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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarter ended December 31, 2002

or

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

SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-22125

DIAMONDCLUSTER INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

(312) 255-5000

Registrant’s Telephone Number, Including Area Code

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

As of January 31, 2003, there were 25,435,475 shares of Class A Common Stock and 6,402,193 shares of Class B Common Stock of the Registrant outstanding.

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DIAMONDCLUSTER INTERNATIONAL, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE FISCAL QUARTER ENDED DECEMBER 31, 2002

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DIAMONDCLUSTER INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

See accompanying notes to condensed consolidated financial statements

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DIAMONDCLUSTER INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share data)

See accompanying notes to condensed consolidated financial statements

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DIAMONDCLUSTER INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

See accompanying notes to condensed consolidated financial statements

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DIAMONDCLUSTER INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A.    Basis of Reporting

The accompanying condensed consolidated financial statements of DiamondCluster International, Inc., formerly Diamond Technology Partners Incorporated (the ‘‘Company’’), include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform with the current period presentation. In the opinion of management, the consolidated financial statements reflect all adjustments that are necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows as of the dates and for the periods presented. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Consequently, these statements do not include all the disclosures normally required by accounting principles generally accepted in the United States of America for annual financial statements nor those normally made in the Company’s Annual Report on Form 10-K. Accordingly, reference should be made to the Company’s Annual Report on Form 10-K for additional disclosures, including a summary of the Company’s accounting policies, which have not changed, except as indicated in Note C in these Notes to Condensed Consolidated Financial Statements. The consolidated results of operations for the quarter ended December 31, 2002, are not necessarily indicative of results for the full year.

B.    Business Combinations

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

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

In October 1999, the Company acquired Leverage Information Systems, Inc. (“Leverage”), a San Francisco-based systems architecture and development company specializing in the building of complex web sites and intranets. Under the terms of the acquisition, the Company paid $3.4 million, consisting of $1.0 million in cash and 97,500 shares of the Company’s Class A Common Stock. Goodwill recorded for the Leverage acquisition was approximately $3.3 million.

In April 1999, the Company acquired OmniTech Consulting Group, Inc. (“Omnitech”), a Chicago-based change management firm specializing in web-based and other multimedia corporate learning. Under the terms of the acquisition agreement, the Company paid $9.0 million, consisting of $4.0 million in cash, a $1.0 million note (which has been fully paid), and 173,461 shares of the Company’s Class A Common Stock. Goodwill recorded for the Omnitech acquisition was approximately $8.8 million.

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DIAMONDCLUSTER INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The acquisitions were accounted for under the purchase method of accounting and, accordingly, the operating results of OmniTech, Leverage, Momentus and Cluster have been included in the Company’s consolidated financial statements since the dates of the acquisitions. The amount of goodwill recorded for OmniTech, Leverage, Momentus and Cluster approximated $319.2 million.

C.    Recently Adopted Accounting Pronouncements

Goodwill and Other Intangible Assets

On April 1, 2002 the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” With the adoption of SFAS No. 142, goodwill and other indefinite life intangible assets (“intangibles”) are no longer subject to amortization, rather they are subject to an assessment for impairment whenever events or circumstances indicate that impairment may have occurred, but at least annually, by applying a fair value based test. Prior to April 1, 2002 the Company amortized goodwill and identifiable intangible assets on a straight-line basis over their estimated useful lives, which did not exceed 40 years, and periodically reviewed the recoverability of these assets based on the expected future undiscounted cash flows.

The Company completed its initial impairment test on goodwill using the methodology described in SFAS No.142 in the first quarter of fiscal 2003, and will conduct an assessment of impairment based on fair value in accordance with the requirements of SFAS No. 142 on an annual basis beginning with the fourth quarter of fiscal year 2003. In connection with the adoption of SFAS No. 142 on April 1, 2002, the Company recognized an impairment loss of $140.9 million as the cumulative effect of the change in accounting principle.

