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, 2011

[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

        SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-20971

EDGEWATER TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

Delaware	71-0788538
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
200 Harvard Mill Square, Suite 210
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:

Title of each class	Name of each exchange on which registered
Common Stock, $0.01 par value	NASDAQ Global Market

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

Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  [    ]  No  [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 Act.    Yes  [    ]  No  [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 was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  [X]  No  [    ]

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

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.    [     ]

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

Large accelerated filer [    ]    Accelerated filer [    ]    Non-accelerated filer [    ]    Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  [    ]  No  [X]

As of June 30, 2011, there were 12,442,418 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, 2011 was approximately $33.6 million, computed based upon the closing price of $2.70 per share on June 30, 2011.

As of March 1, 2012, there were 11,370,578 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 for the Registrant’s 2012 annual meeting of stockholders, 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 in this Annual Report on Form 10-K (this “Form 10-K”) may 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.

In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “believe,” “anticipate,” “anticipated,” “expectation,” “continued,” “future,” “forward,” “potential,” “estimate,” “estimated,” “forecast,” “project,” “encourage,” “opportunity,” “goal,” “objective,” “could,” “expect,” “expected,” “intend,” “plan,” “planned,” 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) failure to obtain new customers or retain significant existing customers; (2) the loss of one or more key executives and/or employees; (3) changes in industry trends, such as a decline in the demand for Enterprise Resource Planning and Enterprise Performance Management solutions, custom development and system integration services and/or declines in industry-wide information technology spending, whether on a temporary or permanent basis and/or delays by customers in initiating new projects or existing project milestones; (4) inability to execute upon growth objectives, including new services and growth in entities acquired by our Company; (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) delays in, or the failure of, our sales pipeline being converted to billable work and recorded as revenue; (8) inability to recruit and retain professionals with the high level of information technology skills and experience needed to provide our services; (9) failure to expand outsourcing services to generate additional revenue; (10) any changes in ownership of the Company or otherwise that would result in a limitation of the net operating loss carry forward under applicable tax laws; (11) the failure of the marketplace to embrace advisory and product-based consulting services; and/or (12) failure to make a successful claim against the Fullscope escrow account. In evaluating these statements, you should specifically consider various factors described above as well as the risks outlined under “Item 1A. Risk Factors.” 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. Neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Except as required by law, we do not intend to update any of the forward-looking statements after the date of this Form 10-K to conform such statements to actual results.

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EDGEWATER TECHNOLOGY, INC.

Form 10-K

Annual Report

For the Year Ended December 31, 2011

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Business Directors and Executive Officers of the Registrant		4 12
Item 1A.	Risk Factors		15
Item 1B.	Unresolved Staff Comments		19
Item 2.	Properties		19
Item 3.	Legal Proceedings		20
Item 4.	Mine Safety Disclosures		20
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		21
Item 6.	Selected Financial Data		25
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		47
Item 8.	Financial Statements and Supplementary Data		48
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		84
Item 9A.	Controls and Procedures		84
Item 9B.	Other Information		84
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance		86
Item 11.	Executive Compensation		86
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		86
Item 13.	Certain Relationships and Related Transactions, and Director Independence		87
Item 14.	Principal Accounting Fees and Services		87
	PART IV
Item 15.	Exhibits, Financial Statement Schedules		88
	OTHER ITEMS
	Signatures		92
	Power of Attorney		92

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PART I

AVAILABLE INFORMATION: BACKGROUND

Edgewater Technology, Inc. maintains executive offices located at 200 Harvard Mill Square, Suite 210, Wakefield, MA 01880-3209. Our telephone number is (781) 246-3343. Our stock is traded on the NASDAQ Global 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 Reports 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, Inc., Attn: Investor Relations, 200 Harvard Mill Square, Suite 210, 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 at 100 F Street, NE, Washington, D.C. 20459, 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,” “Edgewater,” “our Company,” “the Company,” “we,” “our,” and “us” to refer to Edgewater Technology, Inc. and its wholly-owned subsidiaries. A listing of our wholly-owned subsidiaries is included as Exhibit 21.1 to this Annual Report on Form 10-K (“Form 10-K”).

ITEM 1. BUSINESS

Overview

Edgewater is a strategic consulting firm that brings a synergistic blend of specialty services in the areas of business advisory, analytics, data management and technology to its customer base. Our customer based tends to be in the upper mid-market and selectively in the Global 2000 market, with a primary focus on the United States.

We deliver our services across a broad range of industries. We work onsite with our customers, providing a full spectrum of services in the following primary areas: business advisory, product-based consulting and technology consulting.

Edgewater 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 assets. This proven expertise enables us to bring complex technologies and systems together while minimizing risk, leveraging our customers’ technology investments and delivering tailored solutions.

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Our Services

Edgewater offers a full spectrum of services and expertise. Our consulting services are consolidated into three major synergistic offerings: (1) Business Advisory Services, (2) Product-Based Consulting and (3) Technology Consulting. The diagram that follows illustrates these offerings:

Edgewater 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 assets. This proven expertise enables us to bring complex technologies and systems together while minimizing risk, leveraging our customers’ technology investments and delivering tailored solutions.

The following are Edgewater’s service categories with sample services:

¡ Business advisory services

^¡   Monetize knowledge, new revenue streams from corporate data

^¡   Customer transformation, moving from business-to-business to business-to-customer or the reverse for new revenue opportunities

^¡   Cloud Architecture and On-Ramping strategic services

^¡   Business process rejuvenation with industry best practice and cross pollination

^¡   Specialized operational, due diligence and technology management expertise to mergers and acquisitions, private equity and venture capital

^¡   Strategic advice, costing, estimates to complete, failing or failed programs or project initiatives

^¡   Independent package selection and Request for Information or Proposal process design and implementation

¡ Product-based consulting services

^¡   Effect business transformation through the use of packaged software solutions

^¡   Enterprise performance management with Oracle budgeting, planning, consolidation and strategic finance

^¡   Enterprise resource planning with Microsoft Dynamics AX, discrete manufacturing and a specialty of process-based manufacturing

^¡   Customer relationship management with Microsoft CRM

^¡   Industry specific platform and best practice solutions

^¡   Blended solutions; Microsoft CRM/XRM and custom

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¡ Technology consulting services

^¡   Technical architecture and roadmaps

^¡   Technical evaluations and design

^¡   Custom component design and implementation

^¡   Web-centric solutions: internal, external and/or collaborative

^¡   Cloud integration and phasing solutions

^¡   On-going support services

^¡   Infrastructure optimization and redesign, disaster recovery and business continuity specialized design and assistance

In addition to the above services, the Company also provides synergistic services in the area of data management and analytics. Examples of such services include the following:

¡ Enterprise information management services

^¡   Provide for data related matters: master data management, data governance, logical and physical data base design, data warehouse strategies and design

^¡   Provide practical data architectures and roadmaps to support transactional systems, enterprise performance management, through advanced analytics

^¡   Provide forms of data manipulation, transformation and quality services

¡ Analytics services

^¡   Lead derivation of key financial and operational performance indicators and correlate their measurement, visualization and action for a given organization

^¡   Advise on opportunities for the use of predictive techniques, external data and benchmarks to improve business performance measurement and forecasting

^¡   Advise on the creation and adoption of analytics architectures, roadmaps and supporting organizations

^¡   Advise, design and roadmap analytics-based near real-time to real-time alerting strategies and implementations

Our consultants are expected to travel and to be onsite with the customer to provide the highest level of service and support in all of these endeavors. We work with varying degrees of customer project assistance and will incorporate customer resources for technology transfer or cost optimization purposes. Independent teams and proper project process and delineation provide conflict-free transition points among all key service offerings as well as independent entry points. Leads for offerings are internally driven with assistance from the respective vendors for software product solutions.

Customers

Our strategic acquisitions have helped enhance our service and product offerings, increase our customer base and reduce our reliance on individually significant customers. Historically, we have derived a significant portion of our consulting services based revenues (and overall revenues) from large technical consulting projects involving a limited number of customers. When we complete large technical consulting projects, we redeploy consulting professionals to new projects, even though these new projects, either individually or in the aggregate, may not be as large as the prior completed project.

Service revenue from our five largest customers, as a percentage of total service revenue, was 11.1%, 15.3% and 20.4% for the years ended December 31, 2011, 2010 and 2009, respectively. This improvement in customer concentration has occurred in connection with growth in our EPM-related service business, the addition in 2010 of our ERP-related service offerings and our efforts to expand and diversify our customer base. No single customer represented greater than 10% of total revenue during the years ended December 31, 2011, 2010 or 2009. Over the last three fiscal years our reliance on (and the risks associated with) a limited number of significant customers has diminished. See “Item 1A. Risk Factors - Our success depends on a limited number of significant customers, and our results of operations and financial condition could be negatively affected by the

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loss of a major customer or significant project or the failure to collect a large account receivable.” During 2011, we recorded service revenue from 406 customers, of which 129 were new customers, as compared to recording service revenue from 391 customers in 2010, of which 102 were new customers. Additionally, we recorded service revenue from 249 customers in 2009, of which 63 were new customers.

Industry Dynamics and Opportunity

Industry Dynamics. In today’s rapidly shifting macro business environment, corporations are demanding that financial and operational strategies be implemented in the most efficient and complete manner possible. The classic providers, such as the large management consulting firms, large accounting firms and multinational integrators, tend to provide solution services exclusively on large complex platforms, encompassing many players of mixed experience levels and in a myriad of locations. Edgewater’s services are focused and quickly deployed onsite in a specialized solution package, more appropriate to today’s need for faster innovation rollout, pushed deeper into subsidiaries of multinational corporations as well as middle market growth companies.

Expenditures in the information technology market have become a critical success factor in every company’s successful growth. As such, IT expenditures are receiving the scrutiny of C-Level Officers (“CXO”), when specifically focused on transformational change. Our CXO buyers are looking to purchase rapidly deployable, risk-managed, product-based technology solutions. These solutions maintain the ability for a company to differentiate itself from its competitors with proprietary business process, combined with the leverage of product customization. Edgewater assists customers with these solutions primarily in the Oracle and Microsoft product channels, while providing the opportunity for a customer to customize its solutions through the utilization of our custom technology consulting services.

We believe there are three major drivers to transformational change today. The first is the permeation of operational analytics driving corporate command and control. This manifests itself in the centralization of operational analytics on a common enterprise-wide platform of planning, budgeting, consolidation, and strategic finance, which are provided by Edgewater through our EPM services within the Oracle channel. The second driver of transformational change is the software replacement cycle in manufacturing, insurance and health care. Each has its macro drivers (economic, regulatory or demographic), for which the outcome is the same. Core operational systems such as ERP, policy administration and health service line must be replaced or implemented. Edgewater provides product-based solutions in all of these areas through our service offerings within the Microsoft channel. Third, the availability of cloud-based services is providing a new and growing opportunity for the middle market, enabling them to avail themselves of technology usually reserved for larger corporations. Edgewater’s advisory, product-based and technology consulting services fill the gap in expertise between the internal corporate resources available to a middle-market company and the provisioning of the various cloud providers required to provide an effective enterprise solution.

Companies typically turn to consulting firms, like Edgewater, to fill these internal project gaps for a number of different reasons:

¡ For deep industry, product, data and technical expertise;

¡ To obtain strategic consulting services in an accelerated timeframe;

¡ To mitigate their business risk with focused onsite project teams;

¡ To receive an outside objective perspective;

¡ To obtain EPM- and EIM-related services;

¡ To obtain product and services related to ERP and CRM;

¡ To provide cloud architecture and on-ramping services; and/or

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

Industry Opportunity. Focused advisory, product-based and technology consulting services, provided independently of large customary providers and larger classic business consulting engagements, are exactly what many customers are looking for in times of rapid change and uncertainty. Technology has become such an integral part of business that it requires skilled strategic management in its own right. Technology has become a

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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. Strategic 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 appropriate technologies. We have steadily enhanced our offerings to address the evolving need for strategic advisory and IT services and plan to continue to grow our competencies in these areas. Our goal is to provide a complete continuum of focused business services, encompassing all facets of business, through the enablement of technology.

Competitive Strengths

Edgewater offers strategic consulting services designed to assist our customers 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 our competition.

These values include the following:

(1) Delivery Excellence — Our history is built upon more than 20 years of proven methodology and well-defined process, in addition to continuous delivery of 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 — 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. We have developed core competencies in primary vertical markets such as: CPG/Manufacturing; Discrete and Process Manufacturing; Energy/Utilities; Healthcare; Higher Education; Hospitality; Insurance; Retail; Travel/Entertainment; and various Emerging Markets.

(3) Technology Excellence — We deliver our services by blending proven strategic technologies and business practices to build scalable solutions providing a solid return on the investment. Our team of professionals has the business and technology expertise to offer comprehensive strategies and solutions. Our areas of expertise include: business advisory services, EPM solutions in planning, budgeting, consolidation and strategic finance, Microsoft Dynamics solutions in the area of CRM and ERP, data analytics, Web analytics, advanced data and infrastructure services and specialized custom IT services.

(4) Customer Focus — Edgewater is positioned to provide our customers with onsite services across North America. Edgewater’s customer-centric model is well positioned to serve the needs of the Global 2000 for tight, highly-trained product specialist project teams, as well as the upper middle market whose needs tend to span the full spectrum of our business/IT service offerings.

(5) Adherence to Operational Metrics — Since our inception in 1992, Edgewater’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, utilization and gross margin.

