10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
	FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-20971

Edgewater Technology, Inc.
(Exact name of registrant as specified in its charter)

Delaware	71-0788538
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
20 Harvard Mill Square
Wakefield, Massachusetts	01880
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number including area code: (781) 246-3343

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 par value
(Title of class)

Indicate by a check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Exchange Act of 1934). Yes oNo x

Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934). Yes oNo x

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 as required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNo o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Yes oNo x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one): Large accelerated filer oAccelerated filer oNon-accelerated filer x

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities and Exchange Act of 1934). Yes oNo x

As of June 30, 2005, there were 10,353,451 shares of Common Stock of the Registrant outstanding. The aggregate market value of the Common Stock of the Registrant held by non-affiliates (assuming for these purposes, but not conceding, that all executive officers and directors are “affiliates” of the Registrant) as of June 30, 2005 was approximately $45.5 million, computed based upon the closing price of $4.39 per share on June 30, 2005.

As of March 15, 2006, there were 11,000,132 shares of Common Stock of the Registrant outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Annual Report on Form 10-K incorporates by reference portions of the Registrant’s definitive proxy statement, to be filed with the Securities and Exchange Commission no later than 120 days after the close of its fiscal year; provided that if such proxy statement is not filed with the Commission in such 120-day period, an amendment to this Form 10-K shall be filed no later than the end of the 120-day period.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under “Business,” “Risk Factors,” “Legal Proceedings,” “Market for Registrant’s Common Stock and Related Stockholder Matters” and “Management Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report on Form 10-K (this “Form 10-K”) constitute forward-looking statements under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements made with respect to future earnings per share, future revenues, future operating income, future cash flows, potential business combination transactions, competitive and strategic initiatives, potential stock repurchases and future liquidity needs. These statements involve known and unknown risks, uncertainties and other factors that may cause results, levels of activity, growth, performance, earnings per share or achievements to be materially different from any future results, levels of activity, growth, performance, earnings per share or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, those listed under “Business—Factors Affecting Finances, Business Prospects and Stock Volatility” and elsewhere in this Form 10-K.

The forward-looking statements included in this Form 10-K and referred to elsewhere are related to future events or our strategies or future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “believe,” “anticipate,” “future,” “forward,” “potential,” “estimate,” “encourage,” “opportunity,” “goal,” “objective,” “quality,” “growth,” “leader,” “could”, “expect,” “intend,” “plan,” “planned” “expand,” “focus,” “build,” “through,” “strategy,” “expiration,” “provide,”  “offer,” “maximize,” “allow,” “allowed,” “represent,” “commitment,” “create,” “implement,” “result,” “seeking,” “increase,” “add,” “establish,” “pursue,” “feel,” “work,” “perform,” “make,” “continue,”  “can,” “will,” “ongoing,” “include” or the negative of such terms or comparable terminology. These forward-looking statements inherently involve certain risks and uncertainties, although they are based on our current plans or assessments which are believed to be reasonable as of the date of this Form 10-K. Factors that may cause actual results, goals, targets or objectives to differ materially from those contemplated, projected, forecasted, estimated, anticipated, planned or budgeted in such forward-looking statements include, among others, the following possibilities: (1) inability to execute upon growth objectives, including growth in entities acquired by our Company; (2) failure to obtain new customers or retain significant existing customers; (3) the loss of one or more key executives and/or employees; (4) changes in industry trends, such as a decline in the demand for Business Intelligence (“BI”) and Corporate Performance Management (“CPM”) solutions, custom development and system integration services and/or delays in industry-wide information technology (“IT”) spending, whether on a temporary or permanent basis and/or delays by customers in initiating new projects or existing project milestones; (5) adverse developments and volatility involving geopolitical or technology market conditions; (6) unanticipated events or the occurrence of fluctuations or variability in the matters identified under “Critical Accounting Policies”; (7) failure of our sales pipeline to be converted to billable work and recorded as revenue; (8) failure of the middle market and the needs of middle-market enterprises for business services to develop as anticipated; (9) inability to recruit and retain professionals with the high level of information technology skills and experience needed to provide our services; (10) failure to expand outsourcing services to generate additional revenue; (11) any changes in ownership of the Company or otherwise that would result in a limitation of the net operating loss carryforward under applicable tax laws; (12) the failure of the marketplace to embrace CPM or BI services; and/or (13) the failure to obtain remaining predecessor entity tax records that are not in our control and/or successfully resolve remaining outstanding IRS matters relating to our former staffing businesses. In evaluating these statements, you should specifically consider various factors described above as well as the risks outlined under Item 1A. “Risk Factors Affecting Finances, Business Prospects and Stock Volatility.”  These factors may cause our actual results to differ materially from those contemplated, projected, anticipated, planned or budgeted in any such forward-looking statements.

Although we believe that the expectations in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, growth, earnings per share or achievements. However, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. We are under no duty to update any of the forward-looking statements after the date of this Form 10-K to conform such statements to actual results.

1

EDGEWATER TECHNOLOGY, INC.

Form 10-K
Annual Report
For the Year Ended December 31, 2005

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Business		3
Item 1A.	Risk Factors		11
Item 1B.	Unresolved Staff Comments		16
Item 2.	Properties		16
Item 3.	Legal Proceedings		16
Item 4.	Submission of Matters to a Vote of Security Holders		16
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		17
Item 6.	Selected Financial Data		18
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		35
Item 8.	Financial Statements and Supplementary Data		36
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		66
Item 9A.	Controls and Procedures		66
Item 9B.	Other Information		66
	PART III
Item 10.	Directors and Executive Officers of the Registrant		67
Item 11.	Executive Compensation		67
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		67
Item 13.	Certain Relationships and Related Transactions		67
Item 14.	Principal Accounting Fees and Services		67
	PART IV
Item 15.	Exhibits		68
	OTHER ITEMS
	Signatures		72
	Power of Attorney		72

2

PART I

AVAILABLE INFORMATION; BACKGROUND

Edgewater Technology, Inc., formerly known as StaffMark, Inc., maintains executive offices located at 20 Harvard Mill Square, Wakefield, MA 01880-3209. Our telephone number is (781) 246-3343. Our stock is traded on the NASDAQ National Market under the symbol “EDGW.” Our Internet address is www.edgewater.com. We make available, free of charge, on the Investor Relations section of our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (the “SEC”). Copies are also available, without charge, from Edgewater Technology, Attn: Investor Relations, 20 Harvard Mill Square, Wakefield, MA  01880-3209 or by emailing ir@edgewater.com. Alternatively, reports filed with the SEC may be viewed or obtained at the SEC Public Reference Room in Washington, D.C., or the SEC’s Internet site at www.sec.gov. We do not intend for information contained in our website to be part of this Annual Report on Form 10-K.

In this Annual Report on Form 10-K, we use the terms “Edgewater Technology,” “we,” “our Company,” “the Company,” “our,” and “us” to refer to Edgewater Technology, Inc. and its wholly-owned subsidiaries. Our wholly-owned subsidiaries include:  Edgewater Technology (Delaware), Inc. (“Edgewater Delaware”), a Delaware corporation that was incorporated in 1992 and acquired by our Company on May 17, 1999; Edgewater Technology (Virginia), Inc. (formerly known as Intelix, Inc. and referred to in this Form 10-K as  “Intelix”), a northern Virginia corporation that was incorporated in 1993 and acquired by our Company on June 2, 2003; and Edgewater Technology-Ranzal, Inc. (formerly known as Ranzal and Associates, Inc. and referred to in this Form 10-K as “Ranzal”), a Delaware corporation that was incorporated in 2004 and acquired by our Company on October 4, 2004. Also, on February 15, 2006, the Company acquired all of the outstanding capital stock of National Decision Systems, Inc (“NDS”). Please refer to Note 14 of the notes to consolidated financial statements for more information related to the NDS acquisition.

ITEM 1.BUSINESS

Overview

Edgewater Technology, Inc. is an innovative technology management consulting firm providing a unique blend of premium IT services. We provide our clients with a range of business and technology offerings designed to assist them in:

·envisioning and realizing strategic business solutions;

·implementing corporate performance management solutions;

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

·providing program and project management;

·maximizing and unlocking the value of corporate data assets;

·accessing and leveraging our blend of industry and technology expertise; and

·evaluating and leveraging infrastructure services.

Our primary target is the middle market whose needs span the full spectrum of our offerings. We also provide specialized premium services to divisions of Global 2000 companies. We go to market by vertical industry and currently serve clients in the following industries: Consumer Packaged Goods/Manufacturing;

3

Financial Services (Retail Banking, Portfolio/Asset Management); Healthcare (Payor/Managed Care); Higher Education; Hospitality; Insurance; Life Sciences; Retail; and various Emerging Markets.

Industry Dynamics and Opportunity

Industry Dynamics.   In today’s complex business environment, organizations are seeking ways to optimize business processes and improve the delivery of information to customers, suppliers, employees, shareholders, partners and other constituents by enhancing IT systems. While many organizations support their IT needs and initiatives internally, many are faced with the realization that they lack the resources or expertise to clearly identify where improvements can be made. Organizations are looking to build, integrate and implement change across their enterprise and finding the right industry and technical expertise to assist in this process is an important decision.

Companies turn to consulting firms like Edgewater Technology for a number of reasons, including the need:

·For deep industry and technical expertise;

·To provide premium consulting services in an accelerated timeframe;

·To mitigate their business risk;

·To receive an outside objective perspective; and/or

·To serve as an agent to plan, manage and implement change.

We believe a structural change is taking place in the consulting industry. The change is two-fold: customer buying habits are becoming more complex and industry dynamics are evolving.

Customers are looking for lower cost commodity programming services to reduce overall operational expenses. In addition, they are seeking premium consulting services to facilitate and expedite the management of (1) smaller strategic projects and (2) geographically-dispersed complex projects. They are looking to local firms to build strategic components or systems that address a specialized business problem. Lastly, customers are investing in IT to improve business process and corporate performance in order to comply with new regulatory guidelines and successfully compete in today’s business climate.

Consulting industry dynamics are evolving with the acceptance of business process outsourcing (BPO). IT service firms are enhancing their business models to expand services and delivery offerings. These offerings are also being supported by the growing global acceptance of the offshore outsourcing model, which offers a compelling economic alternative primarily for software development services. While the BPO and outsourcing models have their advantages, it also provides an opportunity for technology management consultants to become providers of premium IT services, which these firms do not typically have strong expertise.

Industry Opportunity.Technology has become such an integral part of business that it requires skilled strategic management in its own right. Technology has become a key enabler to business change when the appropriate strategic steps, a meld of business process change and technology, are well laid out and thoughtfully executed. Technology management consulting firms deliver innovative strategic thinking and in-depth vertical industry expertise, along with the ability to implement business process transformation through the judicious use of the appropriate technologies.  Edgewater Technology has steadily enhanced our offerings to address the evolving need for premium IT services and plan to continue to grow our competencies in this arena.

4

Competitive Strengths

Edgewater Technology offers a unique blend of premium IT services designed to assist our clients in improving financial and operational performance across their enterprise. We develop business strategies and technology solutions that address their specific needs while providing them with increased competitive advantage. We feel that five core values differentiate us from the competition.

These values include the following:

(1)Delivery Excellence—Our history is built upon more than thirteen years of proven methodology and well-defined process, in addition to continually delivering business and technology solutions that work. Our delivery excellence is a derivative of a well-defined business plan, highly-skilled consultants, strong technical expertise, and established implementation and support methodologies. Most importantly, we use an iterative business and technology approach, with an emphasis on quality assurance and project management, to achieve rapid and successful deployment of our solutions. Our delivery history has contributed to our ability to build long-term customer relationships.

(2)Vertical Expertise/Horizontal Service Offerings—We combine vertical-industry knowledge with a broad base of key strategic technologies to serve our customers’ needs and deliver tailored and innovative strategies and solutions. The primary vertical markets where we have developed core competencies include: Consumer Packaged Goods/Manufacturing; Financial Services (Retail Banking, Portfolio/Asset Management); Healthcare (Payor/Managed Care); Higher Education; Hospitality; Insurance; Life Sciences; Retail; and various Emerging Markets. Horizontal service offerings include: Business Intelligence/Business Activity Monitoring/Corporate Performance Management; Data Services; Enterprise Architecture Services; and Program/Project Management.

The diagram that follows illustrates our vertical and horizontal service offerings:

(3)Technology Excellence—We deliver our services by blending proven strategic technologies and business practices to build scalable custom solutions providing a solid return on the investment. Our team of professionals has the technology expertise to offer comprehensive strategies and solutions. Our areas of technical expertise include: business activity monitoring, architectural

5

services (assessment and builds), service-oriented architectures, data and infrastructure services, transactional processing and legacy integration.

(4)Middle-Market Focus—Edgewater Technology is well positioned to serve the technology needs of the middle market. Their needs span the full spectrum of our offerings. In 2005 alone, 86% of Edgewater Technology’s business was derived from the middle market.

(5)Strong Operational Metrics—Since our inception in 1992, Edgewater Technology’s original management team has built an organization that is defined by a record of operational excellence, tracking key performance indicators and well-defined operating metrics to manage our consulting resources, company utilization and gross margin.

Business Strategy

Our business strategy is to position our Company as the leading provider of premium information technology services for both the middle market and divisions of Global 2000 companies. We believe we can attain this strategic objective by delivering a range of business and technology offerings. This approach enables Edgewater to progress up the IT value pyramid and provides a measure of influence over the sourcing of integration and software builds. To attain our business strategy objective, we will maximize our ability to deliver the following capabilities:

·Envision and realize strategic business solutions.   We plan to serve our clients by delivering industry-based process re-engineering services coupled with strategic technology management services. These strategic business solutions will assist clients to align their specific business goals with an enterprise-wide IT strategy. We initially conduct an overall IT assessment and business analysis. This involves a detailed evaluation of possible technology alternatives, including whether the solution should be a package solution, a customized solution or a combination of both.

·Implement corporate performance management solutions.   The primary goal of the solutions we develop is to improve financial performance and operating metrics across a client’s enterprise. We develop these solutions by leveraging a blend of technology and vertical expertise as well as partnering with industry CPM leaders, such as Hyperion Solutions. With CPM, clients are able to improve their overall operational performance and productivity. A client’s ability to extract data and alert management of operational issues can enhance near real-time decision making—otherwise known as Business Activity Monitoring, a building block of CPM.

·Optimize business processes to improve the delivery of products and services.   We deliver solutions that integrate effectively into our client’s existing infrastructure while improving business operations that support the generation of revenue. We develop these solutions by conducting business process analysis. The analysis enables us to map business process with technology.

·Provide program and project management.   We have the ability to develop programs that manage multiple projects including those that are complex and could involve multiple local and global vendors. To build the best strategic, customized solutions, we take all facets of our client’s business into consideration and make recommendations that include an approach of integrating packaged and customized solutions.

·Maximize and unlock the value of corporate data assets.   Edgewater Technology provides its clients with the necessary knowledge and experience to successfully integrate data from the most complex systems. With proven methodologies, we deliver data integration solutions, including data warehouses and data marts, enabling organizations to access, integrate, transform, and deliver enterprise data from any source.

6

·Infrastructure services.   We offer a complete range of managed IT services that enable our middle-market clients to concentrate on their core business, while being assured their technical infrastructure will support them as they grow. We offer services including infrastructure assessment and remediation, technology consulting, IT due diligence, as well as managed solution care, which includes hosting solutions; remote monitoring and maintenance; network and operating systems maintenance; and application maintenance. These strategic services ensure that our clients’ technical infrastructure will properly support their short- and long-term business requirements, while aligning their business goals with their technical capabilities.

·Access and leverage our blend of industry and technology expertise.   Across all of our service offerings, we provide a combination of vertical business knowledge along with technology expertise in the areas of strategy, technology and program management. This approach enables us to deliver powerful business solutions for our clients.

Our Services

Edgewater Technology offers a full spectrum of services and expertise to ensure the success of our engagements, including:

·Strategy—We blend our vertical industry and technology expertise to provide our clients with technology strategies that deliver long-term value across their enterprise. Our teams of consulting professionals compile and disseminate defined deliverables that not only support business process change, but strategically drive business. We take a multi-disciplinary approach which ensures that strategic plans not only serve the business need, but also are scalable, maintainable, and ultimately deliver the expected return on investment.

·Design—Within this phase, we identify and document the detailed design of the solution which could range from what technologies and tools will integrate with the client’s current IT infrastructure to what creative resources will be required to maintain consistency with the client’s current brand. In addition, this phase is where a new business flow can be designed to streamline processes and enhance business performance. By investing in the design phase of a project, organizations can (1) reduce overall development costs; (2) reshape the quality of corporate data assets and the effectiveness of business process; and (3) provide a flexible platform for more effective maintenance.

·Build—Edgewater Technology’s team provides a blended approach of services to develop and implement IT systems, including technology, methodology, and project management. We build strategic solutions that address our client’s specific needs, provide them inherent value and ensure that their solution aligns to their business goals.

·Infrastructure Services—We offer a complete range of technical support services, which enables our clients to concentrate on their business, while being assured their technical infrastructure will support their growth. Our complete range of infrastructure services enables our middle-market clients to concentrate on their core business, while being assured their technical infrastructure will support them as they grow. We provide our clients with services that include:

·Managed Services (including Application Support; Database Administration; Disaster Recovery Hosting; Help Desk; Hosting; Remote/Onsite Support & Services).

·Technical Consulting & Advisory Services (including Disaster Recovery Strategy & Services; Information Security Strategy & Services; Infrastructure Project Management; Infrastructure Strategy & Architecture; Integration Services; IT Due Diligence; IT Operational Excellence; IT Planning; Migration Planning).

7

·Assessment of Information Technology (IT) Infrastructure (includingConsolidation of IT Equipment; Create Stability in IT Environment; Implement Disaster Avoidance Strategy; Formulate Backup and Recovery Strategy; Standardize Software Upgrades to Ensure Manufacturer Support).

·Management, Maintenance and Support of the IT Environment (including Supervision of Data Management and Improved Reporting; Rectify Production Problems; Facilitate Maintenance Issues; Administer System Upgrades and System Migrations; Implement Processes based on Industry Best Practices).

Edgewater Technology has the proven expertise to plan, deliver and manage integration services that improve performance and maximize business results. We focus on deploying new systems and unlocking the value of the existing corporate data assets. This proven expertise enables us to bring complex technologies and systems together while minimizing risk, leveraging our clients’ technology investments and delivering tailored solutions.

Customers; Significant Customers

We derive a significant portion of our revenues from large projects with a limited number of customers. In 2005, our five largest customers accounted for 47.5% of our revenues. In 2004, our five largest customers accounted for 69.0% of our revenues. One of these large customers is considered a related party. For further details, see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Party Transactions: Synapse.” During 2005, we recorded revenues from 66 new customers, as compared to 28 new customers in 2004.

Marketing, Sales and Strategic Alliances

Marketing.   The primary goal of all of our marketing efforts is to generate sales opportunities by increasing Edgewater Technology’s brand awareness and value proposition. Our marketing efforts continued to be closely aligned with our go-to-market strategy, while introducing specific offerings that address business and IT challenges clients face within a particular vertical market. We have developed core competencies in delivering our services in key markets to increase the efficiency of our marketing efforts, we target specific areas of content on a monthly basis for each of our vertical practice areas. Marketing builds campaigns around each content area, which include: marketing collateral, webinars, sell sheets, tradeshow/conference participation, speaking engagements, direct mail and public relations activities.

Sales.Our sales approach is to combine traditional sales with our strength in verticals and technology. Our traditional sales function is comprised of direct sales professionals and inside sales professionals. Both work closely with our practice directors to identify potential opportunities within each account. Using a consultative selling methodology, target prospects are identified and a pursuit plan is developed for each key account. When contact with a target is established, we utilize a blended sales model to demonstrate our expertise, combining consultative selling with traditional sales methods, which typically consists of a business development manager, an industry consultant and a technology consultant. This team approach to selling allows Edgewater Technology to demonstrate, from the initial contact point, its expertise in both the specific industry as well as technology. Once the customer has engaged Edgewater Technology, our sales professionals maintain their relationships with the customer by working collaboratively with the consulting professionals who are assigned to the customer.

Strategic Alliances.As part of our sales and marketing effort, we have established working relationships with a number of companies, including: The Affiliated Alan Gray Companies, American Student Assistance, 1Answer Solutions, BEA Systems, Corda Technologies, Document Sciences Corporation,  Hyperion, IBM, LumenSoft Corporation, Microsoft, Nexaweb Technologies, NuGenesis Technologies Corporation, Optical Image Technology, Oracle, PaperThin, SeaTab, Sun Microsystems and

8

UpStream Software. These alliances generally entail sharing sales leads, joint marketing efforts, making joint customer presentations, negotiating discounts on license fees or other charges and conducting similar activities. Our arrangements with many of these companies are informal and are not subject to definitive written agreements. For those companies with whom we do have definitive written agreements, those agreements are either terminable at will by either party or are for terms of one year or less. We believe we have been successful in establishing alliances with a strong group of companies who are either industry leaders or well-regarded new entrants.

Professional Recruitment, Retention and Development

Our success depends in part upon our ability to recruit and retain business and technology professionals with the high level of skills and experience needed to provide our premium services. We believe that the combination of professional support, intellectual challenge, corporate culture and compensation we offer will continue to be attractive to these highly-skilled professionals. Our working environment also fosters collaboration, creativity and innovation. We believe that our employees are one of our most valuable assets.

Employees.   As of December 31, 2005, Edgewater Technology had 282 employees. Of these employees, 233 were billable consultants and 49 were management and administrative personnel, comprising sales, marketing, human resources, finance, accounting, internal information systems, and administrative support. The average tenure of our employee base is approximately 5 years and the average “years of experience” is approximately 12 years. Our employees are not represented by a collective bargaining agreement. We believe that our employee relations are strong.

Culture.   We believe that our business culture is critically important in hiring and retaining qualified professionals. Our ability to provide effective multidisciplinary teams is dependent upon our ability to develop and sustain a business culture that is common across all disciplines and vertical practices throughout our Company. Our employees are talented and energetic professionals that come from a multitude of professional backgrounds. Edgewater Technology believes that this creates an exciting, diverse, and creative work environment for our employees.

Compensation.   We have a competitive compensation program that has been structured to attract and retain highly-skilled professionals. Edgewater Technology’s cash, bonus and equity compensation plans are tied to the achievement of the Company’s financial performance along with individual and team performance goals.

Recruiting.   We believe that our long-term success will depend upon our ability to attract, retain and motivate highly-skilled employees. Our recruitment department has traditionally conducted its own direct recruiting efforts and coordinated informal and search firm referrals. We believe that our business model, which results in an intellectually stimulating work environment, provides greater opportunities for professional development and a dynamic corporate culture, enhances our ability to attract and retain top professionals.

Professional Development.   We believe that providing our professionals with a wide variety of challenging projects, the opportunity to demonstrate ability and achieve professional advancement are keys to their retention. We work with our professionals to assist them with their professional development by offering internal and external learning opportunities. We encourage them to attain industry certifications which strengthen their expertise in both business and technology. In addition, we also believe that the working relationships they form on various project teams foster valuable formal and informal mentoring and knowledge sharing.

