UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

Commission File Number: 000-22125

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		36-4069408 (I.R.S. Employer Identification No.)
875 N. Michigan Avenue, Suite 3000, Chicago, Illinois (Address of principal executive offices)		60611 (Zip Code)

(312) 255-5000
Registrant’s Telephone Number, Including Area Code

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files.) Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in rule 12b-2 of the Exchange Act): Yes o No þ

As of July 31, 2010, there were 27,406,182 shares of Common Stock of the Registrant outstanding.

 

 

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED JUNE 30, 2010

TABLE OF CONTENTS

PART I
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2010 and June 30, 2010			3
Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended June 30, 2009 and 2010			4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2009 and 2010			5
Notes to Condensed Consolidated Financial Statements			6
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
Item 3: Quantitative and Qualitative Disclosures about Market Risk			17
Item 4: Controls and Procedures			17
PART II
Item 1: Legal Proceedings			18
Item 1A: Risk Factors			18
Item 2: Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities			18
Item 6: Exhibits and Reports on Form 8-K			19
SIGNATURES			20
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Exhibit 99.1

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

(In thousands, except per share data)

		March 31,				June 30,
		2010				2010
						(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	55,834			$	60,204
Restricted Cash			4,104				4,104
Accounts receivable, net of allowance of $477 and $510 as of March 31, 2010 and June 30, 2010, respectively			22,947				21,378
Income taxes receivable			—				2,682
Deferred tax asset, net — current portion			6,888				2,754
Prepaid expenses			1,594				1,822
Other current assets			1,472				1,414
Total current assets			92,839				94,358
Computers, equipment, leasehold improvements and software, net			3,667				3,858
Deferred tax asset, net — long-term portion			7,911				7,237
Other assets			1,584				1,316
Total assets		$	106,001			$	106,769
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	5,613			$	3,922
Accrued compensation			17,741				22,044
Deferred revenue			1,358				1,156
Income taxes payable — current portion			2,752				—
Accrued benefits			2,355				2,986
Other accrued liabilities			4,274				4,753
Total current liabilities			34,093				34,861
Deferred rent — long term portion			1,613				1,573
Accrued income tax liabilities — long-term portion			585				585
Total liabilities			36,291				37,019
Commitments and contingencies
Stockholders’ equity:
Preferred Stock, $1.00 par value, 2,000 shares authorized, no shares issued			—				—
Common Stock, $0.001 par value, 100,000 shares authorized, 40,082 shares issued as of March 31, 2010 and June 30, 2010			40				40
Additional paid-in capital			615,467				614,354
Accumulated other comprehensive loss			(4,423	)			(4,593	)
Accumulated deficit			(437,517	)			(436,665	)
			173,567				173,136
Less Common Stock in treasury, at cost, 12,830 and 12,804 shares held at March 31, 2010 and June 30, 2010, respectively			103,857				103,386
Total stockholders’ equity			69,710				69,750
Total liabilities and stockholders’ equity		$	106,001			$	106,769

See accompanying notes to condensed consolidated financial statements.

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except per share data)

		For the Three Months
		Ended June 30,
		2009				2010
		(Unaudited)				(Unaudited)
Revenue:
Net revenue		$	37,892			$	52,002
Reimbursable expenses			7,080				9,171
Total revenue			44,972				61,173
Project personnel expenses:
Project personnel costs before reimbursable expenses			28,621				35,740
Reimbursable expenses			7,080				9,171
Total project personnel expenses			35,701				44,911
Gross margin			9,271				16,262
Other operating expenses:
Professional development and recruiting			706				2,133
Marketing and sales			541				804
Management and administrative support			6,103				6,925
Total other operating expenses			7,350				9,862
Income from operations			1,921				6,400
Other expense, net			(19	)			(57	)
Income from continuing operations before income taxes			1,902				6,343
Income tax expense			1,055				3,037
Income from continuing operations after income taxes			847				3,306
Discontinued operations:
Income from discontinued operations, net of income taxes			85				—
Net income			932				3,306
Foreign currency translation adjustments			418				(158	)
Unrealized gain (loss) on investment			7				(12	)
Comprehensive income		$	1,357			$	3,136
Basic income per share of common stock:
Income from continuing operations		$	0.03			$	0.12
Income from discontinued operations			0.00				—
Net income		$	0.03			$	0.12
Diluted income per share of common stock:
Income from continuing operations		$	0.03			$	0.12
Income from discontinued operations			0.00				—
Net income		$	0.03			$	0.12
Shares used in computing basic income per share of common stock			27,273				27,105
Shares used in computing diluted income per share of common stock			27,369				28,394

