The following information should be read in conjunction with the information contained in the Unaudited 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 December 31, 2007, as filed with the SEC on March 17, 2008. This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. See "Risk Factors" and "Special Note Regarding Forward-Looking Statements" included elsewhere herein. We use the terms "we," "our," "us," "Edgewater" and "the Company" in this report to refer to Edgewater Technology, Inc. and its wholly-owned subsidiaries.

Business Overview

Edgewater is a technology management consulting firm providing a synergistic blend of premium IT services primarily in the North American market. We provide services to our clients focused in three primary areas:

• envisioning and realizing strategic business solutions:

• optimizing business processes to improve the delivery of products and services;

• maximizing and unlocking the value of corporate data assets; and

• providing program and project management.

• implementing enterprise performance management solutions:

• providing dashboard and data cube design and build;

• providing data warehouse and ETL tool strategies and implementations;

• providing implementation services for budgeting, forecasting and consolidation software; and

• combining all components into a comprehensive analytics solution.

• leveraging line business with technology:

• providing design, architectural, core data and strategic build services;

• melding advanced business analysis with workflow enhancement; and

• evaluating and leveraging infrastructure services.

Our primary target is the client who wants experienced, highly-trained talent for strategic, high return projects. Edgewater typically goes to market both vertically by industry and horizontally by product and technology specialty. Our strategic consulting, custom development and integration service offerings go to market by vertical industry ("Vertical Service Offerings") and currently serve clients in the following industries: Consumer Packaged Goods/Manufacturing; Specialized Financial Services (such as Student Lending, Distressed Debt, and Private Equity); Healthcare (Payor/Managed Care)/Life Sciences; Higher Education; Hospitality; Insurance; Retail; and various Emerging Markets. Our BI/EPM and Data Services offerings go to market horizontally ("Horizontal Service Offerings") and provide high level teams of product specialists who span all industries.

During the three- and nine-month periods ended September 30, 2008, we generated total revenue of approximately $18.3 million and $57.4 million from a total of 194 and 281 clients, respectively. Headquartered in Wakefield, Massachusetts, our Company employed approximately 261 consulting professionals as of September 30, 2008.

Factors Influencing Our Results of Operations

Revenue. Our ability to generate revenue is affected by the level of business activity of our clients, which in turn is affected by the level of economic activity occurring in the industries and markets that they serve. A decline in the level of business activity of our clients could have a material adverse effect on our revenue and profit margin. With the general economic slowdown that the U.S. economy has experienced in the last year, we have seen clients utilizing a variety of initiatives to reduce external IT spending, including:
reduced IT initiatives, or delayed timetables or decisions, for new IT projects, which we have noted have occurred at the conclusion of large or legacy projects and in projects that are significantly focused on custom development, integration services, and technical and business consulting; increased internal IT personnel hiring efforts; and corporate budgetary restrictions or limitations on projects that are not deemed critical or significant in the current business environment. We have responded to these developments over the past year by increasing our training and development in new service offerings, and focusing our sales efforts on technologies that we believe the market will embrace or deem critical to their IT objectives and operating strategies. We also have increased cross-disciplinary training for our

personnel in both Vertical Service Offering services and Horizontal Service Offering services, due to the emerging overlap of customer demand for services that involve multiple components of our premium IT service offerings. While we expect to continue to pursue these efforts and objectives to further our goal to provide new services and offerings on a proactive basis, if there is a sustained economic cycle that produces decreasing demand for external IT services in certain areas of our business, we may counter-balance any such decline, with cost-savings initiatives to manage our expenses as a percentage of revenue and our utilization, accordingly. The principal components of operating expenses that affect our results are described below.

Operating Expense. Our consulting professionals represent the largest portion of our operating expenses. Project personnel expenses consist of payroll costs and related benefits associated with our professional staff. Other related expenses include travel, subcontracting, third-party vendor payments and non-billable costs associated with the delivery of services to our clients. We consider the relationship between project personnel expenses and revenue to be an important measure of our operating performance. The relationship between project personnel expenses and revenue is driven largely by the utilization of our consultant base, the rates we charge our clients and the non-billable costs associated with securing new client engagements and developing new service offerings. The remainder of our recurring operating expenses is 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, and management and administrative support. Professional development and recruiting expenses consist primarily of recruiting and training content development and delivery costs. Marketing and sales expenses consist primarily of the costs associated with branding, marketing and positioning the Company as a premium IT services firm. Management and administrative support expenses consist primarily of the costs associated with operations including finance, information systems, human resources, facilities (including the rent of office space) and other administrative support for project personnel.

