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- and nine-month periods ended September 30, 2009 and
2008, revenue from technical consulting engagements, enterprise performance
management consulting engagements and business consulting engagements
represented the following:



                                                       Enterprise
                                                       Performance
                                       Technical       Management        Business
                                      Consulting       Consulting       Consulting
                                      Engagements      Engagements      Engagements
   Three months ended September 30,
   2009                                      25.7 %           72.4 %            1.9 %
   2008                                      31.1 %           61.7 %            7.2 %

   Nine months ended September 30,
   2009                                      29.3 %           66.9 %            3.8 %
   2008                                      36.2 %           57.1 %            6.7 %

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 91.1% and 94.2% of service revenue for the three- and nine-month periods ended September 30, 2009, respectively. Time and materials-based contracts represented 96.7% and 97.0% of service revenue for the three- and nine-month periods ended September 30, 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 5.9% and 3.2% of service revenue for the three- and nine-month period ended September 30, 2009. Fixed-price contracts represented 0.9% and 0.8% of service revenue for the three- and nine-month period ended September 30, 2008, respectively. Revenue under fixed-fee contracts is recognized ratably over the contract period, as outlined within the respective contract. Fixed-fee contracts represented 3.0% and 2.6% of service revenue for the three- and nine-month periods ended September 30, 2009, respectively. Fixed-fee contracts represented 2.4% and 2.2% of service revenue for the three- and nine-month periods ended September 30, 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 three- and nine-month periods ended September 30, 2009, as compared to corresponding 2008 periods. 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 resources. 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 and Nine Months Ended September 30, 2009, Compared to Results for the Three and Nine Months Ended September 30, 2008," included elsewhere in this Quarterly Report on Form 10-Q.

Impairment for the Period Ending June 30, 2008. 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 ASC Topic 350, "Intangibles - Goodwill and Other" and ASC Topic 360, "Property, Plant and Equipment." The review for impairment indicated that the carrying value of both the goodwill and intangible assets were 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.

Results for the Three and Nine Months Ended September 30, 2009, Compared to Results for the Three and Nine Months Ended September 30, 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         Nine Months Ended
                                           September 30,             September 30,
                                        2009           2008        2009          2008
 Revenue:
 Service revenue                          92.2 %        92.9 %       91.5 %       92.6 %
 Software revenue                          1.3 %         0.6 %        1.6 %        1.4 %
 Reimbursable expenses                     6.5 %         6.5 %        6.9 %        6.0 %

 Total revenue                           100.0 %       100.0 %      100.0 %      100.0 %

 Cost of revenue:
 Project and personnel costs              56.7 %        52.4 %       61.0 %       53.7 %
 Software costs                            1.2 %         0.4 %        1.2 %        1.1 %
 Reimbursable expenses                     6.5 %         6.5 %        6.9 %        6.0 %

 Total cost of revenue                    64.4 %        59.3 %       69.1 %       60.8 %

 Gross Profit                             35.6 %        40.7 %       30.9 %       39.2 %

 Operating expenses:
 Selling, general and administrative      35.1 %        32.3 %       35.0 %       32.1 %
 Depreciation and amortization             5.9 %         4.6 %        5.4 %        5.1 %
 Impairment charges                         -             -  %         -          43.1 %

 Total operating expenses                 41.0 %        36.9 %       40.4 %       80.3 %

 Operating (loss) income                  (5.4 )%        3.8 %       (9.5 )%     (41.1 )%

 Other (expense) income, net              (0.1 )%        0.5 %        0.3 %        0.7 %

 (Loss) income before income taxes        (5.5 )%        4.3 %       (9.2 )%     (40.4 )%
 Income tax benefit                       (3.4 )%         -  %       (4.1 )%      (7.1 )%


 Net (loss) income                        (2.1 )%        4.3 %       (5.1 )%     (33.3 )%

Revenue. Total revenue decreased by $6.5 million, or 35.8%, to $11.8 million for the three-month period ended September 30, 2009, compared to total revenue of $18.3 million in the three-month period ended September 30, 2008. Total revenue decreased by $18.7 million, or 32.6%, to $38.7 million for the nine-month period ended September 30, 2009, compared to total revenue of $57.4 million in the nine-month period ended September 30, 2008.