9

Competition

Our service offerings consist of a full spectrum of services and expertise to ensure the success of IT projects. Our competitors include IT solutions providers, in-house technical staff, software product companies with extended service organizations, international outsourcers of IT development, application and Web hosting firms and specialized providers of CPM/BAM/BI.

There is significant competition in the management and IT consulting services space. Mergers or consolidations in our market may create new, larger or better-capitalized competitors with enhanced abilities to attract and retain professionals. We also believe that the principle criteria considered by prospective clients when selecting a consulting firm include skills and capabilities of consultants, scope of services, service model approach, global presence, industry and technical expertise, reputation and quality of past work, perceived value and a results orientation.

The following is a representative list of competitors in the IT and management consulting services space:

·Systems integrators: Accenture, EDS, IBM Global Services, Inforte, Keane Consulting, LogicaCMG, Perficient, and Sapient;

·Offshore software development firms: Aztec Software, Cognizant Technology Solutions, Infosys, Indus, Satyam, Tata, and Wipro;

·Management consulting firms: Bain & Company, Booz-Allen & Hamilton, Boston Consulting Group, DiamondCluster, and McKinsey & Company;

·Corporate Performance Management (CPM) / Business Activity Monitoring (BAM) / Business Intelligence (BI) providers:  AnswerThink/Beacon, Greenbrier & Russel, Informatica Corporation, ISA, Knightsbridge Solutions, Longview Solutions, MicroStrategy, Oracle, Palladium Consulting; and

·Computer hardware, software and service vendors: Hewlett-Packard, IBM, Oracle and SAP.

Intellectual Property

We consider our intellectual property to be a valuable asset in a highly competitive industry. We also consider our intellectual property to be an important factor in building brand recognition for quality service and performance. Therefore, we have secured certain service marks for ‘‘Edgewater,” “Edgewater Technology,’’ and “Edgewater Technology-Ranzal.” We believe we have secured all rights to trademarks and trade names related to our business.

We rely on a combination of trade secret, copyright and trademark laws to protect our proprietary rights. In particular, we require each of our employees to sign an invention and non-disclosure agreement, which provides that they must maintain the confidentiality of our intellectual property and that any intellectual property that they develop while employed by us is the property of Edgewater Technology. We have developed detailed tools, processes and methodologies which are used in developing software code, scripts, libraries, data models, applications, business processes, frameworks and other technology used within our Company and in customer engagements. See also “Item 1A. Risk Factors Affecting Finances, Business Prospects and Stock Volatility.”

Potential Future Strategies, Transactions and Changes

Critical to our ability to create long-term stockholder value, the Company will continue to pursue internal growth initiatives and appropriate business combination transaction alternatives to achieve

10

growth. From time to time, we have engaged and we may continue to engage in preliminary discussions with various persons regarding potential business combination transactions.

We believe that our current cash reserves and our anticipated cash flow from our operations will be, taken together, adequate for our working capital needs for at least the next twelve months. However, our actual experience may differ significantly from our expectation, particularly if we pursue growth through business combination transactions, which we presently believe will be advantageous to building long-term stockholder value. In addition, other future events may adversely or materially affect our business, expenses or prospects and could affect our available cash or the availability or cost of external financial resources.

We may, in the future, purchase common stock in the open market, in private transactions or otherwise, pursuant to any future board approved repurchase program. Any future purchases by us will depend on many factors, including:

·The market price of our common stock at that time;

·Our business strategy;

·Our business and financial position; and

·General economic and market conditions.

ITEM 1A.RISK FACTORS

Risk Factors Affecting Finances, Business Prospects and Stock Volatility

In addition to other information contained in this Form 10-K, the following risk factors should be carefully considered in evaluating Edgewater Technology and its business because such factors could have a significant impact on our business, operating results and financial condition. These risk factors could cause actual results to materially differ from those projected in any forward-looking statements.

Our success depends on a limited number of significant customers, and our results of operations and financial condition could be negatively affected by the loss of a major customer or significant project or the failure to collect a large account receivable.   We generate a significant portion of our service revenues from a limited number of customers. As a result, if we were to lose a major customer or large project, our service revenues could be materially and adversely affected. In 2005, our five largest customers accounted for 47.5% of our service revenues. In 2004, our five largest customers accounted for 69.0% of our service revenues. We perform varying amounts of work for specific customers from year to year. A major customer in one year may not use our services in another year. In addition, we may derive revenues from a major customer that constitutes a large portion of a particular quarter’s total revenues. If we lose any major customers or any of our customers cancel or significantly reduce a large project’s scope, including but not limited to Synapse, our results of operations and financial condition could be materially and adversely affected. Further, if we fail to collect a large accounts receivable balance, we could be subjected to a material financial expense and a decrease in cash flow.

Our lack of long-term customer contracts reduces the predictability of our revenues because these contracts may be canceled on short notice and without penalty.   Our customers generally retain us on a project-by-project basis, rather than under long-term contracts. As a result, a customer may not engage us for further services once a project is complete. If a significant customer, or a number of customers, terminate, significantly reduce, or modify their contracts with us, our results of operations would be materially and adversely affected. Consequently, future revenues should not be predicted or anticipated based on the number of customers we have or the number and size of our existing projects. If a customer were to postpone, modify, or cancel a project, including but not limited to Synapse, we would be required to shift our consultants to other projects to minimize the impact on our operating results. We cannot provide

11

assurance that we will be successful in efficiently and effectively shifting our consultants to new projects in the event of project terminations, which could result in reduced service revenues and lower gross margins. If we experience unexpected changes or variability in our revenue, we could experience variations in our quarterly operating results and our actual results may differ materially from the amounts planned and our operating profitability may be reduced or eliminated.

If we fail to satisfy our customers’ expectations, our existing and continuing business could be adversely affected.Our sales and marketing strategy emphasizes our belief that we have highly referenceable accounts. Therefore, if we fail to satisfy the expectations of our customers, we could damage our reputation and our ability to retain existing customers and attract new customers. In addition, if we fail to deliver and perform on our engagements, we could be liable to our customers for breach of contract. Although most of our contracts limit the amount of any damages to the fees we receive, we could still incur substantial cost, negative publicity, and diversion of management resources to defend a claim, and as a result, our business results could suffer.

We may have lower margins, or lose money, on fixed-price contracts.As part of our strategy, we intend to continue to grow our business with time-and-materials contracts, fixed-price contracts, and fixed-fee contracts. In 2005, fixed-price contracts represented approximately 11.5% of our service revenues. We assume greater financial risk on fixed-price contracts than on time-and-materials or fixed-fee engagements, and we cannot assure you that we will be able to successfully price our larger fixed-price contracts. If we fail to accurately estimate the resources and time required for an engagement, fail to manage customer expectations effectively or fail to complete fixed-price engagements within planned budgets, on time and to our customers’ satisfaction, we could be exposed to cost overruns, potentially leading to lower gross profit margins, or even losses on these engagements.

Competition in the IT and management consulting services market is intense and, therefore, we may lose projects to, or face pricing pressure from, our competitors or prospective customers’ internal IT departments or international outsourcing firms.   The market for IT and management consulting providers is highly competitive. In many cases, we compete for premium IT services work with in-house technical staff, software product companies with extended service organizations and other international IT and management consulting firms, including offshore outsourcing firms. In addition, there are many small, boutique technology management consulting firms who have developed services similar to those offered by us. We believe that competition will continue to be strong and may increase in the future, especially if our competitors continue to reduce their price for IT and management consulting services. Such pricing pressure could have a material impact on our revenues and margins and limit our ability to provide competitive services.

Our target market is rapidly evolving and is subject to continuous technological change. As a result, our competitors may be better positioned to address these developments or may react more favorably to these changes, which could have a material adverse effect on our business. We compete on the basis of a number of factors, many of which are beyond our control. Existing or future competitors may develop or offer IT and management consulting services that provide significant technological, creative, performance, price or other advantages over the services we offer.

See “Item 1—Business—Competition” for a representative list of competitors in the IT and management consulting services space.

Some of our competitors have longer operating histories and significantly greater financial, technical, marketing and managerial resources than we do. There are relatively low barriers of entry into our business. We have no patented or other proprietary technology that would preclude or inhibit competitors from entering the IT services market. Therefore, we must rely on the skill of our personnel and the quality of our customer service. The costs to start an IT and management consulting services firm are low. We expect that we will continue to face additional competition from new entrants into the market in the

12

future, offshore providers and larger integrators and we are subject to the risk that our employees may leave us and may start competing businesses. Any one or more of these factors could have a material impact on our business.

Because we rely on highly-trained and experienced personnel to design and build complex systems for our customers, an inability to retain existing employees and attract new qualified employees would impair our ability to provide our services to existing and new customers.   Our future success depends in large part on our ability to attract new qualified employees and retain existing highly-trained and experienced technical consultants, project management consultants, business analysts and sales and marketing professionals of various experience levels. If we fail to attract new employees or retain our existing employees, we may be unable to complete existing projects or bid for new projects of similar size, which could adversely affect our revenues. While attracting and retaining experienced employees is critical to our business and growth strategy, maintaining our current employee base may also be particularly difficult. Even if we are able to grow and expand our employee base, the additional resources required to attract new employees and retain existing employees may adversely affect our operating margins.

We depend on our key personnel, and the loss of their services may adversely affect our business.We believe that our success depends on the continued employment of the senior management team and other key personnel. This dependence is particularly important to our business because personal relationships are a critical element in obtaining and maintaining customer engagements. If one or more members of the senior management team or other key personnel were unable or unwilling to continue in their present positions, our business could be seriously harmed. Furthermore, other companies seeking to develop in-house business capabilities may hire away some of our key personnel.

Past or Future business combination transactions or other strategic alternatives could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our business.We realized recent growth, in part, through acquisitions, and we anticipate that a portion of our future growth may be accomplished through one or more business combination transactions or other strategic alternatives. The ultimate success of any such transactions will depend upon, among other things, our ability to integrate acquired personnel, operations, products and technologies into our organization effectively, to retain and motivate key personnel of acquired businesses and to retain customers of acquired businesses. We cannot assure you that we will be successful in this regard or that we will be able to identify suitable opportunities, continue to successfully grow acquired businesses, integrate acquired personnel and operations successfully or utilize our cash or equity securities as acquisition currency on acceptable terms to complete any such business combination transactions. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and materially and adversely affect our results of operations. Any such transactions would involve certain other risks, including the reduction of cash and/or working capital, the assumption of additional liabilities, potentially dilutive issuances of equity securities and diversion of management’s attention from operating activities.

Volatility of our stock price could result in expensive class action litigation.If our common stock suffers from volatility like the securities of other technology and consulting companies, we could be subject to securities class action litigation similar to that which has been brought against other companies following periods of volatility in the market price of their common stock. The process of defending against these types of claims, regardless of their merit, is costly and often creates a considerable distraction to senior management. Any future litigation could result in substantial additional costs and could divert our resources and senior management’s attention. This could harm our productivity and profitability and potentially adversely affect our stock price.

We may not be able to protect our intellectual property rights or we may infringe upon the intellectual property rights of others, which could adversely affect our business.   Our future success will depend, in part, upon our intellectual property rights and our ability to protect these rights. We do not have any patents or

13

patent applications pending. Existing trade secret and copyright laws afford us only limited protection. Third parties may attempt to disclose, obtain or use our solutions or technologies. This is particularly true in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States. Others may independently develop and obtain patents or copyrights for technologies that are similar or superior to our technologies. If that happens, we may need to license these technologies and we may not be able to obtain licenses on reasonable terms, if at all. If we are unsuccessful in any future intellectual property litigation, we may be forced to do one or more of the following:

·Cease selling or using technology or services that incorporate the challenged intellectual property;

·Obtain a license, which may not be available on reasonable terms or at all, to use the relevant technology;

·Configure services to avoid infringement; and

·Refund license fees or other payments that we have previously received.

Generally, we develop software applications for specific customer engagements. Issues relating to ownership of and rights to use software applications and frameworks can be complicated. Also, we may have to pay economic damages in these disputes, which could adversely affect our results of operations and financial condition.

Fluctuations in our quarterly revenues and operating results may lead to reduced prices for our stock.Our quarterly revenues and operating results can sometimes be volatile. We believe comparisons of prior period operating results cannot be relied upon as indicators of future performance. If our revenues or our operating results in any future period fall below the expectations of securities analysts and investors, the market price of our securities would likely decline.

Factors that may cause our quarterly results to fluctuate in the future include the following:

·Variability in market demand for IT and management consulting services;

·Length of the sales cycle associated with our service offerings;

·Unanticipated variations in the size, budget, number or progress toward completion of our engagements;

·Unanticipated termination of a major engagement, a customer’s decision not to proceed with an engagement we anticipated or the completion or delay during a quarter of several major customer engagements;

·Efficiency with which we utilize our employees, or utilization, including our ability to transition employees from completed engagements to new engagements;

·Our ability to manage our operating costs, a large portion of which are fixed in advance of any particular quarter;

·Changes in pricing policies by us or our competitors;

·Seasonality and cyclicality, including the effects of lower utilization rates during periods with disproportionately high holiday and vacation usage experience;

·Timing and cost of new office expansions;

·The timing of customer year-end periods and the impact of spending relative to such year-end periods;

·Our ability to manage future growth; and

·Costs of attracting, retaining and training skilled personnel.

14

Some of these factors are within our control, while others are outside of our control.

Anti-takeover provisions in our charter documents, our stockholder rights plan and/or Delaware law could prevent or delay a change in control of our Company.   Our Board of Directors can issue preferred stock in one or more series without stockholder action. The existence of this “blank-check” preferred stock provision could render more difficult or discourage an attempt to obtain control by means of a tender offer, merger, proxy contest or otherwise. In addition, our Company has a stockholder rights plan, commonly referred to as a “poison pill,” that may discourage an attempt to obtain control by means of a tender offer, merger, proxy contest or otherwise. If a person acquires 20% or more of our outstanding shares of common stock, except for certain institutional stockholders, who may acquire up to 25% of our outstanding shares of common stock, then rights under this plan would be triggered, which would significantly dilute the voting rights of any such acquiring person. Certain provisions of the Delaware General Corporation Law may also discourage someone from acquiring or merging with us.

If clients view offshore development as a viable alternative to our service offerings, our pricing, revenue, margins and profitability may be negatively affected.A trend has developed whereas international IT service firms have been founded in countries such as India and China, which have well-educated and technically-trained workforces available at wage rates that are substantially lower than U.S. wage rates. While traditionally we have not competed with offshore development, presently this form of software development is experiencing rapid and increasing acceptance in the market. To counteract this trend, we are focusing towards premium service offerings, including design and strategy consulting engagements, which are more difficult for offshore development firms to replicate. If we are unable to continually evolve our service offerings or the rate of acceptance of offshore development advances even faster than we expect, then our pricing and revenue could be adversely affected.

We may be required to record additional goodwill impairment charges in future quarters.As of December 31, 2005, we had recorded goodwill and related intangible assets with a net book value of $17.1 million related to prior acquisitions. We test for impairment at least annually and whenever evidence of impairment exists. We performed our annual goodwill impairment test as of December 2, 2005 and 2004 and determined that the goodwill and related intangible assets were not impaired. We have in the past recorded impairments to our goodwill, however. In January 2002, we recorded as a change in accounting principle, a non-cash impairment charge of $12.5 million related to our goodwill. We recorded an additional non-cash charge of $7.4 million, related to a further impairment in December 2002. See “Item 8—Financial Statements and Supplementary Data—Note 2.” As goodwill values are measured using a variety of factors, including values of comparable companies and using overall stock market and economic data, in addition to our own future financial performance, we may be required in the future to record additional impairment charges that could have a material adverse effect on our reported results.

We may not generate enough income this year or in future periods to maintain the current net carrying value of our deferred tax asset.   We have a deferred tax asset of approximately $21.5 million, net of an applicable valuation allowance, as of December 31, 2005. If we are unable to generate enough income this year or in future periods, the valuation allowance relating to our deferred tax asset may have to be revised upward, which would reduce the carrying value of this asset on our balance sheet under generally accepted accounting principles. An increase in the valuation allowance and a related reduction in the carrying value of this asset would increase our provision for income taxes, thereby reducing net income or increasing net loss, and could reduce our total assets (depending on the amount of any such change or changes). An increase in the valuation allowance could otherwise have a material adverse effect on our results of operations and/or our stockholders’ equity and financial position.

Material changes to our strategic relationship with Hyperion.The Ranzal business, which we acquired in October of 2004, derives a substantial portion of its revenues from a channel relationship with Hyperion Solutions Corporation. This relationship involves Hyperion assisted lead generation support with respect

15

to the business intelligence services provided by Ranzal. This relationship is governed by a Consulting Reseller Partner Agreement, which is subject to annual renewal and is scheduled to expire in October of 2006. A failure to renew this relationship, or a material modification or change in Hyperion’s partner approach or its contract terms, for any reason, could have a material adverse impact on our results of operations.

Our reliance upon Synapse.   The Synapse Group, Inc. (“Synapse”), as more fully described in “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related-Party Transactions,” is considered both a significant customer and a related party. Revenues from Synapse amounted to $8.4 million, or 21.2% of service revenues, and $9.7 million, or 39.0% of service revenues, for 2005 and 2004, respectively. In fiscal 2005, we experienced a planned decrease in revenues of approximately $1.3 million from Synapse due to anticipated reductions in Synapse’s demand for our services. The Company provides services to Synapse related to infrastructure support, custom software development and systems integration. Services are provided on both a fixed-fee and time and materials basis. Our contracts with Synapse, including all terms and conditions, are consistent with those we have with our other customers and are negotiated on an annual basis. The existing one-year services contract with Synapse, which was entered into in January of 2005, has been automatically extended, as per the terms of the contract, for an additional six-month period. The contract extension became effective on January 1, 2006. The Company anticipates that it will enter into a new one-year services contract with Synapse during the first quarter of fiscal 2006. It is also anticipated that Synapse will purchase professional services consistent with those purchased in fiscal 2005, which approximated $8.4 million. There is no guarantee that the Company will be able to successfully negotiate a new contract with Synapse at the end of the current contract period. Additionally, there is no guarantee that revenues related to Synapse services will be comparable to those generated in the past.

ITEM 1B.UNRESOLVED STAFF COMMENTS

None.

ITEM 2.PROPERTIES

We lease 30,004 square feet of office space for our principal executive offices currently located at 20 Harvard Mill Square, Wakefield, Massachusetts 01880-3209. The lease for our corporate headquarters was extended for a 10 year period on December 31, 2003 and this lease expires on December 31, 2013. We also have office facilities in Arkansas, New Hampshire, New York, and Virginia. Our corporate and satellite offices are all leased properties. We do not own any real estate. An office located in Fayetteville, Arkansas, which was the Company’s principal executive offices until the 2001 fiscal year, is a leased property, which we sublet to a third party on July 1, 2002 until June 30, 2007. The Fayetteville, Arkansas lease expires on June 30, 2009. Our existing properties satisfy our current operating needs, however we will seek additional space in the event our existing properties are unable to meet our operating requirements.

ITEM 3.LEGAL PROCEEDINGS

We are sometimes a party to litigation incidental to our business. We maintain insurance in amounts, with coverages and deductibles that we believe are reasonable. As of the date of the filing of this Form 10-K, our Company is not a party to any existing material litigation matters.

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of 2005.

16

PART II

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Stock Price Information

Our common stock, which has a par value of $0.01 per share, trades on the NASDAQ National Market under the symbol “EDGW.” On March 15, 2006, there were approximately 2,081 holders of record of our common stock and 11,000,132 million shares of our common stock were outstanding. The number of record holders indicated above does not reflect persons or entities that hold their shares of stock in nominee or “street” name through various bankers or brokerage firms. Based on our Company’s solicitations of proxies in April 2005, we estimate that there are approximately 8,000 holders of our Company’s common stock. The following table sets forth the range of high and low trading prices for our common stock as reported by the NASDAQ National Market for each quarter in 2004 and 2005 and the first quarter of 2006 through March 15, 2006.

	High		Low
FISCAL 2004:
First Quarter	$	8.50	$	4.65
Second Quarter	7.15		5.10
Third Quarter	6.19		4.50
Fourth Quarter	5.15		3.80
FISCAL 2005:
First Quarter	$	5.66	$	4.16
Second Quarter	4.60		3.90
Third Quarter	5.75		4.00
Fourth Quarter	6.26		4.59
FISCAL 2006:
First Quarter	$	6.66	$	5.58
(through March 15, 2006)

Other Stockholder Matters

We have not paid dividends in the past and intend to retain any earnings to finance the expansion and operations of our business. Subject to the items discussed in “Item 1—Business—Potential Future Strategies, Transactions and Changes,” we do not anticipate paying any cash dividends with regard to cash generated through our normal operations in the foreseeable future.  The trading price of our common stock is subject to wide fluctuations in response to quarterly variations in operating results, announcements of acquisitions, performance by our competitors, and other market events or factors. In addition, the stock market has, from time to time, experienced price and volume fluctuations, which have particularly affected the market price of many professional service companies and which often have been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our common stock.

17

ITEM 6.SELECTED FINANCIAL DATA

The 2005, 2004, 2003, 2002 and 2001 selected consolidated financial data presented below has been derived from our audited consolidated financial statements. Our former operating businesses, consisting of the StaffMark commercial staffing division, Robert Walters, Strategic Legal, IntelliMark and ClinForce are presented as discontinued operations. We believe that this information should be read in conjunction with our audited consolidated financial statements and accompanying notes and “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K.

	Year Ended December 31,
	2005		2004			2003			2002			2001
	(In thousands, except per share data)
Consolidated Statements of Operations Data:
Total revenue	$	43,126	$	25,322		$	25,054		$	18,666		$	26,574
Cost of revenue	25,126		15,659			13,540			11,905			15,733
Gross profit	18,000		9,663			11,514			6,761			10,841
Operating expenses:
Selling, general and administrative	15,883		10,154			10,080			8,833			10,551
Depreciation and amortization	1,046		896			948			1,003			5,465
Impairment of goodwill(1)	—		—			—			7,411			—
Restructuring(2)	—		—			—			349			—
Total operating expenses	16,929		11,050			11,028			17,596			16,016
Operating income (loss)	1,071		(1,387		)	486			(10,835		)	(5,175		)
Interest income, net	1,054		556			455			777			2,090
Income (loss) before taxes, discontinued operations, extraordinary item and change in accounting principle	2,125		(831		)	941			(10,058		)	(3,085		)
Tax provision (benefit)	850		—			(1,053		)	—			593
Income (loss) from continuing operations before discontinued operations, extraordinary item and change in accounting principle	1,275		(831		)	1,994			(10,058		)	(3,678		)
Discontinued operations:
Income (loss) from operations of discontinued divisions, net of applicable taxes	325		236			(1,020		)	(950		)	(904		)
Gain on sale of divisions, net of applicable taxes	—		—			—			—			6,514
Income (loss) before extraordinary item and change in accounting principle	1,600		(595		)	974			(11,008		)	1,932
Extraordinary item, net of applicable taxes	—		—			—			—			(27		)
Change in accounting principle(1)	—		—			—			(12,451		)	—
Net income (loss)	$	1,600	$	(595	)	$	974		$	(23,459	)	$	1,905
Basic income (loss) per share:
Continuing operations	$	0.13	$	(0.07	)	$	0.18		$	(0.87	)	$	(0.29	)
Discontinued operations	0.03		0.02			(0.09		)	(0.08		)	0.44
Extraordinary item	—		—			—			—			—
Change in accounting principle	—		—			—			(1.08		)	—
Net income (loss)	$	0.16	$	(0.05	)	$	0.09		$	(2.03	)	$	0.15
Weighted average shares, basic	10,241		11,283			11,381			11,575			12,858
Diluted income (loss) per share:
Continuing operations	$	0.12	$	(0.07	)	$	0.17		$	(0.87	)	$	(0.28	)
Discontinued operations	0.03		0.02			(0.09		)	(0.08		)	0.43
Extraordinary item	—		—			—			—			—
Change in accounting principle	—		—			—			(1.08		)	—
Net income (loss)	$	0.15	$	(0.05	)	$	0.08		$	(2.03	)	$	0.15
Weighted average shares, diluted	10,653		11,283			11,694			11,575			12,935

Refer to footnotes on following page.

