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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, 2003  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 incorporation or organization) |  | (I.R.S. Employer 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 9, 2004, 45.4 million shares of the Registrants common
stock, par value $0.001 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 9,
2004, was approximately $915 million. The Registrants Proxy Statement for the Annual Meeting of Stockholders, scheduled to be held on April 21, 2004, 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, 2003



TABLE OF CONTENTS



|         |  |                                                                                                                 |  |     
|-------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                 |  | Page
|PART I   |  |                                                                                                                 |  |     
|Item 1.  |  | Business                                                                                                        |  | 3   
|Item 2.  |  | Properties                                                                                                      |  | 8   
|Item 3.  |  | Legal Proceedings                                                                                               |  | 8   
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                             |  | 9   
|         |  | Executive Officers of the Registrant                                                                            |  | 9   
|         |  |                                                                                                                
|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 of Operations.                          |  | 14  
|Item 7A. |  | Quantitative and Qualitative Disclosure About Market Risk                                                       |  | 24  
|Item 8.  |  | Consolidated Financial Statements and Supplemental Data                                                         |  | 24  
|Item 9.  |  | Changes In and Disagreements with the Companys Independent Accountants on Accounting and Financial Disclosures |  | 24  
|Item 9A. |  | Controls and Procedures                                                                                         |  | 24  
|         |  |                                                                                                                
|PART III |  |                                                                                                                 |  |     
|Item 10. |  | Directors and Executive Officers of the Registrant                                                              |  | 25  
|Item 11. |  | Executive Compensation                                                                                          |  | 25  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  |  | 25  
|Item 13. |  | Certain Relationships and Related Transactions                                                                  |  | 25  
|Item 14. |  | Principal Independent Accountant Fees and Services                                                              |  | 25  
|         |  |                                                                                                                
|PART IV  |  |                                                                                                                 |  |     
|Item 15. |  | Exhibits, Financial Statements and Reports on Form 8-K                                                          |  | 26  
|         |  | 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 



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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 services, healthcare, energy and operational consulting services to government agencies, legal counsel, and
large companies facing the challenges of uncertainty, risk, distress and significant change. The Company focuses on industries undergoing substantial regulatory or structural change and on the issues driving these transformations.



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 and 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, including three large strategic divestitures and closure or sale of a number of other businesses. This realignment eliminated three former business segments: Economic & Policy Consulting, Strategic Consulting
and IT Solutions. During 2001 to 2003, the Company acquired nine consulting firms that were complementary to its current businesses. The most significant acquisition during this period was Hunter & Associates Management Services, Inc.
(Hunter), which occurred in 2002. The Company is required to furnish pro forma financial information relating to the Hunter acquisition, which has been included in the notes to the Companys consolidated financial statements.



The Companys business structure consists of two business
segments: Financial & Claims Consulting and Energy 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 Business 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 to the Companys consolidated financial statements.



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



|                              |  |       |  |       |  |      
|----------------------------- |  | ----- |  | ----- |  | -----
|                              |  | 2003  |  | 2002  |  | 2001 
|Financial & Claims Consulting |  | 77.4% |  | 71.2% |  | 63.1%
|Energy Consulting             |  | 22.6% |  | 28.8% |  | 36.9%



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



|                              |  |       |  |       |  |      
|----------------------------- |  | ----- |  | ----- |  | -----
|                              |  | 2003  |  | 2002  |  | 2001 
|Financial & Claims Consulting |  | 87.0% |  | 87.5% |  | 58.1%
|Energy Consulting             |  | 13.0% |  | 12.5% |  | 41.9%



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



|                               |  |       |  |       |  |      
|------------------------------ |  | ----- |  | ----- |  | -----
|                               |  | 2003  |  | 2002  |  | 2001 
|Financial & Claims Consulting  |  | 18.7% |  | 14.2% |  | 12.6%
|Energy Consulting              |  | 9.5%  |  | 5.0%  |  | 15.5%
|Total segment operating profit |  | 16.6% |  | 11.5% |  | 13.6%



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 based on consulting fee revenues. Certain operating expenses, which primarily relate to operating segments, have been excluded for comparative purposes from the segment operating profit amounts, and are included in the costs not allocated
to segments.



(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. In addition, 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 fees for professional services. Over the last three years, a substantial majority of the
Companys revenues has 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. Such incremental revenues may cause 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 cost of services before reimbursable expenses, which
generally relates to costs associated with generating revenues, and includes consultant compensation and benefits, sales and marketing expenses, and the direct costs of training and recruiting the consulting staff. Consultant compensation consists
of salaries and incentive compensation. The consultants total compensation is competitive with industry standards. Incentive compensation is structured to reward based on business performance.



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 for the Companys 36 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 finance
services, discovery services, government contracting services, and operations advisory and management process outsourcing.



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 client 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.



Human Capital



As of December 31, 2003, the Company had 1,367 employees, including 959 consultants. Revenues are primarily generated from services performed by the
Companys consultants; therefore, 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.



Independent contractors at times supplement the Companys consultants on
certain engagements. The Company has found that the practice of retaining independent contractors on a per-engagement basis provides 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 strategy of selectively acquiring consulting businesses and consulting capabilities strengthens
its platform, market share and overall operating results.



In
connection with recruiting activities and business acquisitions, the Companys policy is to obtain non-solicitation covenants from senior and mid-level consultants. Most of these covenants have restrictions that



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extend 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, staff and projects from departing employees.



To secure new non-solicitation agreements for those consultants hired before 2000 whose non-solicitation agreements would have expired by year-end 2002, the Company successfully executed and implemented, 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 9 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 incentive
compensation, 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. Material changes to the Companys compensation structure are done with the requisite approval from the Compensation Committee of the Companys Board of Directors. 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 those bill rates according to the supply and demand of the then-current market conditions within the various industry segments served by the Company.



In addition, the Company recently changed its formal
compensation program to require certain senior consulting leaders to receive payment of a portion of incentive compensation in restricted stock instead of cash.



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 and information technology 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 independence, experience, reputation, industry focus and broad range of professional
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 5 percent of the Companys total revenues for the year ended December 31, 2003. One client from the Energy Consulting segment accounted for more than 5 percent of the Companys total revenues for the years ended December 31, 2002 and
2001. Revenues earned from the Companys top 20 clients amounted to 36 percent, 39 percent and 42 percent of total revenues for the years ended December 31, 2003, 2002 and 2001, respectively. The mix of the Companys largest clients may
change from year to year.



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.



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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
packages. Equity-based compensation is 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 the Company and the unauthorized use could have a materially adverse impact on the Companys
business. Additionally, many of our service offerings rely on technology that is subject to rapid change.



The Companys intellectual capital, in certain service offerings, 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 acquisition 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, borrowings, 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 current engagements with new 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 assist in funding 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.



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 consultants 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, a 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 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.



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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, Mexico 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 in any of the three years ended December 31, 2003.



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 offices. In addition to the executive offices, the Company has 36 operating leases for office
facilities in 35 cities, principally in the United States. Additional space may be required as the business expands geographically, but the Company believes it will be able to obtain suitable space as needed. Following are principal offices located
in the United States with the indicated cities, alphabetized by state:



|                                                                 |  |                            |  |                            
|---------------------------------------------------------------- |  | -------------------------- |  | ---------------------------
|Arizona  Phoenix                                                |  | Florida  Tampa            |  | New York  Albany          
|California  Glendale                                            |  | Georgia  Atlanta          |  | New York  New York City   
|California  Los Angeles                                         |  | Illinois  Chicago         |  | Pennsylvania  Philadelphia
|California  Sacramento                                          |  | Maryland  Baltimore       |  | Pennsylvania  Pittsburgh  
|California  San Francisco                                       |  | Massachusetts  Boston     |  | Tennessee  Nashville      
|California  San Mateo                                           |  | Massachusetts  Burlington |  | Texas  Austin             
|Colorado  Denver                                                |  | New Jersey  Mt. Laurel    |  | Texas  Dallas             
|Connecticut  Fairfield                                          |  | New Jersey  Princeton     |  | Texas  Houston            
|Delaware  Wilmington                                            |  |                            |  | Virginia  Richmond        
|District of Columbia  Washington                                |  |                            |  | Virginia  Vienna          
|                                                                
|Following are principal offices located in international cities:
|                                                                 |  |                           
|Canada  Toronto                                                 |  | Mexico  Mexico City       |  | United Kingdom  London    



Item 3.Legal Proceedings.



As previously disclosed, in November 2000 the Company was served with a lawsuit filed by two former officers of the Company, Steven J. Denari and Charles
A. Demirjian. As amended, the complaint named as defendants the Company, three of its Directors, and its independent accountants, KPMG LLP. The lawsuit seeks compensatory and punitive damages from the defendants based on various legal theories,
including defamation. The Company is defending this case vigorously.



As previously disclosed, in October 2001 the Company commenced a civil action to collect the unpaid portion of amounts loaned in 1999 to its former General Counsel, Charles Demirjian. The unpaid amount that the



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Company sought to recover, including interest, was approximately $3.5 million. In February 2004, a jury rendered a verdict in Mr. Demirjians favor,
finding that he is not legally obligated to repay such unpaid amount. The Company is considering whether to move for a new trial or appeal, or both. In 2000, the Company fully reserved the unpaid amount of Mr. Demirjians loan and, therefore,
the adverse verdict had no impact on the Companys financial statements.



As previously disclosed, in November 2001 the Company was informed that the SEC had 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 has cooperated fully with the SEC. The SEC has not informed the Company of the current status of its investigation; however, there have been no developments that the
Company is aware of in the last year.



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. 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, 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. Both parties have filed
motions for summary judgment. The case is currently scheduled for trial in May 2004.



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.



Executive Officers of the Registrant



The following are the executive officers of the Company as of March 9, 2004:



|                    |  |                                                      |  |    
|------------------- |  | ---------------------------------------------------- |  | ---
|Name                |  | Office                                               |  | Age
|William M. Goodyear |  | Chairman of Board and Chief Executive Officer        |  | 55 
|Ben W. Perks        |  | Executive Vice President and Chief Financial Officer |  | 62 
|Julie M. Howard     |  | Vice President and Chief Operating Officer           |  | 41 
|Philip P. Steptoe   |  | Vice President, General Counsel and Secretary        |  | 52 



William M. Goodyear,
55, 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.



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Ben W. Perks, 62, 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, licensed in the states of Illinois, California and Arizona, a Certified Fraud Examiner, and a member of the American Institute of Certified Public Accountants and the American Bar Association.



Julie M. Howard, 41, became Vice President and Chief Operating Officer during
2003. Prior to this current role, Ms. Howard was Vice President and Human Capital Officer since July 2000. Since 1986, Ms. Howard has held a variety of consulting and operational positions within the Company and formerly Peterson Consulting, which
was acquired by the Company in 1998. Ms. Howard is a graduate of the University of Wisconsin, with a Bachelor of Science degree in Finance. She has also completed several post-graduate courses within the Harvard Business School Executive Education
program, focusing in Finance and Management.



Philip P.
Steptoe, 52, 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
|2003           |  |      |       |     |   |      
|Fourth quarter |  | $    | 19.29 |     | $ | 12.50
|Third quarter  |  | $    | 15.89 |     | $ | 11.32
|Second quarter |  | $    | 11.85 |     | $ | 5.49 
|First quarter  |  | $    | 6.20  |     | $ | 4.80 
|               |  |     
|2002           |  |      |       |     |   |      
|Fourth quarter |  | $    | 6.09  |     | $ | 3.75 
|Third quarter  |  | $    | 6.80  |     | $ | 5.06 
|Second quarter |  | $    | 6.99  |     | $ | 6.15 
|First quarter  |  | $    | 6.63  |     | $ | 4.68 



Holders



As of March 9, 2004, there were approximately 490 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.



11



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##### Table of Contents

Issuance of Unregistered Securities



During the years ended December 31, 2001, 2002 and 2003, the Company has issued the following unregistered securities:



|                   |  |                    |  |                                     |  |                                                     |  |                                                                               |  |                 
|------------------ |  | ------------------ |  | ----------------------------------- |  | --------------------------------------------------- |  | ----------------------------------------------------------------------------- |  | ----------------
|Date               |  | Type of Securities |  | Number ofShares inConsider-ation(a) |  | Purchaser or Recipient                            |  | Assets Purchased                                                              |  | ExemptionClaimed
|October 31, 2001   |  | Common Stock       |  | 136,500                             |  | FormerStockholderof BostonManagementResources, Inc. |  | All outstandingshares of BostonManagementResources, Inc.                      |  | Section4(2)     
|                   |  |                    |  |                                     | 
|May 24, 2002       |  | Common Stock       |  | 276,448                             |  | FinancialAnalyticsConsultingGroup, LLC              |  | Substantially allof the assets of FinancialAnalytics ConsultingGroup, LLC     |  | Section4(2)     
|                   |  |                    |  |                                     | 
|June 19, 2002      |  | Common Stock       |  | 410,828                             |  | KeevanConsultingGroup, LLC                          |  | Substantially allof the assets of KeevanConsulting Group, LLC                 |  | Section4(2)     
|July 10, 2002      |  | Common Stock       |  | 716,953                             |  | BarringtonEnergyPartners, LLC                       |  | Substantially allof the assets of BarringtonEnergy Partners, LLC              |  | Section4(2)     
|                   |  |                    |  |                                     | 
|July 24, 2002      |  | Common Stock       |  | 92,010                              |  | GCR, LLC                                            |  | Substantially all of theassets of GCR, LLC                                    |  | Section4(2)     
|                   |  |                    |  |                                     | 
|September 23, 2002 |  | Common Stock       |  | 1,464,547                           |  | Hunter &AssociatesManagementServices, Inc.          |  | Substantially allof the assets of Hunter& AssociatesManagement Services, Inc. |  | Section4(2)     
|                   |  |                    |  |                                     | 
|May 30, 2003       |  | Common Stock       |  | 5,675                               |  | T.A. Carlson &Company, Inc.                         |  | Substantially allof the assets of T.A.Carlson & Company, Inc.                 |  | Section4(2)     
|                   |  |                    |  |                                     | 
|December 15, 2003  |  | Common Stock       |  | 74,321                              |  | Front LineStrategicConsulting, Inc.                 |  | Substantially allof the assets of Front LineStrategic Consulting, Inc.        |  | Section4(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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##### Table of Contents

