CLARK/BARDES INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
Commission file number: 000-24769

CLARK/BARDES, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 52-2103926
(State of incorporation or organization) (I.R.S. Employer Identification No.)

102 SOUTH WYNSTONE PARK DRIVE,
NORTH BARRINGTON, ILLINOIS 60010
(Address of principal executive offices) (Zip code)

(Registrant's telephone number) (847) 304-5800

Securities Registered Pursuant to Section 12(b) of the Act:

TITLE OF SECURITIES EXCHANGES ON WHICH REGISTERED
------------------- -----------------------------
COMMON STOCK, PAR VALUE $.01 PER SHARE New York Stock Exchange

JUNIOR PARTICIPATING PREFERRED STOCK,
SERIES A, PURCHASE RIGHTS
PAR VALUE, $.01 PER SHARE

Securities Registered Pursuant to Section 12(g) of the Act:

None

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No __

The aggregate market value of common stock of the Registrant held by
non-affiliates of the Registrant as of June 30, 2002 was approximately $160.4
million.

As of March 3, 2003 the registrant had outstanding 18,071,568 shares of
common stock.

DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement for the 2003 annual meeting is incorporated
into Part III of this Form 10-K by reference.
================================================================================

TABLE OF CONTENTS

PAGE
----

FORWARD-LOOKING STATEMENTS................................................... 2

PART I
ITEM 1. BUSINESS......................................................... 3
ITEM 2. PROPERTIES....................................................... 17
ITEM 3. LEGAL PROCEEDINGS................................................ 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 19

PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.......................................................... 20
ITEM 6. SELECTED FINANCIAL DATA.......................................... 21

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................ 23

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 45

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................. 45

PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 45
ITEM 11. EXECUTIVE COMPENSATION........................................... 45

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 45
ITEM 14 CONTROLS AND PROCEDURES.......................................... 45

PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K......................................................... 46
SIGNATURES................................................................... 77

FORWARD-LOOKING STATEMENTS

This Form 10-K and the documents incorporated by reference in this Form
10-K may contain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such statements are identified by words such
as "anticipate," "believe," "estimate," "expect," "intend," "predict,"
"project," and similar expressions, as they relate to us or our management. When
we make forward-looking statements, we are basing them on our management's
beliefs and assumptions, using information currently available to us. These
forward-looking statements are subject to risks, uncertainties and assumptions,
including but not limited to, risks, uncertainties and assumptions related to
the following:

o changes in tax legislation;
o federal and state regulations;
o general economic conditions;
o competitive factors and pricing pressures;
o our dependence on key consultants and services of key personnel;
o our dependence on persistency of existing business;
o our ability to achieve our earnings projections;
o risks associated with acquisitions;
o significant intangible assets;
o our dependence on a select group of insurance companies; and
o our dependence on information processing systems and risk
of errors or omissions.

If one or more of these or other risks or uncertainties materialize, or
if our underlying assumptions prove to be incorrect, actual results may vary
materially from those anticipated. Any forward-looking statements you read in
this Form 10-K or the documents incorporated herein by reference reflect our
current views with respect to future events and are subject to these and other
risks, uncertainties and assumptions relating to our operations, results of
operations, growth strategy and liquidity. You should specifically consider the
factors identified in this Form 10-K, including under the caption "Risk
Factors," or in the documents incorporated by reference in this Form 10-K, which
could cause actual results to differ materially from those indicated by the
forward-looking statements. In light of the foregoing risks and uncertainties,
you should not unduly rely on such forward-looking statements when deciding
whether to buy, sell or hold any of our securities. We disclaim any intent or
obligation to update or alter any of the forward-looking statements whether in
response to new information, unforeseen events, changed circumstances or
otherwise.

2

PART I

ITEM 1. BUSINESS

Overview

Founded in 1967, Clark/Bardes, Inc. is a national firm dedicated to
helping companies keep their best people through integrated compensation,
benefits and funding solutions. We design, market and administer compensation
and benefit programs for companies supplementing and securing employee benefits
and provide executive compensation and related consulting services to U.S.
corporations, banks and healthcare organizations. We have over 4,800 clients
that use our customized programs to supplement and secure benefits for their
executives, key employees and other professionals and to offset the costs of
employee benefit liabilities and who rely on our consultants to structure their
compensation programs.

We have experienced significant growth and transition over the last
several years. A majority of our revenues result from commissions paid by
insurance companies that underwrite the insurance policies used to finance our
clients' benefit programs. As a result of a series of acquisitions, we have
expanded our service offerings to become a value-added provider of a wide range
of employee compensation and benefit consulting services. Our sources of revenue
are: (1) commissions paid by the insurance companies issuing the policies
underlying our benefit programs, (2) program design and administrative service
fees paid by our clients, (3) executive compensation and benefit and related
consulting fees and (4) legislative liaison and related advisory services.

We are headquartered at 102 S. Wynstone Park Drive, North Barrington,
Illinois 60010 and maintain offices nationwide. Our Internet address is
www.clarkbardes.com. We post, by means of a hyperlink to the SEC's website, the
following filings as soon as reasonably practicable after they are
electronically filed with or furnished to the SEC: our annual report on Form
10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and
any amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934. All such filings on our web site
are available free of charge.

Our products and services

We provide executive compensation and benefit consulting services as
well as evaluate, design, implement and administer a diverse array of
compensation and benefit programs for executives, key employees and other
professionals. Typically, in selling, designing and implementing executive
compensation and benefit programs, we:

o evaluate a client's existing compensation and benefit programs and the
effectiveness of those programs in meeting that client's organizational
needs;

o design or improve the compensation and benefit programs;

o compare financing alternatives for the programs and present the
financial strengths of each to the client;

o arrange for the placement of the insurance coverage or other
instruments which will finance the underlying programs; and

o provide the enrollment, reporting and ongoing administrative services
associated with the programs.

Most of our benefit programs are financed by business-owned life
insurance and other financial products. Business-owned life insurance refers to
life insurance policies purchased and owned by a business on the lives of a
select group of employees. The business pays the premiums on, and is the owner
and beneficiary of, such policies. Business-owned life insurance programs are
used primarily to offset a client's cost of providing executive benefits and to
supplement and secure benefits for executives, key employees and other
professionals. The cash flow characteristics of business-owned life insurance
policies are designed to closely match the long-term cash flow characteristics
of a client's employee benefit liabilities. Additionally, the cash value of the
business-owned life insurance policies grows on a tax-deferred basis and the
policies' death benefits are received tax free, providing an attractive return
to the client.

3

We maintain strategic relationships with insurance companies such as
AEGON, AXA/Equitable, General American, Great-West, Mass Mutual, Nationwide, New
York Life, Phoenix Life, Travelers and West Coast Life, in which both parties
are committed to developing and delivering creative products with high client
value. We work closely with clients to design customized products that meet the
specific organizational needs of the client and with insurance companies to
develop unique policy features and competitive pricing.

Set forth below is a description of our principal benefit plan
solutions, consulting services, financing products and administrative services.

BENEFIT PLAN SOLUTIONS

Deferred Income Plans. Deferred income plans allow executives to defer
a portion of their current income on a tax-deferred basis. The deferred income
and interest in a properly designed and administered deferred income plan grows
on a tax-deferred basis until distributions are made to the executive, usually
at retirement. Corporations often purchase life insurance to create an asset in
order to offset the costs of the liability created by a deferred income plan.
Deferred income plans can be structured in a variety of ways, including:
traditional deferred income plans, which credit the deferred income amount with
a fixed rate of interest and use fixed yield life insurance products to offset
the costs of the company's liability, or variable deferred income plans, which
credit the deferred income amount with interest based on bond or equity indices
and use variable yield life insurance products to offset the costs of the
company's liability. In an effort to provide additional security for executives,
many corporations will create a trust to hold the related insurance policies.

Supplemental Executive Retirement Plans. Supplemental executive
retirement plans are specifically designed to supplement the dollar limitation
on benefits paid from qualified pension plans. The maximum dollar amount of
compensation that can be used to determine the pension benefits payable to an
executive from a qualified plan is currently set at $200,000. Accordingly,
non-qualified plans such as supplemental executive retirement plans, which are
not subject to the same stringent rules, have increased in popularity. Many
supplemental executive retirement plans are funded with the same insurance
products and strategies used to fund deferred income plans.

Supplemental Offset Plans. Supplemental offset plans are designed to
supplement an executive's income by restoring retirement benefits previously
limited by legislative changes. Supplemental offset plans are funded with
insurance policies using a technique commonly known as "split dollar." Ownership
rights to an individual policy are shared between the corporation and the
executive. The corporation and the executive share in the insurance policy's
increasing cash value and death benefit. The corporation pays the premiums and
recovers these expenditures from its share of the policy's proceeds. The
executive's interest in such policy is targeted to equal the present value of
the retirement benefits due at the time of such executive's retirement. In July
2002, proposed Treasury regulations changed the manner in which split dollar
life insurance arrangements will be taxed in the future. The new tax treatment
is, in certain respects, less attractive than the historical tax treatment of
split dollar arrangements. Additionally, provisions under the Sarbanes-Oxley Act
of 2002 have created uncertainty as to whether certain split dollar policies may
be used with respect to certain executives. Consequently, legislation and
proposed tax regulations could result in reduced revenue from split dollar
arrangements.

Group Term Carve Out Plans. Currently, a corporation can provide its
employees with a group term life insurance policy death benefit of up to $50,000
on a tax-free basis. The cost of providing a death benefit in excess of $50,000
is taxed to the employee as ordinary income. Group term carve out plans allow
companies to provide portable coverage in a customized program of amounts
greater than $50,000 that are taxed at lower rates. The purpose of group term
carve out plans is to provide a greater amount of insurance and post-retirement
death benefit to the employee at a competitive overall cost.

Disability Income Plan. Many companies provide group disability income
insurance for their employees. In many cases, these plans have limits that may
not be sufficient to provide reasonable income replacement for executives in the
event of a disability. Group disability insurance plans marketed by our
Executive Benefits Practice (previously known as "Compensation Resource Group")
and Healthcare Group supplement the group plans currently in place, and provide
additional income for executives in the event of a disability.

4

ExecuFLEX Program. Our Healthcare Group provides a total compensation
planning approach to the not-for-profit healthcare market through its
"ExecuFLEX" program. The program includes a base level of benefits, such as
medical, dental, vision, long-term disability, long-term care, and group term
life insurance. In addition, participants are provided an allowance made up of
company contributions and voluntary personal deferrals. The flex allowance is
used to supplement base coverage and to add to the employees' retirement
funding. The ExecuFLEX program is designed to provide maximum flexibility to the
participants at a minimal cost to the organization. The success of ExecuFLEX has
led us to offer the program to companies serviced by our other operating groups
as well as additional market segments within the healthcare industry.

CONSULTING SERVICES

With the acquisition of Pearl Meyer & Partners ("Pearl Meyer") in 2000,
we entered the market for senior executive and board of director level executive
compensation consulting. At the time of the acquisition, Pearl Meyer was one of
the largest independent executive compensation consulting firms in the United
States, and the acquisition broadened the services we offer to our clients. Our
Healthcare Group and Banking Practice have developed compensation consulting
programs in base salary, incentives, deferred compensation, and other
compensation design plans.

In 2002, we formed our Human Capital Practice. The new practice
includes our existing Rewards and Performance Group and ten former partners
("partners") and 74 support staff from Arthur Andersen LLP's ("Andersen") Human
Capital Practice. The Human Capital Practice provides compensation benefits and
human resources consulting services and products to major companies.

With the acquisition of the Federal Policy Group ("FPG") in 2002, we
were able to expand our services to include a variety of legislative and
regulatory strategic services. FPG develops and implements strategies to pursue
legislative changes; anticipate and respond to proposed legislative initiatives;
help shape administrative regulations and rulings; and raise the visibility of
our clients through testimony before Congress and other avenues. Federal Policy
Group clients include Fortune 500 companies, trade associations and other
businesses.

FINANCING PRODUCTS

Business-Owned Life Insurance. Business-owned life insurance is life
insurance purchased and owned by a business on the lives of a select group of
its employees. The insurance is used to help finance the business' executive
benefit obligations. The insurance is held as a general asset and is not
directly linked to the executives' benefits. Business-owned life insurance is
marketed to mid-sized and large corporations and healthcare institutions.

Bank-Owned Life Insurance. When utilized by banks, business-owned life
insurance (as discussed above) is referred to as bank-owned life insurance. We
market these programs to banks with assets in excess of $5 billion, as well as
to regional and community banks that generally have assets of less than $5
billion. We were one of the first organizations to offer business-owned and
bank-owned life insurance programs.

ADMINISTRATIVE SERVICES

We believe that we are an industry leader in providing high quality and
customized administrative services to support the executive benefit and
insurance programs we market. As of December 31, 2002, we administered
approximately 367,000 policies for 3,013 clients. As of the same date, the
insurance policies underlying our employee benefit programs represented a total
of approximately $155 billion of in-force insurance coverage.

5

The following table presents the number of clients, policies
administered, and in-force coverage as of December 31, 2002.

We also provide consulting services for an additional 1,850 clients.

We generate fee-based revenues from providing administrative services
to our clients. We approach administrative services with a strategy focused on
servicing our clients' unique requirements and needs through customized,
value-added services and intensive support in order to create brand and client
loyalty and lower sensitivity to price. We further differentiate ourselves by
employing a focused strategy for a particular buyer group through each of our
practices. For instance, we service clients in the banking industry through our
Banking Practice and not-for-profit healthcare organizations through our
Healthcare Group with an insider's view of each market thereby providing high
quality administrative services customized to a client's needs.

We offer customized enrollment and administrative services for our
employee benefit programs. In an effort to provide a high level of personalized
services, each client is assigned an account team comprised of specialists who
are responsible for servicing the needs of that client. The administrative
services provided by each of our practices' account specialists include
coordinating and managing the enrollment process; distributing communication
materials; monitoring financial, tax and regulatory changes; providing
accounting reports and periodic benefit statements to participants; performing
annual reviews, and reporting the historical and projected cash flow and
earnings impact of the plans. Each practice's account specialists are supported
by actuarial, financial and insurance experts.

We build our client base by fostering long-term client relationships.
To this end, the training and focus of each account team centers on our goal of
delivering the highest quality program, implementation and administrative
services in the industry. This benefits both the client, through top
professional support, and the consultant, who can focus more closely on the
consulting process. To further emphasize long-term client relationships, we
enter into administrative agreements with each client, in most cases for a term
of five to ten years.

We believe our commitment to providing high quality client and
administrative services is one of the primary reasons that we have achieved the
success we have enjoyed to date. We believe that our continued focus on, and
investment in, the personnel and technology necessary to deliver high quality
service to our clients will continue to bolster our reputation as an industry
leader.

OUR BUSINESS UNITS

We operate through six operating segments: (1) Executive Benefits
Practice, (2) Banking Practice, (3) Healthcare Group, (4) Human Capital
Practice, (5) Pearl Meyer & Partners, and (6) Federal Policy Group. Through
these six segments, we design, market and administer compensation and benefit
programs for companies supplementing and securing employee benefits and provide
executive compensation and related consulting and legislative strategic services
to U.S. corporations, banks and healthcare organizations. Our six operating
segments operate as independent and autonomous business units with a central
corporate staff responsible for finance, strategic planning, and human
resources. Each segment has its own client base as well as its own marketing,
administration, and management teams.

We have structured these segments to be independent because each has an
established reputation in their distinct markets and a specific expertise
required to serve these markets. Through these segments, we are able to tailor
compensation and benefit programs and consulting services to the unique needs of
our clients. At the same time, we emphasize the cross-selling of products and
services between our groups. To encourage cross-selling, we have established
percentage-based rewards for cross-segment referrals.

6

EXECUTIVE BENEFITS PRACTICE

One of the leaders in its field, our Executive Benefits Practice
("EBP") focuses on the marketing, designing, implementation, administration and
placement of financing of non-qualified benefit plans for Fortune 1000 companies
and large private companies. This segment currently administers approximately
600 client cases, covering approximately 94,000 policies for executives, key
employees and other professionals. The large corporate marketplace in which the
Executive Benefits Practice does business requires a significant degree of
customization. Growth in this group will focus on further penetrating the
corporate marketplace and providing additional executive compensation and
benefits services to corporations. EBP continues to struggle as a result of
current economic conditions and proposed legislation related to the structure of
deferred compensation plans which caused clients to delay implementation of new
deferred compensation plans. We may continue to experience revenue declines in
future periods due to the economy and the proposed legislation.

Formerly the Clark/Bardes segment, our original core business, this
group was expanded and reorganized with the acquisition of Compensation Resource
Group in September 2000. The segment was also expanded by recent acquisitions
including Forrest, Wagner & Associates, acquired in October 2000; Lyons
Compensation and Benefits, LLC, acquired in August 2001; Coates Kenney, acquired
in December 2001, and Comiskey Kaufman acquired in April 2002. With each of
these acquisitions, we obtained a substantial book of business as well as a
number of talented and experienced benefits professionals. In 2003, Coates
Kenney will become part of our Human Capital Practice.

BANKING PRACTICE

The Banking Practice offers compensation consulting, executive and
director benefits programs, and bank-owned life insurance to the bank market.
The Banking Practice is a market leader that provides programs to 1,950 banks,
including 22 of the top 50 largest banks in the United States. In addition to
compensation and benefit programs, this group also performs incentive consulting
as well as the design of ownership succession programs.

This group has completed several acquisitions of firms in its industry.
The September 1997 acquisition of Bank Compensation Strategies, Inc. was our
first acquisition and expanded our products and services into the community and
small regional banking market. During 1999, we acquired National Institute for
Community Banking and Banking Consultants of America, expanding the practice's
employee and client base with companies that could be readily absorbed into our
operating structure. During 2000, we acquired Christiansen & Associates, a
former independent consultant in the banking practice, along with the Watson
Company and W.M. Sheehan & Company, two regional compensation consulting firms
in the banking market. In April 2002, we acquired Hilgenberg and Associates
which specializes in providing compensation, benefit and bank-owned life
insurance consulting services to banks located in the Midwest. On November 26,
2002, we acquired Long, Miller & Associates, LLC ("LongMiller"). LongMiller,
located in Greensboro, North Carolina, specializes in bank-owned life insurance
portfolio services. This acquisition enhances our capabilities by coupling
LongMiller's product offerings and personnel with our current Banking Practice's
extensive distribution channel. We financed this acquisition, with a purchase
price of approximately $403.5 million and transaction costs of approximately
$736,000, through the issuance of $305 million of non-recourse debt secured by
commission and related payments from in-force policies sold by LongMiller, a
draw-down of approximately $87.5 million on our existing credit facility and the
issuance of $20 million of our common stock at $16.71 per share.

HEALTHCARE GROUP

The Healthcare Group employs a comprehensive benefits approach that
encompasses a variety of insurance products, ranging from traditional life
insurance policies to disability and long-term care coverage. The healthcare
industry's changing environment and complex structure offer many challenges for
the near future. The industry has experienced a great deal of contraction with
changes in our national healthcare regulations and compensation structure.

7

During 1999, we purchased Phynque, Inc. (d.b.a. MCG/Healthcare), an
executive benefit consulting organization servicing the healthcare industry. The
Healthcare Group provides specialized compensation and benefit services for
large and medium sized not-for-profit healthcare organizations. With
approximately 460 clients, the Healthcare Group is a market leader for
compensation and benefit planning for healthcare executives and physicians. The
Healthcare Group expanded in July 2001 with the acquisition of Management
Science Associates. This acquisition allowed us to expand our client base and
the services we provide to our clients.

HUMAN CAPITAL PRACTICE

Human Capital Practice, formed during 2002, includes our existing
Rewards and Performance Group and former partners and support staff from the
Human Capital Practice of Arthur Andersen LLP. The Human Capital Practice
provides compensation, benefits and human resources consulting services and
products to major companies including technology and intellectual capital
companies. The Human Capital Practice has experienced difficulties related to
the start-up of a new consulting practice in the current challenging economic
climate.

PEARL MEYER & PARTNERS

Our executive compensation consulting practice was created through the
acquisition on June 21, 2000 of Pearl Meyer & Partners, Inc., a New York
City-based consulting firm specializing in executive compensation and retention
programs. The Pearl Meyer organization is focused predominantly on executive
compensation consulting for Fortune 1000 corporations. It is one of the largest
executive compensation consulting organizations in the United States.

FEDERAL POLICY GROUP

With the acquisition of the Federal Policy Group ("FPG") in 2002, we
were able to expand our services to include a variety of legislative and
regulatory strategic services. FPG develops and implements strategies to pursue
legislative changes; anticipate and respond to proposed legislative initiatives;
help shape administrative regulations and rulings; and raise the visibility of
our clients through testimony before Congress and other avenues. Federal Policy
Group's clients include Fortune 500 companies, trade associations and other
businesses.

DISTRIBUTION

Each of our segments markets its employee benefit programs and related
administrative and consulting services through an in-house sales organization as
well as through consultants in independently operated sales offices located
throughout the United States. As of December 31, 2002, we were represented by
159 consultants in 48 offices nationwide.

Our independent consultants enter into exclusive agency agreements with
us to market programs and services on our behalf. Each agreement defines the
duties of the consultant to solicit and sell covered business, the commission
splits between the consultant and ourselves, and includes a confidentiality
agreement and operating standards. We pay a substantial portion of the total
sales revenue as commissions to the independent consultant, usually from 50% to
65% of total revenue. All of our independent consultants are responsible for
their own operating expenses. Some of our segments, such as the Healthcare
Group, Human Capital Practice, Pearl Meyer & Partners, and Federal Policy Group
generate a significant portion of their sales revenue through
employee-consultants and we bear the administrative expense of the employee-
consultants in exchange for a lower commission and fee expense.

Many of our products have a securities component and must be sold
through a licensed broker/dealer. Clark/Bardes Financial Services, Inc.
("CBFS"), is used by our consultants for distributing these securities-related
products. CBFS currently distributes insurance, annuities and mutual funds for
our products. CBFS currently has 239 registered representatives and is licensed
to operate in all 50 states and the District of Columbia. By having our own
broker/dealer, we are able to control costs and sensitive customer information
more effectively than when we used an outside broker/dealer.

8

Clark/Bardes Reinsurance Company, Ltd. ("CBRCL"), a wholly-owned
subsidiary of Clark/Bardes, Inc., was incorporated in the Cayman Islands with
Limited Liability effective December 13, 2001. CBRCL was formed in order to
increase and diversify our earnings stream by participating in the underwriting
profits of the insurance business produced by its various operating segments.
The Governor In Council granted approval on December 19, 2001 for the issuance
of an unrestricted Class "B" insurer's license to CBRCL, subject to the receipt
and approval by the Cayman Monetary Authority of certain outstanding
requirements of the Law. The insurance license for CBRCL has been issued and was
capitalized effective as of February 1, 2002. The business activity in this
subsidiary during 2002 consisted of operating expenses. No revenue was generated
by this entity during 2002.

Our consultants are supported by a design and analysis department in
each segment. The primary responsibility of the design and analysis department
is to design customized compensation and benefit programs that will effectively
reduce the costs of a client's employee benefit liabilities. The design analyst
works with the consultant to identify the needs of a prospective client and
investigates the availability and pricing of products that are compatible with
that client's needs. Finally, the analyst develops the financial projections
necessary to evaluate the benefit costs and cost recoveries for the prospective
client, together with an analysis of financing alternatives to assist the client
in making a decision.

We recognize the importance of attracting and retaining qualified,
productive sales professionals. We actively recruit and develop new sales
professionals in order to add to our distribution capacity. Further, our
acquisition strategy focuses on retaining the productive sales professionals of
the entity being acquired.

As our business has grown, internally and through acquisitions, our
reliance on a select few high volume consultants has decreased. Our top three
consultants collectively accounted for approximately 6.8% of our total revenue
in 2002, 6.8% of our total revenue in 2001 and 10.8% of our total revenue in
2000. We expect this concentration in business to continue to decrease as we
expand our consultant base and product offerings.

MARKETING SUPPORT

Substantial investments have been made in establishing highly qualified
marketing departments in each practice. Each marketing department's primary
focus is to support the sales efforts of their operation through integrated
marketing communications strategies. The marketing departments develop and track
leads for consultants through various channels including advertising, public
relations, trade shows, and direct mail. Additionally, the marketing function
provides collateral materials, business communication, brand support and survey
research and distribution. We distribute external newsletters and other program
update pieces to approximately 15,000 clients and prospects throughout the year
and sponsor conferences and meetings featuring our industry experts. Public
relations and corporate marketing functions coordinate the publication of
articles, white papers, and briefs written by our consultants and ensure that
our representatives are positioned as thought leaders and industry experts in
national, local, and industry trade publications. These efforts have made us a
clear leader in the executive compensation and benefits consulting industry.

Our distribution strategy seeks to leverage our relationships within
our organization and among our business partners. We attempt to establish
relationships with carriers and professional service providers that provide
opportunities for cross-utilization of services. We have also developed
strategic relationships with several professional service firms that are used as
a referral source for our consultants. In addition, we have an advisory board of
current and former industry leaders familiar with our products and services who
can provide introductions to prospective clients. We believe these relationships
assist our consultants in gaining access to the appropriate personnel of
prospective clients and more effectively establish a position of trust.

INDUSTRY BACKGROUND

Over the past twenty years, as the result of legislative change and
increased competition for executive talent, compensation and benefit programs
have become more sophisticated and complex. In turn, the financing of these
programs has also become increasingly complex. Corporations and banks now
commonly use life insurance to offset the costs of employee benefit liabilities
and several large insurers, including AEGON, General American, Great-West, Mass
Mutual, New York Life, Nationwide and Travelers, have committed significant
resources to develop business-owned life insurance products for use in this
market. The industry has shifted more toward the use of variable life insurance,
which contain equity investment features to meet these needs.