Business Strategy

Our business strategy is to position our Company as the leading provider of transformational business and technology services. We believe we can attain this strategic objective by delivering a range of blended solutions through a combination of industry specific business advisory services, advanced product–based software consulting and custom technology consulting services. Customers desire the personal attention provided by

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onsite industry, financial and strategic expertise buttressed with the ability to accelerate idea implementation with cost-effective advanced software package solutions. Our ability to initiate our services dialogue at the strategy level all the way through specific software product request, provides a spectrum of sales opportunities with varying degrees of channel control and cost. This spectrum of engagement entry opportunities enables us to serve the upper middle market through the Global 2000 with an appropriate set of services.

As described above under “– Our Services,” our services are loosely categorized into three distinct groups: business advisory, product-based consulting and technology consulting services. The spectrum begins with pure consulting and ends with pure information technology. Smaller organizations such as middle market companies, subsidiaries of Global 2000, private equity firms and venture capital firms will tend to start at the advisory and consulting level, while the Global 2000 tend to initially engage with product-based consulting services.

Marketing, Sales and Strategic Alliances

Marketing. The primary goal of our marketing efforts is to generate sales opportunities by increasing Edgewater’s brand awareness, value proposition and overall domain expertise. Our marketing efforts continue to be closely aligned with the Company’s go-to-market strategy, while introducing specific offerings that address business and IT problems faced by our customers. We leverage the core competencies we have developed in delivering our services in key industries and horizontal offerings to increase the efficiency of our marketing efforts. Our marketing function utilizes comprehensive Internet marketing strategies that involve integrated activities including, but not limited to: webinars, highly-targeted email campaigns distributed to prospect and customer lists developed with specific demographics and attributes and social media outlets to promote our Company’s capabilities and services (e.g., both company-driven and domain-specific blogs, social networking and video sharing websites). By leveraging closely coupled internet marketing strategies to promote our services, we are able to reach a wider audience and communicate in a medium that has become more widely accepted and brings in quicker results from both a sales and marketing perspective. We also gather key statistics from our websites, blogs, email campaigns and other social media outlets to test, measure and trace our marketing initiatives. This enables us to ensure we are reaching the right target audience with concise and compelling offerings to promote our capabilities. We also author white papers and contribute to articles in trade publications, attend events and participate in targeted industry conferences and tradeshows.

Our marketing department has embarked on an enterprise-wide initiative to bring recent acquisitions under a single master brand concept. Since some of our new offerings are not purely technology oriented, we are in the process of establishing our master brand as “Edgewater,” thus dropping the word “Technology” from our corporate identity.

Sales. Our sales approach is to combine traditional sales with our strength in industries and technology. Our traditional sales function is composed 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. Once the customer has engaged Edgewater, 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: Exact Target, Informatica Corporation, ISO Insurance Technology Solutions, Google, Microsoft Corporation (“Microsoft”), Oracle America, Inc. (“Oracle”), SAP, Soft Choice, TeaLeaf, TenDigits, UBMatrix, VMWare and Webtrends. 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

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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 specialty 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, 2011, Edgewater had 380 employees (excluding contractors). Of these employees, 287 were billable consultants and 93 were management and administrative personnel, composed of sales, marketing, human resources, finance, accounting, internal information systems and administrative support. The average tenure of our employees is approximately 5.0 years and the average “years of experience” is approximately 20 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 who come from a multitude of professional backgrounds. Edgewater believes that this creates an exciting, diverse and creative work environment for our employees.

Compensation. We have competitive compensation programs that have been structured to attract and retain highly-skilled professionals. Edgewater’s compensation programs include competitive base salaries, coupled with cash bonus and equity-based incentive opportunities. Compensation plans may be tied to the achievement of the Company’s financial performance or tied to 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 increased opportunities for professional development and a dynamic corporate culture, which 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. We also believe that the working relationships they form on various project teams foster valuable formal and informal mentoring and knowledge sharing.

Competition

We operate in a competitive and rapidly changing market. We also compete with a variety of organizations that offer services similar to those we provide. Our customers often retain us on a non-exclusive, project-by-project basis. We compete with a number of different types of businesses, including:

Traditional management and strategy consulting firms that focus on advising ”C”-level executives on organization and corporate strategy. Many of the traditional strategic consulting firms have added services in information technology.

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Systems integration and IT consulting firms that design and implement technology solutions, including software installation, for departments and enterprises. These firms have grown in size and scope of services, including the provision of offshore software development services.

Information technology product and service vendors that offer technical consulting to support their own products. Many of these firms have also developed various alliances with systems integration and IT consulting firms to augment their own capabilities.

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

¡ Technical Consulting/Systems integrators: Accenture, EDS, Mattersight Corporation (formerly eLoyalty Corporation), Tier Technologies, Ciber, Inc., IBM Global Services, Business and Decision Group, Caritor, Inc., LogicaCMG, Perficient and Sapient;

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

¡ Management/Business Consulting firms: Bain & Company, Booz-Allen & Hamilton, Boston Consulting Group and McKinsey & Company;

¡ Enterprise Performance Management / Business Activity Monitoring / Business Intelligence providers: Deloitte LLP, The Hackett Group, Hitachi Consulting Corporation, Hewlett-Packard, KPMG, PricewaterhouseCoopers and Ernst & Young; and

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

We believe that the principal criteria considered by prospective customers when selecting a consulting firm include skills and capabilities of consultants, scope of services, project methodology and approach, technical and industry expertise, reputation and quality of past work, perceived value and a commitment to delivering a solution that works as intended. Due to our ongoing dedication and attention to all of the above characteristics, we believe that we are well positioned against our competitors in our marketplace.

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,’’ “Edgewater Strategy Services,” “Edgewater Technology-Ranzal,” “Edgewater Ranzal” and “Edgewater Fullscope,” among others. 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. 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” included elsewhere in this Form 10-K.

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

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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 board approved repurchase programs. See “Item 5. – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” included elsewhere in this Form 10-K. Any future purchases by us will depend on many factors, including, but not limited to, the market price of our common stock, our business strategy, our business and financial position and general economic and market conditions.

Directors and Executive Officers of the Registrant

Name	Age		Position with the Company
Shirley Singleton		60	Chairman of the Board, President and Chief Executive Officer
David Clancey		56	Executive Vice President, Chief Strategy Officer and Chief Technology Officer
Timothy R. Oakes		44	Chief Financial Officer, Treasurer and Corporate Secretary
Robin Ranzal-Knowles		45	President Edgewater Technology-Ranzal, Inc.
Kristin Zaepfel		48	Vice President, Human Resources
Paul Flynn		62	Independent Director
Paul Guzzi		69	Independent Director
Nancy Leaming		65	Independent Director
Michael Loeb		56	Independent Director
Daniel O’Connell		63	Independent Director
Wayne Wilson		63	Lead Independent Director

Ms. Singleton currently serves as our Chairman, a position she was elected to in July 2005. Ms. Singleton co-founded Edgewater Technology (Delaware), Inc. (“Edgewater Delaware”) in 1992 and served as President of Edgewater Delaware from 1992 until January 2002. Ms. Singleton has served as President and Chief Executive Officer of our Company (the parent company of Edgewater Delaware) from January 2002 to the present. Prior to co-founding Edgewater Delaware, Ms. Singleton held various management positions from 1982 to 1992 at Logica North America and attained the position of Vice President and General Manager of the Northeast region. Ms. Singleton serves on the Foundation Board of Bunker Hill Community College, the Board of Trustees for North Shore Medical Center and the board of The Commonwealth Institute. Ms. Singleton has served as a Director of our Company since June 2001.

Mr. Clancey has served as Executive Vice President, Chief Strategy Officer and Chief Technology Officer of our Company since June 2006. Before assuming his current title, Mr. Clancey served as our Executive Vice President—Chief Technology Officer from 2001 to 2006 and as Edgewater Delaware’s Senior Vice President—Chief Technology Officer from 1992 until 2001. Mr. Clancey co-founded Edgewater Delaware in 1992 with Ms. Singleton. Prior to co-founding Edgewater Delaware, Mr. Clancey was a Systems Architect and Chief Technology Officer at Logica North America.

Mr. Oakes has served as Chief Financial Officer, Treasurer and Corporate Secretary of our Company since September 2009 and Chief Accounting Officer of our Company since July 2008. Mr. Oakes joined our Company as a Director of Finance in August 2004. Prior to joining Edgewater, Mr. Oakes was a Senior Director of Finance

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at Symmetricom, Inc. from September 2001 to August 2004. Prior to Symmetricom, Mr. Oakes held various financial management and operational reporting positions with companies in the biotechnology, manufacturing and consulting services industries. Mr. Oakes is a certified public accountant.

Ms. Ranzal-Knowles has served as President of Edgewater Technology-Ranzal, Inc., a subsidiary of the Company (“Ranzal”), since October 2004. Prior to joining Edgewater, Ms. Ranzal-Knowles was the founder, owner and President of Ranzal and Associates, Inc., from March 1996 to October 2004.

Ms. Zaepfel has served as Vice President of Human Resources of our Company since September 2003. Prior to joining our Company, Ms. Zaepfel served as Senior Vice President of Human Resources for Xchange, Inc. from 1998 to 2003. Ms. Zaepfel has also held various Human Resources positions at such organizations as HPR, Inc., Mellon Bank Corporation and The Boston Company.

Mr. Flynn currently serves as Executive Vice President and Commercial Loan Officer at Peoples United Bank, a position he has held since June 30, 2011. From 2007 to June 2011, Mr. Flynn was an Executive Vice President and Commercial Loan Officer at DanversBank. From 2000 to 2007, Mr. Flynn was an Executive Vice President of RBS Business Capital, a division of Citizens Financial Group. From 1986 to 2000, Mr. Flynn was an Executive Vice President for the United States Trust Company. Prior to his time at the United States Trust Company, Mr. Flynn was a Senior Vice President for Patriot Bank, N.A. from 1981 to 1986. From 1977 to 1981, Mr. Flynn was an Assistant Vice President at Chase Commercial Corporation and from 1974 to 1977 Mr. Flynn was an Audit Manager with New England Merchants Bank. Mr. Flynn serves as a Director of the Business Development Corporation of New England. Mr. Flynn was elected as a Director of our Company in July 2005.

Mr. Guzzi currently serves as the President and Chief Executive Officer of the Greater Boston Chamber of Commerce, a position he has held since 1996. From 1995 to 1996, Mr. Guzzi was Vice President of State and Community Affairs for Boston College. Prior to his position at Boston College, Mr. Guzzi was a consultant for Heidrick & Struggles, an international recruitment firm from 1994 to 1995. From 1991 to 1993, Mr. Guzzi served as a Vice President at Data General Corporation. Prior to his position at Data General Corporation, Mr. Guzzi was a Senior Vice President at Wang Laboratories from 1981 to 1991. Mr. Guzzi was a State Representative in the Massachusetts Legislature from 1971 to 1974 and the Massachusetts Secretary of State from 1975 to 1978. Mr. Guzzi serves as a Trustee of the Citi Center for the Performing Arts, is a Director of The Partnership and the Vice Chairman of Blue Cross Blue Shield of Massachusetts. Mr. Guzzi is also a Board member of the Partners HealthCare Corporation and serves as an Advisory Board member for The Boston Club. Mr. Guzzi has served as a Director of our Company since April 2004.

Ms. Leaming has been an independent consultant since 2005. From June 2003 to June 2005, Ms. Leaming was the Chief Executive Officer and President of Tufts Health Plan, a provider of healthcare insurance. Prior to that, Ms. Leaming served as Tufts Health Plan’s President and Chief Operating Officer since 1998, the Chief Operating Officer from 1995 to 1998 and the Chief Operating Officer/Chief Financial Officer from 1986 to 1995. Prior to joining Tufts Health Plan, Ms. Leaming held a variety of management positions in managed care and banking, including Chief Financial Officer of Matthew Thornton Health Plan. Ms. Leaming currently serves as a director of Biogen Idec, Hologic, Inc. and the American Red Cross. Ms. Leaming joined our Board in December 2005.

Mr. Loeb is currently the President and CEO of Loeb Enterprises, a New York-based business development lab, a position he has held since 2005. Mr. Loeb was the President of the Synapse Group, Inc., a wholly-owned subsidiary of Time Warner, and its Chief Executive Officer from 1997 to December 2005. Prior to co-founding the Synapse Group, Inc. and becoming its President in 1991, Mr. Loeb had an eight-year career at Time Warner, where he held a number of positions including Consumer Marketing Director for Sports Illustrated and Vice President of Consumer Marketing of Entertainment Weekly. At Time Warner, he also helped introduce SI for Kids. Mr. Loeb was also responsible for starting the direct response division of Deutsch Agency immediately prior to co-founding the Synapse Group, Inc. Mr. Loeb has served as a Director of our Company since April 2000.

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Mr. O’Connell is an attorney and real estate developer with extensive management experience. Mr. O’Connell has served as the President and CEO of the Massachusetts Competitive Partnership, a non-profit civic and educational association focusing on jobs and competitiveness in the Commonwealth of Massachusetts, since February 2010. Previously, Mr. O’Connell served as the Secretary of Housing and Economic Development for the Commonwealth of Massachusetts from January 2007 to February 2010. Prior to that time, from 2005 to 2007, Mr. O’Connell was an Executive Vice President and Partner in the Development and Advisory Services Group of Meredith & Grew, a full service commercial real estate firm. Before joining Meredith & Grew, Mr. O’Connell served seven years as a Principal in the Development Services Group at Spaulding & Slye Colliers. Mr. O’Connell has served as a Director of our Company since August 2009.

