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Article by DailyStocks_admin    (01-18-08 03:37 AM)

The Daily Magic Formula Stock for 01/18/2008 is Diamond Management & Technology Consultants Inc. According to the Magic Formula Investing Web Site, the ebit yield is 16% and the EBIT ROIC is >100 %.

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BUSINESS OVERVIEW

Overview

Diamond is a management and technology consulting firm. We help leading organizations worldwide to understand and leverage technology to realize value in their businesses. Recognizing that information and technology shape market dynamics, Diamond’s small teams of experts work across functional and organizational boundaries to improve growth and profitability. Since the greatest value in a strategy, and its highest risk, resides in its implementation, Diamond also provides proven execution capabilities. Diamond delivers three critical elements to every project: fact-based objectivity, spirited collaboration, and sustainable results.

Our firm offers our clients skills in strategy, technology, operations and program management to help companies improve operations, increase flexibility, reduce costs, address changing regulations and markets, and grow their businesses. We combine innovative strategic thinking, industry expertise, and a thorough understanding of technology to deliver results for our clients. We work collaboratively with our clients using small, multidisciplinary teams because we believe the most lasting and significant improvements occur when the client is integrally involved in the change. Our multidisciplinary approach enables our consultants to develop and execute innovative strategies that may not be identified by consulting firms that use more traditional team structures. We go to market by vertical industry and focus on businesses that are strategically dependent upon technology, and in particular information technology. We currently serve clients primarily in five industries: financial services, insurance, healthcare, telecommunications, and the public sector. The Company also has an industry practice it calls “Enterprise” that serves clients across several industries, including manufacturing, retail, distribution, travel and transportation, and consumer packaged goods.

In July 2006, the Company sold portions of its international operations that included the offices and respective operations in Barcelona, Dubai, Madrid, Münich, Paris and São Paulo for $29.5 million. The Company may also earn up to an additional $7 million in cash if the consulting operations in those markets achieve certain revenue objectives through January 2008. These operations are reported as “discontinued operations” in the financial statements and related notes. The Company retained its consulting practices in North America, the U.K. and India, which are markets of global strategic focus. These operations are considered “continuing operations.” All previously reported data from the Consolidated Statements of Operations and Comprehensive Income (Loss) has been reclassified to conform with this presentation to allow for meaningful comparison. The Consolidated Balance Sheets aggregate amounts associated with the discontinued operations as described above. The Consolidated Statement of Cash Flows is prepared on a combined basis (continuing operations plus discontinued operations) for all periods presented. All analytical and statistical references refer to data from continuing operations only unless otherwise stated.

During the fiscal year ended March 31, 2007, we generated net revenue of $168.7 million from 105 clients. At March 31, 2007, we employed 507 consultants and 106 operations employees. Our physical locations are comprised of six offices in North America, Europe and Asia, which include Chicago, Hartford, London, Mumbai, New York City and Washington, D.C.

Industry Background and Opportunity

Demand in the consulting industry is driven by change. The business environment today is faced with significant changes on a wide variety of fronts, including globalization, regulatory requirements, economic cycles, new competition, industry and market consolidation, organizational restructurings, and new technologies. Management teams are constantly assessing the potential impact of these changes on their businesses. Many of these changes are significant and impact entire organizations. Other changes impact specific products or functional areas.

Among the most pervasive of these changes is technology. Technology often fundamentally affects how a company relates to its customers, suppliers, employees, investors, and competitors. As such, organizations often invest significant resources in technology. Consequently, technology is increasingly an area of focus among the highest levels of business organizations, including the CEO and the board of directors.

Management teams turn to consultants for a number of reasons, including the need for deep expertise in a specific area, shorter execution timeframes, risk mitigation, objective perspective, and the presence of an outside change agent. We believe that companies increasingly seek outside consultants that can provide a combination of innovative strategic analysis, in-depth industry expertise, and a thorough understanding of information technology and its applications to help them create and execute plans that will improve their businesses.

While the fundamental reasons management teams turn to consultants have not changed in decades, we believe a structural change has taken place in the technology consulting industry with the arrival of the offshore firms. Today, we believe the industry is comprised of three main segments: management and advisory, solution delivery and system integration, and offshore maintenance and development. The management and advisory segment is comprised of companies that compete on the basis of their objectivity, relationships, and intellectual capital. Traditional management and advisory firms include McKinsey & Company, Booz Allen Hamilton, Inc., and The Boston Consulting Group. These firms have traditionally offered services in corporate strategy, organization, and business processes, and they have recently begun to offer information technology advisory services as well. Diamond fits squarely in the management and advisory space.

The largest portion of the industry is comprised of solution delivery and system integration companies, such as Accenture Ltd., International Business Machines Corporation (IBM), Electronic Data Systems Corporation (EDS), and Computer Sciences Corporation (CSC). These companies typically compete on scale and scope of services, and there are natural trends toward consolidation, more integrated offerings, and establishment of offshore development sites to drive down cost. The offshore segment is comprised of companies that compete on cost and quality, and are generally located in developing economies, such as India, Mexico, Russia, and China. Examples of these firms are Infosys Technologies Limited and Wipro Ltd. These firms have traditionally offered call center and application maintenance and development services, and they are steadily moving up market to compete directly with the solution delivery and system integration companies. The line between the solution delivery and offshore segments has become blurred.

We believe that the growth and continued consolidation among solution providers, as well as expanding service offerings of offshore firms, will enhance the demand for advisory firms that provide objective advice as a core business, particularly firms with deep competency in information technology and operations like Diamond. Further, as both business and information technology become increasingly complex and linked, the market for consulting services in general is growing. We believe that this increasing complexity, coupled with the changes in industry structure, increases the importance of an objective advisor that is able to remain vendor independent.

Our Competitive Strengths

We combine innovative strategic thinking, in-depth vertical industry expertise, a thorough understanding of information technology and its applications, complex program management skills and a global perspective to deliver economic impact for our clients. We offer clients the skills of a traditional information technology service provider, with the objective, advisory role of the traditional strategic consulting firms. We help our clients use information technology to improve operations, increase flexibility, reduce costs, address changing regulations and markets, and grow their businesses. We believe the following attributes, in combination, distinguish us from our competitors:

Objectivity. We provide our clients with objective advice in the areas of strategy, information technology, operations and program management. We believe that the increasing cost and complexity of information technology and the changing structure within the consulting industry increase the value to senior management of an objective advisor, such as Diamond. We have intentionally avoided offering services or entering into alliances that might bias our objectivity, such as selling or reselling hardware or software, or offering software development services.

Senior-Level Relationships. We serve “c-level” buyers within an organization ( i.e., CEO, COO, CFO, CIO, CMO). We also have in place a number of programs that maintain these relationships in between engagements (see “Business Development”). Our goal is to become managements’ trusted advisor, with no bias towards a particular technology or product.

Small, Multidisciplinary Teams. We work with our clients from the earliest stages of study and assessment, through idea generation, strategy creation, and execution, using small teams with skills in strategy, information technology, operations and program management. We believe our approach of using small, multidisciplinary teams provides our clients with a common perspective and breadth of expertise not available from other consulting firms. This model also enables our clients to develop a relationship with every member of the team.

Collaborative Business Model. Our small-team business model demands that we work collaboratively with our clients. We believe this approach is best because we believe the most lasting and significant improvements occur when the client is integrally involved in the change. We work with CEOs and senior leadership teams of leading organizations worldwide to understand and leverage information technology. This approach transfers to the client critical knowledge and accountability that is necessary to enact lasting and productive change. Our model is designed to provide only the highest value services to our clients. When needed, we work with third-party sources, including solution delivery and offshore firms, to execute strategies and plans. We believe this provides maximum value to our clients.

Delivery of Results. Diamond delivers tangible results, not just recommendations. Our consultants work with client management to develop a complete cost/benefit analysis, which focuses on metrics such as shareholder value and return on invested capital. Diamond then works with the client to execute plans and achieve the results.

Strategic Industry Insight and Expertise. We focus on serving vertical industries that are strategically dependent on information technology: financial services, insurance, healthcare, telecommunications, and the public sector. We also have an industry practice we call “Enterprise” that serves clients across several vertical industries, including manufacturing, retail, distribution, travel and transportation and consumer packaged goods. We believe our vertical industry focus enables us to define strategies and deliver results that effectively address the market dynamics, regulatory environments, and business opportunities facing our clients.

Continuous Innovation. We believe that an enduring, high-quality consulting firm must have three basic qualities: employ highly talented people, maintain a track record of high-impact work, and have the ability to continuously generate new and relevant intellectual capital. While a number of consulting firms have talented people and strong client track records, the ability to continuously generate new intellectual capital is more difficult. Diamond has a systematic approach to innovation, which ensures that we stay ahead of the intellectual capital curve and deliver highly advanced thinking to our clients across industries and within industries.

Ability to Quickly Evolve Our Offerings. The consulting industry is subject to changes in economic, business, and technology cycles, which requires a consulting firm to be agile in order to maintain the relevancy of its services to the market. Our approach of identifying and scaling new service offerings enables us to quickly evaluate and change our service offerings to meet current client demands. Our people are skilled in three enduring competencies — strategy, information technology, and operations as well as underlying program management skills required to manage and orchestrate change — that are independent of particular economic, business, and technology cycles.

Global Diversity and Perspective. We believe that our global perspective and knowledge, combined with our understanding of local markets, provide us the ability to deliver consistent, high-quality consulting services, and to effectively serve our clients.

Foster A Strong Culture. The most important asset of a consulting firm is its people. We have developed a strong and enduring culture by recruiting primarily from leading graduate and undergraduate universities, promoting from within, and developing an environment of continuous learning and innovation that helps to retain our talented professionals (see “Employees and Culture”). We are committed to the long-term growth and development of each of our professionals.

Experienced and Motivated Management. Our management team has an average of nearly 20 years of experience. They have experience managing consulting businesses through business, economic, and technology cycles, and have strong skills in establishing and developing client relationships.

Our Growth Strategy

Our goal is to become the consultant of choice for clients looking for an objective partner to help them understand and leverage information technology to improve operations, increase flexibility, reduce costs, address changing regulations and markets, and grow their businesses. Our business model is designed to allow us to be an objective and trusted advisor who provides the highest value of services to our clients from strategy through execution. We believe our business model provides our Company with a fundamental differentiation because it requires a collaborative approach with the client, utilizes multidisciplinary teams, and effectively leverages the ongoing stream of new intellectual capital in our organization. The following strategies guide our actions as we grow our business:

Focus on, and Expand Relationships with Core Clients. We develop strong, long-term relationships with our clients that often lead to repeat business and referrals. We achieve this by doing high-impact work and cultivating close relationships with CEOs and senior leadership teams, even after our work is complete. The access, contact, and goodwill generated through our existing client relationships afford us opportunities to provide additional services, often resulting in multiple projects at a single client and referrals to new clients.

