e10vq

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K58XlwSjYagMV3pyuOTRi5vdfJEk25cOa1YnbipZubZal9O7+qfZpKZJYwNx9uiZ UoFw/HNui04HN3g8e8z5nw== 0000950137-04-009478.txt : 20041105 0000950137-04-009478.hdr.sgml : 20041105 20041105151749 ACCESSION NUMBER: 0000950137-04-009478 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041105 DATE AS OF CHANGE: 20041105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIAMONDCLUSTER INTERNATIONAL INC CENTRAL INDEX KEY: 0000924940 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT CONSULTING SERVICES [8742] IRS NUMBER: 364069408 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22125 FILM NUMBER: 041122608 BUSINESS ADDRESS: STREET 1: 875 NORTH MICHIGAN AVE SUITE 3000 CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3122555000 MAIL ADDRESS: STREET 1: 875 NORTH MICHIGAN AVE STE 3000 CITY: CHICAGO STATE: IL ZIP: 60611 FORMER COMPANY: FORMER CONFORMED NAME: DIAMOND TECHNOLOGY PARTNERS INC DATE OF NAME CHANGE: 19961212 10-Q 1 c89294e10vq.htm QUARTERLY REPORT e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2004

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-22125

DiamondCluster International, Inc.

(Exact name of registrant as specified in its charter)


Delaware		36-4069408
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

875 N. Michigan Avenue, Suite 3000, Chicago, Illinois (Address of principal executive offices)		60611 (Zip Code)

(312) 255-5000

Registrant’s Telephone Number, Including Area Code

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

As of October 31, 2004, there were 34,191,509 shares of Common Stock of the Registrant outstanding.

DIAMONDCLUSTER INTERNATIONAL, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2004

TABLE OF CONTENTS


PART I
Item 1:	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2004 and September 30, 2004	3
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended September 30, 2003 and 2004	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2003 and 2004	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3:	Quantitative and Qualitative Disclosures about Market Risk	20
Item 4:	Controls and Procedures	20
PART II
Item 2:	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	21
Item 4:	Submission of Matters to a Vote of Security Holders	21
Item 6:	Exhibits and Reports on Form 8-K	22
SIGNATURES		23
Certification
Certification
Certification
Certification
Certification
Certification
Risk Factors

DIAMOND CLUSTER INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)


		March 31,			September 30,
		2004			2004

					(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents	$	81,304		$	86,962
	Accounts receivable, net of allowance of $1,650 and $1,197 as of March 31 and September 30, 2004, respectively		23,219			21,365
	Income taxes receivable		569			568
	Prepaid expenses and other current assets		10,373			6,854

Total current assets			115,465			115,749
Computers, equipment, leasehold improvements and software, net			6,473			5,616
Other assets			729			676

Total assets		$	122,667		$	122,041

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable	$	6,250		$	4,779
	Accrued compensation		5,749			5,305
	Deferred revenue		1,380			937
	Restructuring accruals, current portion		3,528			3,300
	Other accrued liabilities		18,973			15,066

Total current liabilities			35,880			29,387
Restructuring accruals, less current portion			6,000			4,542

Total liabilities			41,880			33,929

Stockholders’ equity:
	Preferred Stock, $1.00 par value, 2,000 shares authorized, no shares issued		—			—
	Common Stock, $0.001 par value, 300,000 shares authorized, 38,683 and 39,492 shares issued as of March 31 and September 30, 2004, respectively		39			39
	Additional paid-in capital		624,682			633,342
	Stock-based compensation		(6,324	)		(4,323	)
	Accumulated other comprehensive income		2,858			2,484
	Accumulated deficit		(479,332	)		(471,771	)

			141,923			159,771
Less Common Stock in treasury, at cost, 4,336 and 5,354 shares held at March 31 and September 30, 2004, respectively			(61,136	)		(71,659	)

Total stockholders’ equity			80,787			88,112

Total liabilities and stockholders’ equity		$	122,667		$	122,041

See accompanying notes to condensed consolidated financial statements.

DIAMONDCLUSTER INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data)



			For the Three Months						For the Six Months
			ended September 30,						ended September 30,

			2003			2004			2003			2004

			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenue:
	Net revenue		$	38,213		$	46,116		$	72,243		$	90,981
	Reimbursable expenses			5,153			6,382			10,340			13,068

		Total revenue		43,366			52,498			82,583			104,049
Operating expenses:
	Project personnel costs before reimbursable expenses			25,355			27,933			48,368			55,699
	Reimbursable expenses			5,153			6,382			10,340			13,068

		Total project personnel expenses		30,508			34,315			58,708			68,767
	Professional development and recruiting			1,132			1,619			1,841			2,931
	Marketing and sales			752			589			1,275			1,375
	Management and administrative support			7,954			8,305			17,429			16,500
	Stock-based compensation*			2,282			3,476			8,303			6,997
	Restructuring charge			—			—			4,233			—

		Total operating expenses		42,628			48,304			91,789			96,570

Income (loss) from operations				738			4,194			(9,206	)		7,479
Other income, net				213			263			615			578

Income (loss) before taxes				951			4,457			(8,591	)		8,057
Income tax expense				490			337			1,001			496

Net income (loss)				461			4,120			(9,592	)		7,561
Foreign currency translation adjustments				(215	)		289			458			(151	)
Unrealized loss on investment				—			(79	)		—			(223	)

Comprehensive income (loss)			$	246		$	4,330		$	(9,134	)	$	7,187

Basic net income (loss) per share of common stock			$	0.01		$	0.12		$	(0.30	)	$	0.23
Diluted net income (loss) per share of common stock			$	0.01		$	0.12		$	(0.30	)	$	0.21
Shares used in computing basic net income (loss) per share of common stock				32,440			33,421			32,244			33,403
Shares used in computing diluted net income (loss) per share of common stock				33,892			35,253			32,244			35,349

* If stock-based compensation expense had been distributed to the operating expense line items below, the allocation would be as follows:



		For the Three Months				For the Six Months
		ended September 30,				ended September 30,

		2003		2004		2003		2004

		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Project personnel expenses		$	2,042	$	3,045	$	7,729	$	6,200
Professional development and recruiting			20		34		45		61
Marketing and sales			20		53		54		101
Management and administrative support			200		344		475		635

	Total stock-based compensation	$	2,282	$	3,476	$	8,303	$	6,997

See accompanying notes to condensed consolidated financial statements.

DIAMONDCLUSTER INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



				For the Six Months
				ended September 30,

				2003			2004

				(Unaudited)			(Unaudited)
Cash flows from operating activities:
	Net income (loss)			$	(9,592	)	$	7,561
	Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
		Restructuring charge			4,233			—
		Depreciation and amortization			2,387			1,684
		Write-down of net book value of computers, equipment, leasehold improvements and software, net			344			31
		Stock-based compensation			8,303			6,997
		Tax benefits from employee stock plans			226			133
		Changes in assets and liabilities:
			Accounts receivable		(6,723	)		2,002
			Prepaid expenses and other		(971	)		3,679
			Accounts payable		825			(1,521	)
			Restructuring accrual		(6,697	)		(1,686	)
			Other assets and liabilities		3,715			(5,570	)

Net cash provided by (used in) operating activities					(3,950	)		13,310

Cash flows from investing activities:
	Capital expenditures, net				(344	)		(813	)
	Other assets				635			91

Net cash provided by (used in) investing activities					291			(722	)

Cash flows from financing activities:
	Common stock issued, net				904			3,530
	Purchase of treasury stock				—			(10,523	)

Net cash provided by (used in) financing activities					904			(6,993	)

Effect of exchange rate changes on cash					92			63

Net increase (decrease) in cash and cash equivalents					(2,663	)		5,658
Cash and cash equivalents at beginning of period					75,328			81,304

Cash and cash equivalents at end of period				$	72,665		$	86,962

Supplemental disclosure of cash flow information:
	Cash paid during the period for interest			$	—		$	6
	Cash paid during the period for income taxes				1,675			546

See accompanying notes to condensed consolidated financial statements.