9

At the same time, the corporations, banks and healthcare organizations
that use these services have become more sophisticated and demanding. Clients
now regularly perform extensive due diligence on the firms providing their
compensation and benefit programs. Issues related to reputation and
technological capabilities are now central to their decision-making process. In
addition, the client's expectation regarding the level of administrative
services to be provided and technological capabilities of a provider has risen
substantially. For example, in the early 1990's, community banks went through a
consolidation phase. This consolidation gave bank executives a greater
appreciation and need for expertise regarding the impact of consolidation on
their compensation and benefit programs. This developed into a stronger demand
by the community banking industry for expert advice in addressing estate and
continuity planning. In addition, healthcare organizations have been faced with
growing challenges to attract and retain executives. The tax status of
healthcare providers, many of whom are not-for-profit healthcare organizations,
requires tailored compensation and benefits programs that comply with the
various not-for-profit compensation and benefit rules.

Our products and services have also historically been affected both
positively and negatively by legislative change. In the past, legislation has
increased the attractiveness of non-qualified benefit plans for highly-paid
executives by limiting the amount of tax-deductible contributions to traditional
pension plans. On the other hand, legislation has limited the use of financing
instruments, such as certain uses of business-owned life insurance. For example,
tax legislation was enacted that disallowed interest deductions on policy loans
and essentially eliminated a financing technique for corporations known as
"leveraged corporate owned life insurance." A recent Internal Revenue Service
("IRS") Notice and forthcoming Treasury regulations change the manner in which
split dollar arrangements will be taxed. The new treatment will be, in certain
respects, less attractive than the historical tax treatment of split dollar
arrangements. Additionally, provisions under the Sarbanes-Oxley Act of 2002 have
created uncertainty as to whether certain split dollar policies may be used with
respect to certain executives. Consequently, legislation and the new tax
regulations could result in reduced revenue from split dollar arrangements. The
insurance-financed employee benefit market will likely continue to be affected
significantly by legislative change. Consequently, we believe that the ability
to respond quickly to legislative initiatives is a competitive advantage.

We believe that increasing product complexity, growing buyer
sophistication, and the changing legislative landscape requires product
development systems and personnel that are more sophisticated and cost intensive
than most producers and producer groups are able to justify economically. We
believe this will continue to drive consolidation in the industry as smaller
firms respond in order to stay competitive.

We also believe the industry offers additional growth opportunities. We
estimate that there are approximately 15,000 corporations, banks and healthcare
institutions that have executive compensation and benefits needs which can be
served by us. Of these, we currently have 3,013 as executive benefit,
healthcare, and banking clients. In addition, the rising pay of executives and
the nearing of retirement of the baby-boom generation are significant
macro-trends that we believe will drive growth in our industry in the future.

10

EMPLOYEES

As of December 31, 2002, we employed 972 people as follows:

Executive Benefits Practice....................................... 316
Banking Practice.................................................. 263
Healthcare Group.................................................. 180
Human Capital Practice............................................ 109
Pearl Meyer & Partners............................................ 37
Federal Policy Group.............................................. 8
Resource Center (formerly Corporate) and Clark/Bardes Financial
Services, Inc..................................................... 59
----
Total.................................................... 972
====

The majority of our employees have college degrees, with several
holding advanced degrees in law, accounting, finance, business administration or
actuarial science. Professional development is a highly valued industry
characteristic, and insurance and financial planning designations, such as
Chartered Life Underwriter, Fellow of the Life Management Institute, Fellow of
the Society of Actuaries and Certified Financial Planner, are held by a large
number of our employees. We actively encourage continuing education for
employees through expense reimbursement and reward plans. Due to the specialized
nature of the business, we often recruit experienced persons from insurance
companies, consulting firms and related industries.

COMPETITION

The executive compensation and benefit consulting market is highly
competitive as the margins from this type of work are high. We compete with
consulting firms, brokers, third party administrators, producer groups and
insurance companies. A number of our competitors offer attractive alternative
programs. The direct competitors of our Executive Benefits Practice include
Mullin Consulting; TBG Financial; and Management Compensation Group. The
competitors of our Banking Practice include Benmark; Meyer-Chatfield; and
Analect. Additionally, the banking industry is constantly consolidating, which
may reduce the number of potential bank clients. Primary competitors of our
Healthcare Group, Human Capital Practice and Pearl Meyer include Hay Group;
Towers Perrin; and Mercer Consulting Group.

We compete for clients on the basis of reputation, client service,
program and product offerings and the ability to tailor our products and
administrative services to the specific needs of a client. We believe that we
are in a superior competitive position in most of the meaningful aspects of our
business because of our track record, name recognition, established
relationships, industry focus and expertise, and specialization. We do not
consider our direct competitors to be our greatest competitive threat. Rather,
we believe that our most serious competitive threat will likely come from large,
diversified financial services organizations that are willing to expend
significant resources to enter our markets and from the larger competitors that
pursue an acquisition or consolidation strategy similar to ours.

GOVERNMENT REGULATION

State governments extensively regulate our life insurance activities.
We sell our insurance products in all 50 states and the District of Columbia
through licensed insurance producers. Insurance laws vary from state to state.
Each state has broad powers over licensing, payment of commissions, business
practices, policy forms and premium rates. While we have not encountered
regulatory problems in the past, we cannot assure you that we will always be in
compliance with all applicable regulatory requirements of each state.
Additionally, we cannot be sure if we or our consultants or the insurance
carriers underwriting the policies will encounter regulatory problems in the
future, including any potential sanctions or penalties for operating in a state
without all required licenses.

While the federal government does not directly regulate the marketing
of most insurance products, securities, including variable life insurance, are
subject to federal securities laws. As a result, our consultants and entities
with which we have administrative service agreements related to selling those
products must be registered with the National

11

Association of Securities Dealers. We market these financial products through
CBFS, a wholly-owned subsidiary and a registered broker-dealer. While we have
not had any regulatory problems in the past related to these products, we cannot
assure you that we or our consultants will not have regulatory problems in the
future.

RISK FACTORS

You should carefully consider the risks described below together with
the other information contained in this 10-K or incorporated by reference before
making a decision to invest in our common stock. The risks described below are
not the only risks we face. Additional risks and uncertainties of which we are
unaware or currently believe may be immaterial may also impair our business
operations. If any of the following risks actually occur, our business,
financial condition and operating results could be adversely affected.

RISKS RELATED TO OUR INDUSTRY

WE ARE SUBSTANTIALLY DEPENDENT ON REVENUE GENERATED BY THE SALE OF
BUSINESS-OWNED LIFE INSURANCE POLICIES. CHANGES IN FEDERAL TAX AND LEGISLATIVE
LAWS COULD MATERIALLY AND ADVERSELY AFFECT OUR RENEWAL INCOME AND ABILITY TO
GAIN NEW BUSINESS.

Many of the compensation and benefit programs we design and implement
for our clients are financed with business-owned life insurance. Business-owned
life insurance programs have tax advantages associated with such products that
are attractive to our current and prospective clients. Commission revenue from
these products represented 72.4%, 78.6% and 79.5%, of our total revenues in
2002, 2001 and 2000, respectively, and are expected to represent a larger
percentage of our total revenues in the future as a result of our acquisition of
LongMiller.

There have been several recent legislative proposals to change the
federal tax laws with respect to business-owned life insurance. For example, in
1998, 1999, and 2000, the Clinton Administration proposed to deny interest
deductions of corporate taxpayers in proportion to the unborrowed cash values of
life insurance policies they held on the lives of their employees; however, this
proposal was not adopted by the Congress and has not been renewed by the Bush
Administration. More recently, in the aftermath of negative media coverage
regarding certain types of business-owned life insurance, Senator Jeff Bingaman
(D-NM) has proposed to tax the death benefits taxpayers receive from policies on
the lives of former employees. Significant segments of the life insurance
industry are engaged in an ongoing, intensive effort to oppose the Bingaman
proposal. While Senator Bingaman did not offer his proposal in 2002, and while
there has not been any significant demonstration of Congressional support for
the proposal, there can be no assurance that the proposal will not ultimately be
included in enacted legislation. If Congress were to adopt this proposal or
other legislation eliminating or limiting the tax-deferred appreciation of
business-owned life insurance policies, eliminating or limiting the tax-free
payment of death benefits on such policies, or otherwise adversely affecting the
tax treatment of the policies, these policies would be less attractive to
policyholders and a large number of such policies could be surrendered or
exchanged, which could have a material adverse effect on our financial condition
and results of operations.

In January 2002, an IRS Notice and proposed Treasury regulations
changed the manner in which split dollar life insurance arrangements will be
taxed in the future. The new tax treatment is, in certain respects, less
attractive than the historical tax treatment of split dollar arrangements.
Additionally, provisions under the Sarbanes-Oxley Act of 2002 have created
uncertainty as to whether certain split dollar policies may be used with respect
to certain executives. Consequently, this initiative could result in reduced
revenue from split dollar arrangements.

12

THE INTERNAL REVENUE SERVICE HAS RECENTLY LAUNCHED A MAJOR ENFORCEMENT
INITIATIVE THAT COULD ADVERSELY AFFECT OUR BUSINESS.

In recent years, the Internal Revenue Service ("IRS") has undertaken a
major enforcement initiative to disallow the interest deductions on certain
leveraged business-owned life insurance programs sold during or prior to 1995.
The IRS has prevailed on the majority of cases it has litigated related to this
initiative and has recently made a temporary public settlement offer to address
ongoing cases. While we stopped selling leveraged business-owned life insurance
programs after 1995 and we do not expect any material adverse impact on our
revenue from this enforcement initiative, it is impossible to determine the
impact of this initiative on a client's decision to continue or surrender an
existing leveraged business-owned life insurance program.

OUR BUSINESS IS SUBJECT TO FLUCTUATIONS IN INTEREST RATES, STOCK PRICES AND
GENERAL ECONOMIC CONDITIONS.

General economic conditions and market factors, such as changes in
interest rates and stock prices, can affect our commission and fee income and
the extent to which clients keep their policies in-force year after year. Equity
returns and interest rates can have a significant effect on the sale and
profitability of many employee benefit programs whether they are financed by
life insurance or other financial instruments. For example, if interest rates
increase, competing products could become attractive to potential purchasers of
the programs we market. Further, a prolonged decrease in stock prices can have
an effect on the sale and profitability of our clients' programs that are linked
to stock market indices. We cannot guarantee that we will be able to compete
with alternative products if these market forces make our clients' programs
unattractive.

The continued general down cycle in the U.S. economy has adversely
affected the financial condition of our clients, which in turn has resulted in a
significant reduction in demand for compensation and benefit consulting services
and programs. A continuation of current economic conditions, or any
deterioration in those conditions, could have a material adverse effect on our
business, financial condition and results of operations.

WE ARE SUBJECT TO REGULATION AT THE STATE LEVEL.

State governments extensively regulate life insurance activities. We
sell our insurance products in all 50 states through licensed insurance
consultants operating as independent agents as well as through our in-house
sales staff. States have broad powers over licensing, payments of commissions,
business practices, policy forms and premium rates. Insurance laws related to
licensing, marketing activities and the receipt of commissions vary from state
to state. While we have not encountered regulatory problems in the past, we
cannot assure you that we or the consultants through whom we sell will be in
compliance at all times with all applicable regulatory requirements of each
state.

RISKS RELATED TO OUR COMPANY

WE FACE STRONG COMPETITION.

Our business is highly competitive. We compete with consulting firms,
insurance brokers, third party administrators, producer groups and insurance
companies. A number of our competitors offer attractive alternative programs.
The direct competitors of our Executive Benefits Practice include Mullin
Consulting; TBG Financial; and Management Compensation Group. The competitors of
our Banking Practice include Benmark; Meyer-Chatfield; and Analect.
Additionally, the banking industry is constantly consolidating, which may reduce
the number of potential bank clients. Primary competitors of our Healthcare
Group, Human Capital Practice and Pearl Meyer include Hay Group; Towers Perrin;
and Mercer Consulting Group.

We may also face competition from large, diversified financial services
firms willing and able to expend the resources to enter our markets and from
large direct competitors that choose to pursue an acquisition or consolidation
strategy similar to ours.

13

WE ARE DEPENDENT ON CERTAIN KEY CONSULTANTS.

Our top three consultants collectively accounted for approximately 6.8%
of our total revenue in 2002, 6.8% of our total revenue in 2001, and 10.8% of
our total revenue in 2000. We enter into agreements with our consultants in
which they agree not to compete with us for a period of time after their
relationship with us terminates. We cannot assure you that we will be able to
maintain consultant relationships with our most productive consultants or that
any non-compete provisions in the agreements will be honored or enforceable. Our
business could suffer in the future as a result of the loss of any of our most
productive consultants.

OUR BUSINESS DEPENDS ON THE RENEWAL COMMISSIONS WE GENERATE FROM THE LIFE
INSURANCE POLICIES UNDERLYING OUR CLIENTS' COMPENSATION AND BENEFIT PROGRAMS.

We derive a substantial portion of our revenue from the renewal
commissions we earn on the business-owned life insurance policies and other
financial instruments that underlie our clients' compensation and benefit
programs. We earn these annual commissions so long as the underlying policies
remain in existence. If a client chooses to cancel a policy, we will stop
receiving any renewal commissions and fees on that policy. In addition, if a
client delays or reduces the annual premiums it pays on the underlying policy
due to a flexible premium structure or financial difficulties, our renewal
commissions will be correspondingly delayed or reduced. We have historically
experienced average persistency of approximately 95% on the policies underlying
our renewal commissions although we cannot assure you that the persistency rate
will not decline in the future. For the year ended December 31, 2002, our
persistency rate was 93%.

OUR QUARTERLY OPERATING RESULTS CAN VARY DRAMATICALLY.

Our operating results can fluctuate considerably from quarter to
quarter. We have experienced and may continue to experience large concentrations
of revenue in the first and fourth quarters. Our operating results may be
affected by a number of factors including: a significant portion of the funding
for our bank-owned life insurance products occurs in the fourth calendar
quarter, many deferred compensation plans marketed by our Executive Benefits
Practice are financed in the first fiscal quarter; and the timing of significant
sales can have a material impact on our quarterly operating results.

Our revenue is difficult to forecast, and we believe that comparing our
consecutive quarterly results of operations is not meaningful, nor does it
indicate what results we will achieve for any subsequent period. In our
business, past operating results are not consistently reliable indicators of
future performance. Significant downward fluctuations in our quarterly operating
results could result in a sharp decline in the trading price of our common
stock. See further discussion about the quarterly operating results in Note 22
to the Consolidated Financial Statements under Item 15 "Exhibits, Financial
Statement Schedules, and Reports on Form 8-K."

WE ARE DEPENDENT ON OUR MANAGEMENT TEAM.

Our performance depends largely on the performance of our executive
officers and key employees. It is important to us to keep and motivate high
quality personnel, especially our management, consultants and program
development teams. The loss of the services of any of our key employees
particularly W. T. Wamberg, Chairman and Chief Executive Officer; Thomas M.
Pyra, Chief Financial Officer and Chief Operations Officer; James C. Bean,
Senior Vice President and Chief Integration Officer and acting President of the
Executive Benefits Practice; Richard C. Chapman, President of the Banking
Practice; Ken Ackerman, President of the Healthcare Group; Bruce Benesh,
President of Human Capital Practice, Steve Hall, President of Pearl Meyer; and
Ken Kies, Managing Director of Federal Policy Group could have a material
adverse effect on our business, financial condition and operating results. We
cannot assure you that we will be successful in retaining our key personnel.

WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR ACQUISITION STRATEGY OR
INTEGRATE THE BUSINESSES WE ACQUIRE.

Since September 1997, we have completed 23 acquisitions. At any point
in time, we may also be considering several other potential acquisitions. Future
acquisitions may require substantial expenditures that will be financed through
cash from

14

operations, or bank debt as well as future debt and/or equity offerings. We
cannot assure you that funds will be available from banks or through the capital
markets or that they will be available on terms acceptable to us. If funds are
not available, we may be unable to fully implement our acquisition strategy.

Acquisitions involve numerous risks, including the diversion of our
management's time and attention to the negotiation of the transaction and to the
assimilation of the businesses acquired, the possible need to modify financial
and other systems and add management resources, and unforeseen difficulties in
the acquired operations. An acquisition may not produce the revenue and profits
we expect. Thus, an acquisition that fails to meet our expectations could have a
material adverse effect on our business, financial condition and operating
results.

A SUBSTANTIAL PORTION OF OUR TOTAL ASSETS ARE REPRESENTED BY INTANGIBLE ASSETS.

When we acquire a company, we normally acquire few tangible assets.
Therefore, substantially all of the purchase price for the acquisition is
allocated to intangible assets. The three primary components of our intangible
assets are in-force revenue, goodwill and non-compete agreements. The amounts of
purchase price allocated to in-force revenue are determined by discounting the
cash flow of future commissions adjusted for expected persistency, mortality and
associated costs. Non-compete agreements are amortized over the period of the
agreements and other identifiable intangibles are amortized over their useful
lives. The persistency of our in-force business is influenced by many factors
outside of our control and we cannot be sure that the value we have allocated
will ultimately be realized. The balance of the purchase price not allocated to
identifiable intangible assets is classified as goodwill.

If any component of our in-force revenue should become unrealizable,
this could have a material adverse effect on our business, financial condition
and operating results. We cannot assure you that all of our in-force revenue
will be realizable or that accounting regulatory bodies will not impose
different amortization methods.

A MAJORITY OF OUR COMMISSION REVENUE IS DERIVED FROM POLICIES WRITTEN BY A
LIMITED NUMBER OF INSURANCE COMPANIES.

We depend on a select group of insurance companies to underwrite the
insurance policies underlying the programs we sell. During 2002, 20 life
insurance companies underwrote substantially all of the insurance policies
underlying our clients' programs. Seven of these companies accounted for
approximately 48.3% of our first year commission revenue in 2002, 60.0% in 2001,
and 66.3% in 2000. If our relationship with any of these insurance companies, or
their financial condition, were to significantly change for any reason, we could
experience a disruption in our ability to provide products and services to our
clients. Although we believe such disruption would only be short-term and that
we would not experience any difficulties in securing replacement relationships
with similar insurance companies, any long-term delays in doing so could affect
our ability to provide competitive financing alternatives to our clients.

MAJOR STOCKHOLDERS HAVE THE ABILITY TO INFLUENCE STOCKHOLDER ACTION.

AEGON and Liberty Wanger Asset Management owned approximately 12.7% and
10.6%, respectively, of our outstanding common stock as of December 31, 2002. W.
T. Wamberg, our Chairman, President and Chief Executive Officer, owned
approximately 10.7% of our outstanding common stock as of December 31, 2002. As
a result, these shareholders are able to exercise significant influence over all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may also have the effect of delaying, preventing or deterring a change in
control of Clark/Bardes that may otherwise be beneficial to stockholders.

WE ARE SUBJECT TO LITIGATION WHICH MAY HAVE A NEGATIVE IMPACT ON OUR BUSINESS
AND REPUTATION.

From time to time, we are subject to lawsuits and other claims, which
are being handled and defended in the ordinary course of business. While we are
unable to predict the outcome of these matters, we do not believe, based upon
currently

15

available facts, that the ultimate resolution of any of such pending matters
will have a material adverse effect on our overall financial condition, results
of operations or cash flows. However, adverse developments could negatively
impact earnings in a particular future period. See Item 3. "Legal Proceedings."

ERRORS OR OMISSIONS IN THE SERVICES WE PROVIDE OUR CLIENTS MAY RESULT IN
LIABILITIES WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND
REPUTATION.

We market, design and administer sophisticated financial products and
we provide accounting, actuarial and other professional services in connection
with marketing, designing and administering these programs. Our clients rely
upon the services and interpretations rendered by our employees. To the extent
any services or interpretations provided by our employees prove to be
inaccurate, we may be liable for the damages, and such liability, to the extent
not covered by existing insurance, could have a material adverse effect on our
business, financial condition and results of operations.

WE ARE DEPENDENT ON OUR INFORMATION PROCESSING SYSTEMS.

Our ability to provide administrative services depends on our capacity
to store, retrieve, process and manage significant databases and expand and
upgrade periodically our information processing capabilities. Interruption or
loss of our information processing capabilities through loss of stored data,
breakdown or malfunctioning of computer equipment and software systems,
telecommunications failure, or damage caused by fire, tornadoes, lightning,
electrical power outage, or other disruption could have a material adverse
effect on our business, financial condition and results of operations. Although
we have disaster recovery procedures in place and insurance to protect against
such contingencies, we cannot assure you that such insurance or services will
continue to be available at reasonable prices, cover all such losses or
compensate us for the possible loss of clients occurring during any period that
we are unable to provide services.

RISKS RELATED TO OUR COMMON STOCK

THE TRADING PRICE OF OUR COMMON STOCK MAY BE SUBJECT TO SIGNIFICANT
FLUCTUATIONS.

The trading price of our common stock could fluctuate significantly in
response to variations in our operating results, changes in earnings estimates,
changes in our business and changes in general market or economic conditions. In
addition, in recent years the stock market has experienced significant price and
volume fluctuations. Such market fluctuations could result in a sharp decline in
the trading price of our common stock and the value of your investment.

THE ISSUANCE OF ADDITIONAL COMMON STOCK MAY DILUTE OTHER STOCKHOLDERS.

We have an aggregate of 18,559,250 shares of common stock authorized
but unissued and not reserved for specific purposes. We may issue all of these
shares without any action or approval by our stockholders. As of December 31,
2002, we had an aggregate of 2,433,202 unissued shares reserved for issuance
under our employee and director incentive plans. In addition, 947,030 shares
(based on the December 31, 2002 closing price of $19.25 per share) are subject
to issuance as contingent payments in connection with our recent acquisitions if
stipulated revenue and/or financial targets are achieved. We intend to continue
to actively pursue acquisitions of competitors and related businesses and may
issue shares of common stock in connection with those acquisitions. Any shares
issued in connection with our acquisitions, the exercise of stock options or
otherwise would dilute the percentage ownership held by existing stockholders.

EXISTING STOCKHOLDERS CAN SELL A SUBSTANTIAL NUMBER OF THEIR SHARES IN THE
PUBLIC MARKET WHICH COULD DEPRESS OUR STOCK PRICE.

Sales of a substantial number of shares of our common stock in the open
market, or the perception that such sales could occur, could adversely affect
the trading price of our common stock. Mr. Wamberg held 1,931,680 shares as of
December 31, 2002, representing approximately 10.7% of the outstanding shares of
common stock. Institutional investors (that individually hold in excess of 5% of
our outstanding shares) cumulatively represent 6,851,355 shares or approximately
37.9% of the outstanding shares of common stock. A decision by Mr. Wamberg or
the other stockholders to sell shares of our common stock could adversely affect
the trading price of our common stock.

16

DELAWARE LAW AND OUR CHARTER DOCUMENTS COULD PREVENT AN UNSOLICITED TAKEOVER.

Delaware law, as well as provisions of our certificate of incorporation
and bylaws, could discourage unsolicited proposals to acquire us, even though
such a proposal may be beneficial to stockholders. These provisions include a
board of directors classified into three classes of directors with the directors
of each class having staggered, three-year terms, our board's authority to issue
shares of preferred stock without stockholder approval, and Delaware law
restrictions on many business combinations and prohibitions on removing
directors serving on a staggered board for any reason other than "for cause."

In addition, we have adopted a stockholder rights plan that could
further discourage attempts to acquire control of us. These provisions of our
certificate of incorporation, bylaws and Delaware law could discourage tender
offers or other transactions that might otherwise result in your receiving a
premium over the market price for our common stock.

WE DO NOT PLAN TO PAY DIVIDENDS.

We intend to retain any future earnings to fund growth and do not
anticipate paying any cash dividends in the foreseeable future. See "Dividend
Policy" in Item 5 below.

ITEM 2. PROPERTIES

The following table sets forth information with respect to the
principal facilities used in our operations, all of which are leased.

18

ITEM 3. LEGAL PROCEEDINGS

From time to time, we are involved in various claims and lawsuits
incidental to our business, including claims and lawsuits alleging breaches of
contractual obligations under agreements with our consultants. The following is
a summary of the current material legal proceedings pending against us.

CONSTELLATION ENERGY GROUP, INC. AND BALTIMORE GAS AND ELECTRIC COMPANY,
ET AL. V. CLARK/BARDES, INC. AND NEW YORK LIFE INSURANCE AND ANNUITY
CORPORATION.

On July 25, 2000, Constellation Energy Group, Inc. ("Constellation")
and related entities filed a civil action against us in the U.S. District Court
for the District of Maryland. On September 14, 2001, Constellation amended its
complaint and added New York Life Insurance and Annuity Corporation as a
defendant. Constellation claims that we failed to take proper action in
connection with the administration of an employee benefit life insurance program
under which policies were issued by this insurance company. On February 20,
2003, an agreement was reached for a complete settlement of this litigation.
While the settlement terms are confidential, we regard the outcome as favorable
and believe such terms will not have a material adverse impact on our financial
condition or results of operations.

FRIEDA SHUSTER, ET AL. V. HYDER MIRZA, ET AL. INCLUDING CLARK/BARDES, INC.

On May 30, 2001, we were named as a defendant in a lawsuit filed in the
District Court of LaSalle County, Texas alleging gross negligence in connection
with the death of an employee, when the private aircraft in which he was
traveling on company business crashed. Damages are unspecified. We deny any and
all claims and allegations in this action and intend to vigorously defend this
matter. The matter is covered by our existing insurance.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted during the fourth quarter of the fiscal year covered
by this Form 10-K to a vote of our security holders, through the solicitation of
proxies or otherwise.

19

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock was traded on the Nasdaq National Market under the
symbol CLKB through March 6, 2002. Our common stock began trading on the New
York Stock Exchange under the symbol CBC on March 7, 2002 and was no longer
quoted on the Nasdaq National Market from that date.

The following table sets forth for the periods indicated the high and
low closing prices for our common stock, as reported on the Nasdaq National
Market and the New York Stock Exchange.

HIGH LOW
---- ---

YEAR ENDED DECEMBER 31, 2001:
First Quarter...............................................$12.13 $8.00
Second Quarter.............................................. 24.13 8.50
Third Quarter............................................... 30.51 17.91
Fourth Quarter.............................................. 26.07 19.00
YEAR ENDED DECEMBER 31, 2002:
First Quarter...............................................$28.80 $22.49
Second Quarter.............................................. 30.60 20.73
Third Quarter............................................... 22.04 14.05
Fourth Quarter.............................................. 20.00 15.16
FIRST QUARTER TO MARCH 3, 2003..............................$19.48 $13.03

The closing price of our common stock on March 3, 2003, as reported on the New
York Stock Exchange, was $13.96 per share. As of March 3, 2003, we had
18,071,568 outstanding shares of common stock and approximately 460 stockholders
of record, which does not include shares held in securities position listings.

