percent. The Company did not have a balance outstanding under the agreement at December 31, 2001.



At December 31, 2002, the Company had letters of credit of $3.7 million outstanding, compared to $7.7 million outstanding as of
December 31, 2001. The decrease relates to the payment of the first installment of Barba-Arkhon notes payable and the litigation settlement obligation during 2002. The letters of credit



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##### Table of Contents

outstanding at December 31, 2002 are to secure the second installment of the Barba-Arkhon notes payable, due in March 2003, and various
leased office space the Company occupies. The letters of credit expire at various dates through January 2004.



15.    INCOME TAX EXPENSE (BENEFIT)



Income tax expense (benefit), shown in thousands, consists of the following:



|                                                              |  | For the year endedDecember 31, |      
|------------------------------------------------------------- |  | ------------------------------ | -----
|                                                              |  | 2002                           |      
|Federal:                                                      |  |                                |      
|Current                                                       |  | $                              | 4,295
|Deferred                                                      |  |                                | (155 
|                                                              |  |                                |      
|Total                                                         |  |                                | 4,140
|                                                              |  |                                |      
|State:                                                        |  |                                |      
|Current                                                       |  |                                | 927  
|Deferred                                                      |  |                                | (36  
|                                                              |  |                                |      
|Total                                                         |  |                                | 891  
|                                                              |  |                                |      
|Foreign                                                       |  |                                | 877  
|                                                              |  |                                |      
|Total federal, state and foreign income tax expense (benefit) |  | $                              | 5,908
|                                                              |  |                                |      



Income
tax expense (benefit) differs from the amounts estimated by applying the statutory income tax rates to income (loss) from continuing operations before income taxes as follows:



|                                                                           |  | For the year endedDecember 31, |  
|-------------------------------------------------------------------------- |  | ------------------------------ | -
|                                                                           |  | 2002                           |  
|Federal tax expense (benefit) at statutory rate                            |  | 35.0                           | %
|State tax expense (benefit) at statutory rate, net of federal tax
benefits |  | 4.2                            |  
|Foreign taxes                                                              |  | (0.2                           | )
|Effect of nontaxable interest and dividends                                |  | (0.7                           | )
|Effect of non-deductible amortization                                      |  | 2.7                            |  
|Effect of non-deductible stock compensation expense                        |  | (1.9                           | )
|Effect of employee stock purchase plan disqualifying disposition           |  | (0.1                           | )
|Effect of restricted stock vesting                                         |  |                               |  
|Effect of non-deductible meals and entertainment expense                   |  | 1.0                            |  
|Effect of other non-deductible expenses                                    |  |                               |  
|                                                                           |  |                                |  
|                                                                           |  | 40.0                           | %
|                                                                           |  |                                |  



The tax
benefits associated with nonqualified stock options and disqualifying dispositions of incentive stock options reduced taxes payable by $0.4 million, $0.08 million, and $0.02 million in 2002, 2001 and 2000, respectively. Such benefits were recorded
as an increase to additional paid-in capital in each year.





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##### Table of Contents

Deferred income taxes result from temporary differences between years in the recognition
of certain expense items for income tax and financial reporting purposes. The source and income tax effects of these differences (shown in thousands) are as follows:



|                                                                                   |  | December 31, |      
|---------------------------------------------------------------------------------- |  | ------------ | -----
|                                                                                   |  | 2002         |      
|Deferred tax assets attributable to:                                               |  |              |      
|State income taxes                                                                 |  | $            | (510 
|Allowance for uncollectible receivables                                            |  |              | 2,772
|Restructuring costs                                                                |  |              | 176  
|Former officers notes                                                             |  |              | 1,414
|Insurance related costs                                                            |  |              | 15   
|Depreciation and amortization                                                      |  |              | 928  
|Stock options                                                                      |  |              | 273  
|Deferred revenue                                                                   |  |              | 176  
|Litigation settlement                                                              |  |              | 1,424
|Acquisition costs                                                                  |  |              | 1,359
|AMT and foreign tax credits carried forward                                        |  |              | 1,010
|Other                                                                              |  |              | (1   
|                                                                                   |  |              |      
|Total deferred tax assets                                                          |  |              | 9,036
|                                                                                   |  |              |      
|Deferred tax liabilities attributable to:                                          |  |              |      
|Compensation program                                                               |  |              | 492  
|Investments                                                                        |  |              | 298  
|Adjustment resulting from changes in the method ofaccounting used for tax
purposes |  |              |     
|Other                                                                              |  |              |     
|                                                                                   |  |              |      
|Deferred tax liabilities                                                           |  |              | 790  
|                                                                                   |  |              |      
|Net deferred tax assets                                                            |  | $            | 8,246
|                                                                                   |  |              |      



The
Company has not recorded a valuation allowance against its net deferred tax assets, as it believes it is more likely than not that the net deferred tax assets are recoverable from future results of operations.