Goodwill amortization was $61.9 million in fiscal 2002, or $2.01 per share on both a pre-tax and after-tax basis. Goodwill amortization for the three and nine months ended December 31, 2001 was $15.5 million and $46.3 million, respectively. No goodwill amortization was recorded for the three and nine months ended December 31, 2002. Goodwill, net, as of March 31, 2002 and December 31, 2002 was $235.2 million and $94.3 million, respectively. There were no indefinite life intangibles, other than goodwill, at December 31, 2002.

The following table sets forth an analysis of the changes in the total carrying amount of goodwill for the year ended March 31, 2002 and for the nine months ended December 31, 2002 (in thousands):

The Company has two geographic operating segments – North America and Europe and Latin America. The majority of goodwill reflected in the Company’s consolidated financial statements was recognized in connection with the November 2000 acquisition of Cluster. The acquired Cluster business comprises the majority of the activities of the Europe and Latin America operations. The carrying value of goodwill allocated to each of these geographic operating segments was tested for impairment as of April 1, 2002, in connection with the initial adoption of SFAS No.142. The goodwill impairment loss of $140.9 million recognized in the first quarter of fiscal 2003 was necessary to write down the carrying amount of goodwill to its implied fair value. The fair value was estimated based on the income approach, using the present value of future estimated cash flows.

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DIAMONDCLUSTER INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table sets forth a reconciliation of reported net income (loss) to adjusted net income (loss) for fiscal 2000, 2001 and 2002 (in thousands):

Long-Lived Assets

On April 1, 2002 the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This Statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” This Statement establishes a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale. The Statement retains most of the requirements of SFAS No. 121 related to the recognition of the impairment of long-lived assets to be held and used. There was no impact on the financial condition or operating results of the Company from adopting SFAS No. 144 in the nine months ended December 31, 2002.

D.    Net Loss Per Share

The following is a reconciliation of the shares used in computing basic and diluted net loss per share for the three and nine-month periods ended December 31 , 2001 and 2002 (in thousands):

The dilutive earnings per share calculation for the three months ended December 31, 2001 and 2002 and the nine months ended December 31, 2001 and 2002 excludes 2.0 million, 0.5 million, 2.0 million and 0.5 million

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DIAMONDCLUSTER INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

common stock equivalents, respectively, related to stock options due to their anti-dilutive effect as a result of the Company’s reported net loss during these periods. For the three months ended December 31, 2001 and 2002 and the nine months ended December 31, 2001 and 2002, respectively, an additional 12.7 million, 17.1 million, 12.4 million and 16.9 million stock options are excluded due to their anti-dilutive effect as a result of the options’ exercise prices being greater than the average market price of the common shares for these periods.

E.    Allowance for Doubtful Accounts and Deferred Revenue

Management makes estimates of the amount of billed and unbilled accounts receivable that may not be collected from clients. In making these estimates, management specifically analyzes individual client balances, the composition of the aging of accounts receivable, historical bad debts, customer credit-worthiness and current economic trends, and considers the Company’s overall experience with estimating uncollectible amounts. As of December 31, 2002, the accounts receivable balance was $18.0 million, including unbilled accounts receivable of $0.5 million, and net of allowance for doubtful accounts of $1.0 million. Unbilled accounts receivable are typically billed the following month.

Provisions are also made for estimated costs to be incurred subsequent to targeted project completion. These provisions are estimated based principally on historical experience and a review of projects in progress and are reflected, net of actual costs incurred on completed projects, in deferred revenue. The deferred revenue balance, measured based on the gross amount of services expected to be rendered subsequent to targeted project completion date, was $1.1 million as of December 31, 2002. Also included in the deferred revenue balance are prepaid client fees related to consulting services that the Company expects to earn in subsequent periods. These prepaid amounts historically have been and continue to be immaterial to the total deferred revenue balance.

F.    Foreign Exchange Risk Management

Objectives and Context

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

Management believes it is prudent to minimize the variability caused by foreign currency risk. Management attempts to minimize foreign currency risk by pricing contracts in the respective local country’s functional currency and by using derivative instruments when necessary. The Company’s financial management continually monitors foreign currency risk and the use of derivative instruments. The Company does not use derivative instruments for purposes other than hedging net investments in foreign subsidiaries.