DIAMONDCLUSTER INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A. Basis of Reporting

The accompanying unaudited interim condensed consolidated financial statements include the accounts of DiamondCluster International, Inc., and its wholly-owned subsidiaries (the “Company”). All intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, the condensed consolidated financial statements reflect all adjustments that are necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows as of the dates and for the periods presented. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Consequently, these statements do not include all the disclosures normally required by accounting principles generally accepted in the United States of America for annual financial statements nor those normally made in the Company’s Annual Report on Form 10-K. Accordingly, reference should be made to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2004 for additional disclosures, including a summary of the Company’s accounting policies, which have not changed. The consolidated results of operations for the three and six months ended September 30, 2004 are not necessarily indicative of results for the full fiscal year.

B. Stock-based Compensation

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

Effective April 1, 2003, the Company adopted the fair value-based recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-based Compensation,” in accounting for stock awards to officers and other employees. Under the recognition provisions of SFAS No. 123, stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. The Company elected the prospective method of transition as described in SFAS No. 148, “Accounting for Stock-based Compensation-Transition and Disclosure,” which applies the recognition provisions to all employee awards granted, modified or settled on or after April 1, 2003, in accounting for employee stock-based compensation. Awards that were outstanding as of March 31, 2003, if not subsequently modified, continue to be accounted for under Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Under APB 25, compensation cost of stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant over the option’s exercise price, and is recognized over the vesting period. The Company applies SFAS No. 123 in accounting for all stock awards issued to individuals or groups other than employees. Compensation expense for stock awards is measured based on the number of shares granted and the stock price at the grant date and is recognized over the required service period.

Had compensation expense on options granted prior to April 1, 2003 been determined based on the fair value at the grant date consistent with the methodology prescribed under SFAS No. 123, the Company’s net

DIAMONDCLUSTER INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

income (loss) and basic and diluted net earnings (loss) per share would have been equal to the pro forma amounts indicated below (in thousands, except per share data):



		Three Months Ended						Six Months Ended
		September 30,						September 30,

		2003			2004			2003			2004

Net earnings (loss):
	As reported	$	461		$	4,120		$	(9,592	)	$	7,561
	Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects(1)		2,282			3,476			8,389			6,997
	Add (deduct): Total stock-based employee compensation income (expense) determined under fair value based method for all awards, net of related tax effects(2)		(4,231	)		(3,404	)		822			(7,357	)

	Pro forma	$	(1,488	)	$	4,192		$	(381	)	$	7,201

Basic net earnings (loss) per share:
	As reported		0.01			0.12			(0.30	)		0.23
	Pro forma		(0.05	)		0.13			(0.01	)		0.22
Diluted net earnings (loss) per share:
	As reported		0.01			0.12			(0.30	)		0.21
	Pro forma		(0.05	)		0.12			(0.01	)		0.20

(1) In the six month period ended September 30, 2003, this amount includes $0.08 million of compensation expense related to restricted stock that was classified as part of the restructuring charge expense in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

(2) As a result of the reversal of previously recognized expense related to stock option forfeitures during the six month period ended September 30, 2003, this amount results in net stock-based employee compensation income.

C. Net Income (Loss) Per Share

Basic net income (loss) per share is computed using the weighted average number of common shares outstanding. Diluted net income (loss) per share is computed using the weighted average number of common shares outstanding and, where dilutive, the assumed exercise of stock options and SARs and vesting of restricted stock and restricted stock units (using the treasury stock method). Following is a reconciliation of

DIAMONDCLUSTER INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the shares used in computing basic and diluted net income (loss) per share for the three and six months ended September 30, 2003 and 2004 (in thousands):



	Three Months Ended				Six Months Ended
	September 30,				September 30,

	2003		2004		2003		2004

Shares used in computing basic net income (loss) per share		32,440		33,421		32,244		33,403
Dilutive effect of stock options and restricted stock/units		1,452		1,832		—		1,946

Shares used in computing diluted net income (loss) per share		33,892		35,253		32,244		35,349

Antidilutive securities not included in dilutive net income (loss) per share calculation		11,663		7,723		15,904		8,000

Dilutive securities not included in dilutive net income (loss) per share due to loss		—		—		919		—

D. Restructuring Charges

The Company restructured its workforce and operations in fiscal years 2002, 2003 and 2004 in order to better align the Company’s operating infrastructure with the then anticipated levels of business in fiscal 2004 and beyond.

Fiscal Year 2004 Restructuring Charges

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

The total cash outlay for the restructuring plan announced in June 2003 was $2.3 million. The remaining $0.1 million of restructuring costs consisted of non-cash charges related to equity grants issued in connection with certain severance agreements. In March 2004, the Company adjusted the remaining restructuring accrual balance for $0.1 million which represented the excess of the accrual estimate over actual expense. The Company does not expect any further activity related to the June 2003 restructuring charge.

Fiscal Year 2003 Restructuring Charges

In connection with the restructuring plan implemented in December 2002, the Company recorded a restructuring charge of $8.4 million ($5.4 million on an after-tax basis, or $0.17 per share). The $8.4 million charge consisted of $7.8 million for severance and related expenses, $0.4 million related to office space reductions and $0.2 million for the write-off of various depreciable assets. The principal actions in the December 2002 restructuring plan included workforce reductions, resulting in the termination of approximately 115 employees, none of whom were still employed by the Company as of September 30, 2004. Of the total employees severed, 79% were project personnel and 21% were operational personnel.

DIAMONDCLUSTER INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The total cash outlay for the restructuring announced in December 2002 was $7.3 million. The remaining $0.9 million of restructuring costs consisted of non-cash charges primarily related to non-cash severance items and the write-down of certain assets to their estimated net realizable value. In March 2004, the Company adjusted the remaining restructuring accrual balance for $0.2 million which represented the excess of the accrual estimate over actual expense. The Company does not expect any further activity related to the December 2002 restructuring charge.

In connection with the restructuring plan implemented in September 2002, the Company recorded a restructuring charge of $20.5 million ($12.8 million on an after-tax basis or $0.41 per share). In June 2003, the Company adjusted this charge and recognized $1.7 million of additional expense to reflect a change in the estimate of future sublease income related to contractual lease obligations, bringing the total restructuring charge to $22.2 million ($14.5 million on an after-tax basis). The $22.2 million charge consisted of $13.8 million for contractual commitments related to office space reductions, $5.7 million for severance and related expenses and $2.7 million for the write-off of various depreciable assets and the termination of certain equipment leases. The principal actions in the September 2002 restructuring plan involved office space reductions, which included further consolidation of office space in multiple offices globally. Estimated costs for the reduction in physical office space are comprised of contractual rental commitments for office space vacated, attorney fees and related costs to sublet the vacated office space, offset by estimated sub-lease rental income. The restructuring plan also included workforce reductions, resulting in the termination of approximately 90 employees, none of whom were still employed by the Company as of September 30, 2004. Of the total employees severed, 60% were project personnel and 40% were operational personnel.