The following amounts of stock-based compensation expense (“SBC”) are included in each of the respective expense categories reported above:

		For the Three Months
		Ended June 30,
		2009				2010
		(Unaudited)				(Unaudited)
Project personnel costs before reimbursable expenses		$	842			$	840
Professional development and recruiting			12				13
Marketing and sales			90				107
Management and administrative support			373				367
Total SBC		$	1,317			$	1,327

See accompanying notes to condensed consolidated financial statements.

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

		For the Three Months
		Ended June 30,
		2009				2010
		(Unaudited)				(Unaudited)
Cash flows from operating activities:
Net income		$	932			$	3,306
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			489				431
Stock-based compensation			1,317				1,327
Deferred income taxes			6,839				4,786
Excess tax benefits from employee stock plans			(5	)			(324	)
Changes in assets and liabilities:
Accounts receivable			1,020				1,549
Prepaid expenses and other			(110	)			(316	)
Accounts payable			(904	)			(1,512	)
Accrued compensation			331				4,298
Income taxes payable / receivable			(6,512	)			(5,283	)
Other assets and liabilities			677				1,304
Net cash provided by operating activities			4,074				9,566
Cash flows from investing activities:
Increase in restricted cash			(2	)			—
Capital expenditures, net			(480	)			(816	)
Net cash used in investing activities			(482	)			(816	)
Cash flows from financing activities:
Stock option and employee stock purchase plan proceeds			397				443
Payment of employee withholding taxes from equity transactions			(106	)			(612	)
Common stock cash dividends			(1,921	)			(2,453	)
Excess tax benefits from employee stock plans			5				324
Purchase of treasury stock			(280	)			(1,963	)
Net cash used in financing activities			(1,905	)			(4,261	)
Effect of exchange rate changes on cash			276				(119	)
Net increase in cash and cash equivalents			1,963				4,370
Cash and cash equivalents at beginning of period			46,112				55,834
Cash and cash equivalents at end of period		$	48,075			$	60,204
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	35			$	1
Cash paid during the period for income taxes		$	653			$	3,539

See accompanying notes to condensed consolidated financial statements.

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A. Basis of Reporting

The accompanying unaudited interim condensed consolidated financial statements include the accounts of Diamond Management & Technology Consultants, Inc., formerly DiamondCluster International, Inc., and its wholly-owned subsidiaries. In this Quarterly Report on Form 10-Q, we use the terms “Diamond,” “we,” “our Company,” “the Company,” “our,” and “us” to refer to Diamond Management & Technology Consultants, Inc. and its wholly-owned subsidiaries. All intercompany accounts and balances have been eliminated in consolidation.

In the opinion of management, the condensed consolidated financial statements reflect all adjustments that are necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows as of the dates and for the periods presented. These adjustments are of a normal and recurring nature. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, (“GAAP”), for interim financial information. Consequently, these statements do not include all the disclosures normally required by GAAP for annual financial statements nor those normally made in the Company’s Annual Report on Form 10-K. Accordingly, reference should be made to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010, for additional disclosures, including a summary of the Company’s accounting policies, which have not changed except as discussed in Note (H) below. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses during the period. Actual results could differ from those estimates. The consolidated results of operations for the three months ended June 30, 2010, are not necessarily indicative of results for the full fiscal year.

B. Restricted Cash

The Company initially deposited $5.5 million in a U.S. Dollar denominated bank account during the fourth quarter of fiscal year 2006 to support the 4.3 million Euros bank guarantee described in Note (C) below. Based upon the terms of the restrictions on the use of the pledged cash, the Company has reported these funds as restricted cash on the Consolidated Balance Sheets. As a result of a favorable ruling received in the fourth quarter of fiscal year 2010, the $4.1 million of restricted cash is classified as a current asset at March 31, 2010, and June 30, 2010. In July 2010, the cash restriction was removed and the cash was released.