DIVIDEND POLICY

We intend to retain future earnings to fund growth and do not plan to
pay any cash dividends in the foreseeable future. Under the terms of our credit
agreement with Bank One, as lead agent in a six bank lending group, we cannot
declare or pay dividends or return capital to our stockholders, nor can we
authorize or make any other distribution, payment or delivery of property or
cash to our stockholders, unless the bank group gives its prior written consent.
As approved by our bank group, we can repurchase, as we deem necessary, up to
$5.0 million worth of common stock.

RECENT SALES OF UNREGISTERED SECURITIES

On November 26, 2002, we issued 1,196,888 shares of our common stock as
part of the purchase price for the acquisition of Long, Miller & Associates,
LLC. The issue was exempt from registration under Section 4(2) of the Securities
Act of 1933. The total value of the shares issued was $20,000,000 and
constituted 5.0% of the purchase price paid at closing.

On March 5, 2002, we issued 127,618 and 43,138 shares of common stock
to the previous owners of National Institute for Community Bank and Christensen
& Associates, respectively, for attaining established financial criteria as
outlined in the respective purchase agreements. The issues were exempt from
registration under Section 4(2) of the Securities Act of 1933. The total value
of the shares issued was approximately $4.6 million.

On March 22, 2002, we issued 34,291 shares of common stock to the
previous owners of Rich, Florin/Solutions, Inc. for attaining established
financial performance criteria as outlined in the purchase agreement. The issue
was exempt from registration under Section 4(2) of the Securities Act of 1993.
The total value of the share issued was approximately $891,000.

20

ITEM 6. SELECTED FINANCIAL DATA

(Dollars in thousands except share and per share amounts)

The following historical information should be read in conjunction with
information included elsewhere herein, including the consolidated financial
statements and notes thereto and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations." The results of operations
presented below are not necessarily indicative of the results of operations that
may be achieved in the future.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

(Tables shown in thousands of dollars, except per share amounts)

The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements, the notes thereto and other information appearing
elsewhere in this Form 10-K.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The Securities and Exchange Commission ("SEC") has
defined a company's most critical accounting policies as those that are most
important to the portrayal of its financial condition and the results of
operations, and which require us to make difficult and subjective judgments,
often as a result of the need to make estimates of matters that are inherently
uncertain. Based on this definition, we have identified the following critical
accounting policies and judgments. Although we believe that our estimates and
assumptions are reasonable, they are based upon information available when they
are made. Actual results may differ significantly from these estimates under
different assumptions and conditions.

REVENUE SOURCES AND RECOGNITION

Our operating segments derive their revenue primarily from:

o commissions paid by the insurance companies issuing the
policies underlying our clients' benefit programs;
o program design and administrative service fees paid by our
clients;
o executive compensation and benefit and related consulting
fees; and
o fees for legislative liaison and related advisory services.

23

Our commission revenue is normally recurring, is typically paid annually
and usually extends for a period of ten years or more after the sale.
Commissions are paid by insurance companies and vary by policy and by program
and typically represent a percentage of the premium or the cash surrender value
of the insurance policies underlying the program.

First Year Commission Revenue and Related Fees. First year
commission revenue and related fees are derived from two principal
sources: (a) the commission we earn when the client first
purchases the policies, which revenue is recognized at the time
the application is substantially completed, the client is
contractually committed to purchase the insurance policies and the
premiums are paid, by the client, to the insurance company; and
(b) fees for the services related to the enrollment and initial
administration of the benefit programs and underlying policies.

Our first year commission revenue is frequently subject to
chargeback, which means that insurance companies retain the right
to recover commissions paid in the event policies prematurely
terminate. The chargeback schedules differ by product and usually
apply to first year commission only. A typical chargeback
schedule, based on a percent of first year commission, is as
follows:
Year 1 100%
Years 2 and 3 50%
Year 4 25%
Years 5 and beyond 0%

While the commission revenue is subject to chargeback, our
experience has indicated that less than 1% of revenue recognized
has ever been refunded to insurance companies pursuant to such
chargeback provisions. Given the homogenous nature of such cases
and historical information about chargebacks, we believe we are
able to accurately estimate the revenue earned. We currently
maintain a chargeback allowance, which is monitored on a quarterly
basis for adequacy.

Renewal Commission Revenue and Related Fees. Renewal
commission revenue is the commission we earn on the policies
underlying the benefit programs we have sold in prior years.
Renewal revenue is recognized on the date that the renewal premium
is due or paid by the client to the insurance company depending on
the type of policy.

Consulting fee revenue. Consulting fee revenue consists of
fees of Human Capital Practice, Pearl Meyer and Federal Policy
Group for the services we perform in advising our clients on their
executive compensation programs and related consulting services,
retirement, benefit, actuarial, pension savings plan design and
management, people strategy, compensation surveys, institutional
registered investment advisory services and fees from legislative
and regulatory policy matters. These fees are generally based on a
rate per hour arrangement and are earned when the service is
rendered. Some of our consulting clients pay a retainer at the
beginning of a project. These revenues are recognized ratably over
the term of the engagement. Consulting revenue generated by the
Executive Benefits Practice, Banking Practice and Healthcare Group
are included in the first year revenue line on our consolidated
income statement.

Administrative service fee revenue. Administrative service fee
revenue consists of fees we charge our clients for the
administration of their benefit programs and are earned when
services are rendered. These revenues are included in our renewal
revenue line on our consolidated income statement.

During the fourth quarter of 2002, we completed an analysis of
the services provided and timing thereof under our administrative
services agreements at our Executive Benefits Practice. As a
result of this analysis, we determined that because of changes in
the timing of the services being provided, revenue under these
agreements should have been recognized on the straight-line during
2002. Historically, these fees were recognized 75% in the renewal
month and 25% ratably over the remainder of the annual service
agreement.

As a result, the first three quarters of the year ended
December 31, 2002, have been restated from the amounts previously
reported to recognize administrative service fees on a
straight-line basis.

24

We record revenue on a gross basis when we are the primary obligor in
the arrangement or when we bear the credit risk in the arrangement. We record
revenue on a net basis when another party is the primary obligor in the
arrangement or when another party bears the credit risk.

In accordance with Emerging Issues Task Force ("EITF") Issue No. 01-14,
Income Statement Characterization of Reimbursements Received for "Out-of-Pocket"
Expenses Incurred, reimbursements received for out-of-pocket expenses incurred
are characterized as revenues and are shown as a separate component of total
revenue. Similarly, related reimbursable expenses are also shown separately
within operating expenses. EITF Issue No. 01-14 was effective as of January 1,
2002 and all periods presented have been reclassified to reflect the adoption of
this accounting literature. The net result of the above is an increase in
revenue and operating expense of approximately $5.0 million, $4.8 million and
$2.0 million for the years ended December 31, 2002, 2001, and 2000,
respectively. These reclassifications had no effect on our operating income.

INTANGIBLE ASSETS

We have intangible assets representing the excess of the costs of
acquired businesses over the fair values of the tangible net assets associated
with an acquisition. Intangible assets consist of the net present value of
future cash flows from policies in-force at the acquisition date, non-compete
agreements with the former owners, other identifiable intangibles and goodwill.
Non-compete agreements are amortized over the period of the agreements and other
identifiable intangibles are amortized over their useful lives.

The net present value of in-force revenue is typically amortized
between 20 and 30 years (the expected average policy duration). The
determination of the amortization schedule involves making certain assumptions
related to persistency, expenses, and discount rates that are used in the
calculation of the carrying value of in-force revenue. If any of these
assumptions change or actual experience differs materially from the assumptions
used, it could affect the carrying value of the in-force revenue.

We are required to assess potential impairments of long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
Accounting for Impairment of Long-Lived Assets, if events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.

In assessing the recoverability of goodwill and the net present value
of future cash flows from policies in-force, we must make assumptions regarding
estimated future cash flows and other factors to determine the fair value of the
respective assets. If these estimates and related assumptions change in the
future, we may be required to record impairment charges not previously recorded.

EMPLOYEE COMPENSATION

We account for stock-based compensation to employees using the
intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees. Under APB 25, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of our stock at the date of grant over the amount an employee must pay to
acquire the stock. Common stock options issued to employees to date did not
result in compensation expense because the exercise price of the option equaled
the market price of the underlying stock on the date of grant.

SFAS No. 123, Accounting for Stock-Based Compensation, established
accounting and disclosure requirements using a fair value based method of
accounting for stock based employee compensation plans. We have elected to
remain on the current method of accounting as described above for employees.
However, we account for stock options granted to non-employees under the
provisions of SFAS No. 123.

Employees are eligible for bonuses based upon us achieving certain
pre-determined targets. The bonus expense is accrued ratably over the year based
upon our estimate of meeting these targets. This bonus accrual is reviewed and
adjusted periodically.

25

FINANCIAL STATEMENT OVERVIEW

Our revenue for the year ended December 31, 2002 was $278.6 million
compared to $236.9 for the year ended December 31, 2001, an increase of 17.6%.
Our net income for 2002 (after cumulative effect of change in accounting
principle of $523,000, net of tax, from the adoption of SFAS No. 142) was $17.3
million compared to $16.0 million for the year ended December 31, 2001, an
increase of 8.2% over 2001. Diluted earnings per share for 2002 was $0.99
compared to $1.18 for 2001. The diluted weighted average number of shares
outstanding increased to 17.5 million for the year ended December 31, 2002
compared to 13.6 million for the year ended December 31, 2001.

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Revenue. Total revenue for the year ended December 31, 2002 was $278.6
million compared to $236.9 million for the year ended December 31, 2001. The
Banking Practice experienced strong revenue growth of 26.3% between December 31,
2001 and December 31, 2002 as a result of the closing of numerous cases in the
community banking sector and the acquisition of LongMiller in November 2002. The
increase of approximately $3.0 million of first year commission and fee revenue
and approximately $14.0 million of renewal revenue is attributable to the
acquisition of LongMiller. Revenue growth was also strong in the Healthcare
Group which benefited from increased first year commission and fee revenue.
Revenue was positively impacted by approximately $9.5 million with the February
2002 acquisition of Federal Policy Group, which provides tax and legislative
consulting services. New business revenue includes $3.2 million received
pursuant to an Administrative Services Agreement and Bonus Forfeiture Agreement
with an insurance carrier with which a significant amount of in-force insurance
is in place (see Administrative Services Agreement and Bonus Forfeiture
Agreement below). Our Executive Benefits Practice experienced a decline in
revenue from $94.2 million in 2001 to $85.6 million in 2002 as a result of the
current economic conditions and proposed legislation related to the structure of
deferred compensation plans that has caused clients to delay implementing new
deferred compensation plans. These circumstances may continue in future periods
and adversely affect our ability to generate future revenue in EBP.

Commission expense. Commission and fee expense was $90.0 million, or
32.2% of total revenue for the year ended December 31, 2002, versus $84.0
million, or 35.5% of total revenue for the year ended December 31, 2001. This
reduction in the percentage of commission expense as a percentage of revenue
reflects an increased proportion of revenue from fee-based consulting activity
in 2002 as well as an increase in the percentage of revenue generated from
employee consultants. We expect our recent acquisition of LongMiller to result
in a significantly greater percentage of commission expense as a percentage of
revenue in the future. Fee-based consulting activity accounted for 11.6% of
December 31, 2002 revenue compared to 8.3% of December 31, 2001 revenue.
Included in commission expense is $474,000 of non-cash expense recognized in
2002 from performance-based stock options issued to non-employee producers. Such
expenses may be incurred in the future if certain non-employee producers achieve
specified targets.

General and administrative expense. General and administrative expense
for the year ended December 31, 2002 was $140.6 million or 50.5% of total
revenue compared to $102.9 million or 43.4% of total revenue for the year ended
December 31, 2001. The increase is attributed to the expanded staffing of sales
consultants and support services company-wide and expenses associated with
recent acquisitions. General and administrative expenses also include $13.3
million of general and administrative expense, which includes approximately
$825,000 of severance costs associated with not pursuing the International
Employment Solutions practice, for Human Capital Practice since May 2002. In
addition, general and administrative expense includes $550,000 of severance
costs related to reorganization initiatives in the Healthcare Group that
occurred in second quarter 2002.

Amortization. Amortization expense for the year ended December 31, 2002
was $9.2 million compared to $11.6 million in the prior year period. The
reduction in amortization expense resulted from the January 2002 adoption of
SFAS No. 142, which eliminated the amortization of goodwill, offset by
amortization related to identifiable intangibles through acquisitions in 2002.
For the year ended December 31, 2001, amortization expense included $4.0 million
pre-tax attributed to goodwill amortization. The acquisition of LongMiller is
expected to add approximately $13.0 million of amortization expense in 2003 as a
result of a full year's of amortization of the net present value of in-force
revenue. We acquired approximately $400 million of in-force revenue with our
November 2002 acquisition of LongMiller and the 2002 results include one month
of amortization related to this intangible asset.

26

Other income. During 2002, we received $269,000 rental income from a
tenant. During 2001, we received $191,000 of life insurance proceeds as the
result of the death of one of our employees, and rental income from a tenant of
$256,000.

Interest expense - net. Net interest expense for the year December 31,
2002 was $3.7 million compared to $7.2 million in 2001. In 2001, we recorded
interest expense of approximately $2.0 million as a result of the interest rate
swap settlements associated with the pay off of our outstanding bank debt with
the proceeds from our secondary equity offering. As a result, we had minimal
debt outstanding during the first half of 2002. With the November 2002
acquisition of LongMiller, we borrowed approximately $87.5 million on our line
of credit and issued $305 million of non-recourse insurance revenue asset-backed
notes. For 2003, interest expense is expected to increase significantly with the
incurrence of this additional indebtedness.

Income taxes. Income taxes for the year ended December 31, 2002 were
$12.4 million at an effective tax rate of 41.0% compared to $8.7 million at an
effective tax rate of 35.3% for the year ended December 31, 2001. The 2001
effective tax rate was affected by the filing of an amended tax return during
the third quarter 2001 which reduced the overall tax rate.

Net income. Net income, after an impairment charge of $523,000 net of
taxes from the adoption of SFAS No. 142, for the year ended December 31, 2002
was $17.3 million, or $0.99 per diluted common share versus net income of $16.0
million or $1.18 per diluted share for the same period last year. The diluted
weighted average number of shares outstanding increased to 17.5 million shares
for the year ended December 31, 2002 from 13.6 million shares for the year ended
December 31, 2001.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

Revenue. For the year ended December 31, 2001, our total revenue was
$236.9 million, an increase of 58.4% over $149.6 million for the year ended
December 31, 2000. This increase was attributable primarily to a full year's
results for Compensation Resource Group (full twelve months compared to four
months in 2000) and Pearl Meyer (full twelve months compared to six months in
2000), and the addition of Rich Florin/Solutions Inc. (f.d.b.a. Executive
Alliance) in March 2001. In addition, we had strong sales results in the
corporate and community banking markets in 2001.

Commission expense. Commission expense increased 65.3% from $50.8
million in 2000 to $84.0 million in 2001, and was negatively impacted by a
larger percentage of sales in 2001 that were generated by independent
consultants who typically are paid higher commissions. However, this was
partially offset by the larger percentage of total sales in 2001 generated by
Pearl Meyer and Human Capital Practice which has no commission expense.

General and administrative expense. General and administrative expense
was $102.9 million or 43.4% of revenue in 2001 compared to $68.2 million or
45.6% of revenue in 2000. The increase can be primarily attributed to the full
year results of Compensation Resource Group, Pearl Meyer and the five
acquisitions completed in 2001. General and administrative expense as a
percentage of revenue has declined from 45.6% to 43.4% due to integration
activities and spreading of fixed costs over a larger revenue base.

During 2001, general and administrative expense for the corporate
headquarters was $11.7 million as compared to $9.1 million in 2000. This
increase over prior year can be attributed primarily to expenses related to the
start up of the reinsurance business and larger bonuses in 2001 as a result of
our performance.

Amortization. Amortization was $11.6 million in 2001 or 62.0% higher
than $7.1 million incurred in 2000. This is a result of a full year's
amortization cost for Compensation Resource Group and Pearl Meyer. Approximately
$4.0 million of the amortization in 2001 related to goodwill.

Interest expense - net. Net interest expense excluding the interest
expense for the settlement of an interest rate swap associated with the pay off
of our outstanding bank debt with the proceeds from our secondary offering was
$5.2 million in 2001 compared to $4.7 million in the prior year. We borrowed
$20.0 million during the year to fund our acquisitions.

27

Income taxes. Income taxes in 2001 were $8.7 million which resulted in
an effective tax rate of 35.3% compared with $5.8 million or an effective tax
rate of 33.7% in 2000. We received a refund for prior year's taxes of
approximately $1.7 million during the year which reduced our rate for the 2001
tax year. In 2000, we received a state tax refund of $500,000 and non-taxable
life insurance proceeds of $1.0 million which lowered our effective tax rate in
that year.

Net income. Net income of $16.0 million in 2001 represented a $4.6
million, or a 39.9% increase over 2000. On a diluted per share basis, earnings
were $1.18, an increase of 12.4% over 2000.

SIGNIFICANT ACQUISITIONS

On November 26, 2002, we acquired Long, Miller & Associates, LLC
("LongMiller"). LongMiller, located in Greensboro, North Carolina, specializes
in bank-owned life insurance portfolio services. For the nine months ended
September 30, 2002 and the year ended December 31, 2001, LongMiller had revenues
of $47.1 million and $65.8 million, respectively, and operating income of $31.1
million and $41.8 million, respectively. This acquisition enhances our
capabilities by coupling LongMiller's product offerings and personnel with our
current Banking Practice's extensive distribution channel. We financed this
acquisition, with a purchase price of approximately $403.5 million and
transaction costs of approximately $736,000, through the issuance of $305
million of non-recourse debt secured by commission and related payments from
in-force policies sold by LongMiller, a draw-down of approximately $87.5 million
on our existing credit facility and the issuance of $20 million of our common
stock at $16.71 per share. The results of LongMiller are included in our Banking
Practice results from date of acquisition.

The unaudited pro forma information below presents our results as if
the acquisition of LongMiller had occurred on January 1, 2001.

YEAR ENDED DECEMBER 31,
--------------------------
2002 2001
---------- -----------
Pro Forma
Revenue....................... $329,435 $302,715
Net income.................... 17,534 21,095
Diluted earnings per share.... 1.00 1.43

More detailed financial information relating to LongMiller and pro
forma financial information relating to our results if the acquisition had been
completed on January 1, 2001, are contained in our Current Report on Form 8-K
filed with the SEC on January 29, 2003.

On February 25, 2002, we acquired the Federal Policy Group of
PricewaterhouseCoopers LLP. Based in Washington, D.C., Federal Policy Group is a
consulting practice representing Fortune 500 companies, trade associations and
other businesses before the government on legislative and regulatory policy
matters. This acquisition allows us to continue to expand our service offerings
to the corporate market. The purchase price was $11.0 million before acquisition
costs, consisting of a cash payment at closing of $5.0 million and $6.0 million
of contingent payments over the next four years based upon attainment of
established performance criteria. If earned, the contingent payments will
consist of 70% cash and 30% our common stock. As of September 30, 2002, Federal
Policy Group attained its 2002 performance criteria. Accordingly, $1.5 million
has been included in accrued liabilities and goodwill on the December 31, 2002
balance sheet. The results of the Federal Policy Group are included in the
consolidated results from date of acquisition. With the acquisition of Federal
Policy Group, it became our sixth operating segment.

Our evaluation focus is on the quality of the management and future
earnings and growth potential of the target company. In several of our
acquisitions, we also acquire the financial value embedded in a book of
recurring renewal business that is expected to be realized for many years after
the acquisition takes place. Up until now, our future renewal revenue stream has
been the source of collateral for our acquisition line of credit. As we acquire
more businesses that do not have this attribute, this may limit our future
borrowing availability. We typically structure a majority of the purchase price
in cash. We acquire little in the way of tangible assets, thus creating a
substantial amount of intangible assets on our balance sheet. The companies we
acquire are typically privately owned and structured as subchapter S
corporations with the income taxed directly to the shareholders and the
acquisitions are usually effected through a purchase of assets.

28

From time to time we are involved in negotiations relating to the
acquisition of companies in our industry or related industries. Some of these
negotiations could involve companies whose acquisition would be highly material
to our results of operations and financial condition. In addition, we could
incur substantial costs in connection with negotiating such transactions, even
if the transactions are not completed.

FORMATION OF HUMAN CAPITAL PRACTICE

On May 16, 2002, we announced the formation of our Human Capital
Practice. The new practice includes our existing Rewards and Performance Group
and ten former partners ("partners") and 74 support staff from the Human Capital
Practice of Arthur Andersen LLP ("Andersen"). Prior to hiring, the partners and
Andersen mutually terminated their partnership interest and association with
each other free of all restrictive provisions under the Andersen Partnership
Agreement and under any agreements relating to the employment with Andersen. We
believe any successor liability is mitigated by hiring each new employee in a
conventional employer/employee relationship.

The former Andersen partners received full recourse and interest
bearing loans in the amount of $8.4 million. Of these loans, $1.2 million have a
term of two years and the remaining $7.2 million have a term of six and one-half
years. As long as the partner is employed on the hiring anniversary date for the
two year loans and each December 31st for the six and one-half year loans, a pro
rata portion of the loans will be forgiven at each date. These loans are
classified as other assets on the December 31, 2002 balance sheet and are being
amortized into the Human Capital Practice financial results as general and
administrative expense. In October 2002, we agreed with one of the partners to
terminate our relationship. In December 2002, we recorded a charge of
approximately $575,000 related to the forgiveness of part of the partner's loan.
The remaining loan amount of approximately $834,000 will be received over the
next six years. Assuming all remaining partners continue to be employed by us
throughout the terms of the loans, the amounts amortized into operating expense
for the following fiscal years would be:

2003 $1,480
2004 1,134
2005 887
2006 887
2007 887
2008 and thereafter 887

In addition, support staff received a total of $602,000 in sign-on
bonuses at the time of their employment. The support staff will retain the bonus
payments if they remain employed through May 16, 2003. If they voluntarily leave
before this date, they must repay a pro-rata portion of their bonus. The sign-on
bonuses are amortized into the Human Capital Practice results over the first
twelve months of employment. As of December 31, 2002, approximately $201,000 is
included in other assets.

In connection with the formation of the Human Capital Practice, the
asset purchase agreement for Rewards and Performance Group (formerly Rich,
Florin/Solutions, Inc.) was amended. One-half of the original contingent
consideration (approximately $3.8 million) will be paid in March 2003 through
March 2005 regardless of performance of the practice and the other half is
contingent upon the results of the Human Capital Practice. Accordingly, $3.8
million has been accrued with a corresponding increase in goodwill.

ADMINISTRATIVE SERVICES AGREEMENT AND BONUS FORFEITURE AGREEMENT

On September 25, 2002, we entered into an Administrative Services
Agreement and Bonus Forfeiture Agreement with an affiliate of AUSA Holding,
Inc., one of our principal stockholders and insurance carrier. During 2002, we
received $2.5 million for services rendered prior to and through September 30,
2002 and recognized a total of $3.2 million in 2002, pursuant to this

29

agreement. Under the terms of this agreement, we expect to continue to receive
approximately $2.5 million annually from the carrier for a period of 30 years,
depending upon certain conditions. Of this annual amount $2.0 million is
included in the cash flows securitizing the asset-backed notes issued to finance
the acquisition of LongMiller, and we will not have access to this cash for
general corporate purposes until the securitized notes are fully paid. This
revenue, net of amounts provided for chargebacks, will be recognized on a
monthly basis beginning in October 2002. The amounts received are subject to
chargeback (reimbursement of a portion of amounts received) if any policies
under this agreement are surrendered or exchanged. Any chargeback amounts would
be deducted from the next scheduled payment.

RECENT DEVELOPMENTS

Tax and legislative initiatives

In recent years, the Internal Revenue Service ("IRS") has undertaken a
major enforcement initiative to disallow the interest deductions on certain
leveraged business-owned life insurance programs sold during or prior to 1995.
The IRS has prevailed on the cases it has litigated to-date related to this
initiative and has recently made a temporary public settlement offer to address
ongoing cases. While we stopped selling leveraged business-owned life insurance
programs after 1995 and we do not expect any material adverse impact on our
revenue from this enforcement initiative, it is impossible to determine the
impact of this initiative on a client's decision to continue or surrender an
existing leveraged business-owned life insurance program.

On July 30, 2002, President Bush signed the Sarbanes-Oxley Act of 2002
into law. This law generally prohibits any personal loans from certain SEC
regulated companies to current directors or executive officers of such
companies. While it is not entirely clear, there is a possibility that company
premium payments made on or after July 30, 2002 on collateral-assignment split
dollar policies, on current directors or executive officers of those
SEC-regulated companies, could be covered by the loan prohibition. Without
favorable clarification of this law, revenue from collateral assignment split
dollar arrangements could be reduced as a result of this law.

We have certain split dollar policies with four of our officers. These
policies are expected to be terminated in 2003.

Change in insurable interest laws

There have been several recent proposals in various states (e.g.,
Georgia, Texas, Washington, and California) to change the insurable interest and
other state laws governing the ability of an employer to purchase or hold life
insurance on the lives of employees. Significant segments of the life insurance
industry are engaged in an ongoing, intensive effort to prevent the enactment of
state law changes that would have an adverse impact on business-owned life
insurance. If one or more states were to adopt proposals limiting the ability of
employers to purchase or hold life insurance on the lives of employees, the
market for these policies would be reduced and a number of existing policies
could be surrendered or exchanged, with a resulting reduction in our revenues
from these arrangements.