Mr. Wilson currently serves as our Lead Independent Director, a position he was elected to in September 2005. Mr. Wilson has been an independent business advisor since 2002. From 1995 to 2002, Mr. Wilson served in various roles, including President, Chief Operating Officer and Chief Financial Officer at PC Connection, Inc., a Fortune 1000 direct marketer of information technology products and services. From 1986 until 1995, he was a partner in the assurance and advisory services practice of Deloitte & Touche LLP. Mr. Wilson also serves as a director of ARIAD Pharmaceuticals, Inc., FairPoint Communications, Inc. and Hologic, Inc. He previously served as a director of Cytyc Corporation. Mr. Wilson has served as a Director of our Company since May 2003.

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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 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 results can be subject to variability as work is completed for 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 have in the past derived, and may in the future derive, a significant portion of our service revenue from a limited number of customers. From year-to-year, revenue from one or more of our customers may exceed 10% of our total service revenue. Although reliance on significant customers has diminished over the last three fiscal years (see “Item 1. Business – Customers”), the loss of a major customer or large project could materially and adversely affect our results of operations. In 2011 and 2010, no customer accounted for more than 5% of our service revenues, and our top five customers represented 11.1% and 15.3% of our 2011 and 2010 service revenues, respectively. Nonetheless, the future receipt of significant commitments from new or existing customers could create future risks such as those described above concerning customer concentration.

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 revenue from a major customer that constitutes a large portion of a particular quarter’s total revenue. If we lose any major customers or any of our customers cancel or significantly reduce a large project’s scope, 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 adverse impact on financial results and a decrease in cash flow.

Our business could be adversely affected by a significant or prolonged economic downturn.    Our results of operations are affected by the level of business activity of our customers, 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 customers has had and could continue to have a material adverse effect on our revenue and profit margin. Future economic conditions could cause some customers to reduce or defer their expenditures for consulting services. We have implemented and will continue to implement cost-savings initiatives to manage our expenses as a percentage of revenue. However, current and future cost-management initiatives may not be sufficient to avoid reductions in our margins if the economic environment should weaken for a prolonged period.

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 revenue 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, we would be required to shift our consultants to other projects to minimize the impact on our operating results. We cannot provide 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 revenue 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.

We have significant fixed operating costs, which may be difficult to adjust in response to unanticipated fluctuations in revenue.    A high percentage of our operating expenses, particularly salary expense, rent, depreciation expense and amortization of intangible assets, is fixed in advance of any particular quarter. As a

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result, an unanticipated decrease in the number or average size of, or unanticipated delay in the scheduling for, our projects may cause significant variations in operating results in any particular quarter and could have a material adverse effect on operations for that quarter. An unanticipated termination or decrease in size or scope of a significant project, a customer’s decision not to proceed with a project we anticipated or the completion during the quarter of several significant customer projects could require us to maintain underutilized employees and could have a material adverse effect on our business, financial condition and results of operations.

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 retainer-based contracts. In 2011, fixed-price contracts represented approximately 2.9% of our total service revenue. We assume greater financial risk on fixed-price contracts than on time-and-materials or retainer-based 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 specialty 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” included elsewhere in this Form 10-K 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 currently 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

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will continue to face additional competition from new entrants into the market in the 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.

If customers view offshore development as a viable alternative to our service offerings, our pricing, revenue, margins and profitability may be negatively affected.    In recent years, 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, the offshore model has matured and offers an alternative choice when companies evaluate their IT consulting needs. To counteract the alternative of going offshore for IT consulting services, we are focusing on advisory and product-based 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 beyond current levels, then our pricing and revenue could be adversely affected.

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.

Our business could be adversely affected by material changes to our strategic relationship with Oracle America, Inc.    Our EPM-related service offering derives a substantial portion of its revenues from a channel relationship with Oracle. This relationship involves Oracle assisted lead generation support with respect to the business intelligence services provided in connection with our EPM-related service offerings. This relationship is governed by an Oracle Partner Network Agreement, which is subject to annual renewal. A failure to renew this relationship, or a material modification or change in Oracle’s partner approach or its contract terms, for any reason, could have a material adverse impact on our results of operations.

Our business could be adversely affected by material changes to our strategic relationship with Microsoft Corporation.    Our ERP-related product and service offering derives a substantial portion of its revenues from a channel relationship with Microsoft. This relationship involves Microsoft-assisted lead generation support with respect to the ERP-related services provided by Fullscope. This relationship is governed by a Microsoft Partner Agreement, which is subject to annual renewal. A failure to renew this relationship, or a material modification or change in Microsoft’s partner approach or its contract terms, for any reason, could have a material adverse impact on our results of operations.

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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 have, in the past, realized growth, in part, through acquisitions, including our recent acquisitions of Fullscope, Inc. and Meridian Consulting International, 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, including the Fullscope and Meridian acquisitions, 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, 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.

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 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 increased volatility of 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;

¡ General economic or stock market conditions unrelated to our operating performance;

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

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

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¡ 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;

¡ 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.

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

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 be required to record additional impairment charges against the carrying value of our goodwill and other intangible assets in future quarters.    As of December 31, 2011, we had recorded goodwill and intangible assets with a net book value of $14.1 million. We test for impairment at least annually and whenever evidence of impairment exists. We have in the past recorded impairment charges against the carrying value of our goodwill and intangible assets. The carrying value of our goodwill and intangible asset values are measured using a variety of factors, including values of comparable companies, overall stock market and economic data and our own projections of 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.

Our operating results could be adversely affected by fluctuations in the value of the U.S. dollar against foreign currencies.    As a result of the our recent acquisitions and the international expansion of our EPM-related business, a portion of our revenues and operating expenses are, and will be, denominated in currencies other than the U.S. dollar. As a result, these revenues and operating expenses are affected by fluctuating foreign currency exchange rates. An increase in the U.S. dollar relative to other currencies in which we have revenues will cause our revenues to be lower than with a stable exchange rate. Changes in exchange rates between other foreign currencies and the U.S. dollar can affect the recorded levels of our assets, liabilities and expenses relating to our operations. The primary foreign currencies in which we have exchange rate fluctuation exposure are the Canadian dollar, the Euro, the British Pound and the South African Rand. Exchange rates between these currencies and U.S. dollars have fluctuated significantly in recent years, particularly as the current global financial crisis has unfolded, and may continue to do so in the future. We cannot predict the impact of future exchange rate fluctuations on our operating results.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We lease 66,027 square feet of office space for our principal executive offices located at 200 Harvard Mill Square, Suite 210, Wakefield, Massachusetts 01880-3209. We also have office facilities in Alabama, Georgia, New Hampshire, New York, Illinois, Montreal and London.

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Our corporate and satellite offices are all leased properties. We do not own any real estate. 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 in the future.

ITEM 3. LEGAL PROCEEDINGS

We are sometimes a party to litigation incidental to our business. We are not currently involved in any active, pending, or (to the best of our knowledge) threatened legal proceedings which would be material to our consolidated financial statements. We maintain insurance in amounts, with coverages and deductibles that we believe are reasonable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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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 Global Market under the symbol “EDGW.” On March 1, 2012, there were approximately 1,800 holders of record of our common stock, and approximately 11.3 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.

The following table sets forth the range of high and low trading prices for our common stock as reported by the NASDAQ Global Market for each quarter in 2010 and 2011and the first quarter of 2012 (through March 1, 2012).

	High		Low
FISCAL 2010:
First Quarter	$	3.30	$	2.76
Second Quarter		3.42		2.65
Third Quarter		2.98		2.32
Fourth Quarter		3.03		2.27
FISCAL 2011:
First Quarter	$	3.60	$	2.15
Second Quarter		3.41		2.50
Third Quarter		3.16		1.59
Fourth Quarter		3.20		2.30
FISCAL 2012:
First Quarter	$	3.85	$	2.75
(through March 1, 2012)

Recent Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities

In December 2007, our Board of Directors (the “Board”) authorized a stock repurchase program for up to $5.0 million of common stock on the open market or through privately negotiated transactions from time-to-time through December 31, 2008 (the “Stock Repurchase Program”). The Board subsequently amended the Stock Repurchase Program, authorizing both an increase to and an extension of the Stock Repurchase Program. The Stock Repurchase Program, as amended, had a maximum purchase value of shares of $8.5 million (the “Purchase Authorization”) and expired on September 23, 2011 (the “Repurchase Period”). On September 9, 2011, the Board approved both a $5.0 million increase to the Purchase Authorization, to $13.5 million, and an extension of the Repurchase Period to September 21, 2012.

The timing and amount of the purchases will be based upon market conditions, securities law considerations and other factors. The Stock Repurchase Program does not obligate the Company to acquire a specific number of shares in any period and may be modified, suspended, extended or discontinued at any time, without prior notice.

In November 2011, the Board authorized an Odd-Lot Program, which was open to stockholders owning fewer than 100 shares of Edgewater common stock. The price paid to stockholders participating in the first trading period, which ended on December 7, 2011 was $2.97 per share. As of December 7, 2011, 77

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stockholders, or approximately 7.3% of stockholders eligible to participate in the program, representing 2,363 shares of the Company’s common stock participated in the first trading period. The Board approved a second trading period which ended on January 14, 2012. In total, 178 stockholders, or approximately 16.8% of stockholders eligible to participate, representing 6,353 shares of the Company’s common stock, elected to participate in the tender offer.

The following table provides information with respect to purchases of our common stock during the quarter ended December 31, 2011:

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
October 1 – 31, 2011		-	$	-		-	$	4,726,727
November 1 – 30, 2011		40,000		3.17		40,000		4,599,967
December 1 –31, 2011 (1)		4,159		2.97		4,159		4,587,614
Total		44,159	$	3.15		44,159	$	4,587,614

(1) In November 2011 the Company authorized an odd-lot tender, which was open to stockholders owning fewer than 100 shares of common stock. Purchases under this program are reflected in the table above.

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Performance Graph

The following chart compares the cumulative total stockholder return and total return analysis, respectively, of our common stock with the cumulative total return on the NASDAQ Composite US Index, the S&P 600 IT Services Index and self-selected peer groups in the technology consulting industry for the five-year period beginning on December 31, 2006 (the closing sale price of our common stock on this date was $6.11) and ending on December 30, 2011 (the last trading date for our common stock in the 2011 fiscal year), assuming a $100 investment in each and assuming the reinvestment of dividends. We did not pay any dividends during the period. Refer to the footnotes below the graph for a listing of the companies included in our peer group.

Company Name / Index	12/31/06		12/31/07		12/31/08		12/31/09		12/31/10		12/31/11
	(Amounts in Dollars)
Edgewater Technology, Inc.		100.00		119.48		42.39		48.61		38.46		45.17
NASDAQ Index		100.00		110.26		65.65		95.19		112.10		110.81
S&P 600 IT Services		100.00		101.13		83.62		109.07		137.03		148.69
New Peer Group (1)		100.00		125.11		65.54		95.62		134.99		134.41
Old Peer Group (2)		100.00		122.01		62.06		92.79		129.31		126.78

(1) Our self-selected peer group for 2011 consists of the following companies: The Hackett Group; Ciber, Inc.; Perficient, Inc.; Sapient Corporation; Tier Technologies, Inc.; and Analysts International Corporation.

(2) Our self-selected peer group for 2010 consists of the following companies: The Hackett Group; Ciber, Inc.; Mattersight Corporation (formerly eLoyalty Corporation); Perficient, Inc.; Sapient Corporation; and Tier Technologies, Inc.

During 2011, we elected to change the composition of our self-selected peer group companies to eliminate, from the 2010 peer group presentation, Mattersight Corporation (“Mattersight”) based upon its 2011 divestiture. As a result, we have elected to remove Mattersight from our analysis of comparable publicly traded companies and replace it with Analysts International Corporation.

We believe that the companies included in our 2011 peer group are comparable to our Company as they provide similar IT consulting services and expertise to their customers.

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The above Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

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. 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.

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ITEM 6. SELECTED FINANCIAL DATA

The 2011, 2010, 2009, 2008, and 2007 selected consolidated financial data presented below have been derived from our audited consolidated financial statements and have been prepared in accordance with United States generally accepted accounting principles. 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 Annual Report on Form 10-K.

	Year Ended December 31,
	2011			2010			2009			2008			2007
	(In Thousands, Except per Share Data)
Consolidated Statements of Operations Data:
Total revenue	$	102,443		$	88,545		$	50,085		$	73,743		$	68,490
Cost of revenue		63,746			56,470			33,987			44,955			40,392
Gross profit		38,697			32,075			16,098			28,788			28,098
Operating expenses:
Selling, general and administrative		32,307			30,263			18,412			23,232			21,335
Lease abandonment expense (1)		2,230			-			-			-			-
Depreciation and amortization		2,846			4,023			2,694			3,771			2,448
Impairment of goodwill and other intangible assets (2)		-			-			-			48,594			-
Total operating expenses		37,383			34,286			21,106			75,597			23,783
Operating income (loss)		1,314			(2,211	)		(5,008	)		(46,809	)		4,315
Other (expense) income, net		(127	)		34			122			503			1,599
Income (loss) before taxes		1,187			(2,177	)		(4,886	)		(46,306	)		5,914
Tax provision (benefit) (3)		843			21,395			(1,047	)		712			(2,896	)
Net income (loss)	$	344		$	(23,572	)	$	(3,839	)	$	(47,018	)	$	8,810
Basic net income (loss) per share:
Net income (loss)	$	0.03		$	(1.93	)	$	(0.32	)	$	(3.66	)	$	0.75
Weighted average shares, basic		12,038			12,195			12,067			12,861			11,793
Diluted net income (loss) per share:
Net income (loss)	$	0.03		$	(1.93	)	$	(0.32	)	$	(3.66	)	$	0.66
Weighted average shares, diluted		12,048			12,195			12,067			12,861			13,358

(1) In December 2011, the Company abandoned certain excess office space within its corporate headquarters in Wakefield, Massachusetts. As a result of the abandonment of such space, the Company recorded a non-cash operating charge of approximately $2.2 million.