C. Discontinued Operations

On July 31, 2006, the Company sold a portion of its international operations which included consulting operations in France, Germany, Spain, Brazil, and the United Arab Emirates as part of a stock sale agreement. Prior to the stock sale, as a result of a tax inspection of the former Spanish subsidiary for the tax years 1999 to 2000, the Company provided a bank guarantee in the amount of 4.3 million Euros, secured by restricted cash, with the Spanish taxing authority in order to appeal such authority’s assessment. In accordance with the terms of the transaction, the Company 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. At the time of the transaction, such settlement was not expected before a period of approximately eight years.

During the fourth quarter of fiscal year 2008, the Spanish tax authorities ruled in favor of the Company on a portion of the assessments that were being appealed. The remaining assessments under appeal were based on the same merits and the Company believed that the tax authorities would rule in favor of the Company on those appeals. As a result, $3.9 million of the indemnification obligation was reversed during the fourth quarter of fiscal year 2008. In addition, the Company also obtained a release in June 2008 of $3.1 million of the restricted cash related to the portion of the assessments that had received a favorable ruling.

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During the fourth quarter of fiscal year 2010, the Spanish tax authorities ruled in favor of the Company on the assessed penalties related to the remaining tax assessments under appeal. As a result, the remaining $0.4 million of the indemnification obligation was reversed during the fourth quarter of fiscal year 2010. During the first quarter of fiscal year 2011, the Spanish tax authorities ruled in favor of the Company on the remaining underlying tax assessment. Based on the favorable rulings, the $4.1 million of restricted cash is classified as a current asset at March 31, 2010, and June 30, 2010. In July 2010, the cash restriction was removed and the cash was released.

The Company holds shares of Diamond’s Common Stock beneficially owned by third parties in an escrow account for the benefit of recovering from the third parties a portion of any payments made by the Company under the tax indemnification obligation from the sale transaction. As a result of the favorable rulings on the assessments that were appealed, the Company is in the process of releasing the shares as part of the favorable conclusion of the tax assessments. The Company recorded a net $0.1 million benefit in the fourth quarter of fiscal year 2010, which reflected the $0.4 million reversal of the indemnification obligation discussed above, offset by the expected release of the remaining escrow shares of $0.3 million.

D. Income Taxes

The Company recorded income tax expense of $3.0 million, which represents a 48% effective income tax rate, in the quarter ended June 30, 2010, compared to income tax expense of $1.1 million, a 55% effective income tax rate, in the quarter ended June 30, 2009. The effective tax rate decreased in the quarter ended June 30, 2010, due to an increase in pre-tax income relative to the corresponding period in the prior fiscal year, which resulted in permanent differences representing a smaller percentage of income. In the quarters ended June 30, 2009 and 2010, the Company incurred international losses in India where, due to ongoing losses and valuation allowances on related deferred tax assets, the Company currently does not recognize a tax benefit. This caused a significant difference between the reported effective tax rate and the statutory tax rate.

The Company has 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 international jurisdictions. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized and adjust the valuation allowances accordingly. Management judgment is required in determining any valuation allowance recorded against the gross deferred tax assets. As of June 30, 2010, the remaining valuation allowance against deferred tax assets was $3.0 million attributable to net operating loss carryforwards in foreign and certain state jurisdictions, as well as U.S. federal capital loss carryforwards.

E. Income Per Share

Basic income per share is computed using the weighted average number of common shares outstanding. Diluted income per share is computed using the weighted average number of common shares outstanding and, where dilutive, the assumed exercise of stock options and stock appreciation rights (“SARs”) and vesting of restricted stock and restricted stock units (using the treasury stock method). Following is a reconciliation of the shares used in computing basic and diluted income per share for the three months ended June 30, 2009 and 2010 (in thousands):

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

		Three Months
		Ended June 30,
		2009				2010
Shares used in computing basic income per share			27,273				27,105
Dilutive effect of stock options, SARs and restricted stock/units			96				1,289
Shares used in computing diluted income per share			27,369				28,394
Antidilutive securities not included in dilutive income per share calculation			6,100				902

F. Geographic Data

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

Data regarding net revenue based on the geographic regions in which the Company operates is presented below for the periods presented in the Condensed Consolidated Statements of Operations and Comprehensive Income (in thousands):

		Three Months
		Ended June 30,
		2009				2010
Net revenue:
North America		$	34,393			$	47,307
United Kingdom and India			3,499				4,695
Total net revenue		$	37,892			$	52,002

The segregation of revenue by geographic region is based upon the location of the legal entity performing the services. The Company had no clients that accounted for over 10% of revenue during the three months ended June 30, 2009. The Company had one client that accounted for over 10% of revenue during the three months ended June 30, 2010.