The total cash outlay for the restructuring announced in September 2002 is expected to approximate $19.7 million (after the adjustment to reflect the revised estimate of sublease rental income described above). The remaining $2.5 million of restructuring costs consist of non-cash charges primarily for the write-down of certain assets to their estimated net realizable value, as well as the write-off of sign-on bonuses previously paid to terminated employees. As of September 30, 2004, $12.7 million of cash had been expended for this initiative, primarily related to contractual commitments for office space reductions, severance and related costs. Cash payments related to this accrual are expected to be made through July 2012.

Fiscal Year 2002 Restructuring Charges

In connection with the restructuring plan announced in December 2001, the Company recorded a restructuring charge of $15.5 million ($9.5 million on an after-tax basis, or $0.31 per share). In September 2002, the Company adjusted this charge and recognized $0.4 million of additional expense due primarily to a change in estimate related to the cost of terminating an equipment lease, bringing the total restructuring charge to $15.9 million ($9.7 million on an after-tax basis). The $15.9 million charge consisted of $10.8 million for severance and related expenses, $3.1 million for contractual commitments and leasehold improvements related to office space reductions, and $2.0 million for other depreciable assets and certain equipment leases. The principal actions in the December 2001 restructuring plan involved workforce reductions, including the discontinuation of certain business activities within the Diamond Marketspace Solutions group which helped build and operate e-business ventures for the Company’s clients. The restructuring plan included the termination of approximately 300 employees, none of whom remained employed by the Company as of September 30, 2004. Of the total employees severed, 90% were project personnel and 10% were operational personnel. In addition, the restructuring plan included office space reductions in San Francisco, New York and Chicago. Estimated costs related to the reduction of office space comprise contractual rental commitments for office space being vacated and certain equipment leases, as well as costs associated with the write-off of leasehold improvements and write-down of other assets to their estimated net realizable value.

DIAMONDCLUSTER INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The total cash outlay for the restructuring announced in December 2001 was $13.2 million. The remaining $2.7 million of restructuring costs consisted of non-cash charges primarily for the write-off of leasehold improvements and other related costs for the facilities being downsized, as well as the write-off of sign-on bonuses previously paid to terminated employees. The Company does not expect any further activity related to the December 2001 restructuring charge.

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



	Restructuring Charge for the Quarter Ended																			Accrual Reduction				Other

																										Remaining
	December 2001					September 2002				December 2002					June 2003					Utilized				Currency		Accrual
																								Translation		Balance as of
Description	Charge		Adj(1)			Charge		Adj(2)		Charge		Adj(3)			Charge		Adj(3)			Cash		Non-cash		Adjustments		9/30/2004

Severance and related costs	$	10,847	$	53		$	5,638	$	—	$	7,761	$	(89	)	$	2,497	$	(43	)	$	24,195	$	2,512	$	43	$	—
Contractual commitments and leasehold improvements related to office space reductions		3,089		(28	)		12,105		1,736		397		(91	)		—		(35	)		8,697		1,567		751		7,660
Write-off of property, plant, equipment and leases		1,606		375			2,714		—		251		—			—		—			2,648		2,116		—		182

	$	15,542	$	400		$	20,457	$	1,736	$	8,409	$	(180	)	$	2,497	$	(78	)	$	35,540	$	6,195	$	794	$	7,842

(1) Adjustment was recorded in September 2002.

(2) Adjustment was recorded in June 2003.

(3) Adjustment was recorded in March 2004.

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

E. Geographic Data

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

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



			Three Months Ended				Six Months Ended
			September 30, 2004				September 30, 2004

			2003		2004		2003		2004

Net revenue:
	North America		$	23,859	$	31,672	$	44,724	$	58,965
	Europe			13,185		13,396		25,823		30,671
	All other countries			1,169		1,048		1,696		1,345

		Total net revenue	$	38,213	$	46,116	$	72,243	$	90,981

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

DIAMONDCLUSTER INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


			March 31,		September 30,
			2004		2004

Long-lived assets:
	North America		$	4,271	$	3,615
	Europe			2,682		2,349
	All other countries			249		328

		Total long-lived assets	$	7,202	$	6,292

F. Recently Adopted Accounting Pronouncements

In March 2004, the Financial Accounting Standards Board (“FASB”) issued a consensus of the Emerging Issues Task Force (ETIF) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” ETIF Issue No. 03-1 clarifies when an investment is considered impaired, whether the impairment is other than temporary and the measurement of the impairment loss. The guidance also includes certain disclosure requirements regarding unrealized losses that have not been recognized as other than temporary impairments. The impairment accounting guidance was effective for reporting periods beginning after June 15, 2004 and the disclosure requirements are effective for annual reporting periods ending after June 15, 2004. The adoption of ETIF Issue No. 03-1 is not expected to have a material impact on the Company’s financial statements.

DIAMONDCLUSTER INTERNATIONAL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with the information contained in the Condensed Consolidated Financial Statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended March 31, 2004. This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. See “Disclosure Regarding Forward-Looking Statements” below. We use the terms “we,” “our,” “us” and “the Company” in this report to refer to DiamondCluster International, Inc. and its wholly-owned subsidiaries.

Overview

We are a premier global management consulting firm that helps leading organizations worldwide to understand and leverage technology to reduce costs, incorporate flexibility into their businesses, address changing regulations and markets, improve operations, and grow their business. We work collaboratively with our clients, utilizing small, multidisciplinary teams of consultants because we believe the most lasting and significant improvements occur when the client is integrally involved in the change. During the quarter ended September 30, 2004, we generated net revenue of $46.1 million from 63 clients. At September 30, 2004, we employed 521 consultants and had nine offices in North America, Europe and Latin America, which included Barcelona, Chicago, Düsseldorf, Lisbon, London, Madrid, Münich, Paris, and São Paulo.

Our revenue is driven by our ability to secure new client engagements, maintain existing client engagements and develop and implement solutions that add value to our clients. Our revenue is comprised of professional fees for services rendered to our clients plus reimbursable expenses. Prior to the commencement of a client engagement, we and our client agree on fees for services based upon the scope of the project, our staffing requirements and the level of client involvement. We recognize revenue as services are performed in accordance with the terms of the client engagement agreement. We bill our clients for these services on either a monthly or semi-monthly basis in accordance with the terms of the client engagement agreement. Accordingly, we recognize amounts due from our clients as the related services are rendered and revenue is earned even though we may be contractually required to bill for those services at an earlier or later date than the date services are provided. Provisions are made based on our experience for estimated uncollectible amounts. These provisions, net of write-offs of accounts receivable, are reflected in the allowance for doubtful accounts. We also set aside a portion of the revenue from each client engagement to cover the estimated costs that are likely to be incurred subsequent to targeted project completion. This portion of the project revenue is reflected in deferred revenue and is calculated based on our historical experience. While we have been required to make revisions to our clients’ estimated deliverables and to incur additional project costs in some instances, to date there have been no such revisions that have had a material adverse effect on our operating results.

We have had six consecutive quarters of net revenue growth resulting from an increase in the demand for our services. Net revenue for the second quarter of fiscal year 2005 increased 3% compared to the first quarter of fiscal year 2005, and 21% compared to the second quarter of the prior fiscal year. We estimate that our net revenue for the third quarter of fiscal year 2005 will be in the range of $48 million to $50 million. For fiscal year 2005, we are projecting net revenue in the range of $190 million to $196 million.