Interest rate swaps

On January 7, 2003, we entered into two interest rate swaps with a
total notional value of $50 million to hedge $50 million of term debt. The terms
of these interest rate swaps are as follows:

RELATED PARTY TRANSACTIONS

We lease 16,266 square feet of office space owned by our Chairman and
Chief Executive Officer, W. Thomas Wamberg, for approximately $400,000, under a
lease expiring on February 21, 2009.

30

Wamberg Financial Corporation, one of our wholly-owned subsidiaries,
leases hangar space for the corporate aircraft from WTW Investment, an entity
controlled by Mr. Wamberg for an annual rent of approximately $45,000.

During 2003, we paid Randy Pohlman, a member of our Board of Directors,
$40,000 as a referral fee. This amount was accrued in our financial statements
as of December 31, 2002.

In 2001, Mr. Wamberg and Richard Chapman, Executive Vice-President of
Clark/Bardes, Inc. and President of the Banking Practice, have collectively
invested $1 million in a company of which George Dalton, a member of our Board
of Directors, is founder and majority shareholder.

Mr. Wamberg's two step-sons, Jason French and Chuck French, are
employed by us. Jason is a Director of Corporate Marketing and Chuck is a
consultant with the Executive Benefits Practice. Neither of them report directly
to Mr. Wamberg.

William Archer, a member of our Board of Directors since February 2001,
is a senior policy advisor at PricewaterhouseCoopers LLP. We previously engaged
PricewaterhouseCoopers LLP to perform various consulting related to the
installation of our wide area network and a knowledge management system at one
of our compensation consulting practices. In addition, PricewaterhouseCoopers
was retained by one of our practices to perform certain legislative work. During
2002 and 2001, we paid approximately $380,000 and $726,000, respectively, to
PricewaterhouseCoopers LLP for these services.

On February 25, 2002, we acquired the Federal Policy Group of
PricewaterhouseCoopers LLP. The purchase price was $11.0 million before
acquisition costs of approximately $28,000, consisting of a cash payment at
closing of $5.0 million and $6.0 million of contingent payments over the next
four years based upon attainment of established performance criteria.

Robert Long became a member of our Board of Directors in January 2003
as a result of the LongMiller acquisition. He received a substantial amount of
the proceeds including notes from our November 2002 purchase of LongMiller.

On September 25, 2002, we entered into an Administrative Services
Agreement and Bonus Forfeiture Agreement with an affiliate of AUSA Holding,
Inc., one of our principal stockholders. During 2002, we received $2.5 million
for services rendered prior to and through September 30, 2002 and recognized a
total of $3.2 million in 2002, pursuant to this agreement. Under the terms of
this agreement, we expect to continue to receive approximately $2.5 million
annually from the carrier for a period of 30 years, depending upon certain
conditions. Of this annual amount, $2.0 million is included in the cash flows
securitizing the asset-backed notes issued to finance the acquisition of
LongMiller, and we will not have access to this cash for general corporate
purposes until the securitization notes are fully paid. This revenue, net of
amounts provided for chargebacks, are being recognized on a monthly basis
beginning in October 2002. The amounts received are subject to chargeback
(reimbursement of a portion of amounts received) if any policies under this
agreement are surrendered or exchanged. Any chargeback amounts would be deducted
from the next scheduled payment.

Fox-Pitt Kelton, co-manager of our November 2001 secondary offering,
owns Conning Capital Partners. Steve Piaker, a member of our Board of Directors,
is a partner with Conning Capital Partners.

QUARTERLY RESULTS

Our operating results can fluctuate considerably, especially when
compared on a consecutive quarterly basis. We can experience large increases in
revenue in the first and fourth quarter and operating results may be affected by
a number of other factors, including new or enhanced programs and services by us
or our competitors and client acceptance or rejection of these programs, program
development expenses, competitive, legislative and regulatory changes and
general economic conditions. Many of these factors are beyond our control. Sales
cycles often take between twelve to eighteen months, with a significant amount
of revenue that can come from a few large cases. Our revenue is thus difficult
to forecast, and we believe that comparing our consecutive quarterly results of
operations is not necessarily meaningful, nor does it indicate what results we
will achieve for any subsequent period.

During the fourth quarter of 2002, we completed an analysis of the
services provided and timing thereof under our administrative services
agreements at our Executive Benefits Practice. As a result of this analysis, we
determined that because

31

of changes in the timing of the services being provided, revenue under these
agreements should have been recognized on the straight-line during 2002.
Historically, these fees were recognized 75% in the renewal month and 25%
ratably over the remainder of the annual service agreement. In addition, we are
also restating to reflect a timing difference whereby CBFS was under-recognizing
revenue in the period earned. This restatement for CBFS had no impact on prior
years reported or on 2002 results for the full year.

As a result, the first three quarters of the year ended December 31,
2002, have been restated from the amounts previously reported to recognize
administrative service fees on a straight-line basis and record CBFS revenue in
the appropriate period.

The following table presents a summary of key revenue and expense
statistics for the most recent eight calendar quarters. This information is not
necessarily indicative of results for any full year or for any subsequent
period.

Our revenue is difficult to forecast, and we believe that comparing our
consecutive quarterly results of operations is not necessarily meaningful, nor
does it indicate what results we will achieve for any subsequent period. Our
quarterly results can vary due to the timing of acquisitions and/or the closing
of large cases, which may not repeat in subsequent quarters. As a result, past
operating results are not reliable indicators of future performance.

SEGMENT RESULTS

The following analysis depicts the results of each of our operating
segments on a stand-alone basis. No allocation of corporate overhead or interest
has been made.

Executive Benefits Practice

Executive Benefits Practice ("EBP") revenue decreased from December 31,
2001 as a result of current economic and legislative conditions which caused
clients to delay implementation of new deferred compensation plans. We may
continue to experience revenue declines in future periods due to the economy and
legislation.

The acquisitions of Comiskey Kaufman, Inc. (acquired April 2002), Lyons
Compensation and Benefits, LLC (acquired August 2001) and Coates Kenney
(acquired December 2001) contributed approximately $7.5 million to the year
ended December 31, 2002 revenue and $1.7 million of operating income. Renewal
revenue increased due to higher than anticipated premium payments on in-force
business and additional renewals from 2001 new business. General and
administrative expense increased for the year ended December 31, 2002 over 2001
due to the acquisitions mentioned above and additional hirings. Amortization
expense decreased in 2002 when compared to 2001 primarily due to the elimination
of goodwill amortization as of January 1, 2002. Goodwill amortization for EBP in
2001 was approximately $759,000.

Revenue was $94.2 million for 2001 compared to $47.2 million for 2000.
This increase of $47.0 million is primarily attributed to a full year of results
in 2001 for Compensation Resource Group (full twelve months in 2001 versus four
months in 2000) and strong first quarter 2001 sales. Commission expense as a
percentage of revenue increased to 50.6% in 2001 from 43.3% in 2000 due to more
sales being generated by senior consultants who are generally paid a higher
commission expense. General and administrative expenses increased 83.1% over
2000 primarily due to a full year of expenses in 2001 for Compensation Resource
Group. Operating income as a percentage of revenue declined to 12.2% in 2001
from 18.9% in 2000 as a result of the higher commission expense mentioned above
and a full year of amortization expense of the goodwill and in-force revenue
from the acquisition of Compensation Resource Group.

34

Banking Practice

Total first year commission revenue increased 15.0% to $64.2 million
and total revenue increased 26.3% to $116.0 million for the year ended December
31, 2002 compared to the prior year. These increases reflect significant sales
growth in the community bank market, and include only limited contribution from
the large bank market, which has been more adversely affected by the economy.
Approximately $14 million of the increase to renewal revenue is attributable to
the acquisition of LongMiller which was completed November 26, 2002. Commission
expense for the year ended December 31, 2002 was $45.3 million, or 39.1% of
revenue, compared to $33.4 million or 36.3% of revenue in the same period in
2001. Commission expense as a percentage of revenue increased due to the mix of
business between independent and employee consultants. General and
administrative expenses for the year ended December 31, 2002 were $30.8 million,
or 26.6% of revenue, compared to $25.5 million or 27.7% of revenue for the
comparable period in 2001, due to the acquisitions of Hilgenberg and LongMiller,
and investments in staffing of sales consultants and support staff to service
increased sales volumes.

Revenue increased 28.2% in 2001 compared to 2000 primarily due to
strong first year sales in the community banking sector. Reduction in the
commission expense as percentage of revenue from 38.3% in 2000 to 36.3% in 2001
relates to more sales being generated by employee consultants who have a lower
commission structure than independent consultants. General and administrative
expense as a percentage of revenue was 27.7% in 2001 and 31.1% in 2000. This has
improved as a result of consolidation of the majority of the banking business in
Minneapolis, thereby centralizing several administrative functions.

35

Healthcare Group

Total revenue increased 37.7% for the year ended December 31, 2002.
Revenue continues to be favorably impacted by the acquisition of Management
Science Associates ("MSA") as it was included for the full year 2002 compared to
six months for 2001 and continued focus on marketing efforts of the managing
directors. Consulting fees included in the first year revenue line for the
Healthcare Group also increased considerably during the period. Revenue from
increased fees for providing recordkeeping services (included in renewal
commission and related fees) contributed $632,000 to revenue for the year ended
December 31, 2002. Reimbursable expenses revenue increased from the year ended
December 31, 2001 as MSA is included for the entire year of 2002 compared to six
months for 2001. Commission expense as a percent of revenue decreased to 10.7%
of revenue for the year ended December 31, 2002 as compared to 10.9% of revenue
in the year ended December 31, 2001, reflecting the increase in administration
and recordkeeping fees, in which no commissions are paid to consultants. General
and administrative expenses increased 15.1% over 2001 primarily due to a full
year of expenses in 2002 for MSA. Severance expense of approximately $550,000
was incurred during the year associated with the downsizing of existing staff
levels of the Healthcare Group. Operating income for the year ended December 31,
2002 was $4.8 million, the highest in any period since acquiring the Healthcare
Group, which is a result of the factors discussed above.

The Healthcare Group acquired Partners First in March 2001 and MSA in
July 2001. MSA contributed $4.1 million of revenue and $1.2 million of operating
income to the consolidated results of the Healthcare Group in 2001.

36

Human Capital Practice

In May 2002, the Human Capital Practice was formed by combining our
existing Rewards and Performance Group with the addition of 10 partners and 74
employees from Andersen's Human Capital Practice. The year ended December 31,
2002 includes $13.3 million of operating expenses related to the costs of
additional personnel, space and administrative costs and approximately $825,000
of severance costs associated with not pursuing the International Employment
Solutions practice. The Human Capital Practice results reflect difficulties
related to the start-up of a new consulting practice in the current challenging
economic climate.

The results prior to May 16, 2002 only included the operating results
of our Rewards and Performance Group. The former Rewards and Performance Group
has a significant concentration of information technology clients and has been
adversely affected by weakness in this sector of the economy.

Pearl Meyer & Partners

Total consulting revenue increased 3.8% to $13.1 million for the year
ended December 31, 2002 compared to $12.6 million for the year ended December
30, 2001. General and administrative expense increased to $9.6 million for the
year ended December 31, 2002 from $8.7 million for the year ended December 31,
2001 due to additional depreciation for new information systems, increased
compensation costs, and a higher headcount than in 2001. Amortization expense
for the year ended December 31, 2002 decreased compared to the year ended
December 31, 2001 due to the elimination of goodwill amortization as of January
1, 2002. Operating income of $1.9 million for the year ended December 31, 2002
decreased compared to the adjusted $2.3 million (before amortization) for the
year ended December 31, 2001 due to the slow economy and the difficult
consulting environment. However, the practice is beginning to experience more
sales activity as a result of engagements in its areas of expertise of corporate
governance and executive compensation.

Although other segments offer compensation consulting in connection
with their benefit plan activities, the June 2000 acquisition of Pearl Meyer &
Partners represented our major initiative into this vital and logical extension
of our business. The performance of compensation consulting was negatively
impacted by the events of September 11, 2001; however, quarterly revenue
continued to increase throughout 2002.

37

Federal Policy Group

Federal Policy Group was acquired on February 25, 2002. Federal Policy
Group is a consulting practice representing Fortune 500 companies, trade
associations, and other businesses before Congress, the Treasury Department, and
other federal agencies on legislative and regulatory policy matters. Revenue for
the year ended December 31, 2002 was $9.5 million with operating income of $4.1
million or 43.0% of revenue. Federal Policy Group continues to experience strong
demand for its services as a result of increased legislative activity.

Results Attributable to Acquisitions

As an active acquirer, our operating results are significantly
influenced by the contributions of our acquired businesses. For reporting
purposes, we consider the operating results from any business not appearing in
four complete quarters as being from acquisitions. After that, they become part
of existing business. Non-material acquisitions are not included in the
acquisition column. An analysis of our operating results, separating
acquisitions from existing business is as follows:

38

In 2002, approximately 9.5% of gross revenue and 46.3% of operating
income were from significant acquisitions (identified parenthetically above)
while 3.8% of gross revenue and 8.5% of operating income were from acquisitions
in 2001. We do not attribute a great deal of significance to these statistics
because an acquisition's contribution to operating performance in any given
period is considerably dependent on the timing of the transaction and whether it
is considered an acquisition for definition purposes. In addition, the
statistics only breakout acquisitions that are considered material to our
financial results. Finally, the resources of our existing businesses that are
dedicated to our acquisition program could have had an impact on the performance
of the existing business had the acquisitions not been made.

LIQUIDITY AND CAPITAL RESOURCES

Selected Measures of Liquidity and Capital Resources.

39

In the acquisition of LongMiller, we incurred approximately $392.5
million in additional debt. Of this amount, $305 million represents non-recourse
debt ("asset-backed notes") incurred by a wholly-owned, special purpose
subsidiary and secured by certain renewal commissions and related payments
associated with in-force policies previously sold by LongMiller. The remaining
$87.5 million was drawn under our revolving credit facility.

In addition to our tangible balance sheet assets and liabilities, we
have an on-going non-securitized renewal revenue stream, estimated to be $738.1
million over the next ten years. This on-going renewal revenue stream reflects
current conditions and is not necessarily indicative of the revenue that may
actually be achieved in the future and we cannot assure you that commissions
under these policies will be received. See "Estimated Future Gross Renewal
Revenue" below.

As a service organization with historically strong operating cash flow
and a revolving credit facility, we believe we have little need to maintain
substantial cash balances. We use net cash from operating activities primarily
to fund capital expenditures, small acquisitions and service existing debt. We
expect large cash outlays and future acquisitions will be financed primarily
through externally available funds. However, we can offer no assurance such
funds will be available and, if so, on terms acceptable to us.

Cash Flows from Operating Activities

Our cash flow from operating activities for the twelve months ended
December 31, 2002, 2001, and 2000 were as follows:

Cash provided by operating activities for the twelve months of 2002
reflects $8.4 million paid for sign-on loans to the former Andersen partners who
joined us from the Human Capital Practice and also reflects the $13.3 million of
related general and administrative expense from May 16, 2002, offset by $3.8
million of revenues as a result of the continued development of the practice.
The non-cash expenses mentioned above include depreciation of equipment and
leasehold improvements, amortization of intangibles, impairment charge for
adoption of SFAS No. 142, and charge for performance-based stock options issued
to non-employee producers.

Estimated Future Gross Renewal Revenue

The following table represents the estimated gross renewal revenue
associated with our in-force business-owned life insurance policies as of
December 31, 2002. The projected gross revenue is not adjusted for mortality,
lapse or other factors that may impair realization. We cannot assure you that
commissions under these policies will be received. These projected gross
revenues are based on the beliefs and assumptions of management and are not
necessarily indicative of the revenue that may actually be achieved in the
future.

40

The 10-year in-force revenues net of commission expense are $516.9
million for the year ended December 31, 2002 as compared to $416.7 at December
31, 2001.

The following table represents the estimated gross renewal revenue
associated with our securitized in-force bank-owned life insurance policies as
of December 31, 2002. These revenue streams are restricted for the specific
purpose of paying off our asset-backed notes which were issued in connection
with the acquisition of LongMiller in November 2002.

The 10-year in-force revenue net of commission expense are $395.5
million for the year ended December 31, 2002.

41

Cash used in Investing Activities

During the year ended December 31, 2002, acquisitions accounted for
$363.2 million used in investing activities and $7.7 million was used for the
purchase of equipment.

Cash spending for 2002 acquisitions included:

Federal Policy Group................................. $5.1
Comiskey Kaufman..................................... 4.2
Hilgenberg........................................... 0.8
LongMiller........................................... 346.8
NICB earnout......................................... 1.1
Rewards and Performance earnout...................... 1.4
The Wamberg Organization earnout..................... 3.5

Other earnouts....................................... 0.3
------
$363.2
======

A substantial portion of the purchase price used to fund the
acquisitions has historically been paid in cash. This is primarily due to our
desire to avoid diluting our existing shareholders. We expect acquisitions to
continue and be financed primarily from available credit lines and possible
additional equity. However, we can offer no assurances such will be the case.

Cash Flows from Financing Activities

In order to finance the acquisition of LongMiller, we entered into a
$305 million gross securitization of a majority of the in-force revenues of
LongMiller. The securitization is broken into four tranches, each rated by
Standard & Poors. The tranches consist of the A-1 and A-2 class totaling
approximately $167 million and each rated "AAA", the B-class tranch of $108
million rated "A" and the C-class tranch of $30 million rated "BBB". The
weighed average interest cost over the 20-year life of the asset-backed notes is
approximately seven percent. The securitized net in-force revenues, which are
approximately $40.6 million in 2003, are used to pay interest and principal to
the bondholders. Assuming the securitized notes amortize as expected, the
securitization will provide residual cash flow to us of approximately five
percent of the securitized in-force revenue in the initial years, and our total
residual interest would equal approximately 28 percent of the total securitized
in-force revenue over the expected life of the asset-backed notes. Such residual
interest could be substantially less if the notes do not amortize as expected.
The securitization is treated as debt, is included in the Banking Practice
segment, and is non-recourse to Clark/Bardes, Inc.

As of December 31, 2002, there was restricted cash of approximately
$14.1 million which will be used to pay down the asset-backed notes issued to
finance the acquisition of LongMiller. This cash is not available for general
corporate purposes, but is solely to service securitization indebtedness
incurred to finance the acquisition of LongMiller.

In May 2002, we amended our December 28, 1999 Credit Agreement to
increase the amount available under the credit facility to $125.0 million. We
converted $50 million of the year-end amount under the revolving credit facility
to term debt at December 31, 2002. The term debt will be paid quarterly over
five years under the term facility agreement. We had $18.0 million available
under our credit lines at December 31, 2002.

The restrictive covenants under the new loan agreement provide for the
maintenance of a minimum ratio of fixed charges, a maximum allowable leverage
ratio, a minimum amount of net worth (stockholders' equity), and a maximum ratio
of debt to capitalization. We were in compliance with all our restrictive
covenants as of December 31, 2002. Our restrictive covenants may limit our
borrowing ability under our credit line.

We believe that our cash flow from operating activities will continue
to provide sufficient funds to service our debt obligations. However, as our
business grows, our working capital and capital expenditure requirements will
also continue to increase. There can be no assurance that the net cash flow from
operations will be sufficient to meet our anticipated cash flow requirements or
that we will not require additional debt or equity financing in the future. We
may continue to issue stock to finance future acquisitions.

42

The following table provides information about our debt obligations.
The table presents principal cash flows and related interest rates by expected
maturity dates totaling $418.1 million.

EXPECTED MATURITY DATE
----------------------
2008 AND
--------
2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------

LIABILITIES
Long term debt
Note to former shareholder $1,154 $1,274 $1,407 $1,553 $691 $- $6,079 $6,708
Average interest rate........ 10.0% 10.0% 10.0% 10.0% 10.0%

Term debt 10,000 10,000 10,000 10,000 10,000 - 50,000 50,000
Average interest rate(1)(2).. 3.43% 3.43% 3.43% 3.43% 3.43%

Revolver...................... - 11,396 11,396 11,396 11,396 11,396 56,980 56,980
Average interest rate(3)..... - 3.83% 3.83% 3.83% 3.83% 3.83%

Asset-backed notes............ 11,521 13,183 11,831 12,188 12,367 243,910 305,000 $305,000
Average interest rate........ 6.2% 6.2% 6.2% 6.2% 6.2% 6.9%

(1) This rate is three-month LIBOR plus our spread of 200 basis
points as of December 31, 2002. Our spread may change depending
on our financial leverage. See Note 12 of the consolidated
financial statements in Item 8 for further information.
(2) See explanation in recent development section regarding
interest rate swaps.
(3) This average interest rate of borrowings of prime and LIBOR at
December 31, 2002.

The interest rate on the outstanding term debt and revolver is variable
based on current prime or LIBOR rates. The asset-backed notes were issued in
November 2002; therefore the carrying value does not differ significantly from
its fair value.

Below is a summary of our contractual cash obligations and other
commitments and contingencies:

2008 AND
--------
2003 2004 2005 2006 2007 THEREAFTER TOTAL
---- ---- ---- ---- ---- ---------- -----

Debt................ $22,675 $35,853 $34,634 $35,137 $34,454 $255,306 $418,059
Operating leases.... 10,743 10,622 10,481 9,997 9,581 25,809 77,233
Contingent
consideration....... 6,100 6,100 6,000 2,600 - - 20,800
------- ------- ------- ------- ------- -------- --------
Total.......... $39,518 $52,575 $51,115 $47,734 $44,035 $281,115 $516,092
======= ======= ======= ======= ======= ======== ========

INFLATION

Inflation has not had a material effect on our results of operations.
Certain of our expenses, such as compensation, benefits and capital equipment
costs, are subject to normal inflationary pressures. However, the majority of
our service and administrative agreements with clients, which generate fee
income, have a cost of living adjustment tied to the consumer price index.

RECENT ACCOUNTING PRONOUNCEMENTS

Business Combinations and Goodwill

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 requires that the purchase method of accounting be used for all business
combinations and also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets arising from business
combinations completed after June 30, 2001. SFAS No. 142 eliminates the
amortization of goodwill and intangible assets with indefinite useful lives and
requires that these assets be reviewed for impairment at least annually.
Intangible assets with determinable lives will continue to be amortized over
their estimated useful lives.

We adopted SFAS No. 142 in the first quarter of 2002. We tested
goodwill for impairment using the two-step process prescribed in SFAS No. 142.
The first step is a determination of potential impairment, while the second step
measures the amount of the impairment, if any. We performed the required
impairment tests of goodwill as of January 1, 2002 in the first quarter of 2002.
An after-tax impairment charge of $523,000 ($892,000 before tax) resulting from
these impairment tests is reflected as the cumulative

43

effect of a change in accounting principle in the first quarter of 2002. We
perform our annual goodwill impairment analysis in the fourth quarter of each
year. No additional impairment was recorded in 2002.

On January 1, 2002, we adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supercedes SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of and the accounting and reporting requirements of
Accounting Principles Board ("APB") Opinion No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions for
the disposal of a segment of a business. SFAS No. 144 removes goodwill from its
scope and it establishes a primary asset approach to determine the cash flow
estimation period for determining potential impairment of a group of assets. The
adoption of this statement did not have a material impact on our consolidated
financial statements.

Emerging Issues Task Force Issue No. 01-14, Income Statement Characterization of
Reimbursements Received for "Out-of-Pocket" Expenses Incurred

In accordance with Emerging Issue Task Force ("EITF") Issue No. 01-14,
Income Statement Characterization of Reimbursements Received for "Out-of-Pocket"
Expenses Incurred, reimbursements received for out-of-pocket expenses incurred
are characterized as revenues and are shown as a separate component of total
revenue. Similarly, related reimbursable expenses are also shown separately
within operating expenses. EITF Issue No. 01-14 was effective as of January 1,
2002 and all periods presented have been reclassified to reflect the adoption of
this accounting pronouncement. The net result of the above is an increase in
revenue and operating expense of $5.0 million, $4.8 million and $2.0 million for
the years ended December 31, 2002, 2001, and 2000, respectively. These
reclassifications had no effect on our operating income.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At December 31, 2002, we had total outstanding indebtedness of $418.1
million, or approximately 120.2% of total market capitalization. Of our
outstanding debt, $6.1 million was subject to fixed rates of 10.0% at December
31, 2002. Of our outstanding debt, $50.0 million was converted to term debt and
is subject to a variable rate based on LIBOR plus a spread (3.43% at December
31, 2002). Outstanding debt on our credit revolver is $57.0 million, borrowed at
prime and at a three-month LIBOR rate plus a spread (weighed average interest
rate of 3.83% as of December 31, 2002). The interest rate swaps which were
entered into in January 2003 should modify our exposure to interest rate risk by
converting our floating rate term debt to a fixed rate.

In order to finance the acquisition of LongMiller, we entered into a
$305 million gross securitization of a majority of the in-force revenues of
LongMiller. The securitization is broken into four tranches, each rated by
Standard & Poors. The tranches consist of the A-1 and A-2 class totaling
approximately $167 million and each rated "AAA", the B-class tranch of $108
million rated "A" and the C-class tranch of $30 million rated "BBB". The
weighed average interest cost over the 20-year life of the asset-backed notes is
approximately seven percent. The securitized net in-force revenues, which are
approximately $40.6 million in 2003, are used to pay interest and principal to
the noteholders. Assuming the securitized notes amortize as expected, the
securitization will provide residual cash flow to us of approximately five
percent of the securitized in-force revenue in the initial years, and our total
residual interest would equal approximately 28 percent of the total securitized
in-force revenue over the life of the asset-backed notes. Such residual interest
could be substantially less if the notes do not amortize as expected. The
securitization is treated as debt and is included in the Banking Practice
segment, and is non-recourse to Clark/Bardes, Inc.

See table under section heading "Cash Flows from Financing Activities"
in Item 7.

44

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our financial statements begin on page 47 of this Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

On February 27, 2002, Ernst & Young LLP after being notified that it
would not be retained to serve as our independent accountants for the 2002
fiscal year, resigned and ceased its relationship with us upon completion of the
annual audit for our fiscal year ended December 31, 2001. The report of Ernst &
Young LLP on our financial statements for the fiscal years ended December 31,
2001 and December 31, 2000, contained no adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles. In addition, there have been no disagreements with Ernst
& Young LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which disagreements if
not resolved to the satisfaction of Ernst & Young LLP would have caused it to
make reference thereto in its reports on the financial statements for such
periods; and there have been no matter that was the subject of a reportable
event.