Data regarding long-lived assets based on the geographic regions in which the Company operates is presented below for the periods presented in the Condensed Consolidated Balance Sheets (in thousands):

		March 31,				June 30,
		2010				2010
Long-lived assets:
North America		$	4,741			$	4,629
United Kingdom and India			615				544
Total long-lived assets		$	5,356			$	5,173

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

G. Dividends

The Board declared the following quarterly cash dividend during the three months ended June 30, 2009, and June 30, 2010:

		Three Months Ended				Three Months Ended
		June 30, 2009				June 30, 2010
Declaration date		June 1, 2009				May 5, 2010
Per share dividend		$	0.07			$	0.09
Record date		June 10, 2009				June 1, 2010
Total amount (in thousands)		$	1,921			$	2,453
Payment date		June 18, 2009				June 11, 2010

H. Recent Accounting Pronouncements

Effective April 1, 2010, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 requires new disclosures about recurring or nonrecurring fair value measurements and provides clarification over certain existing fair value measurement disclosure requirements. The adoption of ASU 2010-06 did not have an impact on the Company’s financial condition or results of operations.

I. Fair Value Measurements

In September 2006, the Financial Accounting Standards Board issued a statement which defines fair value, establishes a framework for measuring fair value, and requires expanded disclosures about fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy that prioritizes the inputs used to measure fair value was established. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

•

Level 1 — Quoted prices in active markets for identical assets and liabilities.

•

Level 2 — Quoted prices in active markets for similar assets and liabilities, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The Company’s financial assets that are measured at fair value on a recurring basis consist of cash and cash equivalents and restricted cash and are measured using Level 1 inputs.

J. Subsequent Event

On July 29, 2010, the Board declared a quarterly cash dividend of $0.09 per share of common stock payable on September 15, 2010, to shareholders of record at the close of business on September 1, 2010.

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

The following information should be read in conjunction with the information contained in the Condensed Consolidated Financial Statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010. This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. See “Disclosure Regarding Forward-Looking Statements” below. We use the terms “we,” “our,” “us,” “the Company” and “Diamond” in this report to refer to Diamond Management & Technology Consultants, Inc. and its wholly-owned subsidiaries.

Overview

Diamond is a management and technology consulting firm. Clients engage Diamond Management & Technology Consultants, Inc. to help their companies grow, improve margins, and increase the productivity of their investments. Working together to design and execute business strategies that capitalize on changing market forces and technology, Diamond’s consultants are experts in helping clients attract and retain customers, increase the value of their information, and plan and execute projects that turn strategy into measurable results.

Diamond’s capabilities are rooted in deep strategy, technology, operations, and industry experience. The firm’s approach to client service is based on objectivity, collaboration, and an unwavering commitment to its clients’ best interests.

During the quarter ended June 30, 2010, we generated net revenue of $52.0 million from 67 clients. At June 30, 2010, we employed 532 consultants and 120 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. Our 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 defer 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 project run-on 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.

Approximately 90% of our revenues and expenses are denominated in the U.S. Dollar, which limits the impact of foreign currency exchange rate fluctuations on consolidated revenues and expenses. Approximately 10% of our revenues and expenses are generated from international transactions, which are denominated in foreign currencies. The most common foreign currencies that we operate under are the British Pound Sterling, the Indian Rupee, and the Euro.

The largest portion of our operating expenses consists of project personnel costs. Project personnel costs before reimbursable expenses consist of payroll costs, variable incentive compensation, stock-based compensation expense, and related benefits expense associated with our consulting staff. Other expenses included in project personnel costs before reimbursable expenses are non-billable travel, third-party vendor payments, and other 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.

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

Gross margin increased $7.0 million, or 75%, in the first quarter of fiscal year 2011 compared to the first quarter of fiscal year 2010 primarily due to a $14.1 million increase in net revenue partially offset by a $7.1 million increase in project personnel costs before reimbursable expenses as discussed below under “Project Personnel Costs”. Our project personnel headcount was 532 at June 30, 2010, compared to 441 at June 30, 2009. Our annualized net revenue per practice professional was $393 thousand for the first quarter of fiscal year 2011 compared to $335 thousand for the first quarter of fiscal year 2010. The increase compared to the quarter ended June 30, 2009, is primarily due to the increase in net revenue and higher realized billing rates.