18

(1)The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142 on January 1, 2002 and, in accordance therewith, recorded as a change in accounting principle a non-cash charge of $12.5 million relating to an impairment of recorded goodwill. On December 2, 2002, the selected annual measurement date, the Company recorded an additional non-cash charge of $7.4 million, relating to a further impairment of goodwill. See “Item 8—Financial Statements and Supplementary Data—Note 2” included elsewhere herein.

(2)As a result of a workforce reduction on February 28, 2002, the Company recorded approximately $0.3 million in associated restructuring charges related to severance costs.

	As of December 31,
	2005		2004		2003		2002		2001
	(In Thousands)
Consolidated Balance Sheet Data:
Cash equivalents, marketable securities and accrued interest	$	33,763	$	33,908	$	44,259	$	46,782	$	51,501
Accounts receivable, net	9,858		5,272		3,532		2,647		4,045
Goodwill and intangibles	17,076		16,628		13,135		11,614		31,807
Deferred tax asset	21,491		22,213		22,175		22,884		22,523
Other assets	2,401		3,681		3,430		2,566		2,971
Total assets	$	84,589	$	81,702	$	86,531	$	86,493	$	112,847
Total liabilities	$	6,504	$	5,106	$	5,647	$	5,456	$	7,855
Stockholders’ equity	78,085		76,596		80,884		81,037		104,992
Total liabilities and stockholders’ equity	$	84,589	$	81,702	$	86,531	$	86,493	$	112,847
Outstanding shares of common stock	10,683		10,549		11,366		11,485		11,594

19

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the “Item 6—Selected Financial Data” and “Item 8—Financial Statements and Supplementary Data” and the related notes thereto in this Annual Report on Form 10-K.

Overview

Edgewater is an innovative technology management consulting firm providing a unique blend of premium IT services. Our primary target is the middle market whose needs span the full spectrum of our offerings. We also provide specialized premium services to divisions of Global 2000 companies. During the fiscal year ended December 31, 2005, we generated revenues, including reimbursement of out-of-pocket expenses, of approximately $43.1 million from a total of 158 clients. Headquartered in Wakefield, Massachusetts, as of December 31, 2005, our Company employed approximately 233 technical consulting professionals.

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 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.

The largest portion of our operating expenses consists of project personnel and related expenses. Project personnel expenses consist of payroll costs and related benefits associated with 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 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 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 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 level. In addition, we monitor the progress of client projects with client senior management. We manage the activities of our professionals by closely monitoring engagement schedules and staffing requirements for new engagements. However, a rapid decline in the demand for the professional services that we provide could result in lower utilization of our professionals than we planned. In addition, because most of our client engagements are terminable by our clients without penalty, an unanticipated termination of a client project could require us to maintain underutilized employees. While professional staff levels must be adjusted to reflect active engagements, we must also maintain a sufficient number of senior professionals to oversee existing client engagements and participate in our sales efforts to secure new client assignments.

The Company’s management monitors and assesses its operating performance by evaluating key metrics and indicators. For example, we review information related to annualized revenue per billable

20

consultant, periodic consultant utilization rates, gross profit margins and billable employee headcount. The 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 Year Ended December 31, 2005 Compared to Results for the Year Ended December 31, 2004.”

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions, upon which we rely, are reasonable based upon information available to us at the time that they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are differences between these estimates, judgments or assumptions and actual results, our financial statements may be affected. The accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

·Revenue Recognition;

·Valuation of Deferred Tax Assets; and

·Valuation of Long-Lived and Intangible Assets.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. Senior management has reviewed these critical accounting policies and related disclosures with our Audit Committee. See “Notes to Consolidated Financial Statements” included in “Item 8—Financial Statements and Supplementary Data” included elsewhere herein, which contain additional information regarding our accounting policies and other disclosures required by GAAP. We have identified the policies listed below as critical to our business operations and the understanding of our results of operations.

Revenue Recognition.The Company recognizes revenue from providing IT and management consulting services under written service contracts with our customers. The service contracts we enter into generally fall into three specific categories: time and materials, fixed-price and fixed-fee. Our revenues are generated from sources such as technical consulting, custom software development, integration services, business intelligence consulting, strategic business process consulting and infrastructure services. Revenues from these services are recognized as the services are performed and amounts are earned in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements,” as amended by SAB No. 104, “Revenue Recognition” (“SAB 104”). We consider amounts to be earned once evidence of an arrangement has been obtained, services are delivered, fees are fixed or determinable and collectibility is reasonably assured. For the years ended December 31, 2005, 2004 and 2003, revenues from strategy engagements, technical consulting and custom software development and integration services, and infrastructure services represented the following:

For the Year Ended December 31,	Strategy Engagements			Consulting and Development and Integration Services			Infrastructure Services
2005		35.7	%		55.9	%		8.4	%
2004		20.7	%		67.2	%		12.1	%
2003		2.9	%		85.7	%		11.4	%

21

The Company derives a significant portion of its service revenue from time and materials-based contracts. Time and materials-based contracts represented 82.5%, 75.0% and 70.9% of service revenues for the years ended December 31, 2005, 2004 and 2003, respectively. Revenue under time and materials contracts is recognized as services are rendered and performed at contractually agreed upon rates.

From time to time, the Company may offer volume purchase arrangements as part of its time and materials contracts to its customers. In accordance with Emerging Issues Task Force Abstract (“EITF”) No. 00-22, “Accounting for “Points” and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future,” the Company has deferred payment amounts based upon its current estimates of the actual discounts expected to be earned by the customers. There were no deferred amounts as of December 31, 2005 related to volume purchase arrangements. As of December 31, 2004, the Company had recorded as deferred revenue a liability in the amount of $0.2 million related to such arrangements.

Revenue pursuant to fixed-price contracts is recognized under the proportional performance method of accounting. Fixed-price contracts represented 11.5%, 15.8% and 18.8% of service revenues for the years ended December 31, 2005, 2004 and 2003, respectively. Over the course of a fixed-price contract, we routinely evaluate whether revenue and profitability should be recognized in the current period. To measure the performance and our ability to recognize revenue and profitability on fixed-price contracts, we compare actual direct costs incurred to the total estimated direct costs and determine the percentage of the contract that is complete. This percentage is multiplied by the estimated total contract value to determine the amount of net revenue that should be recognized in accordance with our revenue recognition policies and procedures, subject to any warranty provisions or other project management assessments as to the status of work performed. This method is used because reasonably dependable estimates of the revenues and costs applicable to various stages of a contract can be made, based on historical experience and milestones identified in any particular contract.

Typically, the Company provides warranty services on its fixed-price contracts related to providing customers with the ability to have any “design flaws” remedied and/or have our Company “fix” routine software design defects.  The services, as outlined in the respective contracts, are provided for a specific period of time after a project is complete. The Company values the warranty services based upon historical labor hours incurred for similar services at standard billing rates. In accordance with SAB 101 and SAB 104, revenue related to the warranty provisions within our fixed-price contracts is recognized as the services are performed and the revenue is earned. The warranty term is typically short term or for a 30-60 day period after the project is complete.

In the event we are unable to accurately estimate the resources required or the scope of work to be performed on a fixed-price contract, or we do not manage the project properly within the planned time period, then we may recognize a loss on a contract. Provisions for estimated losses on uncompleted projects are made on a contract-by-contract basis. Any known or probable losses on projects are charged to operations in the period in which such losses are determined. A formal project review process takes place quarterly, although most projects are evaluated on an ongoing basis. Management reviews the estimated total direct costs on each contract to determine if the estimated amounts are accurate, and estimates are adjusted as needed in the period revised estimates are made. The Company recorded an insignificant loss related to one specific contract during fiscal 2005. There were no recorded losses on contracts during fiscal 2004.

We also perform services on a fixed-fee basis under infrastructure services contracts, which include monthly hosting and support services.  Fixed-fee contracts represented 6.0%, 9.2% and 10.3% of service revenues for the years ended December 31, 2005, 2004 and 2003, respectively. Revenue under fixed-fee contracts are recognized as fixed monthly amounts, for a specified period of time, as outlined within the respective contract.

22

When a customer enters into a time and materials, fixed-price contract or a fixed-fee contract, the related revenue is accounted for under EITF 00-21, “Revenue Arrangement with Multiple Deliverables.”  For all arrangements, we evaluate the deliverables in each contract to determine whether they represent separate units of accounting. If the deliverables represent separate units of accounting, we then measure and allocate the consideration from the arrangement to the separate units, based on reliable evidence of the fair value of each deliverable.

Client prepayments, even if nonrefundable, are deferred (classified as a liability) and recognized over future periods as services are performed. As of December 31, 2005 and 2004, the Company has recorded a deferred liability of approximately $0.2 million and $0.1 million, respectively, which is included in the financial statement caption of “deferred revenue and other liabilities” related to customer prepayments.

Revenues from software resale contracts were less than 4.0% of total revenues for all periods presented. Revenue and related costs are recognized and amounts are invoiced to our customers upon the customer receipt of the purchased software. All related warranty and maintenance arrangements are performed by the primary vendor of the software and are not the obligation of the Company.

We recognize revenues for services where the collection from the client is probable and our fees are fixed or determinable. We establish billing terms at the time at which the project deliverables and milestones are agreed. Our standard payment terms are 30 days from invoice date. Reimbursement of “out-of-pocket” expenses charged to customers is reflected as revenue.

Our revenues and earnings may fluctuate from year to year based on the number, size and scope of projects in which we are engaged, the contractual terms and degree of completion of such projects, any delays incurred in connection with a project, employee utilization rates, the adequacy of provisions for losses, the use of estimates of resources required to complete ongoing projects, general economic conditions and other factors. Certain significant estimates include those used for fixed-price contracts, such as deferrals related to our volume purchase agreements, warranty holdbacks, and allocations of fair value of elements under multiple element arrangements, and the valuation of our allowance for doubtful accounts.

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

As of December 31, 2005, the gross value of the deferred tax asset recorded on the Company’s balance sheet was approximately $26.7 million. This amount was comprised of approximately $21.0 million in federal net operating loss (“NOL”) carryforwards, $1.0 million in state NOL carryforwards, $4.0 million in available federal credits, and $0.7 million in net deferred temporary timing differences. These amounts were offset by a valuation reserve of approximately $5.2 million providing for a net deferred tax asset of $21.5 million. This net deferred tax asset is representative of the Company’s assessment of the expected future realization of recorded deferred tax assets.

23

When assessing the probability of the future realization of the recorded value of this asset, the Company reviews its planned future income and profitability projections. In projecting future income, we use our internal operating budgets and long-range planning projections. We develop our budgets and long-range projections based on recent results and trends, our project pipeline, and other appropriate factors. Based upon these analyses, the Company believes that it is more than likely that it will be able to recover the currently recorded value of our net deferred tax assets by achieving a compounded annual revenue growth rate of approximately 6.7% and achieving annual profitability in the range of 4.4% to 5.8% through fiscal 2020. However, if we do not generate sufficient future income and profits, the realization of these deferred tax assets may be impaired, resulting in an additional income tax expense, thereby reducing net income or increasing net loss, in the period in which it is determined that it is more likely than not that either a portion or all of the deferred tax asset is recoverable.

Valuation of Long-Lived and Intangible Assets.In 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” With the adoption of SFAS No. 142, goodwill and other indefinite lived intangible assets (“intangibles”) are no longer subject to amortization, rather, they are subject to an assessment for impairment whenever events or circumstances indicate that impairment may have occurred, but at least annually, by applying a fair value based test. Under SFAS No. 142, goodwill impairment is assessed at the reporting unit level, using a discounted cash flow method. Prior to April 1, 2002, the Company amortized goodwill and identifiable intangible assets on a straight-line basis over their estimated useful lives not to exceed 40 years, and periodically reviewed the recoverability of these assets based on the expected future undiscounted cash flows.

Under SFAS No. 142, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its net book value (or carrying amount), including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.

Determining the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of a reporting unit (including unrecognized intangible assets) under the second step of the goodwill impairment test requires our management to make significant judgments, assumptions and estimates. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. To assist in the process of determining goodwill impairment, the Company obtains appraisals from independent valuation firms. In addition to the use of independent valuation firms, the Company performs internal valuation analyses and considers other market information that is publicly available. Estimates of fair value are primarily determined using discounted cash flows. This approach requires the use of significant estimates and assumptions including projected future cash flows (including timing), discount rate reflecting the risk inherent in future cash flows and perpetual growth rate, among others.

24

Upon adoption of SFAS 142 in fiscal 2002, the Company recorded as a change in accounting principle, a non-cash impairment charge of $12.5 million. On December 2, 2002, our selected annual measurement date, our Company recorded an additional non-cash charge of $7.4 million due to a further impairment of the recorded goodwill. No other impairment has been recorded in the periods presented.

As further described in Note 3 to the consolidated financial statements included elsewhere herein, the Company, on June 2, 2003, acquired Intelix, Inc. and recorded $1.4 million in goodwill and $0.5 million in identifiable intangible assets, which are being amortized over a period of four to eight years. On October 4, 2004, the Company acquired Ranzal and initially recorded $2.4 million in goodwill and $1.6 million in identified intangible assets, which are being amortized over a period of two to five years. Subsequently, in the first quarter of fiscal 2005, the Company recorded and paid additional purchase price consideration of $1.0 million to Ranzal’s former stockholders. The payment related to additional earnout consideration based upon the successful attainment of certain profitability thresholds achieved from the date of the acquisition through February 28, 2005. Ranzal is also eligible for a second earnout payment, if certain profitability thresholds are met, during the period commencing on March 1, 2005 and ending on February 28, 2006. The Company currently estimates that amounts potentially payable to Ranzal stockholders for the second earnout will be $2.6 million.

Results of Operations

The following table sets forth, for the periods indicated, selected statements of operations data as a percentage of total revenue:

	Year Ended December 31,
	2005		2004		2003
Revenue:
Service revenue	92.3	%	97.7	%	99.3	%
Software revenue	3.5	%	0.2	%	—	%
Reimbursable expenses	4.2	%	2.1	%	0.7	%
Total revenue	100.0	%	100.0	%	100.0	%
Cost of revenue:
Project and personnel costs	50.7	%	59.5	%	53.3	%
Software costs	3.4	%	0.2	%	—	%
Reimbursable expenses	4.2	%	2.1	%	0.7	%
Total cost of revenue	58.3	%	61.8	%	54.0	%
Gross profit	41.7	%	38.2	%	46.0	%
Operating expenses:
Selling, general and administrative	36.8	%	40.1	%	40.2	%
Depreciation and amortization	2.4	%	3.5	%	3.8	%
Total operating expenses	39.2	%	43.6	%	44.0	%
Operating income (loss)	2.5	%	(5.4	)%	2.0	%
Interest income, net	2.4	%	2.2	%	1.8	%
Income (loss) before taxes and discontinued operations	4.9	%	(3.2	)%	3.8	%
Tax provision (benefit)	2.0	%	—	%	(4.2	)%
Income (loss) from continuing operations before discontinued operations	2.9	%	(3.2	)%	8.0	%
Discontinued operations:
Income (loss) from operations of discontinued divisions	0.8	%	0.9	%	(4.1	)%
Net income (loss)	3.7	%	(2.3	)%	3.9	%

25

Results for the Year Ended December 31, 2005 Compared to Results for the Year Ended December 31, 2004

Revenue.Total revenue increased by $17.8 million, or 70.3%, to $43.1 million for the year ended December 31, 2005 from  $25.3 million for the year ended December 31, 2004.

Of the $17.8 million increase in 2005 total revenue, service revenue, excluding software and reimbursable expense revenue, increased by $15.1 million, or 60.9%, to $39.8 million, as compared to service revenue of $24.7 million in 2004.  The 2005 increase in service revenues was primarily attributable to two factors. Our service revenue was enhanced by the October 4, 2004 acquisition of Ranzal, which contributed service revenue of approximately $11.0 million in 2005 revenue, as compared to $2.0 million in the fourth quarter of 2004. The incremental year over year increase in service revenue was also affected by an increase of approximately $6.1 million in service revenue related to Edgewater Technology’s core business in 2005. Current year growth was also impacted by improved market demand for premium IT services, as new and existing clients continued to demand on-shore technical management consulting expertise to help their businesses evolve and grow.

Software revenue, which is directly attributable to Ranzal, increased to $1.5 million in 2005, as compared to $0.06 million in 2004. Software revenue is expected to fluctuate between quarters depending on our customers’ demand for such third-party off-the-shelf software. Gross profit margins are generally much lower on software sales than on consulting services.

Generally, we are reimbursed for our out-of-pocket expenses incurred in connection with our customers’ consulting projects. Reimbursed expense revenue increased approximately $1.3 million in 2005, to approximately $1.8 million, as compared to $0.5 million in 2004. 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.

Our annualized revenue per billable consultant, adjusted for utilization, increased 15.0%, to $261 thousand in 2005, as compared to $227 thousand in 2004. The improvement is due to incremental increases in consultant billing rates, largely associated with our Ranzal business, and an overall improvement in consultant utilization rates in our core business. During 2005, the Company increased the number of customers it served to 158, as compared to 102 customers in 2004. In 2005, service revenue from our five largest customers, including Synapse, decreased to 47.5% of our total service revenue, as compared to 69.0% in 2004.

Cost of Revenue.Cost of revenue primarily consists ofproject 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 $9.4 million, or 60.5%, to $25.1 million in 2005 as compared to $15.7 million in 2004. The 2005 increase in cost of revenue is partially attributable to the full year effect of the Ranzal acquisition, which increased cost of revenue by approximately $6.4 million in 2005. Additionally, there was an increase of $3.0 million, or 20.9%, in project and personnel costs related to Edgewater Technology’s core business, as we increased our total number of billable consultants by 58, separate and apart from the Ranzal Acquisition, to support our growth in projects and related revenue growth. Ranzal increased its billable headcount by 16 in 2005.

As a percentage of service revenue, project personnel costs, before software costs and out-of-pocket expense reimbursements, decreased from 61.0% during 2004 to 54.9% during 2005. The decrease in project personnel costs, as a percentage of service revenue, reflects increases in the Company’s billable consultant utilization rates, which increased to 81.1% in 2005, as compared to 72.1% in 2004.

Software costs increased by $1.4 million, to $1.5 million, in 2005, as compared to $0.05 million in 2004. Software costs are expected to fluctuate from year to year depending on our customers demand for software. Reimbursable expenses, which increased in 2005 by $1.3 million, to $1.8 million, as compared to

26

$0.5 million in 2004, were a direct result of the Company’s increased customer base and associated travel-related expenses incurred during the comparative fiscal periods.

Gross Profit.Gross profit increased by $8.3 million, or 86.3%, to $18.0 million in 2005, as compared to $9.7 million in 2004. Gross profit, as a percentage of total revenue, increased to 41.7% in 2005, as compared to 38.2% in 2004. Gross profit related to service revenue increased to 45.1% in 2005 from 39.0% in 2004. The improvement in gross profit in 2005 is directly related to the cumulative effects of growth within the core Edgewater business, which increased gross profit by $3.3 million in 2005, representing 39.5% of the year over year increase in gross profit, combined with the incremental gross profit of $5.0 million provided by Ranzal in 2005, which represented 60.5% of the year over year increase in gross profit. Positive factors influencing this growth include increases in customer base, increases in billable headcount and improved utilization rates, which are discussed above.

Selling, General and Administrative Expense (“SG&A”).SG&A expenses totaled $15.9 million, or 39.9% of total revenue in 2005, as compared to SG&A expenses of $10.2 million, or 41.1% of total revenue, in 2004. As a percentage of total revenue, SG&A expenses in 2005 remained fairly consistent with 2004 expenditure levels. During 2005, the full year effect of the Ranzal Acquisition, accounted for $4.1 million, or 71.1% of the current year SG&A increase, while Edgewater Technology’s core business represented $1.6 million, or 28.9% of the current year SG&A increase. In total, the $5.7 million, or 56.4% increase in SG&A expenses is attributable to cumulative increases in sales-related salaries, recruiting expenses, marketing expenses, travel expenses and performance-based bonus accruals.

Sales-related salaries expense, inclusive of commission expense, increased by $2.2 million in 2005 as the Company increased its average sales-related headcount from 15 employees in 2004 to 21 employees in 2005. The increase in sales-related headcount was primarily related to Ranzal, which accounted for $1.1 million of the total increase in sales-related salaries and wages. In 2005, the Company reported increased recruiting expense of $0.7 million, as compared to 2004. The increase in recruiting expense is directly related to the overall increase in the Company’s headcount from 205 at the end of 2004 to 282 at the end of 2005. In connection with the increase in sales-related headcount and a concerted effort to penetrate key strategic markets, the Company reported an increase of $0.3 million in marketing and selling expenses in 2005, as compared to 2004. Directly related to the growth experienced in 2005, travel-related expenses increased by $0.3 million, as compared to 2004. Additionally, during the 2005, the Company recorded $1.3 million in connection with its performance-based bonus plan, while only $0.1 million in related performance-based bonus accruals were recorded in 2004. Finally, SG&A expenses in 2005 increased by $0.9 million related to other miscellaneous expense items, which are not described above.

Depreciation and Amortization Expense.   Depreciation and amortization expense increased $0.1 million, or 16.7%, to $1.0 million, as compared to $0.9 million in 2004. Depreciation expense increased by $0.1 million, to $0.5 million, as compared to $0.4 million in 2004. The increase primarily reflected the full year effect of depreciation expense related to the acquired Ranzal fixed assets. Additionally, amortization expense remained consistent at $0.5 million in both 2005 and 2004. In the current fiscal year, amortization expense was increased by the full year effect of amortization expense related to the identified Ranzal intangible assets. Amortization of the Ranzal intangible assets amounted to $0.4 million in 2005, as compared to $0.1 million in 2004. The increase in current year amortization expense related to the Ranzal identified intangible assets was fully offset by a decrease in comparative amortization expense of $0.3 million related to other intangible assets that became fully amortized in 2005.