Strategies

International revenues are generated primarily from sales of services in various countries and are typically denominated in the local currency of each country, most of which now use the euro. The Company’s foreign subsidiaries also incur most of their expenses in the local currency. Accordingly, all foreign subsidiaries use the local currency as their functional currency. As a result, management does not believe that its financial position is significantly exposed to foreign currency risk from foreign currency-denominated receivables and payables or forecasted service transactions.

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DIAMONDCLUSTER INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

DiamondCluster has net investments in foreign operations located throughout Europe and Latin America. In order to mitigate the impact of foreign currency movements on the Company’s financial position, in some cases the Company hedges its euro exposures through the use of euro/U.S. dollar forward contracts. These contracts have been designated and have qualified as hedging instruments of the foreign currency exposure related to the Company’s net investment in its foreign operations. Accordingly, the net amount of gains or losses on these forward foreign exchange contracts offset losses and gains on the Company’s exposure to foreign currency movements related to is net investments in its foreign operations and are reflected in the cumulative translation adjustment account and included as a component of other comprehensive income. At March 31, 2002, the Company had one euro/U.S. dollar forward contract outstanding in the notional principal amount of EUR 62.8 million. On June 28, 2002, the Company settled its euro/U.S. dollar forward contract for EUR 62.8 million. As noted above, the Company entered into this contract to mitigate the effect of an adverse movement of foreign exchange rates. As a result of the weakening of the U.S. dollar against the euro in the first quarter of fiscal 2003, the Company recorded a net loss on the forward exchange contract of $7.4 million in the cumulative translation adjustments account which was offset by the related gain on the net investment in the foreign operations during the period. As of December 31, 2002, there were no open euro/U.S. dollar contracts outstanding.

G.    Restructuring Charges

As a result of management’s plan to better align the Company’s operating infrastructure with anticipated levels of business in fiscal 2003, the Company restructured its workforce and operations in December 2002, September 2002, and December 2001.

In connection with the restructuring plan implemented in December 2002, the Company recorded a restructuring charge of $8.4 million ($5.4 million on an after-tax basis, or $0.17 per share). The $8.4 million charge consisted of $7.8 million for severance and related expenses, $0.4 million related to office space reductions and $0.2 million for the write-off of various depreciable assets. The principal actions in the December 2002 restructuring plan included workforce reductions, resulting in the termination of approximately 115 employees, of whom 38 employees were still employed by the Company as of December 31, 2002, and whom the Company expects to terminate in the fourth fiscal quarter upon the completion of project assignments. Of the total employees severed, 79% were project personnel and 21% were operational personnel.

In connection with the restructuring plan implemented in September 2002, the Company recorded a restructuring charge of $20.5 million ($12.8 million on an after-tax basis) or $0.41 per share. The $20.5 million charge consisted of $12.1 million for contractual commitments related to office space reductions, $5.7 million for severance and related expenses and $2.7 million for the write-off of various depreciable assets and the termination of certain equipment leases. The principal actions in the September 2002 restructuring plan involved office space reductions, which included further consolidation of office space in multiple offices globally. Estimated costs for the reduction in physical office space are comprised of contractual rental commitments for office space vacated, attorney fees and related costs to sublet the office space, offset by estimated sub-lease rental income. The restructuring plan also included workforce reductions, resulting in the termination of approximately 90 employees, none of whom were still employed by the Company as of December 31, 2002. Of the total employees severed, 60% were project personnel and 40% were operational personnel. Also included in the restructuring plan were the costs associated with the termination of certain equipment leases and costs related to the write-down of other assets to their estimated net realizable value.

In connection with the restructuring plan announced in December 2001, the Company recorded a restructuring charge of $15.5 million ($9.5 million on an after-tax basis), or $0.31 per share. In September 2002,

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DIAMONDCLUSTER INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

the Company adjusted this charge and recognized $0.4 million of additional expense due primarily to a change in estimate related to the cost of terminating an equipment lease, bringing the total restructuring charge to $15.9 million ($9.7 million on an after-tax basis). The $15.9 million charge consisted of $10.8 million for severance and related expenses, $3.1 million for contractual commitments and leasehold improvements related to office space reductions, and $2.0 million for other depreciable assets and certain equipment leases. The principal actions in the December 2001 restructuring plan involved workforce reductions, including the discontinuation of certain business activities within the Diamond Marketspace Solutions group. The restructuring plan included the termination of approximately 300 employees, none of whom remained employed by the Company as of December 31, 2002. Of the total employees severed, 90% were project personnel and 10% were operational personnel. In addition, the restructuring plan included office space reductions in San Francisco, New York and Chicago. Estimated costs related to the reduction of office space comprise contractual rental commitments for office space being vacated and certain equipment leases, as well as costs associated with the write-off of leasehold improvements and write-down of other assets to their estimated net realizable value.