Performance. The Company's management monitors and assesses its operating performance by evaluating key metrics and indicators. For example, we review information related to new customer accounts, annualized revenue per billable consultant, periodic consultant utilization rates, gross profit margins and billable employee headcount. This information, along with other operating performance metrics, is used in evaluating our overall performance. These metrics and indicators are discussed in more detail under "- Results for the Three and Nine Months Ended September 30, 2008, Compared to Results for the Three and Nine Months Ended September 30, 2007," included elsewhere in this Quarterly Report on Form 10-Q.

Impairment Charges During the Three-Month Period Ended June 30, 2008. Under SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), goodwill and certain intangible assets are deemed to have indefinite lives and are no longer amortized, but are reviewed at least annually for impairment. In December 2007, the Company completed its annual impairment test and concluded no impairment existed. Following the second quarter of 2008, as a result of the present environment impacting our business and results and an overall decline in billable consultant utilization coupled with a material decline of the Company's stock price since December of 2007, the Company determined that it had identified an impairment triggering event. Therefore, the Company initiated an interim review of the carrying value of our goodwill and other intangible asset balances for possible impairment in accordance with the provisions of SFAS No. 142 and SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), respectively. The review for impairment indicated that the carrying value of both the goodwill and intangible assets was impaired as of June 30, 2008. Based upon the results of the valuation techniques utilized, the Company recognized impairment charges of $23.5 million and $1.2 million during the three months ended June 30, 2008 related to goodwill and other intangible assets, respectively. See "Item 1 - Financial Statements - Notes to the Unaudited Condensed Consolidated Financial Statements-Note 8."

Results for the Three and Nine Months Ended September 30, 2008, Compared to Results for the Three and Nine Months Ended September 30, 2007

The financial information that follows has been rounded in order to simplify its presentation. The amounts and percentages below have been calculated using the detailed financial information contained in the unaudited condensed consolidated financial statements, the notes thereto, and the other financial data included in this Quarterly Report on Form 10-Q.

The following table sets forth the percentage of total revenue of items included in our unaudited condensed consolidated statements of operations:

                                                       Three Months Ended         Nine Months Ended
                                                          September 30,             September 30,
                                                       2008           2007        2008          2007
Revenue:
Service revenue                                          92.9 %         95.7 %      92.6 %       92.3 %
Software revenue                                          0.6 %          0.1 %       1.4 %        3.6 %
Reimbursable expenses                                     6.5 %          4.2 %       6.0 %        4.1 %

Total revenue                                           100.0 %        100.0 %     100.0 %      100.0 %

Cost of revenue:
Project and personnel costs                              52.4 %         53.3 %      53.7 %       51.4 %
Software costs                                            0.4 %          0.1 %       1.1 %        3.0 %
Reimbursable expenses                                     6.5 %          4.2 %       6.0 %        4.1 %

Total cost of revenue                                    59.3 %         57.6 %      60.8 %       58.5 %

Gross profit                                             40.7 %         42.4 %      39.2 %       41.5 %

Operating expenses:
Selling, general and administrative                      32.3 %         31.8 %      32.1 %       31.2 %
Depreciation and amortization                             4.6 %          3.7 %       5.1 %        3.4 %
Impairment of goodwill and intangible assets               -  %           -  %      43.1 %         -  %

Total operating expenses                                 36.9 %         35.5 %      80.3 %       34.6 %

Operating income (loss)                                   3.8 %          6.9 %     (41.1 )%       6.9 %

Interest income, net                                      0.5 %          2.7 %       0.7 %        2.4 %

Income (loss) before income taxes                         4.3 %          9.6 %     (40.4 )%       9.3 %
Income tax provision (benefit)                             -  %          2.9 %      (7.1 )%       3.5 %

Net income (loss)                                         4.3 %          6.7 %     (33.3 )%       5.8 %

Revenue. Total revenue increased by $1.9 million, or 12.2%, to $18.3 million for the three-month period ended September 30, 2008, compared to total revenue of $16.4 million in the three-month period ended September 30, 2007. Total revenue increased by $6.2 million, or 12.1%, to $57.4 million for the nine-month period ended September 30, 2008, compared to total revenue of $51.2 million in the nine-month period ended September 30, 2007.