Operating Income (Loss).The Company’s operating income increased $2.5 million, to $1.1 million, in 2005, as compared to an operating loss of $(1.4) million in 2004. The increase in operating income is attributable to comparatively higher utilization rates, directly tied to the $15.1 million increase in 2005 service revenue. Each of these items is explained in further detail above.

27

Interest Income (Expense), Net.   We earned net interest income of $1.1 million in 2005, as compared to net interest income of $0.6 million in 2004. The increase in interest income reflects a 2004 shift of our available cash and cash equivalent balances into less liquid marketable securities, which have increased yields on our invested balances when compared to the yields achieved in the prior year. Average maturity and yield rates for the year ended December 31, 2005 were approximately 132 days and 4.1%, respectively, as compared to 94 days and 1.6%, respectively, as of December 31, 2004.

Provision for Income Taxes.   The Company recorded an income tax provision of $0.9 million in 2005. The 2005 provision represented tax expense based on an estimated effective income tax rate of 40.0% of operating income, which was inclusive of both state and federal income tax rates. No income tax provision was recorded in 2004 as a result of the reported net operating loss.

Income (Loss) from Continuing Operations.   Income from continuing operations increased $2.1 million, to $1.3 million in 2005, as compared to a loss of $(0.8) million in 2004. The current year increase in income from continuing operations is the cumulative result of increased service revenue, gross margin and other items discussed above.

Discontinued Operations.We have received in the past and may continue to receive various tax notices and assessments from the IRS and various State Departments of Revenue related to our former staffing businesses, which were sold in 2000 and 2001. During both 2005 and 2004, our Company was able to successfully resolve several outstanding assessments. On a net basis, the Company reversed approximately $0.3 million and $0.2 million in 2005 and 2004, respectively, from its discontinued operations accrual related to the successful resolution of certain tax assessments. In 2005, the accrual decrease attributable to the IRS notices totaled approximately $0.3 million, offset by other minor adjustments to remaining discontinued operations accrual items. In 2004, the accrual decrease attributable to the IRS notices totaled approximately $0.8 million. This decrease was offset by an increase in the accrual of $0.6 million, which was primarily the result of an increase in a previously established reserve related to the Company’s expected lease payments on its former corporate headquarters in Fayetteville, Arkansas in the amount of $0.4 million. The increase in the lease accrual was deemed necessary after revising a previously prepared estimate with more current information. See Notes 4 and 12 of the consolidated financial statements included elsewhere herein.

Net Income (Loss).We reported net income of $1.6 million in 2005 as compared to a net loss of $(0.6) million 2004. The increased in net income is a cumulative result of increased service revenue, gross margin and other items discussed above.

Results for the Year Ended December 31, 2004 Compared to Results for the Year Ended December 31, 2003

Service Revenues.During the year ended December 31, 2004, total revenues increased by $0.2 million, or 1.1%, over 2003 revenues of $25.1 million to $25.3 million. Our annualized revenue per billable consultant, adjusted for utilization, increased to $227 thousand during 2004 as compared to $224 thousand in 2003 primarily due to the incremental benefits of improved billing and utilization rates during the fourth quarter of 2004. The Company increased the number of customers it served to 102 clients during 2004 as compared to 52 clients during 2003, which was primarily the result of the Ranzal acquisition. While our overall revenue remained flat on a year-over-year basis, in 2004, revenue from our five largest customers, including Synapse, decreased as a percentage of total revenue to 69.0% of our total revenues as compared to 81.7% in 2003 due to the Company’s revenue diversification efforts.

Revenues for the year ended December 31, 2004 were primarily affected by two factors. Our revenues were enhanced by the October 4, 2004 acquisition of Ranzal, which added approximately $2.3 million in fourth quarter revenues. The incremental year-over-year increase from Ranzal revenues was also mitigated by a decrease of approximately $2.0 million in revenues related to Edgewater Technology’s core business.  The decrease in Edgewater Technology core revenues is primarily attributable to a reduction in revenue

28

from Synapse, a related party and our largest customer. Synapse revenue declined by approximately $2.1 million, or 17.7%, to $9.7 million as compared to 2003 revenues of $11.8 million.  The Company also experienced continued delays and reductions in overall spending as the U.S. economic environment continued to be sluggish during 2004.

Cost of Services.Cost of services consists ofproject 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, project personnel costs increased by $2.2 million, or 15.6%, to $15.7 million in 2004, as compared to $13.5 million in 2003. The 2004 increase in project personnel costs were partially attributable to the Ranzal acquisition, which added approximately 25 billable consultants and $1.3 million in related personnel costs, and the full year effect of the June 2003 Intelix acquisition, which added approximately 29 billable consultants in 2003 and increased project personnel costs by an additional $0.7 million in 2004. As a percentage of revenue, project personnel costs before out-of-pocket expense reimbursements increased from 53.4% during 2003 to 60.2% during 2004. The increase in project personnel costs, as a percentage of revenues, reflects decreases in the Company’s billable consultant utilization rates, which decreased to 72.1% in 2004, as compared to 78.7% in 2003.

Gross Profit.Gross profit decreased $1.8 million, or 16.1%, to $9.7 million in 2004 as compared to $11.5 million in 2003. Gross profit, as a percentage of revenues, decreased to 38.2% in 2004, as compared to 46.0% in 2003. The 2004 decrease in gross profit was partially related to a decrease in Edgewater Technology core revenues during the second half of 2004 as market conditions led to a reduced level of IT spending and delayed IT spending decisions. The effect of these conditions caused a decrease in our billable consultant utilization rates, which decreased to 72.1% in 2004, as compared to 78.7% in 2003 on an overall basis. The 2004 utilization rate decrease was in large part attributable to a decrease of $2.1 million in revenues from the Company’s largest customer. These decreases in Edgewater’s core business were offset by the 2004 gross profit contribution of Ranzal, which added $1.0 million in gross profit during the fourth quarter. Additionally, in 2004, the Company experienced an increase in billable and unbilled expenses. Billable and unbilled expenses increased by approximately $0.4 million in 2004 to $0.7 million, as compared to $0.3 million in 2003. This increase represented 25.2% of the 2004 reduction in gross margin.

Selling, General and Administrative Expense (“SG&A”).SG&A expenses of $10.0 million, or 39.6% of revenues, in 2004 remained consistent with 2003 expenditure levels. SG&A expenses also totaled $10.0 million in 2003 and represented 40.2% of revenues. In 2003, SG&A expenses included a bonus accrual of $1.3 million, as compared to a bonus accrual of $0.1 million in 2004. Offsetting the current year reduction in bonus expense was an increase in sales and administrative salaries expenses of $0.5 million, as the Company increased sales headcount from 10 average full-time-equivalents in 2003 to 14 average full-time-equivalents. In addition, 2004 SG&A expenses included additional expenses related to the operations of Ranzal in the amount of $0.5 million, included in the fourth quarter 2004 operating results.

Depreciation and Amortization Expense.Depreciation and amortization expense remained consistent with the 2003 amount of $0.9 million.  Depreciation expense decreased by $0.2 million, to $0.4 million, in 2004, as compared to $0.6 million in 2003. The decrease reflected continued spending controls on purchases of new fixed assets and an overall reduction in depreciation as older assets fully depreciate. This decrease was offset by an increase in amortization related to the full year amortization of the Intelix intangible assets and the incremental amortization related to the Ranzal intangible assets of $0.1 million in 2004.

29

Operating (Loss) Income.   Operating income decreased $1.9 million to $(1.4) million in 2004, as compared to operating income of $0.5 million in 2003. The decrease in income was attributable to comparatively lower utilization rates, directly tied to decreased spending in IT consulting markets in 2004 and increased salaries and wages related to strategic personnel investments, which were offset by $0.5 million in fourth quarter operating income attributable to the recently acquired Ranzal operations. Each of these items is explained in further detail above.

Interest Income (Expense), Net.   We earned net interest income of $0.6 million in 2004, as compared to net interest income of $0.5 million in 2003. The increase in interest income reflected a 2004 shift of our available cash and cash equivalent balances into less liquid marketable securities, which increased yields on our invested balances when compared to the yields achieved in the prior year. Average maturity and yield rates for the year ended December 31, 2004 were approximately 94 days and 1.6%, respectively.

Provision for Income Taxes.   The Company, as a result of its net operating loss position for the year ended December 31, 2004, has not recorded a tax provision. Conversely, in 2003, we recorded a tax benefit of $1.1 million, which represented a tax provision of $0.3 million, based on an estimated effective rate of 40.0% on operating income for state and federal income tax rates, offset by a benefit related to a refund receivable of $1.4 million related to a 2002 net operating tax loss carry back claim.

We have deferred tax assets which have arisen primarily as a result of operating losses incurred in prior fiscal years, as well as differences between the tax bases of assets and liabilities and their related amounts in the financial statements. SFAS No. 109, “Accounting for Income Taxes,” requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Management judgment is required in determining any valuation allowance recorded against the gross deferred tax asset amounts. As of December 31, 2004, the valuation allowance against deferred tax assets was approximately $14.7 million, providing for a net deferred tax asset of $22.2 million.

Income (Loss) from Continuing Operations.   Income from continuing operations decreased $2.8 million, to $(0.8) million in 2004, as compared to income of $2.0 million in 2003. This decrease was primarily a result of lower 2004 revenues and operating margins, for the reasons described above. In addition a carry back tax claim of $1.4 million was included in income during the previous year as compared to no carry back claim amounts being recorded in 2004.

Discontinued Operations.We have received and may continue to receive various tax notices and assessments from the IRS and various State Departments of Revenue related to our former staffing businesses, which were sold in 2000 and 2001. During 2004, our Company was able to successfully resolve several outstanding assessments. On a net basis, the Company reversed approximately $0.2 million from its discontinued operations accrual related to the successful resolution of our tax assessments. The accrual decrease attributable to the IRS notices totaled approximately $0.8 million. This decrease was offset by an increase in the accrual of $0.6 million, which was primarily the result of an increase in a previously established reserve related to the Company’s expected lease payments on its former corporate headquarters in Fayetteville, Arkansas in the amount of $0.4 million. The increase in the lease accrual was deemed necessary after revising a previously prepared estimate with more current information.  In 2003, we recorded a reserve of $1.0 million representing the low end of potential payments to be made under certain IRS notices, plus related professional fees. See Notes 4 and 12 of the consolidated financial statements included elsewhere herein.

Net (Loss) Income.We recognized a net loss of $(0.6) million in 2004, as compared to net income of $1.0 million in 2003. The net income decreased in 2004 primarily as a result of decreased revenue, gross margin and the tax benefit recorded in 2003.

30

Liquidity and Capital Resources

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

	Years Ended December 31,
	2005			2004			2003
	(In thousands)
Cash flows provided by (used in):
Operating activities	$	1,237		$	10		$	2,633
Investing activities	(80		)	(17,959		)	(914		)
Financing activities	(340		)	(3,827		)	(1,252		)
Discontinued operating activities	(156		)	(541		)	(1,745		)
Total cash provided (used) during the year	$	661		$	(22,317	)	$	(1,278	)

As of December 31, 2005, we had cash, cash equivalents, marketable securities and accrued interest of $33.8 million, a $0.1 million, or 0.3% decrease from the December 31, 2004 balance of $33.9 million. Working capital, which is defined as current assets less current liabilities, increased $2.4 million, to $39.4 million, as of December 31, 2005, as compared to $37.0 million as of December 31, 2004. The $0.1 million decrease in cash, cash equivalents, marketable securities and accrued interest is primarily attributable to cash outflows related to the Company’s current year stock repurchases of $1.6 million and the payment of Ranzal’s first contingent earnout consideration of $1.0 million. These outflows of cash were offset by an inflow of cash of $1.4 million from the IRS related to the Company’s 1997 refund claim and $1.3 million in proceeds from 2005 stock option exercises.

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 customers 30 to 60 days from the date of the invoice.

Historically, a significant portion of the Company’s cash flows from operations have been derived from our largest customer, Synapse, which is considered a related party. Payments received by the Company for services rendered to Synapse totaled approximately $7.7 million, $10.9 million and $11.8 million in 2005, 2004 and 2003, respectively. All receivable amounts were collected within our normal business terms and our contracts with Synapse are typically for a period of one year or more. In the event there is a loss of revenue related to Synapse, it would be expected that such a loss would have an adverse impact upon the Company’s operations and cash flows. However, we believe such an impact could be mitigated through the management of employee headcount and through the redeployment of existing Synapse related resources on to other consulting projects.

Net cash provided by operating activities was $1.2 million in 2005.  Changes in operating accounts included the 2005 income from continuing operations of $1.3 million; depreciation and amortization of $1.0 million; the receipt of $1.4 million related to the 1997 IRS refund claim; an increase in accrued payroll and related liabilities of $2.0 million primarily related to the 2005 performance-based bonus plan accrual and $0.7 million related to the current year reduction of our deferred tax asset, which is representative of the estimated federal income taxes due on our current year income from continuing operations. The cash flow provided by the above items was partially offset by an overall increase in accounts receivable of $4.8 million, which is directly related to our revenue growth in 2005.

In 2004, net cash provided by operating activities was $0.01 million.  Changes in operating accounts included depreciation and amortization of $0.9 million; increases in accounts payable and accrued expenses of $0.8 million related to the acquired Ranzal operations. The cash flows presented above were offset by the 2004 loss from continuing operations of $0.8 million and a decrease in accrued payroll and

31

related liabilities of $1.1 million as a result of the 2004 payment of the Company’s 2003 performance-based bonus accrual.

In 2003, net cash provided by operating activities was $2.6 million. This was a result of 2003 net income from continuing operations of $2.0 million; $1.0 million in loss related to the Company’s discontinued operations as a result of various tax notices and assessments from the IRS; depreciation and amortization of $0.9 million; and an increase in accounts payable and accrued expenses related to the Company’s accrual of its expected 2003 performance-based bonus payouts.

Net cash used in investing activities was $0.1 million in 2005. Net outflows related to $30.6 million in purchases of marketable securities, which represented the systematic reinvestment of proceeds from maturing investments, $1.0 million related to the payment of Ranzal’s first contingent earnout consideration, and capital expenditures of $0.5 million. These outflows of cash were offset by $32.0 million in proceeds from the redemption of marketable securities.  As of December 31, 2005, we have no long-term commitments for capital expenditures and all capital expenditures are discretionary.

In 2004, net cash used in investing activities was $18.0 million. Net outflows related to $12.0 million in net purchases of marketable securities as the Company transitioned cash and cash equivalents into longer-term and higher yield investments and $5.7 million in costs related to the October 4, 2004 purchase of Ranzal.

In 2003, net cash used in investing activities was $0.9 million. This was a result of $1.2 million in net marketable security redemptions, which were offset by $2.0 million in costs related to the June 2003 acquisition of Intelix.

Net cash used in financing activities was $0.3 million, $3.8 million, and $1.3 million for 2005, 2004, and 2003, respectively. Cash used in financing activities in each of these periods was primarily attributable to the repurchase of the Company’s common stock, which totaled $1.6 million, $4.4 million, and $1.4 million in 2005, 2004 and 2003, respectively. These purchases were offset by net proceeds from our employee stock purchase program and exercises of stock options.

Net cash used in discontinued operations was $0.2 million, $0.5 million, and $1.7 million for 2005, 2004, and 2003, respectively. These amounts represent payments made by the Company related to its discontinued operations accrual. As described in Note 4 of the consolidated financial statements and included elsewhere herein, the Company, in 2000-2001 made a strategic decision to undergo a comprehensive restructuring program to refocus future growth initiatives in its systems integration and consulting business and as a result, committed to divestures in each of its staffing businesses. Payments in each of the presented fiscal years represent payments related to the discontinuance of the operations, which were accrued for in previous years.

As a result of the above, and as a result of cash flows from discontinued operations, our combined cash and cash equivalents increased by $0.7 million in 2005, decreased by $22.3 million in 2004 and decreased by $1.3 million in 2003. The aggregate of our cash and cash equivalents, marketable securities and accrued interest was $33.8 million, $33.9 million and $44.3 million, as of December 31, 2005, 2004 and 2003, respectively.

During the first quarter of 2006, the Company acquired all of the outstanding capital stock of National Decision Systems, Inc., pursuant to the terms of a Stock Purchase Agreement. The Company paid to the shareholders of NDS total consideration of approximately $10.2 million, consisting of an initial upfront payment at closing of approximately $8.5 million in cash and assumed liabilities, and 264,610 shares of Edgewater’s common stock, $0.01 par value per share (“Common Stock”), which is subject to a three year lock-up agreement. In addition, an earnout agreement was entered into in connection with the Purchase Agreement, and it specifies additional earnout consideration that could be payable to the former NDS stockholders. Earnout payments are conditioned upon the attainment of certain performance

32

measurements for the NDS business over the next 12 to 24 months. Assuming all performance measurements are met within predetermined performance ranges, additional earnout consideration of approximately $7.2 million would be payable, comprised of approximately $5.8 million payable in cash and the remaining amount payable in Common Stock, which will be valued at the time of such issuance. See Note 14 of the consolidated financial statements included elsewhere herein.

We believe that our current cash balances and cash flows from operations will be sufficient to fund our short-term operating and liquidity requirements, at least through 2006, and the long-term operating and liquidity requirements for our existing operations. We periodically reassess the adequacy of our liquidity position, taking into consideration current and anticipated operating cash flow, anticipated capital expenditures, business combinations, possible stockholder distributions and public or private offerings of debt or equity securities. The pace at which we will either generate or consume cash will be dependent upon future operations and the level of demand for our services on an ongoing basis. See “Item 1—Business—Potential Future Strategies, Transactions and Changes.”

Off Balance Sheet Arrangements, Contractual Obligations and Contingent Liabilities and Commitments

We lease office space under noncancellable operating lease arrangements through 2013. Rent expense, including amounts paid to related parties for discontinued operations, was approximately $1.1 million, $1.2 million and $1.1 million for the years ended December 31, 2005, 2004 and 2003, respectively. The Company entered into a sublease agreement on July 1, 2002 with a third party to occupy our former corporate headquarters in Fayetteville, Arkansas. The sublease commenced on July 15, 2002 and will end on June 30, 2007. Under the sublease agreement, the sub-tenant shall pay base rent to Edgewater in the amount of $0.2 million in 2006 and will pay $0.1 million in 2007.

Annual future minimum payments required under operating leases that have an initial or remaining noncancellable lease term in excess of one year are as follows (these amounts do not include expected sublease payments of approximately $0.2 million in 2006 and $0.01 million in 2007):

Year Ending December 31,	Lease Obligations
	(In thousands)
2006		$	1,060
2007		916
2008		849
2009		653
2010		525
Thereafter		1,575
		$5,578

Recently Issued Accounting Pronouncements

In December 2004, FASB issued SFAS No. 123R, “Share-Based Payment.” This statement is a revision of SFAS No. 123 and supersedes APB No. 25 and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The statement requires entities to recognize compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123R is effective for the first annual reporting period that begins after June 15, 2005, although earlier adoption is encouraged.

The Company will adopt SFAS No. 123R on January 1, 2006, using the statement’s modified-prospective transition method. Adoption of SFAS 123R will not affect the Company’s cash flows or financial position, but it will reduce periodically reported income and earnings per share as the Company

33

currently uses the intrinsic value method as permitted by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). As permitted under APB No. 25, no compensation expense is currently recognized for share purchase rights granted under the Company’s stock option plans or employee stock purchase plan.

Upon adoption, the Company will begin recording compensation expense for employee stock options and employee share purchase rights. We currently estimate our 2006 pre-tax stock-based compensation expense to be in the range of $1.1 million to $1.3 million, reducing diluted earnings per share by $0.10 to $0.12.

Related-Party Transactions

Synapse.Synapse, one of our largest customers, as discussed in Note 11 to the consolidated financial statements included elsewhere in Item 8 herein, is considered a related party as its former President and Chief Executive Officer, Michael Loeb, is also a member of our Board of Directors. Mr. Loeb, who resigned as the President and Chief Executive Officer of Synapse during 2005, remains a member of Synapse’s board of directors as of December 31, 2005. Mr. Loeb joined the Company’s Board of Directors in April 2000. Synapse has been an Edgewater customer since 1996. Revenues from Synapse amounted to $8.4 million, $9.7 million and $11.8 million, for 2005, 2004 and 2003, respectively. Accounts receivable balances for Synapse were $1.4 million and $0.7 million as of December 31, 2005 and 2004, respectively, which amounts were on customary business terms. The Company typically provides services to Synapse related to infrastructure services, custom software development, and systems integration. Services are provided on both a fixed-fee and time and materials basis. Our contracts with Synapse, including all terms and conditions, have been negotiated on an arm’s length basis and on market terms similar to those we have with our other customers. The existing one-year services contract with Synapse, which was entered into in January of 2005, has been automatically extended, as per the terms of the contract, for an additional six-month period. The contract extension became effective on January 1, 2006. The Company anticipates that it will enter into a new one-year services contract with Synapse during the first quarter of 2006. It is also anticipated that Synapse will purchase professional services consistent with those purchased in 2005, which approximated $8.4 million.

Deferred Board Fees.As of December 31, 2004, the Company had recorded a liability in the amount of approximately $0.2 million related to deferred board fees earned and payable to one of our Company’s Directors. Payment of the fees was being deferred until a future date. The deferred fees are recorded under the caption “accounts payable and accrued liabilities” in the Company’s consolidated financial statements included elsewhere herein. There are no deferred board fees as of December 31, 2005 as all previously deferred amounts were fully paid in 2005.

Lease Agreement.   Our Company entered into a lease agreement in 1999, which was modified in June 2000, with a stockholder who is a former officer and director. The lease pertains to certain parcels of land and buildings in Fayetteville, Arkansas for its former corporate headquarters that were included in our Company’s discontinued operations. Rent payments related to these facilities totaled approximately $0.2 million for each the years ended December 31, 2005, 2004 and 2003, respectively. Future related party lease obligations relate to this lease agreement. As our Company’s corporate headquarters moved to Wakefield, Massachusetts during 2001, the Company subleased the Fayetteville facility to a third party in 2002. See Note 12 of the consolidated financial statements included elsewhere herein.

Included in the “Certain Transactions” section of our 2006 Proxy Statement for our June 6, 2006 Annual Meeting of Stockholders’ is additional disclosure concerning our related-party transactions. Our Proxy Statement will be filed with the SEC on or before April 30, 2006.

34

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary financial instruments include investments in money market funds, short-term municipal bonds, commercial paper and U.S. government securities that are sensitive to market risks and interest rates. The investment portfolio is used to preserve our capital until it is required to fund operations, strategic acquisitions or distributions to stockholders. None of our market-risk sensitive instruments are held for trading purposes. We did not purchase derivative financial instruments in 2005 and 2004. Should interest rates on the Company’s investments fluctuate by 10% the impact would not be material to the financial condition, results of operations or cash flows.

For the last three years, the impact of inflation and changing prices has not been material on revenues or income (loss) from continuing operations.

