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. 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 specialty IT services primarily in the North American market. We work with our clients onsite providing services 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 assets; and

• providing management consulting services.

• Implementing enterprise performance management ("EPM") solutions:

• providing business intelligence ("BI") services;

• delivering planning, budgeting and consolidation services; 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;

• providing enterprise information management ("EIM") services/data services; and

• evaluating and leveraging infrastructure services.

Our primary target is the client who wants experienced, highly-trained talent onsite for strategic, high-return projects. Edgewater typically goes to market both vertically by industry and horizontally by product and technology specialty. We provide strategic business solutions through horizontal services and capabilities that are packaged with vertical expertise to clients in industries including, but not limited to: CPG/Manufacturing; Energy/Utilities; Healthcare; Higher Education; Hospitality; Insurance; Retail; Travel/Entertainment; and various Emerging Markets. Our EPM/BI and EIM offerings go to market horizontally and provide highly experienced teams of product specialists who span all industries.

Factors Influencing Our Results of Operations

Revenue. For the three-month periods ended March 31, 2009 and 2008, revenue from
technical consulting engagements, enterprise performance management ("EPM")
consulting engagements and business consulting engagements represented the
following:



                                                     Enterprise
                                                     Performance
                                      Technical      Management       Business
                                     Consulting      Consulting      Consulting
                                     Engagements     Engagements     Engagements
      Three months ended March 31,
      2009                                  31.6 %          62.4 %           6.0 %
      2008                                  45.0 %          46.3 %           8.7 %

The Company derives its service revenue from time and materials-based contracts, fixed-price contracts and fixed-fee arrangements. Time and materials-based contracts represented 96.8% and 97.4% of service revenue for the three-month periods ended March 31, 2009 and 2008, respectively. Revenue under time and materials contracts is recognized as services are rendered and performed at contractually agreed upon rates. Revenue pursuant to fixed-price contracts is recognized under the proportional performance method of accounting. Fixed-price contracts represented 1.0% of service revenue for the three-month

period ended March 31, 2009. We did not generate any service revenue from fixed-price contracts during the three-month period ended March 31, 2008. Revenue under fixed-fee contracts is recognized ratably over the contract period, as outlined within the respective contract. Fixed-fee contracts represented 2.2% and 2.6% of service revenue for the three-month periods ended March 31, 2009 and 2008, respectively.

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. 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. This has led to a decrease in revenues for our 2009 first quarter results, as compared to the first quarter of 2008. A continued decline in the level of business activity of our clients could have a material adverse effect on our revenue and profit margin.

We have encountered reduced client spending for external IT services in various forms, including: reduced IT initiatives; delayed timetables or decisions for new IT projects, which have affected us largely at the conclusion of significant legacy projects and/or with 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 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, we may counter-balance any such decline with cost-savings initiatives to manage our expenses as a percentage of revenue, accordingly. The principal components of operating expenses that affect our results are described below.

Operating Expenses. The largest portion of our operating expenses consists of cash and non-cash compensation and benefits associated with our project consulting personnel and related expenses. Non-cash compensation includes stock compensation expense arising from restricted stock and option grants to employees. Project personnel expenses also consist of payroll costs and related benefits associated with our professional staff. Other related expenses include travel, subcontracting costs, third-party vendor payments and non-billable expenses 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 chargeability of our consultant base, the prices 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 expense 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 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 systems, human resources, facilities (including the rent of office space), and other administrative support for project personnel.

We regularly review our fees for services, professional compensation and overhead costs to ensure that our services and compensation are competitive within the industry, and that our overhead costs are balanced with our revenue levels. 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. 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 consulting professionals to oversee existing client engagements and to participate in sales activities to secure new client assignments.