On March 14, 2002, we engaged Deloitte & Touche LLP to serve as our
independent public accountants for the fiscal year ending December 31, 2002.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 is hereby incorporated by reference
from our proxy statement for the 2003 annual meeting of our stockholders under
the captions "Proposal One -- Election of Directors," and "Our Executive
Officers."

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is hereby incorporated by reference
from our 2003 proxy statement under the caption "Executive Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 is hereby incorporated by reference
from our 2003 proxy statement under the caption "Ownership of Common Stock by
Certain Beneficial Owners and Management" and under the caption "Equity Plan
Compensation Information."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is hereby incorporated by reference
from our 2003 proxy statement under the caption "Certain Relationships and
Related Transactions."

ITEM 14. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based upon, and as of the date
of that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to our company (and its
consolidated subsidiaries) required to be included in the periodic reports we
are required to file and submit to the SEC under the Exchange Act.

45

The Chief Executive Officer and Chief Financial Officer concluded that
there have been no significant changes to our internal controls or in other
factors that could significantly affect these internal controls subsequent to
the date the internal controls were recently evaluated. There were no
significant deficiencies or material weaknesses identified in the evaluation
and, therefore, no corrective actions were taken.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

(1) Financial Statements

Reports of Independent Auditors
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Income for the years ended December
31, 2002, 2001, and 2000
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2002, 2001, and 2000
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001, and 2000
Notes to the Consolidated Financial Statements

(2) Financial Statement Schedules

None.

Schedules not listed above have been omitted because they are not required, are
not applicable, are shown in the related financial statements or notes thereto
or the amounts are immaterial.

(3) Exhibits

The information required by this Item 14(a)(3) is set forth in the Exhibit Index
immediately following our financial statements. The exhibits listed herein will
be furnished upon written request to "Director of Investor Relations" located at
our headquarters and payment of a reasonable fee that will be limited to our
reasonable expense in furnishing such exhibits

(4) Reports on Form 8-K

On November 27, 2002, we filed an 8-K which includes the press release related
to the closing of the Long, Miller and Associates, L.L.C. acquisition.

46

CLARK/BARDES, INC.
AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

PAGE
----

Reports of Independent Auditors.................................................. 48
Consolidated Balance Sheets as of December 31, 2002 and 2001..................... 50
Consolidated Statements of Income for the years ended December 31, 2002,
2001, and 2000................................................................. 51
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2002, 2001, and 2000................................................ 52
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001, and 2000................................................ 53
Notes to Consolidated Financial Statements....................................... 54

47

INDEPENDENT AUDITORS' REPORT

Board of Directors
Clark/Bardes, Inc.

We have audited the accompanying consolidated balance sheet of
Clark/Bardes, Inc. and subsidiaries as of December 31, 2002, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

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

In our opinion, such 2002 consolidated financial statements present
fairly, in all material respects, the financial position of Clark/Bardes, Inc.
and subsidiaries at December 31, 2002, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.

As discussed in Note 2, in 2002 Clark/Bardes, Inc. and subsidiaries
changed its method of accounting for goodwill and other intangible assets as
required by Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets."

DELOITTE AND TOUCHE LLP

Chicago, Illinois
March 3, 2003

48

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Clark/Bardes, Inc.

We have audited the accompanying consolidated balance sheet of
Clark/Bardes, Inc. and subsidiaries as of December 31, 2001, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the two years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Clark/Bardes, Inc. and subsidiaries at December 31, 2001, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.

ERNST & YOUNG LLP

Dallas, Texas
February 22, 2002

49

CLARK/BARDES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001

DECEMBER 31,
----------------------
2002 2001
---- ----
(DOLLARS IN THOUSANDS
EXCEPT SHARE AND PER
SHARE DATA)
ASSETS

Current Assets
Cash and cash equivalents................................. $14,524 $10,207
Restricted cash........................................... 14,065 -
Accounts and notes receivable, net........................ 64,262 51,670
Prepaid income taxes...................................... 3,253 -
Deferred tax assets....................................... 1,252 690
Other current assets...................................... 2,945 1,641
-------- -------
Total Current Assets.............................. 100,301 64,208
Intangible Assets-- net.....................................
Net present value of in-force revenue...................... 479,561 83,243
Goodwill.................................................. 117,803 103,768
Non-compete agreements.................................... 2,831 717
-------- -------
Total Intangible Assets--Net...................... 600,195 187,728
Equipment and Leasehold Improvements--Net................... 15,064 11,005
Other Assets................................................ 19,010 6,990
-------- -------
Total Assets...................................... $734,570 $269,931
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Accounts payable.......................................... $11,065 $4,767
Income taxes payable...................................... - 3,451
Accrued liabilities....................................... 44,769 46,086
Deferred revenue.......................................... 2,349 520
Interest rate swap payable................................ - 2,043
Debt maturing within one year............................. 22,675 1,046
-------- -------
Total Current Liabilities......................... 80,858 57,913

Long-Term Debt.............................................. 395,384 6,079
Deferred Tax Liabilities.................................... 8,837 7,146
Deferred Compensation....................................... 4,395 2,601
Other Non-Current Liabilities............................... 3,974 -

Commitments and Contingencies (Notes 5, 15 and 18)

Stockholders' Equity
Preferred stock
Authorized -- 1,000,000 shares; $.01 par value, none
issued ..................................................... - -
Common stock
Authorized -- 40,000,000 shares; $.01 par value........ - -
Issued and outstanding -- 18,060,518 in 2002 and
16,524,070 in 2001.................................... 181 165
Paid in capital........................................... 183,980 156,394
Retained earnings......................................... 56,961 39,633
-------- -------
Total Stockholders' Equity.................................. 241,122 196,192
-------- -------
Total Liabilities and Stockholders' Equity.................. $734,570 $269,931
======== ========

See accompanying notes to consolidated financial statements

50

CLARK/BARDES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
---- ---- ----
(DOLLARS IN THOUSANDS EXCEPT SHARE AND
PER SHARE AMOUNTS)

REVENUE
First year commissions and related fees........... $126,824 $119,349 $77,768
Renewal commissions and related fees.............. 114,464 93,028 63,818
Consulting fees................................... 32,255 19,659 5,953
Reimbursable expenses............................. 5,043 4,848 2,028
----------- ---------- ----------
Total Revenue....................................... 278,586 236,884 149,567

OPERATING EXPENSES
Commissions and fees.............................. 89,998 84,002 50,804
General and administrative........................ 140,583 102,853 68,189
Reimbursable expenses............................. 5,043 4,848 2,028
Amortization...................................... 9,249 11,560 7,138
Write off of Insurance Alliance Group............. - 2,070 --
Acquisition integration and reorganization........ - -- 518
----------- ---------- ----------
244,873 205,333 128,677
----------- ---------- ----------
OPERATING INCOME.................................... 33,713 31,551 20,890
OTHER INCOME........................................ 262 354 1,075
INTEREST............................................
Income............................................ 350 551 278
Expense........................................... (4,070) (5,738) (4,970)
Interest rate swap settlement..................... - (1,981) --
----------- ---------- ----------
(3,720) (7,168) (4,692)
----------- ---------- ----------
Income before taxes and cumulative effect of change
in accounting principle............................. 30,255 24,737 17,273
Income taxes........................................ 12,404 8,725 5,825
----------- ---------- ----------
Income before cumulative effect of change in
accounting principle, net of tax ................... 17,851 16,012 11,448
Cumulative effect of change in accounting principle,
net of tax ......................................... (523) - -
----------- ---------- ----------
Net income.......................................... $17,328 $16,012 $11,448
=========== ========== ==========

Basic Earnings per Common Share, before cumulative
effect of change in accounting principle ........... $1.06 $1.22 $1.07
Cumulative effect of change in accounting
principle........................................... (0.03) - -
----------- ---------- ----------
Basic Earnings per Common Share..................... $1.03 $1.22 $1.07
=========== ========== ==========

Weighted average shares outstanding - Basic......... 16,896,657 13,162,899 10,744,718
=========== ========== ==========

Diluted Earnings per Common Share, before cumulative
effect of change in accounting principle ........... $1.02 $1.18 $1.05
Cumulative effect of change in accounting
principle........................................... (0.03) - -
----------- ---------- ----------
Diluted Earnings per Common Share................... $0.99 $1.18 $1.05
=========== ========== ==========

Weighted average shares outstanding - Diluted....... 17,513,106 13,575,830 10,880,093
=========== ========== ==========

See accompanying notes to consolidated financial statements

51

CLARK/BARDES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

COMMON STOCK
TOTAL
PAID IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------- -------- -------------
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
Balance at January 1, 2000.................. 9,629,999 $96 $50,099 $12,173 $62,368
Issuance of common stock in connection
with acquisitions....................... 1,035,433 10 12,947 -- 12,957
Sale of common stock in a private
placement net of expenses............... 1,888,887 19 25,098 -- 25,117
Exercise of stock options-- net of
redemptions and tax effect.............. 120,990 2 790 -- 792
Net activity related to employee stock
purchase plan -- -- (124) -- (124)
Net income................................ -- -- -- 11,448 11,448
----------------------------------------------------------------------
Balance at December 31, 2000................ 12,675,309 127 88,810 23,621 112,558
Issuance of common stock in
connection with acquisitions............ 84,664 1 1,548 -- 1,549
Sale of common stock in secondary
offering, net of expenses............... 3,693,750 37 65,389 -- 65,426
Exercise of stock options - net of
redemptions and tax effect.............. 70,347 -- 578 -- 578
Net activity related to employee stock
purchase plan........................... -- -- 69 -- 69
Net income................................ -- -- -- 16,012 16,012
----------------------------------------------------------------------
Balance at December 31, 2001................ 16,524,070 165 156,394 39,633 196,192
Issuance of common stock in
connection with acquisitions............ 1,459,413 15 26,518 -- 26,533
Non-employee compensation................. -- -- 474 -- 474
Exercise of stock options - net of
redemptions and tax effect.............. 72,664 1 624 -- 625
Issuance of stock to directors............ 4,371 -- 100 -- 100
Net activity related to employee stock
purchase plan........................... -- -- (130) -- (130)
Net income................................ -- -- -- 17,328 17,328
----------------------------------------------------------------------
Balance at December 31, 2002................ 18,060,518 $181 $183,980 $56,961 $241,122
======================================================================

See accompanying notes to consolidated financial statements

52

CLARK/BARDES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000

YEAR ENDED DECEMBER 31,
----------------------------------
2002 2001 2000
---------- ----------- -----------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net income ................................. $17,328 $16,012 $11,448
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization....... 13,600 14,666 8,898
Cumulative effect of change in
accounting principle 892 - -
Non-employee stock compensation..... 574 - -
Deferred taxes...................... 1,129 1,089 1,602
Loss on disposal of assets.......... 351 93 -
Interest rate swap settlement....... - 2,043 -
Write off of Insurance Alliance
Group............................. - 2,070 -
Changes in operating assets and
liabilities (excluding the effects
of acquisitions):
Accounts receivable................. (8,252) (15,907) (10,341)
Other current assets................ (1,102) 687 (265)
Other assets........................ (6,148) (4,253) (741)
Accounts payable.................... 4,742 (6,351) 5,940
Income taxes........................ (6,704) (474) (229)
Accrued liabilities................. 1,846 18,641 (936)
Deferred income..................... 1,829 (750) 797
Non-current liabilities............. 482 - -
Deferred compensation............... 1,794 856 1,745
----------------------------------
Cash provided by operating activities......... 22,361 28,422 17,918
----------------------------------
INVESTING ACTIVITIES
Purchase of businesses, net of cash
acquired.................................. (363,233) (29,537) (59,158)
Purchases of equipment...................... (7,701) (5,005) (3,497)
Other....................................... - 300 -
----------------------------------
Cash used in investing activities............. (370,934) (34,242) (62,655)
----------------------------------
FINANCING ACTIVITIES
Proceeds from borrowings.................... 385,130 33,500 63,100
Repayment of borrowings..................... (11,546) (90,948) (41,251)
Bond financing costs........................ (5,057) - -
Cash restricted for the repayment of
non-recourse notes........................ (14,065) - -
Issuance of common stock.................... - 65,426 25,117
Exercise of stock options................... 601 382 654
Net activity related to employee stock
purchase plan............................. (130) 69 (124)
Settlement of interest rate swap............ (2,043) - -
Notes receivable............................ - - 7
----------------------------------
Cash provided by financing activities......... 352,890 8,429 47,503
----------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS..... 4,317 2,609 2,766
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE YEAR................................. 10,207 7,598 4,832
----------------------------------
CASH AND CASH EQUIVALENTS AT END OF
THE YEAR.................................... $14,524 $10,207 $7,598
==================================

Supplemental Disclosure for Cash Paid during
the Period:
--------------------------------------------
Interest paid............................ $3,638 $8,600 $3,965
Income taxes, net of refunds............. $17,636 $7,147 $4,213

Supplemental Non-Cash Information:
----------------------------------

Fair value of common stock issued in
connection with acquisition
contingent payouts..................... $5,289 $504 $1,442
==================================
Fair value of common stock issued in
connection with acquisitions........... $21,244 $1,000 $11,507
==================================
Asset-backed notes issued to sellers in
connection with acquisition............. $37,350 $-- $--
==================================

See accompanying notes to consolidated financial statements

53

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2002

(TABLES SHOWN IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The consolidated financial statements include
the accounts of Clark/Bardes, Inc. and its wholly owned subsidiaries. Through
our six operating segments, Executive Benefits Practice, Banking Practice,
Healthcare Group, Human Capital Practice, Pearl Meyer & Partners, and Federal
Policy Group, we design, market and administer compensation and benefit programs
for companies supplementing and securing employee benefits and provide executive
compensation and related consulting services to U.S. corporations, banks and
healthcare organizations. We assist our clients in using customized life
insurance products to finance their long-term benefit liabilities. In addition,
we own Clark/Bardes Financial Services, Inc. ("CBFS"), a registered
broker-dealer through which we sell all our securities products and receive
related commissions. All significant intercompany amounts and transactions have
been eliminated in the accompanying consolidated financial statements.

Use of Estimates -- The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. We use
estimates in our determination of allowances for accounts receivable and
chargeback and of the net present value of in-force revenue acquired through
acquisitions. Actual results could differ from those estimates.

Revenue Recognition -- First year commissions and related fees are
recognized as revenue in the amount due or paid by the carrier at the time the
policy application is substantially completed, the initial premium payment is
paid and the insured party is contractually committed to purchase the insurance
policy. Renewal revenue is recognized on the date that the renewal premium is
due or paid by the client to the insurance company depending on the type of
policy. We are notified in advance if a client plans to surrender, so
adjustments in subsequent periods due to cancellations are infrequent and minor.
Revenue associated with policies to be surrendered is not recognized. While the
commission revenue is subject to chargeback, our experience has indicated that
less than 1% of revenue recognized has ever been subject to such chargeback
provisions. Given the homogenous nature of such cases and historical information
about chargebacks, we are able to accurately estimate the revenue earned. We
currently maintain a chargeback allowance, which is monitored on a quarterly
basis for adequacy. Service fees are received annually on the policy anniversary
date. Fees related to future services to be provided are recognized as the
services are rendered and fees for program design and placement are recognized
in a manner consistent with commissions. Consulting fee revenue consists of fees
of Human Capital Practice, Pearl Meyer & Partners and Federal Policy Group for
the services we perform in advising our clients. These fees are generally based
on a rate per hour arrangement and are earned when the service is rendered. Some
of our consulting clients pay a retainer at the beginning of a project. These
revenues are recognized ratably over the term of the engagement.

Cash and Cash Equivalents -- We consider all highly liquid instruments
purchased with a maturity of three months or less to be cash equivalents. We
have cash balances at financial institutions in excess of the $100,000 limit
insured by the Federal Deposit Insurance Corporation. Uninsured cash in bank
balances, including restricted cash, aggregated approximately $28.3 million and
$8.9 million at December 31, 2002 and 2001, respectively. We have not
experienced any losses in such accounts and believe it is not exposed to any
significant credit risk on cash and cash equivalents. At December 31, 2002, we
have restricted cash of $14.1 million related to the asset-backed notes
outstanding.

Fair Value of Financial Instruments -- The carrying amount of cash and
cash equivalents, accounts and notes receivable, accounts payable, and other
financial instruments approximate their fair values principally because of the
short-term nature of these instruments. See Note 13 for additional information
on financial instruments.

Equipment and Leasehold Improvements -- Equipment and leasehold
improvements are carried at cost less accumulated depreciation. Depreciation
expense is provided in amounts sufficient to relate the cost of assets to
operations over the estimated service lives using straight line and accelerated
methods. We depreciate furniture, equipment and computer software over periods
of three to seven years while leasehold improvements are amortized over the
lease period.

54

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONSOLIDATED)

Goodwill - With the adoption of Statements of Financial Accounting
Standards ("SFAS") No. 141, Business Combinations and 142, Goodwill and Other
Intangible Assets as of January 1, 2002, amortization of goodwill ceased and it
will be tested annually for impairment or whenever changes in circumstances
indicate an impairment might exist. Prior to the adoption of SFAS No. 142,
goodwill was being amortized over a 20 to 40 year period on a straight-line
basis. Amortization expense was $0 in 2002, $4.0 million in 2001, and $2.2
million in 2000.

Other Identifiable Intangible Assets -- We have identifiable intangible
assets representing the excess of the costs of acquired businesses over the fair
values of the tangible net assets associated with the acquisition. Other
identifiable intangible assets consist of the net present value of future cash
flows from existing business at the acquisition date, and non-compete agreements
with the former owners. Non-compete agreements are amortized over the period of
the agreements. The net present value of in-force revenue is typically amortized
between 20 to 30 years (the expected average policy duration). Amortization
expense was $9.2 million in 2002, $7.6 million in 2001, and $4.9 million in
2000. Our policy, in accordance with SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, is to review intangible and other long-lived
assets for impairment on an annual basis or whenever changes in circumstances
indicate that an impairment might exist. When any indicators are present, the
estimated undiscounted cash flows are compared to the carrying amount of the
assets. If the undiscounted cash flows are less than the carrying amount, an
impairment loss is recorded. Any write-downs are treated as permanent reductions
in the carrying amount of the asset.

Commissions and Fee Expense -- Commissions and fee expense comprise the
portion of the total commission revenue that is earned by and paid to both
employee and independent sales consultants.

Advertising -- Advertising and marketing costs are charged to
operations when incurred. Total expenses for 2002, 2001, and 2000 were $2.5
million, $2.1 million, and $0.8 million, respectively.

Income Taxes -- Income taxes are accounted for under the liability
method. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis and operating loss carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled.

Stock-Based Compensation - We apply Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for our
stock-based compensation plans, and provide the pro forma disclosures required
by SFAS No. 123, Accounting for Stock-Based Compensation. We grant stock options
at an exercise price equal to the quoted market price of our stock on the grant
date. Since the stock options have no intrinsic value on the grant date, no
compensation expense is recorded in connection with the stock option grants.
Generally, stock options vest 25 percent on each anniversary of the grant date,
are fully vested five years from the grant date and have a term of ten years.
For purposes of calculating basic and diluted earnings per share, exercised
stock options are considered outstanding. Under the treasury stock method,
unexercised stock options with fair market values of the underlying stock
greater than the stock options' exercise prices are considered common stock
equivalents for the purposes of calculating diluted earnings per share for
periods when there are positive earnings and the incremental effect would be
dilutive.

Hedging Transactions - We do not enter into derivative transactions
except to mitigate interest rate risk. We adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities--An Amendment of
FASB Statement No. 133, in fiscal year 2001.

55

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONSOLIDATED)

All derivative instruments are reported in the consolidated financial statements
at fair value. Changes in the fair value of derivatives are recorded each period
in earnings or other comprehensive income (loss), depending on whether the
derivative is designated and effective as part of a hedged transaction, and on
the type of hedge transaction. Gains or losses on derivative instruments
reported in other comprehensive income (loss) are reclassified as earnings in
the period in which earnings are affected by the underlying hedged item, and the
ineffective portion of all hedges are recognized in earnings in the current
period. We had no derivative instruments outstanding at December 31, 2002.

In 2001, we entered into interest rate swaps to match floating rate
with fixed rate interest payments periodically over the life of our term loan
agreement. As a result of the payoff of the debt in November 2001 with the
proceeds from the secondary offering, we recorded $2.0 million as interest
expense for the year ended December 31, 2001 related to the interest rate swaps
we had entered into.

Reclassifications -- Certain 2001 and 2000 amounts have been
reclassified to conform to 2002 presentation.

2. RECENT ACCOUNTING PRONOUNCEMENTS

Business Combinations and Goodwill - In June 2001, SFAS No. 141,
Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets
were issued. SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations and also includes guidance on the initial
recognition and measurement of goodwill and other intangible assets arising from
business combinations completed after June 30, 2001. SFAS No. 142 eliminates the
amortization of goodwill and intangible assets with indefinite useful lives and
requires that these assets be reviewed for impairment at least annually.
Intangible assets with determinable lives will continue to be amortized over
their estimated useful lives.

We adopted SFAS No. 142 in the first quarter of 2002. We tested
goodwill for impairment using the two-step process prescribed in SFAS No. 142.
The first step is a determination of potential impairment, while the second step
measures the amount of the impairment, if any. We performed the required
impairment tests of goodwill as of January 1, 2002 in the first quarter of 2002.
An after-tax impairment charge of $523,000 ($892,000 before tax) resulting from
these impairment tests is reflected as the cumulative effect of a change in
accounting principle in 2002. We perform our annual goodwill impairment analysis
in the fourth quarter of each year. No additional impairment was recorded.

56

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONSOLIDATED)

In accordance with SFAS No. 142, we discontinued the amortization of
goodwill effective January 1, 2002. A reconciliation of previously reported net
income and earnings per share to the amounts adjusted for the exclusion of
goodwill amortization, net of the related income tax effect, follows:

2002 2001 2000
---- ---- ----

Reported net income, before cumulative effect of
change in accounting principle $17,851 $16,012 $11,448
Add: Goodwill amortization, net of tax - 2,590 1,500
------- ------- -------
Adjusted net income, before cumulative effect of
change in accounting principle $17,851 $18,602 $12,948
======= ======= =======

Basic earnings per common share, before
cumulative effect of change in accounting
principle $ 1.06 $ 1.22 $ 1.07
Add: Goodwill amortization, net of tax - 0.19 0.14
------- ------- -------
Adjusted basic earnings per common share, before
cumulative effect of change in accounting
principle $ 1.06 $ 1.41 $ 1.21
======= ======= =======

Diluted earnings per common share, before
cumulative effect of change in accounting
principle $ 1.02 $ 1.18 $ 1.05
Add: Goodwill amortization, net of tax - 0.19 0.14
------- ------- -------
Adjusted diluted earnings per common share,
before cumulative effect of change in accounting
principle $ 1.02 $ 1.37 $ 1.19
======= ======= =======

Long-lived Assets - On January 1, 2002, we adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of and the accounting and reporting
requirements of Accounting Principles Board Opinion ("APB") No. 30, Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions for the disposal of a segment of a business. SFAS No. 144 removes
goodwill from its scope and it establishes a primary asset approach to determine
the cash flow estimation period for determining potential impairment of a group
of assets. The adoption of this statement did not have a material impact on our
consolidated financial statements.

Reimbursements Received for "Out-of-Pocket" Expenses - In accordance
with Emerging Issue Task Force ("EITF") Issue No. 01-14, Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred, reimbursements received for out-of-pocket expenses incurred are
characterized as revenues and are shown as a separate component of total
revenue. Similarly, related reimbursable expenses are also shown separately
within operating expenses. EITF Issue No. 01-14 was effective as of January 1,
2002 and all periods presented have been reclassified to reflect the adoption of
this accounting pronouncement. The net result of the above is an increase in
revenue and operating expense of $5.0 million, $4.8 million and $2.0 million for
the years ended December 31, 2002, 2001 and 2000, respectively, with a
corresponding increase in operating expenses. These reclassifications had no
effect on our operating income.

3. ACQUISITIONS

Following is a description of the acquisitions made during 2002, 2001,
and 2000. The results of operations for each acquired entity have been included
in the accompanying consolidated statements of income from the effective date of
the respective acquisition.

Long, Miller & Associates, LLC. - On November 26, 2002, we acquired
Long, Miller & Associates, LLC ("LongMiller"). Based in Greensboro, North
Carolina, LongMiller specializes in bank-owned life insurance portfolio
services. The acquisition combines the two largest distributors of bank-owned
life insurance, as LongMiller will be merged into our existing Banking Practice.

57

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONSOLIDATED)

The purchase price was $403.5 million before acquisition costs of approximately
$736,000, consisting of a cash payment at closing of $346.1 million, $37.4
million of asset-backed notes, and 1,196,888 shares our common stock valued at
$20 million. The cash portion of the acquisition were financed by borrowing
$87.5 million from our existing debt facility, with the remainder through a
capital markets transaction involving the securitization of a majority of the
in-force revenues of LongMiller. We have preliminarily allocated $4.4 million to
tangible assets acquired with the remaining amount allocated to in-force
revenue. The in-force revenue is being amortized over 30 years. The results of
LongMiller are included beginning November 26, 2002.

The unaudited pro forma information below presents our results as if
the acquisition of LongMiller had occurred on January 1, 2001.

YEAR ENDED DECEMBER 31,
-----------------------
2002 2001
----------- -----------
Pro Forma
Revenue....................... $329,435 $302,715
Net income.................... 17,534 21,095
Diluted earnings per share.... 1.00 1.43

The allocation of the purchase price is preliminary pending completion
of a valuation by an independent valuation firm. Upon completion of such
valuation, the allocation of purchase price will be finalized in accordance with
the provisions of SFAS No. 141, Business Combinations.