We generate revenue in many different countries throughout the world and our revenues are denominated in multiple currencies, including the U.S. dollar, the euro, the British pound sterling and the Brazilian real. As such, our revenues and expenses may be significantly impacted by fluctuations in foreign currency exchange rates. Assuming constant foreign currency translation rates, net revenue for the quarter ended September 30, 2004 would have increased 2% compared to the first quarter of fiscal year 2005 and 18% compared to the second quarter of the prior fiscal year.

The largest portion of our operating expenses consists of project personnel costs. Project personnel costs consist of payroll costs, variable incentive compensation, and related benefits associated with professional staff.

DIAMONDCLUSTER INTERNATIONAL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Other expenses included in project personnel costs are travel, subcontracting, third-party vendor payments and non-billable costs associated with the delivery of services to our clients. We consider the relationship between project personnel expenses and net revenue to be an important measure of our operating performance. The relationship between project personnel expenses and net revenue, or gross margin, is driven largely by the chargeability of our consultant base, the prices we charge to our clients, project personnel compensation costs, and the non-billable costs associated with securing new client engagements and developing new service offerings. To accommodate the growth in the demand for our services, we increased our practice headcount to 521 at September 30, 2004, compared to 487 at June 30, 2004 and 454 at September 30, 2003. Our gross margin increased $1.1 million, or 6%, in the second quarter of fiscal year 2005 compared to the first quarter of fiscal year 2005, and increased $5.3 million, or 41%, compared to the second quarter of fiscal year 2004. This increase is primarily due to increased headcount and higher realized billing rates. Our annualized net revenue per professional was $366 thousand for the second quarter of fiscal year 2005, compared to $371 thousand in the first quarter of fiscal year 2005, and $327 thousand in the second quarter of fiscal year 2004.

Our other recurring operating expenses are comprised of expenses associated with the development of our business and the support of our client-serving professionals, such as professional development and recruiting, marketing and sales, management and administrative support, and stock-based compensation expense. Professional development and recruiting expenses consist primarily of recruiting and training content development and delivery costs. Marketing and sales expenses consist primarily of the costs associated with the development and maintenance of our marketing materials and programs. Management and administrative support expenses consist primarily of the costs associated with operations including finance, information systems, human resources, facilities (including the renting of office space), and other administrative support for project personnel. Stock-based compensation expense is primarily due to the amortization of the fair value of employee stock awards granted after April 1, 2003. Management believes that income from operations, which is net revenue less project personnel and other recurring operating expenses is an important measure of our operating performance. Income from operations in the quarter ended September 30, 2004 increased $0.9 million, or 28%, compared to the first quarter of fiscal year 2005, and increased $3.5 million compared to the second quarter of fiscal year 2004.

As with revenues, the strengthening of foreign currencies relative to the U.S. dollar over the last several quarters has increased our expenses. The increases in both revenues and expenses as a result of foreign currency translation have had an immaterial impact on net income.

We regularly review our fees for services, professional compensation and overhead costs to ensure that our services and compensation are competitive within the industry, and that our overhead costs are balanced with our revenue level. In addition, we monitor the progress of client projects with client senior management. We manage the activities of our professionals by closely monitoring engagement schedules and staffing requirements for new engagements. However, a rapid decline in the demand for the professional services that we provide could result in lower utilization of our professionals than we planned. In addition, because most of our client engagements are terminable by our clients without penalty, an unanticipated termination of a client project could require us to maintain underutilized employees. While professional staff levels must be adjusted to reflect active engagements, we must also maintain a sufficient number of senior professionals to oversee existing client engagements and participate in our sales efforts to secure new client assignments. Our utilization rate for the second quarter of fiscal year 2005 was 64% compared to 66% in the first quarter of fiscal year 2005 and 67% in the second quarter of the prior fiscal year. Utilization has decreased due to the increase in practice headcount during the second quarter of fiscal year 2005.

Our net cash provided by operations for the six months ended September 30, 2004 was $13.3 million which included net income of $7.6 million and a decrease in accounts receivable of $2.0 million due to an increase in collections. Management believes that the free cash flow metric, defined as net cash provided by

DIAMONDCLUSTER INTERNATIONAL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

operating activities ($13.3 million) net of capital expenditures ($0.8 million), provides a consistent metric from which the performance of the business may be monitored. Free cash flow for the six months ended September 30, 2004 was $12.5 million. For fiscal year 2005, we are projecting free cash flow in the range of $23 million to $27 million.

Disclosure Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act relating to our operations, results of operations and other matters that are based on our current expectations, estimates and projections. Words such as “expects,” “intends,” “plans,” “projects,” “believes,” “estimates” and similar expressions are used to identify these forward-looking statements. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Forward-looking statements are based upon assumptions as to future events that may not prove to be accurate. Actual outcomes and results may differ materially from what is expressed or forecast in these forward-looking statements. The reasons for this include changes in general economic and political conditions, including fluctuations in exchange rates, and the following factors:

• Our results of operations are materially affected by economic conditions, levels of business activity and rates of change in the industries we serve.

• Our profitability will suffer if we are not able to maintain our pricing and utilization rates and control our costs. A continuation of pricing pressures could result in permanent changes in pricing policies and delivery capabilities.

• If we are unable to attract, retain and motivate employees, we will not be able to compete effectively and will not be able to grow our business.

• We may face damage to our professional reputation or legal liability if our clients are not satisfied with our services.

• Our global operations pose complex management, foreign currency, legal, tax and economic risks, which we may not adequately address.

• Our engagements with clients may not be profitable.

• Our business will be negatively affected if we are not able to anticipate and keep pace with rapid changes in technology or if growth in the use of technology in business is not as rapid as in the past.

• The consulting and technology markets are highly competitive. As a result, we may not be able to compete effectively if we cannot efficiently respond to market developments in a timely manner.

• Our quarterly revenues, operating results and profitability will vary from quarter to quarter, which may result in increased volatility of our share price.

For a more detailed discussion of these factors, see Exhibit 99.1 to this Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2004. We undertake no obligation to update or revise any forward-looking statements.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and

DIAMONDCLUSTER INTERNATIONAL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. For a description of the significant accounting policies which we believe are the most critical to aid in understanding and evaluating our reported financial position and results, refer to our Annual Report on Form 10-K for the fiscal year ended March 31, 2004.

Results of Operations

The following table sets forth the percentage of net revenue of items included in our condensed consolidated statements of operations for the periods indicated:



			For the Three Months Ended									For the Six Months Ended
			September 30,									September 30,

									Increase/									Increase/
			2003			2004			(Decrease)			2003			2004			(Decrease)

Revenue:
	Net revenue			100	%		100	%		—	%		100	%		100	%		—	%
	Reimbursable expenses			14			14			—			14			14			—

		Total revenue		114			114			—			114			114			—
Operating expenses:
	Project personnel costs before reimbursable expenses			66			60			(6	)		67			61			(6	)
	Reimbursable expenses			14			14			—			14			14			—

Total project personnel costs				80			74			(6	)		81			75			(6	)
	Professional development and recruiting			3			4			1			2			3			1
	Marketing and sales			2			1			(1	)		2			2			—
	Management and administrative support			21			18			(3	)		24			18			(6	)
	Stock-based compensation			6			8			2			12			8			(4	)
	Restructuring charges			—			—			—			6			—			(6	)

		Total operating expenses		112			105			(7	)		127			106			(21	)

Income (loss) from operations				2			9			7			(13	)		8			21
Other income, net				1			1			—			1			1			—

Income (loss) before taxes				3			10			7			(12	)		9			21
Income tax expense				1			1			—			1			1			—

Net income				2	%		9	%		7	%		(13	)%		8	%		21	%

Revenue

On a consolidated basis, net revenue increased $7.9 million, or 21%, during the quarter ended September 30, 2004 as compared to the same period in the prior year. Net revenue increased $18.7 million, or 26%, during the six months ended September 30, 2004 as compared to the same period in the prior year. This increase is primarily due to an improvement in the environment for our services over the past six quarters coupled with higher realized billing rates at new and existing clients.