16.    RESTRUCTURING COSTS (CREDITS)



In May 2000, the Company implemented a plan to restructure
its operations. The restructuring of the Companys operations included streamlining its administrative staff, facility closings and space reduction. Accordingly, the Company recorded restructuring costs of $10.2 million for the year ended
December 31, 2000. The Company offered involuntary severance packages to approximately 140 consulting, executive and administrative employees in its continuing operations. The Company recorded $ 6.0 million in severance-related costs associated with
these reductions in force. The Company also recorded $4.2 million of expense associated with facility closings, space reduction and office consolidation. Most of the plan has been completed.



During the year ended December 31, 2001, the Company recorded
a $1.9 million charge for additional costs to be incurred. As of December 31, 2001, the Company had not been able to sublease its remaining lease obligations of office subject to closing or size reduction. The Company reevaluated the time and
additional costs it expected to incur to secure tenants for the lease obligation based on the then current real estate market conditions.



The Company recorded a $0.5 million restructuring credit to its operating results for the year ended December 31, 2002. Certain offices
subject to closing or size reduction were put back into operations as additional space was needed to support acquisitions and headcount growth.



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##### Table of Contents

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)





The
activity affecting the accrual for restructuring charges during 2002, 2001, and 2000 is as follows (shown in thousands):



|                                         |  | Facilities closings |        |   | Workforce reductions |   |        | Total | 
|---------------------------------------- |  | ------------------- | ------ | - | -------------------- | - | ------ | ----- | 
|Balance at December 31, 1999             |  | $                   | 2,824  |   |                      | $ | 536    |       | 
|                                        
|Year ended December 31, 2000:            |  |                     |        |   |                      |   |        |       | 
|Charges to operations                    |  |                     | 4,259  |   |                      |   | 5,970  |       | 
|Utilized                                 |  |                     | (2,275 | ) |                      |   | (5,461 | )     | 
|Reclassified to discontinued operations. |  |                     | (1,312 | ) |                      |   |       |       | 
|                                         |  |                     |        |   |                      |   |        |       | 
|Balance at December 31, 2000             |  |                     | 3,496  |   |                      |   | 1,045  |       | 
|                                        
|Year ended December 31, 2001:            |  |                     |        |   |                      |   |        |       | 
|Credit to operations                     |  |                     | 1,900  |   |                      |   |       |       | 
|Utilized                                 |  |                     | (1,671 | ) |                      |   | (887   | )     | 
|Reclassified                             |  |                     | 158    |   |                      |   | (158   | )     | 
|                                         |  |                     |        |   |                      |   |        |       | 
|Balance at December 31, 2001             |  |                     | 3,883  |   |                      |   |       |       | 
|                                        
|Year ended December 31, 2002:            |  |                     |        |   |                      |   |        |       | 
|Credit to operations                     |  |                     | (500   | ) |                      |   |       |       | 
|Utilized                                 |  |                     | (1,255 | ) |                      |   |       |       | 
|                                         |  |                     |        |   |                      |   |        |       | 
|Balance at December 31, 2002             |  | $                   | 2,128  |   |                      | $ |       |       | 
|                                         |  |                     |        |   |                      |   |        |       | 



17.    DISCONTINUED OPERATIONS



In May 2000, the Company developed plans and identified certain operating units and other entities for disposition, and implemented plans to restructure the remaining operating units. The Company has
made three large strategic divestitures in 2000: Economics & Policy, Strategic Consulting and IT Solutions.



Economics & Policy



On September 29, 2000, the Company sold the assets of LECG to a team of senior LECG professionals in a management buy-out for $45.0
million, principally in cash and notes receivable. The agreement provides for other contingent consideration, including up to a $5.0 million deferred sales price payment plus interest at agreed-upon rates. No value was given to contingent deferred
payments when calculating the gain on disposition. This contingent deferred sales price payment is based on certain employee retention on the first anniversary of the closing date. LECG has informed the Company that no contingent payment is due. The
Company disagrees, but is unable to predict whether it will ever recover any such amounts.



Strategic Consulting



In October 2000, the Company completed a nontaxable exchange of the stock of SDG for the Companys stock with a value at the time of closing of approximately $6.2 million. In addition, the Company
received $16.0 million in cash related to this transaction. The assets of Glaze Creek were included in this transaction.