(2) During 2008, the Company recorded $48.6 million of impairment charges related to the carrying values of its goodwill and certain other intangible assets. Additional details can be found in the Company’s previously filed reports with the SEC.

(3) During the years ended December 31, 2010 and 2008, in connection with our routine, periodic assessment of the estimated future realizability of the carrying value of our net deferred tax assets, we recorded non-cash charges of $21.9 million and $9.9 million, respectively, related to an increase in the valuation allowance recorded against the carrying value of our deferred tax assets.

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	As of December 31,
	2011		2010		2009		2008		2007
			(In Thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities	$	10,333	$	10,903	$	12,661	$	24,566	$	22,775
Accounts receivable, net		23,307		19,496		18,081		11,683		15,146
Goodwill and intangibles, net		14,128		15,870		16,225		3,592		53,715
Deferred tax asset, net		-		-		21,108		22,393		22,255
Other assets		3,430		4,007		5,731		4,836		6,335
Total assets	$	51,198	$	50,276	$	73,806	$	67,070	$	120,226
Total liabilities	$	19,485	$	17,311	$	18,690	$	9,112	$	12,700
Stockholders’ equity		31,713		32,965		55,116		57,958		107,526
Total liabilities and stockholders’ equity	$	51,198	$	50,276	$	73,806	$	67,070	$	120,226
Outstanding shares of common stock		11,311		12,342		12,132		12,162		13,297

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

You should read the following summary together with the more detailed business information and consolidated financial statements and related notes that appear elsewhere in this annual report and in the documents that we incorporate by reference into this annual report. This annual report may contain certain “forward-looking” information within the meaning of the Private Securities Litigation Reform Act of 1995. This information involves risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in “Item 1A – Risk Factors” and under “Special Note Regarding Forward-Looking Statements.”

Overview

Edgewater is a strategic consulting firm that brings a synergistic blend of specialty services in the areas of business advisory, analytics, data management, and technology to its customer base. During the fiscal year ended December 31, 2011, we generated revenues, including software revenue and reimbursement of out-of-pocket expenses, of approximately $102.4 million from a total of 406 customer. Headquartered in Wakefield, Massachusetts, as of December 31, 2011, our Company employed approximately 287 consulting professionals (excluding contractors) and 380 total professionals (excluding contractors).

Factors Influencing Our Results of Operations

Revenue.

The Company derives its service revenue from time and materials-based contracts, fixed-price contracts and retainer-based arrangements. Time and materials-based contracts represented 95.0% of service revenue for the year ended December 31, 2011. Revenue under time and materials contracts is recognized as services are rendered and performed at contractually agreed upon rates. Fixed-price contracts represented 2.9% of service revenue for the year ended December 31, 2011. Revenue pursuant to fixed-price contracts is recognized under the proportional performance method of accounting. Retainer-based contracts represented 2.1% of service revenue for the year ended December 31, 2011. Revenue under retainer-based contracts is recognized ratably over the contract period, as outlined within the respective contract.

Provisions for estimated profits or losses on incomplete projects are made on a contract-by-contract basis and are recognized in the period in which such profits or losses are determined. The company did not recognize any loss contracts during the years ended December 31, 2011, 2010 and 2009, respectively. On many projects, we are reimbursed for out-of-pocket expenses such as airfare, lodging and meals. These reimbursements are included as a component of revenue and cost of revenue. The aggregate amount of reimbursed expenses will fluctuate depending on the location of our customers, the total number of our projects that require travel and whether our arrangements with our customer provide for the reimbursement of travel and other project-related expenses.

Our 2009 quarterly and annual operating results were significantly impacted by a dramatic slowdown in the IT consulting services business environment. However, we proactively responded to these challenges through a systematic reorientation of the Company’s strategic direction, service offerings and resources, which we believe has positioned the Company to respond to and capitalize upon the changing needs of the marketplace.

Each of the strategic initiatives we have implemented (the development of new service offerings, the cross-disciplinary training of our billable consultant resources and focusing our sales efforts on new technologies) was undertaken with the specific goal of transforming the Company’s IT service offerings towards a “product-based” consulting model.

In connection with our migration to more of a product-based consulting model, software revenue will continue to be a significant portion of our revenues. Software revenue, driven by resales of Microsoft Dynamics

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AX product, represented 12.8% and 13.0% of revenue for the years ended December 31, 2011 and 2010, respectively. Software and maintenance revenue are recognized upon delivery, except in the infrequent situation where the Company provides maintenance services, in which case the related maintenance is recognized ratably over the maintenance period (while the software revenue is recognized upon delivery). Software revenue is expected to fluctuate between quarters, dependent on our customers’ demand for such third-party off-the-shelf software. Fluctuations in software revenue may have an impact upon our periodic operating performance, including gross margin.

Operating Expenses.

The largest portion of our operating expenses consists of cash and non-cash compensation and benefits associated with our project consulting personnel and related expenses. Non-cash compensation includes stock compensation expense arising from restricted stock and option grants to employees. Project personnel expenses also consist of payroll costs and related benefits associated with our professional staff. Other related expenses include travel, subcontracting costs, third-party vendor payments and non-billable expenses associated with the delivery of services to our customers. 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 customers and the non-billable costs associated with securing new customer engagements and developing new service offerings. The remainder of our recurring operating expense consists of expenses associated with the development of our business and the support of our customer-serving professionals, such as professional development and recruiting, marketing and sales, and management and administrative support. Professional development and recruiting expenses consist primarily of recruiting and training content development and delivery costs. Marketing and sales expenses consist primarily of the costs associated with the development and maintenance of our marketing materials and programs. Management and administrative support expenses consist primarily of the costs associated with operations including finance, information systems, human resources, facilities (including the rent of office space) and other administrative support for project personnel.

We regularly review our fees for services, professional compensation and overhead costs to ensure that our services and compensation are competitive within the industry, and that our overhead costs are balanced with our revenue levels. In addition, we monitor the progress of customer projects with customer senior management. We manage the activities of our professionals by closely monitoring engagement schedules and staffing requirements. However, a rapid decline in the demand for the professional services that we provide could result in lower utilization of our professionals than we planned. In addition, because most of our customer engagements are terminable by our customers without penalty, an unanticipated termination of a customer project could require us to maintain underutilized employees. While professional staff levels must be adjusted to reflect active engagements, we must also maintain a sufficient number of consulting professionals to oversee existing customer engagements and to participate in sales activities to secure new customer assignments.

Adjustments to Fair Value of Contingent Consideration.    During the years ended December 31, 2011 and 2010, we reported changes in the estimated fair value of certain acquisition-related, contingent consideration liabilities. We remeasure the estimated carrying value of contingent consideration each quarter, with any changes (income or expense) in the estimated fair value recorded as an operating expense. Changes in the carrying value of contingent consideration liabilities may fluctuate significantly in future periods depending on changes in estimates, including probabilities associated with achieving the milestones and the period in which we estimate these milestones will be achieved.

In 2011, the Company recorded an expense, related to the change in fair value of the contingent earnout accrual, of $1.2 million (within selling, general and administrative expense on the consolidated statement of operations) as a result of the performance of Fullscope’s Process contracts during 2011. The Company settled the liability in the amount of $2.7 million during the fourth quarter of 2011 and no further contingent earnout may be earned by the former Fullscope stockholders.

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In May 2011, Meridian completed its first twelve-month earnout period, during which the required performance measurements were not achieved. The former Meridian stockholders did not receive any additional contingent consideration related to the first earnout period. The Company, as of December 31, 2011, has accrued $231 thousand in potential future contingent earnout consideration payable to the former Meridian stockholders related to the completion of the second and third twelve-month earnout periods. As of December 31, 2011, the maximum amount of contingent earnout consideration that the former stockholders of Meridian can earn during the final two earnout periods is capped at $1.8 million.

Non-Routine Professional Services-Related Expenses.    During the years ended December 31, 2011 and 2010, we incurred certain non-routine professional service-related expenses associated with our identification of embezzlement activities at Fullscope, one of our wholly-owned subsidiaries (the “Fullscope Embezzlement Issue”). We incurred the majority of our embezzlement-related expenses during fiscal 2010 in connection with our identification and investigation of the embezzlement activity.

While embezzlement-related expenses decreased in 2011, we anticipate that we may continue to incur additional expenses associated with the Fullscope Embezzlement Issue as we intend to aggressively pursue recovery through all possible avenues, including a claim against the escrow account established in connection with the Fullscope Acquisition and reimbursement under insurance policies. We anticipate that we will be able to recover some, if not all, of the receivable amounts embezzled during 2010, the professional service expenses we have incurred to-date, or will incur in the future, addressing this situation, and any amounts paid to settle any of the identified sales and use tax liability amounts. Amounts recovered, if any, will be recorded during the period in which settlement is determined to be certain.

Acquisition Related Costs.    During the year ended December 31, 2010, we incurred approximately $451 thousand in professional service-related expenses directly associated with our acquisitions of Fullscope, Inc. (the “Fullscope Acquisition”) and Meridian Consulting International (the “Meridian Acquisition”). Our stated goal is to continue to pursue strategic growth initiatives focused upon making our Company a leading provider of specialty information technology consulting services. Our strategic growth initiatives may be based upon the expansion of our existing Core Service Offerings or through the acquisition of new and/or complementary service- or product-based offerings. Pursuing either of these growth avenues may cause the Company to incur non-routine operating expenses in connection with our investment in a particular growth initiative.

2010 Increase to Deferred Tax Asset Valuation Allowance.

We have net deferred tax assets that have arisen primarily as a result of timing differences, net operating loss carryforwards and tax credits. Our ability to realize a deferred tax asset is based on our ability to generate sufficient future taxable income within the applicable carryforward period and subject to any applicable limitations. We assess, on a routine periodic basis, the estimated future realizability of the gross carrying value of our deferred tax assets on a more likely than not basis. Our periodic assessments take into consideration both positive evidence (future profitability projections for example) and negative evidence (recent and historical financial performance for example) as it relates to evaluating the future recoverability of our deferred tax assets.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against the net deferred tax assets. During the third quarter of 2010, the Company performed a review of the more than likely recovery of the net carrying value of its deferred tax assets in connection with its historical financial performance and to a lesser extent, forecasts and projections. As a result of the operating loss in the quarter ended September 30, 2010, our assessment of our adjusted and cumulative loss positions and uncertainty as to the timing of profitability in future periods, we determined that it was not more likely than not that the Company would be able to realize future economic benefit from its net deferred tax assets. Accordingly, we increased our deferred tax valuation allowance by $21.9 million, providing for a full valuation allowance against our deferred tax assets as of September 30, 2010. The 2010 impairment charge is more fully described in “Item 8 – Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 9 – Income Taxes” included elsewhere herein.

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The establishment of a full valuation allowance against the gross carrying value of our net deferred tax assets does not prohibit or limit the Company’s ability to realize a tax benefit in future periods. All existing deferred tax assets, net operating loss carryforwards and credits will be fully available to reduce certain future federal and state income tax obligations, subject to applicable limitations, if taxable income is generated.

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 the future periods, further adjustments to our valuation allowance may be recorded, which could materially impact our financial position and net income (loss) in the period of the adjustment.

Plans for Growth and Acquisitions.

Our goal is to continue to build one of the leading strategic consulting firms in North America by growing our customer base, leveraging our industry expertise to enhance our service offerings and continuing to make disciplined strategic acquisitions. Previous acquisitions have further expanded our geographical footprint, increased our vertical expertise and provided more scale to our organization. While growth in 2011 was organic in nature, the Company plans to continue to evaluate the possibility of growth through acquisition.

Company Performance Measurement Systems and Metrics.

The Company’s management monitors and assesses its operating performance by evaluating key metrics and indicators on an ongoing basis. For example, we regularly review performance information related to annualized revenue per billable consultant, periodic consultant utilization rates, gross profit margins, average bill rates and billable employee headcount. Edgewater has also developed internal Enterprise Performance Management systems which aid us in measuring our operating performance and consultant utilization rates. The matching of sales opportunities to available skill sets in our consultant base is one of our greatest challenges, and therefore we monitor consultant utilization closely. These metrics, along with other operating and financial performance metrics, are used in evaluating management’s overall performance. These metrics and indicators are discussed in more detail under “Results for the Year Ended December 31, 2011, Compared to Results for the Year Ended December 31, 2010,” included elsewhere in this Annual Report on Form 10-K.

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:

• Income Taxes and Valuation of Deferred Tax Assets;

• Revenue Recognition;

• Allowance for Doubtful Accounts;

• Goodwill, Other Intangible Assets and Impairment of Long-Lived Assets;

• Purchase Price Allocation; and

• Valuation of Contingent Earnout Consideration

Senior management has reviewed these critical accounting policies and related disclosures with our Audit Committee. See “Item 8 – Financial Statements and Supplementary Data — Notes to Consolidated Financial

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Statements “included elsewhere herein, which contains 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.

Income Taxes and Valuation of Deferred Tax Assets.    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. We evaluate the realizability of our deferred tax assets and assess the need for a valuation allowance on an ongoing basis. In evaluating our deferred tax assets, we consider whether it is more likely than not that the deferred income tax assets will be realized. The ultimate realization of our deferred tax assets depends upon generating sufficient future taxable income prior to the expiration of the tax attributes. In assessing the need for a valuation allowance, we must project future levels of taxable income. This assessment requires significant judgment. Recovery of the deferred tax assets is dependent on achieving such projections and failure to do so would result in an increase in the valuation allowance in a future period.