Federal Policy Group - On February 25, 2002, we acquired the Federal
Policy Group of PricewaterhouseCoopers LLP. Based in Washington, D.C., Federal
Policy Group is a consulting practice representing Fortune 500 companies, trade
associations and other businesses before the government on legislative and
regulatory policy matters. This acquisition allows us to continue to expand our
service offerings to the corporate market. The purchase price was $11.0 million
before acquisition costs of approximately $28,000, consisting of a cash payment
at closing of $5.0 million and $6.0 million of contingent payments over the next
four years based upon attainment of established performance criteria. If earned,
the contingent payments will consist of 70% cash and 30% our common stock. As of
September 30, 2002, Federal Policy Group attained its 2002 performance criteria.
Accordingly, $1.5 million has been included in accrued liabilities and goodwill
on the December 31, 2002 consolidated balance sheet. Of the purchase price, $2.3
million was allocated to non-compete agreements, which are being amortized over
six years with the remaining purchase price being allocated to goodwill. The
results of the Federal Policy Group are included beginning February 25, 2002.

Other 2002 acquisitions - In 2002, we also acquired the following
entities for an aggregate purchase price of $5.0 million paid in cash (cash
amount includes expenses paid) and 57,478 shares of our common stock valued at
$1.2 million:

o Comiskey Kaufman, located in Houston, Texas, specializes in
executive benefits consulting for major companies in the
Southwest, and is included in our Executive Benefits Practice
segment, and
o Hilgenberg and Associates, located in Minneapolis, MN,
specializes in providing compensation, benefit and
business-owned life insurance consulting services to banks
located in the Midwest, and is included in our Banking
Practice segment.

Additional consideration of $4.5 million in cash and $1.0 million in
common stock is payable if certain objectives are met over the next three years.
If earned, these payments will be accounted for as additional goodwill.

The net present value of in-force revenue and goodwill recorded in the
allocation of purchase price related to those acquisitions amounted to $5.2
million and $0.5 million, respectively. In-force revenue was assigned to the
Executive Benefit Practice segment and the goodwill was assigned to the Banking
Practice segment. The remaining purchase price was allocated to non-compete
agreements which are assigned to the Banking Practice segment.

58

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONSOLIDATED)

Rich, Florin/Solutions, Inc. - On March 12, 2001, we acquired certain
assets, all of the business, and assumed certain liabilities of Rich,
Florin/Solutions, Inc., a Boston, Massachusetts compensation consulting company.
The purchase price was $20.8 million, before expenses, consisting of a cash
payment at closing of $11.3 million and $9.5 million of contingent payments over
the next four years based on the attainment of established financial performance
criteria. We acquired net assets of approximately $1.8 million. When earned, the
contingent payments will consist of 60% cash and 40% our common stock. The
transaction was funded from our existing line of credit. It became our fifth
operating segment - Human Capital Practice (previously Rewards and Performance.)

In connection with the formation of the Human Capital Practice (see
Note 4), the Asset Purchase Agreement for Rewards and Performance Group
(formerly Rich, Florin/Solutions, Inc.) was amended. One-half of the original
contingent consideration (approximately $3.8 million) will be paid in March 2003
through March 2005 regardless of performance of the practice and the other half
is contingent upon the results of the Human Capital Practice. Accordingly, $3.8
million has been accrued with a corresponding increase in goodwill in the
December 31, 2002 consolidated balance sheet.

Other 2001 acquisitions - In 2001, we also acquired the following
entities for an aggregate purchase price of $11.5 million paid in cash (cash
amount includes expenses paid) and 39,558 shares of our common stock valued at
$1.0 million:

o Coates Kenny, a Berkeley, California-based provider of
professional actuarial, consulting, and administrative services
to retirement plans and post-retirement plans, is included in
the Executive Benefits Practice segment;
o Lyons Compensation and Benefits, LLC, a Waltham, Massachusetts-
based provider of executive compensation and benefit plans, is
included in the Healthcare Group segment; and
o Management Science Associates, Inc. and Partners First, both
St. Louis, Missouri-based consulting firms in the healthcare
industry, are included in the Healthcare Group segment.

As of December 31, 2002, additional consideration of $5.7 million in
cash and $1.9 million in common stock is payable if certain objectives are met
over the next two to four years. If earned, these payments will be accounted for
as additional goodwill.

In-force revenue and goodwill recorded in the allocation of purchase
price related to these acquisitions amounted to $5.7 million and $6.5 million,
respectively. In-force revenue was assigned to the Executive Benefits Practice
segment along with $380,000 of the goodwill and the remaining goodwill was
assigned to the Healthcare Group segment.

Compensation Resource Group, Inc. -- On September 6, 2000, we acquired
all the issued and outstanding capital stock of Compensation Resource Group
("CRG") for a total purchase price of $30.5 million consisting of the following:
a cash payment to the CRG selling shareholders of $11.4 million, the issuance of
596,463 shares of our common stock, having an aggregate value of $6.1 million
based on the closing price on September 5, 2000, and the repayment of
approximately $13.0 million of CRG's long-term debt. Acquisition expenses were
$735,000 and are not included in the purchase price above. The cash portion of
the purchase price was borrowed under our acquisition and working capital credit
facility.

CRG is an executive compensation and benefits organization that
provides the design, marketing and administration of non-qualified benefit
plans. CRG is headquartered in Los Angeles, California and has affiliated
offices in seven other cities.

Coincident with this acquisition, we entered into a bonus arrangement
for certain key executives and employees of CRG. This arrangement provides for
the payment of bonuses of up to $20 million if certain stipulated financial
objectives are achieved during the years ended December 31, 2003 to 2005. These
bonuses will be recorded as expense in the year earned. The acquisition of CRG
has been accounted for as a purchase with $26.7 million of the purchase price
allocated to the net present value of in-force revenue and amortized over a
period of thirty years and $11.4 million allocated to goodwill.

The unaudited pro forma financial information below presents our
results as if the acquisition of CRG had occurred on January 1, 2000:

YEAR ENDED
DECEMBER 31, 2000
-----------------
Pro Forma
Revenue..................... $181,787
Net income.................. 9,500
Diluted earnings per share.. 0.84

59

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONSOLIDATED)

Pearl Meyer & Partners, Inc. -- On June 21, 2000, we acquired all of
the issued and outstanding capital stock of Pearl Meyer & Partners, Inc. ("Pearl
Meyer") for a total purchase price of $25.9 million, not including acquisition
expenses. The purchase price consisted of a cash payment of $21.9 million and
the issuance of 250,000 shares of common stock with a value of $4.0 million.
Acquisition expenses were $720,000. The cash portion of the purchase price was
borrowed under our line of credit.

The acquisition has been accounted for as a purchase with goodwill of
$23.5 million.

Pearl Meyer is a New York City-based consulting firm specializing in
executive compensation and retention programs. The Pearl Meyer organization
became our fourth operating segment. Prior to the acquisition, we had no
material relationship with Pearl Meyer.

The unaudited pro forma information below presents our results as if
the acquisition of Pearl Meyer had occurred on January 1, 2000.

YEAR ENDED
DECEMBER 31, 2000
-----------------
Pro Forma
Revenue..................... $154,557
Net income.................. 12,143
Diluted earnings per share.. 1.10

Other 2000 acquisitions - In 2000, we also acquired the following five
entities for an aggregate purchase price of $8.6 million which consisted of $7.2
million of cash and expenses and 92,857 shares of our common stock valued at
$1.4 million:

o Forrest, Wagner and Associates, a Phoenix, Arizona-based firm
specializing in marketing and administering non-qualified
executive benefit plans, is included in the Executive Benefits
Practice segment;
o Three add-on acquisitions for our Banking Practice segment-
Christiansen & Associates, The Watson Company and W.M. Sheehan
& Company;
o Insurance Alliances Group, Inc., a Stamford, Connecticut
insurance firm specializing in executive estate planning, is
included as part of corporate.

As of December 31, 2002, additional consideration of $369,000 in cash
and $1.1 million in common stock is payable if certain objectives are met over
the next two years. If earned, these payments will be accounted for as
additional goodwill. In-force revenue and goodwill recorded in the allocation of
purchase price related to these acquisitions amounted to $5.0 million and $5.0
million, respectively. In-force revenue of $2.7 million and goodwill of $2.2
million was assigned to the Executive Benefits Practice segment; goodwill of
$1.5 million was assigned to the Banking Practice segment; and in-force revenue
of $2.3 million and goodwill of $1.3 million was assigned to corporate.

4. FORMATION OF HUMAN CAPITAL PRACTICE

On May 16, 2002, we announced the formation of our Human Capital
Practice. The new practice includes our existing Rewards and Performance Group
and ten former partners ("partners") and 74 support staff from the Human Capital
Practice of Arthur Andersen LLP ("Andersen"). Prior to hiring, the partners and
Andersen mutually terminated their partnership interest and association with
each other free of all restrictive provisions under the Andersen Partnership
Agreement and under any agreements relating to the employment with Andersen. We
believe any successor liability is mitigated by hiring each new employee in a
conventional employer/employee relationship.

Upon hiring, the former Andersen partners received full recourse and
interest-bearing loans in the amount of $8.4 million. Of these loans, $1.2
million have a term of two years and the remaining $7.2 million have a term of
six and one-half years. As long as the partner is employed on the hiring
anniversary date for the two-year loans and each December 31st for the six and
one-half year loans, a pro rata portion of the loans will be forgiven at each
date. As a result, these loans are classified as other assets on the December
31, 2002 balance sheet and are being amortized into the Human Capital Practice
financial results as general and administrative expense. In October 2002, we
agreed with one of the partners to terminate our relationship. In December 2002,
we recorded a charge of approximately $575,000 related to the forgiveness of
part of the partner's loan under the terms of the separation agreement. The
remaining loan amount of approximately $834,000 will be received over the next
six years. Assuming all remaining

60

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONSOLIDATED)

partners continue to be employed by us throughout the terms of the loans, the
amounts amortized into operating expense for the following fiscal years would
be:

2003............................. $1,480
2004............................. 1,134
2005............................. 887
2006............................. 887
2007............................. 887
2008 and thereafter.............. 887

In addition, support staff received $602,000 of sign-on bonuses at the
time of their employment. The support staff will retain the bonus payments if
they are employed on May 16, 2003. If they voluntarily leave before this date,
they must repay a pro rata portion of their bonus. The sign-on bonuses are being
amortized into the Human Capital Practice results over the first twelve months
of employment. As of December 31, 2002, approximately $201,000 is included in
other assets.

5. CONTINGENT CONSIDERATION

As a result of our acquisition program, we have $39.0 million of
additional consideration issuable to the former owners of our acquired companies
including the amount of $11.1 million that is accrued on the balance sheet at
December 31, 2002. These amounts are payable as additional consideration for the
operating unit having met certain performance criteria negotiated at the time of
the purchase. A summary of the amounts payable if the criteria are met is as
follows for acquisitions that were completed as of December 31, 2002:

CASH SHARES SHARE VALUE(1)
--------------------------------------------
2003 $6.1 340,655 $6.6
2004 6.1 448,251 8.6
2005 6.0 124,618 2.4
2006 2.6 33,506 0.6
--------------------------------------------
$20.8 947,030 $18.2
--------------------------------------------

(1) Shares determined using the share value computed
using the closing price of our common stock at
December 31, 2002 of $19.25 per share.

6. ASSET DISPOSITION

We acquired Insurance Alliances Group in May 2000 with the intent of
establishing it as our estate planning segment. We were unable to develop this
business to the size and scope we contemplated at the time of its acquisition
and on September 21, 2001, we sold substantially all of the assets of this
business for $300,000. We have retained and will continue to service the former
company's in-force revenue stream and maintain a production arrangement with the
former business owner. During 2001, we recorded as operating expense a write-
down of approximately $2.1 million in the carrying value of the goodwill and
in-force revenue intangible assets arising from this acquisition which were
considered unrecoverable. We determined that the license renewal and
administrative fees, revenue streams and the goodwill on our books were no
longer realizable and should be written off.

61

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONSOLIDATED)

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill between December 31, 2001
and December 31, 2002 by reporting units are as follows:

BALANCE ACQUIRED BALANCE
DECEMBER DURING IMPAIRMENT DECEMBER 31,
31, 2001 THE PERIOD EARNOUTS/ETC. CHARGE 2002
-------- ---------- ------------- ---------- ------------

Executive Benefits Practice $ 14,930 $ - $2,022 $ - $16,952
Banking Practice 35,768 522 4,198 - 40,488
Healthcare Group 14,968 - - (892) 14,076
Management Science Associates 5,010 - - - 5,010
Human Capital Practice 11,313 - 3,880 - 15,193
Pearl Meyer & Partners 21,753 - 35 - 21,788
Federal Policy Group - 2,766 1,500 - 4,266
Corporate 26 - 4 - 30
-------- ------ ------- ---- --------
TOTAL $103,768 $3,288 $11,639 ($892) $117,803
======== ====== ======= ==== ========

Information regarding our other intangible assets follows:

AS OF DECEMBER 31, 2002 AS OF DECEMBER 31, 2001
----------------------------------------------------------------------------------------------
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
-------- ------------ --- -------- ------------ ---

In-force revenue $503,895 ($24,334) $479,561 $ 98,936 ($15,693) $83,243
Non-compete
agreements 4,472 (1,641) 2,831 1,750 (1,033) 717
-------- --------- -------- -------- --------- -------
Total $508,367 ($25,975) $482,392 $100,686 ($16,726) $83,960
======== ========= ======== ======== ========= =======

Amortization expense of other intangible assets was $9.2 million, $7.6
million, and $4.9 million for the years ended December 31, 2002, 2001, and 2000,
respectively.

Net present value of future cash flows from in-force revenues are
amortized over 20 to 30 years, periods representative of policy duration, and
non-compete agreements are amortized over five to ten years according to the
terms of the agreements. Goodwill generated from acquisitions completed prior to
July 1, 2001 were amortized over periods of 20 to 40 years. Amortization of
goodwill ceased January 1, 2002 under new accounting rules.

For the past two years, our amortization has been comprised of the
following:

YEAR ENDED DECEMBER 31,
----------------------------------
2002 2001 2000
---- ---- ----
Present value of future cash flows from in-force revenue... $8,641 $7,282 $4,601
Goodwill.................................................. - 4,003 2,262
Non-compete agreements.................................... 608 275 275
-----------------------------------
Total..................................................... $9,249 $11,560 $7,138
===================================

We estimate that our amortization for 2003 through 2007 for all
acquisitions consummated to date will be as follows:

62

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONSOLIDATED)

NON-COMPETE
IN-FORCE REVENUE AGREEMENTS TOTAL
---------------------------------------------
2003................ $19,920 $629 $20,549
2004................ 16,342 554 16,896
2005................ 13,554 529 14,083
2006................ 13,081 529 13,610
2007................ 12,852 504 13,356

8. CLARK/BARDES REINSURANCE COMPANY, LTD.

Clark/Bardes Reinsurance Company, Ltd. (CBRCL), a wholly owned
subsidiary of Clark/Bardes, Inc. was incorporated in the Cayman Islands with
Limited Liability effective December 13, 2001. CBRCL was formed in order to
increase and diversify our earnings stream by participating in the underwriting
profits of the insurance business produced by its various operating segments.
The Governor In Council granted approval on December 19, 2001 for the issuance
of an unrestricted Class "B" insurer's license to CBRCL, subject to the receipt
and approval by the Cayman Monetary Authority of certain outstanding
requirements of the Law. The insurance license for CBRCL has been issued and is
effective as of February 1, 2002. The business activity in this subsidiary
during 2002 consisted of operating expenses. No revenue was generated by this
entity during 2002.

9. ACCOUNTS RECEIVABLE

Major categories of accounts receivable are as follows:

AS OF DECEMBER 31,
--------------------
2002 2001
---- ----
Accounts receivable - trade.... $64,181 $51,459
Loans receivable............... 1,170 1,033
Accounts receivable allowance.. (1,089) (822)
--------------------
$64,262 $51,670
====================

The roll-forward of the accounts receivable allowance is as follows:

AS OF DECEMBER 31,
-------------------------------
2002 2001 2000
---- ---- ----
Beginning balance................. ($822) ($555) ($347)
Write-offs........................ 638 343 498
Expense........................... (905) (610) (706)
------------------------------
Ending balance.................... ($1,089) ($822) ($555)
==============================

As of December 31, 2002 and 2001, there were approximately $1.6 million
and $1.2 million, respectively, of unbilled receivables included in accounts
receivable on the consolidated balance sheet. These unbilled amounts, the
majority of which relate to in-process consulting projects, are billed during
the first quarter of the following year.

10. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Major classifications of equipment and leasehold improvements are as
follows:

AS OF DECEMBER 31,
-------------------
2002 2001
---- ----
Computer software, office furniture and
equipment................................ $22,021 $15,818
Leasehold improvements..................... 3,502 2,163
-------------------
25,523 17,981
Accumulated depreciation and amortization.. (10,459) (6,976)
-------------------
$15,064 $11,005
===================

Depreciation expense was $4.4 million, $3.1 million, and $1.8 million
for 2002, 2001 and 2000, respectively.

11. TAXES

63

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONSOLIDATED)

Income tax expense from operations consists of the following
components:

YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
Current:
Federal..................... $ 8,328 $4,887 $3,941
State and local............. 2,947 1,727 289
Deferred:
Federal..................... 908 1,704 1,458
State and local............. 221 407 137
------- ------ ------
$12,404 $8,725 $5,825
======= ====== ======

Total income taxes incurred consists of the following components:

YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
Income tax expense from operations............ $12,404 $8,725 $5,825
Income tax benefit in equity from exercise
of options.................................. (24) (196) (245)
------- ------ ------
Total income tax incurred $12,380 $8,529 $5,580
======= ====== ======

A reconciliation of the 2002, 2001 and 2000 income tax expense computed
by applying the statutory rate to income before income taxes to the actual taxes
is as follows:

YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000
---- ---- ----
U.S. Federal statutory rate.................. $10,589 $8,657 $6,046
State income tax-- net of federal benefit.... 1,950 1,448 518
Prior year warrant extinguishment............ - (1,650) -
Non-deductible goodwill amortization......... - 299 123
Non-taxable life insurance proceeds - (67) (350)
Tax liability adjustment and prior year taxes (123) (362) (411)
Other - net.................................. (12) 400 (101)
------- ------ ------
$12,404 $8,725 $5,825
======= ====== ======

As a result of a recent Circuit Court case allowing the deductibility
of such expenses, we filed an amended Federal income tax return for the year
ended December 31, 1998 for an additional deduction of $4.8 million expended in
1998 for the repurchase of certain put warrants. During an audit of our Federal
income tax return for the years 1998 and 1999, the Internal Revenue Service
approved our amended return and approved a refund of approximately $1.7 million,
before interest, for the years under audit. No other audit adjustments were
made. Without the benefit of this refund, our effective tax rate would have been
41.9% for the year ended December 31, 2001.

Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets are as follows:

AS OF DECEMBER 31,
------------------
2002 2001
---- ----
DEFERRED TAX LIABILITIES:
Intangible assets.................... $11,454 $8,903

DEFERRED TAX ASSETS:
Accrued liabilities and others....... 2,355 741
Net operating loss................... 1,514 1,706
------- -------
3,869 2,447
------- -------
NET DEFERRED TAX ASSETS (LIABILITIES).. ($7,585) ($6,456)
======= =======

In assessing the realizability of deferred tax assets, we consider the
likelihood that some portion or all of the deferred tax assets may not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which the temporary
differences become deductible. We consider the scheduled reversal of deferred
tax liabilities, projected future taxable income and tax planning strategies in
making this assessment. Based upon the level of historical

64

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONSOLIDATED)

taxable income and projections for future taxable income over the periods with
respect to which the deferred tax assets are deductible, we believe it is more
likely than not that we will realize the benefits of these deductible
differences. Accordingly, no valuation allowance is deemed necessary.

12. LONG TERM DEBT

AS OF DECEMBER 31,
------------------
2002 2001
---- ----
Term loan payable to banks................ $ 50,000 $ -
Revolving credit loan payable to banks.... 56,980 -
Notes payable to former shareholder of
acquired businesses.................... 6,079 7,125
Asset-backed notes........................ 305,000 -
-------- ------
418,059 7,125
Less current maturities................... 22,675 1,046
-------- ------
$395,384 $6,079
======== ======

Securitization - In order to finance the acquisition of LongMiller, we
entered into a $305 million gross securitization of a majority of the in-force
revenues of LongMiller. The securitization is broken into four tranches, each
rated by Standard & Poors. The tranches consist of the A-1 and A-2 class
totaling approximately $167 million and each rated "AAA", the B-class tranch of
$108 million rated "A" and the C-class tranch of $30 million rated "BBB". The
weighted average interest cost over the 20-year life of the asset-backed notes
is approximately seven percent. The securitized in-force revenues, which are
approximately $40.6 million in 2003, are used to pay interest and principal to
the noteholders. Assuming the securitized notes amortize as expected, the
securitization will provide residual cash flow to us of approximately five
percent for the securitized in-force revenue in the initial years, and our total
residual interest would equal approximately 28 percent of the total securitized
in-force revenue over the life of the notes. The securitization is treated as
debt and is included in the Banking Practice segment, and is non-recourse to us.
The note agreement requires cash flow from the assets securitizing the notes to
be held in a separate account. As of December 31, 2002, there was restricted
cash of $14.1 million related to such requirements.

Credit Facility -- In May 2002, we amended our December 28, 1999 Credit
Agreement to increase the amount available under the credit facility to $125.0
million. We converted $50 million of amounts under the revolving credit facility
to term debt at December 31, 2002. The term debt will be paid quarterly over
five years under the term facility agreement. We had $18.0 million available
under our credit line at December 31, 2002. Our assets are pledged to the bank
group as part of the credit facility except for cash flows from commissions to
be received upon the renewals of the in-force policies acquired in connection
with the acquisition of LongMiller.

Interest on the revolver is paid quarterly and based upon prime or
LIBOR plus a spread, at our preference. Our average interest rate at December
31, 2002 is 3.83%. Interest on the term loan is paid quarterly and is based on
LIBOR plus a spread. (3.43% at December 31, 2002). Our spread may change
depending on our financial leverage.

The restrictive covenants under the loan agreement provide for the
maintenance of a minimum ratio of fixed charges, a maximum allowable leverage
ratio, a minimum level of net worth (stockholders' equity), and a maximum ratio
of debt to capitalization. We were in compliance with all its restrictive
covenants as of December 31, 2002. Our restrictive covenants may limit our
borrowing ability under our credit line.

We are obligated to pay a commitment fee based on the daily average of
undrawn funds under the credit agreement. The fee is a minimum of .25% and a
maximum of .50% based on the ratio of consolidated indebtedness to income before
interest, taxes, depreciation and amortization for the most recent four quarters
on a rolling quarterly basis.

In 2001, we recorded interest expense of approximately $2.0 million as
a result of the interest rate swap settlements associated with the payoff of
our outstanding bank debt with the proceeds from our secondary offering.

Phynque, Inc. Notes. In connection with the purchase of Phynque, Inc.
d/b/a Management Compensation Group/Healthcare, we issued a $8.7 million
promissory note payable in thirty-two equal quarterly installments of principal
and interest at 10%. A portion of the promissory note is guaranteed personally
by W. T. Wamberg, Chairman and Chief Executive Officer of Clark/Bardes, Inc.

65

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONSOLIDATED)

At December 31, 2002, future payments under all financing arrangements
are as follows:

2003........ $ 22,675
2004........ 35,853
2005........ 34,634
2006........ 35,137
2007........ 34,454
2008 and
thereafter.. 255,306
--------
$418,059
========

13. FINANCIAL INSTRUMENTS

Derivative Financial Instruments. We have used derivatives only for
hedging purposes to mitigate interest rate risk. The following is a summary of
our risk management strategies and the effect of these strategies on our
consolidated financial statements.

Cash Flow Hedging Strategy. We entered into interest-rate swap
agreements to manage our interest-rate risk exposure. The interest-rate swap
agreement effectively modified our exposure to interest rate risk by converting
our floating rate debt to a fixed rate based on LIBOR. On December 21, 2001, we
repaid $41.2 million of the hedged term debt from the proceeds of the sale of
3,693,750 shares of our common stock in a public offering on November 15, 2001.
As a result of the repayment, the cash flow hedge has been effectively
discontinued and therefore the $2.0 million related to the settlement of the
swaps has been recognized as a component of interest expense in our December 31,
2001 statement of income. We have no derivative instruments outstanding at
December 31, 2002.

Concentrations of credit risk. Financial instruments that potentially
subject us to significant concentrations of credit risk consist principally of
cash, trade accounts receivable, and derivatives.

We maintain cash and cash equivalents and short-term investments only
with financial institutions having the highest ratings of liquidity.
Concentration of credit risk with respect to accounts receivable are minimal
because a majority of our receivables are with insurance carriers that have high
credit ratings. We are exposed to credit risk in the event of non-performance by
counterparties to derivative instruments. We limit this exposure by entering
into swap arrangements with one or more of the members of our group of lending
banks.

The following methods and assumptions were used in estimating the fair
value disclosures for financial instruments:

Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.

Accounts receivable and accounts payable: The carrying amounts reported
in the balance sheet for accounts receivable and accounts payable approximate
their fair value.

Long- and short-term debt: The carrying amounts of the borrowings under
our loan arrangements approximate their fair value. The fair values of the
long-term debt are estimated using discounted cash flow analyses, based on our
current incremental borrowing rates for similar types of borrowing arrangements.

The carrying amounts and fair values of our financial instruments at
December 31 are as follows:

AS OF DECEMBER 31,
---------------------------------------------------
2002 2001
---- ----
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----

Cash and cash equivalent............ $14,524 $14,524 $10,207 $10,207
Accounts and notes receivable....... 64,262 64,262 51,670 51,670
Accounts payable.................... 11,065 11,065 4,767 4,767
Short-term debt..................... 22,675 23,202 1,046 1,046
Long-term debt...................... 395,385 395,487 6,079 6,079
Interest rate swaps................. - - 2,043 2,043

66

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONSOLIDATED)

14. BENEFIT PLANS

Incentive Stock Option Plan. The Incentive Stock Option Plan provided
certain employees options to purchase shares for $4.80 and $7.00 per share;
190,832 shares were granted and no additional options may be granted under this
program. The $4.80 and $7.00 options became fully vested at the date of the
Initial Public Offering. The options expire ten years from the grant date and
are voided within 90 days of the employee's termination or one year from date of
death. No future options will be granted under this plan.