During the three-month period ended September 30, 2008, service revenue, excluding software and reimbursable expense revenue, increased by $1.3 million, or 8.9%, to $17.0 million compared to service revenue of $15.7 million in the three-month period ended September 30, 2007. During the nine-month period ended September 30, 2008, service revenue increased by $5.9 million, or 12.5%, to $53.1 million compared to the service revenue of $47.2 million in the three-month period ended September 30, 2007. The comparative 2008 three- and nine-month period increases in service revenue were favorably impacted by the additive effects of our 2007 EPM-related acquisitions, which include the Vertical Pitch Acquisition, Lynx Acquisition and Alecian Acquisition, which are collectively referred to in this document as the "2007 Acquisitions," and by the year-over-year organic growth within our EPM service offering. Service revenues related to the Lynx and Vertical Pitch acquisitions had minimal or no impact on our results for the nine-month period ended September 30, 2007, as the acquisitions were completed in September 2007 and December 2007, respectively. For the most part, the 2007 Acquisitions were fully

integrated into our EPM-related operations prior to the beginning of the 2008 fiscal year, and are reported as part of our overall revenues, as it is impractical to isolate the additive impact of these businesses that have been integrated into our operations.

Service revenue growth for our EPM-related services outpaced service revenue declines related to our technical consulting and business consulting offerings during the three- and nine month periods of 2008. We believe these declines relate to a reduction in comparative year-over-year service revenue from certain of our legacy customers and factors arising out of the general U.S. economic slowdown impacting demand for certain IT services. For more detail on this current trend, see "- Business Overview; Factors Influencing Our Results of Operations; Revenue." We remain optimistic that our EPM-related revenues will experience future growth. We believe that the revenue mix for technical consulting and business consulting, will undergo change, as our efforts to increase training and development in new services, technologies and applications that we believe the market will embrace or deem critical to their IT objectives have resulted in, and will continue to result in, new customers and engagements; however, it is possible that these new and diversified revenue streams may not exceed reductions due to the general economic/legacy business factors described above.

Utilization, which is the rate at which we are able to generate revenue from our consultants, amounted to 71.9% during the third quarter of 2008 compared to 80.8% during the third quarter of 2007. We target utilization in a range from 78%-82%, and this objective is influenced by a variety of factors, including customer demand for IT spending and general economic circumstances. The drop in our utilization rate below our target rate is attributable to seasonality related to vacations, coupled with a decrease in technical consulting and business consulting service revenue due to the factors described above and under "-Business Overview; Factors Influencing Our Results of Operations; Revenue." Our billable consultant headcount at the end of September 30, 2008 was 261 compared to 274 at the end of the third quarter of 2007. Annualized service revenue per billable consultant increased to $354 thousand, during the quarterly period ended September 30, 2008 compared to $294 thousand during the same quarterly period in 2007. The improvement in this metric is primarily due to a greater mix of high-end EPM consulting services, which services have higher consultant billing rates than our other offerings. All of the above metrics are key elements associated with our ability to generate growth in our service revenue.

Software revenue, which is directly attributable to our EPM offerings, was $0.1 million and $0.8 million during the three- and nine-month periods ended September 30, 2008, respectively compared to $18 thousand and $1.8 million in the comparative 2007 quarterly and year-to-date periods, respectively. Software revenue is expected to fluctuate between quarters depending on our customers' demand for such third-party off-the-shelf software. Gross profit margins on software sales are generally much lower than gross margins on consulting services.

Generally, we are reimbursed for out-of-pocket expenses incurred in connection with our customers' consulting projects. Reimbursed expense revenue amounted to $1.2 million and $3.5 million during the three- and nine-month periods ended September 30, 2008, respectively compared to $0.7 million and $2.1 million during the three- and nine-month periods ended September 30, 2007, respectively. The aggregate amount of reimbursed expenses will fluctuate from quarter-to-quarter depending on the location of our customers, the general fluctuation of travel costs, such as airfare, and the number of our projects that require travel.