Company Performance Measurement Systems and Metrics. The Company's management monitors and assesses its operating performance by evaluating key metrics and indicators on an ongoing basis. For example, we regularly review performance information related to annualized revenue per billable consultant, periodic consultant utilization rates, gross profit margins, average bill rates and billable employee headcount. Edgewater has also developed internal Enterprise

Performance Management systems which aid us in measuring our operating performance and consultant utilization rates. The matching of sales opportunities to available skill sets in our consultant base is one of our greatest challenges and therefore, we monitor consultant utilization closely. These metrics, along with other operating and financial performance metrics, are used in evaluating management's overall performance. These metrics and indicators are discussed in more detail under "Results for the Three Months Ended March 31, 2009, Compared to Results for the Three Months Ended March 31, 2008," included elsewhere in this Quarterly Report on Form 10-Q.

Results for the Three Months Ended March 31, 2009, Compared to Results for the Three Months Ended March 31, 2008

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 March 31,
                                                     2009        2008
              Revenue:
              Service revenue                         91.1 %      92.3 %
              Software revenue                         2.5 %       2.3 %
              Reimbursable expenses                    6.4 %       5.4 %

              Total revenue                          100.0 %     100.0 %

              Cost of revenue:
              Project and personnel costs             60.7 %      54.7 %
              Software costs                           1.7 %       1.8 %
              Reimbursable expenses                    6.4 %       5.4 %

              Total cost of revenue                   68.8 %      61.9 %

              Gross Profit                            31.2 %      38.1 %

              Operating expenses:
              Selling, general and administrative     31.9 %      31.8 %
              Depreciation and amortization            4.7 %       5.4 %

              Total operating expenses                36.6 %      37.2 %

              Operating (loss) income                 (5.4 )%      0.9 %

              Interest income, net                     0.5 %       1.1 %

              (Loss) income before income taxes       (4.9 )%      2.0 %
              Tax (benefit) provision                 (1.8 )%      1.0 %

              Net (loss) income                       (3.1 )%      1.0 %

Revenue. Total revenue decreased by $4.6 million, or 23.5%, to $14.9 million for the three-month period ended March 31, 2009, compared to total revenue of $19.5 million in the three-month period ended March 31, 2008.

During the three-month period ended March 31, 2009, service revenue, excluding software and reimbursable expense revenue, decreased by $4.4 million, or 24.5%, to $13.6 million compared to service revenue of $18.0 million in the three-month period ended March 31, 2008. The current quarter decline in service revenue is reflective of the combined effect of 1) the economic and external IT spending factors described below, 2) a decrease in service revenue attributable to certain of our historically larger accounts within our technology service offerings and 3) a decrease in service revenue following the successful completion of projects during the fourth quarter of 2008 and the first quarter of 2009 that we have not been able to fully replace due to external IT spending trends. We believe that in the current economic landscape, companies have reduced capital budgets and have been hesitant to initiate new or additional phases of projects; this in turn has created an environment in which IT services companies, in general, are experiencing difficulty closing sales for an expanding number of customers. As a result, these conditions have had an adverse impact on our ability to generate recurring service revenues and have produced a decline in first quarter 2009 revenue compared to first quarter 2008 revenue.

In light of these trends, we believe that the revenue mix for our service offerings will continue to undergo change. In response, we have increased training and development in new services, technologies and applications that we believe the market will embrace or deem critical to their IT objectives; however, during the first quarter of 2009, these new and diversified revenue streams did not exceed reductions in spending by legacy customers due to the general economic/legacy business factors described above. We cannot estimate when this adverse spending development will stabilize or reverse, but we believe any improvement or reversal will be associated with materially improved general economic conditions in the U.S.

Utilization, which is the rate at which we are able to generate revenue from our consultants, amounted to 67.8% during the first quarter of 2009 compared to 77.2% during the first quarter of 2008. We target utilization in a range from 75%-80%, 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 the factors described above and under "-Business Overview; Factors Influencing Our Results of Operations; Revenue." See also "-Billable Consultants; Headcount Data" below.

Annualized service revenue per billable consultant, as adjusted for utilization, increased to $341 thousand, during the quarterly period ended March 31, 2009 compared to $320 thousand during the same 2008 quarterly period. 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.