1998 Stock Option Plan. In 1998, the Board of Directors approved a
stock option plan providing for certain employees, directors and consultants to
purchase shares at the fair market value at the time the option is granted. The
Plan is administered by a committee of non-employee directors who have full
discretion to determine participation, vesting and term of the option at the
time of the grant providing that no option may have a term greater than ten
years from the date of the grant. A total of 2.0 million shares are reserved for
issuance under this plan. The vesting period of the stock options is generally
between three and five years. As of December 31, 2002, 1,795,146 options have
been granted under this program.

1998 Non-Employee Director Stock Option Plan. A total of 100,000 shares
of our common stock has been reserved for issuance under our Non-Employee
Director Plan approved by the Board of Directors in January 2000. The
non-employee director plan is administered by the compensation committee of the
board. Only nonqualified options may be granted and all of our non-employee
directors participate in the plan. The plan provides for the automatic grant of
stock options to purchase 10,000 shares of our common stock to each newly
elected non-employee director on the first day of the month following the
election. The plan also provides for the automatic grant of stock options to
purchase 4,000 shares of our common stock to continuing non-employee directors
on the first day of the month immediately following our annual stockholder
meeting. The exercise price for stock options granted under the non-employee
director plan is the fair market value of our common stock on the date of grant.
The vesting period of the stock options is generally between one and three
years. As of December 31, 2002, 97,110 options had been granted under the
non-employee director plan and a total of 2,890 shares of our common stock
remain available for grant.

2002 Stock Option Plan - On April 30, 2002, the Board of Directors
approved the Clark/Bardes, Inc. 2002 Stock Option Plan (the "2002 Plan"). A
total of 500,000 shares of our common stock have been reserved for issuance
under the 2002 Plan. The exercise price for stock options granted under the 2002
Plan is the fair market value of our common stock on the date of grant. The
vesting period of the stock options is generally between three and five years.
As of December 31, 2002, 48,000 options had been granted under this plan and a
total of 452,000 shares of our common stock remain available for grant.

The following table summarizes the combined status of all of our stock
option plans.

WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
------- --------------

OUTSTANDING AT JANUARY 1, 2000.................................... 1,237,842 $11.51
Granted......................................................... 338,100 12.89
Exercised....................................................... (167,866) 6.35
Forfeited....................................................... (30,800) 12.51
---------
OUTSTANDING AT DECEMBER 31, 2000.................................. 1,377,276 12.56
Granted......................................................... 541,100 17.28
Exercised....................................................... (119,440) 8.44
Forfeited....................................................... (38,300) 15.40
---------
OUTSTANDING AT DECEMBER 31, 2001.................................. 1,760,636 14.23
Granted......................................................... 351,964 23.25
Exercised....................................................... (75,400) 23.55
Forfeited....................................................... (118,768) 18.20
---------
OUTSTANDING AT DECEMBER 31, 2002.................................. 1,918,432 15.94
=========
EXERCISABLE AT DECEMBER 31, 2002.................................. 1,132,515 14.32
=========
EXERCISABLE AT DECEMBER 31, 2001.................................. 824,742
=========
EXERCISABLE AT DECEMBER 31, 2000.................................. 770,741
=========

The options granted in 1999 include 263,300 issued to executives and
employees of the Healthcare Group segment in connection with the acquisition of
MCG/Healthcare. These options vest at the rate of 20% per year beginning in 1999
but are subject to certain forfeiture provisions if the segment fails to attain
certain financial performance goals.

67

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONSOLIDATED)

The following table summarizes the stock options outstanding and
exercisable as of December 31, 2002:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ---------------- ----- ----------- -----
(YEARS)

$4.80 - $7.00 66,674 4.2 $5.74 66,674 $5.74
$9.00 267,291 3.3 9.00 256,291 9.00
$9.88 - $11.50 299,150 7.4 10.26 116,061 10.12
$11.75 - $14.50 179,956 8.3 13.59 123,887 13.25
$14.75 - $15.93 154,370 7.0 14.89 103,200 14.86
$16.63 - $18.13 444,846 7.1 16.80 315,971 16.78
$21.50 - $25.28 436,645 9.3 24.21 112,499 24.98
$27.49 - $30.30 69,500 5.4 27.79 37,932 28.05
--------- ---------
1,918,432 1,132,515
========= =========

The pro forma information regarding net income and earnings per share
required by SFAS No. 123 has been determined as if we accounted for our stock
based compensation plans under the fair value method. The fair value of each
option grant was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants in
2002, 2001, and 2000, respectively:

2002 2001 2000
---- ---- ----

Dividend yield........................................ None None None
Volatility............................................ 64.8% 64.17% 64.3%
Risk-free interest rates.............................. 5.2% 5.4% 5.1%
Expected life (years)................................. 5 6 6

The estimated average fair values of options outstanding in 2002, 2001,
and 2000 were $10.63, $9.00, and $9.03, respectively. Had compensation cost for
our stock-based compensation plans been determined in accordance with SFAS No.
123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation --
Transition and Disclosure -- An Amendment of FASB Statement No. 123, our net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:

YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000

NET INCOME
As reported...................................................... $17,328 $16,012 $11,448
Stock option compensation expense, net of tax.................... (2,132) (1,876) (780)
------- ------- -------
Proforma......................................................... $15,196 $14,136 $10,668
======= ======= =======
BASIC EARNINGS PER COMMON SHARE
As reported...................................................... $1.03 $1.22 $1.07
Proforma......................................................... $0.90 $1.07 $0.99

DILUTED EARNINGS PER COMMON SHARE
As reported...................................................... $0.99 $1.18 $1.05
Pro forma........................................................ $0.87 $1.04 $0.98

These pro forma amounts are not likely to be representative of the
effect on reported net income for future years.

Savings Investment Plan. The Savings Investment Plan is a defined
contribution profit sharing plan, qualifying under Section 401(k) of the
Internal Revenue Code, covering substantially all eligible employees. At our
discretion, we may contribute up to 100% of an eligible participant's
contributions to the Plan up to a maximum of 3% of salary. Our contributions to
the Plan were $2.0 million, $1.1 million, and $746,000 for the years ended
December 31, 2002, 2001, and 2000, respectively.

Stock Purchase Plan. On July 10, 1998, the Board of Directors adopted
the Stock Purchase Plan, under which a total of 200,000 shares of common stock
have been reserved for issuance. Any employee who has been employed for 90 days
is eligible to participate in offerings under the Stock Purchase Plan.

The Stock Purchase Plan consists of eight semi-annual offerings of
common stock beginning on each January 1 and July 1 in each of the years 1999,
2000, 2001 and 2002, and terminating on June 30 and December 31 of each such
year. The maximum number of shares issued in such years will be 50,000 in 1999,
and 50,000 plus the number of unissued shares from prior offerings for

68

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONSOLIDATED)

subsequent periods. The price of the shares under each offering segment is 85%
of the lower of the closing market price on the day before the offering period
begins or on the day the offering period ends.

We have, for the eight expired periods prior to December 31, 2002,
determined that we will purchase the requisite shares on the open market and
have not issued any additional shares to fulfill this obligation. Future
fulfillment under this Plan may be made through open market purchases or
unissued shares, at our discretion.

During 2002, 2001, and 2000, our employees purchased 49,824, 52,663,
and 49,780 shares, respectively of common stock at an average cost to them of
$17.89, $13.00, and $10.34 per share, respectively. Our open market purchases of
these shares for the employees were made at an average cost of $21.18, $11.67,
and $12.78 per share during 2002, 2001 and 2000, respectively.

Key Executive Life Insurance. We maintain key man life insurance
policies of $50.0 million on our Chairman and Chief Executive Officer and
policies ranging from $1.0 to $19.0 million on certain other key executives. As
part of our Chairman and Chief Executive Officer's employment agreement, we
agree to use the proceeds from the key man life insurance to purchase from the
Chairman's estate up to $20 million of common stock at the closing price on the
last trading day immediately preceding his death.

15. COMMITMENTS

Leases -- We conduct operations from leased office facilities. We
expect that, in the normal course of business, leases that expire will be
renewed or replaced by other leases; thus it is anticipated that future minimum
lease commitments will not be less than the amount shown in the table below.

Rental expense for the years ended December 31, 2002, 2001, and, 2000
was $9.4 million, $6.0 million, and $4.1 million, respectively.

At December 31, 2002, approximate minimum rental commitments under all
non-cancelable leases having terms in excess of a year are as follows:

2003 $10,743
2004 10,622
2005 10,481
2006 9,997
2007 9,581
2008 and
thereafter 25,809
-------
$77,233
=======

16. RELATED PARTY TRANSACTIONS

A summary of our related party balances and transactions at December
31, 2002, 2001, and 2000 and for the years then ended are:

2002 2001 2000
---- ---- ----
BALANCES:
Accounts receivable -- officers
and directors...................... $ -- $ -- $ 64
Accrued liabilities.................... 40 23 25

TRANSACTIONS:
Commissions and service fees........... $ 52 $ 6 --
Commission and fee expense............. -- -- $ 25
General and administrative expense..... 418 347 154

We entered into compensation and employment agreements with certain key
employees. The agreements provide for an indefinite employment term,
compensation, stock bonuses, expense reimbursements and participation in benefit
plans and are subject to the employees' compliance with certain provisions. In
addition, nine administrative employees of our Healthcare Group are entitled to
a severance payment in the event they voluntarily terminate their employment.
This was an obligation of MCG/Healthcare at the time of its acquisition and was
valued and included in our consolidated balance sheet at approximately $616,000,
and $1.1 million at December 31, 2002 and 2001, respectively.

69

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONSOLIDATED)

We lease 16,266 square feet of office space owned by W.T. Thomas
Wamberg for approximately $400,000, under a lease expiring on February 21, 2009.

Wamberg Financial Corporation, one of our subsidiaries, leases hangar
space for the corporate aircraft from WTW Investment, an entity controlled by
Mr. Wamberg for an annual rent of approximately $45,000.

During 2003, we paid Randy Pohlman, a member of our Board of Directors,
$40,000 as a referral fee. This amount was accrued in our financial statements
as of December 31, 2002.

In 2001, Mr. Wamberg and Richard Chapman, Executive Vice-President of
Clark/Bardes, Inc. and President of the Banking Practice, have collectively
invested $1 million in a company of which George Dalton, a member of our Board
of Directors, is founder and majority shareholder.

Mr. Wamberg's two step-sons, Jason French and Chuck French, are
employed by us. Jason is a Director of Corporate Marketing and Chuck is a
consultant with the Executive Benefits Practice. Neither of them report directly
to Mr. Wamberg.

William Archer, a member of our Board of Directors since February 2001,
is a senior policy advisor at PricewaterhouseCoopers LLP. We previously engaged
PricewaterhouseCoopers LLP to perform various consulting related to the
installation of our wide area network and a knowledge management system at one
of our compensation consulting practices. In addition, PricewaterhouseCoopers
was retained by one of our practices to perform certain legislative work. During
2002 and 2001, we paid approximately $380,000 and $726,000, respectively, to
PricewaterhouseCoopers LLP for these services.

On February 25, 2002, we acquired the Federal Policy Group of
PricewaterhouseCoopers LLP. The purchase price was $11.0 million before
acquisition costs of approximately $28,000, consisting of a cash payment at
closing of $5.0 million and $6.0 million of contingent payments over the next
four years based upon attainment of established performance criteria.

Robert Long became a member of our Board of Directors in January 2003
as a result of the LongMiller acquisition. He received a substantial amount of
the proceeds including notes from our November 2002 purchase of LongMiller.

On September 25, 2002, we entered into an Administrative Services
Agreement and Bonus Forfeiture Agreement with an affiliate of AUSA Holding,
Inc., one of our principal stockholders. During 2002, we received $2.5 million
for services rendered prior to and through September 30, 2002 and recognized a
total of $3.2 million in 2002, pursuant to this agreement. Under the terms of
this agreement, we expect to continue to receive approximately $2.5 million from
the carrier for a period of 30 years depending upon certain conditions. Of this
annual amount, $2.0 million is included in the cash flows securitizing the
asset-backed notes issued to finance the acquisition of LongMiller, and we will
not have access to this cash for general corporate purposes until the
securitization notes are fully paid. This revenue, net of amounts provided for
chargebacks, are being recognized on a monthly basis beginning in October 2002.
The amounts received are subject to chargeback (reimbursement of a portion of
amounts received), if any policies under this agreement are surrendered or if
there is a section 1035 exchange. Any chargeback amounts would be deducted from
the next scheduled payment.

Fox-Pitt Kelton, co-manager of our November 2001 secondary offering,
owns Conning Capital Partners. Steve Piaker, a member of our Board of Directors,
is a partner with Conning Capital Partners.

70

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONSOLIDATED)

17. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted
earnings per share:

YEAR ENDED DECEMBER 31,
-----------------------------------------------
2002 2001 2000
---- ---- ----

NUMERATOR:
Net income for basic and diluted
earnings per share................. $17,328 $16,012 $11,448
------- ------- -------
DENOMINATOR:
Basic earnings per share -- weighted average
shares outstanding....................... 16,896,657 13,162,899 10,744,718
Effect of dilutive securities:
Stock options............................... 456,490 412,931 135,375
Contingent shares earned not issued........... 159,959 - -
---------- ---------- ----------
Diluted earnings per share -- weighted average
shares plus assumed conversions.......... 17,513,106 13,575,830 10,880,093
========== ========== ==========
PER SHARE:
Basic earnings ............................. $1.03 $1.22 $1.07
===== ===== =====
Diluted earnings............................ $0.99 $1.18 $1.05
===== ===== =====

There are 581,580, 225,000 and 737,821 potentially dilutive shares
related to outstanding stock options which are not included in the calculations
as they are anti-dilutive for the years ended December 31, 2002, 2001 and 2002,
respectively.

18. SIGNIFICANT RISKS AND UNCERTAINTIES

Federal tax laws create certain advantages for the purchase of life
insurance products; therefore, the life insurance products underlying the
benefit programs marketed by us are vulnerable to adverse changes in laws and
interpretation. Any proposal or enactment of changes in federal tax laws that
would reduce or eliminate such advantages could result in the surrender of
existing policies. As a result of any such change, we could lose a substantial
amount of renewal revenue and our ability to write new business could be
impaired.

In July 2002, proposed Treasury regulations changed the manner in which
split dollar life insurance arrangements will be taxed in the future. The new
tax treatment is, in certain respects, less attractive than the historical tax
treatment of split dollar arrangements. Consequently, this initiative could
result in reduced revenue from split dollar arrangements.

Other types of potential changes to federal tax laws could also have a
significant adverse effect on our revenues. In July 2002, the Senate Finance
Committee reported legislation that would have removed a 1978 moratorium on
Treasury Department regulatory guidance on the tax treatment of nonqualified
deferred compensation arrangements. On February 3, 2003, the Bush Administration
made a similar proposal to remove this guidance moratorium. Also, there have
been legislative proposals that would tax the deferrals of compensation by top
executives under certain "funded" deferred compensation arrangements, including
those involving rabbi trusts. If any of these legislative proposals were
enacted, future compensation deferrals under arrangements we market could be
significantly curtailed, with a resulting reduction in our revenues from these
arrangements.

There have been several recent legislative proposals to change the
federal tax laws with respect to business-owned life insurance. For example, in
1998, 1999, and 2000, the Clinton Administration proposed to deny interest
deductions of corporate taxpayers in proportion to the unborrowed cash values of
life insurance policies they held on the lives of their employees; however, this
proposal was not adopted by the Congress and has not been renewed by the Bush
Administration. More recently, in the aftermath of negative media coverage
regarding certain types of business-owned life insurance, Senator Jeff Bingaman
(D-NM) has proposed to tax the death benefits taxpayers receive from policies on
the lives of former employees. Significant segments of the life insurance
industry are engaged in an ongoing, intensive effort to oppose the Bingaman
proposal. While Senator Bingaman did not offer his proposal in 2002, and while
there has not been any significant demonstration of Congressional support for
the proposal, there can be no assurance that the proposal will not ultimately be
included in enacted legislation. If Congress were to adopt this proposal or
other legislation eliminating or limiting the tax-deferred appreciation of
business-owned life insurance policies, eliminating or limiting the tax-free
payment of death benefits on such policies, or otherwise adversely affecting the
tax treatment of the policies, these policies would be less attractive to
policyholders and a large number of such policies could be surrendered or
exchanged, which could have a

71

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONSOLIDATED)

material adverse effect on our financial condition and results of operations.

In recent years, the Internal Revenue Service ("IRS") has undertaken a
major enforcement initiative to disallow the interest deductions on certain
leveraged business-owned life insurance programs sold during or prior to 1995.
The IRS has prevailed on the majority of cases it has litigated related to this
initiative and has recently made a temporary public settlement offer to address
ongoing cases. While we stopped selling leveraged business-owned life insurance
programs after 1995 and we do not expect any material adverse impact on our
revenue from this enforcement initiative, it is impossible to determine the
impact of this initiative on a client's decision to continue or surrender an
existing leveraged business-owned life insurance program.

On July 30, 2002, President Bush signed the Sarbanes-Oxley Act of 2002
into law. This law generally prohibits any personal loans from certain
SEC-regulated companies to current directors or executive officers of such
companies. While it is not entirely clear, there is a possibility that company
premium payments made on or after July 30, 2002 on collateral-assignment split
dollar policies, on current directors or executive officers of those
SEC-regulated companies, could be covered by the loan prohibition. We have
certain split dollar policies with four of our officers. These policies are
expected to be terminated in 2003. Without favorable clarification of this law,
revenue from collateral assignment split dollar arrangements could be reduced as
a result of this law.

19. SEGMENTS AND RELATED INFORMATION

We have six reportable segments:
Executive Benefits Practice
Banking Practice
Healthcare Group
Human Capital Practice
Pearl Meyer & Partners
Federal Policy Group

On September 6, 2000, we acquired all of the outstanding common stock
of Compensation Resource Group, Inc. ("CRG") an independent company specializing
in the design, marketing and administration of non-qualified executive
compensation plans using company owned life insurance products. In acquiring
CRG, we reorganized as follows:
o The segment formerly known as Clark/Bardes was renamed Compensation
Resource Group and consists of a Los Angeles, California
headquarters with service centers in Dallas, Texas and Bethesda,
Maryland.
o The bank-owned life insurance product sold by the former
Clark/Bardes segment was transferred to the Banking Practice thus
placing all of our bank-owned life insurance business in one
segment, commencing January, 2001.

The Healthcare Group became a segment with the acquisition of Phynque,
Inc. (d.b.a. MCG/Healthcare) on April 5, 1999.

Prior to May 16, 2002, the amounts reflected below for the Human
Capital Practice segment reflect the results of and information related to the
Rewards and Performance Group, which is now part of the Human Capital Practice
(see Note 4). Pearl Meyer & Partners, Inc. became our fourth segment when it was
acquired on June 21, 2000.

In order to provide consistent presentation, we have reclassified
certain revenue and expense amounts related to CBFS. These amounts are included
with Corporate revenue and expense.

The six reportable segments operate as independent and autonomous
business units with a central corporate staff responsible for finance, strategic
planning, and human resources. Each segment has its own client base as well as
its own marketing, administration, and management.

We evaluate performance and allocate resources based on income from
operations before income taxes, interest, or corporate administrative expenses.
The accounting policies of the reporting segments are the same as those
described in the summary of significant policies. There are no inter-segment
revenues or expenses.

72

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONSOLIDATED)

FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2002 2001 2000
---- ---- ----

REVENUES FROM EXTERNAL CUSTOMERS
Executive Benefits Practice...................... $ 85,565 $ 94,238 $ 47,238
Banking Practice................................. 116,036 91,890 71,691
Healthcare Group................................. 37,906 27,527 23,498
Human Capital Practice........................... 11,584 9,028 --
Pearl Meyer & Partners........................... 13,074 12,600 6,453
Federal Policy Group............................. 9,520 - -
-------- -------- --------
Total segments -- reported.................. 273,685 235,283 148,880
Corporate/CBFS................................... 4,901 1,601 687
-------- -------- --------
Total consolidated -- reported.............. $278,586 $236,884 $149,567
======== ======== ========
OPERATING INCOME AND INCOME BEFORE TAXES
Executive Benefits Practice ...................... $ 4,169 $ 11,523 $ 8,931
Banking Practice.................................. 37,153 31,265 19,260
Healthcare Group.................................. 4,818 (1,334) 601
Human Capital Practice............................ (7,938) 2,680 --
Pearl Meyer & Partners............................ 1,916 1,164 1,232
Federal Policy Group.............................. 4,094 - -
-------- -------- --------
Total segments -- reported................... 44,212 45,298 30,024
Corporate/CBFS.................................... (10,499) (11,677) (9,134)
Write-off of Insurance Alliance Group.............. - (2,070) --
Other income...................................... 262 354 1,075
Interest -- net (1) .............................. (3,720) (7,168) (4,692)
-------- -------- --------
Income before taxes.......................... $ 30,255 $ 24,737 $ 17,273
======== ======== ========
DEPRECIATION AND AMORTIZATION
Executive Benefits Practice....................... $ 5,207 $ 6,778 $ 2,511
Banking Practice.................................. 3,666 2,128 2,955
Healthcare Group.................................. 2,947 3,256 2,479
Human Capital Practice............................ 255 496 --
Pearl Meyer & Partners............................ 646 1,653 783
Federal Policy Group.............................. 330 - --
-------- -------- --------
Total segments -- reported................... 13,051 14,311 8,728
Corporate/CBFS.................................... 549 355 (149)
-------- -------- --------
Total consolidated -- reported............... $ 13,600 $ 14,666 $ 8,579
======== ======== ========
IDENTIFIABLE ASSETS
Executive Benefits Practice....................... $ 83,665 $ 93,743 $ 83,964
Banking Practice.................................. 526,485 79,720 65,156
Healthcare Group.................................. 36,793 41,520 33,768
Human Capital Practice............................ 28,378 16,364 --
Pearl Meyer & Partners............................ 29,211 31,670 29,627
Federal Policy Group.............................. 7,413
-------- -------- --------
Total segments -- reported................... 711,945 263,017 212,515
Deferred tax asset................................ 1,252 690 1,861
Corporate/CBFS.................................... 21,373 6,224 5,479
-------- -------- --------
Total consolidated -- reported............... $734,570 $269,931 $219,855
======== ======== ========
CAPITAL EXPENDITURES
Executive Benefits Practice....................... $ 726 $ 1,352 $ 1,091
Banking Practice.................................. 1,657 724 1,161
Healthcare Group.................................. 2,049 1,117 663
Human Capital Practice............................ 668 154 --
Pearl Meyer & Partners............................ 383 1,104 550
Federal Policy Group.............................. 67 - -
-------- -------- --------
Total segments -- reported................... 5,550 4,451 3,465
Corporate/CBFS.................................... 2,151 554 32
-------- -------- --------
Total consolidated -- reported............... $ 7,701 $ 5,005 $ 3,497
======== ======== ========

(1) In 2001, we incurred $2.0 million of interest expense
related to our interest rate swaps.

Geographic Information -- Virtually all our revenue is derived from
clients located in the United States.

Major Customers and Clients -- We generated in excess of 25% of our
revenue in 2002 from 41 clients, in 2001 from 22 clients and in 2000 from 17
clients, respectively. None of the carriers individually accounted for more than
10% of consolidated revenue. Substantially all of the policies underlying the
programs marketed by us are underwritten by 20 life insurance companies, of
which seven accounted for approximately 48.3% of our first year revenue for the
year ended December 31, 2002, 60.0% of our first year revenue for the year ended
December 31, 2001, and 66.3% for the year ended December 31, 2000.

73

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONSOLIDATED)

20. ADDITIONAL FINANCIAL INFORMATION

Statement of Income -- In 2002, other income includes rental income
from a tenant who is subleasing office space from one of our practices.

In 2001, other income includes $191,000 of life insurance proceeds as a
result of the death of one of our employees and rental income from a tenant of
$256,000.

In 2000, other income includes $1.0 million death benefit proceeds
under a key person insurance policy as the result of the death of an executive
of the Banking Practice.

21. LITIGATION

From time to time, we are involved in various claims and lawsuits
incidental to our business, including claims and lawsuits alleging breaches of
contractual obligations under agreements with our consultants. The following is
a summary of the current material legal proceedings pending against us.

CONSTELLATION ENERGY GROUP, INC. AND BALTIMORE GAS AND ELECTRIC COMPANY, ET AL.
V. CLARK/BARDES, INC. AND NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION.

On July 25, 2000, Constellation Energy Group, Inc. ("Constellation")
and related entities filed a civil action against us in the U.S. District Court
for the District of Maryland. On September 14, 2001, Constellation amended its
complaint and added New York Life Insurance and Annuity Corporation as a
defendant. Constellation claims that we failed to take proper action in
connection with the administration of an employee benefit life insurance program
under which policies were issued by the defendant insurance company. On February
20, 2003, an agreement was reached for a complete settlement of this litigation.
While the settlement terms are confidential, we regard the outcome as favorable
and believe such terms will not have a material adverse impact on our financial
condition or results of operations.

FRIEDA SHUSTER, ET AL. V. HYDER MIRZA, ET AL. INCLUDING CLARK/BARDES, INC.

On May 30, 2001, we were named a defendant in a lawsuit filed in the
District Court of LaSalle County, Texas alleging gross negligence in connection
with the death of an employee when the private aircraft in which he was
traveling on company business crashed. Damages are unspecified. We deny any and
all claims and allegations in this action and intend to vigorously defend this
matter. The matter is covered by our existing insurance.

22. INTERIM FINANCIAL DATA (UNAUDITED)

During the fourth quarter of 2002, we completed an analysis of the
services provided and timing thereof under our administrative services
agreements at our Executive Benefits Practice. As a result of this analysis, we
determined that because of changes in the timing of the services being provided,
revenue under these agreements should have been recognized on the straight-line
during 2002. Historically, these fees were recognized 75% in the renewal month
and 25% ratably over the remainder of the annual service agreement. In addition,
we are also restating to reflect a timing difference whereby CBFS was under-
recognizing revenue in the period earned. This restatement for CBFS had no
impact on prior years reported or on 2002 results for the full year.