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, |        
|                                                                     |  | 2003                             |         | 2002 |   |         | 2001 |  |   | 2000    |   |  | 1999 |         
|Revenues before reimbursements                                       |  | $                                | 276,130 |      | $ | 225,305 |      |  | $ | 210,532 |   |  | $    | 211,327  |   |  | $ | 193,000 |  
|Reimbursements                                                       |  |                                  | 41,652  |      |   | 32,715  |      |  |   | 25,048  |   |  |      | 33,302   |   |  |   | 26,491  |  
|                                                                     |  |                                  |         |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Total revenues                                                       |  |                                  | 317,782 |      |   | 258,020 |      |  |   | 235,580 |   |  |      | 244,629  |   |  |   | 219,491 |  
|Cost of services before reimbursable expenses                        |  |                                  | 160,080 |      |   | 136,121 |      |  |   | 126,959 |   |  |      | 125,418  |   |  |   | 116,474 |  
|Reimbursable expenses                                                |  |                                  | 41,652  |      |   | 32,715  |      |  |   | 25,048  |   |  |      | 33,302   |   |  |   | 26,491  |  
|                                                                     |  |                                  |         |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Total costs of services                                              |  |                                  | 201,732 |      |   | 168,836 |      |  |   | 152,007 |   |  |      | 158,720  |   |  |   | 142,965 |  
|Stock-based compensation expense                                     |  |                                  | 11,107  |      |   | 3,401   |      |  |   | 3,812   |   |  |      | 492      |   |  |   | 3,850   |  
|VSRP cash compensation expense                                       |  |                                  |        |      |   |        |      |  |   | 12,399  |   |  |      | 6,357    |   |  |   |        |  
|General and administrative expenses                                  |  |                                  | 63,292  |      |   | 60,721  |      |  |   | 55,413  |   |  |      | 59,846   |   |  |   | 58,742  |  
|Depreciation expense                                                 |  |                                  | 7,488   |      |   | 7,651   |      |  |   | 7,118   |   |  |      | 6,797    |   |  |   | 9,550   |  
|Amortization expense                                                 |  |                                  | 1,880   |      |   | 2,373   |      |  |   | 5,700   |   |  |      | 4,573    |   |  |   | 900     |  
|Restructuring costs (credits)                                        |  |                                  |        |      |   | (500    | )    |  |   | 1,900   |   |  |      | 10,229   |   |  |   | (881    | )
|Litigation and settlement provisions                                 |  |                                  | 440     |      |   | 750     |      |  |   | 5,700   |   |  |      | 16,500   |   |  |   | 2,335   |  
|                                                                     |  |                                  |         |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Operating income (loss) from continuing operations                   |  |                                  | 31,843  |      |   | 14,788  |      |  |   | (8,469  | ) |  |      | (18,885  | ) |  |   | 2,030   |  
|Other income (expense), net                                          |  |                                  | 264     |      |   | (19     | )    |  |   | 874     |   |  |      | (1,666   | ) |  |   | (2,653  | )
|                                                                     |  |                                  |         |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Income (loss) from continuing operations before income taxes         |  |                                  | 32,107  |      |   | 14,769  |      |  |   | (7,595  | ) |  |      | (20,551  | ) |  |   | (623    | )
|Income tax expense (benefit)                                         |  |                                  | 13,399  |      |   | 5,908   |      |  |   | (2,284  | ) |  |      | (6,194   | ) |  |   | 1,534   |  
|                                                                     |  |                                  |         |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Income (loss) from continuing operations                             |  |                                  | 18,708  |      |   | 8,861   |      |  |   | (5,311  | ) |  |      | (14,357  | ) |  |   | (2,157  | )
|Income (loss) from discontinued operations, net of income taxes      |  |                                  |        |      |   |        |      |  |   |        |   |  |      | (10,193  | ) |  |   | (12,465 | )
|Loss on dispositions of discontinued operations, net of income taxes |  |                                  |        |      |   |        |      |  |   |        |   |  |      | (155,003 | ) |  |   |        |  
|                                                                     |  |                                  |         |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Net income (loss)                                                    |  | $                                | 18,708  |      | $ | 8,861   |      |  | $ | (5,311  | ) |  | $    | (179,553 | ) |  | $ | (14,622 | )
|                                                                     |  |                                  |         |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Basic income (loss) per share:                                       |  |                                  |         |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Income (loss) from continuing operations                             |  | $                                | 0.43    |      | $ | 0.22    |      |  | $ | (0.14   | ) |  | $    | (0.35    | ) |  | $ | (0.05   | )
|Income (loss) from discontinued operations                           |  | $                                |        |      | $ |        |      |  | $ |        |   |  | $    | (0.25    | ) |  | $ | (0.30   | )
|Loss on dispositions of discontinued operations                      |  | $                                |        |      | $ |        |      |  | $ |        |   |  | $    | (3.79    | ) |  | $ |        |  
|Net income (loss)                                                    |  | $                                | 0.43    |      | $ | 0.22    |      |  | $ | (0.14   | ) |  | $    | (4.39    | ) |  | $ | (0.35   | )
|Shares used in computing income (loss) per basic share               |  |                                  | 43,236  |      |   | 40,350  |      |  |   | 38,439  |   |  |      | 40,895   |   |  |   | 41,601  |  
|Diluted income (loss) per share:                                     |  |                                  |         |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Income (loss) from continuing operations                             |  | $                                | 0.40    |      | $ | 0.21    |      |  | $ | (0.14   | ) |  | $    | (0.35    | ) |  | $ | (0.05   | )
|Income (loss) from discontinued operations                           |  | $                                |        |      | $ |        |      |  | $ |        |   |  | $    | (0.25    | ) |  | $ | (0.30   | )
|Loss on dispositions of discontinued operations                      |  | $                                |        |      | $ |        |      |  | $ |        |   |  | $    | (3.79    | ) |  | $ |        |  
|Net income (loss)                                                    |  | $                                | 0.40    |      | $ | 0.21    |      |  | $ | (0.14   | ) |  | $    | (4.39    | ) |  | $ | (0.35   | )
|Shares used in computing income (loss) per diluted share             |  |                                  | 47,029  |      |   | 42,670  |      |  |   | 38,439  |   |  |      | 40,895   |   |  |   | 41,601  |  
|                                                                     | 
|                                                                     |  | As of December 31,               |        
|                                                                     |  | 2003                             |         | 2002 |   |         | 2001 |  |   | 2000    |   |  | 1999 |         
|Balance Sheet Data:                                                  |  |                                  |         |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Cash and cash equivalents                                            |  | $                                | 38,402  |      | $ | 8,109   |      |  | $ | 35,950  |   |  | $    | 48,798   |   |  | $ | 42,345  |  
|Working capital                                                      |  | $                                | 51,866  |      | $ | 25,910  |      |  | $ | 53,556  |   |  | $    | 63,656   |   |  | $ | 67,598  |  
|Total assets                                                         |  | $                                | 255,316 |      | $ | 201,204 |      |  | $ | 158,826 |   |  | $    | 163,482  |   |  | $ | 414,676 |  
|Long-term debt, less current portion                                 |  | $                                | 1,761   |      | $ | 4,418   |      |  | $ | 1,500   |   |  | $    |         |   |  | $ |        |  
|Total stockholders equity                                           |  | $                                | 188,758 |      | $ | 144,295 |      |  | $ | 112,105 |   |  | $    | 115,725  |   |  | $ | 300,669 |  



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##### Table of Contents

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



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 services, healthcare, energy and operational consulting services to government agencies, legal counsel, and large companies facing the challenges of uncertainty, risk, distress, and significant change. The Company
focuses on industries undergoing substantial regulatory or structural change and on the issues driving these transformations.



The Company derives substantially all of its revenues from fees for professional services. Over the last three years, a substantial majority of the
Companys revenues has 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 billings, which are contingent on the attainment of certain contractual objectives. Such incremental revenues may cause 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 cost of services before reimbursable expenses, which generally relates to costs associated with generating revenues, and includes consultant compensation and benefits, sales and marketing expenses, and the
direct costs of training and recruiting the consulting staff. Consultant compensation consists of salaries and incentive compensation. The consultants total compensation is competitive with industry standards. Incentive compensation is
structured to reward based on business performance.



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 for the Companys 36 offices.



In addition, the Company recently changed its formal compensation program to require certain senior consulting leaders to receive payment of a portion of
incentive compensation in restricted stock instead of cash.



Critical
Accounting Policies



The preparation of the consolidated
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 with respect to 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. These incremental revenue amounts
are generally contingent on a specific event and the incremental revenues are recognized when the contingencies are resolved.



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Determinations of Accounts Receivable Realization



The Company maintains allowances for doubtful accounts for estimated
reduction, if any, in amounts to be received, 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 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



2003
Acquisition:



On December 15, 2003, the Company acquired
substantially all of the assets of Front Line Strategic Consulting, Inc. (Front Line) for $4.8 million, which included $2.5 million cash at closing and 0.1 million shares of its common stock valued at $1.3 million at closing, and $1.0
million payable in two equal installments on the first and second anniversary of the closing date. The Front Line acquisition consisted of 27 consulting professionals. Front Line was acquired primarily to augment the Companys healthcare
practice. The Front Line acquisition has 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 date of
acquisition.



2002 Acquisitions:



On 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 professionals that primarily serve the energy and public sector industries.



On May 24, 2002, the Company acquired substantially all of 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 contingency will be accounted for as goodwill. FACG was formed in conjunction with a management buyout from Arthur Andersen, LLP and consisted of approximately 90 consulting 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 substantially all of 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



15



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##### Table of Contents

accounted for as goodwill. Keevan was formed in conjunction with a management buyout from Arthur Andersen, LLP and consisted of approximately 38 consulting
professionals. Keevan was acquired to augment the Companys government contracts services practice.



On July 15, 2002, the Company acquired substantially all of 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 who 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 substantially all of 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 the Companys common stock valued at $8.2 million at closing, $0.5 million cash payable on April 1, 2003, and $6.5
million in the Companys 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
substantially all of 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 bore interest at 6 percent, and was paid when due
in two equal annual installments. Barba-Arkhon provides project program management and claims analysis services for construction, governmental and institutional projects.



On July 2, 2001, the Company acquired substantially all of 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 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.



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##### Table of Contents

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.



2003 Divestiture:



In September 2003, the Company sold for a nominal sales price its water consulting practice, BookmanEdmonston, Inc., which was previously part of
the Energy Consulting business segment. BookmanEdmonston accounted for 3 percent or less of the Companys total revenues for the years ended December 31, 2003, 2002 and 2001. For the years ended December 31, 2003 and 2002, the water
consulting practice operated at a loss and the operating results had deteriorating financial performance trends.



Results of Operations



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



|                                              |  |                          |   |  |       |   |  |       |   
|--------------------------------------------- |  | ------------------------ | - |  | ----- | - |  | ----- | --
|                                              |  | Years ended December 31, |  
|                                              |  | 2003                     |   |  | 2002  |   |  | 2001  |   
|Revenues before reimbursements                |  | 100.0                    | % |  | 100.0 | % |  | 100.0 | % 
|Reimbursements                                |  | 15.1                     |   |  | 14.5  |   |  | 11.9  |   
|                                              |  |                          |   |  |       |   |  |       |   
|Total revenues                                |  | 115.1                    | % |  | 114.5 | % |  | 111.9 | % 
|Cost of services before reimbursable expenses |  | 58.0                     |   |  | 60.4  |   |  | 60.3  |   
|Reimbursable expenses                         |  | 15.1                     |   |  | 14.5  |   |  | 11.9  |   
|                                              |  |                          |   |  |       |   |  |       |   
|Total costs of services                       |  | 73.1                     | % |  | 74.9  | % |  | 72.2  | % 
|Stock-based compensation expense              |  | 4.0                      |   |  | 1.5   |   |  | 1.8   |   
|VSRP cash compensation expense                |  |                         |   |  |      |   |  | 5.9   |   
|General and administrative expenses           |  | 22.9                     |   |  | 27.0  |   |  | 26.3  |   
|Depreciation expense                          |  | 2.7                      |   |  | 3.4   |   |  | 3.4   |   
|Amortization expense                          |  | 0.7                      |   |  | 1.1   |   |  | 2.7   |   
|Restructuring cost (credits)                  |  |                         |   |  | (0.2  | ) |  | 0.9   |   
|Litigation and settlement provisions          |  | 0.2                      |   |  | 0.3   |   |  | 2.7   |   
|                                              |  |                          |   |  |       |   |  |       |   
|Operating income (loss)                       |  | 11.5                     |   |  | 6.5   |   |  | (4.0  | ) 
|Other income (loss), net                      |  | 0.1                      |   |  |      |   |  | 0.4   |   
|                                              |  |                          |   |  |       |   |  |       |   
|Income (loss) before income taxes             |  | 11.6                     |   |  | 6.5   |   |  | (3.6  | ) 
|Income tax expense (benefit)                  |  | 4.9                      |   |  | 2.6   |   |  | (1.1  | ) 
|                                              |  |                          |   |  |       |   |  |       |   
|Net income (loss)                             |  | 6.7                      | % |  | 3.9   | % |  | (2.5  | )%
|                                              |  |                          |   |  |       |   |  |       |   



Results of OperationsAnnual
Comparisons for the Years ended December 31, 2003, 2002 and 2001



Revenues before Reimbursements. Most revenues before reimbursements are earned from consultants fee revenues that are primarily a function of billable hours, bill rates and consultant headcount. Revenues before reimbursements
were $276.1 million and $225.3 million for the years ended December 31, 2003 and 2002, respectively, which represent increases in revenues before reimbursements of 23 percent and 7 percent, respectively, when compared to the preceding years.



Revenues before reimbursements in 2003 increased through an
improvement in consultant utilization and pricing mix. Consultant utilization rates were 72 percent for 2003, compared to 66 percent for both 2002 and 2001. The improvement in utilization, in 2003, was a function of an increase in client engagement
activities and a reduction of excess consulting capacity. The Companys improved pricing mix also accounted for a significant



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portion of the revenues increase in 2003 compared to 2002 and had limited impact from 2001 to 2002. The Company continued to increase the number of senior
level consultants. Given that the Companys bill rates are tiered in accordance with experience and levels, the higher amount of senior level consultants was a contributing factor in the revenue increase. The increase in revenues from 2001 to
2002 was primarily a function of increased consultant headcount.



In September 2003, the Company sold its water practice, which had declining revenues and other deteriorating financial performance trends. The divestiture partially offset the increase in revenues from the Companys remaining business
for the year ended December 31, 2003.



Cost of Services
before Reimbursable Expenses. Cost of services before reimbursable expenses increased $24.0 million, or 18 percent, to $160.1 million for the year ended December 31, 2003, and increased $9.1 million, or 7 percent, to $136.1 million for the year
ended December 31, 2002, when compared to the preceding years.



Cost of services before reimbursable expenses increased primarily because of consultant compensation and benefits. The Companys business model rewards employees with incentive compensation, which is generally derived as a percentage
of profitability. The increase in the Companys profits and the associated incentive compensation to employees is the primary reason for the increase in cost of services before reimbursable expense for 2003 and 2002 when compared to the
preceding years. Another factor in the increase in cost of services is the change in the consultant personnel mix. The Company has increased the number of senior level consultants through a combination of recruiting and business acquisitions and, as
a result, has incurred higher salary costs per consultant. Increasing amounts of recruiting expenses were an additional factor in the expense increases.



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 Value Sharing Retention Program (VSRP) stock options awarded to the Companys employees. Stock-based compensation expense is recorded for restricted stock awards on
a straight-line basis over their term based on the valuation amount at grant date. In addition, stock-based compensation expense was recorded for certain 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 periodic basis, quarterly, for
the increase (or decrease) in the market price of the Companys common stock above the grant prices.



Stock-based compensation expense was $11.1 million and $3.4 million for the years ended December 31, 2003 and 2002, respectively, which represented an
increase of $7.7 million and a decrease of $0.4 million, respectively, when compared to the preceding years. The Companys closing common stock price was $18.86, $5.90 and $5.50 per share at December 31, 2003, 2002, and 2001, respectively.
Accordingly, the Company recorded stock based-compensation expense to reflect changes in the market valuation of stock option awards and stock appreciation rights subject to variable accounting treatment. The expense related to variable accounting
awards accounted for $4.1 million of the increase in 2003. The expense related to restricted stock awards granted under the Management Stock Purchase Program (MSPP), which was implemented in October 2002, accounted for $2.1 million of
the increase in 2003. Also implemented in October 2002 was an exchange of restricted stock awards for stock options subject to variable accounting treatment. The expense related to these restricted stock awards accounted for $1.5 million of the
increase in 2003.



In future periods, the Company expects to
record approximately $0.3 million of stock-based compensation expense for variable accounting awards for every one dollar change in its common stock price, until the variable accounting awards outstanding at December 31, 2003 have been exercised or
cancelled. The number of awards, as of December 31, 2003, subject to variable accounting was 0.3 million and approximately two-thirds of these awards are stock appreciation rights that expire in the second quarter of 2005; the remaining variable
awards



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were issued before December 31, 1999 and expire 10 years from the original date of issue. The agreements for certain restricted stock awards outstanding at
December 31, 2003 contain provisions that call for an acceleration of vesting, if the Company achieves certain levels of financial performance. Accordingly, the Company may be required to accelerate the unamortized compensation expense related to
those awards and, therefore, the Company may experience variations in stock-based compensation expense from period to period.



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 $2.6 million, or 4 percent, to $63.3 million in the year ended December 31, 2003 and increased $5.3 million,
or 10 percent, to $60.7 million in 2002. General and administrative expenses as a percentage of revenues before reimbursements were 23 percent, 27 percent, and 26 percent for the years ended December 31, 2003, 2002 and 2001, respectively. The
Companys objective is to increase revenues in the future while maintaining or reducing general and administrative expenses as a percentage of revenues. The $2.6 million increase in general and administrative expenses for 2003 compared to 2002
was primarily related to the increase in administrative compensation costs. Incentive compensation for the Companys management and support personnel is based on the Companys profitability and increased in 2003 compared to 2002. The $5.3
million increase in general and administrative expense for 2002 compared to 2001 was primarily related to facility-related costs and administrative wages. Facility-related costs increased to support headcount increases. Some of the facility-related
costs and headcount increases were added through acquisitions of businesses. The Company is reviewing opportunities to 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 in 2002 compared to 2001 related to other professional service expenses, primarily legal fees and compensation-related consulting services.



Amortization Expense. Amortization expense includes amortization of
goodwill and intangible assets, including customer lists, covenants not-to-compete and trade names. In accordance with Statement of Financial Accounting Standards No. 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 $0.5 million, to $1.9 million in the year ended December 31, 2003, from $2.4 million in 2002. Amortization expense decreased $3.3 million from $5.7 million in 2001.



Litigation and Settlements Provisions. Litigation and settlement
provisions included amounts accrued, based on then current information, for costs estimated to resolve certain litigation matters. The Company recorded $5.7 million in litigation and settlement provisions in the year ended December 31, 2001. The
Company recorded an additional $0.8 million in 2002 and $0.4 million in 2003 to settle the litigation for which the Company had established an accrual in 2001. The provisions in 2002 and 2003 reflect the additional estimated costs in settling the
aforementioned matters and does not relate to any new litigation matters. The matters for which the Company had established the provisions, have been resolved and payments were made prior to the year ended December 31, 2003.