Continue to Diversify Across Industries and Geographic Locations. We believe that diversifying our business across industries and key geographies will allow the Company to have steady growth through economic, business, and technology cycles. We serve clients in five key industries: financial services, insurance, healthcare, telecommunications, and the public sector. The Company also has an industry it calls “Enterprise” that serves clients across several vertical industries, including manufacturing, retail, distribution, travel and transportation and consumer packaged goods. We believe that our vertical market focus provides a scalable structure for growth. We expect the number of vertical markets we serve, as well as the services we offer and geographic locations in which we work, to change and grow as our expertise and client demands evolve. For example, we expect to see the consumer packaged goods industry emerge from the Enterprise sector as a significant vertical practice area. We currently serve clients across the globe through offices in North America, the U.K. and India.

Market Our Brand. We intend to continue to invest in the development and maintenance of our brand identity in the markets we serve. We will continue to promote our name and credentials through publications, seminars, speaking engagements, media and analyst relations, and other efforts. We believe that building a brand image facilitates both the lead generation process and the ability to attract and retain the best people by raising awareness of our firm, resulting in an increase in the number of new clients and recruitment opportunities.

Nurture and Promote Our Intellectual Capital. We utilize our accumulated knowledge and experience to provide relevant intellectual capital to each project. We continuously seek to identify, disseminate, and incorporate new intellectual capital throughout our organization to keep abreast of business and information technology trends, while creating repeatable frameworks that can be leveraged to deliver results more effectively and efficiently. Internal and external experts, as well as industry practitioners including the Diamond Fellows (see “Business Development — Capture Phase”), provide intellectual capital to the Company.

Cultivate Our Multidisciplinary Culture. In order to maintain a differentiated service offering, we work to develop and sustain a business culture that is common across all of our organizational competencies. We promote our culture by exposing our professionals to all of the various services that we provide through training and practice, while further developing skills in each professional’s principal area of expertise.

Attract and Retain Skilled Personnel. Our continued success and growth requires us to expand our base of highly skilled professionals. This emphasis on human resources begins with our recruitment of client-serving professionals from leading graduate and undergraduate universities, as well as from industry and from other consulting firms. It continues through the process of training, developing, and promoting promising professionals within Diamond, and it includes the sharing of equity in Diamond as an acknowledgment of merit, a means of retention, and an alignment of interests.

Enhance Our Operating Efficiency. We have a continuous focus on cost effectiveness and efficiency. We are committed to taking advantage of information technology in the areas of human resources, training, recruiting, marketing, and financial and operations management.

Our Services

Diamond provides services that help leading organizations worldwide understand and leverage information technology to improve operations, increase flexibility, reduce costs, address changing regulations and markets, and grow their businesses. We offer clients the skills of a traditional information technology service provider, with the objective, advisory role of the traditional strategic consulting firms. We currently operate globally with offices in North America, the United Kingdom, and India. We sell our services to “c-level” executives and their senior leadership teams.

We have a business model that we believe is preferred by clients, and a process for creating and quickly bringing to market new service offerings. Our business model is collaborative and multidisciplinary, providing better value to clients through knowledge transfer and better results through our unique perspective that combines strategy and execution skills with business and technology skills. We believe this approach creates the most lasting and powerful improvements for our clients.

We have a process for creating new service offerings that identifies and tests market opportunities, refines the service offering, then scales the service offering to bring it to market. By maintaining our consultants’ core skills in strategy, information technology, operations and program management, we are able to be more agile because we are not dependent upon a particular economic, business, or technology cycle. Service Offerings

We offer services to help leading organizations worldwide to understand and leverage technology to realize value in their businesses. We deliver our services through small teams with consultants skilled in strategy, technology, operations and program management. Generally, our services are designed to help companies improve operations, increase flexibility, reduce costs, address changing regulations and markets, and grow their businesses.

We go to market by vertical industry and focus on businesses that are strategically dependent on information technology. While our core competencies do not change significantly over time, our service lines and service offerings are designed to quickly adapt to client and market needs. By continuously leveraging research from our target markets, we constantly examine and monitor our business and combine our core skills into relevant service offerings.

We deliver both vertical industry-specific services, and broader based horizontal services that apply across many industries. Our vertical services are designed to address the most pressing industry-specific issues involving technology that are facing executives in our targeted industries. While the competencies required to deliver these services may be the same for each vertical ( i.e., strategy, information technology, operations and program management), deep knowledge of the industry is also required. Our horizontal services, which also address executives’ most pressing issues involving information technology, require similar skills across industries and tend to have more repeatable processes that can be leveraged across a number of different industries. Below is a representative list of current vertical (industry-specific) and horizontal (cross-industry) services: Vertical Industries Served

We currently serve clients primarily in five vertical industries: financial services, insurance, healthcare, telecommunications, and the public sector. We are working to grow healthcare and the public sector as a percent of revenues because these industries are less cyclical and increase long-term revenue predictability. The Company also has a vertical practice it calls “Enterprise” that serves clients across several vertical industries, including manufacturing, retail, distribution, travel and transportation and consumer packaged goods.

Financial Services Practice. Our financial services industry practice provides services to capital markets firms, retail brokerages, asset managers, credit card issuers, credit card processors and payment system operators, and full-service retail and commercial banks. We help these financial services clients with the issues they face today, including the need to manage large technology and business transformations, grow revenues by developing information management strategies, improve service, improve productivity through strategic sourcing, assist with compliance and risk management initiatives, and assess various leading technologies. Our clients include four of the top five investment banks, the top three universal banks, three of the top four credit card brands as well as a number of other firms. Examples include Goldman Sachs Group Inc. and American Express. During fiscal year 2007, financial services clients represented approximately 32% of billed fee revenue.

Insurance Practice. Our insurance practice provides services to life, property and casualty, reinsurance, and brokerage firms. We advise and collaborate with our clients to help them unlock the market value of their business strategies such as: improving the return on marketing and sales investments through customer experience improvement across acquisition, cross-sell and retention areas; exploiting the use of emergent data to create competitive advantage through improved insight and decision making; creating more flexible product and service delivery architectures that increase speed to market and product profitability; evaluating strategic positioning in context of converging insurance, financial services and healthcare value chains; designing targeted solutions to meet the growing retirement populations’ needs using IT innovation to drive global growth; and improving distribution service platforms. Representative clients in the insurance industry have included: Allstate Corporation (P&C and Life segments), The Hartford (P&C and Life segment) and Willis Group Holdings Limited. During fiscal year 2007, insurance clients represented approximately 26% of billed fee revenue.

Healthcare Practice. Our healthcare industry practice provides services across the healthcare value chain. Our clients include major pharmaceutical, biotech, device, health insurance, provider and disease management companies. We help our healthcare clients address some of their most important business and technology issues in the areas of consumer directed healthcare strategy and execution, IT optimization and value extraction, integrated business and technology architecture, process and planning and large transformational program management. Representative healthcare clients have included: Pfizer Inc., Bayer HealthCare LLC, Connecticut General Life Insurance Company and Aetna Life Insurance Company. During fiscal year 2007, healthcare clients represented approximately 19% of billed fee revenue.

Enterprise Practice. The enterprise practice is a cross-industry practice. Its role is to identify, incubate, and scale new vertical practices. The enterprise practice serves clients across several vertical industries, including manufacturing, retail, distribution, travel and transportation, and consumer packaged goods. We help our clients find solutions for complex business and technology problems such as trade promotion management, sales & operations planning, pricing, transformational technology platforms, and data analytics. We help our clients better understand customer needs across the value chain, increase visibility to their customers, and assist with strategic alternatives to maximize growth and operating income. The enterprise practice has included clients such as: United States Gypsum (USG), Kraft, PepsiAmericas, Fisher Scientific International, Inc (Thermo Fisher Scientific), American Greetings Corporation, Deere & Company, and Lowe’s Companies, Inc. During fiscal year 2007, enterprise practice clients represented approximately 13% of billed fee revenue.

Telecommunications Practice. Our telecommunications industry practice provides services to operators, vendors, and content providers in the equipment, wireless, cable, and fixed line markets as well as media and entertainment. We assist our telecommunications clients with business and marketing strategy, customer behavior insight, profit improvement, wireless and broadband strategy and execution, convergence, and IT assessment and strategy issues. Representative telecommunications clients have included: Sprint PCS and U.S. Cellular Corp. During fiscal year 2007, telecommunications clients represented approximately 6% of billed fee revenue.

Public Sector Practice. The public sector practice provides services to U.S. local, state, and federal government agencies. Issues facing this sector today include increased scrutiny to demonstrate performance and measurable results for spending, the need to improve operational efficiency, demand for agencies to become more citizen-centric by minimizing complexity and improving responsiveness, and homeland security. Representative clients in the public sector have included: the U.S. Department of Justice, the Chicago Transit Authority, and a major U.S. national laboratory. During fiscal year 2007, public sector clients represented approximately 4% of billed fee revenue.

In December of 2006, the Company established the Diamond Information & Analytics Center in Mumbai to extend its information and analytics capabilities. The Company anticipates being able to add value to clients across all verticals by helping them to better understand and compete in their markets. The center is staffed by professionals with advanced statistics and econometrics capabilities.

Business Development

We primarily serve “c-level” executives of national and multinational businesses. Our fees are sourced from both operating budgets as well as information technology budgets within our clients’ organizations. Our practice partners (the term “partner” is an internal designation only and does not refer to a partner of a general or limited partnership; all partners are officers of the Company) are assigned to a vertical practice (see “Our Services: Vertical Industries Served”). Each vertical industry practice maintains a list of prospects and a senior partner is assigned revenue and profit contribution responsibility for each practice.

Our business development process is designed to efficiently attract the Company’s best prospects, leverage the firm’s strong track record of project successes and references, and then sustain a long-term, value-added relationship. Across the various phases of the business development process, programs are designed to build brand recognition, create and provide for the placement of new intellectual capital, promote industry practices, and develop and deepen client relationships in a focused manner. The process has four stages — Attract, Capture, Convert, and Retain — each with different objectives and programs within each stage specifically designed to support these objectives. Attract Phase

Programs within the Attract phase of our business development pipeline are designed to create awareness of Diamond and its capabilities. There are a number of programs within the Attract phase including: media relations, speeches, books, published viewpoints, surveys, and an Internet website for the Company. These programs are built around specific intellectual capital within our target industries, and are very focused on executives within our target clients and prospects.