35

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(a)Consolidated Financial Statements:

The following consolidated financial statements are included in this Form 10-K:

	Page
Report of Independent Registered Public Accounting Firm		37
Consolidated Balance Sheets at December 31, 2005 and 2004		38
Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003		39
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2005, 2004 and 2003		40
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003		41
Notes to Consolidated Financial Statements		42

(b)Not Covered by Above Report:

Unaudited Supplementary Quarterly Financial Information 65

36

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Edgewater Technology, Inc.
Wakefield, Massachusetts:

We have audited the accompanying consolidated balance sheets of Edgewater Technology, Inc. and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Edgewater Technology, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 20, 2006

37

EDGEWATER TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Data)

	December 31,
	2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	6,225		$	5,564
Marketable securities	27,156			28,344
Accounts receivable, net(1) of allowance of $403 and $205, respectively	9,858			5,272
Deferred income taxes, net	1,323			710
Income tax refund receivable	—			1,430
Prepaid expenses and other current assets	1,367			822
Total current assets	45,929			42,142
Property and equipment, net	1,364			1,364
Intangible assets, net	1,481			1,996
Goodwill, net	15,595			14,632
Deferred income taxes, net	20,168			21,503
Other assets	52			65
Total assets	$	84,589		$	81,702
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	2,430		$	2,440
Accruals related to discontinued operations	729			1,210
Accrued payroll and related liabilities	3,085			1,091
Deferred revenue and other liabilities	260			365
Total current liabilities	6,504			5,106
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.01 par value; 2,000 shares authorized, no shares issued or outstanding	—			—
Common stock, $0.01 par value; 48,000 shares authorized,
29,736 shares issued, 10,683 and 10,549 shares outstanding
as of December 31, 2005 and 2004, respectively	297			297
Paid-in capital	216,512			217,526
Treasury stock, at cost, 19,053 and 19,187 shares at December 31, 2005
and 2004, respectively	(143,505		)	(144,852		)
Deferred stock-based compensation	(913		)	(469		)
Retained earnings	5,694			4,094
Total stockholders’ equity	78,085			76,596
Total liabilities and stockholders’ equity	$	84,589		$	81,702

(1)Includes related-party amounts of $1,433 and $706 at December 31, 2005 and 2004, respectively.

See notes to consolidated financial statements.

38

EDGEWATER TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

	Years Ended December 31,
	2005		2004			2003
Revenue:
Service revenue(1)	$	39,788	$	24,731		$	24,876
Software revenue	1,528		60			—
Reimbursable expenses	1,810		531			178
Total revenue	43,126		25,322			25,054
Cost of revenue:
Project and personnel costs	21,841		15,079			13,362
Software costs	1,475		49			—
Reimbursable expenses	1,810		531			178
Total cost of revenue	25,126		15,659			13,540
Gross profit	18,000		9,663			11,514
Operating expenses:
Selling, general and administrative	15,883		10,154			10,080
Depreciation and amortization	1,046		896			948
Total operating expenses	16,929		11,050			11,028
Operating income (loss)	1,071		(1,387		)	486
Interest income, net	1,054		556			455
Income (loss) before taxes and discontinued operations	2,125		(831		)	941
Tax provision (benefit)	850		—			(1,053		)
Income (loss) from continuing operations before discontinued operations	1,275		(831		)	1,994
Discontinued operations:
Income (loss) from operations of discontinued divisions, net of applicable taxes	325		236			(1,020		)
Net income (loss)	$	1,600	$	(595	)	$	974
Basic income (loss) per share:
Continuing operations	$	0.13	$	(0.07	)	$	0.18
Discontinued operations	0.03		0.02			(0.09		)
Net income (loss)	$	0.16	$	(0.05	)	$	0.09
Weighted average shares, basic	10,241		11,283			11,381
Diluted income (loss) per share:
Continuing operations	$	0.12	$	(0.07	)	$	0.17
Discontinued operations	0.03		0.02			(0.09		)
Net income (loss)	$	0.15	$	(0.05	)	$	0.08
Weighted average shares, diluted	10,653		11,283			11,694
The following amounts of non-cash stock-based compensation expense is included in selling, general and administrative expense above:	$	229	$	134		$	65

(1)Includes related-party amounts of $8,441; $9,685; and $11,766 for the years ended December 31, 2005, 2004 and 2003, respectively.

See notes to consolidated financial statements.

39

EDGEWATER TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In Thousands)

														Deferred								Total
	Common Stock					Paid-in			Treasury Stock					Stock-based				Retained				Stockholders’
	Shares		Amount			Capital			Shares		Amount			Compensation				Earnings				Equity
BALANCE, December 31, 2002		29,596		$296		$217,302			(18,111	)	$(140,276		)		$	—			$3,715				$81,037
Issuance of common stock related
to employee stock plans		—		—		(65		)	24		153				—				—				88
Stock option exercises		—		—		(80		)	32		208				—				—				128
Repurchase of common stock		—		—		—			(315	)	(1,409		)		—				—				(1,409		)
Deferred stock-based compensation		140		1		668			—		—				(603		)		—				66
Net income		—		—		—			—		—				—				974				974
BALANCE, December 31, 2003		29,736		297		217,825			(18,370	)	(141,324		)		(603		)		4,689				80,884
Issuance of common stock related
to employee stock plans		—		—		(57		)	27		177				—				—				120
Stock option exercises		—		—		(242		)	104		680				—				—				438
Repurchase of common stock		—		—		—			(948	)	(4,385		)		—				—				(4,385		)
Deferred stock-based compensation		—		—		—			—		—				134				—				134
Net loss		—		—		—			—		—				—				(595		)		(595		)
BALANCE, December 31, 2004		29,736		297		217,526			(19,187	)	(144,852		)		(469		)		4,094				76,596
Issuance of common stock related
to employee stock plans		—		—		(204		)	68		459				—				—				255
Stock option exercises		—		—		(564		)	248		1,605				—				—				1,041
Repurchase of common stock		—		—		—			(321	)	(1,636		)		—				—				(1,636		)
Deferred stock-based compensation		—		—		(246		)	139		919				(444		)		—				229
Net income		—		—		—			—		—				—				1,600				1,600
BALANCE, December 31, 2005		29,736		$	297	$	216,512		(19,053	)	$	(143,505	)		$	(913	)		$	5,694			$	78,085

See notes to consolidated financial statements.

40

EDGEWATER TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

	Years Ended December 31,
	2005			2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	1, 600		$	(595	)	$	974
(Income) loss from operations of discontinued divisions	(325		)	(236		)	1,020
Net income (loss) from continuing operations	1,275			(831		)	1,994
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	1,046			896			948
Provision for bad debts	189			—			94
Deferred income taxes	722			(38		)	(1,053		)
Amortization of deferred stock-based compensation	229			134			65
Amortization of marketable securities premiums, net	(226		)	—			—
Change in operating accounts:
Accounts receivable	(4,775		)	(11		)	(225		)
Income tax refund receivable	1,430			—			—
Prepaid expenses and other current assets	(545		)	(140		)	312
Other assets	13			—			14
Accounts payable and accrued liabilities	(10		)	789			(370		)
Accrued payroll and related liabilities	1,994			(1,070		)	911
Deferred revenues and other liabilities	(105		)	281			(57		)
Net cash provided by operating activities	1,237			10			2,633
Net cash used in discontinued operating activities	(156		)	(541		)	(1,745		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Redemptions of marketable securities	31,983			44,072			32,042
Purchases of marketable securities	(30,569		)	(56,038		)	(30,797		)
Purchase of Intelix, net of cash acquired	—			—			(1,966		)
Purchase of Ranzal, net of cash acquired	(963		)	(5,684		)	—
Purchases of property and equipment	(531		)	(309		)	(193		)
Net cash used in investing activities	(80		)	(17,959		)	(914		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital leases	—			—			(60		)
Proceeds from employee stock plans and stock option exercises	1,296			558			217
Repurchases of common stock	(1,636		)	(4,385		)	(1,409		)
Net cash used in financing activities	(340		)	(3,827		)	(1,252		)
Net increase (decrease) in cash and cash equivalents	661			(22,317		)	(1,278		)
CASH AND CASH EQUIVALENTS, beginning of year	5,564			27,881			29,159
CASH AND CASH EQUIVALENTS, end of year	$	6,225		$	5,564		$	27,881
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	—		$	—		$	2
Income taxes paid, net of refunds	$	240		$	—		$	—
Cash receipts from related parties	$	7,741		$	10,872		$	11,842
Cash paid to related parties	$	216		$	223		$	223
NON-CASH FINANCING ACTIVITIES:
Issuance of restricted stock awards	$	673		$	—		$	668

See notes to consolidated financial statements.

41

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   NATURE OF BUSINESS AND BASIS OF PRESENTATION:

Edgewater Technology, Inc. (“Edgewater Technology” or the “Company”) is an innovative technology management consulting firm providing a unique blend of premium information technology (“IT”) services. We provide our clients with a range of business and technology offerings. Headquartered in Wakefield, Massachusetts, as of December 31, 2005, our Company employed approximately 233 technical consulting professionals throughout our network of strategically positioned satellite offices.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Certain prior period amounts, as they relate to the presentation of the Company’s revenue and related cost of revenue attributable to software sales, have been reclassified to conform to current period presentation.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The accompanying consolidated financial statements reflect the application of certain significant accounting policies as described in this note and elsewhere in the accompanying consolidated financial statements and notes.

Principles of Consolidation—

The consolidated financial statements include the accounts of Edgewater Technology and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation.

Use of Estimates—

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. These accounting principles require management to make certain estimates, judgments and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. These estimates, judgments and assumptions used in preparing the accompanying consolidated financial statements are based upon management’s evaluation of the relevant facts and circumstances as of the date of the financial statements. Although the Company regularly assesses these estimates, judgments and assumptions used in preparing these consolidated financial statements, actual results could differ from those estimates. Changes in estimates are recorded in the period in which they become known. Significant assets and liabilities with reported amounts based on estimates include deferred income tax assets, intangible assets, and other liabilities including matters involving historical payroll tax assessments included in discontinued operations.

Cash and Cash Equivalents—

All highly liquid investments with remaining maturities of three months or less at the date of purchase are considered cash equivalents. Cash and cash equivalent balances consist of deposits, investments in money market funds and repurchase agreements with large U.S. commercial banks. The Company’s cash equivalents consisted of $2.3 million in money market funds and $1.0 million in commercial paper as of December 31, 2005. Cash equivalents consisted of $3.3 million in money market funds as of December 31, 2004.

42

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

Marketable Securities—

Marketable securities are classified as held-to-maturity securities, which are recorded at amortized cost and consist of marketable instruments, which include but are not limited to government obligations, including agencies and commercial paper. All marketable securities have original maturities greater than three months but less than one year at the date of purchase.  As of December 31, 2005, we had $27.2 million in commercial paper. As of December 31, 2004, we had $26.3 million in commercial paper and $2.0 million in government obligations, including agencies, respectively. Amortized cost approximated fair value.

Property and Equipment—

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Property and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets, which range from three to ten years (or life of lease, if less). Additions that extend the lives of the assets are capitalized, while repairs and maintenance costs are expensed as incurred.

Costs Incurred to Develop Software for Internal Use—

We account for costs related to software developed for internal use in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 98-1, “Accounting for Costs of Computer Software Developed or Obtained for Internal Use.”  In accordance with SOP 98-1, the Company capitalizes certain internal and external costs, which are comprised of employee salaries and third-party consulting fees incurred during the application development stage of the project, to develop and implement the internal-use software. Such capitalized costs are allocated to expense over the estimated life of the software of three years using the straight-line method.

Impairment of Long-Lived Assets—

We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Impairment is generally assessed by a comparison of cash flows expected to be generated by an asset to its carrying value, with the exception that goodwill impairment is assessed by use of a fair value model (see Note 7 of the notes to the consolidated financial statements). If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value.

Goodwill and Intangible Assets—

Intangible assets consist primarily of goodwill, customer relationships and amounts paid pursuant to non-compete agreements. Non-compete agreements are amortized using the straight-line method over the life of the respective agreements. Customer relationships are amortized using the straight-line method over their estimated remaining life.

Goodwill is tested for impairment at the reporting unit level at least annually, utilizing the “fair value” methodology. The Company evaluates the fair value of its reporting unit utilizing various valuation techniques.

43

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

Goodwill must be tested for impairment on an annual basis and between annual tests in certain circumstances. The Company performed its annual impairment test on December 2, 2005, 2004 and 2003, our selected annual measurement dates. Historically, we recorded a non-cash impairment charge of $7.4 million in the fourth quarter of 2002, primarily as a result of the decline in industry stock prices for our peer group and lower revenues and operating margins for our Company at that time. As of December 2, 2005, 2004 and 2003, after receiving an independent third-party valuation appraisal, it was determined that there was no further impairment to the remaining goodwill asset. Our net unamortized goodwill as of December 31, 2005 and 2004 was $15.6 million and $14.6 million, respectively. The increase in goodwill from December 31, 2004 was directly related to the successful completion of Ranzal’s first earnout period, which ended on February 28, 2005. In 2005, the Company recorded and paid additional purchase price consideration of $1.0 million directly related to the earnout consideration payable to Ranzal’s former stockholders. Ranzal is also eligible for a second earnout payment, if certain profitability thresholds are met, during the period commencing on March 1, 2005 and ending on February 28, 2006. The Company currently estimates that amounts potentially payable to Ranzal stockholders for the second earnout will be approximately $3.0 million.

Other net intangibles amounted to $1.5 million and $2.0 million as of December 31, 2005 and 2004, respectively. The identifiable intangible assets are being amortized over two to five years and are further described in Notes 3 and 8.

Revenue Recognition and Allowance for Doubtful Accounts—

The Company recognizes revenue from providing IT and management consulting services under written service contracts with our customers. The service contracts we enter into generally fall into three specific categories: time and materials, fixed-price and fixed-fee. Our revenues are generated from sources such as technical consulting, custom software development, integration services, business intelligence consulting, strategic business process consulting, and infrastructure services. Revenues from these services are recognized as the services are performed and amounts are earned in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements,” as amended by SAB No. 104, “Revenue Recognition (“SAB 104”).” We consider amounts to be earned once evidence of an arrangement has been obtained, services are delivered, fees are fixed or determinable and collectibility is reasonably assured. For the years ended December 31, 2005, 2004 and 2003, revenues from strategy engagements, technical consulting and custom software development and integration services, and infrastructure services represented the following:

For the Year Ended December 31,	Strategy Engagements			Consulting and Development and  Integration Services			Infrastructure Services
2005		35.7	%		55.9	%		8.4	%
2004		20.7	%		67.2	%		12.1	%
2003		2.9	%		85.7	%		11.4	%

The Company derives a significant portion of its service revenue from time and materials-based contracts. Time and materials-based contracts represented 82.5%, 75.0% and 70.9% of service revenues for the years ended December 31, 2005, 2004 and 2003, respectively. Revenue under time and materials contracts is recognized as services are rendered and performed at contractually agreed upon rates.

44

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

From time to time, the Company may offer volume purchase arrangements as part of its time and materials contracts to its customers. In accordance with Emerging Issues Task Force Abstract (“EITF”) No. 00-22, “Accounting for “Points” and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future,” the Company has deferred payment amounts based upon its current estimates of the actual discounts expected to be earned by the customers. There were no deferred amounts as of December 31, 2005 related to volume purchase arrangements. As of December 31, 2004, the Company had recorded as deferred revenue a liability in the amount of $0.2 million related to such arrangements.

Revenue pursuant to fixed-price contracts is recognized under the proportional performance method of accounting. Fixed-price contracts represented 11.5%, 15.8% and 18.8% of service revenues for the years ended December 31, 2005, 2004 and 2003, respectively. Over the course of a fixed-price contract, we routinely evaluate whether revenue and profitability should be recognized in the current period. To measure the performance and our ability to recognize revenue and profitability on fixed-price contracts, we compare actual direct costs incurred to the total estimated direct costs and determine the percentage of the contract that is complete. This percentage is multiplied by the estimated total contract value to determine the amount of net revenue that should be recognized in accordance with our revenue recognition policies and procedures, subject to any warranty provisions or other project management assessments as to the status of work performed. This method is used because reasonably dependable estimates of the revenues and costs applicable to various stages of a contract can be made, based on historical experience and milestones identified in any particular contract.

Typically, the Company provides warranty services on its fixed-price contracts related to providing customers with the ability to have any “design flaws” remedied and/or have our Company “fix” routine software design defects.  The services, as outlined in the respective contracts, are provided for a specific period of time after a project is complete. The Company values the warranty services based upon historical labor hours incurred for similar services at standard billing rates. In accordance with SAB 101 and SAB 104, revenue related to the warranty provisions within our fixed-price contracts is recognized as the services are performed and the revenue is earned. The warranty term is typically short term or for a 30-60 day period after the project is complete.

In the event we are unable to accurately estimate the resources required or the scope of work to be performed on a fixed-price contract, or we do not manage the project properly within the planned time period, then we may recognize a loss on a contract. Provisions for estimated losses on uncompleted projects are made on a contract-by-contract basis. Any known or probable losses on projects are charged to operations in the period in which such losses are determined. A formal project review process takes place quarterly, although most projects are evaluated on an ongoing basis. Management reviews the estimated total direct costs on each contract to determine if the estimated amounts are accurate, and estimates are adjusted as needed in the period revised estimates are made. The Company recorded an insignificant loss related to one specific contract during 2005. There were no recorded losses on contacts during 2004 or 2003.

We also perform services on a fixed-fee basis under infrastructure services contracts, which include monthly hosting and support services.  Fixed-fee contracts represented 6.0%, 9.2% and 10.3% of service revenues for the years ended December 31, 2005, 2004 and 2003, respectively. Revenue under fixed-fee

45

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

contracts are recognized as fixed monthly amounts, for a specified period of time, as outlined within the respective contract.

When a customer enters into a time and materials, fixed-price contract or a fixed-fee contract, the related revenue is accounted for under EITF 00-21, “Revenue Arrangement with Multiple Deliverables.”  For all arrangements, we evaluate the deliverables in each contract to determine whether they represent separate units of accounting. If the deliverables represent separate units of accounting, we then measure and allocate the consideration from the arrangement to the separate units, based on reliable evidence of the fair value of each deliverable.

Client prepayments, even if nonrefundable, are deferred (classified as a liability) and recognized over future periods as services are performed. As of December 31, 2005 and 2004, the Company has recorded a deferred liability of approximately $0.2 million and $0.1 million, respectively, which is included in the financial statement caption of “deferred revenue and other liabilities” related to customer prepayments.

Revenues from software resale contracts were less than 4.0% of total revenues for all periods presented. Revenue and related costs are recognized and amounts are invoiced to our customers upon the customer receipt of the purchased software. All related warranty and maintenance arrangements are performed by the primary vendor of the software and are not the obligation of the Company.

We recognize revenues for services where the collection from the client is probable and our fees are fixed or determinable. We establish billing terms at the time at which the project deliverables and milestones are agreed. Our standard payment terms are 30 days from invoice date. Reimbursement of “out-of-pocket” expenses charged to customers is reflected as revenue.

Our revenues and earnings may fluctuate from year to year based on the number, size and scope of projects in which we are engaged, the contractual terms and degree of completion of such projects, any delays incurred in connection with a project, employee utilization rates, the adequacy of provisions for losses, the use of estimates of resources required to complete ongoing projects, general economic conditions and other factors. Certain significant estimates include those used for fixed-price contracts, such as deferrals related to our volume purchase agreements, warranty holdbacks, and allocations of fair value of elements under multiple element arrangements, and the valuation of our allowance for doubtful accounts.

We maintain allowances for doubtful accounts in order to estimate losses attributable to the inability of our clients to make required payments. We base our estimates on our historical collection and write-off experience, current trends, credit policy, detailed analysis of specific client situations and percentage of our accounts receivable by aging category. While such credit losses have historically been within our expectations and the allowances we established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payment, additional allowances may be required. Our failure to accurately estimate the losses on doubtful accounts and ensure that the payments are received on a timely basis could have a material adverse effect on our business, financial condition, results of operation and cash flows.

46

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

Cost of Services—

Our cost of services are comprised primarily of project personnel costs, including direct 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.

Interest Income, Net—

Interest income, net was $1.1 million, $0.6 million and $0.5 million, for the years ended December 31, 2005, 2004 and 2003, respectively. The following table represents the components of interest income, net:

	Year Ended December 31,
	2005		2004		2003
	(In Thousands)
Interest income	$	1,054	$	556	$	457
Interest expense	—		—		(2		)
Interest income, net	$	1,054	$	556	$	455

Provision for Taxes—

In determining our current income tax provision, we assess temporary differences resulting from different treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded in our consolidated balance sheets. A valuation allowance is provided to the extent tax assets are not likely to be recovered. We have recorded a valuation allowance against our net deferred tax assets of approximately $5.2 million and $14.7 million as of December 31, 2005 and 2004, respectively. This valuation allowance was established due to uncertainties related to the Company’s ability to utilize some of its deferred tax assets, primarily consisting of certain net operating losses carried forward and foreign tax credits, before they expire. The current year decrease in the Company’s valuation allowance relates to the write down of deferred tax asset amounts related to certain state net operating loss carryforwards which expired in 2005. The state net operating loss carryforwards were fully reserved for as part of the Company’s valuation allowance.

The Company considers scheduled reversals of deferred tax liabilities, projected future taxable income, ongoing tax planning strategies and other matters, including the period over which our deferred tax assets will be recoverable, in assessing the need for and the amount of the valuation allowance. In the event that actual results differ from these estimates or we adjust these estimates in future periods, an adjustment to the valuation allowance may be recorded, which could materially impact our financial position and net income (loss) in the period of the adjustment. In addition, as a result of a change in the Internal Revenue Code, our 2002 tax loss was carried back to 1997, resulting in a refund of previously paid taxes of $1.4 million. This amount was recorded as a benefit in the fourth quarter of 2003 and is shown as a current asset at December 31, 2004. The full amount of the $1.4 million refund receivable balance, plus accrued interest thereon, was collected during 2005.  See Note 8 of the notes to the consolidated financial statements.

47

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

Earnings (Loss) Per Share—

Basic earnings (loss) per share reflect the weighted-average number of common shares outstanding during each period. Diluted earnings (loss) per share reflect the impact, when dilutive, of the exercise of options using the treasury stock method. Following is a reconciliation of the shares used in computing basic and diluted net (loss) earnings per share for the fiscal years ended December 31, 2005, 2004 and 2003:

	Year Ended December 31,
	2005	2004	2003
	(In Thousands)
Shares used in computing basic net earnings (loss) per share	10,241	11,283	11,381
Dilutive effect of stock options and unvested restricted stock awards	412	—	313
Shares used in computing diluted net earnings (loss) per share	10,653	11,283	11,694
Dilutive securities not included in net loss per share due to reported loss	—	658	—

Stock options for which the exercise price exceeds the average market price have an anti-dilutive effect on earnings per share, and accordingly, are excluded from the diluted computations of earnings per share in each of the periods presented. Had such shares been included, the presented number of shares for the diluted computation would have increased by approximately 2.7 million, 2.7 million and 2.8 million in the years ended December 31, 2005, 2004 and 2003, respectively.