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 was $6.4 million in the first quarter of fiscal year 2011 compared to $1.9 million in the first quarter of fiscal year 2010, an increase of $4.5 million. The increase is primarily due to the $7.0 million increase in gross margin discussed above partially offset by an increase in training and recruiting costs, an increase in variable compensation expense, and an increase in marketing costs.

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 aligned with our revenue level. In addition, we regularly 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 first quarter of fiscal year 2011 increased to 75% compared to 74% in the first quarter of fiscal year 2010.

Free cash flow was $8.8 million for the three months ended June 30, 2010. Management believes that the free cash flow metric, which is a non-GAAP measure, defined as net cash provided by operating activities of $9.6 million net of capital expenditures of $0.8 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.

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

Recent Accounting Pronouncements

See Note (H) to the condensed consolidated financial statements for accounting pronouncements adopted during the first quarter of fiscal year 2011.

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, 2010.

Revenue

Net revenue increased $14.1 million, or 37%, in the quarter ended June 30, 2010, as compared to the same period in the prior fiscal year. The increase was primarily due to further penetration of existing clients and the addition of new client relationships. We served 67 clients during the first quarter of fiscal year 2011 compared to 61 clients during the first quarter of the prior fiscal year. Average net revenue per client increased to $0.8 million during the first quarter of fiscal year 2011, as compared to $0.6 million during the first quarter of the prior fiscal year.

Revenue from new clients (defined as clients that generated revenue in the current period but were absent from the prior period) accounted for 3% of revenue during the quarter ended June 30, 2010, and 6% of revenue during quarter ended June 30, 2009. For the quarters ended June 30, 2009 and 2010, billed fee revenue and new client revenue mix by the industries that we serve was as follows:

		Billed Fee Revenue								New Client Revenue
		For the Three Months								For the Three Months
		Ended June 30,								Ended June 30,
Industry		2009				2010				2009				2010
Financial Services			33	%			30	%			54	%			42	%
Insurance			24	%			26	%			30	%			1	%
Healthcare			19	%			21	%			12	%			29	%
Enterprise			18	%			19	%			3	%			21	%
Public Sector			6	%			4	%			1	%			7	%
			100	%			100	%			100	%			100	%

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

Operating Expenses

Project Personnel Costs

Project personnel costs before reimbursable expenses increased $7.1 million, or 25%, during the quarter ended June 30, 2010, as compared to the same period in the prior fiscal year. This increase was primarily caused by an increase in compensation costs associated with an increase in headcount and an increase in variable compensation. As a percentage of net revenue, project personnel costs before reimbursable expenses decreased to 69% during the quarter ended June 30, 2010, compared to 76% in the same period in the prior fiscal year. This decrease was primarily due to higher realized billing rates and higher chargeability of our project personnel staff.

The following table summarizes practice personnel data for quarters ended June 30, 2009 and 2010:

		For the Three Months
		Ended June 30,
		2009				2010
Practice headcount			441				532
Annualized net revenue per practice professional (in thousands)		$	335			$	393
Chargeability			74	%			75	%
Annualized voluntary attrition			13	%			17	%
Total annualized attrition (1)			34	%			20	%

Professional Development and Recruiting

Professional development and recruiting expenses increased $1.4 million, or 202%, during the quarter ended June 30, 2010, as compared to the same period in the prior fiscal year. The increase was primarily due to costs incurred in the first quarter of fiscal year 2011 for a firm-wide training event, an increase in new hire training costs, and higher costs associated with the recruitment and on boarding of our project personnel. 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.

Marketing and Sales

Marketing and sales expenses increased $0.3 million, or 49%, during the quarter ended June 30, 2010, as compared to the same period in the prior fiscal year. The increase was primarily due to an increase in costs related to increasing our brand awareness.

Management and Administrative Support

Management and administrative support expenses increased $0.8 million, or 14%, during the quarter ended June 30, 2010, as compared to the same period in the prior fiscal year. This increase was primarily due to an increase in variable compensation expense.

Other Income, Net

Other income (expense), did not change significantly during the quarter ended June 30, 2010, as compared to the same period in the prior fiscal year.