Books, surveys, and published viewpoints provide intellectual capital for our business development programs. Books published by employees or Fellows in the past include: Unleashing the Killer App: Digital Strategies for Market Dominance , The Seven Steps to Nirvana: Strategic Insights into eBusiness Transformation , and E-Learning: Strategies for Delivering Knowledge in the Digital Age. Recent surveys conducted by the Company, or in conjunction with an academic institution, include: “The 2007 Global IT Outsourcing Study,” “The 2006 Global IT Outsourcing Study,” and “IT Portfolio Management: Challenges and Best Practices.” Recently published viewpoints produced by the Company include: “WiMAX Outlook in the US Market: Implications for Service Providers,” “Wireless: The Next Frontier for the Media & Entertainment Industry,” “Curing Customer Churn,” “IT Total Capacity Management,” “Real ID — The Art of the Possible,” “Structural Innovation for the 21st Century,” “A New Business Model for Card Payments,” “The New Economics of Information and Analytics: 5 Key Drivers for Success,” “The Right Way Towards SOA,” “Building a More Inclusive Financial System in India,” and “Is the Indian Market Ready to go Virtual for Mobile?”

Capture Phase

Capture programs are designed to create relationships with interested executives, while continuing to showcase the Company’s capabilities. We build relationships directly through our partners, as well as collaboratively with our Diamond Network (see below).

DiamondExchange tm (DX) DiamondExchange programs are designed to deepen and broaden relationships with prospective and existing client executives while engaging in a dialog about strategic business issues. CEOs and other senior executives within our target vertical industries are invited to participate in the Exchange, and to become regular members. DiamondExchange events are designed to build community among our member executives, guest participants, Diamond partners, our Diamond Fellows and Client Relationship Executives (see below). The content of the DiamondExchange program showcases the Company’s capabilities, drawing on findings from recent client work and primary and secondary research to help executives understand the strategic risks and opportunities of emerging technologies.

The DiamondExchange offers several different learning forums at different locations throughout the year. We hold two large meetings per year and a series of smaller, more intimate sessions. In fiscal year 2007, our two main events were entitled: “The Battle for the Customer” and “Competing in the Networked Economy.”

The shorter events allow executives to explore more detailed topics. Diamond develops proprietary research and shares the findings with members and research participants. In fiscal year 2007, the topics for these sessions were “Outsmarting Outsourcing,” “Killer Platforms: How Architecture Shapes Competition” and “Competitive Implications of Consumer Driven Healthcare” which was co-hosted by Goldman Sachs. We also offered a half-day tour of the MIT Media Lab “The Social Implications of Information,” and a dinner “Healthcare Innovation: An Employer’s Perspective.”

Diamond Network. Diamond maintains a network of experts to augment its skills and relationships. Members of the Diamond Network help the firm to enhance its understanding of emerging marketplace developments, provide new client introductions, and enhance the value we provide to our clients. The network has two components: Diamond Fellows and Client Relationship Executives.

Diamond Fellows. The Diamond Fellows are a group of recognized business and technology leaders associated with Diamond. Diamond Fellows provide us with a set of skills that augment and enhance the value that we can provide to our clients. Diamond Fellows provide a source of intellectual capital, introduce us to prospective clients, author and contribute to industry publications, serve as faculty to the DiamondExchange program, and participate in client projects. Diamond Fellows are contractually committed to dedicate a certain number of days annually to Diamond to support marketing and client work. Diamond Fellows are compensated with a combination of equity and per diem payments for services provided to us, or to our clients, on our behalf. As of March 31, 2007, we had ten Diamond Fellows including:

Dan Ariely is a professor at MIT with a joint appointment between MIT’s program in Media Arts and Sciences and the Sloan School of Management. He is the principal investigator of the MIT Media Lab’s eRationality group and co-director of the Lab’s SIMPLICITY consortium. His current projects include examinations of on-line auction behaviors, personal health monitoring, the effects of different pricing mechanisms, and the development of systems to overcome day-to-day irrationality.

Vincent Barabba is the former General Manager of Corporate Strategy and Knowledge Development of the General Motors Corporation. Mr. Barabba twice served as Director of the United States Bureau of the Census. He has served as U.S. Representative to the Population Commission of the United Nations. Mr. Barabba is the author of Meeting of the Minds , and co-author of Hearing the Voice of the Market and Decision Making Amid Turbulence, the Story of the 1980 Census. His latest book, Surviving Transformation: Lessons from GM’s Surprising Turnaround , was published in 2004.

John Perry Barlow is a writer and lecturer on the social, legal, and economic issues arising on the border between the physical and virtual worlds. He is a contributing writer for Wired magazine and co-founder and Vice Chairman of the Electronic Frontier Foundation, an organization that promotes freedom of expression in digital media. He is also a fellow at Harvard Law School’s Berkman Center for Internet and Society.

Gordon Bell is a Senior Researcher with Microsoft Corporation and computer consultant-at-large. Mr. Bell spent 23 years at Digital Equipment Corp. as Vice President of Research and Development where he managed the development of the first time-sharing and mini-computers. He also led the development of Digital Equipment’s VAX. Additionally, Mr. Bell directed the National Science Foundation’s efforts in computing research. His current work is the MyLife Bits project which endeavors to capture all aspects of his life in a digital format.

Dan Bricklin is currently President of Software Garden, Inc., focusing on protecting open source and copyright for developers. He has helped to found other organizations, including the largest Web hosting and online services company dedicated to helping small and medium businesses achieve success by providing the knowledge, services, and tools to build, manage, and promote businesses. Mr. Bricklin is best known for co-developing VisiCalc, the first electronic spreadsheet, while he was a student at the Harvard Business School. VisiCalc is widely credited for fueling the rapid growth of the personal computer industry.

Alan Kay, Ph.D. is president of the Viewpoints Research Institute and is one of the earliest pioneers of object-oriented programming, and graphical user interfaces. His contributions have been recognized with the Charles Stark Draper Prize of the National Academy of Engineering, the A.M. Turing Award from the Association of Computing Machinery, and the Kyoto Prize from the Inamori Foundation. This work was done in the rich context of ARPA and Xerox PARC with many talented colleagues. Mr. Kay is a member of our Board of Directors.

Andrew Lippman, Ph.D. is a co-Director and founding member of the Media Lab at the Massachusetts Institute of Technology. Mr. Lippman is the principal investigator of the Digital Life research program, a consortium of 45 companies and 15 faculties that researches the technical, social, and economic aspects of computing in everyday life. He has published widely and made numerous presentations on digital entertainment, personal communications, and making the information highway entertaining and profitable.

Chunka Mui is a writer and consultant on business issues at the intersection of strategy and technology. Mr. Mui also chairs Diamond’s Diamond Fellows advisory group. Mr. Mui is perhaps best known as the co-author of the best selling book, Unleashing the Killer App , which the New York Times in 1998 called a “practical and persuasive guide” to the dramatic changes being wrought by technology. Mr. Mui was a Partner with Diamond from 1996 to 2003.

David P. Reed, Ph.D. is an information architect and independent entrepreneur who focuses on designing the information space in which people, groups, and organizations operate. He was a senior scientist at Interval Research Corp., Vice President and Chief Scientist for Lotus Development Corp., and Vice President of Research and Development and Chief Scientist at Software Arts Inc.

Marvin Zonis, Ph.D. is a Professor of International Political Economy and Leadership at the University of Chicago Graduate School of Business. He is an expert and consultant on political risk and emerging markets, Mideast politics, the oil industry, and the foreign policies of Russia and the United States.

Client Relationship Executives. Client Relationship Executives, or CREs, provide an alternative relationship development channel for Diamond. Our CREs are retired executives, executives-in-transition, and independent consultants. The program leverages these executives’ senior-level contacts within our targeted vertical industries. The program is also designed to enhance brand awareness of our capabilities among industry sector senior executives. CREs do not directly offer Diamond services, but facilitate introductions to industry buyers of consulting services. Our CREs have non-exclusive contracts with Diamond and are typically paid on a commission basis. At March 31, 2007, we had 20 CREs, the majority of which are former EVPs, CIOs and COOs.

Convert Phase

Programs within this phase are designed to convert prospects into client relationships. The programs in the Convert phase support our partners during the process of identifying and discussing potential engagements, negotiating the terms of engagements, and directing the staffing and execution of consulting projects.

Diamond Knowledge Center. The Diamond Knowledge Center provides project teams with access to both internal and external research and expertise on a variety of industry, technology, economic, and business topics on a global basis. The Knowledge Center is also responsible for converting existing project work into repeatable frameworks that can be leveraged for future projects.

Intellectual Capital Alliances. In an increasingly complex business environment, intellectual capital alliances enhance Diamond’s ability to deliver technology savvy strategies and high-impact results. Our Intellectual Capital Alliance program is designed to provide Diamond’s professionals and clients with early access to market-leading hardware and software, as well as to provide specialized services and training. Diamond works with selected companies to develop its intellectual capital and provide the best ideas to its clients with lower execution risk and accelerated speed-to-market.

Our Intellectual Capital Alliance program has two components — Strategic Alliances and Network Alliances. Strategic Alliance companies work with us to develop industry points-of-view and white papers, co-sponsor conferences, develop unified professional development programs, and pursue joint business opportunities. Network Alliances are designed to identify best-of-breed technologies and services that are currently relevant to our clients.

All of our intellectual capital alliances are non-exclusive agreements designed to deliver benefits to both organizations through knowledge sharing and joint marketing. Diamond does not recognize revenue for work performed by any alliance company and there are no fees associated with joining the Intellectual Capital Alliance program.

CEO BACKGROUND

Melvyn E. Bergstein has served as a Director of the Company since 1994 when he founded the Company. Since April 1, 2006, Mr. Bergstein has served as Chairman of the Company’s Board of Directors, after having served as its Chairman and Chief Executive Officer from 1994 through March 31, 2006. Prior to founding the Company, Mr. Bergstein held several senior executive positions with Technology Solutions Company from 1991 to 1993. Prior to that time, Mr. Bergstein held several senior positions with other consulting firms, including 21 years in various positions with Andersen Consulting, now Accenture Ltd. Mr. Bergstein is a director of Simon Property Group Inc., a publicly traded real estate investment trust. He also serves on the boards of several not-for-profit organizations. Mr. Bergstein is 65 years old.