The total cash outlay for the restructuring announced in December 2002 is expected to approximate $7.5 million. The remaining $0.9 million of restructuring costs consist of non-cash charges primarily related to non-cash severance items and the write-down of certain assets to their estimated net realizable value. As of December 31, 2002, approximately $1.3 million of cash had been expended for this initiative, primarily related to severance and related costs.

The total cash outlay for the restructuring announced in September 2002 is expected to approximate $18.0 million. The remaining $2.5 million of restructuring costs consist of non-cash charges primarily for the write-down of certain assets to their estimated net realizable value, as well as the write-off of sign-on bonuses previously paid to terminated employees. As of December 31, 2002, $5.3 million of cash had been expended for this initiative, primarily related to severance and related costs.

The total cash outlay for the restructuring announced in December 2001 is expected to approximate $13.2 million. The remaining $2.7 million of restructuring costs consist of non-cash charges primarily for the write-off of leasehold improvements and other related costs for the facilities being downsized, as well as the write-off of sign-on bonuses previously paid to terminated employees. As of December 31, 2002, $12.0 million of cash had been expended for this initiative, primarily related to severance and related costs.

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

*Relates to currency translation adjustments

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DIAMONDCLUSTER INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

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DIAMONDCLUSTER INTERNATIONAL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with the information contained in the Condensed Consolidated Financial Statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements” below.

Overview

DiamondCluster is a premier global management-consulting firm. We help leading organizations worldwide develop and implement growth strategies, improve operations, and capitalize on technology. We work collaboratively with our clients, utilizing teams of consultants with skills in strategy, technology and program management. During the quarter ended December 31, 2002 we generated net revenues (before reimbursements of out-of-pocket expenses) of $30.1 million from 70 clients. We employed 613 client-serving professionals and had eleven offices in North America, Europe and Latin America as of December 31, 2002.

Our revenues are comprised of professional fees for services rendered to our clients which are billed either monthly or semi-monthly in accordance with the terms of the client engagement. Prior to the commencement of a client engagement, we and our client agree on fees for services based upon the scope of the project, our staffing requirements and the level of client involvement. We recognize revenue as services are performed in accordance with the terms of the client engagement. Provisions are made based on our experience for estimated uncollectible amounts. These provisions, net of write-offs of accounts receivable, are reflected in the allowance for doubtful accounts. If it becomes evident that costs are likely to be incurred subsequent to targeted project completion, a portion of the project revenue is reflected in deferred revenue. Although from time to time we have been required to make revisions to our clients’ estimated deliverables, to date none of such revisions have had a material adverse effect on our operating results.

The largest portion of our costs is comprised of employee-related expenses for our client-serving professionals and other direct costs, such as third-party vendor costs and unbillable costs associated with the delivery of services to our clients. The remainder of our costs are comprised of the expenses associated with the development of our business and the support of our client-serving professionals, such as professional development and recruiting, marketing and sales, and management and administrative support. Professional development and recruiting expenses consist primarily of recruiting and training content development and delivery costs. Marketing and sales expenses consist primarily of the costs associated with the development and maintenance of our marketing materials and programs. Management and administrative support expenses consist primarily of the costs associated with operations, finance, information systems, facilities (including the rent of office space) and other administrative support for project personnel.

We regularly review our fees for services, professional compensation and overhead costs to ensure that our services and compensation are competitive within the industry, and that our overhead costs are balanced with our revenue level. In addition, we monitor the progress of client projects with client senior management. We manage the activities of our professionals by closely monitoring engagement schedules and staffing requirements for new engagements. However, a rapid decline in the demand for the professional services we provide could result in a lower utilization of our professionals than we planned. In addition, because most of our client engagements are, and may be in the future, terminable by our clients without penalty, an unanticipated termination of a client project could require us to retain underutilized employees. While the number of client serving professionals must be adjusted to reflect active engagements, we must also retain a sufficient number of senior professionals to oversee existing client engagements and participate in our sales efforts to secure new client assignments.