Fair Value of Financial Instruments—

Edgewater Technology’s financial instruments include cash and cash-equivalents, marketable securities, accounts receivable, and accounts payable. The carrying values of cash and cash equivalents, accounts receivable, and accounts payable approximate their fair value due to the relatively short-term nature of the accounts. Management believes that the marketable securities have interest rates which approximate prevailing market rates for instruments with similar characteristics and, accordingly, that the carrying value for these instruments reasonably estimates fair value.

Concentrationsof Credit Risk—

Financial instruments that potentially subject the Company to significant concentration of market or credit risk consist principally of cash equivalent instruments, investments and accounts receivable. The Company places its cash balances with reputable financial institutions and investments are generally limited to 10% in any one financial instrument. Investments are carried at cost or fair value, as appropriate. Trade receivables potentially subject the Company to credit risk. The Company extends credit to its customers based upon an evaluation of the customer’s financial condition and credit history and generally does not require collateral. The Company has historically incurred minimal credit losses. The Company had two customers with outstanding balances that accounted for greater than 10% of the accounts receivable balance as of December 31, 2005 and 2004, respectively.

48

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

	December 31,
	2005		2004
Accounts receivable:
Synapse (related party—Note 11)	14.3	%	13.4	%
Customer A	13.6	%	27.3	%

For the years ended December 31, 2005, 2004 and 2003, two customers, including Synapse (a related party—See Note 11), each contributed more than 10% of the Company’s service revenues. For the years ended December 31, 2005, 2004 and 2003, our five largest customers represented 47.5%, 69.0% and 81.7% of our service revenues in the aggregate, respectively.

	For the Year Ended December 31,
	2005		2004		2003
Revenues:
Synapse (related party—11)	21.2	%	39.0	%	47.3	%
Customer A	15.3	%	14.3	%	21.0	%

Comprehensive Income (Loss)—

There are no elements of comprehensive income (loss) other than net income (loss).

Stock Options—

The Company records stock-based compensation awards issued to employees and directors using the intrinsic value method and stock-based compensation awards issued to non-employees using the fair value method of accounting. Stock-based compensation expense, if any, is recognized on awards of restricted shares or grants of stock options issued to employees and directors if the purchase price or exercise price, as applicable, is less than the market price of the underlying stock on the measurement date, generally the date of grant. The differences between accounting for stock-based compensation under the intrinsic value method and the fair value method are shown below, with the fair value estimated on the grant date or award issue date as applicable. The assumptions used are described in Note 10.

	Year Ended December 31,
	2005			2004			2003
	(In Thousands)
Net income (loss)
As reported	$	1,600		$	(595	)	$	974
Add: Stock-based compensation expense included in reported net income (loss), net of tax	137			80			39
Deduct: Stock-based compensation expense determined under fair value based method for all awards, net of tax	(607		)	(917		)	(1,310		)
Pro forma net income (loss)	$	1,130		$	(1,432	)	$	(297	)
Basic and diluted earnings (loss) per share
As reported—basic	$	0.16		$	(0.05	)	$	0.09
As reported—diluted	$	0.15		$	(0.05	)	$	0.08
Pro forma—basic	$	0.11		$	(0.13	)	$	(0.03	)
Pro forma—diluted	$	0.11		$	(0.13	)	$	(0.03	)

49

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)

Segment Information—

The Company engages in business activities under one operating segment, which combines strategic consulting, technical knowledge, and industry domain expertise to develop custom technology and business process solutions.

Recent Accounting Pronouncements—

In December 2004, FASB issued SFAS No. 123R, “Share-Based Payment.”  This statement is a revision of SFAS No. 123 and supersedes APB No. 25 and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The statement requires entities to recognize compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123R is effective for the first annual reporting period that begins after June 15, 2005, although earlier adoption is encouraged.

The Company will adopt SFAS No. 123R on January 1, 2006, using the statement’s modified-prospective transition method. Adoption of SFAS 123R will not affect the Company’s cash flows or financial position, but it will reduce periodically reported income and earnings per share as the Company currently uses the intrinsic value method as permitted by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). As permitted under APB No. 25, no compensation expense is currently recognized for share purchase rights granted under the Company’s stock option plans or employee stock purchase plan.

Upon adoption, the Company will begin recording compensation expense for employee stock options and employee share purchase rights. We currently estimate our fiscal 2006 pre-tax stock-based compensation expense to be in the range of $1.1 million to $1.3 million, reducing both basic and diluted earnings per share by $0.10 to $0.12.

3.   BUSINESS COMBINATIONS:

Acquisition of Ranzal and Associates, Inc.:On October 4, 2004, the Company acquired substantially all of the assets, operations and business of Ranzal and Associates, Inc. (“Ranzal”), a consulting firm specializing in the development of Business Intelligence and Business Performance Management solutions. The results of Ranzal’s operations have been included in the Company’s accompanying consolidated statement of operations since the October 4, 2004 acquisition date. The acquisition was made to strengthen Edgewater Technology’s capabilities in strategy and design, solidify the Company’s east coast presence, and expand vertical expertise and service offerings to the middle market, in particular in the high-growth area of Business Performance Management. The initial aggregate purchase price was $5.7 million, including cash paid to the Ranzal stockholders of $5.2 million and direct acquisition costs incurred of $0.5 million.

50

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.BUSINESS COMBINATIONS: (Continued)

The Company used an independent third-party appraiser to calculate the amounts allocated to assets, liabilities and identified intangible assets. The allocation of the initial purchase price was as follows:

	Total			Life (in years)
	(In Thousands)
Net book value of assets and liabilities acquired		$	1,689
Acquired intangible assets		1,600			2 to 5 years
Goodwill (deductible for tax purposes under Section 197 of the IRS Code)		2,395
Total purchase price		$	5,684

In addition to the initial cash consideration, the stockholders of Ranzal are eligible for additional cash payments, based upon a formula applied to Earnings Before Interest, Taxes, Depreciation and Amortization of the Ranzal business over the six and eighteen month periods beginning on September 1, 2004 and ending February 28, 2006. In fiscal 2005, the Company recorded and paid additional purchase price consideration of $1.0 million directly related to the earnout consideration payable to Ranzal’s former stockholders. Ranzal is also eligible for a second earnout payment, if certain profitability thresholds are met, during the period commencing on March 1, 2005 and ending on February 28, 2006. As of December 31, 2005, the Company has not accrued any payment amounts related to the second earnout as the underlying facts related to the potential contingencies have not been resolved and additional consideration is not currently distributable to the shareholders of Ranzal. As of December 31, 2005, the Company believes that it is likely the second earnout payment amount of approximately $2.6 million will be attained. Any additional amounts paid to the former stockholders of Ranzal will be recorded as additional goodwill.

The following table sets forth supplemental unaudited pro forma financial information that assumes the acquisition of Ranzal was completed at the beginning of fiscal 2003. The information for the twelve month periods ended December 31, 2004 and 2003 include the historical results of Ranzal.

The unaudited pro forma results include estimates and assumptions regarding increased amortization of intangible assets related to the acquisition, a reduction in administrative wages and benefits related to the elimination of positions, reduced rent expense, reduced interest expense related to note payable agreements and estimated state income taxes in states which Edgewater does not have available net operating loss carryforwards to offset taxable income. The pro forma results, as presented, are not necessarily indicative of the results that would have occurred if the acquisition had occurred on the date indicated, or that may result in the future.

	For the Year Ending  December 31,
	2004		2003
	(In Thousands)
Pro forma revenues	$	31,743	$	31,829
Pro forma net income	$	1,099	$	2,188
Pro forma diluted earnings per share	$	0.09	$	0.19

51

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.BUSINESS COMBINATIONS: (Continued)

Acquisition of Intelix, Inc.:On June 2, 2003, the Company acquired all of the outstanding common stock of Intelix, Inc. (“Intelix”), a provider of systems integration and custom software development services located in Fairfax, Virginia. The results of Intelix’s operations have been included in the Company’s accompanying consolidated statements of operations since the June 2, 2003 acquisition date. The acquisition was made to enhance Edgewater Technology’s geographical presence and to provide additional vertical expertise. The aggregate purchase price was $2.7 million, including cash paid to the Intelix stockholders of $0.9 million, assumed liabilities with an estimated fair value in the amount of $1.5 million, and direct costs incurred of $0.3 million.

The Company used an independent third-party appraiser to calculate the amounts allocated to assets, liabilities and identified intangible assets. The allocation of the initial purchase price was as follows:

	Total			Life (in years)
	(In Thousands)
Net book value of assets and liabilities acquired		$	845
Acquired intangible assets		530			4 to 8 years
Goodwill (not deductible for tax purposes)		1,367
Total purchase price		$	2,742

The Intelix acquisition was accounted for as a purchase transaction, and accordingly, the results of operations, commencing from the acquisition date of June 2, 2003, are included in the Company’s consolidated statements of operations. Pro forma financial information related to the Intelix acquisition is not presented as the effect of this acquisition was not material to the Company.

4.   DISCONTINUED OPERATIONS:

During the second quarter of 2000, the Company began to divest itself from its staffing businesses. Between June of 2000 and March of 2001, the Company disposed of several of its business divisions in either stock or equity transactions. As a result of the completion of these transactions, the operating results for the Company’s StaffMark, Robert Walters, Strategic Legal, IntelliMark and ClinForce business units have been included in discontinued operations in the accompanying consolidated financial statements. Operating income from discontinued operations was $0.3 million and $0.2 million in 2005 and 2004, respectively. These amounts reflect the reversal of a portion of the accrual to reflect management’s current estimate of the remaining liabilities as of December 31, 2005 and 2004. The remaining accrual for discontinued operations as of December 31, 2005 provides for a loss on a lease and an estimate of additional professional fees. Operating loss from discontinued operations for 2003 was $1.0 million, which did not have any tax effect. The Company provided an accrual for certain tax assessments and professional fees related to the discontinued businesses in 2003. See Note 12.

52

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.DISCONTINUED OPERATIONS: (Continued)

Related to the above transactions, the Company has received certain payroll tax assessments related to our former staffing businesses, which were sold in 2000 and 2001. We have been successful in obtaining abatements of certain IRS notices. In 2003, we recorded a reserve of $1.0 million representing the low end of our estimated exposure related to the assessments, plus related professional fees. During both 2005 and 2004, our Company was able to successfully resolve several outstanding notices related to these tax matters as the Company received formal notice from the IRS that certain assessments had been fully abated. In 2005, on a net basis, the Company reversed approximately $0.3 million from its discontinued operations accrual directly related to the successful resolution of certain tax assessments. In 2004, directly related to the above notices, which totaled approximately $0.8 million, we reversed approximately $0.2 million of our accrual for discontinued operations in 2004. Also in 2004, based upon currently available information, we increased our previously established accrual related to our exposure on estimated future lease payments expected to be made on office space related to our former corporate headquarters by approximately $0.4 million. The increase in the lease accrual was deemed necessary after revising a previously prepared estimate with more current information. We continue to dispute additional unresolved IRS assessments in the amount of $0.02 million as of December 31, 2005.

5.ACCOUNTS RECEIVABLE:

Included in accounts receivable are unbilled amounts totaling approximately $2.5 million and $1.8 million at December 31, 2005 and 2004, respectively, which relate to services performed during the year and billed in the subsequent period. Edgewater Technology maintains allowances for potential losses which management believes are adequate to absorb any possible losses to be incurred in realizing the accounts receivable amounts recorded in the accompanying consolidated financial statements.

The following are the changes in the allowance for doubtful accounts:

	Years Ending December 31,
	2005		2004
	(In Thousands)
Balance at beginning of year	$	205	$	220
Provisions for bad debts	198		—
Charge-offs, net of recoveries	—		(15		)
Balance at end of year	$	403	$	205

6.   PROPERTY AND EQUIPMENT:

Components of property and equipment consisted of the following as of December 31:

	2005		2004
	(In Thousands)
Furniture, fixtures and equipment	$	1,186	$	1,121
Computer equipment and software	2,564		2,156
Leasehold improvements	1,381		1,356
	5,131		4,633
Less accumulated depreciation and amortization	3,767		3,269
	$	1,364	$	1,364

53

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.PROPERTY AND EQUIPMENT: (Continued)

Depreciation expense related to property and equipment for the years ended December 31, 2005, 2004 and 2003 totaled approximately $0.5 million, $0.4 million and $0.6 million, respectively.

7.   GOODWILL AND INTANGIBLE ASSETS:

Intangible Assets with Indefinite Lives:

The changes in the carrying amount of goodwill for the years ended December 31, are as follows:

	2005		2004
Goodwill:	(In Thousands)
Balance at beginning of year	$	14,632	$	12,237
Acquisition consummated during 2004 (see Note 3)	—		2,395
Additional consideration related to 2004 acquisition	963		—
Balance at end of year	$	15,595	$	14,632

Intangible Assets with Definite Lives:

Following is a summary of the Company’s identifiable intangible assets that are subject to amortization as of December 31:

	2005									2004
Identifiable intangibles:	Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount			Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount
	(In Thousands)
Non-compete agreements		$	2,230		$	1,820		$	410		$	2,230		$	1,612		$	618
Customer relationships		1,430			397			1,033			1,430			140			1,290
Trade name and trademark		100			62			38			100			12			88
		$	3,760		$	2,279		$	1,481		$	3,760		$	1,764		$	1,996

The intangible assets were identified and valued by an independent third-party appraiser. The original estimated useful lives of the acquired identifiable intangible assets are as follows:

Non-compete agreements	4—5 years
Customer relationships	5—7.5 years
Trade name and trademark	2 years

As of December 31, 2005, the net carrying amount of intangible assets acquired in business combinations mainly relate to the Ranzal and Intelix acquisitions, which were consummated in fiscal 2004 and 2003, respectively. Each of these transactions is further described in Note 3. Amortization expense related to intangible assets for the years ended December 31, 2005, 2004 and 2003 totaled approximately $0.5 million, $0.5 million and $0.4 million, respectively.

54

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.GOODWILL AND INTANGIBLE ASSETS: (Continued)

Estimated annual amortization expense for the next five years ended December 31, is as follows:

	Amortization
	Expense
	(In Thousands)
2006		$	419
2007		$	367
2008		$	357
2009		$	282
2010		$	56

8.   INCOME TAXES:

The provision for income taxes consisted of the following for the years ended December 31:

	2005			2004			2003
	(In Thousands)
Current tax expense benefit:
Federal	$	66		$	—		$	(1,541	)
State	63			—			(27		)
Foreign	—			—			—
	129			—			(1,568		)
Deferred tax expense (benefit):
Federal	962			(566		)	414
State	9,203			(50		)	101
Change in valuation allowance	(9,444		)	616			—
	721			—			515
Income tax provision (benefit) from continuing operations	$	850		$	—		$	(1,053	)

The components of deferred income tax assets and liabilities as of December 31, 2005 and 2004 were as follows:

	2005			2004
	(In Thousands)
Deferred income tax assets:
Net operating loss carryforwards and credits	$	26,059		$	36,145
Nondeductible reserves and accruals	736			724
Depreciation and amortization	82			64
Total deferred income tax assets	26,877			36,933
Deferred income tax liabilities:
Other	(162		)	(75		)
Total deferred income tax liabilities	(162		)	(75		)
Valuation allowance	(5,224		)	(14,645		)
Deferred income tax, net	$	21,491		$	22,213

55

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.INCOME TAXES: (Continued)

The current year decreases in the Company’s reported net operating loss carryforward and credits and valuation allowance relates to the current year write down deferred tax asset amounts related to certain state net operating loss carryforwards which expired in 2005. The state net operating loss carryforwards were fully reserved for as part of the Company’s valuation allowance.

Components of the net deferred tax assets (liabilities) reported in the accompanying consolidated balance sheets were as follows as of December 31, 2005 and 2004:

	2005								2004
	Current				Long-term				Current				Long-term
	(In Thousands)
Assets		$	1,361			$	20,367			$	748			$	21,540
Liabilities		(38		)		(199		)		(38		)		(37		)
		$	1,323			$	20,168			$	710			$	21,503

As of December 31, 2005, we have tax affected net operating loss carryforwards for federal income tax purposes of approximately $21.1 million and tax credits of approximately $4.0 million, which expire through 2021. In addition, the Company has various tax affected net operating loss carryforwards for state income tax purposes of approximately $1.0 million, which expire through 2014. The Internal Revenue Code contains provisions that limit the net operating loss and tax credit carryforwards available to be used in any given year in the event of certain circumstances, including significant changes in ownership interests.

Due to the uncertainty surrounding the realization and timing of certain deferred tax assets, the Company recorded a valuation allowance of approximately $5.2 million and $14.7 million as of December 31, 2005 and 2004, respectively, which reduces the net assets to amounts management believes are more likely than not to be realized. Management regularly evaluates the realizability of the deferred tax assets and may adjust the valuation allowance based on such analysis in the future. The valuation allowance decreased by approximately $9.6 million in fiscal 2005 in connection with the write down of deferred tax asset amounts related to certain state net operating loss carryforwards, which expired in the current year. The expired state net operating loss carryforwards were fully reserved for as part of the Company’s valuation allowance. The valuation allowance increased by approximately $0.6 million in fiscal 2004 primarily due to management’s estimate of the Company’s ability to realize certain recorded deferred tax assets.

56

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.INCOME TAXES: (Continued)

The differences in income taxes determined by applying the statutory federal tax rate of 34% to income from continuing operations before income taxes and the amounts recorded in the accompanying consolidated statements of operations for the years ended December 31, 2005, 2004 and 2003 result from the following:

	2005					2004						2003
	Amount			Rate		Amount				Rate		Amount			Rate
	(Dollar Amounts In Thousands)
Income tax (benefit) at statutory rate		$	722	34.0	%		$	(282	)	(34.0	)%	$	303		34.0	%
Add (deduct):
State income taxes, net of federal tax benefit		63		3.0			(16		)	(2.0	)	73			6.0
Net operating loss carry back claim		—		—			—			—		(1,430		)	(152.0	)
Non-deductible intangible asset and goodwill amortization charges		48		2.2			141			16.9		—			—
Provision of valuation allowance against currently generated net operating loss carryforwards		—		—			128			15.5		—			—
Other, net		17		0.8			29			3.6		1			—
		$	850	40.0	%		$	—		—	%	$	(1,053	)	(112.0	)%

9.   EMPLOYEE BENEFIT PLANS:

The Company has a 401(k) tax deferred savings plan that is available to all employees who satisfy certain minimum hour requirements each year (the “Plan”). The Company matches 30% of each participant’s annual contribution under the Plan, up to 6% of each participant’s annual base salary. Contributions by the Company to the plan were approximately $0.3 million, $0.2 million and $0.2 million for the years ended December 31, 2005, 2004 and 2003, respectively.

57

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.COMMON STOCK,  STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN:

Common and Preferred Stock—

The Company’s stockholders had authorized 48.0 million shares of common stock available for issuance as of December 31, 2005 and 2004, and had 2.0 million shares of preferred stock available for issuance as of December 31, 2005 and 2004.

Stockholder Rights Plan—

The Company has a stockholder rights plan, commonly referred to as a “poison pill,” that may discourage an attempt to obtain control by means of a tender offer, merger, proxy contest or otherwise. Under this plan, our Board of Directors can issue preferred stock in one or more series without stockholder action. If a person acquires 20% or more of our outstanding shares of common stock, except for certain institutional stockholders, who may acquire up to 25% of our outstanding shares of common stock, then rights under this plan would be triggered, which would significantly dilute the voting rights of any such acquiring person. Certain provisions of the General Corporation Law of Delaware may also discourage someone from acquiring or merging with us. No preferred stock has been issued as of December 31, 2005.

2003 Equity Incentive Plan—

In May 2003, the Company’s Board of Directors approved the “Edgewater Technology, Inc. 2003 Equity Incentive Plan” (the “2003 Plan”) for the purpose of attracting and retaining employees and providing a vehicle to increase management’s equity ownership in the Company. The 2003 Plan provides for restricted share awards and grants of nonqualified stock options in the aggregate of up to 500,000 shares of the Company’s common stock. Restricted awards are made at prices determined by the Compensation Committee of the Board of Directors (the “Compensation Committee”) and are compensatory in nature. Employees granted restricted share awards are required to provide consideration for the shares at the share price set by the Compensation Committee. During fiscal 2005, awards of 138,750 restricted shares were made to employees at a weighted average value at the grant date of $4.84 per share.  No such restricted share awards were granted to employees in fiscal 2004. As of December 31, 2005, restricted share awards made to employees under the 2003 Plan total 269,750 shares at a weighted average value at grant date of $4.80 per share. The value of the compensation expense related to the awards of restricted shares is being amortized on a straight-line basis over the vesting term (five years). The aggregate deferred compensation expense associated with the restricted share awards is $1.3 million, which compensation expense amount is being amortized straight-line over the vesting term (five years). Compensation expense relating to the Restricted Share Awards during the years ended December 31, 2005, 2004 and 2003 was approximately $0.2 million, $0.1 million and $0.07 million, respectively.

The restricted share awards vest ratably over a five-year period, during which time the Company has the right to repurchase the unvested shares at the amount paid if the relationship between the employee and the Company ceases. The Company maintains the right to repurchase the unvested shares if an employee is terminated without cause. As of December 31, 2005 and 2004, 213,750 and 112,000 restricted share awards, respectively, were subject to repurchase by the Company under these restricted stock agreements.

58

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.COMMON STOCK,  STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN: (Continued)

Stock Options—

In October 1999, the Company’s Board of Directors amended the Company’s 1996 Stock Option Plan (the “1996 Plan”) to increase the maximum number of shares of the Company’s common stock that may be issued under the 1996 Plan from 12% to 15% of the total number of shares of the Company’s common stock outstanding. Options granted under the 1996 Plan generally become 33% vested after one year and then vest 33% in each of the next two years or become 40% vested after two years and then vest 20% in each of the next three years. Under the 1996 Plan, the exercise price of the option equals the market value of the Company’s common stock on the date of the grant, and the maximum term for each option is ten years.

In February 2000, the Company adopted a subsidiary stock option plan (the “Subsidiary Plan”) for employees and consultants of Edgewater Technology (Delaware), Inc., a wholly-owned subsidiary of Edgewater Technology. The purpose of the Subsidiary Plan was to aid Edgewater Technology in attracting and retaining employees. The total amount of subsidiary common stock for which stock options could be granted under the Subsidiary Plan could not exceed 5.0 million shares of subsidiary common stock. In August 2000, the Subsidiary Plan was terminated and options for 2.9 million shares of the Company’s subsidiary stock that had been granted under this Subsidiary Plan were exchanged into options for 1.8 million shares of the Company’s common stock under a newly created parent company stock option plan, currently entitled the “Edgewater Technology, Inc., Amended and Restated 2000 Stock Option Plan” (the “2000 Plan”) and into options for 1.1 million shares under the 1996 Plan, for an aggregate of 2.9 million shares underlying options. The fair market value of the subsidiary’s stock did not change for the period of granting of the options to the exchange date. The Subsidiary Plan had no other activity other than the granting of the aforementioned options for 2.9 million shares of the subsidiary common stock and there were no exercises or forfeitures of options between grant and conversion in August 2000. Grants of stock options under the 2000 Plan may not exceed 4.0 million shares of the Company’s common stock. As a result of this exchange, the Company recorded a one-time compensation charge of $0.2 million. In 2002, the Company amended the 2000 Plan to include grants of stock options to directors and officers.