We served 63 clients during quarter ended September 30, 2004 which was flat compared to the same period in the prior year. Revenue from new clients accounted for 11% of revenue during the quarter ended

DIAMONDCLUSTER INTERNATIONAL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

September 30, 2004 which was flat compared to the same period in the prior year. We served 92 clients during the six months ended September 30, 2004 as compared to 80 clients during the same period in the prior year. Revenue from new clients accounted for 11% of revenue during the six months ended September 30, 2004, compared to 9% during the same period in the prior year. The term “new clients” is defined as clients that generated revenue in the current period but were absent from the prior period.

Operating Expenses

Project Personnel Costs

Project personnel costs before reimbursable expenses increased $2.6 million, or 10%, during the quarter ended September 30, 2004 as compared to the same period of the prior year and $7.3 million, or 15%, during the six months ended September 30, 2004 as compared to the same period of the prior year. The increase in project personnel costs for both periods is primarily due to increases in practice headcount and practice personnel compensation. As a percentage of net revenue, project personnel costs before reimbursable expenses decreased 6% from 66% during the quarter ended September 30, 2003 to 60% during the quarter ended September 30, 2004 and decreased 6% from 67% during the six months ended September 30, 2003 to 61% during the six months ended September 30, 2004 primarily due to an increase in revenues resulting from additional project personnel and higher realized billing rates, which more than offset the increase in compensation costs. Our annualized net revenue per professional was $366 thousand for the second quarter of fiscal year 2005, compared to $371 thousand in the first quarter of fiscal year 2005, and $327 thousand in the second quarter of fiscal year 2004.

Our global utilization rate for the second quarter of fiscal year 2005 was 64% compared to 66% in the first quarter of fiscal year 2005 and 67% in the second quarter of the prior fiscal year. Utilization has decreased due to the increase in practice headcount during the second quarter of fiscal year 2005. Annualized voluntary attrition decreased to 25% for the quarter ended September 30, 2004, compared to 27% for the same period in the prior year.

Professional Development and Recruiting

Professional development and recruiting expenses increased $0.5 million, or 43%, during the quarter ended September 30, 2004 and increased $1.1 million, or 59%, during the six months ended September 30, 2004 as compared to the same periods in the prior year. The increase for both periods is primarily due to our increased campus and experienced recruiting initiatives as well as increases in our level of training conduct expenditures.

Management and Administrative Support

Management and administrative support expenses increased $0.4 million, or 4%, during the quarter ended September 30, 2004 as compared to the same period in the prior year primarily due to the increases in variable compensation for non-client serving personnel and facilities expenditures, partially offset by a decrease in information technology-related depreciation expense. Management and administrative support expenses decreased $0.9 million, or 5%, during the six months ended September 30, 2004 as compared to the same period in the prior year primarily due to decreases in information technology-related depreciation expense.

Stock-based Compensation

Stock-based compensation expense increased $1.2 million, or 52%, during the quarter ended September 30, 2004 compared to the quarter ended September 30, 2003 principally due to stock-based compensation expense resulting from stock-based awards granted during the first quarter of fiscal year 2005. Stock-based

DIAMONDCLUSTER INTERNATIONAL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

compensation expense decreased $1.3 million, or 16%, during the six months ended September 30, 2004 compared to the same period in the prior year principally due to restricted stock issued in connection with the Cluster acquisition being fully amortized as of June 30, 2003. Stock-based compensation expense includes amortization of the fair value of employee stock awards granted or modified on or after April 1, 2003 calculated under the fair value method of SFAS No. 123. It also includes amortization of stock-based compensation resulting largely from the issuance of stock and stock options at prices below fair market value to Cluster employees in connection with the Cluster acquisition in November, 2000, as well as from awards of restricted stock and restricted stock units to our employees. In all cases, stock-based compensation is earned over the service period and is contingent on the continued employment of these employees.

Restructuring Charges

In the first quarter of fiscal year 2004, the Company recorded a restructuring charge of $4.2 million, $2.5 million of which was related to a restructuring plan implemented in June 2003 and $1.7 million of which was recorded as an adjustment to the restructuring charge recorded in September 2002 to reflect a change in estimate of future sublease income for a contractual lease obligation related to office space reductions. The $2.5 million restructuring plan implemented in June 2003 consisted solely of severance and related expenses resulting in workforce reductions in the Europe and Latin America region and the termination of approximately 30 employees.

Income Tax Expense

Income tax expense decreased $0.2 million, or 31%, during the quarter ended September 30, 2004 compared to the quarter ended September 30, 2003. Income tax expense decreased $0.5 million, or 50%, during the six months ended September 30, 2004 compared to the six months ended September 30, 2003. The income tax expense recorded in the quarter ended September 30, 2004 was related to income earned in jurisdictions where we do not have available loss carryforwards, or where loss carryforwards are limited. The income tax expense recorded in the quarter ended September 30, 2003 was principally related to income earned in profitable international jurisdictions where we do not have available loss carryforwards. The decrease was due to a change in the mix of earnings among the jurisdictions in which we operate.

We have deferred tax assets which have arisen primarily as a result of operating losses incurred in fiscal year 2002 and fiscal year 2003, as well as differences between the tax bases of assets and liabilities and their related amounts in the financial statements. SFAS No. 109, “Accounting for Income Taxes,” requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Management judgment is required in determining any valuation allowance recorded against the gross deferred tax assets. Management recorded a full valuation allowance against the net deferred tax assets as of March 31, 2003 largely due to the tax losses we incurred during fiscal years 2002 and 2003. As of September 30, 2004, the valuation allowance against deferred tax assets was $67.6 million and covered the full amount of our net federal, state and international deferred tax assets. We have achieved a profitable level of operations in certain tax jurisdictions since the first quarter of fiscal year 2004. If we are able to sustain our profitability in these tax jurisdictions, we may conclude at some point in the future that certain deferred tax assets are more likely than not to be realized, which would lead us to reverse those respective valuation allowances.

DIAMONDCLUSTER INTERNATIONAL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Liquidity and Capital Resources

The following table describes our liquidity and financial position on September 30, 2003 and 2004:



	September 30,

	2003		2004


	(in millions)
Working capital	$	73.1	$	86.4
Cash and cash equivalents	$	72.7	$	87.0
Unutilized bank credit facilities	$	9.2	$	9.2
Stockholders’ equity	$	74.9	$	88.1

We maintain a revolving line of credit pursuant to the terms of a secured credit agreement with a commercial bank under which we may borrow up to $10.0 million at an annual interest rate based on the prime rate or based on LIBOR plus 1.5%, at our discretion. The line of credit is secured by cash and certain accounts receivable of the Company’s wholly-owned subsidiary DiamondCluster International North America, Inc and expires on July 31, 2005. This line of credit is reduced, as necessary, to account for letters of credit outstanding. As of September 30, 2004, there were no outstanding borrowings and we had approximately $9.2 million available under this line of credit.