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DIAMONDCLUSTER INTERNATIONAL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS—(Continued)

Forward Looking Statements

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

Recently Adopted Accounting Pronouncements

Goodwill and Other Intangible Assets

On April 1, 2002 the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” With the adoption of SFAS No. 142, goodwill and other indefinite life intangible assets (“intangibles”) are no longer subject to amortization, rather they are subject to an assessment for impairment whenever events or circumstances indicate that impairment may have occurred, but at least annually, by applying a fair value based test. Prior to April 1, 2002 the Company amortized goodwill and identifiable intangible assets on a straight-line basis over their estimated useful life not to exceed 40 years, and periodically reviewed the recoverability of these assets based on the expected future undiscounted cash flows.

The Company completed its initial impairment test on goodwill using the methodology described in SFAS No. 142 in the first quarter of fiscal 2003, and will conduct an assessment of impairment based on fair value in accordance with the requirements of SFAS No. 142 on an annual basis beginning with the fourth quarter of fiscal year 2003. In connection with the adoption of SFAS No. 142 on April 1, 2002, the Company recognized an impairment loss of $140.9 million as the cumulative effect of a change in accounting principle.

Goodwill amortization was $61.9 million in fiscal 2002, or $2.01 per share on both a pre-tax and after-tax basis. Goodwill amortization for the three and nine months ended December 31, 2001 was $15.5 million and $46.3 million, respectively. No goodwill amortization was recorded for the three and nine months ended December 31, 2002. Goodwill, net, as of March 31, 2002 and December 31, 2002 was $235.2 million and $94.3 million, respectively. There were no indefinite life intangibles other than goodwill at December 31, 2002.

The Company has two geographic operating segments – North America and Europe and Latin America. The majority of goodwill reflected in the Company’s consolidated financial statements was recognized in connection with the November 2000 acquisition of Cluster. The acquired Cluster business comprises the majority of the activities of the Europe and Latin America operations. The carrying value of goodwill allocated to each of these geographic operating segments was tested for impairment as of April 1, 2002, in connection with the initial adoption of SFAS No.142. The goodwill impairment loss of $140.9 million recognized in the first quarter of fiscal 2003 was necessary to write down the carrying amount of goodwill to its implied fair value. The fair value was estimated based on the income approach, using the present value of future estimated cash flows.

Long-Lived Assets

On April 1, 2002 the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This Statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived

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DIAMONDCLUSTER INTERNATIONAL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS—(Continued)

Assets and for Long-Lived Assets to Be Disposed Of.” This Statement establishes a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale. The Statement retains most of the requirements of SFAS No. 121 related to the recognition of the impairment of long-lived assets to be held and used. There was no impact on the financial condition or operating results of the Company from adopting SFAS No. 144 in the nine months ended December 31, 2002.

Results of Operations

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

Quarter Ended December 31, 2002 Compared to Quarter Ended December 31, 2001

Our net loss for the quarter ended December 31, 2002 was $20.9 million compared to a net loss of $43.1 million during the quarter ended December 31, 2001. This decrease in the loss of $22.2 million is primarily due

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DIAMONDCLUSTER INTERNATIONAL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS—(Continued)

to the decrease in total operating expenses as a result of the cost reduction programs implemented throughout fiscal years 2002 and 2003, the decrease in goodwill amortization upon the adoption of SFAS No. 142 effective April 1, 2002, and the decrease in the restructuring charge taken in this quarter as compared to the same quarter in the prior year. These expense decreases were partially offset by a decrease in revenue before out-of-pocket expense reimbursements.

The Company applies Accounting Principles Board (APB) Opinion 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for stock issued to employees. Effective April 1, 2003, the Company will apply Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based Compensation, in accounting for stock issued to employees for grants awarded subsequent to that date. Had compensation expense on options issued to employees been determined based on the fair value at the grant date consistent with the methodology prescribed in SFAS No. 123, the Company’s net loss and diluted earnings per share would have increased by $1.6 million to a net loss of $22.5 million for the three months ended December 31, 2002, or $(0.72) per share.