Pauline A. Schneider has served as a Director of the Company since December 2003. Ms. Schneider has been a partner at the law firm of Orrick, Herrington & Sutcliffe LLP since 2006. Prior thereto, Ms. Schneider was a partner at the law firm of Hunton & Williams LLP from 1985 to 2006. Ms. Schneider specializes in capital finance and real estate. Ms. Schneider also serves as a director of Pepco Holdings, Inc. and is active on the boards of several not-for-profit organizations ranging from the arts to health care to public policy. Ms. Schneider is 64 years old.

John J. Sviokla joined the Company in September 1998 as a Vice President and became a member of the Company’s Board of Directors in August 1999. Since April 1, 2000, Dr. Sviokla has served as Vice Chairman of the Company. Prior to joining the Company, Dr. Sviokla was a professor at the Harvard Business School from October 1986 to August 1998. His pioneering work on “Marketspace” established Harvard’s first course on electronic commerce. He co-authored the seminal articles “Managing in the Marketspace” and “Exploiting the Virtual Value Chain,” both appearing in the Harvard Business Review. Dr. Sviokla has authored over 100 articles, cases, videos and tele-seminars, edited books and been a consultant to large and small companies around the world. He has been a frequent speaker at executive forums and a guest professor at many universities including the Kellogg School of Management at Northwestern University, MIT, The London Business School, the Melbourne Business School and the Hong Kong Institute of Science and Technology. Dr. Sviokla also serves as a director of Amicas, Inc. Dr. Sviokla is 50 years old.

Class III Directors Whose Terms of Office Continue until 2008
Edward R. Anderson has served as a Director of the Company since June 1994. Mr. Anderson has been the President of iPoint Systems since 2005. He is also the founder and Chief Executive Officer of Ambrosia Solutions, a software company. Prior to founding Ambrosia in 2003, Mr. Anderson served as Chairman and Chief Executive Officer of TorchQuest, Inc. From July 1999 until July 2000, Mr. Anderson was the Chairman and Chief Executive Officer of E-Certify Corp. Mr. Anderson is 60 years old.

Adam J. Gutstein has served as President and Chief Executive Officer of the Company since August 2006, as CEO from April to August 2006 and as a Director since 1999. Mr. Gutstein joined the Company as a Vice President in January 1994, became a member of its Management Committee in July 1998 and served in a number of executive positions prior to being named CEO. Prior to joining the Company, Mr. Gutstein was a vice president at Technology Solutions Company and a manager with Andersen Consulting, now Accenture Ltd. Mr. Gutstein is also a director of Healthaxis, Inc. Mr. Gutstein is 44 years old.

Michael E. Mikolajczyk joined the Company in April 1994 and has served as a member of the Board of Directors since that time. From April 1994 until July 1998, Mr. Mikolajczyk served as the Company’s Senior Vice President, Chief Financial and Administrative Officer. From July 1998 until his departure in August 2001, Mr. Mikolajczyk served in a number of executive positions with the Company, including Vice Chairman, President and Secretary. Following his departure from the Company in 2001 and until August 2004, Mr. Mikolajczyk was an independent consultant. Since September 2004, Mr. Mikolajczyk has served as managing director of Catalyst Capital Management, LLC, a private investment firm. Prior to Mr. Mikolajczyk’s service with the Company, Mr. Mikolajczyk held several senior financial and corporate development positions at MCI Telecommunications Corporation. Mr. Mikolajczyk is also a director of Accume Partners and Rubicon Technology, Inc. Mr. Mikolajczyk is 55 years old.

Javier Rubio has served as a Director of the Company since the consummation of the business combination between the Company and Cluster Consulting in November 2000. Mr. Rubio currently is the President and a director of Nauta Capital, a venture capital firm. From November 2000 through June 2003, Mr. Rubio served as the Company’s President, Europe and Latin America. On June 30, 2003, Mr. Rubio resigned as an employee of the Company. Mr. Rubio founded Cluster Consulting in 1993 serving as its Chairman and Chief Executive Officer. Prior to founding Cluster Consulting, Mr. Rubio held several senior positions with other consulting firms, including seven years in various positions with the MAC Group (Gemini Consulting) and the Monitor Company. Mr. Rubio is 46 years old.

Class I Directors Whose Terms of Office Continue until 2009
Donald R. Caldwell has served as a Director of the Company since June 1994 and in May 2006 was appointed as the Board’s Lead Director. In March 1999, Mr. Caldwell founded and presently serves as Chairman and Chief Executive Officer of Cross Atlantic Capital Partners, Inc. From February 1996 to March 1999, Mr. Caldwell was President and Chief Operating Officer and a director of Safeguard Scientifics, Inc. Prior to that time, Mr. Caldwell held various executive and management positions with several companies, including a predecessor company of Cambridge Technology Partners (Massachusetts), Inc. and Arthur Young & Co., a predecessor of Ernst & Young LLP. Mr. Caldwell also serves as a director of Quaker Chemical Corporation and Voxware, Inc. in addition to a number of privately held companies and civic organizations. Mr. Caldwell is 61 years old.

Alan C. Kay has served as a Director of the Company since June 1996. Dr. Kay currently is President of Viewpoints Research Institute, Inc. From November 2002 to October 2005, Dr. Kay was a Senior Fellow at HP Labs. From 1996 to 2001, Dr. Kay was Vice President of research and development for Walt Disney Imagineering, Inc. and a Disney fellow. From 1984 to 1996, Dr. Kay was an Apple fellow at Apple Computer, Inc. Prior to that time, Dr. Kay held scientific positions at Atari Corporation and Xerox Palo Alto Research Center. He was a research associate and lecturer in computer science at Stanford University from 1969 to 1971. In June 2004, Dr. Kay received the Kyoto Prize in advanced technology given by the Inamori Foundation, which is considered one of the world’s leading awards for lifetime achievement in engineering. In February 2004, Dr. Kay received the Association of Computing Machinery’s 2003 Turing Award for leading the team that invented Smalltalk, an influential programming language, and together with three former colleagues, received the Stark Draper Prize for the development of the networked personal computer. Dr. Kay is 67 years old.

Samuel K. Skinner has served as a Director of the Company since September 2003. Mr. Skinner currently serves as an Adjunct Professor of Management and Strategy at the Kellogg School of Management at Northwestern University. He is also “of counsel” to the law firm of Greenberg Traurig, LLP. Mr. Skinner was President and Chief Executive Officer of U.S. Freightways, a major transportation and logistics service provider, from July 17, 2000 and Chairman of its Board from January 1, 2001 until his retirement in May of 2003. From October 1998 through July 2000, Mr. Skinner was a partner and Co-Chairman of the law firm Hopkins & Sutter. From February 1993 to April 1998, Mr. Skinner was President and a director of Commonwealth Edison Company. Prior to joining Commonwealth Edison, Mr. Skinner served as Chief of Staff to President George H. W. Bush. Prior to his White House service, Mr. Skinner served in the President’s cabinet for nearly three years as Secretary of Transportation. From 1977 to 1989, Mr. Skinner practiced law as a senior partner in the Chicago law firm of Sidley Austin LLP. Mr. Skinner is also a director of Dade Behring, Inc., Express Scripts, Inc., Midwest Air Group, Inc., Navigant Consulting, Inc. and the Chicago Board of Options Exchange. He is also involved with numerous charitable and civic organizations. Mr. Skinner is 69 years old.

Arnold R. Weber has served as a Director of the Company since April 2005 and was previously a member of the Company’s Board of Directors from November 1999 until September 2003. Mr. Weber has been President Emeritus of Northwestern University since July 1998 and was its 14 th president from 1984 to 1994. From 1995 to 1999 he served as President of the Civic Committee of the Commercial Club of Chicago, a leading business and civic organization. Mr. Weber has been a member of the faculty at the Graduate School of Business at the University of Chicago, Stanford University and the Massachusetts Institute of Technology. Mr. Weber is a trustee of the Museum of Science and Industry and the Committee for Economic Development. He has received honorary degrees from various universities including Notre Dame, the University of Colorado, Loyola University of Chicago, Northwestern University and the University of Illinois. Mr. Weber is 77 years old.

COMPENSATION

The Board of Directors believes that competitive compensation arrangements are necessary to attract and retain qualified non-employee directors. Directors who are employees receive no additional compensation for serving on the Board. The key components of the director compensation program are an annual retainer of cash and equity and additional compensation to committee chairs, Audit Committee members and the Lead Director. In addition, the Company may pay additional compensation to directors for service on special committees requiring significant additional time.

During fiscal year 2007, the Company paid each non-employee director an annual retainer of $100,000 comprised of $60,000 in equity and $40,000 in cash. Non-employee directors who serve as chairs of standing committees receive an additional annual cash fee of $10,000 and Audit Committee members other than the chair receive an additional annual cash fee of $5,000 to reflect the greater number of meetings required of the Audit Committee. The Lead Director, currently Mr. Caldwell, also receives an additional annual cash fee of $5,000. The Company reimburses the directors for customary business expenses incurred but does not pay any separate meeting fees.

The Company makes annual awards of restricted stock or restricted stock units valued at $60,000 to the non-employee directors under the Amended and Restated 1998 Equity Incentive Plan (the “1998 Plan”). Each non-employee director receives his or her equity award and annual cash fees following the Company’s annual meeting. The number of shares or units included in any award is determined in the same manner as for Company employees, with reference to the 10 trading day trailing average closing price of Company common stock. The equity award vests in full after one year.

Starting in fiscal year 2007, non-employee directors may defer all or part of their compensation until the director retires, dies or becomes disabled or otherwise no longer serves as a director. The directors are required to make their deferral elections annually. For fiscal year 2007, Messrs. Kay and Weber chose to defer the receipt of their equity awards.

In addition, in February 2006, the Board-approved the payment of $50,000 to Mr. Rubio as compensation for his role related to the sale of portions of the Company’s international operations. Such payment was made to Mr. Rubio in August 2006.

(1) Includes $10,000 for serving as Chair of the Compensation Committee and $5,000 for serving as a member of the Audit Committee.

(2) Includes $5,000 for serving as lead director and $10,000 for serving as Chair of the Audit Committee.

(3) Includes $5,000 for serving as a member of the Audit Committee.

(4) Includes $5,000 for serving as a member of the Audit Committee.

(5) Includes $10,000 for serving as Chair of the Nominating & Governance Committee.

(6) The amounts shown in this column represent the dollar amount recognized by the Company for restricted stock awards for financial statement reporting purposes with respect to fiscal year 2007 and previous fiscal years in accordance with FAS 123R. The amount shown differs from the $60,000 in equity award value received by each non-employee director (as discussed above in “— Compensation of Non-Employee Directors”) because this table shows the total expense recognized by the Company for financial statement purposes under FAS 123R in making each such grant.