The Company increased the number of customers it served to 281 during the nine-month period ended September 30, 2008 compared to 197 customers during the comparative nine-month period ended September 30, 2007. This increase is primarily due to the 2007 Acquisitions and also due to our ongoing growth initiatives focused on new customer engagements and services that were previously described. Further, as the Company continued to diversify its revenue mix across its growing client base, service revenue from our five largest customers during the three- and nine-month period ended September 30, 2008 was approximately 25.2% and 27.2% of our total service revenue, respectively compared to 45.0% and 48.4% in the comparative 2007 quarter and year-to-date periods, respectively.

Cost of Revenue. Cost of revenue primarily consists of project personnel costs principally related to salaries, payroll taxes, employee benefits and travel expenses for personnel dedicated to customer projects. These costs represent the most significant expense we incur in providing our services. In total, cost of revenue increased by $1.5 million, or 15.5%, to $10.9 million for the three-month period ended September 30, 2008 compared to $9.4 million in the comparative quarterly period of 2007. Similarly, total cost of revenue increased by $5.0 million, or 16.6%, to $34.9 million for the nine-month period ended September 30, 2008 compared to total cost of revenue of $29.9 million in the nine-month period ended September 30, 2007.

The increase in reported cost of revenue in both the three- and nine-month periods ended September 30, 2008 primarily relates to an increase in project and personnel costs. During the three- and nine-months ended September 30, 2008, project

and personnel costs increased by $0.9 million, or 10.2%, and $4.5 million, or 17.3%, respectively compared to the three- and nine-month periods ended September 30, 2007. The increase in project and personnel costs is primarily driven by the incremental quarterly and year-to-date costs associated with the 2007 Acquisitions and to a lesser extent selective additions of higher-end consultants. This served to increase the average salaries of our consultants, which resulted in a reported year-over-year increase in project and personnel costs during the three- and nine-month periods of 2008.

Software costs amounted to $81 thousand and $643 thousand during the three- and nine-month periods ended September 30, 2008, respectively compared to software costs of $10 thousand and $1.6 million during the three- and nine-month periods ended September 30, 2007. The increase in quarter-to-date software costs is a result of the quarter-to-date increase in software sales. Similarly, the decrease in year-to-date software costs is a result of the 2008 year-to-date decrease in software sales. Software costs are expected to fluctuate between quarters depending on our customer's demand for EPM-related software. Reimbursable expenses increased by $0.5 million, or 73.6%, to $1.2 million during the three months ended September 30, 2008 compared to reimbursable expenses of $0.7 million during the comparative 2007 quarterly period. Similarly, reimbursable expenses increased by $1.4 million, or 64.1%, to $3.5 million during the nine-months ended September 30, 2008 compared to reimbursable expenses of $2.1 million during the comparative 2007 quarterly period. The quarterly increases in reimbursable expenses are a direct result of the Company's increased customer base and associated travel-related expenses incurred during the reported periods.

Gross Profit. During the three-month period ended September 30, 2008, total gross profit increased by $0.6 million, or 7.7%, to $7.5 million compared to total gross profit of $6.9 million in the three-month period ended September 30, 2007. For purposes of further analysis, we refer to gross profit as a percentage of revenue generally as gross margin. Gross margin, as a percentage of total revenue, decreased to 40.7% in the third quarter of 2008 compared to 42.4% in the comparative 2007 quarterly period. Gross margin, as a percentage of service revenue, decreased to 43.6% during the three-month period ended September 30, 2008 compared to 44.3% for the three-month period ended September 30, 2007. The Company's management targets gross margin related to service revenue at 42% to 45%.

During the nine-month period ended September 30, 2008, total gross profit increased by $1.2 million, or 5.9%, to $22.5 million compared to total gross profit of $21.3 million in the nine-month period ended September 30, 2007. Gross margin, as a percentage of total revenue, decreased to 39.2% in the 2008 year-to-date period compared to 41.5% in the comparative 2007 year-to-date period. Gross margin related to service revenue decreased to 42.0% during the nine-month period ended September 30, 2008 compared to 44.4% for the nine-month period ended September 30, 2007.