Our revenues before out-of-pocket expense reimbursements decreased 16.8% to $30.1 million during the quarter ended December 31, 2002 as compared to the same period in the prior year. Total revenue including out-of-pocket expense reimbursements decreased 17.0% to $33.5 million for the quarter ended December 31, 2002 compared with $40.4 million reported for the same period of the prior year. The decrease in revenue can be principally attributed to the continued weakness in the global economy, resulting in a decline in current demand for the Company’s services. The unstable economic conditions have also led to pricing pressures, a lengthening of the Company’s sales cycle and reductions and/or deferrals of client expenditures for consulting services. Revenue from new clients accounted for 8% of the revenue during the three-month period ended December 31, 2002 compared to 10% during the same period in the prior year. We served 70 clients during the quarter ended December 31, 2002 as compared to 63 clients during the same period in the prior year.

Project personnel and related expenses before out-of-pocket reimbursable expenses decreased $4.1 million to $26.8 million during the quarter ended December 31, 2002 as compared to the same period in the prior year. The decrease in project personnel and related expenses reflects savings resulting from cost reduction programs implemented during the third quarter of fiscal 2002 and throughout fiscal 2003. During the quarters ended December 31, 2001, September 30, 2002, and December 31, 2002 we further reduced personnel as part of the Company’s restructuring plan. We reduced our client-serving professional staff from 958 at December 31, 2001 to 613 at December 31, 2002. As a percentage of net revenues, project personnel and related expenses before out-of-pocket expense reimbursements increased from 85.4% to 89.0% during the quarter ended December 31, 2002, as compared to the same period in the prior year, due primarily to a decline in revenue. Similarly, project personnel and related expenses including out-of-pocket reimbursable expenses decreased $4.9 million to $30.2 million during the quarter ended December 31, 2002 as compared to the same period of the prior year.

Professional development and recruiting expenses decreased $1.7 million to $1.1 million during the quarter ended December 31, 2002 as compared to the same period in the prior year. This decrease primarily reflects decreases in our level of recruiting and decreased training conduct expenditures. As a percentage of net revenues, these expenses decreased to 3.7% as compared to 7.7% during the same period in the prior year.

Marketing and sales expenses decreased $0.6 million to $0.8 million during the quarter ended December 31, 2002 as compared to the same period in the prior year as a result of decreased marketing activities. As a percentage of net revenues, these expenses decreased to 2.6% as compared to 3.8% during the same period in the prior year.

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DIAMONDCLUSTER INTERNATIONAL, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS—(Continued)

Management and administrative support expenses decreased from $11.1 million to $8.2 million, or 26.1%, during the quarter ended December 31, 2002 as compared to the same period in the prior year, principally as a result of our cost reduction programs, including the closing of the New York office and the downsizing of other offices globally. As a percentage of net revenues, these expenses decreased from 30.8% to 27.4% during the quarter ended December 31, 2002 as compared to the same period in the prior year.

Goodwill amortization decreased from $15.5 million to zero during the quarter ended December 31, 2002, as compared to the same period in the prior year, as a result of the Company’s adoption of SFAS No. 142 on April 1, 2002. As a percentage of net revenues, these expenses decreased from 42.7% to 0.0% as compared to the same period in the prior year.

Noncash compensation decreased from $13.0 million during the quarter ended December 31, 2001 to $10.5 million during the quarter ended December 31, 2002. Noncash compensation expense is primarily the amortization of unearned compensation resulting from the issuance of stock options at prices below fair market value to Cluster employees in connection with the Cluster acquisition. The unearned compensation will be earned over time contingent on the continued employment of these employees. The decrease in noncash compensation is primarily due to stock option cancellations as a result of forfeitures from terminated employees. As a percentage of net revenues, noncash compensation was 35.1% during the quarter ended December 31, 2002 as compared to 36.0% in the same period of the prior year.