During the three-month period ended September 30, 2009, service revenue, excluding software and reimbursable expense revenue, decreased by $6.1 million, or 36.3%, to $10.9 million compared to service revenue of $17.0 million in the three-month period ended September 30, 2008. Similarly, service revenue in the nine-month period ended September 30, 2009 decreased by $17.7 million, or 33.3%, to $35.4 million compared to service revenue of $53.1 million in the nine-month period ended September 30, 2008. The decline in total revenue and service revenue in both the current quarter and year-to-date periods is reflective of the combined effect of current economic and external IT spending trends, which have lead to 1) a decrease in service revenue attributable to certain of our historically larger accounts within our technology service offerings; 2) the absence of follow-on service revenue following the successful completion of projects during the fourth quarter of 2008 and the first nine months of 2009 that we have not been able to fully replace due to external IT spending trends; and 3) a slower than anticipated cyclical recovery in our EPM-related service offerings during the second and third quarters of 2009. Our EPM-related offerings tend to have a slower first quarter followed by stronger second and third quarters. 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. As a result, these conditions have had an adverse impact on our ability to generate recurring service revenue in current quarter and year-to-date period, as compared to service revenue generated in the comparative 2008 periods.

The comparative quarterly and year-to-date fluctuations in our service revenue are largely attributable to changes in our customers buying habits specific to our classic technology consulting service offerings and our long-term technology maintenance engagements. Traditionally, our classic technology consulting offerings have centered upon long-term system designs and builds. With the current macroeconomic environment, customer cutbacks in classic IT services have drastically reduced these opportunities in terms of size, scope and timing. This is reflected in our classic IT consulting engagements becoming more concentrated in our newer, shorter-term, specialized projects around a core product set. The loss of classic technology consulting engagements is the primary driver of our comparative revenue decline in quarterly and year-to-date periods of 2009. In advance of, and during, this macroeconomic decline, we have taken proactive measures to match the dramatic shift in our revenue mix. We have expanded our service offerings and capabilities, implemented training initiative in late 2007 and 2008 and initiated cost and staff reduction initiatives targeted at aligning our operating expenses with our anticipated service revenues.

In connection with the pullback in classic IT spending, our EPM-related offerings have become the major portion of service revenues during the quarterly and year-to-date periods of 2009. EPM-related engagements, which represent 66.9% of our service revenue during the nine months ended September 30, 2009, have always reflected the profile of the project-types that are currently selling in the classic IT arena. EPM engagements are naturally smaller in size and have shorter project cycles than our historic classic technology consulting projects. Our EPM business remains strong, despite the general malaise of the current economy. We have not seen the same secular and economic shifts that are affecting our classic IT consulting engagements, impacting our EPM-related services. While we cannot estimate when the current economic conditions that are negatively impacting our business will reverse, we believe that we have stabilized the Company and are positioned to capitalize on opportunities as conditions improve.

Utilization, which is the rate at which we are able to generate revenue from our consultants, amounted to 65.1% during the third quarter of 2009 compared to 71.9% during the third quarter of 2008. On a year-to-date basis, utilization for the first nine months of 2009 amounted to 65.1% compared to utilization of 75.2% during the first nine months of 2008. We typically target utilization in a range from 75%-80%. This objective is influenced by a variety of factors, including customer demand for IT spending and general economic circumstances. Our current quarter and year-to-date utilization is below the historical target range. The drop in our utilization rate below our target rate during the current quarter and 2009 year-to-date period is attributable to the factors described above and under "-Business Overview; Factors Influencing Our Results of Operations; Revenue." To offset this decline in utilization, the Company has proactively managed billable consultant headcount to anticipated revenue. To that end, our third quarter 2009 utilization rate has improved slightly from that reported in the second quarter of 2009. We believe that our fourth quarter utilization will be similar to our third quarter rate. See also "-Billable Consultants; Staff Data" below.

Annualized service revenue per billable consultant, as adjusted for utilization, was $352 thousand, during the quarterly period ended September 30, 2009 compared to $354 thousand during the same 2008 quarterly period. This metric reflects the shift in our revenue to a greater mix of high-end EPM consulting services, which services have higher consultant billing rates than our other offerings and remains a solid measure of our performance in a tough environment.