59

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.COMMON STOCK,  STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN: (Continued)

A summary of stock option activity under the Company’s 1996 Plan, 2000 Plan and 2003 Plan is as follows:

	Shares Under Option			Weighted Average Price Per Share
Outstanding, January 1, 2003		3,828,510			$	6.09
Granted		905,900			3.76
Exercised		(32,119	)		4.01
Forfeited		(181,769	)		5.73
Outstanding, December 31, 2003		4,520,522			$	5.77
Granted		231,450			5.48
Exercised		(104,667	)		4.19
Forfeited		(296,888	)		6.89
Outstanding, December 31, 2004		4,350,417			$	5.73
Granted		303,445			4.82
Exercised		(247,728	)		4.20
Forfeited		(194,337	)		5.78
Outstanding, December 31, 2005		4,211,797			$	5.76

Options exercisable were approximately 3.7 million, 3.5 million and 3.2 million as of December 31, 2005, 2004 and 2003, respectively. The weighted average exercise price of these options was $5.90, $6.07 and $6.46 per share as of December 31, 2005, 2004 and 2003, respectively. The following is a summary of stock options outstanding and exercisable as of December 31, 2005:

Options Outstanding									Options Exercisable
						Weighted				Weighted
				Weighted		Average				Average
Number of			Range of	Average		Exercise			Number of	Exercise
Options			Exercise	Remaining		Price			Options	Price
	Outstanding		Prices	Life in Years		Per Share			Exercisable	Per Share
		1,476,923	$3.72 – $4.95		6.5		$	4.08	1,124,819		$	3.99
		1,386,595	5.00 – 6.08		5.0		5.96		1,253,075		6.02
		1,215,512	6.25 – 8.63		4.6		6.43		1,208,413		6.42
		77,400	9.81 – 12.88		1.8		11.33		77,400		11.33
		36,327	18.25 – 18.84		1.9		18.71		36,327		18.71
		19,040	30.46 – 33.61		2.4		31.81		19,040		31.81
		4,211,797			5.3		$	5.76	3,719,074		$	5.90

As discussed in Note 2, the Company has elected to account for its stock options using the intrinsic method. Accordingly, compensation expense, if any, is recognized on awards of restricted shares or grants of stock options issued to employees and directors if the purchase price or exercise price, as applicable, is less than the market price of the underlying stock on the measurement date, generally the date of grant. Note 2 includes disclosures to reflect the Company’s pro forma net income (loss) for the years ended December 31, 2005, 2004 and 2003 as if the fair value method of accounting had been used. In preparing

60

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.COMMON STOCK,  STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN: (Continued)

the pro forma disclosures, the fair value was estimated on the grant date using the Black-Scholes option-pricing model. These fair value calculations were based on the following assumptions:

	For the Year Ended December 31,
	2005		2004		2003
Weighted average risk-free interest rate	4.35	%	3.63	%	3.25	%
Dividend yield	0	%	0	%	0	%
Weighted average expected life	4 years		4 years		5 years
Expected volatility	62	%	65	%	68	%

Using these assumptions, the fair value of the stock options granted during the years ended December 31, 2005, 2004 and 2003 was approximately $0.7 million, $0.6 million and $2.5 million, respectively. The weighted average fair value per share of options granted during 2005, 2004 and 2003 was $2.26, $2.48 and $2.40, respectively.

Employee Stock Purchase Plan—

The Company has an employee stock purchase plan entitled the Edgewater Technology, Inc. 1999 Employee Stock Purchase Plan (the “1999 ESPP”) that allows for employee stock purchases of the Company’s common stock at the lower of 85% of the stock price as of the first or last trading day of each quarter. Purchases under the 1999 ESPP are limited to 10% of the respective employee’s annual compensation. The 1999 ESPP authorizes purchases for up to 700,000 shares of the Company’s common stock and continues in effect until October 1, 2009 or until earlier terminated. As of December 31, 2005, there were 270,717 shares of common stock remaining for purchase under the 1999 ESPP. During 2005, 2004 and 2003, we issued 68,198, 27,184 and 23,537 shares, respectively, under the 1999 ESPP.

Treasury Stock Repurchase Program—

In September 2002, our Board of Directors authorized a stock repurchase program for up to $20.0 million of common stock through December 31, 2003, which was extended through and expired in February 2005. Under this program, stock purchases have been made from time to time on the open market at prevailing market prices or in negotiated transactions off the market. As part of the most recently authorized stock repurchase program, effective February 14, 2003, our Company entered into a SEC Rule 10b5-1 repurchase program with a broker that allowed purchases of our common stock through traditional blackout periods. Both the stock repurchase program and the 10b5-1 repurchase program expired on February 25, 2005.

During the years ended December 31, 2005, 2004 and 2003, the Company repurchased 321,029, 948,234 and 304,195 shares of its outstanding common stock for an aggregate purchase price of $1.6 million, $4.4 million and $1.4 million, respectively. From the inception of our stock repurchase program in 2000 through its February 25, 2005 expiration date, we repurchased 3.6 million shares of our common stock for an aggregate purchase price of approximately $17.9 million.

61

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.   RELATED PARTY TRANSACTIONS:

Synapse.Synapse, one of our largest customers, is considered a related party as its former President and Chief Executive Officer, Michael Loeb, is also a member of our Board of Directors. Mr. Loeb, who resigned as the President and Chief Executive Officer of Synapse during 2005, remains a member of Synapse’s board of directors as of December 31, 2005. Mr. Loeb joined the Company’s Board of Directors in April 2000. Synapse has been an Edgewater customer since 1996. Service revenues from Synapse amounted to $8.4 million, $9.7 million and $11.8 million, for 2005, 2004 and 2003, respectively. Accounts receivable balances for Synapse were $1.4 million and $0.7 million as of December 31, 2005 and 2004, respectively, which amounts were on customary business terms. The Company typically provides services to Synapse related to infrastructure services, custom software development, and systems integration. Services are provided on both a fixed-fee and time and materials basis. Our contracts with Synapse, including all terms and conditions, have been negotiated on an arm’s length basis and on market terms similar to those we have with our other customers. The existing one-year services contract with Synapse, which was entered into in January of 2005, has been automatically extended, as per the terms of the contract, for an additional six-month period. The contract extension became effective on January 1, 2006. The Company anticipates that it will enter into a new one-year services contract with Synapse during the first quarter of 2006. It is also anticipated that Synapse will purchase professional services consistent with those purchased in 2005, which approximated $8.4 million.

Deferred Board Fees.   As of December 31, 2004, the Company had recorded a liability in the amount of approximately $0.2 million related to deferred board fees earned and payable to one of our Company’s Directors. Payment of the fees was being deferred until a future date. The deferred fees are recorded under the caption “accounts payable and accrued liabilities” in the Company’s consolidated financial statements included elsewhere herein. There are no deferred board fees as of December 31, 2005 as all previously deferred amounts were fully paid in fiscal 2005.

Lease Agreement.   Our Company entered into a lease agreement in 1999, which was modified in June 2000, with a stockholder who is a former officer and director. The lease pertains to certain parcels of land and buildings in Fayetteville, Arkansas for its former corporate headquarters that were included in our Company’s discontinued operations. Rent payments related to these facilities totaled approximately $0.2 million for each of the years ended December 31, 2005, 2004 and 2003, respectively. Future related party lease obligations relate to this lease agreement. As our Company’s corporate headquarters moved to Wakefield, Massachusetts during 2001, the Company subleased the Fayetteville facility to a third party in 2002.

12.   COMMITMENTS AND CONTINGENCIES:

We are sometimes a party to litigation incidental to our business. We believe that these routine legal proceedings will not have a material adverse effect on our financial position. We maintain insurance in amounts with coverages and deductibles that we believe are reasonable.

On February 11, 2003, our Company entered into a mutual Settlement and Release Agreement with the Stephens Group, Inc., StaffMark Investment, LLC, a majority-owned subsidiary of Stephens Group, Inc. and its subsidiaries (collectively, the “Stephens Group”), to terminate, dismiss and retain intact our Company’s favorable summary judgment ruling with respect to a litigation matter in Delaware Superior Court. In addition to the mutual releases, the mutual Settlement and Release Agreement required our Company to pay $1.0 million to the Stephens Group. The parties agreed that the existence of

62

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.COMMITMENTS AND CONTINGENCIES: (Continued)

the settlement agreement and all of its terms, including any payment, were not evidence of any wrongdoing or liability related to the sale of our Company’s commercial staffing business in June 2000. The settlement amount of $1.0 million was charged to discontinued operations in the 2002 statement of operations and such amount was subsequently paid in February 2003.

During the second quarter of 2002, our Company was notified by the IRS that it would be auditing our consolidated income tax returns for the 1998, 1999 and 2000 fiscal years, and subsequently the 1997 fiscal year. Our Company has responded to various IRS information requests by delivering documents and answering questions. For the period of the fiscal years covered by the audit, we owned staffing-related businesses, which were sold during the 2000 and 2001 fiscal years. During fiscal 2004, the Company received notice from the IRS formally closing its examination of the filed corporate income tax returns for the 1997, 1998, 1999 and 2000 fiscal years, without any additional income tax liability.

We have received and may continue to receive various tax notices and assessments from the IRS and various State Departments of Revenue related to our former staffing businesses, which were sold in 2000 and 2001. In fiscal 2003, we recorded a reserve of $1.0 million representing the low end of our estimated exposure related to the assessments, plus related professional fees. During both 2005 and 2004, our Company was able to successfully resolve several outstanding notices related to these tax matters as the Company received formal notice from the IRS that certain assessments had been fully abated. In fiscal 2005, on a net basis, the Company reversed approximately $0.3 million from its discontinued operations accrual directly related to the successful resolution of certain tax assessments. In fiscal 2004, directly related to the above notices, which totaled approximately $0.8 million, we reversed approximately $0.2 million of our accrual for discontinued operations in 2004. Also in fiscal 2004, based upon currently available information, we increased our previously established accrual related to our exposure on estimated future lease payments expected to be made on office space related to our former corporate headquarters by approximately $0.4 million. The increase in the lease accrual was deemed necessary after revising a previously prepared estimate with more current information. We continue to dispute additional unresolved IRS assessments in the amount of $20 thousand as of December 31, 2005. Also see Note 4 to the consolidated financial statements.

13.   LEASE COMMITMENTS:

Edgewater Technology leases office space and certain equipment under operating leases through 2013. As discussed in Notes 4 and 11, certain of these facilities are leased from related parties. Annual future minimum payments required under operating leases, excluding sublease rentals, that have an initial or remaining lease term in excess of one year are as follows:

Fiscal Years	Amount (In thousands)
2006		$	1,060
2007		916
2008		849
2009		653
2010		525
Thereafter		1,575
		$	5,578

63

EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.LEASE COMMITMENTS: (Continued)

Rent payments under operating leases, including amounts paid to related parties for discontinued operations, was approximately $1.1 million, $1.3 million and $1.1 million for the years ended December 31, 2005, 2004 and 2003, respectively. The Company entered into a sublease agreement on July 1, 2002 with a third party to occupy our Fayetteville office facility. The sublease commenced on July 15, 2002 and will end on June 30, 2007. Under the sublease agreement, the sub-tenant shall pay base rent to Edgewater Technology in the amount of $0.2 million in fiscal 2006 and will pay $0.1 million in fiscal 2007.

14.   SUBSEQUENT EVENTS—ACQUISITION OF NATIONAL DECISION SYSTEMS, INC.:

On February 15, 2006, we acquired all of the outstanding capital stock of National Decision Systems, Inc. (“NDS”), pursuant to the terms of a Stock Purchase Agreement.

The Company paid to the shareholders of NDS total consideration of approximately $10.2 million, consisting of an initial upfront payment at closing of approximately $8.5 million in cash and assumed liabilities, and 264,610 shares of Edgewater’s common stock, $0.01 par value per share (“Common Stock”), which is subject to a three year lock-up agreement. In addition, an earnout agreement was entered into in connection with the Purchase Agreement, and it specifies additional earnout consideration that could be payable to the former NDS stockholders. Earnout payments are conditioned upon the attainment of certain performance measurements for the NDS business over the next 12 to 24 months. Assuming all performance measurements are met within predetermined performance ranges, additional earnout consideration of approximately $7.2 million would be payable, comprised of approximately $5.8 million payable in cash and the remaining amount payable in Common Stock, which will be valued at the time of such issuance. To the extent NDS business performance favorably exceeds performance ranges for such measurement periods, additional earnout consideration would be payable in relation to additive EBITDA contribution by the NDS business above such performance ranges.

The Company has engaged an independent third-party valuation firm to allocate the purchase price. The Company expects to record acquisition-related intangible assets and goodwill upon the completion of such valuation in the quarterly period ending March 31, 2006.

64

Unaudited Supplementary Quarterly Financial Information
(In Thousands, Except Per Share Data)

The net income (loss) and earnings (loss) per share amounts below include results from discontinued operations.

	2005
	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter			Total
Total revenue		$	8,959		$	10,559		$	11,497		$	12,111	$	43,126
Gross profit		3,821			4,592			4,850			4,737		18,000
Income before discontinued operations		188			392			414			281		1,275
Net income		188			392			739			281		1,600
Basic income per share before discontinued operations		$	0.02		$	0.04		$	0.04		$	0.03	$	0.13
Diluted income per share before discontinued operations		$	0.02		$	0.04		$	0.04		$	0.03	$	0.12
Basic income per share		$	0.02		$	0.04		$	0.07		$	0.03	$	0.16
Diluted income per share		$	0.02		$	0.04		$	0.07		$	0.03	$	0.15

	2004
	1st Quarter			2nd Quarter				3rd Quarter				4th Quarter			Total
Total revenue		$	6,422		$	6,138			$	4,893			$	7,869	$	25,322
Gross profit		2,581			2,408				1,492				3,182		9,663
Income (loss) before discontinued  operations		65			(43		)		(1,017		)		164		(831		)
Net income (loss)		65			(43		)		(1,017		)		400		(595		)
Basic and diluted income (loss) per share before discontinued operations		$	0.01		$	0.00			$	(0.09	)		$	0.03	$	(0.05	)
Basic and diluted income (loss) per share		$	0.01		$	0.00			$	(0.09	)		$	0.03	$	(0.05	)

65

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, which we have designed to ensure that material information related to the Company, including our consolidated subsidiaries, is properly identified and evaluated on a regular basis and disclosed in accordance with all applicable laws and regulations. In response to recent legislation and proposed regulations, we reviewed our disclosure controls and procedures. We also established a disclosure committee which consists of certain members of our senior management. The President and Chief Executive Officer and the Chief Financial Officer of Edgewater Technology, Inc. (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluations as of the end of the period covered by this Report, that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management as appropriate to allow timely decisions regarding required disclosure.

Changes in Controls and Procedures

There were no significant changes in the Company’s internal controls, or in other factors that could significantly affect these internal controls, subsequent to the date of our most recent evaluation.

ITEM 9B.OTHER INFORMATION

None.

66

PART III

ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by Part III of Form 10-K is omitted from this report because we will file a definitive proxy statement in accordance with Regulation 14A of the SEC’s rules on or before April 30, 2006. These items include:

(a)The information called for by Item 10 of Form 10-K, involving Item 401 of Regulation S-K is incorporated herein by reference to the material under the caption “Election of Directors—Nominees for Election—Other Named Executive Officers” in our proxy statement for our Annual Meeting of Stockholders to be held on June 6, 2006.

(b)The information called for by Item 10 of Form 10-K involving Item 405 of Regulation S-K is incorporated by reference to the material under the caption “Stock Ownership—Section 16 (a) Beneficial Ownership Reporting Compliance” in our proxy statement for our Annual Meeting of Stockholders to be held on June 6, 2006.

(c)The information called for by Item 10 of Form 10-K involving Item 406 of Regulation S-K is incorporated by reference to the material under the caption “Code of Ethics” in our proxy statement for our Annual Meeting of Stockholders to be held on June 6, 2006.

ITEM 11.EXECUTIVE COMPENSATION

The information called for by Item 11 of Form 10-K for management remuneration involving Item 402 of Regulation S-K is incorporated herein by reference to the material under the caption “Compensation of Outside Directors and the Named Executive Officers” in our proxy statement for our Annual Meeting of Stockholders to be held on June 6, 2006.

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information called for by Item 12 of Form 10-K involving Item 201 (d) of Regulation S-K and Item 403 of Regulation S-K for the securities authorized under equity compensation plans and security ownership of certain beneficial owners and management, respectively, is incorporated herein by reference to the material under the caption “Compensation of Outside Directors and the Named Executive Officers—Equity Compensation Plans” and “Stock Ownership—Beneficial Ownership of Certain Stockholders, Directors and Executive Officers”, respectively, in our proxy statement for our Annual Meeting of Stockholders to be held on June 6, 2006.

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by Item 13 of Form 10-K involving Item 404 of Regulation S-K is incorporated herein by reference to the material under the caption “Certain Transactions” in our proxy statement for our Annual Meeting of Stockholders to be held on June 6, 2006.

ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES

The information called for by Item 9(e) of Regulation 14A is incorporated herein by reference to the material under the captions “Audit and Non-Audit Fees” and “Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of the Independent Auditor” in our proxy statement for our Annual Meeting of Stockholders to be held on June 6, 2006.

67

PART IV

ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) 1.Financial Statements required by Item 14 are included and indexed in Part II, Item 8.

(a) 2.Financial Statement Schedules included in Part IV of this report. Schedule II is omitted because the information is included in the Notes to Consolidated Financial Statements. All other schedules under the accounting regulations of the SEC are not required under the related instructions or are inapplicable and, thus have been omitted.

(a) 3. See “Exhibit Index” on the following pages.

68

(a) 3. Exhibits

EXHIBIT INDEX

Exhibit Number			Description
	2	.1	Asset Purchase Agreement dated as of October 4, 2004, by and among Edgewater Technology-Ranzal, Inc., Ranzal and Associates, Inc., Robin Ranzal-Knowles and Theodore Ranzal (Incorporated by reference from Exhibit 99.1 to the Company’s Form 8-K filed with the SEC on October 7, 2004).
	2	.2	Earnout Agreement dated as of October 4, 2004 by and among Edgewater Technology-Ranzal, Inc., Ranzal and Associates, Inc., Robin Ranzal-Knowles and Theodore Ranzal (Incorporated by reference from Exhibit 99.1 to the Company’s Form 8-K filed with the SEC on October 7, 2004).
	2	.3	Stock Purchase Agreement dated as of February 15, 2006, by and among Edgewater Technology, Inc. and certain stockholders of National Decision Systems, Inc. (Incorporated by reference from Exhibit 99.1 to the Company’s Form 8-K filed with the SEC on February 15, 2006).
	2	.4	Earnout Agreement dated as of February 15, 2006 by and among Edgewater Technology, Inc. and certain stockholders of National Decision Systems, Inc. (Incorporated by reference from Exhibit 99.2 to the Company’s Form 8-K filed with the SEC on February 15, 2006).
	2	.5	Amended and Restated Earnout Agreement dated as of February 15, 2006 by and among Edgewater Technology, Inc. and certain stockholders of National Decision Systems, Inc.*
	3	.1	Certificate of Incorporation of the Company (Incorporated by reference from Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (File No. 333-07513)).
	3	.2	Certificate of Amendment of the Certificate of Incorporation (Incorporated by reference from Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (File No. 333-07513)).
	3	.3	Certificate of Amendment of the Certificate of Incorporation dated May 8, 1998 (Incorporated by reference from Exhibit 3.3 to the Company’s Form 10-K filed with the SEC on March 16, 1999).
	3	.4	Amended and Restated By-Laws of the Company, as amended to date (Incorporated by reference from Exhibit 3.3 to the Company’s Registration Statement on Form S-1 (File No. 333-07513)).
	4	.1	Form of certificate evidencing ownership of common stock of the Company (Incorporated by reference from Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (File No. 333-07513)).
	4	.2	Article Four of the Certificate of Incorporation of the Company (included in Exhibit 3.1).
	10	.1	Form of Director Indemnification Agreement between the Company and each of its directors and executive officers (Incorporated by reference from Exhibit 10.3 to the Company’s Registration Statement on Form S-1 (File No. 333-07513)).
	10	.2	The Company’s 1997 Employee Stock Purchase Plan adopted May 2, 1997 (Incorporated by reference from the Company’s Registration Statement on Form S-8 (File No. 333-29689)), which has been terminated by approval and adoption of the Edgewater Technology, Inc. 1999 Employee Stock Purchase Plan referenced in Exhibit 10.52.