Cash Flow from Operating Activities

During the six months ended September 30, 2004, net cash provided by operating activities was $13.3 million. This primarily resulted from the following:

• Net income of $7.6 million, which includes non-cash charges aggregating $8.8 million that must be excluded to arrive at cash flows from operating activities. The principal non-cash charges are stock-based compensation ($7.0 million) and depreciation and amortization ($1.7 million).

• Changes in assets and liabilities that result from operating activities are also considered in arriving at cash flows from operations. Cash flows from operating activities was increased by $5.7 million as a result of decreases in accounts receivable ($2.0 million), and decreases in prepaid expenses and other current assets ($3.7 million), primarily related to a decrease in VAT receivables.

• Cash flows from operating activities was decreased by $8.8 million as a result of decreases in accounts payable ($1.5 million), cash outflows to reduce the restructuring accrual ($1.7 million), which included payments under contractual lease obligations, and decreases in other assets and liabilities, net of ($5.6 million) primarily related to a decrease in VAT payable.

Our billings for the three and six months ended September 30, 2004 totaled $54.0 million and $107.6 million, respectively, compared to $45.8 million and $86.5 million for the three and six months ended September 30, 2003. These amounts include value added tax (“VAT”) (which are not included in recognized revenue) and billings to clients for reimbursable expenses. Our gross accounts receivable balance of $22.6 million at September 30, 2004 represented 38 days of billings for the quarter ended September 30, 2004. This compares to a gross receivable balance of $25.0 million at September 30, 2003 which represented 49 days of billings for the quarter ended September 30, 2003.

At the annual meeting of directors on September 14, 2004, the Board of Directors (the “Board”) authorized a partial advance of the fiscal year 2005 cash bonus to all non-partner employees. The cash payment of approximately $3 million is being accelerated from April 2005 and will be paid to all non-partner employees on December 1, 2004.

DIAMONDCLUSTER INTERNATIONAL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

Cash Flow from Investing Activities

Cash used in investing activities was $0.7 million for the six months ended September 30, 2004. Cash used in investing activities resulted primarily from capital expenditures for laptops and servers, partially offset by cash provided from other assets resulting from the collection of certain employee notes receivable.

Cash Flow from Financing Activities

Cash used in financing activities was $7.0 million for the six months ended September 30, 2004 resulting from the repurchase of DiamondCluster common stock in the amount of $10.5 million, less $4.9 million in proceeds from the issuance of common stock in connection with the Employee Stock Purchase Plan and option exercises, offset by $1.4 million for employee shares withheld for tax purposes.

The Board has authorized from time to time the repurchase of the Company’s common stock in the open market or through privately negotiated transactions (“Buy-back Program”). Prior to the annual meeting of directors on September 14, 2004, the Board had authorized the repurchase of up to six million shares, of which 0.7 million were available for repurchase as of September 14, 2004. At the annual meeting of directors on September 14, 2004, the Board restated the aggregate number of repurchases that could be made under the Buy-back Program to be based on a maximum dollar amount rather than a maximum number of shares. The new authorization approved the repurchase of shares under the Buy-back Program having an aggregate fair market value of no more than $25.0 million. During the quarter ended September 30, 2004, we repurchased 0.6 million shares at an average price of $10.80. As of September 30, 2004, the amount available for repurchase under the Board authorization was $23.8 million. During the period beginning with the inception of the Buy-back Program in October 1998 through September 30, 2004, the number of shares purchased under the current and prior authorizations was 5.4 million shares at an aggregate cost of $71.7 million.

Summary

We believe that our current cash balances, existing lines of credit, and cash flow from existing and future operations will be sufficient to fund our operating requirements at least through fiscal year 2006. If necessary, we believe that additional bank credit would be available to fund any additional operating and capital requirements. In addition, we could consider seeking additional public or private debt or equity financing to fund future growth opportunities. However, there is no assurance that such financing would be available to us on acceptable terms.

DIAMONDCLUSTER INTERNATIONAL, INC.


Item 3.	*Quantitative and Qualitative Disclosures About Market Risk*

Foreign Currency Risk

This information is set forth in the Company’s Annual Report on Form 10-K for the year ended March 31, 2004, and is incorporated herein by reference. There have been no material changes to the Company’s market risk during six months ended September 30, 2004.


Item 4.	*Controls and Procedures*

Evaluation of Controls and Procedures

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

Changes in Controls and Procedures

There were no changes in the Company’s internal controls over financial reporting that occurred during the second quarter of fiscal year 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

DIAMONDCLUSTER INTERNATIONAL, INC.

PART II. OTHER INFORMATION

Item 1.

None


Item 2.	*Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities*

The Board of Directors (the “Board”) has authorized from time to time the repurchase of the Company’s common stock in the open market or through privately negotiated transactions (“Buy-back Program”). Prior to the annual meeting of directors on September 14, 2004, the Board had authorized the repurchase of up to six million shares, of which 0.7 million were available for repurchase as of September 14, 2004. At the annual meeting of directors on September 14, 2004, the Board restated the aggregate number of repurchases that could be made under the Buy-back Program to be based on a maximum dollar amount rather than a maximum number of shares. The new authorization approved the repurchase of shares under the Buy-back Program having an aggregate fair market value of no more than $25.0 million. In the absence of an additional buy-back authorization from the Board, the Buy-back Program expires when the $25.0 million authorized for share repurchases has been expended. As of September 30, 2004, the amount available for repurchase under the Board authorization was $23.8 million. During the quarter ended September 30, 2004, we repurchased 0.6 million shares at an average price of $10.80 in the following months:



	Issuer Purchases of Equity Securities

							Maximum
							Number/Approximate Dollar
					Total Number of Shares		Value of Shares
	Total Number		Average Price		Purchased as Part of		That May be Purchased
Period	of Shares Purchased		Paid per Share		Publicly Announced Plans		Under the Plan

July 1, 2004 — July 31, 2004		—	$	—		—		1,268,526	shares
August 1, 2004 — August 31, 2004		447,200	$	10.35		447,200		821,326	shares
September 1, 2004 — September 14, 2004		87,400	$	11.57		87,400		733,926	shares
September 15, 2004 — September 30, 2004		94,900	$	12.21		94,900	$	23,841,527	(1)

(1) On September 14, 2004, the Board restated the aggregate number of repurchases that could be made under the Buy-back Program to be based on a maximum dollar amount rather than a maximum number of shares.


Item 3.

None


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

On September 14, 2004, the Company held its annual meeting of stockholders at the Westin Hotel in Chicago, Illinois. Melvyn E. Bergstein, Mark L. Gordon, Pauline A. Schneider and John J. Sviokla were elected by the stockholders to serve as Class II members of the Board of Directors for three-year terms expiring at the 2007 annual meeting of stockholders. The classification of directors is to effect 3 year staggered terms, with no other differences in director rights. The vote on this matter is set forth below. There were no broker non-votes for this matter voted upon by the stockholders.

DIAMONDCLUSTER INTERNATIONAL, INC.

