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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x

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

SECURITIES EXCHANGE ACT OF 1934

As of and for the year ended December 31, 2002

OR

¨

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

SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-28830

Navigant Consulting, Inc.

(Exact name of Registrant as specified in its charter)

615 North Wabash Avenue, Chicago, Illinois 60611

(Address of principal executive offices, including zip code)

(312) 573-5600

(Registrant’s telephone number, including area code)

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

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

None

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

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

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

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

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NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

FORM 10-K

AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2002

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PART I

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

Item 1.     Business.

General

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

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

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

(a) General Development of Business

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

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

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(b) Financial Information about industry segments

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

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

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

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

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

(c) Narrative description of business

Overview

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

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

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

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

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

Service Offerings

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

Industry Sectors

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

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

Human Capital

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

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

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

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

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

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

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

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

Competition

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

(d) Other Matters

Concentration of Revenues

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

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Business Risks

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

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

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

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

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

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

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

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

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

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

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

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

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

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

International Operations

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

Available Information

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

Item 2.     Properties.

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

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Item 3.     Legal Proceedings.

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

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

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

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

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

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

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

Not Applicable.

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Executive Officers of the Registrant

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

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

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

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

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PART II

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

Market Information

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

Holders

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

Distributions

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

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Sale of Unregistered Securities

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

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Item 6.     Selected Financial Data.

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

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

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

Overview

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

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

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

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

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

Critical Accounting Policies

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

Revenue Recognition Policies

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

Determinations of Accounts Receivable Realization

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

Valuation of Net Deferred Tax Assets

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

Acquisitions and Divestitures

2002 Acquisitions:

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

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

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

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

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

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

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

2001 Acquisitions:

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

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

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

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

2000 Acquisitions:

There were no acquisitions of businesses during 2000.

2000 Divestitures:

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

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

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

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

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

Results of Operations

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

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Results of Operations—2002 compared to 2001

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Results of Operations—2001 compared to 2000

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

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

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

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

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

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

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

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

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

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

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

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

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Unaudited Quarterly Results

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