We have net deferred tax assets that have arisen primarily as a result of timing differences, net operating loss carryforwards and tax credits. Our ability to realize a deferred tax asset is based on our ability to generate sufficient future taxable income. As is our practice, we assess, on a routine periodic basis, the estimated future realizability of the gross carrying value of our net deferred tax assets on a more likely than not basis. Our periodic assessments take into consideration both positive evidence (future profitability projections for example) and negative evidence (recent and historical financial performance for example) as it relates to evaluating the future recoverability of our deferred tax assets.

As of December 31, 2011, the gross carrying value of the Company’s net deferred tax assets was $39.0 million. This amount consisted of approximately $21.8 million in federal NOL carryforwards, $1.2 million in state NOL carryforwards, $0.5 million in foreign federal and provincial NOL carryforwards, $2.1 million in available federal credits, $1.9 million in future tax benefits related to share-based compensation expense and $11.5 million in net deferred tax assets related to temporary timing differences.

During the year ended December 31, 2010, in connection with our periodic review of the estimated future realizability of our net deferred tax attributes, we recorded a non-cash charge of $21.9 million in connection with an increase to the previously established valuation allowance recorded against the gross carrying value of our net deferred tax assets. Subsequent to this adjustment, the recorded valuation allowance represented a full valuation reserve against the total gross carrying value of our net deferred tax assets. As of December 31, 2011, the Company maintained a $39.0 million valuation allowance against the gross carrying value of its net deferred tax assets.

The establishment of a full valuation allowance against the gross carrying value of our net deferred tax assets does not prohibit or limit the Company’s ability to realize a tax benefit in future periods. All existing deferred tax assets, net operating loss carryforwards and credits will be fully available to reduce certain future federal and state income tax obligations.

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 the future periods, further adjustments to our valuation allowance may be recorded, which could materially impact our financial position and net income (loss) in the period of the adjustment.

Revenue Recognition.    Our Company recognizes revenue primarily through the provision of consulting services and the resale of third-party, off-the-shelf software and maintenance.

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We recognize revenue by providing 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 retainer. Time and materials-based contracts represented 95.0%, 93.5% and 92.7% of service revenue for the years ended December 31, 2011, 2010 and 2009, respectively. Revenue related to our service offerings is recognized as the services are performed and amounts are earned.

When a customer enters into a time and materials, fixed-price or a periodic retainer-based contract, we recognize revenue in accordance with our evaluation of the deliverables in each contract. 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 fair value for each deliverable.

Revenue under time and materials contracts is recognized as services are rendered and performed at contractually agreed upon rates. Revenue pursuant to fixed-price contracts is recognized under the proportional performance method of accounting. Over the course of a fixed-price contract, we routinely evaluate whether revenue and profitability should be recognized in the current period. We estimate the proportional performance on our fixed-price contracts on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project. If we do not have a sufficient basis to measure progress toward completion, revenue is recognized upon completion of performance, 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 costs and revenue earned can be made, based on historical experience and milestones identified in any particular contract.

If our initial estimates of the resources required or the scope of work to be performed on a fixed-price contract are inaccurate, or we do not manage the project properly within the planned time period, a provision for estimated losses on incomplete projects is made. 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. No losses were recognized on fixed-price contracts during the years ended December 31, 2011, 2010 or 2009.

We also perform services on a periodic retainer basis under infrastructure service contracts, which include monthly hosting and support services. Revenue under periodic retainer-based contracts is recognized ratably over the contract period, as outlined within the respective contract. In the event additional services are required, above the minimum retained or contracted amount, then such services are billed on a time and materials basis.

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 defects. The warranty 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. Revenue related to the warranty provisions within our fixed-price contracts is recognized as the services are performed or the revenue is earned. The warranty period is typically for a 30-60 day period after the project is complete.

Customer prepayments, even if nonrefundable, are deferred (classified as a liability) and recognized over future periods as services are performed. As of December 31, 2011 and 2010, the Company recorded a deferred liability of approximately $915 thousand and $418 thousand, respectively, which is included in the financial statement caption of “deferred revenue and other liabilities” related to customer prepayments.

Software revenue represents the resale of certain third-party off-the-shelf software and related maintenance and is recorded on a gross basis provided we act as a principal in the transaction, whereby we have credit risk and we set the price to the end user. In the event we do not meet the requirements to be considered a principal in the

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software sale transaction and act as an agent, software revenue will be recorded on a net basis. Revenue from software resale arrangements represented 12.8%, 13.0% and 1.3% of total revenue for the years ended December 31, 2011, 2010 and 2009, respectively.

The majority of the software sold by the Company is delivered electronically. For software that is delivered electronically, we consider delivery to have occurred when the customer either (a) takes possession of the software via a download (that is, when the customer takes possession of the electronic data on its hardware), or (b) has been provided with access codes that allow the customer to take immediate possession of the software on its hardware pursuant to an agreement or purchase order for the software.

The Company enters into multiple element arrangements which typically include software, post-contract support (or maintenance), and consulting services. Consistent with the software described above, maintenance that is in the form of a pass through transaction, is recognized upon delivery of the software, as all related warranty and maintenance is performed by the primary software vendor and not the Company. Maintenance fee revenue for the Company’s software products, which is inconsequential in all years presented, is recognized ratably over the term of the arrangements, which are generally for a one-year period. The Company has established Vendor Specific Objective Evidence (“VSOE”) with respect to the services provided, for which revenue is recognized as the services are performed.

We consider amounts to be earned once evidence of an arrangement has been obtained, services are delivered, fees are fixed or determinable and collectability is reasonably assured. 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. Out-of-pocket reimbursable expenses charged to customers are reflected as revenue.

We received royalty revenue in connection with the sale of Microsoft Dynamics AX-related discrete and process manufacturing modules (the “Software Modules”) developed by Fullscope, which were subsequently sold to Microsoft in June 2009. Royalty revenues earned were determined as a percentage of net receipts from the periodic sale of license keys and enhancements related to the Software Modules sold by Microsoft. Royalties were recognized as earned in accordance with the contract terms when royalties from licensees were reasonably estimated and collectability was reasonably assured. As per the terms of an earnout agreement entered with the former Fullscope stockholders, our obligation to perform support services ended on June 30, 2011 concurrent with the conclusion of the service and royalty revenue generated by the business process contracts. No future service or royalty revenues are expected to be generated by the business process contracts after the second quarter of 2011.

Allowance for Doubtful Accounts.    The Company maintains an allowance for doubtful accounts related to its accounts receivable that have been deemed to have a high risk of collectability. Management reviews its accounts receivable balances on a monthly basis to determine if any receivables are potentially uncollectible. Management further analyzes historical collection trends and changes in its customer payment patterns, customer concentration and credit worthiness when evaluating the adequacy of its allowance for doubtful accounts. The Company includes any accounts receivable balances that are deemed to be potentially uncollectible, along with a general reserve, in its overall allowance for doubtful accounts.

Billed and unbilled receivables that are specifically identified as being at risk are provided for with a charge to revenue or bad debts as appropriate in the period the risk is identified.

Based on the information available, management believes the allowance for doubtful accounts is adequate; however, future write-offs could exceed the recorded allowance.

Goodwill, Other Intangible Assets and Impairment of Long-Lived Assets.    Business acquisitions typically result in goodwill and other intangible assets, and the recorded values of those assets may become impaired in the future. The determination of the value of such intangible assets requires us to make estimates and assumptions that affect our consolidated financial statements. Goodwill has an indefinite useful life and is not

- 33 -

amortized but is evaluated for impairment annually, on December 2, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We record intangible assets at cost. Our intangible assets consist primarily of non-compete arrangements, customer relationships and trade names and trademarks. We amortize our intangible assets that have finite lives using either the straight-line method or based on estimated future cash flows to approximate the pattern in which the economic benefit of the asset will be utilized.

Goodwill is tested annually for impairment at the reporting unit level utilizing the “fair value” methodology. Factors the Company considers important that could trigger an interim review for impairment include, but are not limited to, the following:

¡ Significant underperformance relative to historical or projected future operating results;

¡ Significant changes in the manner of its use of acquired assets or the strategy for its overall business;

¡ Significant negative industry or economic trends;

¡ Significant decline in its stock price for a sustained period; and

¡ Significant decline in market capitalization relative to net book value.

Goodwill is evaluated for impairment using the two-step process. The first step is to compare the fair value of the reporting unit to the carrying amount of the reporting unit (the “First Step”). If the carrying amount exceeds the fair value, a second step must be followed to calculate impairment (the “Second Step”). Otherwise, if the fair value of the reporting unit exceeds the carrying amount, the goodwill is not considered to be impaired as of the measurement date. In its review of the carrying value of the goodwill, the Company determines fair values for the reporting units using the Income Approach, or more specifically the Discounted Cash Flow Method, and the Market Approach, utilizing both the Guideline Company Method and the Comparable Transactions Method. These valuation methods require management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting units over a multiyear period, as well as determine the weighted average cost of capital to be used as a discount rate.

Long-lived assets, specifically our tangible and intangible assets other than goodwill, held and used are reviewed for impairment whenever events or changes in circumstances indicate that their net book value may not be entirely recoverable. When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets and is recorded in the period in which the determination was made. Any resulting impairment losses recorded by the Company could have an adverse impact on our results of operations by either decreasing net income or increasing net loss.

On December 2, 2011, in connection with the Annual Impairment Test, the Company performed its annual review for impairment. Based upon the valuation approaches described above, the Company determined that the current carrying value of its goodwill had not been impaired. For purposes of its December 2, 2011 Annual Impairment Test, the Company performed its review based upon three individual reporting units.

Goodwill amounted to $12.0 million as of December 31, 2011 and 2010. Other net intangible assets amounted to $2.1 million and $3.8 million as of December 31, 2011 and 2010, respectively.

Significant changes impacting the carrying value of goodwill and other intangible assets during the year ended December 31, 2011 and 2010 included the following, which are described further detail in “Item 8 – Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — Note 4 – Business Combinations” included elsewhere herein:

¡ Meridian Consulting International Acquisition:    In May 2010, the Company increased the gross carrying value of goodwill and other intangible assets by $2.1 million and $0.6 million, respectively, during the year ended December 31, 2010 in connection with the Meridian Acquisition.

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¡ Intangible Asset Amortization:    During 2011 and 2010, the Company recorded $2.0 million (of which, $39 thousand was related to capitalized software and included within cost of revenue on the consolidated statement of operations) and $3.1 million, respectively, in amortization expense on its previously recorded identifiable intangible asset balances.

Purchase Price Allocation.    We allocate the purchase price of our acquisitions to the assets and liabilities acquired, including identifiable intangible assets, based on their respective fair values at the date of acquisition. Some of the items, including accounts receivable, property and equipment, other intangible assets, certain accrued liabilities and other reserves require a degree of management judgment. Certain estimates may change as additional information becomes available. Goodwill is assigned at the enterprise level and is deductible for tax purposes for certain types of acquisitions. Management finalizes the purchase price allocation within 12 months of the acquisition date as certain initial accounting estimates are resolved.

Valuation of Contingent Earnout Consideration.    Acquisitions may include contingent consideration payments based on the achievement of certain future financial performance measures of the acquired company. For acquisitions completed before 2009, these obligations were recognized as incurred and accounted for as an adjustment to the initial purchase price of the acquired assets. For acquisitions completed during 2009 and beyond, contingent consideration is required to be recognized at fair value as of the acquisition date. We estimate the fair value of these liabilities based on financial projections of the acquired companies and estimated probabilities of achievement. We believe our estimates and assumptions are reasonable, however, there is significant judgment involved. We evaluate, on a routine, periodic basis, the estimated fair value of the contingent consideration and changes in estimated fair value, subsequent to the initial fair value estimate at the time of the acquisition, will be reflected in income or expense in the consolidated statements of operations. Changes in the fair value of contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of revenue and/or earnings estimates and changes in probability assumptions with respect to the likelihood of achieving the various earnout criteria. Any changes in the estimated fair value of contingent consideration may have a material impact on our operating results.

Results of Operations

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

	Year Ended December 31,
	2011			2010			2009
Revenue:
Service revenue		77.4	%		77.8	%		92.1	%
Software revenue		12.8	%		13.0	%		1.3	%
Process royalties		2.6	%		2.6	%		-	%
Reimbursable expenses		7.2	%		6.6	%		6.6	%
Total revenue		100.0	%		100.0	%		100.0	%
Cost of revenue:
Project and personnel costs		46.9	%		48.2	%		60.3	%
Software costs		8.1	%		9.0	%		1.0	%
Reimbursable expenses		7.2	%		6.6	%		6.6	%
Total cost of revenue		62.2	%		63.8	%		67.9	%
Gross profit		37.8	%		36.2	%		32.1	%
Operating expenses:
Selling, general and administrative		31.5	%		34.2	%		36.8	%
Lease abandonment expense		2.2	%		-	%		-	%
Depreciation and amortization		2.8	%		4.5	%		5.3	%
Total operating expenses		36.5	%		38.7	%		42.1	%
Operating income (loss)		1.3	%		(2.5	%)		(10.0	%)
Other (expense) income, net		(0.1	%)		-	%		0.2	%
Income (loss) before taxes		1.2	%		(2.5	%)		(9.8	%)
Tax provision (benefit)		0.8	%		24.2	%		(2.1	%)
Net income (loss)		0.4	%		(26.7	%)		(7.7	%)

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Results for the Year Ended December 31, 2011 Compared to Results for the Year Ended December 31, 2010

Revenue.    Total revenue increased by $13.9 million, or 15.7%, to $102.4 million for the year ended December 31, 2011 from $88.5 million for the year ended December 31, 2010. Of the $13.9 million increase in 2011 total revenue, service revenue increased by $10.4 million, or 15.1%, to $79.2 million, as compared to service revenue of $68.8 million in 2010.