Software revenue, which is directly attributable to our EPM offerings, was $154 thousand and $617 thousand, respectively, during the three- and nine-month periods ended September 30, 2009 as compared to $122 thousand and $824 thousand in the comparative 2008 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 $771 thousand and $2.7 million during the three- and nine-month periods ended September 30, 2009, respectively compared to $1.2 million and $3.5 million during the three- and nine-month periods ended September 30, 2008, 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.

During the current quarter, we entered into service arrangements with 18 new customers, bringing our year-to-date total of new customer engagement to 52. Comparatively, in the 2008 quarterly and year-to-date periods, we secured engagements with 32 and 64 new customers, respectively. The number of customers the Company served during the nine-month period ended September 30, 2009 totaled 229, as compared to 281 customers during the comparative 2008 nine-month period. This year-over-year change is a result of a general slowdown in IT spending for new projects, delays in proposal decisions for IT service project commitments due to a challenging economic climate and a shift in our revenue mix towards a greater concentration of EPM-related consulting engagements.

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, the Company reduced cost of revenue by $3.3 million, or 30.3%, to $7.6 million for the three-month period ended September 30, 2009 as compared to $10.9 million in the comparative quarterly period of 2008. Similarly, cost of revenue declined by $8.2 million, or 23.4%, to $26.7 million for the nine-month period ended September 30, 2009 as compared to total cost of revenue of $34.9 million in the nine-month period ended September 30, 2008.

Both the current quarter and year-to-date periodic changes in reported cost of revenue, on an absolute dollar basis, is directly attributable to the year-over-year fluctuations in billable consultant resources. The Company maintained 185 billable consultants as of September 30, 2009 compared to 261 billable consultants September 30, 2008. The change in billable consultant resources is primarily a result of the cost reduction initiatives enacted by the Company during the latter half of 2008 and through April of 2009. See "-Billable Consultants; Staff Data" below.

As a percentage of total revenue, total cost of revenue was 64.4% and 69.1% during the three- and nine-month periods ended September 30, 2009, respectively, compared to 59.3% and 60.8% during the comparative 2008 quarterly and year-to-date periods, respectively. A significant portion of our cost of revenue is attributable to project and personnel costs. Project and personnel costs represented 56.7% and 61.0% of total revenue during the three- and nine-month periods ended September 30, 2009, as compared to 52.4% and 53.7% of total revenue during the comparative three- and nine-month periods of 2008. The 2009 periodic increases, as a percentage of total revenue, are attributable to both the year-over-year changes in total revenue and the lower utilization rate for our billable consultants during the current quarter and year-to-date periods. Our utilization rates during the three- and nine-month periods of 2009 have been negatively impacted by excess capacity in connection with the revenue and sales trends described above under "- Revenue."

Software costs amounted to $147 thousand and $464 thousand during the three- and nine-month periods ended September 30, 2009, respectively, as compared to software costs of $81 thousand and $643 thousand during the three- and nine-month periods ended September 30, 2008, respectively. Software costs are expected to fluctuate between quarters depending on our customers demand for EPM-related software. Reimbursable expenses decreased by $413 thousand, or 34.9%, to $771 thousand during the three months ended September 30, 2009 compared to reimbursable expenses of $1.2 million during the comparative 2008 quarterly period. Similarly, reimbursable expenses decreased by $805 thousand, or 23.3%, to $2.7 million during the nine months ended September 30, 2009 compared to reimbursable expenses of $3.5 million during the comparative 2008 year-to-date period. The 2009 quarterly and year-to-date decreases in reimbursable expenses are a direct result of the revenue and sales trends described above under "- Revenue."

Gross Profit. During the three-month period ended September 30, 2009, total gross profit declined by $3.3 million, or 43.9%, to $4.2 million compared to total gross profit of $7.5 million in the three-month period ended September 30, 2008. During the nine-month period ended September 30, 2009, total gross profit decreased by $10.5 million, or 46.8%, to $12.0 million as compared to total gross profit of $22.5 million in the nine-month period ended September 30, 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 35.6% and 30.9% in the three- and nine-month periods ended September 30, 2009, respectively, compared to 40.7% and 39.2% in the comparative 2008 quarterly and year-to-date periods. The comparative quarterly decrease in gross margin were a result of the revenue and sales trends described above and under "-Revenue" and pricing pressure as a result of increased competition. Each of these was offset by lower cost of 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 three- and nine-month periods of 2009. See "-Billable Consultants; Staff Data" below.

. . .