In the third quarter of fiscal 2003, the Company recorded a restructuring charge of $8.4 million as a result of management’s plan to better align the Company’s operating infrastructure with anticipated levels of business in fiscal 2003. The $8.4 million charge consisted of $7.8 million for severance and related expenses, $0.4 million related to office space reductions and $0.2 million for the write-off of various depreciable assets. The principal actions in the December 2002 restructuring plan included workforce reductions, resulting in the termination of approximately 115 employees, of whom 38 employees were still employed by the Company as of December 31, 2002, and whom the Company expects to terminate in the fourth quarter upon the completion of project assignments. Of the total employees severed, 79% were project personnel and 21% were operational personnel. The client-serving personnel consist of partners, principals, managers, associates and analysts. The Company expects savings from the December 2002 restructuring plan to be about $15—$16 million on an annualized basis.

The loss from operations decreased from a loss of $54.0 million to a loss of $25.8 million during the quarter ended December 31, 2002 as compared to the same period in the prior year. This decrease is primarily due to the decrease in total operating expenses as a result of the cost reduction programs implemented throughout fiscal years 2002 and 2003, the decrease in goodwill amortization upon the adoption of SFAS No. 142 effective April 1, 2002, and the decrease in the restructuring charge taken in this quarter as compared to the same quarter in the prior year. These expense decreases were partially offset by a decrease in revenue before out-of-pocket expense reimbursements. EBITA, which consists of earnings from operations before amortization of goodwill, noncash compensation and restructuring charges decreased from a loss of $10.0 million to a loss of $6.8 million during the quarter ended December 31, 2002 as compared to the same period in the prior year. EBITA is not a measure of financial performance under U.S. generally accepted accounting principles. You should not consider it in isolation from, or as a substitute for, net income or cash flow measures prepared in accordance with U.S. generally accepted accounting principles or as a measure of profitability or liquidity. Additionally, our EBITA calculation may not be comparable to other similarly titled measures of other companies. We have included EBITA as a supplemental disclosure because it may provide useful information regarding our ability to generate cash for operating and other corporate purposes.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS—(Continued)

Other income (expense), net decreased from $1.4 million to $0.3 million during the quarter ended December 31, 2002 as compared to the same period in the prior year. As a percentage of net revenues, other income decreased to 1.2% as compared to 3.7% during the same period in the prior year.

The Company has deferred tax assets which have arisen primarily as a result of operating losses incurred in fiscal year 2002 and the first nine months of fiscal year 2003, as well as other temporary differences between book and tax accounting. Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Management judgment is required in determining the Company’s provision for income taxes, its deferred tax assets and liabilities and any valuation allowance recorded against the gross deferred tax assets. The income tax benefit decreased from a benefit of $9.6 million to a benefit of $4.5 million during the quarter ended December 31, 2002 as compared to the same period in the prior year, due principally to the decrease in the pre-tax loss before nondeductible goodwill amortization incurred in the current quarter. The Company believes that the ultimate realization of the net deferred tax assets for federal, state, and foreign income tax purposes is considered more likely than not, due to anticipated sufficient future taxable income.

Nine Months Ended December 31, 2002 Compared to Nine Months Ended December 31, 2001

Our net loss for the nine months ended December 31, 2002 of $214.4 million increased $112.7 million from $101.7 million during the nine months ended December 31, 2001. This increase is due primarily to the noncash loss related to the impairment in the value of goodwill and the decrease in net revenue before out-of-pocket expense reimbursements, partially offset by a reduction in goodwill amortization upon the adoption of SFAS No. 142 on April 1, 2002, and the decrease in operating expenses resulting from the implementation of cost reduction programs throughout fiscal 2002 and 2003.

The Company applies Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for stock issued to employees. Effective April 1, 2003, the Company will apply Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based Compensation, in accounting for stock issued to employees for grants awarded subsequent to that date. Had compensation expense on options issued to employees been determined based on the fair value at the grant date consistent with the methodology prescribed in SFAS No. 123, the Company’s net loss and diluted earnings per share would have been increased by $2.4 million to a net loss of $216.8 million for the nine months ended December 31, 2002, or a loss of $6.89 per share.