Our 2011 year-over-year service revenue growth is entirely organic and includes service revenue contributions from Meridian, which was acquired in May 2010. Additionally, 2011 total revenue includes only six months of service and royalty revenue generated under the Fullscope process contracts which expired in June of 2011. No revenue associated with the Fullscope process contracts has been recognized since June 2011. Additionally, we do not expect to generate any future revenue under the process contracts.

The year-over-year increase in 2011 service revenue is the result of growth within our EPM and ERP product-based service offerings. EPM-related service revenue growth is reflective of continued growth in bid and proposal activity, resulting in expansion of the EPM-related sales pipeline. Additionally, year-over-year EPM service revenue was aided by our international expansion efforts and the full year impact of service revenue generated by the Meridian Acquisition. Year-over-year growth in our ERP-related service offerings is reflective of an increase in Microsoft Dynamics AX product sales during 2011.

Utilization, which is the rate at which we are able to generate revenue from our consultants, increased slightly to 75.8% for the year ended December 31, 2011 compared to 75.6% during the year ended December 31, 2010. During 2011, we maintained our billable consultant utilization rate while increasing billable headcount (including contractors) from 290 (in 2010) to 313 (at the end of the 2011). The consistency of the utilization rate in light of the increased billable consultants is reflective of our current year growth in EPM and ERP service revenue and our efforts to support the growth. We typically target utilization in a range from 78%-82%. This objective is influenced by a variety of factors, including customer demand for IT spending and general economic circumstances.

Annualized service revenue per billable consultant, as adjusted for utilization, was $336 thousand during the year ended December 31, 2011, compared to service revenue per billable consultant of $324 thousand during the comparative 2010 annual period. The change in this operating metric is primarily attributable to the growth of the EPM-related service offerings.

During the years ended December 31, 2011 and 2010, software revenue totaled $13.1 million, or 12.8% of total revenue, and $11.5 million, or 13.0% of total revenue, respectively. Our software revenue is primarily related to our resale of Microsoft Dynamics AX ERP software and maintenance. The year-over-year increase in software revenue is a result of our high rate of maintenance renewals (for pass through arrangements) combined with several new product sales during 2011. Software revenue is expected to fluctuate on an annual basis dependent upon our customers’ demand for such third-party off-the-shelf software. We anticipate that software revenue will continue to be a significant component of annual revenues in future years.

Our historical gross margins related to software revenue have generally been much lower than those achieved on our consulting services. Our ERP-related software revenue, which represents the majority of our 2010, 2011 and anticipated future software revenue, has historically been sold at a higher margin than our EPM-related software. Because software revenue has become a larger percentage of our total revenue, periodic fluctuations in the amount of software revenue recognized by the Company may have a material impact upon our gross margins.

During 2011 and 2010, we recognized $3.2 million and $4.6 million in combined service and royalty revenue, respectively, from Fullscope’s business process contracts. These contracts entailed providing services upon which the earnout agreement associated with the Fullscope Acquisition was based. Per the terms of the

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earnout agreement, the service and royalty revenue generated under the business process contracts ended on June 30, 2011. No revenues have been generated under the business process contracts since June 2011, and the Company does not anticipate that any future revenue will be generated under the business process contracts.

Generally, we are reimbursed for our out-of-pocket expenses incurred in connection with our customers’ consulting projects. Reimbursed expense revenue increased approximately $1.6 million in 2011, to approximately $7.4 million, as compared to $5.9 million in 2010. The aggregate amount of reimbursed expenses will fluctuate from year-to-year 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.

In 2011, we entered into service arrangements with 129 new customers. Comparatively, in 2010, we secured engagements with 102 new customers. The total number of customers the Company served during 2011 totaled 406, as compared to 391 customers during 2010. This year-over-year change is in large part driven by the growth in our EPM- and ERP-related service offerings.

Cost of Revenue.    Cost of revenue primarily consists of project personnel costs principally related to salaries, payroll taxes, employee benefits and travel expenses for personnel dedicated to customer projects. These costs represent the most significant expense we incur in providing our services. In total, cost of revenue increased by $7.3 million, or 12.9%, to $63.7 million in 2011, as compared to $56.5 million in 2010.

The comparative 2011 periodic year-over-year increase in reported cost of revenue, on an absolute dollar basis, is directly attributable to the overall growth in our service revenue during 2011. Increases in cost of revenue necessary to support our growth included an increase in billable consultant headcount, fringe-related expenses and billable consultant bonus expense.

On a year-over-year basis, the Company’s total number of billable consultants (excluding contractors) increased by 19, to 287 billable consultants at the end of 2011compared to 268 billable consultants at the end of 2010.

During 2011, we continued to leverage the use of contractors to support the growth in our EPM- and ERP-related service offerings. Contractor expense totaled $3.9 million and $4.1 million during 2011 and 2010, respectively. We continue to proactively focus upon reducing the number of contractors utilized by the Company as a means to improve gross margin, without simultaneously sacrificing service revenue growth. We will continue to utilize contractors to support short term staffing needs, allowing the flexibility to respond to customer proposals while appropriately managing our bench.

Project and personnel costs represented 46.9% and 48.2% of total revenue during the years ended December 31, 2011 and 2010, respectively. The periodic change, as a percentage of total revenue, is primarily related to the comparative revenue growth and the associated impact upon billable consultant-related expenses as described above, and a decreased reliance on contractors.

Software costs amounted to $8.3 million during the year ended December 31, 2011. The increase in the 2011 software costs, as described under “—Revenue” above, is due primarily to the increase in ERP-related software product sales. Software costs are expected to fluctuate depending on our customers’ demand for software.

Reimbursable expenses increased by $1.6 million in 2011, to $7.4 million, as compared to $5.9 million in 2010. The aggregate amount of reimbursed expenses will fluctuate from year-to-year 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.

Gross Profit.    Gross profit in 2011 increased by $6.6 million, or 20.6%, to $38.7 million, as compared to $32.1 million in 2010. Gross profit, as a percentage of total revenue (which we generally refer to as gross margin) improved to 37.8%, as compared to 36.2% in 2010.

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The year-over-year improvement in gross margin is directly related to the comparative growth in total revenue and billable consultant base, combined with a relatively consistent utilization rate and an increase in billable consultant wage-related expenses.

Additionally, gross profit benefited from $2.7 million and $2.3 million of royalty revenue in 2011 and 2010, respectively, related to the Fullscope business process contracts, which are the contracts subject to the earnout agreement entered into in connection with the Fullscope Acquisition. The earnout period, and the related royalty revenue, concluded on June 30, 2011.

Our 2011 utilization rate was 75.8%, a slight increase from 2010 utilization rate of 75.6%, both of which are below our historical and targeted utilization ranges. The consistency in the 2011 utilization rate is reflective of the increase in billable headcount to support the growth in EPM- and ERP-related service revenue experienced during 2011 and anticipated during 2012.

Historically, the Company has targeted and operated at utilization rates ranging between 78% and 82%. We have been able to achieve our targeted utilization rates during periods in which we have been simultaneously engaged on several high-value, long-term projects. In the near-term, we do not anticipate that we will consistently generate utilization rates within our targeted ranges. This is largely due to the current spending habits and contract negotiation process of our customers, which tend to result in inconsistent, short-term, gated project implementation plans, which create volatility in the consistent usage of our billable consultant over a long period of time.

Selling, General and Administrative Expense (“SG&A”).    SG&A expense increased 6.8% to $32.3 million, as compared to SG&A expense of $30.3 million in 2010. The increase in SG&A expense during the year ended December 31, 2011 is primarily reflective of increases attributable to the overall growth we have experienced in 2011. SG&A expense, as a percentage of total revenue, was 31.5% and 34.2% in 2011 and 2010, respectively.

The year-over-year increase in SG&A expense was driven by comparative increases in salaries and wages associated with sales-related salaries and wages (including commission expense in connection with current year revenue growth), travel, bonus expense recorded in connection with the Company’s 2011 performance-based bonus programs, management salaries and wages, fringe-related expense, marketing, recruiting and training expenses incurred in connection with the increase in our billable consultant headcount. The 2011 increases were partially offset by the reversal of $295 thousand in allowance for doubtful accounts (due to the collection of certain accounts receivable previously reserved as uncollectible) and a decrease of $307 thousand in professional fees (primarily associated with the Fullscope and Meridian acquisitions and the Fullscope Embezzlement Issue).

During 2010, in connection with our review of the impact of the discovered embezzlement activity upon Fullscope’s historical financial statements, the Company recorded a $950 thousand liability associated with potential pre-acquisition sales and use tax obligations. The potential sales and use tax-related liability was created by the methods employed to conceal the discovered fraudulent activity. While the Company has accounted for this liability as a period expense, we believe that any amounts actually paid to resolve this issue will be recoverable from an existing, fully funded escrow account which was established in connection with our acquisition of Fullscope. Future amounts recovered, if any, will be recorded by the Company in the period the amounts are determined to be probable of recovery from escrow.

We anticipate that we may continue to incur additional expenses associated with the Fullscope Embezzlement Issue as we intend to aggressively pursue recovery through all possible avenues, including a claim against the escrow account established in connection with the Fullscope Acquisition and reimbursement under insurance policies. We believe that we may be able to recover some, if not all, of the expenses we incur in addressing this situation. Amounts recovered and/or reimbursed, if any, in connection with this matter will be recorded in the period during which amounts are determined to be probable of recovery from escrow.

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Lease Abandonment Charge.    In December 2011, the Company abandoned certain excess office space within its corporate headquarters in Wakefield, Massachusetts. As a result of the abandonment of such space, the Company incurred a non-cash operating expense charge of approximately $2.2 million. Future contractual lease payments have been reduced by estimated potential future sub-lease income in arriving at the abandonment charge recognized during 2011.

We anticipate that the abandonment of the excess office space will result in a reduction of operating expense of approximately $580 thousand during 2012 and $2.2 million over the remaining life of the lease, which expires in July 2016. The Company will evaluate the assumption of estimated potential sub-lease income on a routine, periodic basis and record a period expense adjustment, when and if necessary, to reflect any changes to our original assumptions and estimates.

Depreciation and Amortization Expense.    Depreciation and amortization expense decreased by $1.2 million, or 29.3%, to $2.8 million, as compared to $4.0 million in 2010. Amortization expense decreased to $2.0 million in 2011, as compared to $3.1 million in 2010. The decrease in amortization expense during 2011 is the result of a reduction in the amortization expense associated with the intangible assets identified in connection with the Fullscope Acquisition. The Company recognizes amortization expense over the periods in which it expects to realize the economic benefit. A significant portion of the intangible asset amortization expense related to the Fullscope Acquisition was recorded during 2010.

Operating Income (Loss).    The Company’s operating income improved by $3.5 million, to $1.3 million compared to an operating loss of $(2.2) million in 2010. The 2011 improvement in operating income is attributable to the overall increase in comparative revenue, the associated improvements in gross margins and the 2011 reduction in amortization expense. The improvement in our 2011 operating income driven by these changes was partially offset by the increases in SG&A expense associated with our 2011 growth.

Other Income (Expense), Net.    Other expense, net totaled $(127) thousand during 2011, as compared to other income, net of $34 thousand in 2010. Other income (expense) represents the net amount of earned interest income and foreign currency translations. During 2011 and 2010, these amounts primarily represent the Company’s foreign currency exchange losses and gains.

Income Tax Provision (Benefit).    We recorded a provision for income taxes of $843 thousand and $21.4 million for the years ended December 31, 2011 and 2010, respectively. Our 2011 and 2010 periodic income tax provision amounts were derived based upon federal and state income taxes (at statutory rates), foreign income taxes, changes in deferred tax assets and liabilities (and their related valuation allowance), uncertain tax positions and interest and penalties. Our effective tax rate was 71.0% and 982.8% for the years ended December 31, 2011 and 2010, respectively.

During the third quarter of 2010, in connection with our periodic review of the carrying value of our net deferred tax assets, we recorded a non-cash charge of $21.9 million in connection with an increase to the previously established valuation allowance recorded against the gross carrying value of our net deferred tax assets. Subsequent to this adjustment, the recorded valuation allowance represented a full valuation reserve against the total gross carrying value of our net deferred tax assets.

We have net deferred tax assets that have arisen primarily as a result of timing differences, net operating loss carryforwards and tax credits. Our ability to realize a deferred tax asset is based on our ability to generate sufficient future taxable income. As is our practice, we assess, on a routine periodic basis, the estimated future realizability of the gross carrying value of our net deferred tax assets on a more likely than not basis. Our periodic assessments take into consideration both positive evidence (future profitability projections for example) and negative evidence (recent and historical financial performance for example) as it relates to evaluating the future recoverability of our deferred tax assets.

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The establishment of a full valuation allowance against the gross carrying value of our net deferred tax assets does not prohibit or limit the Company’s ability to realize a tax benefit in future periods. All existing deferred tax assets, net operating loss carryforwards and credits will be fully available to reduce certain future federal and state income tax obligations.

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 the future periods, further adjustments to our valuation allowance may be recorded, which could materially impact our financial position and net income (loss) in the period of the adjustment.