1. Election of Directors


Name	For		Withheld

Melvyn E. Bergstein		25,157,512		2,716,004
Mark L. Gordon		25,080,667		2,792,849
Pauline A. Schneider		26,380,687		1,492,829
John J. Sviokla		25,021,536		2,851,980


Item 5.	*None*


Item 6.	*Exhibits and Reports on Form 8-K*

(a) Exhibits


3.1	(a)	Form of Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1(a) to the Form 8-A filed by the Company on October 21, 2003 and incorporated herein by reference.)
3.2		Amended and restated By-Laws (filed as Exhibit 3.2 to the Form 8-A filed by the Company on October 21, 2003 and incorporated herein by reference.)
31.1	*	CEO Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002
31.2	*	CFO Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002
31.3	*	Chief Administrative Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002
32.1	*	CEO Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
32.2	*	CFO Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
32.3	*	Chief Administrative Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
99.1	*	Risk Factors

(b) Reports on Form 8-K

Form 8-K dated July 29, 2004 (earnings release)

Form 8-K dated July 29, 2004 (conference call transcript)

* filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		DIAMONDCLUSTER INTERNATIONAL, INC


Date: November 3, 2004		By: /s/ MELVYN E. BERGSTEIN Melvyn E. Bergstein Chairman, Chief Executive Officer and Director

Date: November 3, 2004		By: /s/ KARL E. BUPP Karl E. Bupp Vice President, Chief Financial Officer and Treasurer

23 EX-31.1 2 c89294exv31w1.htm CERTIFICATION exv31w1

Exhibit 31.1

CERTIFICATION UNDER EXCHANGE ACT RULE 13A-14 AND 15D-14

I, Melvyn E. Bergstein, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of DiamondCluster International, Inc;

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

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

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-15(f) and 15d-15(f)) for the registrant and we have:

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

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: November 3, 2004

/s/ Melvyn E. Bergstein

By: Melvyn E. Bergstein
Its: Chairman and Chief Executive Officer

EX-31.2 3 c89294exv31w2.htm CERTIFICATION exv31w2

Exhibit 31.2

CERTIFICATION UNDER EXCHANGE ACT RULE 13A-14 AND 15D-14

I, Karl E. Bupp, certify that:

Date: November 3, 2004

/s/ Karl E. Bupp

By: Karl E. Bupp
Its: Chief Financial Officer

EX-31.3 4 c89294exv31w3.htm CERTIFICATION exv31w3

Exhibit 31.3

CERTIFICATION UNDER EXCHANGE ACT RULE 13A-14 AND 15D-14

I, William R. McClayton, certify that:

Date: November 3, 2004

/s/ William R. McClayton

By: William R McClayton
Its: Chief Administrative Officer

EX-32.1 5 c89294exv32w1.htm CERTIFICATION exv32w1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of DiamondCluster International, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Melvyn E. Bergstein, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Melvyn E. Bergstein

Melvyn E. Bergstein
Chairman and Chief Executive Officer
November 3, 2004

EX-32.2 6 c89294exv32w2.htm CERTIFICATION exv32w2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of DiamondCluster International, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Karl E. Bupp, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Karl E. Bupp

Karl E. Bupp
Chief Financial Officer
November 3, 2004

EX-32.3 7 c89294exv32w3.htm CERTIFICATION exv32w3

Exhibit 32.3

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of DiamondCluster International, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William R. McClayton, Senior Vice President of Finance and Administration of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ William R. McClayton

William R. McClayton
Chief Administrative Officer
November 3, 2004

EX-99.1 8 c89294exv99w1.htm RISK FACTORS exv99w1

Exhibit 99.1

RISK FACTORS

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

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

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

• our clients’ perception of our ability to add value through our services;

• competition;

• introduction of new services or products by us or our competitors;

• pricing policies of our competitors; and

• general economic conditions.

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

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

• our ability to transition employees from completed projects to new engagements; and

• our ability to forecast demand for our services and thereby maintain an appropriate headcount in the appropriate areas of our workforce.

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

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

We conduct business in a number of countries around the world. In the three months ended September 30, 2004, approximately 69% of our revenue was attributable to activities in North America, 20% of our

revenue was attributable to our activities in Europe, and 11% of our revenue was attributable to our activities in Latin America, Asia/Pacific and Africa. As a result, we are subject to a number of risks, including:

• the burdens of complying with a wide variety of national and local laws;

• multiple and possibly overlapping and conflicting tax laws;

• successful conversion to global operating and financial systems;

• coordinating geographically separated organizations;

• restrictions on the movement of cash;

• the absence in some jurisdictions of effective laws to protect our intellectual property rights;

• political instability;

• currency fluctuations;

• longer payment cycles;

• restrictions on the import and export of certain technologies;

• price controls or restrictions on exchange of foreign currencies; and

• trade barriers.

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

Our results of operations are affected by the level of business activity of our clients, which in turn is affected by the level of economic activity in the industries and markets that they serve. A decline in the level of business activity of our clients could have a material adverse effect on our revenue and profit margin. Although current economic conditions have improved over previous quarters, future economic conditions could cause some clients to reduce or defer their expenditures for consulting services. Net revenue for the three months ended September 30, 2004 increased by 21% from the three months ended September 30, 2003. We have implemented and will continue to implement cost-savings initiatives to manage our expenses as a percentage of revenue. However, current and future cost-management initiatives may not be sufficient to maintain our margins if economic environment should weaken for a prolonged period.

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

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

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

• the business decisions of our clients regarding the use of our services;

• the timing of projects and their termination;

• the timing of revenue or income;

• our ability to transition employees quickly from completed projects to new engagements;

• the introduction of new products or services by us or our competitors;

• changes in our pricing policies or those of our competitors;

• our ability to manage costs, including personnel costs and support services costs; and

• global economic and political conditions and related risks, including acts of terrorism.

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

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

We have in the past derived, and may in the future derive, a significant portion of our revenue from a relatively limited number of major clients. From year to year, revenue from one or more individual clients may exceed 10% of our revenue for the quarter. During the three months ended September 30, 2004, we had two clients that individually accounted for more than 10% of our net revenue. If we lose any major clients or any of our clients cancel or significantly reduce a large project’s scope, we would lose a significant amount of revenue. In addition, if we fail to collect a large account receivable, we could be subject to significant financial exposure.

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

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

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

A failure or inability by us or one of our subcontractors to meet a client’s expectations could damage our reputation and adversely affect our ability to attract new business and result in delayed or lost revenue. Our client engagements involve the creation, implementation and maintenance of business systems and

other applications that can be critical to our clients’ businesses. We may be sued or unable to collect accounts receivable if a client is not satisfied with our service.

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

The Price for Our Common Stock Has Been Volatile and Unpredictable.

The price for our Common Stock has been volatile. Our Common Stock has been listed on the NASDAQ National Market since February 1997. The closing market price of the Common Stock has experienced variations, and since January 19, 2000 through October 31, 2004, our high and low sales price has ranged from a high of $106.00 to a low of $1.38. The market price of our Common Stock may experience fluctuations in the future for a variety of reasons. These include:

• negative news about other publicly traded companies in our industry;

• general economic or stock market conditions unrelated to our operating performance;

• quarterly variations in our operating results;

• changes in earnings estimates by analysts;

• announcements of new contracts or service offerings by us or our competitors;

• financial performance of the Company; and

• other events or factors.

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

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

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

• continue to develop our strategic and technical experience;

• develop new services that meet changing client needs; and

• effectively use leading technologies.

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

Competition in Our Industry is Intense and Could Harm Our Business.