Software revenue, which is directly attributable to our EPM offerings, was $0.4 million and $0.5 million during the three-month periods ended March 31, 2009 and 2008, 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 $1.0 million in both of the three-month periods ended March 31, 2009 and 2008. 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 number of customers the Company served during the three-month period ended March 31, 2009 totaled 161, as compared to 201 customers during the comparative 2008 three-month period. This decrease is primarily a result of a general slowdown in IT spending for new projects and delays in proposal decisions for IT service project commitments due to a challenging economic climate.

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 decreased by $1.9 million, or 15.1%, to $10.2 million for the three-month period ended March 31, 2009 compared to $12.1 million in the comparative 2008 quarterly period.

The current quarter decrease in reported cost of revenue, on an absolute dollar basis, is directly attributable to the year-over-year decrease in billable consultant headcount. The Company maintained 228 billable consultants as of the quarter ended March 31, 2009 compared to 285 billable consultants at the end of the comparative prior year quarter. The decrease in billable consultant headcount is a result of the combined effect of cost reduction initiatives enacted by the Company in 2008 and 2009 and traditional consultant attrition. See "-Billable Consultants; Headcount Data" below.

Project and personnel costs represented 60.7% of total revenue during the three-month period ended March 31, 2009, as compared to 54.7% of total revenue during the three-month period ended March 31, 2008. The increase, as a percentage of

total revenue, was primarily related to the lower utilization rate for our billable consultants during the current quarter. Our utilization rates during the first quarter of 2009 were negatively impacted by excess capacity in connection with the revenue and sales trends described above under "- Revenue."

Software costs amounted to $251 thousand and $359 thousand during the three-month periods ended March 31, 2009 and 2008, respectively. The decrease in current quarter software costs is a result of the decrease in comparable quarterly software sales. Software costs are expected to fluctuate between quarters depending on our customer's demand for EPM-related software. Reimbursable expenses, at $1.0 million for the quarter ended March 31, 2009, remained consistent with reimbursable expenses for the quarter ended March 31, 2008.

Gross Profit.During the three-month period ended March 31, 2009, total gross profit decreased by $2.8 million, or 37.2%, to $4.6 million compared to total gross profit of $7.4 million in the three-month period ended March 31, 2008. 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 31.2% in the first quarter of 2009 compared to 38.1% in the comparative 2008 quarterly period. The comparative quarterly decrease in gross margin is a result of the revenue and sales trends described above and under "-Revenue." The combination of these factors led to lower than anticipated utilization rates for our billable consultants, which negatively impacted our gross margin in the first quarter of 2009. See also "-Billable Consultants; Headcount Data" below.

Selling, General and Administrative Expenses ("SG&A"). SG&A expenses decreased by $1.5 million, or 23.4%, to $4.7 million in the three-month period ended March 31, 2009 compared to SG&A expenses of $6.2 million in the three-month period ended March 31, 2008. The decrease in SG&A expenses during the three months ended March 31, 2009 is the combined result of personnel reductions initiated in the later part of 2008, which have served to reduce operations-related salary expense, reduced 2009 commissions and bonus expense as a result of the decrease in comparative quarterly operating performance and a reduction in other SG&A expenses such as travel, recruiting and occupancy expenses in connection with the Company's objective of reducing its operating costs to be more appropriately aligned with its revenues. See "Billable Consultants; Headcount Data" below.

Depreciation and Amortization Expense. Depreciation and amortization expense decreased $0.3 million, or 32.2%, to $0.7 million in the quarter ended March 31, 2009 compared to $1.0 million in the quarter ended March 31, 2008. Amortization expense was $0.5 million and $0.8 million during the three-month periods ended March 31, 2009 and 2008, respectively. The current quarter decrease in amortization expense is primarily a result of the $1.4 million of intangible asset impairment charges recorded in 2008, which reduced current year amortization expense.

Operating (Loss) Income. Operating income decreased by $1.0 million, to a reported operating loss of $(0.8) million, in the three-month period ended March 31, 2009 compared to operating income of $0.2 million in the three-month period ended March 31, 2008. The current quarter fluctuation in operating results can be attributed to the decrease in comparative service revenue and a lower billable consultant utilization rate and associated gross margin, which was partially offset by a decrease in comparative SG&A expenses. Each factor is explained in further detail above.