The comparative 2008 year-over-year decrease in gross margin is principally related to the Company's decrease in its consultant utilization rate, as described above under "-Factors Influencing Our Results of Operations; Revenue." The absolute dollar increase in gross profit is principally related to the Company's growth in higher billable EPM-related headcount, including such positive effects brought about by the 2007 Acquisitions.

Selling, General and Administrative Expenses ("SG&A"). SG&A expenses increased by $0.7 million, or 13.9%, to $5.9 million in the three-month period ended September 30, 2008 compared to SG&A expenses of $5.2 million in the three-month period ended September 30, 2007. SG&A expenses increased by $2.4 million, or 15.2%, to $18.4 million in the nine-months ended September 30, 2008 compared to SG&A expenses of $16.0 million in the nine-month period ended September 30, 2007. The increase in SG&A expenses during the three and nine months ended September 30, 2008 is primarily attributable to additional sales and operational personnel associated with the 2007 Acquisitions, and to a lesser extent increases in commission expense associated with the growth in new service revenues, increases in travel expenses and increases in training costs as we expand the current skill set mix of our consultant base. SG&A expense, as a percentage of total revenue, increased to 32.3% and 32.1% for the three- and nine-month periods ended September 30, 2008 compared to 31.8% and 31.2% for the three- and nine-month periods ended September 30, 2007.

Depreciation and Amortization Expense. Depreciation and amortization expense increased $0.3 million, or 42.4%, to $0.9 million in the quarter ended September 30, 2008 compared to $0.6 million in the quarter ended September 30, 2007. Depreciation and amortization expense increased $1.2 million, or 69.2%, to $2.9 million in the nine-month period ended September 30, 2008 compared to $1.7 million in the nine-month period ended September 30, 2007. Amortization expense was $0.6 million and $2.1 million during the three- and nine-month periods ended September 30, 2008, respectively, compared to $0.3 million and $1.0 million for the three- and nine-month periods ended September 30, 2007, respectively. $0.5 million and $1.4 million of the year-over-year increase in amortization expense during the three- and nine-month periods ended September 30, 2008, respectively related to the intangible assets identified in conjunction with the 2007 Acquisitions.

Impairment of Goodwill and Intangible Assets. As more fully described in "Item 1
- Financial Statements - Notes to the Unaudited Condensed Consolidated Financial Statements-Note 8" and "-Factors Influencing Our Results of Operations" included elsewhere herein, the Company, following the end of the second quarter of 2008, determined that it had identified an impairment triggering event. As a result of the triggering event, the Company performed a review of the current carrying value of its goodwill and intangible assets for possible impairment. The review for impairment indicated that the carrying value of both the goodwill and intangible assets was impaired as of June 30, 2008. Based upon the results of the valuation analysis, the Company recognized a total impairment charge of $24.7 million during three-month period ended June 30, 2008.

Operating Income (Loss). Operating income decreased by $0.4 million, to a reported operating income of $0.7 million, in the three-month period ended September 30, 2008 compared to operating income of $1.1 million in the three-month period ended September 30, 2007. Similarly, operating income decreased by $27.1 million, to a reported operating loss of $(23.6) million, in the nine-month period ended September 30, 2008 compared to operating income of $3.5 million in the nine-month period ended September 30, 2007. The current quarter fluctuation in operating income can be attributed to a lower billable consultant utilization rate, and associated gross margin, and increases in SG&A expenses. The year-to-date fluctuation in operating (loss) income is primarily attributable to the $24.7 million in impairment charges recorded against the carrying value of the Company's goodwill and intangible assets in the second quarter of fiscal year 2008, and to a far lesser extent, due to lower billable consultant utilization (described previously) and comparative increases in SG&A expenses, which reduced overall gross profit margins for our business. Each is explained in further detail above.

Interest Income, Net. We earned net interest income of $0.1 million during the third quarter of 2008 ompared to net interest income of $0.4 million during the third quarter of 2007. Interest income totaled $0.4 million and $1.2 million in the nine-month periods ended September 30, 2008 and 2007, respectively. Interest income has decreased in the comparative three- and nine-month periods as a result of the reduction in the Company's invested balances, primarily due to the 2007 Acquisitions and decreasing yields achieved on our marketable securities as market interest rates for high grade commercial bonds, commercial paper and . . .