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

• diagnostic capabilities;

• effectiveness of strategic business models;

• scope of services;

• service delivery approach;

• technical and industry expertise;

• perceived value; and

• results orientation.

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

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

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

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

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

Currency Exchange Rate Fluctuations Could Materially Adversely Affect Our Results of Operations.

Approximately 31% of DiamondCluster’s revenue for the three months ended September 30, 2004 was derived from operations outside North America. The results of operations for DiamondCluster in the future could be significantly affected by factors associated with international operations, such as changes in foreign currency exchange rates and uncertainties relative to regional economic or political circumstances, as well as by other risks sometimes associated with international operations. Since the revenue and expenses of DiamondCluster’s foreign operations will generally be denominated in local currencies, exchange rate fluctuations between such local currencies and the U.S. dollar subject us to currency translation risk with respect to the reported results of our foreign operations. As exchange rates fluctuate, these results, when translated, may vary from expectations and adversely impact overall expected results and profitability. Also, we may be subject to foreign currency translation risks when transactions are denominated in a currency other than the currency in which we incur expenses related to such transactions. There can be no assurance that we will not experience fluctuations in financial results from our operations outside the United States as a result of foreign currency fluctuations, and there can be no assurance that we will be able to reduce contractually or otherwise favorably affect the currency translation risk associated with our operations.

We Must Build Recognition and Client Acceptance of Our Name.

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

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

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

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

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

We may not be able to raise capital in the future to meet our liquidity needs and finance our operations and future growth. We were not profitable in the eleven quarters prior to the quarter ended September 30, 2003 and we may not be profitable at times in the future. We believe that existing cash resources, the amounts available under our revolving line of credit and cash generated from operations will be sufficient to satisfy our operating cash needs at least through fiscal 2006. Any future decreases in our operating income, cash flow, or stockholders’ equity may impair our future ability to raise additional funds to finance operations. As a result, we may not be able to maintain adequate liquidity to support our operations.

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

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

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

Provisions of our certificate of incorporation, by-laws, and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. We may issue shares of preferred stock in the future without stockholder approval and upon such terms as our board of directors may determine. Our issuance of this preferred stock could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our

outstanding stock. In addition, the Company has adopted a Shareholder Rights Purchase Plan which could also have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring a majority of our outstanding stock. Our charter and by-laws also provide that special stockholders meetings may be called only by our Chairman of the board of directors, by our Secretary at the written request of the chairman or by our board of directors, with the result that any third-party takeover not supported by the board of directors could be subject to significant delays and difficulties. In addition, our board of directors is divided into three classes, each of which serves for a staggered three-year term, which may make it more difficult for a third party to gain control of our board of directors.

We Currently Do Not Intend to Pay Dividends.

We have never paid any cash dividends on our common stock and do not expect to declare or pay any cash or other dividends in the foreseeable future.

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*	If stock-based compensation expense had been distributed to the operating expense line items below, the allocation would be as follows:


(1)	In the six month period ended September 30, 2003, this amount includes $0.08 million of compensation expense related to restricted stock that was classified as part of the restructuring charge expense in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

(2)	As a result of the reversal of previously recognized expense related to stock option forfeitures during the six month period ended September 30, 2003, this amount results in net stock-based employee compensation income.


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


	•	Our results of operations are materially affected by economic conditions, levels of business activity and rates of change in the industries we serve.

	•	Our profitability will suffer if we are not able to maintain our pricing and utilization rates and control our costs. A continuation of pricing pressures could result in permanent changes in pricing policies and delivery capabilities.

	•	If we are unable to attract, retain and motivate employees, we will not be able to compete effectively and will not be able to grow our business.

	•	We may face damage to our professional reputation or legal liability if our clients are not satisfied with our services.

	•	Our global operations pose complex management, foreign currency, legal, tax and economic risks, which we may not adequately address.

	•	Our engagements with clients may not be profitable.

	•	Our business will be negatively affected if we are not able to anticipate and keep pace with rapid changes in technology or if growth in the use of technology in business is not as rapid as in the past.

	•	The consulting and technology markets are highly competitive. As a result, we may not be able to compete effectively if we cannot efficiently respond to market developments in a timely manner.

	•	Our quarterly revenues, operating results and profitability will vary from quarter to quarter, which may result in increased volatility of our share price.


	•	Net income of $7.6 million, which includes non-cash charges aggregating $8.8 million that must be excluded to arrive at cash flows from operating activities. The principal non-cash charges are stock-based compensation ($7.0 million) and depreciation and amortization ($1.7 million).

	•	Changes in assets and liabilities that result from operating activities are also considered in arriving at cash flows from operations. Cash flows from operating activities was increased by $5.7 million as a result of decreases in accounts receivable ($2.0 million), and decreases in prepaid expenses and other current assets ($3.7 million), primarily related to a decrease in VAT receivables.

	•	Cash flows from operating activities was decreased by $8.8 million as a result of decreases in accounts payable ($1.5 million), cash outflows to reduce the restructuring accrual ($1.7 million), which included payments under contractual lease obligations, and decreases in other assets and liabilities, net of ($5.6 million) primarily related to a decrease in VAT payable.


(1)	On September 14, 2004, the Board restated the aggregate number of repurchases that could be made under the Buy-back Program to be based on a maximum dollar amount rather than a maximum number of shares.

1.		I have reviewed this Quarterly Report on Form 10-Q of DiamondCluster International, Inc;

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

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

4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-15(f) and 15d-15(f)) for the registrant and we have:

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

	b)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	c)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

	a)		All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

	•		our clients’ perception of our ability to add value through our services;

	•		competition;

	•		introduction of new services or products by us or our competitors;

	•		pricing policies of our competitors; and

	•		general economic conditions.

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

	•		our ability to transition employees from completed projects to new engagements; and

	•		our ability to forecast demand for our services and thereby maintain an appropriate headcount in the appropriate areas of our workforce.

	•		the burdens of complying with a wide variety of national and local laws;

	•		multiple and possibly overlapping and conflicting tax laws;

	•		successful conversion to global operating and financial systems;

	•		coordinating geographically separated organizations;

	•		restrictions on the movement of cash;

	•		the absence in some jurisdictions of effective laws to protect our intellectual property rights;

	•		political instability;

	•		currency fluctuations;

	•		longer payment cycles;

	•		restrictions on the import and export of certain technologies;

	•		price controls or restrictions on exchange of foreign currencies; and

	•		trade barriers.

	•		the business decisions of our clients regarding the use of our services;

	•		the timing of projects and their termination;

	•		the timing of revenue or income;

	•		our ability to transition employees quickly from completed projects to new engagements;

	•		the introduction of new products or services by us or our competitors;

	•		changes in our pricing policies or those of our competitors;

	•		our ability to manage costs, including personnel costs and support services costs; and

	•		global economic and political conditions and related risks, including acts of terrorism.

	•		negative news about other publicly traded companies in our industry;

	•		general economic or stock market conditions unrelated to our operating performance;

	•		quarterly variations in our operating results;

	•		changes in earnings estimates by analysts;

	•		announcements of new contracts or service offerings by us or our competitors;

	•		financial performance of the Company; and

	•		other events or factors.

	•		continue to develop our strategic and technical experience;

	•		develop new services that meet changing client needs; and

	•		effectively use leading technologies.

	•		diagnostic capabilities;

	•		effectiveness of strategic business models;

	•		scope of services;

	•		service delivery approach;

	•		technical and industry expertise;

	•		perceived value; and

	•		results orientation.