Interest Income, Net. We earned net interest income of $68 thousand during the first quarter of 2009 compared to net interest income of $210 thousand during the first quarter of 2008. Interest income decreased in the comparative three-month periods as a result of decreasing yields on our marketable securities as market interest rates for high grade commercial bonds, commercial paper and government-backed securities have substantially decreased in the 2009 comparative period.

Income Tax (Benefit) Provision. The Company records an income tax (benefit) provision for federal and state income taxes at the applicable statutory rates, adjusted for non-deductible expenses. We recorded an income tax (benefit) provision of $(0.3) million and $0.2 million for the three-month periods ended March 31, 2009 and 2008, respectively. The recorded income tax benefit for the three-months ended March 31, 2009 represents a tax benefit based on an annualized effective income tax rate of 40.2%. The income tax provision for the three-month period ended March 31, 2008 was determined based upon an effective income tax rate of 41.5%.

We have deferred tax assets, resulting primarily from federal net operating loss carry-forwards and future deductible timing differences related to the 2008 impairment charges recorded against certain tax-deductible intangible assets, totaling $33.7 million, against which we have recorded a valuation allowance in the amount of $11.0 million. Our federal income tax payable amounts will be charged directly against our deferred tax asset and will not result in an annual cash outlay by the Company, except with regard to state and alternative minimum tax liabilities. The majority of the Company's net operating loss carry-forwards are scheduled to expire on or before 2020.

Net Income (Loss). We reported net (loss) income of $(0.5) million and $0.2 million during the three-month periods ended March 31, 2009 and 2008, respectively. The current quarter reported net loss is due to the decrease in comparative service revenue, lower billable consultant utilization rate and associated gross margin, the decrease in comparative quarterly SG&A expenses and the tax benefit recorded by the Company. Each is explained in further detail above.

Billable Consultants; Headcount Data. Our billable consultant and total employee headcount as of March 31, 2009 was 228 and 291 compared to 285 and 353 at the end of the first quarter of 2008. This reflects in part the effect of carefully considered workforce reductions and, to a lesser extent, natural attrition. During 2009, the Company enacted cost savings measures consisting of billable workforce reductions and selling, general and administrative cost reductions. These cost saving measures will result in severance payments of approximately $0.4 million that will be substantially paid by the conclusion of the second quarter of 2009. As the severance payments will substantially offset the benefits of related lower salary expense, there should be an immaterial amount of net cost savings impact during the second quarter. These cost savings measures should contribute towards annualized savings of approximately $3.9 million, from which the Company should begin to recognize a benefit during the third quarter of 2009.

Liquidity and Capital Resources

The following table summarizes our cash flow activities for the periods
indicated:



                                                   Three Months Ended
                                                        March 31,
                                                    2009          2008
                                                     (In Thousands)
             Cash flows (used in) provided by:
             Operating activities                $   (2,407 )   $ (3,732 )
             Investing activities                    (1,636 )      1,691
             Financing activities                       (33 )        187
             Discontinued operating activities           -            (6 )

             Total cash used during the period   $   (4,076 )   $ (1,860 )

As of March 31, 2009 and December 31, 2008, we had cash, cash equivalents, and marketable securities of $22.1 and $24.6 million, respectively. Working capital, which is defined as current assets less current liabilities, increased $0.1 million, to $29.4 million, as of March 31, 2009 compared to $29.3 million as of December 31, 2008. Current year decrease in our cash, cash equivalents and marketable securities balance is primarily attributable to cash outflows related to broad-based payments made under our 2008 performance-based bonus plan and annual renewals of insurance premiums. These cash outlays were partially offset by proceeds from issuances under the Company's employee stock purchase plan.

Our primary historical sources of funds have been from operations and the proceeds from equity offerings, as well as sales of businesses in fiscal years 2000 and 2001. Our principal historical uses of cash have been to fund working capital requirements, capital expenditures and acquisitions. We generally pay our employees bi-weekly for their services, while receiving payments from . . .