VSRP Cash Compensation Expense. VSRP cash compensation expense is the
cash compensation component of the Value Sharing Retention Program (VSRP). The cash component of the retention program included four installments totaling $18.8 million. The expense was recorded on a straight-line basis starting on
September 1, 2000 through September 1, 2001. For the year ended December 31, 2001, VSRP cash compensation expense was $12.4 million. As of December 31, 2001, the Company had no further obligations related to the VSRP cash compensation program.





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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 |       
|                                              |  | Dec. 31,2003   |        | Sept. 30,2003 |   | Jun. 30,2003 |  |   | Mar. 31,2003 |   | Dec. 31,2002 |   |        | Sept. 30,2002 |   |        | Jun. 30,2002 |  | Mar. 31,2002 |       
|Revenues:                                     |  |                |        |               |   |              |  |   |              |   |              |   |        |               |   |        |              |  |              |        |   |  |   |        |  |   |        |  
|Revenues before reimbursements                |  | $              | 71,417 |               | $ | 70,807       |  | $ | 69,882       |   |              | $ | 64,024 |               | $ | 59,697 |              |  | $            | 58,160 |   |  | $ | 53,793 |  | $ | 53,655 |  
|Reimbursements                                |  |                | 9,776  |               |   | 10,569       |  |   | 11,567       |   |              |   | 9,740  |               |   | 10,137 |              |  |              | 8,441  |   |  |   | 7,222  |  |   | 6,915  |  
|                                              |  |                |        |               |   |              |  |   |              |   |              |   |        |               |   |        |              |  |              |        |   |  |   |        |  |   |        |  
|Total revenues                                |  |                | 81,193 |               |   | 81,376       |  |   | 81,449       |   |              |   | 73,764 |               |   | 69,834 |              |  |              | 66,601 |   |  |   | 61,015 |  |   | 60,570 |  
|Cost of services:                             |  |                |        |               |   |              |  |   |              |   |              |   |        |               |   |        |              |  |              |        |   |  |   |        |  |   |        |  
|Cost of services before reimbursable expenses |  |                | 42,242 |               |   | 40,326       |  |   | 39,078       |   |              |   | 38,434 |               |   | 35,715 |              |  |              | 34,954 |   |  |   | 33,292 |  |   | 32,160 |  
|Reimbursable expenses                         |  |                | 9,776  |               |   | 10,569       |  |   | 11,567       |   |              |   | 9,740  |               |   | 10,137 |              |  |              | 8,441  |   |  |   | 7,222  |  |   | 6,915  |  
|                                              |  |                |        |               |   |              |  |   |              |   |              |   |        |               |   |        |              |  |              |        |   |  |   |        |  |   |        |  
|Total costs of services                       |  |                | 52,018 |               |   | 50,895       |  |   | 50,645       |   |              |   | 48,174 |               |   | 45,852 |              |  |              | 43,395 |   |  |   | 40,514 |  |   | 39,075 |  
|Stock-based compensation expense (credit)     |  |                | 3,008  |               |   | 1,860        |  |   | 4,527        |   |              |   | 1,712  |               |   | 1,732  |              |  |              | (1,527 | ) |  |   | 1,254  |  |   | 1,942  |  
|General and administrative expenses           |  |                | 14,739 |               |   | 15,890       |  |   | 16,737       |   |              |   | 15,926 |               |   | 15,894 |              |  |              | 15,794 |   |  |   | 14,659 |  |   | 14,374 |  
|Depreciation expense                          |  |                | 1,854  |               |   | 1,642        |  |   | 2,291        |   |              |   | 1,701  |               |   | 1,897  |              |  |              | 1,916  |   |  |   | 2,047  |  |   | 1,791  |  
|Amortization expense                          |  |                | 395    |               |   | 495          |  |   | 495          |   |              |   | 495    |               |   | 1,137  |              |  |              | 449    |   |  |   | 449    |  |   | 338    |  
|Restructuring (credit)                        |  |                |       |               |   |             |  |   |             |   |              |   |       |               |   | (500   | )            |  |              |       |   |  |   |       |  |   |       |  
|Litigation and settlement provisions          |  |                | 440    |               |   |             |  |   |             |   |              |   |       |               |   | 750    |              |  |              |       |   |  |   |       |  |   |       |  
|                                              |  |                |        |               |   |              |  |   |              |   |              |   |        |               |   |        |              |  |              |        |   |  |   |        |  |   |        |  
|Operating income                              |  |                | 8,739  |               |   | 10,594       |  |   | 6,754        |   |              |   | 5,756  |               |   | 3,072  |              |  |              | 6,574  |   |  |   | 2,092  |  |   | 3,050  |  
|Other income (expense), net                   |  |                | 75     |               |   | 87           |  |   | (70          | ) |              |   | 172    |               |   | (83    | )            |  |              | (43    | ) |  |   | 135    |  |   | (28    | )
|                                              |  |                |        |               |   |              |  |   |              |   |              |   |        |               |   |        |              |  |              |        |   |  |   |        |  |   |        |  
|Income before income tax expense              |  |                | 8,814  |               |   | 10,681       |  |   | 6,684        |   |              |   | 5,928  |               |   | 2,989  |              |  |              | 6,531  |   |  |   | 2,227  |  |   | 3,022  |  
|Income tax expense                            |  |                | 3,738  |               |   | 4,559        |  |   | 2,680        |   |              |   | 2,422  |               |   | 1,188  |              |  |              | 2,592  |   |  |   | 934    |  |   | 1,194  |  
|                                              |  |                |        |               |   |              |  |   |              |   |              |   |        |               |   |        |              |  |              |        |   |  |   |        |  |   |        |  
|Net income                                    |  | $              | 5,076  |               | $ | 6,122        |  | $ | 4,004        |   |              | $ | 3,506  |               | $ | 1,801  |              |  | $            | 3,939  |   |  | $ | 1,293  |  | $ | 1,828  |  
|                                              |  |                |        |               |   |              |  |   |              |   |              |   |        |               |   |        |              |  |              |        |   |  |   |        |  |   |        |  
|Net income per diluted share                  |  | $              | 0.11   |               | $ | 0.13         |  | $ | 0.09         |   |              | $ | 0.08   |               | $ | 0.04   |              |  | $            | 0.09   |   |  | $ | 0.03   |  | $ | 0.04   |  
|                                              |  |                |        |               |   |              |  |   |              |   |              |   |        |               |   |        |              |  |              |        |   |  |   |        |  |   |        |  
|Diluted shares                                |  |                | 47,986 |               |   | 47,330       |  |   | 46,550       |   |              |   | 46,250 |               |   | 45,608 |              |  |              | 42,583 |   |  |   | 41,583 |  |   | 40,905 |  
|                                              |  |                |        |               |   |              |  |   |              |   |              |   |        |               |   |        |              |  |              |        |   |  |   |        |  |   |        |  

---

|(1) |  | The sum of quarterly earnings per diluted share does not equal annual amounts in 2002 and 2003 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, and employee hiring and utilization rates. The timing of revenues varies
from quarter to quarter due to various factors, such as 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 fluctuations in expenses and operating results as the Company measures the valuation of stock-based compensation for options subject to variable accounting treatment from quarter to quarter.



Human Capital Resources



The Company had 959 consultants as of December 31, 2003, a net decrease of
56 consultants during the year. The decrease included approximately 75 employee terminations in the Energy Consulting segment,



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principally related to the Company reducing excess consulting capacity in the first quarter of 2003 and the disposition of the water consulting practice in
September 2003.



In October 2003, the Company adopted certain
ownership guidelines for corporate officers and senior consulting leaders. These guidelines include an employee stock ownership program set as a multiple of base salary. This program sets stock ownership guidelines of four times annual base salary
for the Chief Executive Officer, three times annual base salary for other corporate officers, and other amounts for senior consulting leaders. Additionally, the program includes certain initial adoption and ongoing compliance standards to be
monitored by the Company. At the same time, the Company instituted a program in which corporate officers and senior consulting leaders will receive a specified portion of their annual incentive compensation in restricted stock in lieu of cash. In
such cases, the Company will grant an additional premium amount in restricted stock equal to a percentage of the value of the incentive compensation paid in restricted stock in lieu of cash. This program has a mandatory and voluntary component for
incentive compensation earned beginning in 2004 and is voluntary in 2003.



In connection with certain recruiting activities and business acquisitions, the Companys policy is to obtain non-solicitation covenants from senior and mid-level consultants. Most of these covenants have
restrictions that extend twelve 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, staff and projects from
departing employees.



In order to secure new non-solicitation
agreements for those consultants hired before 2000 whose non-solicitation agreements would have expired by year-end 2002, the Company successfully executed and implemented, 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 9 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 incentive compensation, 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. Material changes to the Companys compensation structure are done with the
requisite approval from the Compensation Committee of the Companys Board of Directors. 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
those bill rates according to the supply and demand of the then-current market conditions within the various industry segments served by the Company.



Liquidity and Capital Resources



Summary



The Company had $38.4 million in cash and cash equivalents at December 31, 2003, compared to $8.1 million at December 31, 2002. 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 $51.9 million at December 31, 2003 compared to $25.9 million at December 31,
2002.



The Company calculates accounts receivable days sales
outstanding (DSO) 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 quarterly net revenues divided by 90 days,
approximately equal to the number of days in a quarter. Calculated as such, DSO was 72 days at December 31, 2003 compared to 77 days at



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December 31, 2002. Revenues for the fourth quarter 2003 increased by 16 percent compared with 2002 fourth quarter revenues, while accounts receivable, net of
deferred revenue credits, increased 8 percent to $64.5 million at December 31, 2003, from $59.8 million at December 31, 2002.



The Company has a limited number of engagements that are billed and collected in advance of services. The collection of these billings, and
managements continued focus on collection efforts and on more timely billings, was a factor in reducing the DSO at the 2003 year-end.



Cash Flow



For the year ended December 31, 2003, net cash provided by operating activities was $57.0 million, compared to $8.9 million and $11.5 million for the
years ended December 31, 2002 and 2001, respectively. For the year ended December 31, 2003, the Companys net income was $18.7 million, which included $9.4 million of depreciation and amortization expense, and $11.1 million of non-cash
stock-based compensation expense. Several factors significantly affected the Companys net operating cash flows during the year ended December 31, 2003. First, during 2003, the Company recorded accruals for employee incentive compensation,
which are based on profitability for the period and was paid in the first quarter 2004 with a combination of cash and shares of the Companys common stock. The timing of incentive compensation payments was the primary factor which caused the
Companys accrued compensation-related costs liability to increase by $21.0 million in 2003. Second, the Company realized tax benefits of $10.3 million related to the restricted stock and non-qualified stock options exercised for the difference
between the Companys then-current market price and the strike price of the equity awards when those equity awards were exercised. Third, the Companys cash inflow was offset by a $12.1 million increase in accounts receivable resulting
from increased revenue generation.



Net cash used by investing
activities for the year ended December 31, 2003 was $22.0 million. The Company paid $2.8 million in cash for businesses acquired during the year ended December 31, 2003 and paid $10.3 million related to businesses acquired prior to 2003. In
addition, the Company used $9.3 million for capital spending related to facilities furnishing and leasehold improvements to certain offices. The leases of several offices expired during 2003 and, in some cases, the Company relocated the personnel to
new offices. Capital expenditures were incurred at these offices and at existing offices in anticipation of future growth.



Net cash used in financing activities was $4.8 million in 2003. During 2003, the Company received $7.8 million in cash related to employee purchases of
vested stock options and shares of its common stock. The Company experienced an increase in stock option exercise transactions in 2003 when the Companys stock price rose substantially above the exercise prices of stock options in the latter
part of the second quarter. The market price of the Companys common stock was $18.86 at December 31, 2003, compared to $5.90 at December 31, 2002. The average exercise price of the stock options exercised in 2003 was $4.44 per share. During
2003, the Company used $6.1 million to purchase 1.0 million shares of its common stock, most of which was purchased during the first quarter of 2003. During 2003, the Company used $6.5 million to repay its bank borrowings under its line of credit
and did not have a balance outstanding at December 31, 2003.



Debt, Commitments and Capital



As of December
31, 2003, the Company maintained an unsecured revolving line of credit agreement for $150.0 million. In December 2003, the Company amended its revolving line of credit agreement to increase the line from $75.0 million to $150.0 million. In addition,
Harris Trust and Savings Bank and Fifth Third Bank  Chicago joined the existing bank group of LaSalle Bank, N.A., a subsidiary of ABN AMRO Bank N.V., and U.S. Bank. There were no other substantive changes in the terms and conditions in the
amendment. The line of credit amendment was made to give the Company more financial flexibility to pursue selective acquisitions and support growth.



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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
rates plus 0.5 percent, or (2) London Interbank Offered Rate (LIBOR) plus 1.25 percent. The line of credit agreement requires the Company to maintain a minimum level of earnings before interest, taxes, depreciation and amortization, among other
things.



The Company was in compliance with the terms of its
credit agreements as of December 31, 2003 and 2002. As of December 31, 2003, the Company did not have a balance outstanding under the line of credit agreement, compared to a balance outstanding of $6.5 million as of December 31, 2002.



As of December 31, 2003, the Company had a total of $16.5 million in deferred
purchase price and contingent earnout obligations, approximately 25 percent of which are payable in the Companys common stock. The Company also had a $2.2 million cash obligation related to the MSPP agreements. As of December 31, 2003, the
Company had no significant commitments for capital expenditures.



The following table shows the components of significant commitments as of December 31, 2003 and the scheduled years of payments (shown in thousands):



|                                       |  |      |        |             |   |            |  |       |        |  |   |       
|-------------------------------------- |  | ---- | ------ | ----------- | - | ---------- |  | ----- | ------ |  | - | ------
|                                       |  | 2004 |        | 2005 to2007 |   | Thereafter |  | Total
|Acquisition earnout obligations        |  | $    | 12,206 |             | $ |           |  | $     |       |  | $ | 12,206
|Deferred purchase price obligations    |  |      | 3,750  |             |   | 500        |  |       |       |  |   | 4,250 
|Cash obligations under MSPP agreements |  |      | 1,114  |             |   | 1,097      |  |       |       |  |   | 2,211 
|Lease Commitments                      |  |      | 12,909 |             |   | 33,643     |  |       | 22,781 |  |   | 69,333
|                                       |  |      |        |             |   |            |  |       |        |  |   |       
|                                       |  | $    | 29,979 |             | $ | 35,240     |  | $     | 22,781 |  | $ | 88,000
|                                       |  |      |        |             |   |            |  |       |        |  |   |       



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 investments in the future for major acquisitions or other non-operating activities, the Company might need additional debt or equity financing, as appropriate.



Other Event



On January 30, 2004, the Company acquired substantially all of the assets of Tucker Alan, Inc. (Tucker) for $89.5 million, which included
$45.6 million cash at closing and 0.3 million shares of its common stock valued at $6.0 million at closing, and $37.9 million payable in two installments of cash and the Companys common stock within the first two years, following the closing
date of the transaction. The Tucker acquisition included 230 consulting professionals active primarily in the litigation, construction and healthcare practices. The Company acquired Tucker to strengthen its national platform. Tucker has a
significant presence in the western region of the United States that would complement the Companys other geographic regions. Tuckers service offerings and industry expertise are also complementary to those of the Companys.



Contingencies



The Company is subject to pay additional purchase price amounts that are
part of the consideration for certain business acquisition agreements. The payments, if any, are contingent on the achievement of certain revenue and gross margin targets by 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.



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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, 2003, 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s 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 amended 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 rates plus 0.5 percent, or (2) London Interbank Offered Rate (LIBOR) plus 1.25 percent. Because at December 31, 2003, no amounts were outstanding under the line of credit, a change in
interest rates would not affect the Companys financial position or operating results. The Company does not anticipate any material changes in interest rates in the short-term future.



At December 31, 2003, 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 in this report as pages F-1 through F-28. An index to such information appears on page F-1.



Item 9.Changes In and Disagreements with the Companys Independent Accountants on Accounting and Financial Disclosure.



None.



Item 9A.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 its Chief Financial Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures pursuant to Rules 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 noted and, therefore, there were no
corrective actions taken.



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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 21, 2004, 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, 2003.



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 21, 2004, 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, 2003.



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 21, 2004, 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, 2003.



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 21, 2004, 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, 2003.



Item 14.Principal Independent Accountant Fees and Services.



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 21, 2004, 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, 2003.



25



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##### Table of Contents

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, 2003:



(1) A Form 8-K dated October 21, 2003 reported under Items 7 and 9 of Form 8-K of the Companys press release dated October 21, 2003
announcing the Companys third quarter 2003 results of operations.