(7) Represents additional compensation provided for Mr. Rubio’s assistance with the sale of portions of the Company’s international operations during fiscal year 2007.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Diamond is a management and technology consulting firm. We help leading organizations worldwide to understand and leverage technology to realize value in their businesses. Recognizing that information and technology shape market dynamics, Diamond’s small teams of experts work across functional and organizational boundaries to improve growth and profitability. Since the greatest value in a strategy, and its highest risk, resides in its implementation, Diamond also provides proven execution capabilities. We deliver three critical elements to every project: fact-based objectivity, spirited collaboration, and sustainable results.

In March 2006, the Company’s Board of Directors approved a strategy to focus the Company on its markets in North America, the U.K. and India. As part of the Board approved strategy, the Company committed to a plan to sell the portions of its international operations that included the offices and respective operations in Barcelona, Dubai, Madrid, Münich, Paris and São Paulo and as a result these are reported as “discontinued operations” in the financial statements and related notes. North America, the U.K. and India are considered “continuing operations.” All previously reported data from the Consolidated Statements of Operations and Comprehensive Income (Loss) has been reclassified to conform with this presentation to allow for meaningful comparison. The Consolidated Balance Sheets aggregate amounts associated with discontinued operations as described above. The Consolidated Statements of Cash Flows is prepared on a combined basis (continuing operations plus discontinued operations) for all periods presented. All analytical and statistical references refer to data from continuing operations only unless otherwise stated.

On July 19, 2006, we signed a definitive agreement to sell our consulting operations in Barcelona, Dubai, Madrid, Münich, Paris and São Paulo. The transaction closed on July 31, 2006. On August 1, 2006, the Company changed its name to “Diamond Management & Technology Consultants, Inc.” and began marketing itself under the brand “Diamond.” The Company continues to trade under the symbol “DTPI” on the NASDAQ Global Market.

During the fiscal year ended March 31, 2007, we generated net revenue of $168.7 million from 105 clients. At March 31, 2007, we employed 507 consultants and 106 operations employees. Our operations are comprised of six offices in North America, Europe and Asia, which include Chicago, Hartford, London, Mumbai, New York City and Washington, D.C. We opened our Mumbai, India and New York City offices in March 2006. We opened our Hartford office in May 2006.

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

We generate revenue in several different countries globally and our revenues and expenses are denominated in multiple currencies. The most common currencies that we operate under are the U.S. Dollar, the British Pound Sterling and the Indian Rupee. However, the majority of revenue and expenses are denominated in the U.S. Dollar and as such, our consolidated revenues and expenses are not significantly impacted by fluctuations in foreign currency exchange rates.

The largest portion of our operating expenses consists of project personnel costs. Project personnel costs consist of payroll costs, stock-based compensation expense related to our consulting staff, variable incentive compensation, and related benefits expense associated with our consulting staff. Other expenses included in project personnel costs are travel, subcontracting fees, third-party vendor payments and non-billable costs associated with the delivery of services to our clients. Net revenue less project personnel costs before reimbursable expenses (“gross margin”) is considered by management to be an important measure of our operating performance and is driven largely by the chargeability of our consultant base, the prices we charge to our clients, project personnel compensation costs, and the level of non-billable costs associated with securing new client engagements and developing new service offerings. Our gross margin decreased 9% in the fourth quarter of fiscal year 2007 compared to the third quarter of fiscal year 2007. The decrease is primarily due a decrease in net revenue during the fourth quarter of fiscal year 2007 and an increase in benefits and stock-based compensation expense for practice personnel offset by a decrease in vacation expense. Gross margin increased 8% in the fourth quarter of fiscal year 2007 compared to the fourth quarter of fiscal year 2006 and increased 9% in fiscal year 2007 compared to fiscal year 2006. These increases are primarily due to increased net revenue during the three and twelve months ended March 31, 2007, respectively, partially offset by increased compensation costs associated with increased practice personnel. Our practice headcount increased to 507 at March 31, 2007, compared to 503 at December 31, 2006 and 441 at March 31, 2006. Our annualized net revenue per practice professional was $351 thousand for fiscal year 2007 compared to $336 thousand for fiscal year 2006.

Our other recurring operating expenses are comprised of expenses associated with the development of our business and the support of our client-serving professionals, such as professional development and recruiting, marketing and sales, management and administrative support, and stock-based compensation expense earned by personnel working in these functional areas. Professional development and recruiting expenses consist primarily of recruiting and training course content development and delivery costs. Marketing and sales expenses consist primarily of the costs associated with the development and maintenance of our marketing materials and programs. Management and administrative support expenses consist primarily of the costs associated with operations including finance, information technology, human resources, facilities administration and support (including the renting of office space) and legal services. Management believes that income from operations, which is gross margin less other operating expenses, is an important measure of our operating performance. Income from continuing operations before income taxes decreased 5% in the fourth quarter of fiscal year 2007 compared to the third quarter of fiscal year 2007 primarily due to the increases in gross margin discussed above partially offset by decreased recruiting and training expenditures in the fourth quarter of fiscal year 2007 compared to the third quarter of fiscal year 2007. Income from continuing operations before income taxes decreased 12% in the fourth quarter of fiscal year 2007 compared to the fourth quarter of the prior fiscal year due to the reversal of a portion of a restructuring accrual in the fourth quarter of fiscal year 2006, partially offset by the increases in gross margin discussed above. Income from continuing operations before income taxes increased 7% in fiscal year 2007 compared to fiscal year 2006 primarily due to the increases in gross margin discussed above as well as increased interest income resulting from a higher cash and cash equivalents balance and higher interest yields, partially offset by increased training, recruiting and facilities expenditures during fiscal year 2007.

We regularly review our fees for services, professional compensation and overhead costs to ensure that our services and compensation are competitive within the industry, and that our overhead costs are balanced with our revenue level. In addition, we monitor the progress of client projects with client senior management. We manage the activities of our professionals by closely monitoring engagement schedules and staffing requirements for new engagements. However, a rapid decline in the demand for the professional services that we provide could result in lower utilization of our professionals than we planned. In addition, because most of our client engagements are terminable by our clients without penalty, an unanticipated termination of a client project could require us to maintain underutilized employees. While professional staff levels must be adjusted to reflect active engagements, we must also maintain a sufficient number of senior professionals to oversee existing client engagements and participate in our sales efforts to secure new client assignments. Our utilization rate for the fourth quarter of fiscal year 2007 was 61% which increased from 60% in the third quarter of fiscal year 2007 and decreased from 70% in the fourth quarter of the prior fiscal year. Our utilization rate for fiscal year 2007 remained flat at 63% compared to fiscal year 2006.

Free cash flow from continuing operations was $21.6 million for the fiscal year ended March 31, 2007. Management believes that the free cash flow from continuing operations metric, which is a non-GAAP measure, defined as net cash provided by operating activities ($23.2 million) net of capital expenditures ($2.9 million) and free cash outflow from discontinued operations ($1.3 million), provides a consistent metric from which the performance of the business may be monitored.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

Revenue Recognition

We earn revenues from a range of consulting services, including helping organizations worldwide to leverage technology to develop and implement growth strategies, improve operations, and capitalize on technology. Our revenues are comprised of professional fees for services rendered to our clients plus reimbursement of out-of-pocket expenses and excludes applicable taxes. 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. Revenue is recognized over the term of the client engagement in direct proportion to the level of services performed by each member of the engagement team during the period relative to the estimated total level of effort required to perform the project. Therefore, the amount of revenue recognized in a period is for all intents and purposes, equal to the amount that would be recognized based on the stated contract price and the ratio of direct costs incurred in the period to perform the service to the total estimated direct costs of the project.

Service revenue recognition inherently involves a degree of estimation. Examples of important estimates in this area include determining the level of effort required to execute the project, calculating costs incurred and assessing our progress toward project completion on an ongoing basis. We believe that these are critical accounting estimates because they can materially affect our revenues and earnings and require us to make judgments about matters that are uncertain. We utilize a number of management processes to monitor project performance and revenue recognition including monthly reviews of the progress of each project against plan, staff and resource usage, service quality and client feedback. From time to time, as part of our normal management process, circumstances are identified that require us to revise our estimates of the timing of revenues to be realized on a project. To the extent that a revised estimate affects revenue previously recognized, we record the full effect of the revision in the period when the underlying facts become known.

Allowance for Doubtful Accounts and Deferred Revenue

We earn our revenues by providing consulting services to clients. We bill our clients for these services on either a monthly or semi-monthly basis in accordance with the terms of the client engagement. Accordingly, we recognize amounts due from our clients as the related services are rendered and revenue is earned even though we may not be able to bill for those services until a later date. The terms of our client engagements also require us to assume the risk of non-collection of amounts billed to clients.

Management makes estimates of the amount of our billed and unbilled accounts receivable that may not be collected from clients. We believe the allowance for doubtful accounts is a critical accounting estimate because it can materially affect our operating results and requires us to make judgments about matters that are uncertain. 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 our overall experience with estimating uncollectible amounts. We recognize the effect of changes in our estimates, assumptions and assessments of the factors impacting the collectibility of amounts due from customers on an ongoing basis. As of March 31, 2007, our accounts receivable balance was $14.9 million, including unbilled accounts receivable of $4.3 million, and net of an allowance for doubtful accounts of $0.6 million. Unbilled receivables represent revenues and reimbursable expenses earned for services performed that have not been billed. Unbilled receivables are typically billed the following month.

Although we and our clients agree on the scope of projects, expected deliverables and related fees in advance, from time to time we have made revisions to the scope of work and deliverables without making a corresponding adjustment to the fees for the project. We refer to this as “project run-on” as these revisions generally cause a project to extend beyond its targeted completion. We monitor our actual project run-on experience on an ongoing basis and perform monthly reviews of projects in progress against plan. We provide for project run-on costs based on our analysis of historical experience. These provisions, net of actual costs incurred on completed projects, are reflected in deferred revenue. As of March 31, 2007, our deferred revenue balance was $1.4 million. Also included in the deferred revenue balance is $0.6 million of prepaid client fees related to consulting services that the Company expects to earn in future periods. While we have been required to make revisions to our clients’ estimated deliverables and to incur additional project costs in some instances, to date there have been no such revisions that have had a material adverse effect on our operating results.

Stock-based Compensation

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

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

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, “Share-based Payment.” SFAS No. 123R is a revision of SFAS No. 123 and supersedes APB No. 25 and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which a company receives services from employees in share-based payment transactions. SFAS No. 123R requires companies to recognize compensation expense from all share-based payment transactions in the financial statements. SFAS No. 123R establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all companies to apply a fair-value-based measurement method in accounting for all share-based payment transactions with employees.