The current year income tax-related changes impacting our reported income tax expense are more fully described elsewhere herein, including “Item 8 – Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 9 – Income Taxes.”

Net Income (Loss).    Net income (loss) increased $23.9 million, to $344 thousand, as compared to a net loss of $(23.6) million in 2010. The current year change in reported net income (loss) is a direct result of the overall growth in current year revenue, the improvements in our gross margins, the reduction in current year amortization expense and the absence of tax expense associated with the full valuation allowance provided against the Company’s deferred tax assets recorded in 2010.

Results for the Year Ended December 31, 2010 Compared to Results for the Year Ended December 31, 2009

Revenue.    Total revenue increased by $38.5 million, or 76.8%, to $88.5 million for the year ended December 31, 2010 from $50.1 million for the year ended December 31, 2009. Of the $38.5 million increase in 2010 total revenue, service revenue increased by $22.7 million, or 49.3%, to $68.8 million, as compared to service revenue of $46.1 million in 2009.

The primary driver of the increase in comparative service revenue is the result of the additive effects of the December 31, 2009 acquisition of Fullscope, Inc. (“Fullscope”) (the “Fullscope Acquisition”) and the May 17, 2010 acquisition of Meridian Consulting International (“Meridian”) (the “Meridian Acquisition”), which are collectively referred to elsewhere herein as “The Acquired Companies.” Service revenues attributable to The Acquired Companies were not recorded during the year ended December 31, 2009, due to the timing of the respective acquisitions. Additionally, service revenue generated by our Core Service Offerings has increased due to improvement in 2010 bid and proposal activity and the intended cross selling synergies resulting from the combination of our technology and management service offerings with Fullscope’s ERP-related service offerings. Service revenue related to our Core Service Offerings increased by $3.0 million, or 6.5%, during the year ended December 31, 2010.

During the year ended December 31, 2010, we saw a noticeable increase in bid and proposal activity, which translated into new customer engagements driving our comparative increase in year-over-year service revenue attributable to our Core Service Offerings. Specific to the year-over-year increase in our Core Service Offerings, during 2010 we successfully capitalized on cross selling opportunities that called for the integration of our Core Service Offerings with Fullscope’s ERP-related service offerings and experienced an anticipated service revenue lift in our EPM-related service offerings.

Utilization, which is the rate at which we are able to generate revenue from our consultants, improved to 75.6% for the year ended December 31, 2010 compared to 65.5% during the year ended December 31, 2009. We typically target utilization in a range from 78%-82%. This objective is influenced by a variety of factors, including customer demand for IT spending and general economic circumstances. The improvement in our 2010 billable consultant utilization rate is attributable to the cumulative effects of the Fullscope Acquisition and the 2010 growth in our Core Service Offerings service revenue.

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Annualized service revenue per billable consultant, as adjusted for utilization, was $324 thousand during the year ended December 31, 2010, compared to service revenue per billable consultant of $348 thousand during the comparative 2009 annual period. The change in this operating metric is primarily attributable to the 2010 increase in Fullscope contractor headcount.

Software revenue, on an annual basis, has traditionally represented less than 5% of our total revenue and has primarily been attributable to our EPM offering. During the year ended December 31, 2010, software revenue totaled $11.5 million, or 13.0% of total revenue. The year-over-year increase in software revenue is directly related to the acquisition of Fullscope, which now represents substantially all of our software sales.

Our historical gross margins related to software revenue have generally been much lower than those achieved on our consulting services. Fullscope’s software revenue, which represents the majority of our 2010 and anticipated go-forward software revenue, has historically been sold at a higher margin than our EPM-related software. Because software revenue has become a larger percentage of our total revenue, periodic fluctuations in the amount of software revenue recognized by the Company may have a material impact upon our gross margins.

During 2010, we recognized $4.6 million in service and royalty revenue from Fullscope’s business process contract. This contract entails providing services upon which the earnout agreement associated with the Fullscope Acquisition is based. As per the terms of the earnout agreement, the service and royalty revenue generated by the business process contract ended on June 30, 2011.

Generally, we are reimbursed for our out-of-pocket expenses incurred in connection with our customers’ consulting projects. Reimbursed expense revenue increased approximately $2.6 million in 2010, to approximately $5.9 million, as compared to $3.3 million in 2009. The aggregate amount of reimbursed expenses will fluctuate from year-to-year 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.

In 2010, we entered into service arrangements with 102 new customers. Comparatively, in 2009, we secured engagements with 63 new customers. The total number of customers the Company served during 2010 totaled 391, as compared to 249 customers during 2009. This year-over-year change is in large part the cumulative effect of the customers added in connection with the Fullscope Acquisition combined with the traction we are seeing in our Core Service Offerings.

Cost of Revenue.    Cost of revenue primarily consists of project personnel costs principally related to salaries, payroll taxes, employee benefits and travel expenses for personnel dedicated to customer projects. These costs represent the most significant expense we incur in providing our services. In total, cost of revenue increased by $22.5 million, or 66.2%, to $56.5 million in 2010, as compared to $34.0 million in 2009.

The comparative 2010 periodic year-over-year increase in reported cost of revenue, on an absolute dollar basis, is directly attributable to the overall increase in billable consultant headcount, which includes an increase in the number of contractors we utilized. During 2010, we increased our billable consultant headcount in connection with the Fullscope Acquisition, the Meridian Acquisition and an increase in billable consultants (including contractors) necessary to support growth in Fullscope’s Service Offerings.

On a year-over-year basis, the Company’s total number of billable consultants increased by 88, to 268 billable consultants at the end of 2010, as compared to 180 billable consultants at the end of 2009. The Fullscope Acquisition increased our billable consultant headcount by 62 full-time billable resources, while the acquisition of Meridian added an additional 6 billable resources. Excluding the increase in headcount directly associated with the acquisitions, additional headcount increases were primarily associated with our consultant needs necessary to support the growth in Fullscope’s ERP-related service offering and in connection with the growth in our Core Service Offerings.

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During 2010, we leveraged the use of contractors primarily to support our Fullscope service delivery needs. Contractor expense totaled $4.1 million and $1.1 million during 2010 and 2009, respectively. During the third and fourth quarter of 2010, we proactively focused upon reducing the number of contractors utilized by the Company as a means to improve gross margin, without simultaneously sacrificing service revenue growth. We reduced sequential quarterly contractor expense in both the third and fourth quarters of 2010.

Project and personnel costs represented 48.2% and 60.3% of total revenue during the years ended December 31, 2010 and 2009, respectively. The periodic change, as a percentage of total revenue, is primarily related to the comparative revenue growth and the associated improvement in our billable consultant utilization rate. Improvement in the comparative 2010 and 2009 periods is also reflective of a reduction in salary and wages in the Company’s Core Service Offerings as a result of the headcount reductions enacted by the Company in 2009.

Software costs amounted to $8.0 million during the year ended December 31, 2010. The increase in the comparative 2010 software costs, as described under “—Revenue” above, is due primarily to the Fullscope Acquisition. Software costs are expected to fluctuate depending on our customers’ demand for software.

Reimbursable expenses increased by $2.6 million in 2010, to $5.9 million, as compared to $3.3 million in 2009. The 2010 increase is largely attributable to the incremental effects of the Fullscope Acquisition. Reimbursable expenses, as a percentage of total revenue, remained consistent at 6.6% in 2010 and 2009.

Gross Profit.    Gross profit in 2010 increased by $16.0 million, or 99.2%, to $32.1 million, as compared to $16.1 million in 2009. Gross profit, as a percentage of total revenue (which we generally refer to as gross margin) improved to 36.2%, as compared to 32.1% in 2009.

The year-over-year improvement in gross margin is directly related to the comparative improvement in our billable consultant utilization rate, offset by an increase in contractor salaries (necessary to support the growth in Fullscope’s ERP-related service offerings) and fringe benefit-related expenses. Gross margins for the year ended December 31, 2009 were unfavorably impacted as a result of a decrease in billable consultant utilization rates and severance costs associated with the Company’s proactive reduction of billable headcount due to the loss of service revenue associated with our larger, legacy accounts.

Additionally, gross profit benefited from $2.3 million of royalty revenue in 2010 related to the Fullscope business process contract, which is the contract subject to the earnout agreement entered into in connection with the Fullscope Acquisition. The earnout period, and the related royalty revenue, ended on June 30, 2011.

Historically, the Company has targeted and operated at utilization rates ranging between 78% and 82%. Our 2010 utilization rate was 75.6%, an increase from 2009 utilization rate of 65.5%, but still below our historical and targeted utilization ranges. Billable consultant headcount reductions initiated by the Company during 2009 were made with the intention of reducing excess capacity and improving consultant utilization. These reductions in 2009 allowed the Company to proactively manage headcount-related expenses for 2010, directly resulting in the increased utilization rate and reported improvement in comparative gross margin.

Selling, General and Administrative Expense (“SG&A”).    SG&A expenses increased 64.4% to $30.3 million, as compared to SG&A expenses of $18.4 million in 2009. The comparative periodic increases in SG&A expenses during the year ended December 31, 2010 is reflective of the incremental impact upon SG&A expenses associated with the Fullscope Acquisition, the Meridian Acquisition, a $950 thousand non-routine charge related to a potential pre-acquisition sales and use tax exposure associated with the Fullscope Embezzlement Issue and an increase in core SG&A expenses as a result of the growth, during 2010, in our Core Service Offerings. SG&A expenses, as a percentage of total revenue was 34.2% and 36.8% in 2010 and 2009, respectively.

The year-over-year increase in core SG&A expenses was driven by comparative increases in sales-related salaries and wages (including commission expense), bonus expense recorded in connection with the Company’s

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2010 performance-based bonus programs, increased professional services expenses related to acquisition costs and legal and forensic accounting expenses resulting from the Fullscope Embezzlement Issue and recruiting expenses incurred in connection with the increase in our billable consultant headcount. The Company did not incur a significant amount of bonus expense in the year ended December 31, 2009 due to the Company’s overall financial performance. During the year ended December 31, 2010, the Company recognized $451 thousand in acquisition-related expenses and $1.1 million in net expenses related to the Fullscope Embezzlement Issue.

During the fourth quarter of 2010, in connection with our review of the impact of the discovered embezzlement activity upon Fullscope’s historical financial statements, the Company recorded a $950 thousand liability associated with potential pre-acquisition sales and use tax obligations. The potential sales and use tax-related liability was created by the methods employed to conceal the discovered fraudulent activity. While the Company has accounted for this liability as a period expense, we believe that any amounts actually paid to resolve this issue will be recoverable from an existing, fully funded escrow account which was established in connection with our acquisition of Fullscope. Future amounts recovered, if any, will be recorded by the Company in the period the amounts are determined to be probable of recovery from escrow.

Depreciation and Amortization Expense.    Depreciation and amortization expense increased by $1.3 million, or 49.3%, to $4.0 million, as compared to $2.7 million in 2009. The change is primarily related to intangible assets associated with the Fullscope and Meridian Acquisitions. Amortization expense increased to $3.1 million in 2010, as compared to $1.8 million in 2009.

Operating Loss.    The Company’s comparative operating loss improved by $2.8 million, to $(2.2) million, as compared to $(5.0) million in 2009. The improvement in operating loss is attributable to the overall increase in comparative service revenue and software revenue and the associated gross margins. The improvement in total gross margin was offset by the incremental increases in SG&A expenses and amortization expense.

Other Income, Net.    Other income totaled $34 thousand during 2010, as compared to $122 thousand in 2009. Other income in 2010 represents the net amount of earned interest income and foreign currency translations. Other income in 2009 consists primarily of interest income. The decrease in interest income recognized by the Company is attributable to reduced principal balances and average yields on our investments throughout 2010, as compared to those achieved throughout 2009.

Income Tax Provision (Benefit).    We recorded a provision (benefit) for income taxes of $21.4 million and $(1.0) million for the years ended December 31, 2010 and 2009, respectively. Our 2010 and 2009 periodic income tax provision (benefit) amounts were derived based upon an effective income tax rate, inclusive of both federal and state income taxes, of 0.4% and 40.2%, respectively. Additionally, our reported periodic income tax provision (benefit) includes expense (benefit) amounts attributable to foreign income taxes, changes in deferred tax assets and liabilities and their related valuation allowance, uncertain tax positions and interest and penalties.

We have net deferred tax assets that have arisen primarily as a result of timing differences, net operating loss carryforwards and tax credits. Our ability to realize a deferred tax asset is based on our ability to generate sufficient future taxable income. As is our practice, we assess, on a routine periodic basis, the estimated future realizability of the gross carrying value of our net deferred tax assets on a more likely than not basis. Our periodic assessments take into consideration both positive evidence (future profitability projections for example) and negative evidence (recent and historical financial performance for example) as it relates to evaluating the future recoverability of our deferred tax assets.

During the third quarter of 2010, in connection with our periodic review of the carrying value of our net deferred tax assets, we recorded a non-cash charge of $21.9 million in connection with an increase to the previously established valuation allowance recorded against the gross carrying value of our net deferred tax assets. Subsequent to this adjustment, the recorded valuation allowance represents a full valuation reserve against the total gross carrying value of our net deferred tax assets.

- 43 -

The establishment of a full valuation allowance against the gross carrying value of our net deferred tax assets does not prohibit or limit the Company’s ability to realize a tax benefit in future periods. All existing deferred tax assets, net operating loss carryforwards and credits will be fully available to reduce certain future federal and state income tax obligations.

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 the future periods, further adjustments to our valuation allowance may be recorded, which could materially impact our financial position and net income (loss) in the period of the adjustment.