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



a.    Exhibits:



|           |  |                                                                                                                                                                                                                                                                                                                                                                                                        
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                                                                                                                                                                                                                            
|2.1        |  | Asset Purchase Agreement dated as of September 1, 2002 among the Company, Hunter & Associates Management Services, Inc. and THG Investors, Inc. (13)                                                                                                                                                                                                                                                   
|2.2        |  | Asset Purchase Agreement dated as of January 30, 2004 among the Company, Tucker Alan Inc., and the shareholders of Tucker Alan Inc. (14)                                                                                                                                                                                                                                                               
|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)                                                                                                                                                                                                                                                                                                                                        
|10.10+     |  | Employment Agreement dated January 1, 2003 between the Company and William M. Goodyear (11)                                                                                                                                                                                                                                                                                                            
|10.11*+    |  | Employment Agreement dated May 19, 2000 and Amendment dated December 23, 2003 between the Company and Ben W. Perks (6)                                                                                                                                                                                                                                                                                 
|10.12+     |  | Employment Agreement dated July 24, 2003 between the Company and Philip P. Steptoe (12)                                                                                                                                                                                                                                                                                                                
|10.13*+    |  | Employment Agreement dated November 3, 2003 between the Company and Julie M. Howard                                                                                                                                                                                                                                                                                                                    
|21.1*      |  | Significant Subsidiaries of the Company                                                                                                                                                                                                                                                                                                                                                                
|23.1*      |  | Consent of KPMG LLP                                                                                                                                                                                                                                                                                                                                                                                    
|32.1*      |  | Certification of Chairman and Chief Executive Officer Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.                                                                                                                                                                                                                                                                    
|32.2*      |  | Certification of Executive Vice President and Chief Financial Officer Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.                                                                                                                                                                                                                                                    

---

|(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.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------



26



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##### Table of Contents

|(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.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



|(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 or the year ended December 31, 2002.
|---- |  | ------------------------------------------------------------------------------------------------------------



|(12) |  | Incorporated by reference from the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------



|(13) |  | Incorporated by reference from the Companys Current Report on Form 8-K dated September 23, 2002.
|---- |  | -------------------------------------------------------------------------------------------------



|(14) |  | Incorporated by reference from the Companys Current Report on Form 8-K dated February 12, 2004.
|---- |  | ------------------------------------------------------------------------------------------------



|* |  | 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:



Report of Independent Accountants

Schedule II: Valuation and Qualifying Accounts



27



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##### Table of Contents

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.



|                    |  |  |  |                           |  |                            |  |                                                         
|------------------- |  |  |  | ------------------------- |  | -------------------------- |  | --------------------------------------------------------
|                    |  |  |  | Navigant Consulting, Inc.
|                    |  |  | 
|Date: March 9, 2004 |  |  |  | By:                       |  | /s/    WILLIAM M.
GOODYEAR
|                    |  |  |  |                           |  |                            |  | William M. Goodyear Chairman and Chief Executive Officer



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 9, 2004
|                                                            |  |                                                                                                 
|/s/    BEN W.
PERKSBen W. Perks                             |  | Executive Vice President andChief Financial Officer (Principal Financial and Accounting Officer) |  | March 9, 2004
|                                                            |  |                                                                                                 
|/s/    THOMAS A.
GILDEHAUSThomas A.
Gildehaus               |  | Director                                                                                         |  | March 9, 2004
|                                                            |  |                                                                                                 
|/s/    VALERIE B.
JARRETTValerie B.
Jarrett                 |  | Director                                                                                         |  | March 9, 2004
|                                                            |  |                                                                                                 
|/s/    PETER B.
PONDPeter B. Pond                           |  | Director                                                                                         |  | March 9, 2004
|                                                            |  |                                                                                                 
|/s/    SAMUEL K.
SKINNERSamuel K. Skinner                   |  | Director                                                                                         |  | March 9, 2004
|                                                            |  |                                                                                                 
|/s/    GOVERNOR JAMES R.
THOMPSONGovernor James R.
Thompson |  | Director                                                                                         |  | March 9, 2004



28



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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, 2003 and 2002,
and for each of the three years ended December 31, 2003.



|                                                                      |  |     
|--------------------------------------------------------------------- |  | ----
|                                                                      |  | 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 and Divestitures                                   |  | F-9 
|4.    Segment Information                                             |  | F-11
|5.    Goodwill and Intangible Assets                                  |  | F-13
|6.    Earnings per Share                                              |  | F-14
|7.    Stockholders Equity                                            |  | F-15
|8.    Stock-based Compensation Expense                                |  | F-17
|9.    Long-Term Incentive Plan and Supplemental Equity Incentive Plan |  | F-18
|10.    Supplemental Consolidated Balance Sheet Information            |  | F-22
|11.    Supplemental Consolidated Cash Flow Information                |  | F-23
|12.    Lease Commitments                                              |  | F-24
|13.    Bank Borrowings                                                |  | F-24
|14.    Income Tax Expense (Benefit)                                   |  | F-25
|15.    Restructuring Costs (Credits)                                  |  | F-26
|16.    Employee Benefits Plan                                         |  | F-27
|17.    Related Party Transactions                                     |  | F-27
|18.    Subsequent Event                                               |  | F-27
|19.    Litigation and Settlements                                     |  | F-28



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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, 2003 and 2002, 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, 2003. 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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in
the three year period ended December 31, 2003 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 December 31, 2002, the Company changed its method of accounting
for goodwill.



/s/    KPMG
LLP



Chicago, Illinois

February 6, 2004





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##### Table of Contents

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(In thousands)



|                                                                                                                                                 |  |                  |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                 |  | December 31,2003 |          |   | December 31,2002 |  
|ASSETS                                                                                                                                           |  |                  |          |   |                  |   |          |  
|Current assets:                                                                                                                                  |  |                  |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                        |  | $                | 38,402   |   |                  | $ | 8,109    |  
|Accounts receivable, net                                                                                                                         |  |                  | 68,715   |   |                  |   | 61,693   |  
|Prepaid expenses and other current assets                                                                                                        |  |                  | 5,741    |   |                  |   | 3,998    |  
|Deferred income taxes                                                                                                                            |  |                  | 3,805    |   |                  |   | 4,601    |  
|                                                                                                                                                 |  |                  |          |   |                  |   |          |  
|Total current assets                                                                                                                             |  |                  | 116,663  |   |                  |   | 78,401   |  
|Property and equipment, net                                                                                                                      |  |                  | 19,958   |   |                  |   | 18,124   |  
|Goodwill and intangible assets, net                                                                                                              |  |                  | 112,075  |   |                  |   | 97,372   |  
|Deferred income taxes, non-current                                                                                                               |  |                  | 4,326    |   |                  |   | 3,645    |  
|Other assets                                                                                                                                     |  |                  | 2,294    |   |                  |   | 3,662    |  
|                                                                                                                                                 |  |                  |          |   |                  |   |          |  
|Total assets                                                                                                                                     |  | $                | 255,316  |   |                  | $ | 201,204  |  
|                                                                                                                                                 |  |                  |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                             |  |                  |          |   |                  |   |          |  
|Current liabilities:                                                                                                                             |  |                  |          |   |                  |   |          |  
|Bank borrowings                                                                                                                                  |  | $                |         |   |                  | $ | 6,500    |  
|Accounts payable and accrued liabilities                                                                                                         |  |                  | 7,015    |   |                  |   | 10,621   |  
|Accrued compensation-related costs                                                                                                               |  |                  | 35,552   |   |                  |   | 11,995   |  
|Income tax payable                                                                                                                               |  |                  | 2,539    |   |                  |   | 6,705    |  
|Other current liabilities                                                                                                                        |  |                  | 19,691   |   |                  |   | 16,670   |  
|                                                                                                                                                 |  |                  |          |   |                  |   |          |  
|Total current liabilities                                                                                                                        |  |                  | 64,797   |   |                  |   | 52,491   |  
|Non-current liabilities                                                                                                                          |  |                  | 1,761    |   |                  |   | 4,418    |  
|                                                                                                                                                 |  |                  |          |   |                  |   |          |  
|Total liabilities                                                                                                                                |  |                  | 66,558   |   |                  |   | 56,909   |  
|Stockholders equity:                                                                                                                            |  |                  |          |   |                  |   |          |  
|Common stock, $.001 par value per share; 75,000 shares authorized; 44,922 and 42,083 shares issued and outstanding at December 31, 2003 and
2002 |  |                  | 51       |   |                  |   | 47       |  
|Preferred stock, $.001 par value per share; 3,000 shares authorized; no shares issued or outstanding                                             |  |                  |         |   |                  |   |         |  
|Additional paid-in capital                                                                                                                       |  |                  | 398,699  |   |                  |   | 372,012  |  
|Deferred stock issuance                                                                                                                          |  |                  | 4,375    |   |                  |   | 3,209    |  
|Restricted stock units outstanding                                                                                                               |  |                  | 1,459    |   |                  |   | 4,439    |  
|Deferred compensationrestricted stock                                                                                                           |  |                  | (6,376   | ) |                  |   | (9,152   | )
|Treasury stock                                                                                                                                   |  |                  | (68,100  | ) |                  |   | (65,803  | )
|Accumulated deficit                                                                                                                              |  |                  | (141,645 | ) |                  |   | (160,353 | )
|Accumulated other comprehensive income (loss)                                                                                                    |  |                  | 295      |   |                  |   | (104     | )
|                                                                                                                                                 |  |                  |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                       |  |                  | 188,758  |   |                  |   | 144,295  |  
|                                                                                                                                                 |  |                  |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                       |  | $                | 255,316  |   |                  | $ | 201,204  |  
|                                                                                                                                                 |  |                  |          |   |                  |   |          |  





See accompanying notes to the consolidated financial statements.



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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, |        
|                                                  |  | 2003                             |         | 2002 |   |         | 2001 | 
|Revenues before reimbursements                    |  | $                                | 276,130 |      | $ | 225,305 |      |  | $ | 210,532 |  
|Reimbursements                                    |  |                                  | 41,652  |      |   | 32,715  |      |  |   | 25,048  |  
|                                                  |  |                                  |         |      |   |         |      |  |   |         |  
|Total revenues                                    |  |                                  | 317,782 |      |   | 258,020 |      |  |   | 235,580 |  
|                                                  |  |                                  |        
|Cost of services before reimbursable expenses     |  |                                  | 160,080 |      |   | 136,121 |      |  |   | 126,959 |  
|Reimbursable expenses                             |  |                                  | 41,652  |      |   | 32,715  |      |  |   | 25,048  |  
|                                                  |  |                                  |         |      |   |         |      |  |   |         |  
|Total costs of services                           |  |                                  | 201,732 |      |   | 168,836 |      |  |   | 152,007 |  
|Stock-based compensation expense                  |  |                                  | 11,107  |      |   | 3,401   |      |  |   | 3,812   |  
|VSRP cash compensation expense                    |  |                                  |        |      |   |        |      |  |   | 12,399  |  
|General and administrative expenses               |  |                                  | 63,292  |      |   | 60,721  |      |  |   | 55,413  |  
|Depreciation expense                              |  |                                  | 7,488   |      |   | 7,651   |      |  |   | 7,118   |  
|Amortization expense                              |  |                                  | 1,880   |      |   | 2,373   |      |  |   | 5,700   |  
|Restructuring costs (credits)                     |  |                                  |        |      |   | (500    | )    |  |   | 1,900   |  
|Litigation and settlement provisions              |  |                                  | 440     |      |   | 750     |      |  |   | 5,700   |  
|                                                  |  |                                  |         |      |   |         |      |  |   |         |  
|Operating income (loss)                           |  |                                  | 31,843  |      |   | 14,788  |      |  |   | (8,469  | )
|Other income (expense), net                       |  |                                  | 264     |      |   | (19     | )    |  |   | 874     |  
|                                                  |  |                                  |         |      |   |         |      |  |   |         |  
|Income (loss) before income taxes                 |  |                                  | 32,107  |      |   | 14,769  |      |  |   | (7,595  | )
|Income tax expense (benefit)                      |  |                                  | 13,399  |      |   | 5,908   |      |  |   | (2,284  | )
|                                                  |  |                                  |         |      |   |         |      |  |   |         |  
|Net income (loss)                                 |  | $                                | 18,708  |      | $ | 8,861   |      |  | $ | (5,311  | )
|                                                  |  |                                  |         |      |   |         |      |  |   |         |  
|Basic income (loss) per share                     |  | $                                | 0.43    |      | $ | 0.22    |      |  | $ | (0.14   | )
|Shares used in computing income per basic share   |  |                                  | 43,236  |      |   | 40,350  |      |  |   | 38,439  |  
|                                                  |  |                                  |        
|Diluted income (loss) per share                   |  | $                                | 0.40    |      | $ | 0.21    |      |  | $ | (0.14   | )
|Shares used in computing income per diluted share |  |                                  | 47,029  |      |   | 42,670  |      |  |   | 38,439  |  







See accompanying notes to the consolidated financial statements.



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##### Table of Contents

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(In thousands)