In June 2000, the Company shut down the operations of Triad International through employee terminations and sold certain Triad
International assets to the remaining employees. The purchasers also assumed certain liabilities in connection with this disposition. In consideration for the sale, the Company is eligible to receive up



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##### Table of Contents

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)



to $4.0 million in contingent deferred payments over four years following the disposition date. No value was given to the contingent deferred
payments when calculating the loss on disposition. Since disposition, the Company received a total of $0.6 million in contingent deferred payments.



The Company sold to either management or various interested third parties the operations of Brooks International AB, Brooks International
SARL and SPRL, and Brooks International Consulting OY and completed this process during 2001.



IT Solutions



In July 2000, the Company sold the assets of GeoData Solutions for $9 million cash, and retained all accounts receivable, which had an estimated realizable value of approximately $4.1 million at July 1, 2000. There were no
Geodata receivable amounts outstanding as of December 31, 2001. The Company shut down the operations of SSC and Dowling Associates during the third quarter of 2000.



The Economics & Policy, Strategic Consulting and IT Solutions operating segments are accounted for as
discontinued operations and, accordingly, amounts in the consolidated financial statements and related notes have been restated to reflect discontinued operations accounting. Summarized results of discontinued businesses are shown separately as
discontinued operations in the accompanying consolidated financial statements. Certain information with respect to discontinued operations is summarized as follows (shown in thousands):



|                                  |  | 2000 |        
|--------------------------------- |  | ---- | -------
|Revenues:                         |  |      |        
|Economics & Policy                |  | $    | 60,029 
|Strategic Consulting              |  |      | 35,288 
|IT Solutions                      |  |      | 15,557 
|                                  |  |      |        
|Total revenues                    |  |      | 110,874
|                                  |  |      |        
|Loss from discontinued operations |  |      | (13,794
|Income tax (benefit)              |  |      | (1,877 
|                                  |  |      |        
|Net loss                          |  | $    | (11,917
|                                  |  |      |        



Results
of discontinued operations for the year ended December 31, 2000 only include amortization of associated intangible assets through the measurement date of April 30, 2000. The above results include $1.7 million of net loss (excluding amortization
expenses) for the period May 1, 2000 through disposition dates.



The loss on dispositions for the year ended December 31, 2000 includes the following (in thousands):



|Book value of net assets in excess of proceeds, including intangible assets of
$162,346                      |  | $ | 138,181
|------------------------------------------------------------------------------------------------------------ |  | - | -------
|Net pre-tax loss on discontinued operations for the period Ma 1, 2000 through the
expected disposition dates |  |   | 3,597  
|Expenses associated with asset disposals (including $5,861 in severance-related
expenses)                    |  |   | 8,407  
|                                                                                                             |  |   |        
|Pre-tax loss on dispositions                                                                                 |  |   | 150,185
|Income tax provision                                                                                         |  |   | 4,818  
|                                                                                                             |  |   |        
|Loss on dispositions                                                                                         |  | $ | 155,003
|                                                                                                             |  |   |        



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NAVIGANT CONSULTING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)





18.    EMPLOYEE BENEFIT PLANS



The Company maintains profit sharing and savings plans for several operating subsidiaries. Eligible employees may contribute a portion of their compensation to their respective operating subsidiarys plan. In February
2000, the Company amended the profit sharing and savings plans of all operating subsidiaries to provide employer-matching contributions for all participants. The Company matches in an amount equal to 100 percent of the employees current
contributions, up to a maximum of 3 percent of the employees total eligible compensation and limited to $5,100 per participant.



The Company, as sponsor of the plans, uses independent third parties to provide administrative services to the plans. The Company has the
right to terminate the plans at any time. The Companys contributions to the various plans were $2.6 million, $2.4 million, and $2.3 million in the years ended December 31, 2002, 2001, and 2000, respectively.



19.    RELATED PARTY TRANSACTIONS



Mr. Thompson, one of the Companys directors, is
Chairman of the law firm of Winston & Strawn. Winston & Strawn has provided legal representation for the Company in the past and may provide services to the Company in the future. Total payments related to services rendered were $0.3
million, $0.2 million, and $1.1 million in 2002, 2001 and 2000, respectively.



20.    LITIGATION AND SETTLEMENTS



As previously disclosed, in August 2000, the Company agreed to settle for $23.0 million the consolidated securities law class actions (the Consolidated Class Actions). The
Companys contribution to the settlement was $16.5 million, with the insurance companies contributing $6.5 million. The federal district court approved this settlement in March 2001. The Company subsequently recovered from one of its insurers
an additional contribution of $4.0 million, which it agreed to share with the class on a 50/50 basis, net of the Companys costs. All settlement funds were paid into escrow pending final resolution of appeals and distribution issues. In July
2002 the last pending appeal was resolved. In February 2003, the federal district court entered an order authorizing the distribution of all settlement funds.