We adopted SFAS No. 123R on April 1, 2005 (the first day of our 2006 fiscal year). While the provisions of SFAS No. 123R were not effective until the first annual reporting period that begins after June 15, 2005, we elected to adopt SFAS No. 123R before the required effective date. The Company adopted SFAS No. 123R using a modified prospective method, as permitted under SFAS No. 123R. Accordingly, prior period amounts have not been restated. Under this method, we must record compensation expense for all awards granted after the adoption date and for the unvested portion of previously granted awards that remain outstanding at the adoption date, under the fair value method.

The adoption of SFAS No. 123R did not affect our financial position or have more than a minimal impact on reported income and earnings per share because we adopted SFAS No. 123 on April 1, 2003. SFAS 123R requires that stock-based compensation be amortized over the period from the grant date to the date an employee is eligible for retirement, when the equity awards would be vested upon retirement. We have been amortizing these awards over the normal vesting period stated in the notice of grant. Had we followed the amortization method outlined in SFAS 123R for awards granted prior to the adoption of SFAS 123R, stock-based compensation in fiscal year 2006 would have been approximately $0.4 million higher. In addition, upon the adoption of SFAS No. 123R in fiscal year 2006, tax benefits from employee stock plans were reported as cash flows from financing activities. They were previously reported as cash flows from operating activities.

Operating Expenses

The largest portion of our operating expenses consists of project personnel costs. Project personnel costs consist of payroll costs, stock-based compensation expense related to project personnel, variable incentive compensation, and related benefits associated with professional staff. Other related expenses include travel, subcontracting fees, third-party vendor payments and non-billable costs associated with the marketing and delivery of services to our clients. The amount of these other direct costs can vary substantially from period to period depending largely on revenue. However, project personnel and related expenses are relatively stable in nature, and declines in revenue will often result in reduced utilization of professional personnel and lower operating margins.

Our other recurring operating expenses are comprised of expenses associated with the development of our business and the support of our client-serving professionals, such as professional development and recruiting, marketing and sales, management and administrative support, and stock-based compensation expense earned by personnel working in these functional areas. Professional development and recruiting expenses consist primarily of recruiting and training course content development and delivery costs. Marketing and sales expenses consist primarily of the costs associated with the development and maintenance of our marketing materials and programs. Management and administrative support expenses consist primarily of the costs associated with operations including finance, information technology, facilities administration and support (including the renting of office space), and legal services.

Valuation of Deferred Tax Assets

In determining our current income tax provision we assess temporary differences resulting from differing treatments of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are recorded in our consolidated balance sheets. When we maintain deferred tax assets we must assess the likelihood that these assets will be recovered from future taxable income. To the extent we believe recovery is not more likely than not, we establish a valuation allowance to reduce the net deferred tax asset to a value we believe will be recoverable by future taxable income. We believe the accounting estimate related to the valuation allowance is a critical accounting estimate because it is highly susceptible to change from period to period as it requires management to make assumptions about the Company’s future income over the life of the deferred tax asset and the impact of increasing or decreasing the valuation allowance is potentially material to our results of operations. Management’s assumptions about future income require significant judgment because actual income has fluctuated in the past and may continue to do so.

In estimating future income, we use our internal operating budgets and long-range planning projections. We develop our budgets and long-range projections based on recent results, trends, economic and industry forecasts influencing our performance, our project pipeline, and other appropriate factors.

We have deferred tax assets which have arisen primarily as a result of temporary differences between the tax bases of assets and liabilities and their related amounts in the financial statements as well as operating losses incurred in fiscal year 2002 and fiscal year 2003. SFAS No. 109, “Accounting for Income Taxes,” requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Management judgment is required in determining any valuation allowance recorded against the gross deferred tax assets. Management recorded a full valuation allowance against the net deferred tax assets as of March 31, 2003 largely due to the losses we incurred during fiscal years 2002 and 2003. Based on the reported income in the U.S. in fiscal years 2004 and 2005, the Company reversed $20.2 million of the valuation allowance as of March 31, 2005. As of March 31, 2007, the remaining valuation allowance against deferred tax assets was $8.6 million attributable to net operating loss carryforwards in foreign and certain state jurisdictions, as well as unrealized U.S. federal capital loss carryforwards. The need to maintain a valuation allowance is reviewed on at least a quarterly basis.

Revenue

On a consolidated basis, net revenue increased $23.5 million, or 16%, in fiscal year 2007 as compared to fiscal year 2006. The increase in net revenue is primarily due to an increase in the number of clients that we served during fiscal year 2007 compared to fiscal year 2006. We continue to focus on transitioning to a broader and less concentrated client base. Additionally, headcount increased from 441 at March 31, 2006 to 507 at March 31, 2007, utilization remained flat at 63% in fiscal year 2007 compared to fiscal year 2006, and net revenue per practice professional increased from $336 thousand in fiscal year 2006 to $351 thousand in fiscal year 2007. Net revenue increased $0.3 million during fiscal year 2006 as compared to fiscal year 2005. The slight increase in net revenue was partially due to unexpected moderated spending at two core healthcare and insurance clients during fiscal year 2006.

We served 105 clients during fiscal year 2007, compared to 81 clients during fiscal year 2006 and 64 clients during fiscal year 2005. Average revenue per client decreased to $1.6 million during fiscal year 2007 from $1.8 million during fiscal year 2006. Average revenue per client decreased to $1.8 million during fiscal year 2006 from $2.3 million during fiscal year 2005. These decreases were primarily due to the increases in the number of clients that we served in fiscal year 2006 and 2007 as we transitioned to a broader and less concentrated client base. Operating Expenses

Project Personnel Costs

Project personnel costs before reimbursable expenses increased $19.5 million, or 20%, during fiscal year 2007 as compared to fiscal year 2006. The increase in project personnel costs was primarily due to increased compensation costs and stock-based compensation expense associated with the increased number of project personnel as well as an increase in the variable compensation expenses for practice personnel, which included a $4.1 million special bonus recorded during the second quarter of fiscal year 2007. As a percentage of net revenue, project personnel costs before reimbursable expenses increased from 68% during fiscal year 2006 to 70% during fiscal year 2007 primarily due to the increase in variable compensation expense in fiscal year 2007 compared to fiscal year 2006.

Project personnel costs before reimbursable expenses increased $12.9 million, or 15%, during fiscal year 2006 as compared to fiscal year 2005. The increase in project personnel costs was primarily due to increases in practice headcount and an increase in stock-based compensation expense related to stock-based awards granted to project personnel during fiscal year 2006. As a percentage of net revenue, project personnel costs before reimbursable expenses increased from 60% during fiscal year 2005 to 68% during fiscal year 2006 primarily due to an increase in practice headcount while revenue remained relatively flat during fiscal year 2006.

Professional Development and Recruiting

Professional development and recruiting expenses increased $2.1 million, or 32%, during fiscal year 2007 as compared to fiscal year 2006. The increase was primarily due to our increased campus and experienced recruiting initiatives as well as increases in the level of training development and training course conduct expenditures. The costs incurred to recruit consultants include travel and lodging costs for our consultants and recruiting staff, travel expense reimbursements for candidates, and sourcing fees related to non-campus hire searches. As a result of increases in headcount, our expenditures related to training in turn increased as we added to the number of training courses offered to employees during the fiscal year 2007 compared to the prior fiscal year. In addition, during the fiscal year 2007, we held three newly created partner training courses.

Professional development and recruiting expenses increased $0.6 million, or 10%, during fiscal year 2006 as compared to fiscal year 2005. The increase was primarily due to our increased campus and experienced recruiting initiatives as well as increases in the level of training development and training course conduct expenditures in relation to the increased headcount.

Marketing and Sales

Marketing and sales expenses increased $0.2 million, or 7%, during fiscal year 2007 as compared to fiscal year 2006. The increase was primarily due to costs incurred to re-brand the new Company name during fiscal year 2007. Marketing and sales expenses were flat in fiscal year 2006 as compared to fiscal year 2005.

Management and Administrative Support

Management and administrative support expenses increased $2.2 million, or 9%, in fiscal year 2007 as compared to fiscal year 2006. Management and administrative support expenses include the rent expense associated with our six offices in North America, the U.K. and India. Rent expense increased in fiscal year 2007 compared to fiscal year 2006 due to the opening of the New York City and Mumbai, India offices in March 2006. Additionally, in March 2006 we reversed part of a previously recorded restructuring accrual related to office space in Chicago as we now occupy and use that additional space for operations and training facilities. Management and administrative support expense also increased due to an increase in stock-based compensation expense. Management and administrative support expenses increased $1.0 million, or 4%, in fiscal year 2006 as compared to fiscal year 2005 due primarily to an increase in compensation expense, including stock-based compensation for management and administrative personnel.

Restructuring Charges (Recovery)

We recorded a restructuring recovery of $24 thousand during fiscal year 2007 and a restructuring charge of $0.4 million during fiscal year 2006 related to the net change in facilities usage assumptions related to office space in our Chicago office. Restructuring charge expense was zero for fiscal year 2005.

Other Income, Net

Other income, net increased $1.1 million, or 38%, during fiscal year 2007 as compared to fiscal year 2006 primarily due to increase in interest income resulting from higher interest rate yields and an increase in the cash and cash equivalent balances resulting from the proceeds received from the sale of the discontinued operations in July 2006. Other income, net increased $1.5 million, or 107%, during fiscal year 2006 as compared to fiscal year 2005 primarily due to an increase in interest income resulting from higher interest rate yields and foreign exchange gains recorded in fiscal year 2006.

Income Tax Expense (Benefit)

We recorded income tax expense of $6.9 million, a 49% effective income tax rate, in fiscal year 2007, compared to income tax expense of $11.2 million, an 85% effective income tax rate, in fiscal year 2006. The income tax expense recorded in fiscal years 2007 and 2006 related to income earned in North America. Due to valuation allowances on international deferred tax assets, tax benefits are not recorded on losses in the U.K. and India which creates a significant difference between our effective tax rate and our statutory tax rate. Also, due to the Company’s intent to focus only on its core markets in North America, the U.K. and India, during fiscal year 2006 we recorded a $1.8 million tax expense due to the reversal of certain foreign tax credits we no longer expected to utilize. We recorded an income tax benefit in fiscal year 2005 of $13.4 million principally related to the reversal of the valuation allowance for U.S. deferred tax assets of $20.2 million at year-end. The income tax benefit from the reversal of the valuation allowance was partially offset by income tax expense recorded as a result of income earned in jurisdictions where tax loss carryforwards are limited. We have deferred tax assets which have arisen primarily as a result of temporary differences between the tax bases of assets and liabilities and their related amounts in the financial statements as well as operating losses incurred in fiscal year 2002 and fiscal year 2003. SFAS No. 109 requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Management judgment is required in determining any valuation allowance recorded against the gross deferred tax assets. Management recorded a full valuation allowance against the net deferred tax assets as of March 31, 2003 largely due to the losses we incurred during fiscal years 2002 and 2003. Based on the reported income in the U.S. in fiscal years 2004 and 2005, the Company reversed $20.2 million of the valuation allowance as of March 31, 2005. As of March 31, 2007, the remaining valuation allowance against deferred tax assets was $8.6 million attributable to net operating loss carryforwards in foreign and certain state jurisdictions, as well as unrealized U.S. federal capital loss carryforwards.