|                                                                   |  |                        |  |                   |  |                     |   |  |                          |   |                     |   |                            |  |                       |         |  |                                  |        |   |                                         |   |        |                   |  |   |                                             |   |  |                                       |         |   |                           |   |      |   |  |   |          |   |  |   |         |  
|------------------------------------------------------------------ |  | ---------------------- |  | ----------------- |  | ------------------- | - |  | ------------------------ | - | ------------------- | - | -------------------------- |  | --------------------- | ------- |  | -------------------------------- | ------ | - | --------------------------------------- | - | ------ | ----------------- |  | - | ------------------------------------------- | - |  | ------------------------------------- | ------- | - | ------------------------- | - | ---- | - |  | - | -------- | - |  | - | ------- | -
|                                                                   |  | Pre- ferredStockShares |  | CommonStockShares |  | TreasuryStockShares |   |  | Pre- ferredStockParValue |   | CommonStockParValue |   | Addi- tionalPaid-InCapital |  | DeferredStockIssuance |         |  | RestrictedStock UnitsOutstanding |        |   | DeferredCompen- sation RestrictedStock |   |        | TreasuryStockCost |  |   | Accumu-latedOtherCompre-hensiveIncome(loss) |   |  | RetainedEarnings(Accumu-latedDeficit) |         |   | TotalStock-holdersEquity |  
|Balance at December 31, 2000                                       |  |                       |  | 43,433            |  | (4,989              | ) |  | $                        |  |                     | $ | 43                         |  | $                     | 343,340 |  | $                                |       |   |                                         | $ |       |                   |  | $ |                                            |   |  | $                                     | (63,541 | ) |                           | $ | (214 | ) |  | $ | (163,903 | ) |  | $ | 115,725 |  
|Comprehensive income (loss)                                        |  |                       |  |                  |  |                    |   |  |                          |  |                     |   |                           |  |                       |        |  |                                  |       |   |                                         |   |       |                   |  |   |                                            |   |  |                                       |        |   |                           |   | 153  |   |  |   | (5,311   | ) |  |   | (5,158  | )
|Issuance of common stock related to business combinations          |  |                       |  | 137               |  |                    |   |  |                          |  |                     |   |                           |  |                       | 493     |  |                                  |       |   |                                         |   |       |                   |  |   |                                            |   |  |                                       |        |   |                           |   |     |   |  |   |         |   |  |   | 493     |  
|Other issuances of common stock                                    |  |                       |  | 264               |  |                    |   |  |                          |  |                     |   | 1                          |  |                       | 1,105   |  |                                  |       |   |                                         |   |       |                   |  |   |                                            |   |  |                                       |        |   |                           |   |     |   |  |   |         |   |  |   | 1,106   |  
|Tax benefit on stock options exercised and restricted stock vested |  |                       |  |                  |  |                    |   |  |                          |  |                     |   |                           |  |                       | 79      |  |                                  |       |   |                                         |   |       |                   |  |   |                                            |   |  |                                       |        |   |                           |   |     |   |  |   |         |   |  |   | 79      |  
|Issuance of restricted stock, net of forfeitures                   |  |                       |  | 624               |  |                    |   |  |                          |  |                     |   |                           |  |                       | 7,277   |  |                                  |       |   |                                         |   |       |                   |  |   | (7,277                                      | ) |  |                                       |        |   |                           |   |     |   |  |   |         |   |  |   |        |  
|Purchases of treasury stock                                        |  |                       |  |                  |  | (769                | ) |  |                          |  |                     |   |                           |  |                       |        |  |                                  |       |   |                                         |   |       |                   |  |   |                                            |   |  |                                       | (3,853  | ) |                           |   |     |   |  |   |         |   |  |   | (3,853  | )
|Stock-based compensation expensevariable accounting stock options |  |                       |  |                  |  |                    |   |  |                          |  |                     |   |                           |  |                       | 940     |  |                                  |       |   |                                         |   |       |                   |  |   |                                            |   |  |                                       |        |   |                           |   |     |   |  |   |         |   |  |   | 940     |  
|Stock-based compensation expenserestricted stock and units        |  |                       |  |                  |  |                    |   |  |                          |  |                     |   |                           |  |                       |        |  |                                  |       |   |                                         |   |       |                   |  |   | 2,773                                       |   |  |                                       |        |   |                           |   |     |   |  |   |         |   |  |   | 2,773   |  
|                                                                   |  |                        |  |                   |  |                     |   |  |                          |   |                     |   |                            |  |                       |         |  |                                  |        |   |                                         |   |        |                   |  |   |                                             |   |  |                                       |         |   |                           |   |      |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2001                                       |  |                       |  | 44,458            |  | (5,758              | ) |  |                          |  |                     |   | 44                         |  |                       | 353,234 |  |                                  |       |   |                                         |   |       |                   |  |   | (4,504                                      | ) |  |                                       | (67,394 | ) |                           |   | (61  | ) |  |   | (169,214 | ) |  |   | 112,105 |  
|Comprehensive income (loss)                                        |  |                        |  |                  |  |                    |   |  |                          |  |                     |   |                           |  |                       |        |  |                                  |       |   |                                         |   |       |                   |  |   |                                            |   |  |                                       |        |   |                           |   | (43  | ) |  |   | 8,861    |   |  |   | 8,818   |  
|Issuance of common stock related to business combinations          |  |                       |  | 1,556             |  | 1,404               |   |  |                          |  |                     |   | 2                          |  |                       | 11,465  |  |                                  | 3,077  |   |                                         |   |       |                   |  |   |                                            |   |  |                                       | 6,630   |   |                           |   |     |   |  |   |         |   |  |   | 21,174  |  
|Other issuances of common stock                                    |  |                       |  | 827               |  | 39                  |   |  |                          |  |                     |   | 1                          |  |                       | 3,650   |  |                                  |       |   |                                         |   |       |                   |  |   |                                            |   |  |                                       | 140     |   |                           |   |     |   |  |   |         |   |  |   | 3,791   |  
|Tax benefit on stock options exercised and restricted stock vested |  |                       |  |                  |  |                    |   |  |                          |  |                     |   |                           |  |                       | 416     |  |                                  |       |   |                                         |   |       |                   |  |   |                                            |   |  |                                       |        |   |                           |   |     |   |  |   |         |   |  |   | 416     |  
|Issuance of restricted stock, net of forfeitures                   |  |                       |  | 479               |  |                    |   |  |                          |  |                     |   |                           |  |                       | 2,745   |  |                                  |       |   |                                         |   |       |                   |  |   | (2,745                                      | ) |  |                                       |        |   |                           |   |     |   |  |   |         |   |  |   |        |  
|Grants of restricted stock units                                   |  |                       |  |                  |  |                    |   |  |                          |  |                     |   |                           |  |                       |         |  |                                  |       |   |                                         |   | 4,439  |                   |  |   | (4,439                                      | ) |  |                                       |        |   |                           |   |     |   |  |   |         |   |  |   |        |  
|Purchases of treasury stock                                        |  |                       |  |                  |  | (922                | ) |  |                          |  |                     |   |                           |  |                       |         |  |                                  |       |   |                                         |   |       |                   |  |   |                                            |   |  |                                       | (5,179  | ) |                           |   |     |   |  |   |         |   |  |   | (5,179  | )
|Stock-based compensation expensevariable accounting stock options |  |                       |  |                  |  |                    |   |  |                          |  |                     |   |                           |  |                       | 502     |  |                                  |       |   |                                         |   |       |                   |  |   |                                            |   |  |                                       |        |   |                           |   |     |   |  |   |         |   |  |   | 502     |  
|Stock-based compensation expenserestricted stock and units        |  |                       |  |                  |  |                    |   |  |                          |  |                     |   |                           |  |                       |         |  |                                  | 132    |   |                                         |   |       |                   |  |   | 2,536                                       |   |  |                                       |        |   |                           |   |     |   |  |   |         |   |  |   | 2,668   |  
|                                                                   |  |                        |  |                   |  |                     |   |  |                          |   |                     |   |                            |  |                       |         |  |                                  |        |   |                                         |   |        |                   |  |   |                                             |   |  |                                       |         |   |                           |   |      |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2002                                       |  |                       |  | 47,320            |  | (5,237              | ) |  |                          |  |                     | $ | 47                         |  | $                     | 372,012 |  | $                                | 3,209  |   |                                         | $ | 4,439  |                   |  | $ | (9,152                                      | ) |  | $                                     | (65,803 | ) |                           | $ | (104 | ) |  | $ | (160,353 | ) |  | $ | 144,295 |  
|Comprehensive income                                               |  |                        |  |                  |  |                    |   |  |                          |  |                     |   |                           |  |                       |        |  |                                  |       |   |                                         |   |       |                   |  |   |                                            |   |  |                                       |        |   |                           |   | 399  |   |  |   | 18,708   |   |  |   | 19,107  |  
|Issuance of common stock related to business combinations          |  |                       |  | 74                |  | 325                 |   |  |                          |  |                     |   | 1                          |  |                       | 1,701   |  |                                  | (2,004 | ) |                                         |   |       |                   |  |   |                                            |   |  |                                       | 1,967   |   |                           |   |     |   |  |   |         |   |  |   | 1,665   |  
|Deferred purchase price commitment to issue stock                  |  |                       |  |                  |  |                    |   |  |                          |  |                     |   |                           |  |                       |        |  |                                  | 3,097  |   |                                         |   |       |                   |  |   |                                            |   |  |                                       |        |   |                           |   |     |   |  |   |         |   |  |   | 3,097   |  
|Other issuances of common stock                                    |  |                       |  | 1,295             |  | 279                 |   |  |                          |  |                     |   | 2                          |  |                       | 5,293   |  |                                  |       |   |                                         |   | 330    |                   |  |   | 385                                         |   |  |                                       | 1,817   |   |                           |   |     |   |  |   |         |   |  |   | 7,827   |  
|Tax benefit on stock options exercised and restricted stock vested |  |                       |  |                  |  |                    |   |  |                          |  |                     |   |                           |  |                       | 10,333  |  |                                  |       |   |                                         |   |       |                   |  |   |                                            |   |  |                                       |        |   |                           |   |     |   |  |   |         |   |  |   | 10,333  |  
|Issuance of restricted stock, net of forfeitures                   |  |                       |  | 1,842             |  |                    |   |  |                          |  |                     |   | 1                          |  |                       | 4,529   |  |                                  | 73     |   |                                         |   | (3,310 | )                 |  |   | (1,293                                      | ) |  |                                       |        |   |                           |   |     |   |  |   |         |   |  |   |        |  
|Grants of restricted stock awards                                  |  |                       |  |                  |  |                    |   |  |                          |  |                     |   |                           |  |                       | 2,613   |  |                                  |       |   |                                         |   |       |                   |  |   | (2,613                                      | ) |  |                                       |        |   |                           |   |     |   |  |   |         |   |  |   |        |  
|Purchases of treasury stock                                        |  |                       |  |                  |  | (976                | ) |  |                          |  |                     |   |                           |  |                       |         |  |                                  |       |   |                                         |   |       |                   |  |   |                                            |   |  |                                       | (6,081  | ) |                           |   |     |   |  |   |         |   |  |   | (6,081  | )
|Stock-based compensation expensevariable accounting stock options |  |                       |  |                  |  |                    |   |  |                          |  |                     |   |                           |  |                       | 2,218   |  |                                  |       |   |                                         |   |       |                   |  |   |                                            |   |  |                                       |        |   |                           |   |     |   |  |   |         |   |  |   | 2,218   |  
|Stock-based compensation expenserestricted stock and units        |  |                       |  |                  |  |                    |   |  |                          |  |                     |   |                           |  |                       |        |  |                                  |       |   |                                         |   |       |                   |  |   | 6,297                                       |   |  |                                       |        |   |                           |   |     |   |  |   |         |   |  |   | 6,297   |  
|                                                                   |  |                        |  |                   |  |                     |   |  |                          |   |                     |   |                            |  |                       |         |  |                                  |        |   |                                         |   |        |                   |  |   |                                             |   |  |                                       |         |   |                           |   |      |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2003                                       |  |                       |  | 50,531            |  | (5,609              | ) |  | $                        |  |                     | $ | 51                         |  | $                     | 398,699 |  | $                                | 4,375  |   |                                         | $ | 1,459  |                   |  | $ | (6,376                                      | ) |  | $                                     | (68,100 | ) |                           | $ | 295  |   |  | $ | (141,645 | ) |  | $ | 188,758 |  
|                                                                   |  |                        |  |                   |  |                     |   |  |                          |   |                     |   |                            |  |                       |         |  |                                  |        |   |                                         |   |        |                   |  |   |                                             |   |  |                                       |         |   |                           |   |      |   |  |   |          |   |  |   |         |  



See accompanying notes
to the consolidated financial statements.



F-5



---

##### Table of Contents



NAVIGANT CONSULTING, INC.
AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                                                        |  |                          |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                        |  | Years ended December 31, |        
|                                                                                                                        |  | 2003                     |         |   | 2002 |   |         | 2001 | 
|Cash flows from operating activities:                                                                                   |  |                          |         |   |      |   |         |      |  |   |         |  
|Net income (loss)                                                                                                       |  | $                        | 18,708  |   |      | $ | 8,861   |      |  | $ | (5,311  | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities, net of acquisitions: |  |                          |         |   |      |   |         |      |  |   |         |  
|Depreciation expense                                                                                                    |  |                          | 7,488   |   |      |   | 7,651   |      |  |   | 7,118   |  
|Amortization expense                                                                                                    |  |                          | 1,880   |   |      |   | 2,373   |      |  |   | 5,700   |  
|Stock-based compensation expense                                                                                        |  |                          | 11,107  |   |      |   | 3,250   |      |  |   | 3,812   |  
|Tax benefit of issuances of common stock                                                                                |  |                          | 10,333  |   |      |   | 416     |      |  |   | 79      |  
|Payments related to consultants non-solicitation agreements                                                            |  |                          | (1,290  | ) |      |   | (1,363  | )    |  |   |        |  
|Amortization of consultants non-solicitation agreements                                                                |  |                          | 1,816   |   |      |   | 279     |      |  |   |        |  
|Provision for bad debts                                                                                                 |  |                          | 4,894   |   |      |   | 4,643   |      |  |   | 5,604   |  
|Deferred income taxes                                                                                                   |  |                          | 1,290   |   |      |   | (191    | )    |  |   | (1,013  | )
|Other, net                                                                                                              |  |                          |        |   |      |   | 212     |      |  |   |        |  
|Changes in assets and liabilities:                                                                                      |  |                          |         |   |      |   |         |      |  |   |         |  
|Accounts receivable                                                                                                     |  |                          | (12,141 | ) |      |   | (10,484 | )    |  |   | (2,310  | )
|Prepaid expenses and other current assets                                                                               |  |                          | (1,365  | ) |      |   | 2,266   |      |  |   | (650    | )
|Accounts payable and accrued liabilities                                                                                |  |                          | (3,606  | ) |      |   | (2,854  | )    |  |   | (3,881  | )
|Accrued compensation-related costs                                                                                      |  |                          | 20,965  |   |      |   | (2,982  | )    |  |   | (4,251  | )
|Income taxes payable                                                                                                    |  |                          | (5,340  | ) |      |   | (1,485  | )    |  |   | 8,437   |  
|Other current liabilities                                                                                               |  |                          | 2,306   |   |      |   | (1,716  | )    |  |   | (1,811  | )
|                                                                                                                        |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                                                               |  |                          | 57,045  |   |      |   | 8,876   |      |  |   | 11,523  |  
|                                                                                                                        |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash flows from investing activities:                                                                                   |  |                          |         |   |      |   |         |      |  |   |         |  
|Purchases of property and equipment                                                                                     |  |                          | (9,254  | ) |      |   | (5,242  | )    |  |   | (7,659  | )
|Acquisitions of businesses, net of cash acquired                                                                        |  |                          | (2,780  | ) |      |   | (32,740 | )    |  |   | (7,593  | )
|Payment of acquisition liabilities                                                                                      |  |                          | (8,816  | ) |      |   | (2,146  | )    |  |   | (1,980  | )
|Payment of notes payable related to acquisition                                                                         |  |                          | (1,500  | ) |      |   | (1,500  | )    |  |   |        |  
|Payment of non-contingent acquisition liabilities                                                                       |  |                          |        |   |      |   |        |      |  |   | (3,875  | )
|Other, net                                                                                                              |  |                          | 352     |   |      |   | (201    | )    |  |   | (517    | )
|                                                                                                                        |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                                                                   |  |                          | (21,998 | ) |      |   | (41,829 | )    |  |   | (21,624 | )
|                                                                                                                        |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities:                                                                                   |  |                          |         |   |      |   |         |      |  |   |         |  
|Issuance of common stock                                                                                                |  |                          | 7,827   |   |      |   | 3,791   |      |  |   | 1,106   |  
|Stock repurchases                                                                                                       |  |                          | (6,081  | ) |      |   | (5,179  | )    |  |   | (3,853  | )
|Borrowings from (repayments to) bank                                                                                    |  |                          | (6,500  | ) |      |   | 6,500   |      |  |   |        |  
|                                                                                                                        |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) financing activities                                                                     |  |                          | (4,754  | ) |      |   | 5,112   |      |  |   | (2,747  | )
|                                                                                                                        |  |                          |         |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                                                    |  |                          | 30,293  |   |      |   | (27,841 | )    |  |   | (12,848 | )
|Cash and cash equivalents at beginning of the year                                                                      |  |                          | 8,109   |   |      |   | 35,950  |      |  |   | 48,798  |  
|                                                                                                                        |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of the year                                                                            |  | $                        | 38,402  |   |      | $ | 8,109   |      |  | $ | 35,950  |  
|                                                                                                                        |  |                          |         |   |      |   |         |      |  |   |         |  



See accompanying notes
to the consolidated financial statements.



F-6



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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 services, healthcare, energy and operational consulting services to government agencies, legal counsel and
large companies facing the challenges of uncertainty, risk, distress and significant change. The Company focuses on industries undergoing substantial regulatory or structural change and on the issues driving these transformations.



The Company is headquartered in Chicago, Illinois and has offices in various
cities primarily within the United States, as well as offices in Canada, Mexico 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 affect 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 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, 2003 and 2002.



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 amortized on the straight-line method based on the
estimated useful lives, ranging up to seven years.



F-7



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##### Table of Contents

Prior to the adoption of Statement of Financial Accounting Standards (SFAS) No. 142 in 2002,
Accounting for Goodwill, 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 2003 and 2002. In 2001, goodwill was not
amortized for an acquisition that occurred subsequent to June 30, 2001, in accordance with SFAS No. 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. The Company also earns incremental revenues. These incremental revenue amounts are generally contingent on a specific event and the incremental revenues are recognized when the contingencies are resolved.



Stock-Based Compensation



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



Other than equity awards subject to variable accounting, the Company accounts for stock-based compensation using the
intrinsic value-based method as prescribed in APB Opinion No. 25, and related interpretations, for its stock-based compensation plans. Accordingly, no stock-based compensation costs have been recognized for those option grants where the exercise
price was equal to or higher than the fair market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the purported fair
value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to its stock-based compensation plans (shown in thousands, except per share amounts):



|                               |  |                                                                                                                                     |        |      |        |   |       |  |        |      |        |   |        |  
|------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------- | ------ | ---- | ------ | - | ----- |  | ------ | ---- | ------ | - | ------ | -
|                               |  |                                                                                                                                     |        | 2003 |        |   | 2002  |  |        | 2001 |       
|Net income (loss), as reported |  | $                                                                                                                                   | 18,708 |      |        | $ | 8,861 |  |        | $    | (5,311 | )
|Add:                           |  | Stock-based compensation expense included in reported net income, net of related tax effects                                        |        |      | 6,664  |   |       |  | 2,041  |      |        |   | 2,287  |  
|Deduct:                        |  | Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |        |      | (7,766 | ) |       |  | (4,400 | )    |        |   | (4,895 | )
|                               |  |                                                                                                                                     |        |      |        |   |       |  |        |      |        |   |        |  
|Pro forma net income (loss)    |  | $                                                                                                                                   | 17,606 |      |        | $ | 6,502 |  |        | $    | (7,919 | )
|                               |  |                                                                                                                                     |        |      |        |   |       |  |        |      |        |   |        |  
|Earnings (loss) per share:     |  |                                                                                                                                     |        |      |        |   |       |  |        |      |        |  
|Basic, as reported             |  | $                                                                                                                                   | 0.43   |      |        | $ | 0.22  |  |        | $    | (0.14  | )
|Basic, pro forma               |  | $                                                                                                                                   | 0.41   |      |        | $ | 0.16  |  |        | $    | (0.21  | )
|Diluted, as reported           |  | $                                                                                                                                   | 0.40   |      |        | $ | 0.21  |  |        | $    | (0.14  | )
|Diluted, pro forma             |  | $                                                                                                                                   | 0.37   |      |        | $ | 0.15  |  |        | $    | (0.21  | )



The weighted average
fair value of options granted in 2003, 2002 and 2001 was $4.23, $2.95, and $2.91, respectively. For purposes of calculating compensation cost under SFAS No. 123, the fair value of each option 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 2003, 2002 and 2001:



|                                      |  |      |   |  |      |   |  |      |  
|------------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                                      |  | 2003 |   |  | 2002 |   |  | 2001 |  
|Expected volatility                   |  | 65   | % |  | 62   | % |  | 80   | %
|Risk free interest rate               |  | 3.8  | % |  | 4.5  | % |  | 5.0  | %
|Dividend yield                        |  | 0    | % |  | 0    | % |  | 0    | %
|Contractual or expected lives (years) |  | 7.2  |   |  | 7.2  |   |  | 9.6  |  



F-8



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##### Table of Contents

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 rates, and revenue and expenses are translated using the average exchange rates 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.