In February 2003, the Company agreed to settle, without any admission of liability, a previously disclosed lawsuit entitled Klein v.
Navigant Consulting, Inc. et al. for a payment of $1.35 million. The plaintiffs had opted out of the settlement of the Consolidated Class Action. There are no other opt out lawsuits remaining. The Company recorded an additional $0.8 million to
litigation and settlement provisions during the year ended December 31, 2002 related to the matter.



As previously disclosed, in October 2002, the Company filed a complaint against two former employees in the United States District Court
for the Northern District of Texas entitled, Navigant Consulting Inc. v. Wilkinson et al.In November 2002, the Company amended its complaint to add as a defendant a third former employee, Sharon Taulman. The complaint, as amended, seeks to
protect the Companys intellectual property rights in certain proprietary software and to enforce certain provisions of its former employees confidentiality and non-solicitation agreements. The Company is seeking declaratory and
injunctive relief, compensatory and punitive damages and attorneys fees on various legal theories, including misappropriation of trade secrets, conversion, breach of contract, and breach of fiduciary duties. The defendants have counter-claimed
for defamation and for breach of contract based on NCIs refusal to permit the defendants to exercise certain employee stock options.



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NAVIGANT CONSULTING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)





As
previously disclosed, in November 2001, the Company was informed that the SEC has initiated a formal investigation, through the Chicago office of its Division of Enforcement, as to whether there may have been violations of the securities laws at the
Company during 1998 and 1999. The Company is cooperating fully with the SEC.



As previously disclosed, in November 2000, the Company was served with a lawsuit filed in the Circuit Court of Cook County, Illinois by two former officers, Steven J. Denari and Charles A. Demirjian.
The lawsuit named as defendants the Company, three of its directors, and its auditors, KPMG LLP. The lawsuit seeks compensatory and punitive damages from defendants based on various legal theories, including defamation. NCI is defending this lawsuit
vigorously. In an independent action, the Company is also pursuing collection of approximately $3.0 million from Mr. Demerjian, who borrowed money from the Company to purchase the Companys common stock and has, to date, declined to repay the
money borrowed.



From time to time the Company is
party to various other lawsuits and claims in the ordinary course of business. While the outcome of those lawsuits or claims cannot be predicted with certainty, the Company does not believe that any of those lawsuits or claims will have a material
adverse effect on the Company.



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##### Table of Contents

REPORT OF INDEPENDENT ACCOUNTANTS



The Board of Directors and Stockholders

Navigant Consulting, Inc.:



Under date of February 7, 2003, we reported on the consolidated balance sheets of Navigant Consulting, Inc.
and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders equity and cash flows for each of the years in the three year period ended December 31, 2002, as contained in the 2002
Annual Report on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule of valuation and qualifying accounts. The consolidated financial
statement schedule is the responsibility of the Companys management. Our responsibility is to express an opinion on the consolidated financial statement schedule based on our audits.



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



As discussed in note 2 of the notes to the consolidated financial statements, in the year ended December 31, 2002, the Company changed its
method of accounting for goodwill.



/s/    KPMG LLP



Chicago, Illinois

February 7, 2003





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##### Table of Contents

SCHEDULE II



NAVIGANT CONSULTING, INC. AND SUBSIDIARIES



VALUATION AND QUALIFYING ACCOUNTS

Years ended December 31, 2002, 2001 and 2000

(amounts in thousands)



|Description                                                 |  | Balance at beginning of year |        | Charged to expenses |   | Deductions(1) |  |   | Balance at end of year
|----------------------------------------------------------- |  | ---------------------------- | ------ | ------------------- | - | ------------- |  | - | ----------------------
|Year ended December 31, 2002Allowance for doubtful accounts |  | $                            | 9,948  |                     | $ | 4,643         |  | $ | (5,401                
|Year ended December 31, 2001Allowance for doubtful accounts |  | $                            | 9,521  |                     | $ | 5,604         |  | $ | (5,177                
|Year ended December 31, 2000Allowance for doubtful accounts |  | $                            | 16,330 |                     | $ | 4,900         |  | $ | (11,709               

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|(1) |  | Represents write-offs of bad debts. In 2000, $5.1 million was attributed to divestitures.
|--- |  | -----------------------------------------------------------------------------------------



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