Discontinued Operations

In March 2006, the Board approved a strategy to focus the Company on its markets in North America, the U.K. and India. As part of the Board approved strategy, we committed to a plan to sell the portions of our international operations that included the offices and respective operations in Barcelona, Dubai, Madrid, Münich, Paris and São Paulo and as a result these are reported as “discontinued operations” for the periods presented. All previously reported data from the Consolidated Statements of Operations and Comprehensive Income (Loss) has been reclassified to conform with this presentation to allow for meaningful comparison. On July 19, 2006, we signed a definitive agreement to sell our consulting operations reported as discontinued operations. The transaction closed on July 31, 2006. The Company recorded a net gain from the sale, net of an income tax benefit, during the second quarter of fiscal year 2007 of $23.0 million, and recorded adjustments to reduce the gain to $22.9 million during the third and fourth quarters of fiscal year 2007 to reflect changes in estimates of the net assets sold. Refer to Note (4) to the consolidated financial statements for a summary of the components of the operating results of discontinued operations in the fiscal years ended March 31, 2005, 2006 and 2007.

MANAGEMENT DISCUSSION FOR LATEST QUARTER


Overview

Diamond is a management and technology consulting firm. We help leading organizations worldwide to understand and leverage technology to realize value in their businesses. Recognizing that information and technology shape market dynamics, Diamond’s small teams of experts work across functional and organizational boundaries to improve growth and profitability. Since the greatest value in a strategy, and its highest risk, resides in its implementation, Diamond also provides proven execution capabilities. We deliver three critical elements to every project: fact-based objectivity, spirited collaboration, and sustainable results.

In March 2006, the Company’s Board of Directors approved a strategy to focus the Company on its markets in North America, the U.K. and India. As part of the Board approved strategy, the Company committed to a plan to sell the portions of its international operations that included the offices and respective operations in Barcelona, Dubai, Madrid, Münich, Paris and São Paulo and as a result these are reported as “discontinued operations” in the financial statements and related notes. North America, the U.K. and India are considered “continuing operations.” The Condensed Consolidated Statements of Cash Flows are prepared on a combined basis (continuing operations plus discontinued operations) for all periods presented. All analytical and statistical references refer to data from continuing operations only unless otherwise stated.

On July 19, 2006, we signed a definitive agreement to sell our consulting operations in Barcelona, Dubai, Madrid, Münich, Paris and São Paulo. The transaction closed on July 31, 2006. On August 1, 2006, the Company changed its name to “Diamond Management & Technology Consultants, Inc.” and began marketing itself under the brand “Diamond.” The Company continues to trade under the symbol “DTPI” on the NASDAQ Global Select Market.

During the quarter ended September 30, 2007, we generated net revenue of $45.3 million from 63 clients. At September 30, 2007, we employed 518 consultants and 112 operations employees. Our operations are comprised of six offices in North America, Europe and Asia, which include Chicago, Hartford, London, Mumbai, New York City and Washington, D.C.

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

We generate revenue in several different countries globally and our revenues and expenses are denominated in multiple currencies. The most common currencies that we operate under are the U.S. Dollar, the British Pound Sterling, the Euro and the Indian Rupee. However, the majority of revenue and expenses are denominated in the U.S. Dollar and as such, our consolidated revenues and expenses are not significantly impacted by fluctuations in foreign currency exchange rates.

The largest portion of our operating expenses consists of project personnel costs. Project personnel costs consist of payroll costs, stock-based compensation expense related to our consulting staff, variable incentive compensation, and related benefits expense associated with our consulting staff. Other expenses included in project personnel costs are travel, subcontracting fees, third-party vendor payments and non-billable costs associated with the delivery of services to our clients. Net revenue less project personnel costs before reimbursable expenses (“gross margin”) is considered by management to be an important measure of our operating performance and is driven largely by the chargeability of our consultant base, the prices we charge to our clients, project personnel compensation costs, and the level of non-billable costs associated with securing new client engagements and developing new service offerings. Gross margin decreased 9% in the second quarter of fiscal year 2008 compared to the first quarter of fiscal year 2008 primarily due to the decrease in net revenue as a result of lower chargeability. This decrease was partially offset by a decrease in practice personnel expenses primarily related to lower salaries and benefits expense due to a decrease in practice personnel early in the quarter and an increase in capitalized internal labor costs for internal use software. Gross margin increased 60% in the second quarter of fiscal year 2008 compared to the second quarter of fiscal year 2007 primarily due to an increase in net revenue as a result of improved rate realization in addition to a decrease in practice personnel expenses due to a $4.1 million special bonus accrual that was recorded during the second quarter of fiscal year 2007. Excluding the special bonus accrual, gross margin would have increased 9% due to the increase in net revenue partially offset by increased practice personnel expenses related to an increase in practice headcount. Our practice headcount was 518 at September 30, 2007 compared to 496 at June 30, 2007 and 502 at September 30, 2006. Our annualized net revenue per practice professional was $357 thousand for the second quarter of fiscal year 2008 compared to $382 thousand for the first quarter of fiscal year 2008 and $346 thousand for the second quarter of fiscal year 2007. The decrease compared to the first quarter of fiscal year 2008 is primarily related to the net addition of 22 consultants to the project personnel headcount coupled with a decrease in net revenue during the quarter. The increase compared to the second quarter of fiscal year 2007 is primarily related to an improvement in rate realization, partially offset by a 7% increase in the average number of consultants during those periods.

Our other recurring operating expenses are comprised of expenses associated with the development of our business and the support of our client-serving professionals, such as professional development and recruiting, marketing and sales, management and administrative support, and stock-based compensation expense earned by personnel working in these functional areas. Professional development and recruiting expenses consist primarily of recruiting and training course content development and delivery costs. Marketing and sales expenses consist primarily of the costs associated with the development and maintenance of our marketing materials and programs. Management and administrative support expenses consist primarily of the costs associated with operations including finance, information technology, human resources, facilities administration and support (including the renting of office space) and legal services. Management believes that income from operations, which is gross margin less other operating expenses, is an important measure of our operating performance. Income from operations decreased 15% in the second quarter of fiscal year 2008 compared to the first quarter of fiscal year 2008 and increased 444% in the second quarter of fiscal year 2008 compared to the second quarter of fiscal year 2007. Excluding the special bonus recorded in the second quarter of fiscal year 2007, income from operations would have increased 43% in the second quarter of fiscal year 2008 compared to the second quarter of fiscal year 2007. These fluctuations were primarily due to the changes in gross margin discussed above with a modest decrease in management and administrative support expenses.

We regularly review our fees for services, professional compensation and overhead costs to ensure that our services and compensation are competitive within the industry, and that our overhead costs are balanced with our revenue level. In addition, we monitor the progress of client projects with client senior management. We manage the activities of our professionals by closely monitoring engagement schedules and staffing requirements for new engagements. However, a rapid decline in the demand for the professional services that we provide could result in lower utilization of our professionals than we planned. In addition, because most of our client engagements are terminable by our clients without penalty, an unanticipated termination of a client project could require us to maintain underutilized employees. While professional staff levels must be adjusted to reflect active engagements, we must also maintain a sufficient number of senior professionals to oversee existing client engagements and participate in our sales efforts to secure new client assignments. Our utilization rate for the second quarter of fiscal year 2008 decreased to 60% compared to 65% the first quarter of fiscal year 2008 and decreased from 64% in the second quarter of fiscal year 2007.

Free cash flow was $3.6 million for the six months ended September 30, 2007. Management believes that the free cash flow metric, which is a non-GAAP measure, defined as net cash provided by operating activities ($5.0 million) net of capital expenditures ($1.4 million), provides a consistent metric from which the performance of the business may be monitored.

Disclosure Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act relating to our operations, results of operations and other matters that are based on our current expectations, estimates and projections, based on information currently available to us, and we assume no obligation to update any forward-looking statements. Words such as “expects,” “intends,” “plans,” “projects,” “believes,” “estimates” and similar expressions are used to identify these forward-looking statements. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Forward-looking statements are based upon assumptions as to future events that may not prove to be accurate. Actual outcomes and results may differ materially from what is expressed or forecast in these forward-looking statements. For a discussion of some of the risks and uncertainties that could cause actual outcomes and results to materially differ, please see the section entitled “Risk Factors” to this Quarterly Report on Form 10-Q.

Critical Accounting Policies and Estimates

We prepare our condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. For a description of the significant accounting policies which we believe are the most critical to aid in understanding and evaluating our reported financial position and results, refer to our Annual Report on Form 10-K for the fiscal year ended March 31, 2007.

Revenue

Net revenue increased $4.1 million, or 10%, in the quarter ended September 30, 2007 as compared to the same period in the prior fiscal year. This increase was primarily due to higher realized billing rates at new and existing clients during the quarter ended September 30, 2007. Net revenue increased $11.1 million, or 14%, in the six months ended September 30, 2007 as compared to the same period in the prior fiscal year. This increase was primarily due to higher realized billing rates at new and existing clients as well as an increase in the number of clients that we served in the six months ended September 30, 2007. We continue to focus on expanding our client base and reducing client concentration.

We served 63 clients during the second quarter of fiscal year 2008 which was flat compared to the second quarter of the prior fiscal year. Average net revenue per client improved to just over $0.7 million during the second quarter of fiscal year 2008 compared to just under $0.7 million during the second quarter of the prior fiscal year.