3.    ACQUISITIONS AND DIVESTITURES



2003 Acquisition:



On December 15, 2003, the Company acquired substantially all of the assets
of Front Line Strategic Consulting, Inc. (Front Line) for $4.8 million, which included $2.5 million cash at closing and 0.1 million shares of its common stock valued at $1.3 million at closing, and $1.0 million payable in two equal
installments on the first and second anniversary of the closing date. The Front Line acquisition consisted of 27 consulting professionals. Front Line was acquired primarily to augment the Companys healthcare practice. The Front Line
acquisition has 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 date of acquisition.



2002 Acquisitions:



On 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 professionals that primarily serve the energy and public sector industries.



On May 24, 2002, the Company acquired substantially all of 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 contingency will be accounted for as goodwill. FACG was formed in conjunction with a management buyout from Arthur Andersen, LLP and consisted of approximately 90 consulting 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 substantially all of 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



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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 approximately 38 consulting professionals. Keevan was acquired to augment the
Companys government contracts services practice.



On July
15, 2002, the Company acquired substantially all of 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 who 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 substantially all of 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 the Companys common stock valued at $8.2 million at closing, $0.5 million cash payable on April 1, 2003, and $6.5 million in the Companys 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 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.



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Pro Forma Information



The following unaudited pro forma financial information presents combined financial information as if the acquisition of
Hunter had been effective as of January 1, 2001. The pro forma financial information (shown 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 No. 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:



|                                |  |      |         |      |   |         |  
|------------------------------- |  | ---- | ------- | ---- | - | ------- | -
|                                |  | 2002 |         | 2001 |  
|Revenues:                       |  |      |         |      |   |         |  
|Financial & Claims Consulting   |  | $    | 203,171 |      | $ | 176,556 |  
|Energy Consulting               |  |      | 74,373  |      |   | 87,017  |  
|                                |  |      |         |      |   |         |  
|Total combined segment revenues |  | $    | 277,544 |      | $ | 263,573 |  
|                                |  |      |         |      |   |         |  
|Net income (loss)               |  | $    | 11,446  |      | $ | (1,618  | )
|Basic income (loss) per share   |  | $    | 0.27    |      | $ | (0.04   | )
|Diluted income (loss) per share |  | $    | 0.27    |      | $ | (0.04   | )



2001 Acquisitions:



On March 1, 2001, the Company acquired substantially all
of 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 bore interest at 6 percent, and were paid when due in two equal
annual installments. Barba-Arkhon provides project program management and claims analysis services for construction, governmental and institutional projects.



On July 2, 2001, the Company acquired substantially all of 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 provided 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. 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.



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.



2003 Divestiture:



In
September 2003, the Company sold for a nominal sales price its water consulting practice, BookmanEdmonston, Inc., which was previously part of the Energy consulting business segment. BookmanEdmonston accounted for 3 percent or less of
the Companys total revenues for the years ended December 31, 2003, 2002 and 2001. For the years ended December 31, 2003 and 2002, the water consulting practice operated at a loss and the operating results had deteriorating financial
performance trends.



4.    SEGMENT INFORMATION



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



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analyzing complex accounting, finance, economic, operations and information management issues. The Energy Consulting business segment provides a wide range
of management consulting services to companies facing the challenges of the deregulating energy industry. Its services include strategy development, financial transaction support, operations support, regulatory advisement, and technical analysis. On
September 26, 2003, the Company sold, for a nominal sales price, its water consulting practice, BookmanEdmonston, Inc., which accounted for less than 3 percent of the Companys total revenues for the years ended December 31, 2003 and
2002. In each year, the water consulting practice operated at a loss and the operating results had deteriorating financial performance trends.



The Company evaluates segment performance and allocates resources based upon revenues and operating results. The basis of measurement of segment operating
results are consistent among the periods. Transactions between segments have been eliminated. Information on the segment operations for the years ended December 31, 2003, 2002 and 2001 have been summarized as follows (shown in thousands):



|                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                             |  | 2003 |         |   | 2002 |   |         | 2001 | 
|Total Revenues:                                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Financial & Claims Consulting                                                |  | $    | 245,818 |   |      | $ | 183,647 |      |  | $ | 148,563 |  
|Energy Consulting                                                            |  |      | 71,964  |   |      |   | 74,373  |      |  |   | 87,017  |  
|                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Total combined segment revenues                                              |  | $    | 317,782 |   |      | $ | 258,020 |      |  | $ | 235,580 |  
|                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Operating profit:                                                            |  |      |         |   |      |   |         |      |  |   |         |  
|Financial & Claims Consulting                                                |  | $    | 45,921  |   |      | $ | 26,068  |      |  | $ | 18,682  |  
|Energy Consulting                                                            |  |      | 6,837   |   |      |   | 3,712   |      |  |   | 13,467  |  
|                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Total combined segment operating profit                                      |  | $    | 52,758  |   |      | $ | 29,780  |      |  | $ | 32,149  |  
|                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Operating Profit and Statement of Operations reconciliation:                 |  |      |         |   |      |   |         |      |  |   |         |  
|Unallocated:                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|Depreciation expense                                                         |  | $    | 7,488   |   |      | $ | 7,651   |      |  | $ | 7,118   |  
|Amortization expense                                                         |  |      | 1,880   |   |      |   | 2,373   |      |  |   | 5,700   |  
|Stock-based compensation expense                                             |  |      | 11,107  |   |      |   | 3,401   |      |  |   | 3,812   |  
|VSRP cash compensation expense                                               |  |      |        |   |      |   |        |      |  |   | 12,399  |  
|Restructuring costs (credits)                                                |  |      |        |   |      |   | (500    | )    |  |   | 1,900   |  
|Litigation and settlement provisions                                         |  |      | 440     |   |      |   | 750     |      |  |   | 5,700   |  
|Acquisition/integration costs                                                |  |      |        |   |      |   | 1,317   |      |  |   |        |  
|Acquisition-related compensation expense                                     |  |      |        |   |      |   |        |      |  |   | 3,609   |  
|Excluded general and administrative expenses                                 |  |      |        |   |      |   |        |      |  |   | 380     |  
|Other expense (income)                                                       |  |      | (264    | ) |      |   | 19      |      |  |   | (874    | )
|                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Total unallocated expenses, net                                              |  |      | 20,651  |   |      |   | 15,011  |      |  |   | 39,744  |  
|                                                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Income (loss) from continuing operations before income tax expense (benefit) |  | $    | 32,107  |   |      | $ | 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.



Certain general and administrative expenses, which relate to general corporate costs, were allocated to operating segments on the basis of consulting fee
revenue. Certain cost of services and general and administrative 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



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the year ended December 31, 2001, the Company incurred $0.4 million of personnel related costs, which were not allocated to either operating segment.



The Company records accounts receivable, net (see Note 10) and
goodwill and intangible assets (see Note 5) on a segment basis. Other balance sheet amounts are not maintained on a segment basis.



5.    GOODWILL AND INTANGIBLE ASSETS



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



|                                    |  |      |         |   |      |   |        |  
|----------------------------------- |  | ---- | ------- | - | ---- | - | ------ | -
|                                    |  | 2003 |         |   | 2002 |  
|Goodwill                            |  | $    | 116,176 |   |      | $ | 99,593 |  
|Lessaccumulated amortization       |  |      | (5,425  | ) |      |   | (5,425 | )
|                                    |  |      |         |   |      |   |        |  
|Goodwill, net                       |  |      | 110,751 |   |      |   | 94,168 |  
|Intangible assets:                  |  |      |         |   |      |   |        |  
|Customer lists                      |  |      | 4,470   |   |      |   | 4,470  |  
|Non-compete agreements              |  |      | 5,200   |   |      |   | 5,200  |  
|Trade name                          |  |      |        |   |      |   | 400    |  
|Other                               |  |      | 1,055   |   |      |   | 1,055  |  
|                                    |  |      |         |   |      |   |        |  
|Intangible assets, at cost          |  |      | 10,725  |   |      |   | 11,125 |  
|Less: accumulated amortization      |  |      | (9,401  | ) |      |   | (7,921 | )
|                                    |  |      |         |   |      |   |        |  
|Intangible assets, net              |  |      | 1,324   |   |      |   | 3,204  |  
|                                    |  |      |         |   |      |   |        |  
|Goodwill and intangible assets, net |  | $    | 112,075 |   |      | $ | 97,372 |  
|                                    |  |      |         |   |      |   |        |  



In accordance with
SFAS No. 142, the Company is required to perform an annual goodwill impairment test. The Company completed the annual impairment test based on May 31, 2003 balances and there was no impairment recognized as of that date. As of December 31, 2003,
there is no indication of impairment to the Companys goodwill balance at December 31, 2003.



The Company reviewed the intangible assets net book values and estimated useful lives by class. As of December 31, 2003, there was no impairment
related to the intangible assets. The Company amortizes 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, 2003 are as follows (shown in
thousands):



|                                          |  |                             |        |   |                  |   |        |       |  |   |         |  
|----------------------------------------- |  | --------------------------- | ------ | - | ---------------- | - | ------ | ----- |  | - | ------- | -
|                                          |  | Financial& ClaimsConsulting |        |   | EnergyConsulting |   |        | Total | 
|Balance as of January 1, 2003Goodwill    |  | $                           | 75,913 |   |                  | $ | 18,255 |       |  | $ | 94,168  |  
|Balance as of January 1, 2003Intangibles |  |                             | 3,003  |   |                  |   | 201    |       |  |   | 3,204   |  
|                                          |  |                             |        |   |                  |   |        |       |  |   |         |  
|Balance as of January 1, 2003Total       |  |                             | 78,916 |   |                  |   | 18,456 |       |  |   | 97,372  |  
|Goodwill acquired during year             |  |                             | 16,583 |   |                  |   |       |       |  |   | 16,583  |  
|Lessamortization expense                 |  |                             | (1,804 | ) |                  |   | (76    | )     |  |   | (1,880  | )
|                                          |  |                             |        |   |                  |   |        |       |  |   |         |  
|Balance as of December 31, 2003Total     |  | $                           | 93,695 |   |                  | $ | 18,380 |       |  | $ | 112,075 |  
|                                          |  |                             |        |   |                  |   |        |       |  |   |         |  
|Goodwill and intangible assets:           |  |                             |        |   |                  |   |        |       |  |   |         |  
|Goodwill, net                             |  | $                           | 92,496 |   |                  | $ | 18,255 |       |  | $ | 110,751 |  
|Intangible assets, net                    |  |                             | 1,199  |   |                  |   | 125    |       |  |   | 1,324   |  
|                                          |  |                             |        |   |                  |   |        |       |  |   |         |  
|Balance as of December 31, 2003Total     |  | $                           | 93,695 |   |                  | $ | 18,380 |       |  | $ | 112,075 |  
|                                          |  |                             |        |   |                  |   |        |       |  |   |         |  



During the year ended
December 31, 2003, the Company recorded $16.6 million in goodwill. The Company recorded $11.5 million, in aggregate, related to certain previously acquired businesses that achieved earnout



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provisions specified in their purchase agreements. In addition, the Company identified as goodwill a total of $5.1 million for business combinations
consummated in 2003.



In connection with the acquisition of
businesses acquired during the year ended December 31, 2003, 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.



Total amortization expense for 2003 was $1.9 million, compared with $2.4 million and $5.7 million for 2002 and 2001, respectively. Below is the estimated annual aggregate amortization expense of intangible assets for
each of the five succeeding years and thereafter from December 31, 2003 based on intangible assets at December 31, 2003 (shown in thousands):



|                         |  |        |      
|------------------------ |  | ------ | -----
|Year ending December 31, |  | Amount
|2004                     |  | $      | 379  
|2005                     |  |        | 352  
|2006                     |  |        | 352  
|2007                     |  |        | 220  
|2008                     |  |        | 21   
|Thereafter               |  |        | 0    
|                         |  |        |      
|Total                    |  | $      | 1,324
|                         |  |        |      



6.    EARNINGS
PER SHARE (EPS)



Basic earnings per share (EPS) is
computed by dividing income 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. Diluted shares include the dilutive effect of common shares that could potentially be issued due to the exercise of stock options, restricted shares, or contingently issuable shares. Diluted EPS is computed by dividing income 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.



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):



|                                                   |  |        |  |        |  |       
|-------------------------------------------------- |  | ------ |  | ------ |  | ------
|                                                   |  | 2003   |  | 2002   |  | 2001  
|Common shares outstanding                          |  | 43,026 |  | 40,247 |  | 38,439
|Business combination obligations payable in shares |  | 210    |  | 103    |  |      
|                                                   |  |        |  |        |  |       
|Basic shares                                       |  | 43,236 |  | 40,350 |  | 38,439
|Employee stock options and restricted shares       |  | 2,458  |  | 2,022  |  |      
|Equivalent shares of restricted stock units        |  | 1,138  |  | 271    |  |      
|Stock purchase contracts                           |  | 105    |  |       |  |      
|Contingently issuable shares                       |  | 92     |  | 27     |  |      
|                                                   |  |        |  |        |  |       
|Diluted shares                                     |  | 47,029 |  | 42,670 |  | 38,439
|                                                   |  |        |  |        |  |       



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



As a result of the Hunter business combination, the Company is obligated to issue a certain number of shares of its common stock based on the trading
price share value at the time of issuance. The weighted average of these shares for the years ended December 31, 2003 and 2002 is included in the basic earnings per share calculation.



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In January 2001, the Company granted 1.9 million restricted shares of its common stock in conjunction
with the Value Sharing Retention Program. The third and final vesting of these restricted shares occurred on September 1, 2003; no shares remain unvested and outstanding as of December 31, 2003. In November 2002, the Company granted 0.8 million
restricted shares of its common stock, as part of an exchange for stock options that were subject to variable accounting treatment. Approximately 0.3 million of these exchanged shares were unvested and outstanding as of December 31, 2003. In
addition, in December 2002, the Company granted 0.3 million restricted shares that remain unvested as of December 31, 2003. These unvested restricted shares, which total 0.6 million, have voting rights but are excluded from basic earnings per
share calculations until vesting occurs.



The Company granted
1.6 million restricted stock units in October and November of 2002, as a part of the Management Stock Purchase Program (MSPP). In July 2003, 0.8 million shares were vested in accordance with the program. Certain business events occurred
in the third quarter of 2003, which triggered an acceleration of vesting for a certain amount of these restricted stock units beyond the stipulated 20 percent annual installment. As of December 31, 2003, 0.8 million restricted stock units remain
outstanding. The restricted stock units are treated as an equivalent to restricted shares in the diluted earnings per share calculation.



As part of the MSPP, employees of the Company entered into contracts to purchase restricted stock units of the Companys common stock. As of December
31, 2003, 0.6 million restricted stock units remain unvested and outstanding for purchase. The stock purchase contracts are excluded from basic earnings per share calculation until vesting and purchase occurs.



As of December 31, 2003, the unvested restricted shares, restricted stock
units, and stock purchase contract shares total 2.0 million. In accordance with SFAS No. 128, the Company uses the treasury stock method to calculate the dilutive effect of its common stock equivalents should they vest. The vesting of restricted
shares, restricted stock units and stock purchase contract shares triggers taxable benefit proceeds. The taxable proceeds could be used to repurchase shares to reduce the dilutive effect of such shares being issued. The taxable benefit proceeds are
obtained from the spread of the Companys market price of its common stock over the measurement prices of the restricted shares, restricted stock units and stock purchase contract shares on the date the shares vest. Based on the
Companys weighted-average common stock market price for the fourth quarter ended December 31, 2003, the dilutive effect of these shares is 1.1 million shares.