69

10	.3	The Company’s Non-Qualified 401(K) Plan. (Incorporated by reference from Exhibit 10.27 from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, as filed with the SEC on May 7, 1998). (1)
10	.4	Edgewater Technology, Inc. Amended and Restated 1996 Stock Option Plan, most recently amended, effective March 20, 2002 (Incorporated by reference from Exhibit 10.48 to the Company’s Form 10-K for the year ended December 31,2001, filed with the SEC on March 27, 2002). (1)
10	.5	Edgewater Technology, Inc. Amended and Restated 2000 Stock Option Plan, amended and restated effective March 20, 2002. (Incorporated by reference from Exhibit 10.49 to the Company’s Form 10-K for the year ended December 31, 2001, filed with the SEC on March 27, 2002) which has been amended and in its current state is reflected in Exhibit 10.51.(1)
10	.6	Edgewater Technology, Inc. Amended and Restated 2000 Stock Option Plan, as most recently amended on May 22, 2002. (Incorporated by reference from Exhibit 4.9 to Post Effective Amendment No. 1 to Form S-8, File No. 333-50912 filed with the SEC on May 30, 2002).(1)
10	.7	Edgewater Technology, Inc. Amended and Restated 1999 Employee Stock Purchase Plan, as amended on May 22, 2002. (Incorporated by reference from Exhibit 4.9 to Post Effective Amendment No. 1 to Form S-8, File No. 333-88313 filed with the SEC on May 30, 2002). (1)
10	.8	Lease Agreement by and between the Company and Brewer Investments II, LLC dated June 28, 2000 and effective as of July 1, 2000 for Edgewater Technology, Inc.’s former corporate headquarters at 302 E. Millsap Rd., Fayetteville, Arkansas. (Incorporated by reference from Exhibit 10.54 to the Company’s Form 10-K for the year ended December 31, 2002, filed with the SEC on March 28, 2003).
10	.9	Sublease Agreement dated as of July 1, 2002 by and between the Company and Tyson Foods, Inc. for the sublease of the property at 302 E. Millsap Rd., in Fayetteville, Arkansas. (Incorporated by reference from Exhibit 10.55 to the Company’s Form 10-K for the year ended December 31, 2002, filed with the SEC on March 28, 2003).
10	.10	Edgewater Technology, Inc. 2003 Equity Incentive Plan, incorporated by reference to Exhibit 4.10 of Form S-8, 333-106325 filed with the SEC on June 20, 2003. (Incorporated by reference from Exhibit 10.56 to the Company’s Form 10-Q for the quarter ended June 30, 2003 filed with the SEC on August 14, 2003). (1)
10	.11	Employment Agreement by and among the Company, Edgewater Technology (Delaware), Inc. (“Edgewater Delaware”) and Shirley Singleton dated as of June 12, 2003, which supersedes and terminates that certain employment agreement dated as of April 14, 2000 by and between Edgewater Delaware and Shirley Singleton. (Incorporated by reference from Exhibit 10.57 to the Company’s Form 10-Q for the quarter ended June 30, 2003 filed with the SEC on August 14, 2003). (1)
10	.12	Employment Agreement by and among the Company, Edgewater Delaware and Dave Clancey dated as of June 12, 2003, which supersedes and terminates that certain employment agreement dated as of April 14, 2000 by and between Edgewater Delaware and Dave Clancey. (Incorporated by reference from Exhibit 10.58 to the Company’s Form 10-Q for the quarter ended June 30, 2003 filed with the SEC on August 14, 2003). (1)

70

10	.13	Employment Agreement by and among the Company, Edgewater Delaware and Dave Gallo dated as of June 12, 2003, which supersedes and terminates that certain employment agreement dated as of July 31, 2000 by and between Edgewater Delaware and Dave Gallo. (Incorporated by reference from Exhibit 10.59 to the Company’s Form 10-Q for the quarter ended June 30, 2003 filed with the SEC on August 14, 2003). (1)
10	.14	Employment Agreement by and among the Company, Edgewater Delaware and Kevin Rhodes dated as of May 22, 2003, which supersedes and terminates that certain employment agreement dated as of July 19, 2002 by and between the Company and Kevin Rhodes. (Incorporated by reference from Exhibit 10.60 to the Company’s Form 10-Q for the quarter ended June 30, 2003 filed with the SEC on August 14, 2003). (1)
16	.1	Letter from Arthur Andersen LLP to the SEC dated June 28, 2002 regarding a change in the Company’s independent accountants. (Incorporated by reference from Exhibit 16.1 to the Company’s Form 8-K filed with the SEC on June 28, 2002).
21	.1	Subsidiaries of Edgewater Technology, Inc. as of December 31, 2005.*
23	.1	Consent of Independent Registered Public Accounting Firm.*
24	.1	Power of Attorney (See Signature Page).*
31	.1	13a-14 Certification—President and Chief Executive Officer*
31	.2	13a-14 Certification—Chief Financial Officer*
32		Section 1350 Certification*

(1)This agreement is a compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(c).

*Filed herein

71

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, in the Town of Wakefield, State of Massachusetts, on March 23, 2006.

Edgewater Technology, Inc.

/s/ SHIRLEY SINGLETON

Shirley Singleton

President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below appoints jointly and severally, Shirley Singleton and Kevin R. Rhodes and each one of them, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the SEC, hereby ratifying and confirming all that each said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

	Name		Title		Date
/s/ SHIRLEY SINGLETON		President, Chief Executive Officer and		March 23, 2006
Shirley Singleton		Director
/s/ KEVIN R. RHODES		Chief Financial Officer & Treasurer		March 23, 2006
Kevin R. Rhodes		(Principal Financial and Accounting Officer)
/s/ WAYNE WILSON		Director		March 23, 2006
Wayne Wilson
/s/ CLETE T. BREWER		Director		March 23, 2006
Clete T. Brewer
/s/ PAUL E. FLYNN		Director		March 23, 2006
Paul E. Flynn
/s/ PAUL GUZZI		Director		March 23, 2006
Paul Guzzi
/s/ NANCY L. LEAMING		Director		March 23, 2006
Nancy L. Leaming
/s/ MICHAEL R. LOEB		Director		March 23, 2006
Michael R. Loeb
/s/ BARRY B. WHITE		Director		March 23, 2006
Barry B. White

72

EX-2.5

Exhibit 2.5

Execution Copy

AMENDED AND RESTATED EARNOUT AGREEMENT

THIS AMENDED AND RESTATED EARNOUT AGREEMENT (this “Agreement”) effective as of February 15, 2006, by and among Edgewater Technology, Inc., a Delaware corporation (“Purchaser”), National Decision Systems, Inc., a New Jersey corporation (the “Company”) and the undersigned stockholders of the Company (each such person is individually referred to as a “Stockholder” and such persons are collectively referred to as the “Stockholders”).

RECITALS

WHEREAS, pursuant to a Stock Purchase Agreement dated of even date herewith, by and among Purchaser, the Company and the Stockholders (the “Purchase Agreement”), Purchaser is acquiring the Shares from the Stockholders, with the Stockholders receiving the Purchase Price as a consequence thereof; and

WHEREAS, Section 1.2(c) of the Purchase Agreement provides that any and all payments pursuant to this Agreement constitute and are considered a part of the Purchase Price; and

WHEREAS, Section 7.2 of the Purchase Agreement provides that it is a condition precedent to the obligation of the Company and the Stockholders to consummate the transactions contemplated by the Purchase Agreement that Purchaser shall have entered into one or more counterparts of this Agreement.

AGREEMENT

NOW, THEREFORE, for good and valuable consideration the receipt and sufficiency of which is hereby acknowledged by the parties hereto and in consideration of the premises, the representations, warranties, covenants and agreements contained herein and subject to the conditions contained herein, the parties hereto agree as follows:

1.Definitions. Capitalized terms not otherwise defined in this Section 1 or otherwise in this Agreement shall have the meanings ascribed thereto in the Purchase Agreement.

“30 Day Trailing Average” shall mean the average 4:00 p.m. share price of the Common Stock of Purchaser for the thirty (30) consecutive trading days ending on the last business day immediately prior to the date any Earnout Shares are to be issued to the Selling Stockholders, as reported on the NASDAQ.

1

“Agent” shall mean Richard Foudy.

“Business Day” means any day, other than Saturday, Sunday or a federal holiday, and shall consist of the time period from 12:01 a.m. through 12:00 midnight (Eastern time).

“Cash Consideration” means the dollar amount equal to the cash portion of the Initial Earnout, the cash portion of the Second Earnout, or the cash portion of the Third Earnout.

“Certificate” means the certificate to be delivered by Purchaser, and executed by an executive of Purchaser, reflecting the Earnout Consideration and the applicable calculations relating thereto.

“Company’s EBITDA” means the dollar amount equal to the sum of the Company’s earnings before interest, taxes, depreciation and amortization for the appropriate Earnout Period based on the Financial Statements for that period, calculated in accordance with GAAP.

“Company’s Initial EBITDA” means the Company’s EBITDA during the Initial Earnout Period.

“Company Initial EBITDA Differential” means the excess of the Company Initial EBITDA over $2,000,000.00. If the Company Initial EBITDA Differential shall exceed $2,280,000.00, the amount of such excess is referred to as “Excess Initial EBITDA” and shall not be counted as Company Initial EBITDA Differential.

“Company’s Second EBITDA” means the sum of (i) the Company’s EBITDA during the Second Earnout Period, and (ii) the Excess Initial EBITDA, if any.

“Company Second EBITDA Differential” means the excess of (i) the Company Second EBITDA over (B) $2,000,000.00. If the Company Second EBITDA Differential shall exceed $2,280,000.00, the amount of such excess shall not be counted as Company Second EBITDA Differential.

“Company Third EBITDA Differential” means the excess of (i) the Company’s Second EBITDA over (ii) the Third Company’s EBITDA Minimum Threshold.

“Determination Date” means the date that Purchaser delivers the Financial Statements to the Agent; provided, however, that such date shall not be later than ninety (90) days following the end of the applicable Earnout Period.

“Earnout Consideration” means the Cash Consideration and the Earnout Shares, as the case may be.

2

“Earnout Periods” means the Initial Earnout Period and the Second Earnout Period.

“Earnout Shares” means the Initial Earnout Shares, the Second Earnout Shares and the Third Earnout Shares.

“Excess Initial EBITDA” means the amount, if any, by which the Company’s Initial EBITDA is in excess of the Initial Company EBITDA Maximum Threshold.

“Financial Statements” means Company income statements, which will be prepared by Purchaser in accordance with GAAP.

“Initial Company’s EBITDA Minimum Threshold” means $2,000,000.

“Initial Earnout” means the dollar amount equal to the product of (i) the Company’s Initial EBITDA Differential multiplied by (ii) 1.535.

“Initial Earnout Period”, means the twelve (12)-months period commencing on the Closing Date.

“Initial Earnout Shares”  means the portion of the Initial Earnout paid to the Stockholders in Shares.

“Notice Form” has the meaning set forth in Section 3(a)(iii).

“Second Company’s EBITDA Minimum Threshold” means $2,000,000.

“Second Earnout” means the dollar amount equal to the product of (i) Company’s Second EBITDA Differential multiplied by (ii)1.627.

“Second Earnout Period” means the twelve (12)-months period commencing on the first anniversary of the Closing.

“Second Earnout Shares” means the portion of the Second Earnout paid to the Stockholders in Shares.

“Shares” means shares of the Purchaser’s Common Stock.

“Third Company’s EBITDA Minimum Threshold” means $4,700,000.

“Third Earnout” means the dollar amount equal to the product of (i) Company’s Third EBITDA Differential multiplied by (ii) 1.00.

3

“Third Earnout Shares” means the portion of the Third Earnout paid to the Stockholders in Shares.

2.Calculation of the Earnout Consideration. Subject to the provisions set forth below, the Stockholders (in accordance with Schedule A attached hereto) shall be eligible to receive the Earnout Consideration, pursuant to and in accordance with the payment and review procedures in Section 3 below.

(i)If Company’s Initial EBITDA is equal to or in excess of the Initial Company’s EBITDA Minimum Threshold, the Stockholders shall be entitled to receive the Initial Earnout. In no event shall the value of the Initial Earnout (including any Initial Earnout Shares) exceed Three Million Five Hundred Thousand ($3,500,000.00) Dollars.

(ii)If the Company’s Second EBITDA is in excess of the Second Company’s EBITDA Minimum Threshold, the Stockholders shall be entitled to receive the Second Earnout. In no event shall the value of the Second Earnout (including any Second Earnout Shares) exceed Three Million Seven Hundred Ten Thousand ($3,710,000.00) Dollars.

(iii)If the Company’s Third EBITDA is in excess of the Third Company’s EBITDA Minimum Threshold, the Stockholders shall be entitled to receive the Third Earnout.

(iv)Subject to clause (vi) below, Purchaser shall pay to the Stockholders eighty (80%) percent of the Initial Earnout and the Second Earnout, if any, in the form of Cash Consideration, and twenty (20%) percent in the form of Initial Earnout Shares or Second Earnout Shares, valued at the 30 Day Trailing Average.

(v)Subject to clause (vi) below, Purchaser shall pay to the Stockholders seventy (70%) percent of the Third Earnout, if any, in the form of Cash Consideration and thirty (30%) percent in the form of Third Earnout Shares valued at the 30 Day Trailing Average.

(vi)No Earnout Share, together with any prior issuance of Earnout Shares pursuant to this Agreement, and any issuance of Purchaser Common Stock pursuant to Purchase Agreement, shall be issued if such issuance would result in a collective issuance under this Agreement and the Purchase Agreement of more than 19.9% of Purchaser’s common stock outstanding as of February

4

15, 2006 unless such issuance shall have been approved by stockholders of Purchaser, and in the event of any failure to obtain such stockholder approval prior to such scheduled issuance, the value of such shares in excess of 19.9% of Purchaser’s outstanding common stock (valued at the 30 Day Trailing Average) shall be payable and be paid instead in cash. The Earnout Shares shall be subject to the terms and conditions of the Restriction Agreement, provided, however, that any transfer restrictions imposed on the Shares shall lapse thirty six (36) months from the date of the Closing.

3.Payment and Review Procedures.

(a)Delivery of the Certificate and the Reviewed Financial Statements. On the Determination Date, Purchaser will deliver the following items to the Agent (except with respect to Section 3(a)(iii) which shall be delivered by the Agent to the Purchaser):

(i)the Certificate;

(i)a notice form that will require the Agent to designate the bank account, address and other necessary information that will enable Purchaser to deliver the Cash Consideration (the “Cash Notice Form”);

(ii)a notice form providing the Purchaser with such necessary information to enable the Purchaser to deliver the Earnout Shares to the Stockholders (the “Share Notice Form”, and with the Cash Notice Form, collectively, the “Notice Form”).

(iii)a copy of the Financial Statements from which the calculations in the Certificate were derived; and/or

(iv)a letter denoting that no payment is due with respect to the Earnout Consideration, if applicable.

(b)Payment Without Objection. If the Agent does not object to any of the calculations in the Certificate or the Financial Statements from which such calculations were derived in accordance with the objection procedures in subsection (c) below, then on or before the eleventh (11th) Business Day following the Purchaser’s receipt of the Notice Form, Purchaser will promptly pay the Earnout Consideration by delivering to the Stockholders and the Company the Cash Consideration and Earnout Shares reflected in the Certificate.

5

(c)Objection Procedures and Payment Thereafter. If the Agent has any objection to the calculation of the Earnout Consideration in the Certificate or the Financial Statements from which such calculation was derived, then the Agent shall deliver a detailed statement describing such objections to Purchaser within ten (10) Business Days after receiving the Certificate. Purchaser and the Agent will use reasonable efforts to resolve any such objections themselves. If the parties do not obtain a final resolution within ten (10) Business Days after Purchaser has received the statement of objections, then Purchaser and the Agent will select an accounting firm mutually acceptable to them to resolve any remaining objections (the “Referee”). If Purchaser and the Agent are unable to agree on the choice of a Referee, the Boston, Massachusetts office of Grant Thornton, LLP shall act as the Referee. The determination of any Referee so selected as to any objections of the Agent or Purchaser will be set forth in writing and will be conclusive and binding upon the parties. Within five (5) Business Days, Purchaser will revise the Certificate as appropriate to reflect the resolution of any objections thereto pursuant to this Section 3(c) by the Referee. Following resolution of the objection and on or before the tenth (10th) Business Day following receipt of the Notice Form, Purchaser will promptly pay to the Stockholders the Earnout Consideration by delivering the Cash Consideration and Earnout Shares in accordance with the amounts shown on such revised Certificate.

(d)Review of Materials. Purchaser will make the work papers and back-up materials used in preparing the Certificate available to the Agent and its accountants and other representatives at reasonable times and upon reasonable notice at any time during: (i) the review by the Agent of the Certificate; and (ii) the resolution by the parties of any objections thereto.

4.Termination of Purchaser’s Obligations and Responsibilities. Notwithstanding any other provision of this Agreement, following the completion of the Second Earnout Period Purchaser’s obligations, responsibilities, covenants, agreements and liabilities pursuant to this Agreement shall terminate on the earlier of either of the following situations:  (i) payment in accordance with Section 3(b) above; (ii) delivery of the letter by Purchaser denoting that no payment is due with respect to the Earnout Consideration and no objection by the Agent pursuant to Section 3(c) above; or (iii) resolution of objections to the Certificate by the Referee in accordance with Section 3(c) above and delivery of the Earnout Consideration thereafter based upon the Referee’s findings and conclusions.

5.Company Operations. During the Earnout Periods, (i) the compensation and benefits of the Company’s employees shall be managed and structured in accordance with the Company’s historical business practices, and any increases in compensation of the Company’s employees to

6

reflect appropriate upward adjustments relating to Purchaser’s employee benefits (in the aggregate), shall be appropriately reflected at the Closing, and (ii) no direct and indirect selling expenses or general and administrative expenses of Purchaser shall be allocated to the Company, unless set forth in Exhibit 5 attached hereto or otherwise agreed to in writing by the Purchaser and the Agent.

6.Miscellaneous.

(a)No Third Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any Person other than the parties named herein and their respective successors and permitted assigns.

(b)Entire Agreement. This Agreement, together with the Purchase Agreement (and the Exhibits and Schedules thereto), and any certificates or other documents delivered thereunder, supersedes all prior agreements, understandings or representations by or among the parties hereto, written or oral, that may have related in any way to the subject matter thereof.

(c)Succession and Assignment. This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of the other party.

(d)Counterparts. This Agreement may be executed in one or more counterparts (including execution by facsimile), each of which shall be deemed an original but all of which together will constitute one and the same instrument.

(e)Headings. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement.

(f)Notices. Notices shall be delivered to the parties at the addresses set forth in Section 10.6 of the Purchase Agreement. All communications required or permitted hereunder shall be provided in accordance with and pursuant to Section 10.6 of the Purchase Agreement.

(g)Governing Law. This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule that would cause the application of the laws of any jurisdiction other than the State of Delaware.

7

(h)Amendments and Waivers. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by all of the parties hereto. No waiver by any party of any covenant or agreement hereunder shall be deemed to extend to any prior or subsequent default or breach of covenant or agreement hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence.

(i)Severability. Any term of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction.

(j)Expenses. Purchaser shall pay all costs and expenses incurred or to be incurred by them in negotiating and preparing this Agreement and carrying out the transactions contemplated thereby. The Stockholders shall be solely responsible for and bear all of their own respective expenses, including without limitation, expenses of legal counsel, accountants, finders, financial advisors incurred at any time in connection with pursuing or consummating this Agreement and the transactions contemplated thereby. Notwithstanding the foregoing, Purchaser and the Stockholders will share the fees and expenses of the Referee equally.

(k)Construction. The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local, or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word “including” shall mean without limitation. The parties intend that each representation, warranty, and covenant contained herein shall have independent significance. If any party has breached any representation, warranty, or covenant contained herein in any respect, then the fact that there exists another representation, warranty, or covenant relating to the same subject matter (regardless of the relative levels of specificity) which the party has not breached shall not detract from or mitigate the fact that the party is in breach of the first representation, warranty, or covenant.

(l)Specific Performance. Each of the parties acknowledges and agrees that the other parties would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each of the parties agrees that the other parties shall be

8

entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provision hereof in any action instituted in any court of the United States or any state thereof having jurisdiction over the parties and the matter in addition to any other remedy to which they may be entitled, at law or in equity.

9

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

EDGEWATER TECHNOLOGY, INC.
By:	/s/ Kevin R. Rhodes
Title:	Chief Financial Officer, Treasurer & Corporate Secretary
NATIONAL DECISION SYSTEMS, INC.
By:	/s/ Richard J. Foudy
Title:	President
THE STOCKHOLDERS:
/s/ Richard J. Foudy
Richard J. Foudy
/s/ Mark Manfredi
Mark Manfredi
/s/ Mark Farrell
Mark Farrell
/s/ Joanne Wortman
Joanne Wortman
/s/ Dan MacAndrew
Dan MacAndrew
/s/ Sundar Ranganathan
Sundar Ranganathan
/s/ Kenneth Allard
Kenneth Allard

10

Exhibit 5

Expenses to be allocated to the Company’s operations:

1.All direct expenses related to the Company employees’ participation in the Purchaser’s benefits programs will be allocated to the Company, as such benefits programs are outlined in the Purchaser’s then existing human resources/employee Manual.

2.All incremental direct costs related to adding the Company’s operations onto Purchaser’s insurance policies will be allocated to the Company, and such expense will not exceed $36,000 per annum.

3.Direct marketing costs associated with revenue generation programs for the Company will be allocated to the Company, including but not limited to advertising, production of marketing materials, participation in trade shows and production of case studies.

4.Direct costs and expenses incurred to recruit and hire any new employees or engage new independent contractors for the Company will be allocated to the Company.

5.Direct costs for legal fees incurred to represent the Company on any legal matters will be allocated to the Company.

6.Direct costs for sales commissions, regardless of the sales personnel’s affiliation with Purchaser or the Company, derived from revenue generated by the Company will be allocated to the Company.

7.Direct costs for salary, fringe and taxes for the use of any of the Purchaser’s personnel who are directed to work on an engagement for the Company, for the duration of time directed to perform such work, will be allocated to the Company.

11

EX-21.1

EXHIBIT 21.1

Subsidiaries of Edgewater Technology, Inc. as of December 31, 2005. Edgewater Technology, Inc. owns one hundred percent (100%) of the issued and outstanding shares of each of the following subsidiaries.

Subsidiary	State or Country of Origin
Edgewater Technology (Delaware), Inc.	Delaware, USA
Edgewater Technology (Europe) Limited	United Kingdom
Edgewater Technology Securities Corp.	Massachusetts, USA
Edgewater Technology (Virginia), Inc.	Virginia, USA
Edgewater Technology-Ranzal, Inc.	Delaware, USA

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements Nos. 333-50912, 333-88313, and 333-106325 on Forms S-8 of our report dated March 20, 2006, relating to the financial statements of Edgewater Technology, Inc. appearing in the Annual Report on Form 10-K of Edgewater Technology, Inc. for the year ended December 31, 2005.

/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 20, 2006

EX-31.1

EXHIBIT 31.1

13a-14 CERTIFICATION

I, Shirley Singleton, the President and Chief Executive Officer of Edgewater Technology, Inc. (the “Company”), certify that:

1.I have reviewed this Annual Report on Form 10-K of Edgewater Technology, Inc. (the “Company”);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operation and cash flow of the Company as of, and for, the periods presented in this report;

4.The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, to the registrant’s internal control over financial reporting; and

5.The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the Audit Committee of the Company’s Board of Directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: March 23, 2006	/s/ SHIRLEY SINGLETON
	Shirley Singleton
	President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

13a-14 CERTIFICATION

I, Kevin R. Rhodes, the Chief Financial Officer of Edgewater Technology, Inc. (the “Company”), certify that:

1.I have reviewed this Annual Report on Form 10-K of Edgewater Technology, Inc. (the “Company”);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operation and cash flow of the Company as of, and for, the periods presented in this report;

4.The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, to the registrant’s internal control over financial reporting; and

5.The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the Audit Committee of the Company’s Board of Directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: March 23, 2006	/s/ KEVIN R. RHODES
	Kevin R. Rhodes
	Chief Financial Officer (principal financial and accounting officer)

EX-32

EXHIBIT 32

1350 CERTIFICATION

Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. § 1350, as adopted), Shirley Singleton, the President and Chief Executive Officer of Edgewater Technology, Inc. (the “Company”), and Kevin R. Rhodes, the Chief Financial Officer of the Company, each hereby certifies that, to the best of her or his knowledge:

The Company’s Annual Report on Form 10-K for the period ended December 31, 2005, to which this Certification is attached as Exhibit 32 (the “Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and the information contained in the Periodic Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Periodic Report and results of operations of the Company for the period covered by the Periodic Report.

Date: March 23, 2006	/s/ SHIRLEY SINGLETON
	Shirley Singleton
	President and Chief Executive Officer
Date: March 23, 2006	/s/ KEVIN R. RHODES
	Kevin R. Rhodes
	Chief Financial Officer (principal financial and accounting officer)