Net revenue for the nine months ended December 31, 2002 was $106.5 million, down 26.6% compared with $145.1 million reported for the same period in the prior year. The decrease in revenue can be principally attributed to the continued weakness in the global economy, resulting in a decline in current demand for the Company’s services. The unstable economic conditions have also led to pricing pressures, a lengthening of the Company’s sales cycle and reduction and/or deferrals of client expenditures for consulting services. Revenue from new clients accounted for 16% of the revenue during the nine month period ended December 31, 2002 compared to 12% during the same period in the prior year. We served 120 clients during the nine months ended December 31, 2002, a decrease from the 129 clients served in the same period in the prior year.

Project personnel and related expenses before out-of-pocket reimbursable expenses decreased $18.0 million to $85.2 million during the nine months ended December 31, 2002 as compared to the same period in the prior year. The decrease in project personnel and related expenses reflects savings resulting from cost reduction programs implemented throughout fiscal 2002 and 2003. Beginning in June 2001, we reduced salaries between

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS—(Continued)

10% and 15% for most employees, and in August 2001, we reduced salaries 65% for approximately 200 furloughed employees. During the quarters ended December 31, 2001, March 31, 2002, September 30, 2002, and December 31, 2002, we further reduced personnel as part of the Company’s restructuring plan. We reduced our client-serving professional staff from 958 at December 31, 2001 to 613 at December 31, 2002. As a percentage of net revenues, project personnel and related expenses before out-of-pocket expense reimbursements increased from 71.1% to 79.9% during the nine months ended December 31, 2002, as compared to the same period in the prior year, due primarily to increased client prospecting costs and a decline in revenue. Similarly, project personnel and related expenses including out-of-pocket reimbursable expenses decreased $20.3 million to $100.7 million during the nine-month period ended December 31, 2002 as compared to the same period of the prior year.

Professional development and recruiting expenses decreased $6.8 million to $3.3 million during the nine months ended December 31, 2002 as compared to the same period in the prior year. This decrease primarily reflects decreases in our level of recruiting, a reduction in firm-wide meetings, and decreased training conduct expenditures. As a percentage of net revenues, these expenses decreased to 3.1% as compared to 6.9% during the same period in the prior year.

Marketing and sales expenses decreased from $5.9 million to $3.6 million during the nine months ended December 31, 2002 as compared to the same period in the prior year as a result of decreased marketing activities and personnel reductions. As a percentage of net revenues, these expenses decreased to 3.4% as compared to 4.1% during the same period in the prior year.

Management and administrative support expenses decreased from $36.8 million to $28.5 million, or 22.5%, during the nine months ended December 31, 2002 as compared to the same period in the prior year, principally as a result of our cost reduction programs, including the closing of the New York office and the downsizing of other offices globally. As a percentage of net revenues, these expenses increased from 25.4% to 26.8% during the nine-month period ended December 31, 2002 as compared to the same period in the prior year.

Goodwill amortization decreased from $46.3 million to zero during the nine months ended December 31, 2002 as compared to the same period in the prior year as a result of the Company’s adoption of SFAS No. 142 on April 1, 2002. As a percentage of net revenues, these expenses decreased from 31.9% to 0% as compared to the same period in the prior year.

Noncash compensation increased from $40.0 million during the nine months ended December 31, 2001 to $44.0 million during the nine months ended December 31, 2002. Noncash compensation expense is primarily the amortization of unearned compensation resulting from the issuance of stock options at prices below fair market value to Cluster employees in connection with the Cluster acquisition. The unearned compensation will be earned over time contingent on the continued employment of these employees. The increase in noncash compensation expense during the nine months ended December 31, 2002 is due principally to the recognition of $8.6 million of additional expense related to the remaining unamortized original intrinsic value of certain non-vested stock options cancelled by the Company on May 14, 2002, pursuant to an offer to employees (other than senior officers) to surrender certain stock options previously granted to them in exchange for a future grant of new options to purchase the same class of shares. As a percentage of net revenues, noncash compensation increased from 27.6% to 41.3% during the nine months ended December 31, 2002 as compared to the same period in the prior year.

Restructuring charge expense increased from $15.5 million during the nine months ended December 31, 2001 to $29.3 million during the nine months ended December 31, 2002. In September and December 2002, the