As part of the earnout provisions for certain acquisition agreements, the Company will settle a portion of its obligations
through the issuance of its common stock. Issuance of these shares is contingent based on certain provisions of the acquisition agreements and the shares are included in the diluted earnings per share calculation. As of December 31, 2003, the
equivalent shares to be issued is 0.2 million and is based on the average market price of the Companys common stock from the dates the necessary conditions were satisfied on December 31, 2003.



7.    STOCKHOLDERS EQUITY



Issuance of Common StockBusiness Combinations



In connection with the business acquired in 2003, the Company issued a total
of 0.1 million shares of common stock with an aggregate value of $1.3 million at closing. As part of the purchase price of businesses acquired prior to 2003, the Company issued 0.3 million shares of common stock, out of the treasury stock account,
with an aggregate value of $2.3 million.



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.



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During 2003, the Company repurchased 1.0 million shares for $6.1 million. From December 1, 2000 to
December 31, 2003, the Company repurchased 2.8 million shares for an aggregate total of $12.7 million.



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 vested 33 percent per year from September 1, 2001 to September 1, 2003. The Company recorded stock-based compensation expense for these restricted shares on a straight-line basis over
the vesting term starting in January 2001. The third and final vesting of these restricted shares occurred on September 1, 2003; no shares remain unvested and outstanding as of December 31, 2003. A total of 1.5 million shares vested and 0.4 million
shares were forfeited. For the years ended December 31, 2003, 2002 and 2001, the Company recorded $1.4 million, $1.8 million and $2.7 million, respectively, for a total of $5.9 million in stock-based compensation related to these restricted shares.



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 on the first anniversary of the grant date 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 $3.8 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
years ended December 31, 2003 and 2002, the Company recorded $2.1 million and $0.4 million, respectively, of stock-based compensation expense, in total, for these restricted shares. As of December 31, 2003, 0.3 million of these restricted shares
remain outstanding and unvested.



In December 2002, the Company
issued 0.3 million restricted shares with a market valuation of $1.5 million, which was based on the closing market price of the Companys common stock on the date of grant. 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. The Company may be required to accelerate the recognition of the unamortized portion of the awards, if the awards are accelerated. The Company recorded $0.3 million for these restricted shares in stock-based
compensation expense for the year ended December 31, 2003.



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 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 9, Long-Term Incentive Plan, Management Stock Purchase Plan (MSPP).



Deferred Stock Issuance



As of December 31, 2003, the Company had a deferred stock issuance account of $4.2 million, which consisted of $3.1 million for the contingent earnout
provisions of certain acquisition agreements and $1.1 million for payment under the Hunter purchase price agreement. The stock issuance obligations related to the contingent earnout provisions of certain acquisition agreement are payable during the
first four months of 2004.



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As part of the purchase price for the Hunter acquisition, the Company had a $6.5 million deferred stock
payment due 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 September 2003, the Company satisfied the first installment by issuing 0.1 million shares with a value of $1.1 million at issuance date. The second and last installment of $1.1 million is due September 2004.



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. As of December 31, 2003, the Company was authorized to sell 1.7 million shares. During 2003, 2002 and 2001, the Company sold 138,000, 124,000 and 76,000 shares, respectively, under the plan. The Company had sold 450,000 shares
under the plan, prior to 2001.



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 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 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 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.



Other Issuances of Common Stock



All other issuances of common stock during the years 2001 through 2003 were
related to business combinations and exercised stock options.



8.    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 the
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):



|                                       |  |      |        |      |   |       |  |   |      
|-------------------------------------- |  | ---- | ------ | ---- | - | ----- |  | - | -----
|                                       |  | 2003 |        | 2002 |   | 2001 
|Restricted stock awards                |  | $    | 6,297  |      | $ | 2,668 |  | $ | 2,773
|Variable accounting awards             |  |      | 4,810  |      |   | 733   |  |   | 1,039
|                                       |  |      |        |      |   |       |  |   |      
|Total stock-based compensation expense |  | $    | 11,107 |      | $ | 3,401 |  | $ | 3,812
|                                       |  |      |        |      |   |       |  |   |      



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The year-end stock prices used to compute the market valuation adjustment for variable accounting stock
awards were $18.86, $5.90, and $5.50 at December 31, 2003, 2002 and 2001, respectively.



The following table summarizes the stock-based compensation expense for the years ended December 31, 2003, 2002 and 2001 recorded for the Companys consultants and administrative and corporate executive
management personnel (shown in thousands):



|                                                            |  |      |        |      |   |       |  |   |      
|----------------------------------------------------------- |  | ---- | ------ | ---- | - | ----- |  | - | -----
|                                                            |  | 2003 |        | 2002 |   | 2001 
|Consultants                                                 |  | $    | 7,688  |      | $ | 2,843 |  | $ | 3,238
|Corporate executive management and administrative personnel |  |      | 3,419  |      |   | 558   |  |   | 574  
|                                                            |  |      |        |      |   |       |  |   |      
|Total stock-based compensation expense                      |  | $    | 11,107 |      | $ | 3,401 |  | $ | 3,812
|                                                            |  |      |        |      |   |       |  |   |      



9.    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 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.



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 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, 2003, the Company had less than 0.1 million of these options outstanding. These options are subject to variable accounting, which stock-based compensation expense has been recorded for the
valuation increase of the closing market price above the exercise price.



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 program covered approximately 30 percent of
the employee population. The program provided for maximum incentives of approximately $20.0 million in cash, 2.1 million restricted shares, and 4.8 million stock options, subject to vesting. The cash and equity incentives vest in stages over a four
and one half year period.



The cash incentives vested and were
paid over a 12-month period, commencing on September 1, 2000. 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



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5 percent per quarter thereafter through March 2004. As of December 31, 2003, less than 0.1 million of these stock options remained outstanding. These
options are subject to variable accounting, on 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 vested 33 percent per year from September 1, 2001 to September 1, 2003. The Company recorded stock-based compensation expense for these restricted shares on a straight-line basis over
the vesting term, starting in January 2001. The third and final vesting of these restricted shares occurred on September 1, 2003; no shares remain unvested and outstanding as of December 31, 2003. A total of 1.5 million shares vested and 0.4 million
shares were forfeited. For the years ended December 31, 2003, 2002 and 2001, the Company recorded $1.4 million, $1.8 million and $2.7 million, respectively, for a total of $5.9 million in stock-based compensation related to these restricted shares.



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 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 vested 50 percent on February 1, 2002 and 50 percent on November 19, 2002.



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 on the first anniversary of the grant date, 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 $3.8 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 years ended December 31, 2003 and 2002, the Company recorded $2.1 million and $0.4 million, respectively, of stock-based
compensation expense, in total, for these restricted shares. As of December 31, 2003, 0.3 million of these restricted shares remain outstanding and unvested.



In addition, 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
had agreements that expired in November 2002 or shortly thereafter, the Company implemented and executed a predominantly stock-based retention program, the Management Stock Purchase Program (MSPP), for key leaders in both of the



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Companys business segments, using the Companys existing Long-Term Incentive Program authorization. The program provides for individual purchases
and grants 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 $4.9 million over three years in 25 percent installments.
The Company issued 1.6 million of these restricted stock units in October and November 2002. 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.



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 25 percent installments, with purchase dates extending
to July 1, 2007. Other restricted stock units that were awarded vest in 20 percent installments over 32 months from grant dates to July 1, 2005. The MSPP contains certain provisions, 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.



In July 2003, 0.8 million shares were vested in accordance with the program. Certain business events occurred in the third quarter of 2003, which
triggered an acceleration of vesting for a certain amount of these restricted stock units beyond the stipulated 20 percent annual installment. As of December 31, 2003, 0.8 million restricted stock units remain outstanding. The restricted stock units
outstanding 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. In 2003, the Company paid the first two of the
four installments totaling $2.7 million, in aggregate. As of December 31, 2003, $2.2 million remains as a liability under the program. The new non-solicitation agreements signed in exchange for participation in the MSPP included 12 months
post-employment restrictions. The Management Stock Purchase Program is expected to supersede the AEIP for a three-year period, commencing in 2002.



Other Long-Term Incentive Plan Grants



The Company granted a total of 0.2 million and 0.7 million stock options during 2003 and 2002, respectively, all under its existing LTIP authority. The
Company granted a total of 1.9 million options during 2001, which includes the 1.1 million options 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 in 2001 were related to new hires and performance awards.



The Company granted, in 2003, 0.1 million restricted shares and restricted stock units, in aggregate, in connection with new hires and performance awards.



Stock Options Outstanding



As of December 31, 2003, the Company had 4.3 million stock options
outstanding at a weighted average exercise price of $5.95 per share. As of December 31, 2003, 2.9 million options were exercisable at a weighted average exercise price of $6.11 per share.



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The following table summarizes stock option activity for the years ended December 31, 2003, 2002 and
2001:



|                                         |  |                        |   |      |                               |      |                         |        |   |                                |   |                        |  |       |                               |  |   |     
|---------------------------------------- |  | ---------------------- | - | ---- | ----------------------------- | ---- | ----------------------- | ------ | - | ------------------------------ | - | ---------------------- |  | ----- | ----------------------------- |  | - | ----
|                                         |  | 2003                   |   | 2002 |                               | 2001
|                                         |  | Number of shares(000s) |   |      | Weighted averageexerciseprice |      | Number of shares (000s) |        |   | Weighted averageexercise price |   | Number of shares(000s) |  |       | Weighted averageexerciseprice
|Options outstanding at beginning of year |  | 5,860                  |   |      | $                             | 5.42 |                         | 8,550  |   |                                | $ | 5.90                   |  | 7,662 |                               |  | $ | 6.39
|Granted                                  |  | 232                    |   |      |                               | 9.45 |                         | 660    |   |                                |   | 6.14                   |  | 1,912 |                               |  |   | 4.52
|Exercised                                |  | (1,435                 | ) |      |                               | 4.44 |                         | (742   | ) |                                |   | 4.36                   |  | (170  | )                             |  |   | 4.56
|Forfeited or exchanged                   |  | (352                   | ) |      |                               | 5.60 |                         | (2,608 | ) |                                |   | 7.46                   |  | (854  | )                             |  |   | 7.60
|                                         |  |                        |   |      |                               |      |                         |        |   |                                |   |                        |  |       |                               |  |   |     
|Options outstanding at end of year       |  | 4,305                  |   |      | $                             | 5.95 |                         | 5,860  |   |                                | $ | 5.42                   |  | 8,550 |                               |  | $ | 5.90
|                                         |  |                        |   |      |                               |      |                         |        |   |                                |   |                        |  |       |                               |  |   |     
|Options exercisable at year end          |  | 2,919                  |   |      | $                             | 6.11 |                         | 3,352  |   |                                | $ | 5.69                   |  | 3,057 |                               |  | $ | 7.85
|                                         |  |                        |   |      |                               |      |                         |        |   |                                |   |                        |  |       |                               |  |   |     

The following table summarizes information regarding stock options outstanding at December 31, 2003
and 2002:



|                         |  |                         |  |                              |       |                                |     |                         |       |                              |   |                                |  |    
|------------------------ |  | ----------------------- |  | ---------------------------- | ----- | ------------------------------ | --- | ----------------------- | ----- | ---------------------------- | - | ------------------------------ |  | ---
|                         |  | 2003                    |  | 2002                        
|Range of exercise prices |  | OutstandingShares(000s) |  | Weightedaverageexerciseprice |       | Remainingexerciseperiod(years) |     | OutstandingShares(000s) |       | Weightedaverageexerciseprice |   | Remainingexerciseperiod(years)
|$0.00 to $3.74           |  | 664                     |  | $                            | 3.70  |                                | 7.8 |                         | 1,082 |                              | $ | 3.70                           |  | 8.5
|$3.75 to $4.99           |  | 1,998                   |  |                              | 3.98  |                                | 6.8 |                         | 2,907 |                              |   | 3.98                           |  | 7.2
|$5.00 to $7.49           |  | 1,127                   |  |                              | 5.81  |                                | 6.9 |                         | 1,435 |                              |   | 5.91                           |  | 7.6
|$7.50 to $9.99           |  | 218                     |  |                              | 8.67  |                                | 7.2 |                         | 186   |                              |   | 8.36                           |  | 7.4
|$10.00 and above         |  | 298                     |  |                              | 22.73 |                                | 5.7 |                         | 250   |                              |   | 24.67                          |  | 5.7
|                         |  |                         |  |                              |       |                                |     |                         |       |                              |   |                                |  |    
|Total                    |  | 4,305                   |  | $                            | 5.95  |                                | 6.9 |                         | 5,860 |                              | $ | 5.42                           |  | 7.5
|                         |  |                         |  |                              |       |                                |     |                         |       |                              |   |                                |  |    

The following table summarizes information regarding stock options exercisable at December 31,
2003:



|                         |  |                         |  |                               |      
|------------------------ |  | ----------------------- |  | ----------------------------- | -----
|Range of exercise prices |  | OutstandingShares(000s) |  | Weighted averageexerciseprice
|$0.00 to $3.74           |  | 644                     |  | $                             | 3.70 
|$3.75 to $4.99           |  | 1,305                   |  |                               | 3.97 
|$5.00 to $7.49           |  | 606                     |  |                               | 5.48 
|$7.50 to $9.99           |  | 124                     |  |                               | 8.77 
|$10.00 and above         |  | 240                     |  |                               | 24.38
|                         |  |                         |  |                               |      
|Total                    |  | 2,919                   |  | $                             | 6.11 
|                         |  |                         |  |                               |      



The following table
summarizes the information regarding stock options outstanding by each plan the Company had as of December 31, 2003:



|              |  |                           |  |                                |      |                                                        |      
|------------- |  | ------------------------- |  | ------------------------------ | ---- | ------------------------------------------------------ | -----
|Plan category |  | Outstanding Shares (000s) |  | Weightedaverage exercise price |      | Shares remaining available for future issuances (000s)
|LTIP          |  | 3,976                     |  | $                              | 5.85 |                                                        | 2,347
|SEIP          |  | 329                       |  | $                              | 7.16 |                                                        | 209  
|              |  |                           |  |                                |      |                                                        |      
|Total         |  | 4,305                     |  | $                              | 4.54 |                                                        | 2,556
|              |  |                           |  |                                |      |                                                        |      



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10.    SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION



Accounts Receivable:



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



|                                     |  |      |         |   |      |   |        |  
|------------------------------------ |  | ---- | ------- | - | ---- | - | ------ | -
|                                     |  | 2003 |         |   | 2002 |  
|Billed amounts                       |  | $    | 53,232  |   |      | $ | 51,978 |  
|Engagements in process               |  |      | 26,647  |   |      |   | 18,905 |  
|Allowance for uncollectible accounts |  |      | (11,164 | ) |      |   | (9,190 | )
|                                     |  |      |         |   |      |   |        |  
|                                     |  | $    | 68,715  |   |      | $ | 61,693 |  
|                                     |  |      |         |   |      |   |        |  



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



Accounts receivable, net of the allowance for uncollectible accounts, was
$56.1 million for the Financial & Claims Consulting business segment and $12.6 million for the Energy Consulting business segment as of December 31, 2003, compared with $45.1 million for the Financial & Claims Consulting business segment and
$16.6 million for the Energy Consulting business segment as of December 31, 2002.



Property and Equipment:



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



|                                                |  |      |         |   |      |   |         |  
|----------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                |  | 2003 |         |   | 2002 |  
|Land and buildings                              |  | $    | 3,548   |   |      | $ | 3,497   |  
|Furniture, fixtures and equipment               |  |      | 30,318  |   |      |   | 35,641  |  
|Software                                        |  |      | 8,622   |   |      |   | 7,808   |  
|Leasehold improvements                          |  |      | 10,054  |   |      |   | 8,602   |  
|                                                |  |      |         |   |      |   |         |  
|                                                |  |      | 52,542  |   |      |   | 55,548  |  
|Less: accumulated depreciation and amortization |  |      | (32,584 | ) |      |   | (37,424 | )
|                                                |  |      |         |   |      |   |         |  
|Property and equipment, net                     |  | $    | 19,958  |   |      | $ | 18,124  |  
|                                                |  |      |         |   |      |   |         |  



Other Current
Liabilities:



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



|                                    |  |      |        |      |   |       
|----------------------------------- |  | ---- | ------ | ---- | - | ------
|                                    |  | 2003 |        | 2002
|Acquisition earnout obligations     |  | $    | 9,109  |      | $ | 3,400 
|Deferred purchase price obligations |  |      | 2,678  |      |   | 4,878 
|Notes payablecurrent               |  |      |       |      |   | 1,500 
|Deferred revenue credits            |  |      | 4,204  |      |   | 1,861 
|Deferred rent                       |  |      | 2,094  |      |   | 1,989 
|Other liabilities                   |  |      | 1,606  |      |   | 3,042 
|                                    |  |      |        |      |   |       
|                                    |  | $    | 19,691 |      | $ | 16,670
|                                    |  |      |        |      |   |       





Acquisition earnout obligations relate to payments due under certain purchase agreements. These amounts become payable upon the achievement of specified
financial objectives by acquired businesses. On April 1, 2003, the Company paid the earnout obligations that existed at December 31, 2002. As of December 31, 2003, the Company had a $9.1 million liability for acquisition earnout obligations, which
are to be paid during the first four months of 2004.