As a result, the first three quarters of the year ended December 31,
2002, have been restated from the amounts previously reported to recognize
administrative service fees on a straight-line basis and record CBFS revenue in
the appropriate period.

The following table presents a summary of key revenue and expense
statistics for the most recent eight calendar quarters. This information is not
necessarily indicative of results for any full year or for any subsequent
period.

74

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONSOLIDATED)

QUARTER ENDED
DEC. SEPT. JUNE MAR. DEC. SEPT. JUNE MAR.
2002 2002 2002 2002 2001 2001 2001 2001
---- ---- ---- ---- ---- ---- ---- ----
(AS (AS (AS
PREVIOUSLY PREVIOUSLY PREVIOUSLY
REPORTED) REPORTED) REPORTED)

REVENUE
First year commissions
and related fees $39,824 $36,042 $26,307 $24,551 $40,813 $22,021 $20,353 $36,162
Renewal commissions and
related fees 43,324 17,665 18,409 36,172 32,278 18,167 16,678 25,905
Consulting fees 10,098 8,215 8,911 5,031 5,100 4,255 6,398 3,906
Reimbursable expenses 1,603 768 1,322 1,350 1,725 1,233 1,024 866
------- ------- ------- ------- ------- ------- ------- -------
TOTAL REVENUE 94,849 62,690 54,949 67,104 79,916 45,676 44,453 66,839
% of annual 33.9% 22.4% 19.7% 24.0% 33.7% 19.3% 18.8% 28.2%

OPERATING EXPENSES
Commissions and fees 30,790 18,971 16,183 24,054 30,005 13,972 13,070 26,955
% of revenue 32.5% 30.3% 29.5% 35.8% 37.5% 30.6% 29.4% 40.3%
General and administrative 40,388 37,237 32,832 30,126 28,922 24,638 24,642 24,651
% of revenue 42.6% 59.4% 59.7% 44.9% 36.2% 53.9% 55.4% 36.9%
Reimbursable expenses 1,603 768 1,322 1,350 1,725 1,233 1,024 866
Amortization 3,158 2,163 2,097 1,831 2,934 2,887 2,940 2,799
Write-off of IAG (2) - - - - 2,070 - - -
------- ------- ------- ------- ------- ------- ------- -------
TOTAL OPERATING EXPENSES 75,939 59,139 52,434 57,361 65,656 42,730 41,676 55,271
------- ------- ------- ------- ------- ------- ------- -------
OPERATING INCOME 18,910 3,551 2,515 9,743 14,260 2,946 2,777 11,568
------- ------- ------- ------- ------- ------- ------- -------
% of revenue 19.9% 5.7% 4.6% 14.5% 17.8% 6.4% 6.2% 17.3%

INTEREST AND OTHER INCOME 155 145 155 157 37 419 56 393
INTEREST EXPENSE (3) 2,642 588 458 382 3,218 1,561 1,511 1,429
------- ------- ------- ------- ------- ------- ------- -------
INCOME BEFORE TAXES 16,423 3,108 2,212 9,518 11,079 1,804 1,322 10,532
Income taxes 6,597 1,431 846 3,940 3,946 39 422 4,318
------- ------- ------- ------- ------- ------- ------- -------
INCOME BEFORE CUMULATIVE
EFFECT IN CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX 9,826 1,677 1,366 5,578 7,133 1,765 900 6,214
Cumulative effect of change in
accounting principle, net of tax - - - 523 - - - -
------- ------- ------- ------- ------- ------- ------- -------
NET INCOME $ 9,826 $ 1,677 $ 1,366 $ 5,055 $ 7,133 $ 1,765 $ 900 $ 6,214
------- ------- ------- ------- ------- ------- ------- -------
Basic Earnings per Common Share $0.55 $0.10 $0.08 $0.31 $0.48 $0.14 $0.07 $0.49
===== ===== ===== ===== ===== ===== ===== =====
Diluted Earnings per Common
Share $0.55 $0.10 $0.08 $0.30 $0.48 $0.13 $0.07 $0.49
===== ===== ===== ===== ===== ===== ===== =====

75

CLARK/BARDES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONSOLIDATED)

QUARTER ENDED
DEC. SEPT. JUNE MAR. DEC. SEPT. JUNE MAR.
2002 2002(1) 2002(1) 2002(1) 2001 2001 2001 2001
---- ------- ------- ------- ---- ---- ---- ----
(AS (AS (AS
RESTATED) RESTATED) RESTATED)

REVENUE
First year commissions
and related fees $39,824 $35,941(1) $26,281(1) $24,778(1) $40,813 $22,021 $20,353 $36,162
Renewal commissions and
related fees 43,324 17,889(1) 18,376(1) 34,875(1) 32,278 18,167 16,678 25,905
Consulting fees 10,098 8,215 8,911 5,031 5,100 4,255 6,398 3,906
Reimbursable expenses 1,603 768 1,322 1,350 1,725 1,233 1,024 866
------- ------- ------- ------- ------- ------- ------- -------
TOTAL REVENUE $94,849 $62,813 $54,890 $66,034 $79,916 $45,676 $44,453 $66,839
% of annual 34.0% 22.6% 19.7% 23.7% 33.7% 19.3% 18.8% 28.2%

OPERATING EXPENSES
Commissions and fees 30,790 18,971 16,183 24,054 30,005 13,972 13,070 26,955
% of revenue 32.5% 30.2% 29.5% 36.4% 37.5% 30.6% 29.4% 40.3%
General and administrative 40,388 37,237 32,832 30,126 28,922 24,638 24,642 24,651
% of revenue 42.6% 59.3% 59.8% 45.6% 36.2% 53.9% 55.4% 36.9%
Reimbursable expenses 1,603 768 1,322 1,350 1,725 1,233 1,024 866
Amortization 3,158 2,163 2,097 1,831 2,934 2,887 2,940 2,799
Write-off of IAG(2) - - - - 2,070 - - -
------- ------- ------- ------- ------- ------- ------- -------
TOTAL OPERATING EXPENSES 75,939 59,139 52,434 57,361 65,656 42,730 41,676 55,271
------- ------- ------- ------- ------- ------- ------- -------
OPERATING INCOME 18,910 3,674 2,456 8,673 14,260 2,946 2,777 11,568
------- ------- ------- ------- ------- ------- ------- -------
% of revenue 19.9% 5.8% 4.5% 13.1% 17.8% 6.4% 6.2% 17.3%

INTEREST AND OTHER INCOME 155 145 155 157 37 419 56 393
INTEREST EXPENSE (3) 2,642 588 458 382 3,218 1,561 1,511 1,429
------- ------- ------- ------- ------- ------- ------- -------
INCOME BEFORE TAXES 16,423 3,231 2,153 8,448 11,079 1,804 1,322 10,532
INCOME TAXES 6,597 1,487(1) 823(1) 3,497(1) 3,946 39 422 4,318
------- ------- ------- ------- ------- ------- ------- -------
INCOME BEFORE CUMULATIVE
EFFECT IN CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX 9,826 1,744 1,330 4,951 7,133 1,765 900 6,214
Cumulative effect of change in
accounting principle, net of tax - - - 523 - - - -
------- ------- ------- ------- ------- ------- ------- -------
NET INCOME $ 9,826 $ 1,744 $ 1,330 $ 4,428 $ 7,133 $ 1,765 $ 900 $ 6,214
------- ------- ------- ------- ------- ------- ------- -------
Basic Earnings per Common Share $0.55 $0.10 $0.08 $0.27 $0.48 $0.14 $0.07 $0.49
===== ===== ===== ===== ===== ===== ===== =====
Diluted Earnings per Common Share $0.55 $0.10 $0.08 $0.26 $0.48 $0.13 $0.07 $0.49
===== ===== ===== ===== ===== ===== ===== =====

(1) As restated
(2) In the fourth quarter of 2001, we incurred an operating
expense of $2.1 million in connection with the write-down of
assets acquired from Insurance Alliances Group.
(3) In 2001, we recorded interest expense of approximately $2.0
million as a result of the interest rate swap settlements
associated with the payoff of our outstanding bank debt with
the proceeds from our secondary offering.

23. SUBSEQUENT EVENTS

On January 28, 2003, our Board of Directors approved an amendment to
our certificate of incorporation changing our name to Clark, Inc., approved the
Clark, Inc. 2003 Stock Option Plan, and approved the Amended and Restated
Employee Stock Purchase Plan. These proposals will be submitted to the
shareholders for approval at the April 29, 2003 Annual Shareholder meeting.

On January 7, 2003, we entered into two interest rate swaps with a
total notional value of $50 million to hedge the $50 million of term debt. The
terms of these interest rate swaps are as follows:

Fixed rate to Variable rate to
Notional amount be paid be received Maturity date
- --------------- ------- ----------- -------------
$28 million 2.85% LIBOR December 31, 2007
$22 million 2.92% LIBOR December 31, 2007

76

SIGNATURES

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

CLARK/BARDES, INC.

By: /s/ W.T. WAMBERG
-----------------------------------------
W. T. Wamberg
President and Chief Executive Officer

Date: March 26, 2003

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

/s/ W.T. WAMBERG Chairman of the Board, March 26, 2003
- ------------------------------ President, Chief
W. T. Wamberg Executive Officer and Director

/s/ THOMAS M. PYRA Vice President and Chief March 26, 2003
- ------------------------------ Financial Officer, Principal
Thomas M. Pyra Accounting Officer and Chief
Operating Officer

/s/ RANDOLPH A. POHLMAN Director March 26, 2003
- ------------------------------
Randolph A. Pohlman

/s/ L. WILLIAM SEIDMAN Director March 26, 2003
- ------------------------------
L. William Seidman

/s/ GEORGE D. DALTON Director March 26, 2003
- ------------------------------
George D. Dalton

/s/ STEVEN F. PIAKER Director March 26, 2003
- ------------------------------
Steven F. Piaker

/s/ BILL ARCHER Director March 26, 2003
- ------------------------------
Bill Archer

/s/ ROBERT LONG Director March 26, 2003
- ------------------------------
Robert Long

77

CERTIFICATIONS
- --------------

I, W.T. Wamberg, certify that:

1. I have reviewed this annual report on Form 10-K of
Clark/Bardes, Inc.;

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

3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual 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-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures 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 annual
report is being prepared;

b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) Presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date.

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

1. all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and

2. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have
indicated in this annual report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.

Date: March 26, 2003 /s/ W.T. Wamberg
-----------------

Title: President and Chief Executive Officer
---------------------------------------

78

I, Thomas M. Pyra, certify that:

1. I have reviewed this annual report on Form 10-K of
Clark/Bardes, Inc.;

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

3. Based on my knowledge, the financial statements, and
other financial information included in this annual
report, fairly present in all material respects the
financial condition, results of operations and cash
flows of the registrant as of, and for, the periods
presented in this annual 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-14 and 15d-14) for the
registrant and we have:

a. Designed such disclosure controls and
procedures 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 annual report is being prepared;

b. Evaluated the effectiveness of the
registrant's disclosure controls and
procedures as of a date within 90 days prior
to the filing date of this annual report
(the "Evaluation Date"); and

c. Presented in this annual report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date.

5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, 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 in the design
or operation of internal controls which
could adversely affect the registrant's
ability to record, process, summarize and
report financial data and have identified
for the registrant's auditors any material
weaknesses in internal controls; and

b. any fraud, whether or not material, that
involves management or other employees who
have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have
indicated in this annual report whether or not there
were significant changes in internal controls or in
other factors that could significantly affect
internal controls subsequent to the date of our most
recent evaluation, including any corrective actions
with regard to significant deficiencies and material
weaknesses.

Date: March 26, 2003 /s/ Thomas M. Pyra
------------------

Title: Chief Financial Officer and Chief
Operating Officer
--------------------------------------

79

EXHIBIT INDEX

2.1 Reorganization Agreement, dated as of July 30, 1998, by and among
Clark/Bardes Holdings, Inc., Clark/Bardes, Inc. and the Predecessor
Company (Incorporated herein by reference to Exhibit 2.1 of
Clark/Bardes' Registration Statement on Form S-1, File No. 333-56799).

2.2 Asset Purchase Agreement, dated September 5, 1997, among Clark/Bardes,
Inc., Bank Compensation Strategies, Inc., et al. (Incorporated herein
by reference to Exhibit 2.3 of Clark/Bardes' Registration Statement on
Form S-1, File No. 333-56799).

2.3 Asset Purchase Agreement, dated September 18, 1998, with Schoenke &
Associates Corporation, Schoenke & Associates Securities Corporation
and Raymond F. Schoenke, Jr. (Incorporated herein by reference to
Exhibit 2.2 of Clark/Bardes' Current Report on Form 8-K, File No.
000-24769, filed with the SEC on October 2, 1998).

2.4 Asset Purchase Agreement, dated April l5, 1999, by and among
Clark/Bardes, Inc., Clark/Bardes Holdings, Inc., Phynque, Inc., and
certain shareholders of Phynque, Inc. (Incorporated herein by reference
to Exhibit 2.1 of Clark/Bardes' Current Report on Form 8-K, File No.
000-24769, filed with the SEC on April 20, 1999).

2.5 Asset and Stock Purchase Agreement, dated September 1, 1999, by and
among Clark/Bardes, Inc. and The Wamberg Organization Inc. and W.T.
Wamberg (Incorporated herein by reference to Exhibit 2.1 of
Clark/Bardes' Current Report on Form 8-K, File No. 000-24769, filed
with the SEC on September 16, 1999).

2.6 Stock Purchase Agreement, dated June 21, 2000 by and among
Clark/Bardes, Inc. and Clark/Bardes Holdings, Inc. as Purchasers and
Pearl Meyer, Diane Posnak, Steven E. Hall, Rhonda C. Edelman, Claude E.
Johnston and David E. Swinford as Stockholders (Incorporated herein by
reference to Exhibit 2.1 of Clark/Bardes Current Report on Form 8-K,
File No. 000-24769, filed with the SEC on July 5, 2000).

2.7 Agreement of Merger and Plan of Reorganization, dated September 6,
2000, by and among Clark/Bardes Holdings, Inc., and Clark/Bardes
Acquisition, Inc., and Compensation Resource Group, Inc. and William L.
MacDonald, Sr. (Incorporated herein by reference to Exhibit 2.1 of
Clark/Bardes Current Report on Form 8-K, File No. 000-24769, filed with
the SEC on September 11, 2000).

2.8 Asset Purchase Agreement, dated March 12, 2001, by and among
Clark/Bardes, Inc., Clark/Bardes Holdings, Inc., Rich,
Florin/Solutions, Inc., Rich, Florin/Solutions Trust and certain
shareholders of Rich, Florin/Solutions, Inc. (Incorporated herein by
reference to Exhibit 2.8 of Clark/Bardes' Registration Statement on
Form S-3, File No. 333-72232, filed with the SEC on November 2, 2001).

2.9 Asset Purchase Agreement, dated August 31, 2001, by and among
Clark/Bardes Consulting, Inc., Clark/Bardes, Inc. Lyons Compensation &
Benefits, LLC and certain shareholders of Lyons Compensation &
Benefits, LLC (Incorporated herein by reference to Exhibit 29 of
Clark/Bardes' Registration Statement on Form S-3, File No. 333-72232,
filed with the SEC on November 2, 2001).

2.10 Membership Interests Purchase Agreement regarding FTPG LLC, dated
February 25, 2002, by and among Clark/Bardes, Inc., Clark/Bardes
Consulting, Inc. and PricewaterhouseCoopers LLP, Kenneth J. Kies,
Patrick J. Raffaniello and FTPG LLC. (Incorporated herein by reference
to Exhibit 2.10 of Clark/Bardes' Annual Report on Form 10-K, File No.
000-27469, filed with the SEC on March 29, 2002).

3.1 Certificate of Incorporation of Clark/Bardes, Inc. (Incorporated herein
by reference to Exhibit 3.1 of Clark/Bardes' Registration Statement on
Form S-1, File No. 333-56799, filed with the SEC on July 12, 1998).

3.2 Certificate of Amendment of Certificate of Incorporation of
Clark/Bardes, Inc. (incorporated herein by reference to Exhibit 3.3 to
Amendment No.1 to the Clark/Bardes' Registration Statement on Form S-1,
File No. 333-56799), filed with the SEC on July 27, 1998).

3.3 Certificate of Amendment of Certificate of Incorporation of
Clark/Bardes, Inc. (incorporated herein by reference to Exhibit 5 of
Clark/Bardes' Registration Statement on Form 8-A, filed with the SEC on
February 28, 2002).

80

3.4 Bylaws of Clark/Bardes, Inc. (Incorporated herein by reference to
Exhibit 3.2 of Clark/Bardes' Registration Statement on Form S-1, File
No. 333-56799, filed with the SEC on July 12, 1998).

3.5 Certificate of Designation (Incorporated herein by reference to Exhibit
3.4 of Clark/ Bardes' Registration Statement on Form S-1, File No.
333-56799).

3.6 Certification of Amendment of the Certification of Incorporation of
Clark/Bardes, Inc. (Incorporated herein by reference to Exhibit 3.6 of
Clark/Bardes' Quarterly report on Form 10-Q, File No. 000-24769, filed
with the SEC on August 14, 2002).

4.1 Specimen Certificate for shares of Common Stock, par value $.01 per
share, of Clark/Bardes Holdings, Inc. (Incorporated herein by
reference to Exhibit 4.1 of Clark/Bardes' Amendment No. 1 to the
Registration Statement on Form S-1, File No. 333-56799, filed with the
SEC on July 27, 1998).

4.2 Rights Agreement, dated as of July 10, 1998, by and between
Clark/Bardes Holdings, Inc. and The Bank of New York (Incorporated
herein by reference to Exhibit 4.4 of Clark/Bardes' Quarterly Report on
Form 10-Q, File No. 000-24769, filed with the SEC on November 16,
1998).

10.1 Clark/Bardes, Inc. 1998 Stock Option Plan (Incorporated herein by
reference to Exhibit 10.1 of Clark/Bardes' Registration Statement on
Form S-1, File No. 333-56799).

10.2 Clark/Bardes Consulting, Inc. Execu-FLEX Benefit Plan, restated
effective as of June 1, 2001(Incorporated herein by reference to
Exhibit 10.2 of Clark/Bardes' Annual Report on Form 10-K, File No.
000-27469, filed with the SEC on March 29, 2002).

(a) Amendment No. 1 to Clark/Bardes Consulting, Inc. Execu-FLEX
Benefit Plan, effective as of January 1, 2002 (Incorporated
herein by reference to Exhibit 10.2(a) of Clark/Bardes' Annual
Report on Form 10-K, File No. 000-27469, filed with the SEC on
March 29, 2002).

10.3 Administration and Services Agreement, by and between Clark/Bardes,
Inc. and Clark/Bardes Securities, Inc. (Incorporated herein by
reference to Exhibit 10.3 of Clark/Bardes' Registration Statement on
Form S-1, File No. 333-56799).

10.4 Administration and Services Agreement, by and between Clark/Bardes,
Inc. and Clark/Bardes, Inc. of Pennsylvania (Incorporated herein by
reference to Exhibit 10.4 of Clark/Bardes Registration Statement on
Form S-1, File No. 333-56799).

10.5 Letter of Agreement, dated July 24, 1998, to Great-West, Life Investors
and Nationwide (Incorporated herein by reference to Exhibit 10.34 of
Clark/Bardes' Registration Statement on Form S-1, File No. 333-56799).

10.6 Tax Indemnity Agreement by and between Clark/Bardes Holdings, Inc.,
Clark/Bardes, Inc. and certain former Shareholders of the Predecessor
Company (Incorporated herein by reference to Exhibit 10.28 of
Clark/Bardes' Registration Statement on Form S-1, File No. 333-56799).

10.7 Lease Agreement, dated April 24, 1998, by and between Northland Center
Limited Partnership and Clark/Bardes, Inc. (Incorporated herein by
reference to Exhibit 10.16 of Clark/Bardes' Registration Statement on
Form S-1, File No. 333-56799).

10.8 Sublease Agreement, dated as of September 1, 1999, between
Clark/Bardes, Inc. and The Wamberg Organization (Incorporated herein by
reference to Exhibit 10.49 of Clark/Bardes' Quarterly Report on Form
10-Q, File No. 000-24769, filed with the SEC on November 12, 1999).

10.9 Form of Employee Stock Purchase Plan (Incorporated herein by reference
to Exhibit 10.29 of Clark/Bardes' Registration Statement on Form S-1,
File No. 333-56799).

10.10 1998 Non-Employee Director Stock Option Plan (Incorporated herein by
reference to Exhibit 4.7 of Clark/Bardes' Registration Statement on
Form S-8, File No. 333-68163, filed with the SEC on December 1, 1998).

10.11 Form of Clark/Bardes, Inc. 401(k) Savings Plan (Incorporated herein by
reference to Exhibit 4.3 of Clark/Bardes' Registration Statement on
Form S-8, File No. 333-68982, filed with the SEC on September 5, 2001).

81

10.12 Form of Employment Agreement dated October 30, 2001 by and between
Clark/ Bardes, Inc. and Thomas M. Pyra. (Incorporated herein by
reference to Exhibit 10.12 of Clark/Bardes' Annual Report on Form 10-K,
File No. 000-27469, filed with the SEC on March 29, 2002).

10.13 Form of Employment Agreement dated April 5, 1999 by and between
Clark/Bardes, Inc. and Donald Wegmiller (Incorporated herein by
reference to Exhibit 10.47 of Clark/Bardes' Quarterly Report on Form
10-Q, File No. 000-24769, filed with the SEC on August 16, 1999).

10.14 Employment Agreement effective August 14, 2001 by and between
Clark/Bardes, Inc. and Richard C. Chapman. (Incorporated herein by
reference to Exhibit 10.14 of Clark/Bardes' Annual Report on Form 10-K,
File No. 000-27469, filed with the SEC on March 29, 2002).

10.15 Employment Agreement, dated as of September 1, 1999, by and between
Clark/Bardes Holdings, Inc. and W.T. Wamberg (Incorporated herein by
reference to Exhibit 10.48 of Clark/Bardes' Quarterly Report on Form
10-Q, File No. 000-24769, filed with the SEC on November 12, 1999).

(a) First Amendment, dated March 6, 2002, to the Employment
Agreement by and between Clark/Bardes Holdings, Inc. and W.T.
Wamberg (Incorporated herein by reference to Exhibit 10.15 (a)
of Clark/Bardes' Annual Report on Form 10-K, File No.
000-27469, filed with the SEC on March 29, 2002).

10.16 Employment Agreement dated as of March 1, 2001 by and between
Clark/Bardes Holdings, Inc. and James C. Bean. (Incorporated herein by
reference to Exhibit 10.16 of Clark/Bardes' Annual Report on Form 10-K,
File No. 000-27469, filed with the SEC on March 29, 2002).

10.17 Amended and Restated Credit Agreement, dated as of December 28, 1999
among Clark/Bardes, Inc. as Borrower, Bank One Texas, NA as
Administrative Agent, U.S. Bank National Association as Co-Agent,
Certain Financial Institutions as Lenders, and Bank One Capital
Markets, Inc. as Lead Arranger and Sole Book Runner (Incorporated
herein by reference to Exhibit 10.50 of Clark/Bardes' Annual Report on
Form 10-K, filed with the SEC on March 29, 2000).

(a) First Amendment to Amended and Restated Credit Agreement as of
August 23, 2000 by and among Clark/Bardes, Inc., Bank One,
Texas, N.A. as administrative agent for itself and other
designated lenders. (Incorporated herein by reference to
Exhibit 10.51 of Clark/Bardes' Annual Report on Form 10-K/A
for the period ending December 31, 2000, filed with the SEC on
April 9, 2001).

10.18 Promissory Note dated September 6, 2000 by and among Clark/Bardes
Holdings, Inc. and William L. MacDonald, Sr. (Incorporated herein by
reference to Exhibit 10.1 of Clark/Bardes' Current Report on Form 8-K,
File No. 000-24769, filed with the SEC on September 20, 2000).

10.19 Clark/Bardes, Inc. 2002 Stock Option Plan (Incorporated herein by
reference to Exhibit 10.1 of Clark/Bardes' Quarterly Report on Form
10-Q, File No. 000-24769, filed with the SEC on November 14, 2002).

10.20 Membership Interest Purchase Agreement, dated as of September 25, 2002,
by and among Clark/Bardes, Inc., Clark/Bardes Consulting, Inc., Long,
Miller & Associates, LLC and certain other parties named therein
(Incorporated herein by reference to Exhibit 10.19 of Clark/Bardes'
Quarterly Report on Form 10-Q, File No. 000-24769, filed with the SEC
on November 14, 2002).

10.21 Bonus Forfeiture Agreement dated as of September 25, 2002, among Life
Investors Insurance Company of America, Transamerica Life Insurance
Company and Clark/Bardes Consulting, Inc. (Incorporated herein by
reference to Exhibit 10.20 of Clark/Bardes' Quarterly Report on Form
10-Q, File No. 000-24769, filed with the SEC on November 14, 2002).

10.22 Administrative Services Agreement, dated as of September 25, 2002,
among Life Investors Insurance Company of America, Transamerica Life
Insurance Company and Clark/Bardes Consulting, Inc. (Incorporated
herein by reference to Exhibit 10.21 of Clark/Bardes' Quarterly Report
on Form 10-Q, File No. 000-24769, filed with the SEC on November 14,
2002).

10.23 Sale and Servicing Agreement, dated as of October 1, 2002 by and among
CBC Insurance Revenue Securitization, LLC, Long, Miller & Associates,
LLC, Clark/Bardes Consulting, INC., BNY Midwest Trust Company and BNY
Asset Solutions LLC.*

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10.24 Indenture, dated as of October 1, 2002 by and among CBC Insurance
Revenue Securitization, LLC and BNY Midwest Trust Company.*

21 Subsidiaries of the Registrant*

23.1 Consent of Deloitte and Touche LLP*

23.2 Consent of Ernst & Young LLP*

23.3 Consent of Ernst & Young LLP*

_______________
*filed herewith

83