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

Income Tax Expense

We recorded income tax expense of $3.0 million, which represents a 48% effective income tax rate, in the quarter ended June 30, 2010, compared to income tax expense of $1.1 million, a 55% effective income tax rate, in the quarter ended June 30, 2009. The effective tax rate decreased in the quarter ended June 30, 2010, due to an increase in pre-tax income relative to the corresponding period in the prior fiscal year, which resulted in permanent differences representing a smaller percentage of income. We incurred international losses in India where, due to ongoing losses and valuation allowances on related international deferred tax assets, we currently do not recognize a tax benefit. This caused a significant difference between the reported effective tax rate and the statutory tax rate.

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 international jurisdictions. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized and adjust the valuation allowances accordingly. Management judgment is required in determining any valuation allowance recorded against the gross deferred tax assets. As of June 30, 2010, the remaining valuation allowance against deferred tax assets was $3.0 million attributable to net operating loss carryforwards in foreign and certain state jurisdictions, as well as U.S. federal capital loss carryforwards.

Discontinued Operations

On July 31, 2006, we sold a portion of our international operations which included consulting operations in France, Germany, Spain, Brazil, and the United Arab Emirates as part of a stock sale agreement. Prior to the stock sale, as a result of a tax inspection of the former Spanish subsidiary for the tax years 1999 to 2000, we provided a bank guarantee in the amount of 4.3 million Euros, secured by restricted cash, with the Spanish taxing authority in order to appeal such authority’s assessment. In accordance with the terms of the 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. At the time of the transaction, such settlement was not expected before a period of approximately eight years.

During fiscal year 2008, the Spanish tax authorities ruled in favor of the Company on a portion of the assessments that were being appealed. The appeals of the remaining assessments were based on the same merits and the Company believed that the tax authorities would rule in favor of the Company on those appeals. As a result, $3.9 million of the indemnification obligation was reversed during the fourth quarter of fiscal year 2008. In addition, the Company also obtained a release in June 2008 of $3.1 million of the restricted cash related to the portion of the assessments that had received a favorable ruling.

During the fourth quarter of fiscal year 2010, the Spanish tax authorities ruled in favor of the Company on the assessed penalties related to the remaining tax assessments under appeal. As a result, the remaining $0.4 million of the indemnification obligation was reversed during the fourth quarter of fiscal year 2010. During the first quarter of fiscal year 2011, the Spanish tax authorities ruled in favor of the Company on the remaining underlying tax assessment. Based on the favorable rulings, the $4.1 million of restricted cash is classified as a current asset at March 31, 2010, and June 30,2010. In July 2010, the cash restriction was removed and the cash was released.

The Company holds shares of Diamond’s Common Stock beneficially owned by third parties in an escrow account for the benefit of recovering from the third parties a portion of any payments made by the Company under the tax indemnification obligation from the sale transaction. As a result of the favorable rulings on the assessments that were appealed, the Company is in the process of releasing the shares as part of the favorable conclusion of the tax assessments. The Company recorded a net $0.1 million benefit in the fourth quarter of fiscal year 2010, which reflected the $0.4 million reversal of the indemnification obligation discussed above, offset by the expected release of the remaining escrow shares of $0.3 million.

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

Liquidity and Capital Resources

The following table describes our liquidity and financial position as of June 30, 2009 and 2010:

		June 30,
		2009				2010
		(in millions)
Working capital (1)		$	51.8			$	59.5
Cash and cash equivalents (1)		$	48.1			$	60.2
Non-utilized bank credit facilities		$	17.8			$	12.3
Stockholders’ equity (1)		$	64.8			$	69.8

Over the past several years, our principal sources of liquidity have consisted of our existing cash and cash equivalents and cash flow from operations. 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 2012. 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.

Our cash is invested in highly-liquid, short-term investments with little to no principal risk. These investments must be rated either AAA or A1/P1 by Standard & Poors, Moody’s or Fitch, Inc. We do not invest in nonconsolidated conduits, collateralized debt obligations, auction-rate securities, or structured investment vehicles, and we do not have any plans to invest in such investments in the foreseeable future.