Operating Expenses

Project Personnel Costs

Project personnel costs before reimbursable expenses decreased $1.1 million, or 3%, during the quarter ended September 30, 2007 as compared to the same period in the prior fiscal year. This decrease was primarily due to a $4.1 million special bonus for practice personnel that was recorded in the second quarter of fiscal year 2007 and the capitalization of internal labor costs for internal use software during the second quarter of fiscal year 2008. This decrease was partially offset by an increase in compensation costs and stock-based compensation expense associated with an average increase in project personnel of 7% during the second quarter of fiscal year 2008 compared to the same period in the prior fiscal year. Project personnel costs before reimbursable expenses increased $3.6 million, or 6%, during the six months ended September 30, 2007 as compared to the same period in the prior fiscal year. This increase is primarily due to increased compensation costs and stock-based compensation expense associated with an average increase in project personnel of 9% offset by a decrease in variable compensation due to the $4.1 million special bonus recorded in the second quarter of fiscal year 2007. As a percentage of net revenue, project personnel costs before reimbursable expenses decreased to 69% during the quarter ended September 30, 2007 compared to 79% in the same period in the prior fiscal year. As a percentage of net revenue, project personnel costs before reimbursable expenses decreased to 69% during the six months ended September 30, 2007 compared to 74% in the same period in the prior fiscal year.

Professional Development and Recruiting

Professional development and recruiting expenses increased $0.2 million, or 8%, during the quarter ended September 30, 2007 as compared to the same period in the prior fiscal year. Professional development and recruiting expenses increased $0.3 million, or 7%, during the six months ended September 30, 2007 as compared to the same period in the prior fiscal year. The increases were primarily due to increases in campus recruiting initiatives and training and higher costs associated with our summer intern program, partially offset by decreases in experienced recruiting initiatives and sourcing fees during the quarter and six months ended September 30, 2007 compared to the same periods in the prior fiscal year. The costs incurred to recruit consultants include travel and lodging costs for our consultants and recruiting staff, travel expense reimbursements for candidates, costs related to our summer intern program and sourcing fees related to non-campus searches. Due to an increase in headcount, our expenditures related to training increased as we increased the number of training courses offered to employees in the three and six months ended September 30, 2007 compared to the same periods in the prior fiscal year.

Marketing and Sales

Marketing and sales expenses increased $0.1 million, or 12%, during the quarter ended September 30, 2007 as compared to the same period in the prior fiscal year. This increase was primarily due to increased expenditures related to the executive learning forum, known as the DiamondExchange tm , held during the quarter ended September 30, 2007 compared to that of the same period in the prior fiscal year. Marketing and sales expenses did not change significantly during the six months ended September 30, 2007 as compared to the same period in the prior fiscal year.

Management and Administrative Support

Management and administrative support expenses decreased $1.0 million, or 13%, during the quarter ended September 30, 2007 as compared to the same period in the prior fiscal year. This decrease was primarily due to decreases in compensation expense for management and administrative personnel related to the capitalization of internal labor costs for internal use software during the second quarter of fiscal year 2008, decreased stock-based compensation expense during the second quarter of fiscal year 2008 and decreased variable compensation due to a special bonus of $0.5 million recorded in the second quarter of fiscal year 2007. In addition, management and administrative support expense decreased due to lower professional fees during the second quarter of fiscal year 2008 compared to the same period in the prior fiscal year. Management and administrative support expenses decreased $0.9 million, or 7%, during the six months ended September 30, 2007 as compared to the same period in the prior fiscal year primarily due to the decreases described above partially offset by an increase in rent and facilities expenses in our global offices. Management and administrative support expenses include the rent expense associated with our six offices in North America, the U.K. and India.

Other Income, Net

Other income, net decreased $0.1 million, or 13%, during the quarter ended September 30, 2007 as compared to the same period in the prior fiscal year. This decrease is primarily due to a decrease in interest income resulting from lower interest rate yields and a lower average cash and cash equivalents balance from continuing operations during the quarter ended September 30, 2007 compared to the same periods in the prior fiscal year. Other income, net did not change significantly during the six months ended September 30, 2007 as compared to the same period in the prior fiscal year.

Income Tax Expense

We recorded income tax expense of $2.7 million, a 49% effective income tax rate, in the quarter ended September 30, 2007, compared to an income tax benefit of $0.2 million, a 108% effective income tax rate, in the quarter ended September 30, 2006. The 108% effective income tax rate in the quarter ended September 30, 2006 was a divergence from historical reported effective income tax rates due to minimal reported income in the period. We recorded income tax expense of $5.2 million, a 43% effective income tax rate, in the six months ended September 30, 2007, compared to income tax expense of $1.9 million, a 48% effective income tax rate, in the six months ended September 30, 2006. The decreases in the effective tax rate in the quarter and six months ended September 30, 2007 were primarily related to improved performance in our international operations in the current tax year where there are valuation allowances on the international deferred tax assets. Due to these valuation allowances, we currently receive no reported tax benefit for international losses or reported tax expense for international profits.

We have deferred tax assets which have arisen primarily as a result of temporary differences between the tax bases of assets and liabilities and their related amounts in the financial statements as well as operating losses incurred in fiscal years 2002 and 2003. Statement of Accounting Financial Standards (“SFAS”) No. 109, “Accounting for Income Taxes,” requires the establishment of a valuation allowance to reflect the likelihood that deferred tax assets will not be realized. Management judgment is required in determining any valuation allowance recorded against the gross deferred tax assets. Management recorded a full valuation allowance against the net deferred tax assets as of March 31, 2003 largely due to the losses we incurred during fiscal years 2002 and 2003. Based on the reported income in the U.S. in fiscal years 2004 and 2005, the Company reversed $20.2 million of the valuation allowance as of March 31, 2005. As of September 30, 2007, the remaining valuation allowance against deferred tax assets was $8.1 million attributable to net operating loss carryforwards in foreign and certain state jurisdictions, as well as unrealized U.S. federal capital loss carryforwards.

Effective April 1, 2007, we adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”). FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.

Unrecognized tax benefits as of the adoption of FIN 48 were approximately $1.4 million, of which $1.2 million would affect the effective tax rate if recognized. In conjunction with the adoption of FIN 48, we have classified uncertain tax positions as non-current income tax liabilities unless expected to be paid in one year. We do not expect the total amount of unrecognized tax benefits as of September 30, 2007 to change significantly in the next twelve months. Reserves for interest and penalties are not material. We file income tax returns in the U.S. at the federal level as well as in various state and foreign jurisdictions. We are no longer subject to U.S. federal or U.K. income tax examinations by tax authorities for years before fiscal year 2002, and are no longer subject to state and local tax examinations by tax authorities for years before fiscal year 2000.

We have several income tax audits pending and while the final resolution is uncertain, in the opinion of our management, the ultimate disposition of the audits will not have a material adverse effect on our financial position, liquidity or results of operation.

Discontinued Operations

In March 2006, the Board approved a strategy to focus the Company on its markets in North America, the U.K. and India. As part of the Board approved strategy, we committed to a plan to sell the portions of our international operations that included the offices and respective operations in Barcelona, Dubai, Madrid, Münich, Paris and São Paulo and as a result these are reported as “discontinued operations” for the periods presented. On July 19, 2006, we signed a definitive agreement to sell our consulting operations reported as discontinued operations. The transaction closed on July 31, 2006. The Company recorded a net gain from the sale, net of an income tax benefit, during the second quarter of fiscal year 2007 of $23.0 million, and recorded adjustments to reduce the gain to $22.9 million during the third and fourth quarters of fiscal year 2007 to reflect changes in estimates of the net assets sold. Refer to Note D to the condensed consolidated financial statements for a summary of the components of the operating results of discontinued operations in the three and six month periods ended September 30, 2006 and 2007.

Over the past several years, our principal sources of liquidity have consisted of our existing cash and cash equivalents, cash flow from operations, proceeds received upon the exercise of stock options by our employees and in fiscal year 2007, proceeds from the sale of portions of our international operations reported as discontinued operations. These internal sources of liquidity have been adequate to support our operating and capital expenditure requirements as well as to provide the funding needed for our stock repurchase program and our annual dividend. We anticipate that these sources will provide sufficient liquidity to fund our operating, capital, stock repurchase program and common stock dividend requirements at least through fiscal year 2009.

As a matter of prudent business practice, we maintain a revolving line of credit pursuant to the terms of an unsecured credit agreement with a commercial bank under which we may borrow up to $10.0 million. This line of credit was amended and restated on July 31, 2007 to amend certain covenants while maintaining the $10.0 million credit limit. Under the new credit agreement, the Company is required to maintain financial covenants including a minimum tangible net worth of $50.0 million and a minimum cash and cash equivalents balance of $20.0 million. In addition, annual dividend payments cannot exceed $17.5 million and the annual purchase, retirement or redemption of Company stock cannot exceed 20% of market capitalization. The annual interest rate under the new agreement is based on the prime rate minus 50 basis points or LIBOR plus 75 basis points. The new credit agreement expires July 31, 2009. The line of credit is reduced, as necessary, to account for letters of credit outstanding that secure our office leases and that serve as collateral for any potential future indemnification obligation related to the sale of a portion of our international operations. As of September 30, 2007, these letters of credit totaled $2.5 million. As of September 30, 2007, there were no outstanding borrowings and we had approximately $7.5 million available under this line of credit. We do not rely on our line of credit for liquidity, as evidenced by the fact that we have never borrowed cash against the line of credit.

On November 6, 2007, the Board declared an annual cash dividend of thirty-five cents per share of common stock outstanding payable to shareholders of record on November 20, 2007. The dividend will be paid on December 6, 2007.

From time to time, we undergo various tax examinations and audits related to our holding company and its subsidiaries. As a result of a tax inspection of a former Spanish subsidiary for the tax years 1999 to 2000, on January 3, 2006 we provided a bank guarantee in the amount of 4.3 million Euros with the Spanish taxing authority in order to appeal such authority’s assessment. The bank guarantee is secured by $6.6 million, classified as restricted cash, as of September 30, 2007. The Spanish subsidiary was sold as part of the July 31, 2006 sale transaction and in accordance with the terms of the sale transaction, we agreed to indemnify the buyer for any liability related to this Spanish tax inspection (“tax indemnification obligation”). The terms of the guarantee require that it be renewed annually until the results of the appealed tax inspection are settled. Such settlement is not expected before a period of approximately seven years. The maximum potential amount of future payments under the tax indemnification obligation is approximately 7.8 million Euros, assuming the full amount assessed is sustained at the end of the appeals process. We believe that we are adequately reserved for any potential exposure related to this assessment based upon our current accruals which were determined based on advice from our third-party tax advisors and based upon guidance set forth in FIN No. 45. We currently hold shares of Diamond’s common stock beneficially owned by a third party in an escrow account for the benefit of recovering from the third party a portion of any payments made by us under the tax indemnification obligation from the sale transaction. The value of those shares at September 30, 2007 was $1.8 million. The $4.1 million net tax indemnification obligation reported on the Condensed Consolidated Balance Sheet as of September 30, 2007 is comprised of our current accruals net of the current value of the escrow shares.

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