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The Company had $2.7 million in deferred purchase price obligations as of December 31, 2003. The Company
had a $2.2 million obligation, which relates to the last installment of a 2002 acquisition agreement and is payable in September 2004. In addition, the Company had a $0.5 million liability related to a December 2003 acquisition agreement.



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



11.    SUPPLEMENTAL CASH FLOW INFORMATION



2003 Non-Cash Transactions



The Company entered into a $1.0 million deferred cash payment commitment and issued 0.1 million shares of its common stock with a value of $1.3 million at
closing as part of the purchase price for the Front Line acquisition. (See Note 3, Acquisitions and Divestitures).



During the year ended December 31, 2003, the Company recorded, in aggregate, $12.2 million of goodwill relating to contingent earnout liabilities and
stock obligations for earnout provisions met under provisions of certain purchase agreements. For the year ended December 31, 2003, the Company recorded $6.3 million for deferred compensation related to restricted shares and restricted stock units.



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 and Divestitures).



During the year ended December 31, 2002, the Company recorded, in aggregate, $4.3 million of goodwill relating to 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 Chambers acquisition. (See Note 3, Acquisitions and Divestitures). 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.



Other Information



Total interest paid during the years ended December 31, 2003, 2002 and 2001
was $0.7 million, $0.8 million and $0.4 million, respectively. Total income taxes paid during the years ended December 31, 2003, 2002 and 2001 were $7.9 million, $7.8 million and $3.3 million, respectively.



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12.    LEASE COMMITMENTS



The Company leases its office facilities and certain equipment under operating lease arrangements that expire at various
dates through 2014. 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 2003 and in the aggregate are as follows:



|                         |  |        |       
|------------------------ |  | ------ | ------
|Year ending December 31, |  | Amount
|2004                     |  | $      | 12,909
|2005                     |  |        | 12,389
|2006                     |  |        | 11,815
|2007                     |  |        | 9,439 
|2008                     |  |        | 8,258 
|Thereafter               |  |        | 14,523
|                         |  |        |       
|                         |  | $      | 69,333
|                         |  |        |       



In addition, the
Company has other lease commitments for the years subsequent to 2003, totaling $4.3 million for offices that were abandoned as a part of a restructuring plan established in 2000. The Company decided in 2000 to terminate or sublease such leases and
has reserved for the associated net costs within the facilities closings reserve. (See Note 15 Restructuring Costs (Credits).)



Rent expense for operating leases was $14.3 million, $14.5 million, and $12.1 million for the years ended December 31, 2003, 2002 and 2001, respectively.



13.    BANK BORROWINGS



As of December 31, 2003, the Company maintained an unsecured revolving line
of credit agreement for $150.0 million. In December 2003, the Company amended its revolving line of credit agreement to increase the line from $75.0 million to $150.0 million. In addition, Harris Trust and Savings Bank and Fifth Third
BankChicago joined the existing bank group of LaSalle Bank, N.A., a subsidiary of ABN AMRO Bank N.V., and U.S. Bank. There were no other substantive changes in the terms and conditions in the amendment. The line of credit amendment was made to
give the Company more financial flexibility to pursue selective acquisitions and support growth.



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 requires the Company to maintain a minimum level of earnings before interest, taxes, depreciation and amortization, among other things.



The Company was in compliance with the terms of the agreements, then in
place, as of December 31, 2003 and 2002. As of December 31, 2003, the Company did not have a balance outstanding under the line of credit agreement, compared to a balance outstanding of $6.5 million as of December 31, 2002.





At December 31, 2003 and 2002, the Company had letters of credit of $3.7 million outstanding. The letters of credit outstanding are to secure various leased office space the Company occupies. The letters of credit expire at various dates
through May 2009.



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14.    INCOME TAX EXPENSE (BENEFIT)



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



|                                                              |  |                                 |        |   |      |   |       |      |  |   |        |  
|------------------------------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                                              |  | For the year ended December 31, |       
|                                                              |  | 2003                            |        |   | 2002 |   |       | 2001 | 
|Federal:                                                      |  |                                 |        |   |      |   |       |      |  |   |        |  
|Current                                                       |  | $                               | 10,137 |   |      | $ | 4,295 |      |  | $ | (1,941 | )
|Deferred                                                      |  |                                 | 239    |   |      |   | (155  | )    |  |   | (949   | )
|                                                              |  |                                 |        |   |      |   |       |      |  |   |        |  
|Total                                                         |  |                                 | 10,376 |   |      |   | 4,140 |      |  |   | (2,890 | )
|                                                              |  |                                 |        |   |      |   |       |      |  |   |        |  
|State:                                                        |  |                                 |        |   |      |   |       |      |  |   |        |  
|Current                                                       |  |                                 | 2,547  |   |      |   | 927   |      |  |   | (308   | )
|Deferred                                                      |  |                                 | (123   | ) |      |   | (36   | )    |  |   | (48    | )
|                                                              |  |                                 |        |   |      |   |       |      |  |   |        |  
|Total                                                         |  |                                 | 2,424  |   |      |   | 891   |      |  |   | (356   | )
|                                                              |  |                                 |        |   |      |   |       |      |  |   |        |  
|Foreign                                                       |  |                                 | 599    |   |      |   | 877   |      |  |   | 962    |  
|                                                              |  |                                 |        |   |      |   |       |      |  |   |        |  
|Total federal, state and foreign income tax expense (benefit) |  | $                               | 13,399 |   |      | $ | 5,908 |      |  | $ | (2,284 | )
|                                                              |  |                                 |        |   |      |   |       |      |  |   |        |  



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



|                                                                           |  |                                |   |  |      |   |  |       |   
|-------------------------------------------------------------------------- |  | ------------------------------ | - |  | ---- | - |  | ----- | --
|                                                                           |  | For the year endedDecember 31, |  
|                                                                           |  | 2003                           |   |  | 2002 |   |  | 2001  |   
|Federal tax expense (benefit) at statutory rate                            |  | 35.0                           | % |  | 35.0 | % |  | (35.0 | )%
|State tax expense (benefit) at statutory rate, net of federal tax benefits |  | 4.6                            |   |  | 4.2  |   |  | (5.6  | ) 
|Foreign taxes                                                              |  | 0.1                            |   |  | (0.2 | ) |  | 0.8   |   
|Effect of nontaxable interest and dividends                                |  |                               |   |  | (0.7 | ) |  | (2.9  | ) 
|Effect of non-deductible amortization                                      |  | 1.3                            |   |  | 2.7  |   |  | 12.7  |   
|Effect of non-deductible stock compensation expense                        |  |                               |   |  | (1.9 | ) |  | 0.8   |   
|Effect of employee stock purchase plan disqualifying disposition           |  |                               |   |  | (0.1 | ) |  | (0.5  | ) 
|Effect of restricted stock vesting                                         |  |                               |   |  |     |   |  | (3.2  | ) 
|Effect of non-deductible meals and entertainment expense                   |  | 0.7                            |   |  | 1.0  |   |  | 2.8   |   
|                                                                           |  |                                |   |  |      |   |  |       |   
|                                                                           |  | 41.7                           | % |  | 40.0 | % |  | (30.1 | )%
|                                                                           |  |                                |   |  |      |   |  |       |   



The tax benefits
associated with nonqualified stock options and disqualifying dispositions of incentive stock options reduced taxes payable by $10.3 million, $0.4 million, and $0.08 million in 2003, 2002 and 2001, respectively. Such benefits were recorded as an
increase to additional paid-in capital in each year.



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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, |       
|                                                  |  | 2003         |        |   | 2002 |  
|Deferred tax assets attributable to:              |  |              |        |   |      |   |       |  
|Allowance for uncollectible receivables           |  | $            | 3,377  |   |      | $ | 2,772 |  
|Restructuring costs                               |  |              | (80    | ) |      |   | 176   |  
|Former officers notes                            |  |              | 1,142  |   |      |   | 1,414 |  
|Insurance related costs                           |  |              | 15     |   |      |   | 15    |  
|Depreciation and amortization                     |  |              | 179    |   |      |   | 928   |  
|Stock options                                     |  |              | 1,672  |   |      |   | 273   |  
|Deferred revenue                                  |  |              | 1,834  |   |      |   | 176   |  
|Litigation settlement                             |  |              | 1,424  |   |      |   | 1,424 |  
|Acquisition costs                                 |  |              | (1,365 | ) |      |   | 1,359 |  
|Tax credits and capital loss carry forward        |  |              | 1,089  |   |      |   | 1,010 |  
|State income taxes offset for deferred tax assets |  |              | (553   | ) |      |   | (510  | )
|Other                                             |  |              |       |   |      |   | (1    | )
|                                                  |  |              |        |   |      |   |       |  
|Total deferred tax assets                         |  |              | 8,734  |   |      |   | 9,036 |  
|                                                  |  |              |        |   |      |   |       |  
|Deferred tax liabilities attributable to:         |  |              |        |   |      |   |       |  
|Compensation program                              |  |              | 305    |   |      |   | 492   |  
|Investments                                       |  |              | 298    |   |      |   | 298   |  
|                                                  |  |              |        |   |      |   |       |  
|Deferred tax liabilities                          |  |              | 603    |   |      |   | 790   |  
|                                                  |  |              |        |   |      |   |       |  
|Net deferred tax assets                           |  | $            | 8,131  |   |      | $ | 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.



15.    RESTRUCTURING COSTS (CREDITS)



In May 2000, the Company implemented a plan to restructure its operations
and recorded restructuring costs of $10.2 million for the year ended December 31, 2000. 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 the Company had not been able
to sublease its remaining lease obligations of office subject to closing or size reduction.



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.



The $1.0 million balance as of December 31, 2003 represents the excess of rental payment obligations less expected sublease receipts, if any, and the expected lease termination costs of certain office space which the Company decided to
abandon and sublease.



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The activity affecting the accrual for restructuring charges during 2003, 2002, and 2001 is as follows
(shown in thousands):



|                              |  |                    |        |   |                     |   |       |       |  |   |        |  
|----------------------------- |  | ------------------ | ------ | - | ------------------- | - | ----- | ----- |  | - | ------ | -
|                              |  | FacilitiesClosings |        |   | Workforcereductions |   |       | Total | 
|Balance at December 31, 2000  |  | $                  | 3,496  |   |                     | $ | 1,045 |       |  | $ | 4,541  |  
|Year ended December 31, 2001: |  |                    |        |   |                     |   |       |       |  |   |        |  
|Charges to operations         |  |                    | 1,900  |   |                     |   |      |       |  |   | 1,900  |  
|Utilized                      |  |                    | (1,671 | ) |                     |   | (887  | )     |  |   | (2,558 | )
|Reclassified                  |  |                    | 158    |   |                     |   | (158  | )     |  |   |       |  
|                              |  |                    |        |   |                     |   |       |       |  |   |        |  
|Balance at December 31, 2001  |  | $                  | 3,883  |   |                     | $ |      |       |  | $ | 3,883  |  
|Year ended December 31, 2002: |  |                    |        |   |                     |   |       |       |  |   |        |  
|Charges to operations         |  |                    | (500   | ) |                     |   |      |       |  |   | (500   | )
|Utilized                      |  |                    | (1,255 | ) |                     |   |      |       |  |   | (1,255 | )
|                              |  |                    |        |   |                     |   |       |       |  |   |        |  
|Balance at December 31, 2002  |  | $                  | 2,128  |   |                     | $ |      |       |  | $ | 2,128  |  
|Utilized                      |  |                    | (1,102 | ) |                     |   |      |       |  |   | (1,102 | )
|                              |  |                    |        |   |                     |   |       |       |  |   |        |  
|Balance at December 31, 2003  |  | $                  | 1,026  |   |                     | $ |      |       |  | $ | 1,026  |  
|                              |  |                    |        |   |                     |   |       |       |  |   |        |  



16.    EMPLOYEE
BENEFIT PLANS



The Company maintains profit sharing and
savings plans and provides employer-matching contributions for all participants. The Company matches in an amount equal to 100 percent of the employees current contributions, up to a maximum of 3 percent of the employees 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 $2.7 million,
$2.6 million, and $2.4 million in the years ended December 31, 2003, 2002, and 2001, respectively.



17.    RELATED PARTY TRANSACTIONS



Governor 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, $0.3 million, and $0.2 million in 2003, 2002 and 2001, respectively.



18.    SUBSEQUENT EVENT



On January 30, 2004, the Company acquired substantially all of the assets of Tucker Alan, Inc. (Tucker) for $89.5 million, which included
$45.6 million cash at closing and 0.3 million shares of its common stock valued at $6.0 million at closing, and $37.9 million payable in two installments of cash and the Companys common stock within the first two years following the closing
date of the transaction. The Tucker acquisition included 230 consulting professionals active primarily in the litigation, construction and healthcare practices. The Company acquired Tucker to strengthen its national platform. Tucker has a
significant presence in the western region of the United States of America that would complement the Companys other geographic regions. Tuckers service offerings and industry expertise are also complementary to those of the
Companys. The Tucker acquisition occurred subsequent to December 31, 2003 and the Company is currently in the process of, but has not completed, allocating the purchase price paid for the Tucker business.



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19.    LITIGATION AND SETTLEMENTS



As previously disclosed, in November 2000 the Company was served with a
lawsuit filed by two former officers of the Company, Steven J. Denari and Charles A. Demirjian. As amended, the complaint names as defendants the Company, three of its Directors, and its independent accountants, KPMG LLP. The lawsuit seeks
compensatory and punitive damages from the defendants based on various legal theories including defamation. The Company is defending this case vigorously.



As previously disclosed, in October 2001 the Company commenced a civil action to collect the unpaid portion of amounts loaned in 1999 to its former
General Counsel, Charles Demirjian. The unpaid amount that the Company sought to recover, including interest, was approximately $3.5 million. In February 2004, a jury rendered a verdict in Mr. Demirjians favor, finding that he is not legally
obligated to repay such unpaid amount. The Company is considering whether to move for a new trial and appeal. The Company fully reserved the unpaid amount of Mr. Demirjians loan in 2000 and, therefore, the adverse verdict has no impact on the
Companys financial statements.



As previously disclosed,
in November 2001 the Company was informed that the SEC had 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 NCI during 1998 and 1999.
The Company cooperated fully with the SEC. The SEC has not informed the Company of the current status of its investigation; however, there have been no developments that the Company is aware of in the last year.



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. 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, 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. Both parties have filed motions for summary judgment. The case is
currently scheduled for trial in May 2004.



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 6, 2004, we reported on the consolidated balance sheets of Navigant Consulting, Inc. and subsidiaries as of December 31, 2003 and
2002, 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, 2003, as contained in the 2003 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 6, 2004



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##### Table of Contents

SCHEDULE II



NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS



Years ended December 31, 2003, 2002 and 2001

(amounts in thousands)



|                                |  |                            |       |                   |   |               |  |   |                      |   |  |   |       
|------------------------------- |  | -------------------------- | ----- | ----------------- | - | ------------- |  | - | -------------------- | - |  | - | ------
|Description                     |  | Balance atbeginningof year |       | Chargedtoexpenses |   | Deductions(1) |  |   | Balanceat endof year
|Year ended December 31, 2003    |  |                            |       |                   |   |               |  |   |                      |   |  |   |       
|Allowance for doubtful accounts |  | $                          | 9,190 |                   | $ | 4,894         |  | $ | (2,920               | ) |  | $ | 11,164
|Year ended December 31, 2002    |  |                            |       |                   |   |               |  |   |                      |   |  |   |       
|Allowance for doubtful accounts |  | $                          | 9,948 |                   | $ | 4,643         |  | $ | (5,401               | ) |  | $ | 9,190 
|Year ended December 31, 2001    |  |                            |       |                   |   |               |  |   |                      |   |  |   |       
|Allowance for doubtful accounts |  | $                          | 9,521 |                   | $ | 5,604         |  | $ | (5,177               | ) |  | $ | 9,948 

---

|(1) |  | Represents write-offs of bad debts.
|--- |  | -----------------------------------



S-2