On July 31, 2009, the Company entered into a credit agreement with Harris N.A. (“Harris Bank”) to secure a revolving line of credit. Pursuant to the terms of the credit agreement, the Company may borrow up to $12.5 million. The extensions of credit from Harris Bank may be made in the form of loans and letters of credit, and certain other credit and financial accommodations. The Company is required to adhere to certain operating and financial covenants including a minimum net worth of $30.0 million and, when borrowing against the credit facility, a minimum interest coverage ratio of 1.5 to 1. The minimum interest coverage is measured as the ratio of earnings before interest and tax expense to interest expense for the past four fiscal quarters.

The annual interest rate under this credit agreement is at the Company’s option, LIBOR plus one hundred and twenty five basis points or a base rate. The base rate is generally defined as the greatest of: a) the prime rate, b) the sum of the Federal Funds rate plus one half of one percent, or c) the one month LIBOR rate plus one hundred basis points. The Company agrees to pay an annual commitment fee to Harris Bank equal to one-quarter of one percent on the unused credit facility from August 1, 2009, through the termination date of the agreement. Pursuant to the terms of the agreement, outstanding letters of credit issued by Harris Bank for the Company cannot exceed $2.5 million and any outstanding obligations under the line of credit are secured by substantially all of the Company’s assets. As of June 30, 2010, the Company had letters of credit outstanding totaling $0.2 million and there have been no cash borrowings against the line of credit since it was established. The Harris Bank credit agreement expires July 31, 2011.

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

As of June 30, 2009, and through July 31, 2009, the Company maintained a revolving line of credit pursuant to the terms of a credit agreement with JP Morgan Chase Bank, N.A. (“Chase Bank”) under which the Company could borrow up to $20.0 million. On July 31, 2009, this credit agreement was replaced by the credit agreement with Harris Bank discussed above. Under the Chase Bank credit agreement, the Company was required to adhere to financial covenants. The Chase Bank credit agreement expired on July 31, 2009. The Company never borrowed cash against this line of credit during the two years it was in effect.

Cash Flows from Operating Activities

During the three months ended June 30, 2010, net cash provided by operating activities was $9.6 million primarily resulting from the net income reported for the period, adjusted for depreciation and stock-based compensation expense, and the increase in accrued compensation, partially offset by the net change in deferred income taxes and income taxes payable/receivable. The decrease in deferred income tax assets was primarily due to the timing of the income tax deduction for accrued variable compensation expense, which became deductible in the first quarter of fiscal year 2011. This decrease was offset by an increase in income taxes receivable, primarily related to the income tax deduction discussed above and income tax deposits paid in the first quarter of fiscal year 2011.

Our billings for the three months ended June 30, 2010, totaled $61.6 million compared to $45.5 million for the three months ended June 30, 2009. The increase in billings is due to an increase in net revenue and reimbursable expenses as a result of increased project personnel headcount. These amounts include value added tax (“VAT”) and billings to clients for reimbursable expenses (which are not included in net revenue). Our gross accounts receivable balance of $21.9 million at June 30, 2010, represented 32 days of billings for the quarter ended June 30, 2010. At June 30, 2009, the gross receivable balance was $15.6 million which represented 31 days of billings for the quarter ended June 30, 2009. The increase in accounts receivable at June 30, 2010, as compared to June 30, 2009, was principally due to increased total revenue during the quarter ended June 30, 2010. An increase or decrease in accounts receivable and days of billings in accounts receivable between periods is primarily the result of the timing of the collection of payments and issuance of invoices, and therefore, we do not believe it is indicative of a trend in the business.

Cash Flows from Investing Activities

Cash used in investing activities was $0.8 million for the three months ended June 30, 2010, primarily related to capital expenditures which consisted of purchases of computer hardware and software licenses.

Cash Flows from Financing Activities

Cash used in financing activities was $4.3 million for three months ended June 30, 2010, primarily due to the payment of common stock cash dividends and the purchase of treasury stock.

Contractual Obligations

There have been no material changes to the table presented in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010.

Off Balance Sheet Arrangements

We do not maintain any off-balance sheet arrangements that would have a material current or future impact on our financial condition or results of operations.

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

Treasury Stock Transactions

The Board has authorized, from time to time, the repurchase of our Common Stock in the open market or through privately negotiated transactions. During the period beginning with the inception of the Buy-back Program in October 1998 until the meeting of directors on September 14, 2004, the Board had authorized the repurchase of up to 6.0 million shares, of which 5.3 million shares were repurchased at an aggregate cost of $70.5 million as of September 14, 2004. At the meeting of directors on September 14, 2004, the Board restated the aggregate amount of repurchases that could be made under the Buy-back Program to be based on a maximum dollar amount rather than a maximum number of shares. The authorization approved the repurchase of shares under the Buy-back Program having an aggregate market value of no more than $25.0 million. In April 2005, July 2006, March 2007 and February 2008, the Board authorized the repurchase of an additional $50.0 million, $35.0 million, $50.0 million and $25.0 million, respectively, of shares of the Company’s outstanding Common Stock under the existing Buy-back Program, resulting in an aggregate market value of up to $185.0 million in addition to the 5.3 million shares repurchased prior to September 14, 2004. During the quarter ended June 30, 2010, we repurchased approximately 0.2 million shares at an average price of $8.19. As of June 30, 2010, the amount available for repurchase under the Buy-back Program was $20.1 million.

Summary

We believe that our current cash balances, existing lines of credit, and cash flow from existing and future operations will be sufficient to fund our operating requirements at least through fiscal year 2012. In addition, we could consider seeking additional public or private debt or equity financing to fund future growth opportunities. However, there is no assurance that such financing would be available to us on acceptable terms, or at all.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

This information is set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010. There have been no material changes to the Company’s market risk during the three months ended June 30, 2010.

Item 4. Controls and Procedures

(a) Controls and Procedures. Our senior management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective such that information relating to the Company (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

(b) Changes in Internal Control Over Financial Reporting. There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in several legal claims or proceedings concerning matters arising in the ordinary course of business. However, we do not expect that any of these matters, individually or in the aggregate, will have a material effect or impact on our results of operation or financial condition.

Item 1A. Risk Factors

There have been no material changes to our Risk Factors as reported in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010.

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

The Board has authorized, from time to time, the repurchase of the Company’s Common Stock in the open market or through privately negotiated transactions. During the period beginning with the inception of the Buy-back Program in October 1998 until the meeting of directors on September 14, 2004, the Board had authorized the repurchase of up to 6.0 million shares, of which 5.3 million shares were repurchased at an aggregate cost of $70.5 million as of September 14, 2004. At the meeting of directors on September 14, 2004, the Board restated the aggregate amount of repurchases that could be made under the Buy-back Program to be based on a maximum dollar amount rather than a maximum number of shares. The authorization approved the repurchase of shares under the Buy-back Program having an aggregate market value of no more than $25.0 million. In April 2005, July 2006, March 2007 and February 2008, the Board authorized the repurchase of an additional $50.0 million, $35.0 million, $50.0 million and $25.0 million, respectively, of shares of the Company’s outstanding Common Stock under the existing Buy-back Program, resulting in an aggregate market value of up to $185.0 million in addition to the 5.3 million shares repurchased prior to September 14, 2004. In the absence of an additional buy-back authorization from the Board, the Buy-back Program expires when the existing authorized amounts for share repurchases has been expended. During the quarter ended June 30, 2010, the Company repurchased approximately 0.2 million shares at an average price of $8.19. As of June 30, 2010, the amount available for repurchase under the Buy-back Program was $20.1 million.

		Issuer Purchases of Equity Securities
														Maximum Approximate Dollar
						Average Price				Total Number of Shares				Value of Shares
		Total Number of				Paid per				Purchased as Part of				That May be Purchased
Period		Shares Purchased (1)				Share (2)				Publicly Announced Plans				Under the Plan
April 1, 2010 – April 30, 2010			239,614				8.19				239,614			$	20,098,028
May 1, 2010 – May 31, 2010			547				9.72				—			$	20,098,028
June 1, 2010 – June 30, 2010			—				—				—			$	20,098,028

DIAMOND MANAGEMENT & TECHNOLOGY CONSULTANTS, INC.

Item 6. Exhibits

(a) Exhibits

	3.1			Form of Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the quarterly report on Form 10-Q for the period ended September 30, 2009 and incorporated herein by reference)
	3.2			Amended and Restated By-Laws (filed as Exhibit 3.2 to the quarterly report on Form 10-Q for the period ended September 30, 2006 and incorporated herein by reference)
	31.1	*		CEO Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002
	31.2	*		CFO Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002
	32.1	*		CEO Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
	32.2	*		CFO Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
	99.1	*		Press Release dated August 4, 2010, Reporting First Quarter Earnings

SIGNATURES

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