The income tax-related changes impacting our reported income tax expense are more fully described elsewhere herein, including “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations – Income Taxes and Valuation of Deferred Tax Assets” and “Item 8 – Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 9 – Income Taxes.”

Net Loss.    Net loss increased $19.8 million, to $(23.6) million, as compared to $(3.8) million in 2009. The change in reported net loss is a direct result of the full valuation allowance of deferred tax assets offset by the increase in revenue and gross profit. Each of these items is described in further detail above.

Liquidity and Capital Resources

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

	Year Ended December 31
	2011			2010			2009
	(In Thousands)
Cash flows provided by (used in):
Operating activities	$	5,833		$	698		$	(243	)
Investing activities		(3,498	)		4,098			(7,123	)
Financing activities		(2,894	)		222			(363	)
Effects of exchange rates		(11	)		(4	)		-
Total cash (used in) provided by during the year	$	(570	)	$	5,014		$	(7,729	)

As of December 31, 2011, we had cash and cash equivalents of $10.3 million, a $570 thousand decrease from the December 31, 2010 balance of $10.9 million. During the year ended December 31, 2011, the Company made cash payments of $3.2 million for the repurchase of common stock and $2.7 million in settlement of the Fullscope contingent earnout. Working capital, which is defined as current assets less current liabilities, increased $2.7 million, to $16.9 million, as of December 31, 2011, as compared to $14.2 million as of December 31, 2010. Historically, we have used our operating cash flows, available cash and periodic sales of our common stock to finance ongoing operations and business combinations. We believe that our cash and cash equivalents will be sufficient to finance our working capital needs for at least the next twelve months. We periodically reassess the adequacy of our liquidity position, taking into consideration current and anticipated operating cash flow, anticipated capital expenditures, and possible business combinations. 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.”

Cash flow from operating activities is driven by collections of fees for our consulting services, reselling of software products and, to a lesser extent until June 2011, the collection of royalties on software products sold to a third party. Cash used in operations predominantly relates to employee compensation and payments to third party software providers.

- 44 -

Accrued payroll and related liabilities fluctuate from period to period based on the timing of our normal payroll cycle and the timing of variable compensation payments. Annual components of our variable compensation plans are paid in the first quarter of the following year, causing fluctuations in cash flow from quarter to quarter.

Accounts payable and accrued expenses are most significantly impacted by the timing of payments required to be made to third party software providers in connection with the resale of software products to our customers. Typically, a significant portion of our software sales occur at the end of the second and fourth quarters.

Net cash provided by operating activities was $5.8 million in 2011, as compared to net cash provided by operating activities of $698 thousand in 2010 and cash used in operations of $(243) thousand in 2009. The primary components of operating cash flow during 2011 were net income of $344 thousand plus non-cash charges of $6.3 million (consisting of depreciation and amortization, partial lease abandonment and stock-based compensation), partially offset by an increase in accounts receivable of $3.6 million. The primary components of cash flow from operations for 2010 were the net loss of $(23.6) million plus the establishment of a full valuation allowance against the deferred tax assets of $21.9 million and other non-cash charges of $5.5 million plus an increase in accrued expenses of $2.3 million and decrease in accounts receivable of $1.4 million. The primary components of cash used in operations in 2009 was a net loss of $(3.8) million plus non-cash charges of $3.0 million less decreases in accrued compensation and accrued expenses plus an increase in accounts receivable.

For the year ended December 31, 2011, net cash used in investing activities was $(3.5) million compared to cash provided by investing activities of $4.1 million in 2010 and cash used in investing activities of $(7.1) million in 2009. The 2011 uses of investing cash are driven by the fourth quarter payment of $2.7 million to fund the escrow account in connection with the Fullscope contingent earnout. The Fullscope earnout period concluded on June 30, 2011 and no further purchase consideration can be earned. Cash provided by investing activities in 2010 and used in investing activities in 2009 were driven by the purchase and redemptions of marketable securities offset by cash payments made in relation to the Fullscope and Meridian acquisitions.

Cash used in investing activities in 2011 and 2010 also included capitalized software development costs related to software to be used in the Microsoft Dynamics AX environment. There were no capitalized software development costs in 2009.

All capital expenditures are discretionary as the Company currently has no long-term commitments for capital expenditures.

Net cash used in financing activities was $(2.9) million in 2011 compared to cash provided by financing activities of $222 thousand in 2010 and cash used in financing activities of $(363) thousand in 2009. The 2011 activities were driven by the repurchase of common stock in the amount of $3.2 million, returning excess cash balances that were not being invested in organic operations or strategic acquisitions to stockholders, and partially offset by $483 thousand received from our employees related to our Employee Stock Purchase Plan. Financing activities in 2010 and 2009 consisted of proceeds received from our Employee Stock Purchase Plan, partially offset in 2009 by repurchases of treasury stock.

As a result of the above, our combined cash, cash equivalents, and marketable securities (decreased) increased by $(570) thousand, $5.0 million, and $(7.7) million in 2011, 2010, and 2009, respectively. The aggregate of our cash, cash equivalents and marketable securities was $10.3 million, $10.9 million and $12.7 million as of December 31, 2011, 2010, and 2009, respectively.

We have entered into various contingent earnout agreements in connection with the acquisitions we have completed. Earnout periods, related performance measurements and the value of the contingent earnout consideration to be earned are specific to each acquisition. Contingent earnout consideration paid by the Company has historically been paid in either cash or a combination of cash and stock. As of December 31, 2011, the only ongoing earnout period is related to the Meridian Acquisition.

- 45 -

On May 17, 2010, the Company acquired substantially all of the assets of Meridian Consulting International. As provided for under the related purchase agreement, Meridian’s former stockholders are eligible to receive additional contingent consideration based upon performance-based thresholds, which will be determined, periodically, over a 36-month period from the date of acquisition. The Company increased total purchase price consideration by $1.2 million, which represented our initial fair value estimate of the contingent consideration to be paid to the former stockholders of Meridian.

On a routine periodic basis, the Company reassesses the estimated fair value of contingent consideration and, during the third quarter of 2011, reduced the carrying value of the accrued contingent consideration associated with the Meridian Acquisition by $1.2 million. This reduction in the estimated fair value of the contingent consideration, as required by GAAP, was reflected as a credit in the consolidated statement of operations. As of December 31, 2011, the Company is reporting an accrual of $231 thousand related to the current fair value estimate of the contingent earnout consideration to be earned by the former Meridian stockholders. The maximum amount of contingent earnout consideration that the former stockholders of Meridian can earn during the final two earnout periods is capped at $1.8 million. See “Item 8 – Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 4 – Business Combinations.”

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

We lease office space under noncancellable operating lease arrangements through 2016. Rent expense was approximately $1.6 million, $1.6 million and $1.7 million for the years ended December 31, 2011, 2010 and 2009, respectively.

In December of 2011, the Company abandoned a portion of its leased facility due to a shift in the deployment of our billable resources. Customer demand for onsite consulting lessened our need for leased office space. As a result, we have abandoned part of our leased facility space and recorded a non-cash charge of $2.2 million (recorded as selling, general and administrative expense in our consolidated statement of operations). The related accrual is recorded at fair value on our balance sheet and will be remeasured on a routine periodic basis.

We have lease financing arrangements (the “Capital Lease Arrangements”) with a bank related to certain property and equipment, as further described in “Item 8 – Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 6 – Property and Equipment” included elsewhere herein. Payments under the Capital Lease Arrangements are to be made over a period of 48 to 60 months and have a blended interest rate of 6.03% per annum on the outstanding principal balances. As of December 31, 2011and 2010, our outstanding obligations under the Capital Lease Arrangements totaled $52 thousand and $200 thousand, respectively. During the years ended December 31, 2011, 2010 and 2009, the Company made payments of principal and interest totaling $148 thousand, $215 thousand and $251 thousand, respectively, under the Capital Lease Arrangements.

Annual future minimum payments required under capital and operating leases that have an initial or remaining noncancellable lease term in excess of one year and existing purchase obligations are as follows:

	Payments Due By Period
Contractual Obligations	Less Than 1 Year		1 – 3 Years		3 – 5 Years		Greater Than 5 Years		Total
	(In thousands)
Capital leases (1)	$	52	$	-	$	-	$	-	$	52
Contingent earnout consideration		126		105		-		-		231
Operating leases		848		1,519		1,234		-		3,601
Total (2)	$	1,026	$	1,624	$	1,234	$	-	$	3,884

(1) - Presented future payments on capital lease obligations represent payments of principal and related interest.

- 46 -

(2) - Excluded from the above table are $361 thousand and $282 thousand of gross liability for uncertain tax positions recorded in accounts payable and accrued liabilities in our consolidated balance sheets at December 31, 2011 and 2010. We are not able to reasonably estimate in which future periods these amounts will ultimately be settled. See “Item 8 – Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 9 – Income Taxes” included elsewhere herein.

Recently Issued Accounting Pronouncements

Refer to “Item 8 – Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 2 – Summary of Significant Accounting Policies” included elsewhere herein for a discussion of recent accounting changes.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary financial instruments include investments in money market funds 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 is held for trading purposes. We did not purchase derivative financial instruments in 2011 or 2010. 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 from continuing operations.

- 47 -

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(a) Consolidated Financial Statements:

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

	Page
Reports of Independent Registered Public Accounting Firms		50
Consolidated Balance Sheets at December 31, 2011 and 2010		51
Consolidated Statements of Operations for the Years Ended December 31, 2011, 2010 and 2009		52
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (loss) for the Years Ended December 31, 2011, 2010 and 2009		53
Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009		54
Notes to Consolidated Financial Statements		55

- 48 -

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Edgewater Technology, Inc.:

We have audited the accompanying consolidated balance sheet of Edgewater Technology, Inc. as of December 31, 2011 and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for the year then ended. 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 audit.

We conducted our audit 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. 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Edgewater Technology, Inc. at December 31, 2011, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ BDO USA, LLP

Boston, Massachusetts

March 12, 2012

- 49 -

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, 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2010. 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. Our audits included 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, 2010, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Boston, Massachusetts

March 31, 2011

- 50 -

EDGEWATER TECHNOLOGY, INC.

Consolidated Balance Sheets

(In Thousands, Except Per Share Data)

	December 31,
	2011			2010
ASSETS
Current assets:
Cash and cash equivalents	$	10,333		$	10,903
Accounts receivable, net of allowance of $300 and $595, respectively		23,307			19,496
Prepaid expenses and other current assets		763			1,035
Total current assets		34,403			31,434
Property and equipment, net		2,429			2,797
Intangible assets, net		2,079			3,821
Goodwill		12,049			12,049
Other assets		238			175
Total assets	$	51,198		$	50,276
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,858		$	604
Accrued liabilities		13,934			12,391
Accrued contingent earnout consideration		126			2,800
Deferred revenue		1,569			1,301
Capital lease obligations, current		52			148
Total current liabilities		17,539			17,244
Other liabilities		1,841			15
Accrued contingent earnout consideration		105			-
Capital lease obligations		-			52
Total liabilities		19,485			17,311
Commitments and contingencies (Note 14)
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 and 11,311 and 12,342 shares outstanding as of December 31, 2011 and 2010, respectively		297			297
Paid-in capital		213,282			213,326
Treasury stock, at cost, 18,425 and 17,394 shares at December 31, 2011 and 2010, respectively		(125,389	)		(123,888	)
Accumulated other comprehensive loss		(99	)		(48	)
Accumulated deficit		(56,378	)		(56,722	)
Total stockholders’ equity		31,713			32,965
Total liabilities and stockholders’ equity	$	51,198		$	50,276

See notes to consolidated financial statements.

- 51 -

EDGEWATER TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

	Year Ended December 31,
	2011			2010			2009
Revenue:
Service revenue	$	79,239		$	68,843		$	46,120
Software revenue		13,064			11,508			664
Royalty revenue		2,734			2,341			-
Reimbursable expenses		7,406			5,853			3,301
Total revenue		102,443			88,545			50,085
Cost of revenue:
Project and personnel costs		48,078			42,640			30,190
Software costs		8,262			7,977			496
Reimbursable expenses		7,406			5,853			3,301
Total cost of revenue		63,746			56,470			33,987
Gross profit		38,697			32,075			16,098
Operating expenses:
Selling, general and administrative		32,307			30,263			18,412
Lease abandonment expense		2,230			-			-
Depreciation and amortization		2,846			4,023			2,694
Total operating expenses		37,383			34,286			21,106
Operating income (loss)		1,314			(2,211	)		(5,008	)
Other (expense) income, net		(127	)		34			122
Income (loss) before income taxes		1,187			(2,177	)		(4,886	)
Tax provision (benefit)		843			21,395			(1,047	)
Net income (loss)	$	344		$	(23,572	)	$	(3,839	)
Income (loss) per share:
Basic net income (loss) per share of common stock	$	0.03		$	(1.93	)	$	(0.32	)
Diluted net income (loss) per share of common stock	$	0.03		$	(1.93	)	$	(0.32	)
Shares used in computing basic net income (loss) per share of common stock		12,038			12,195			12,067
Shares used in computing diluted net income (loss) per share of common stock		12,048			12,195			12,067

See notes to consolidated financial statements.

- 52 -

EDGEWATER TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)

(In Thousands)

														Accumulated Other Comprehensive Income (loss)			Retained Earnings/ (Deficit)			Total Stockholders’ Equity			Comprehensive Income (loss)
	Common Stock				Paid-in Capital			Treasury Stock
	Shares		Amount					Shares			Amount
BALANCE, January 1, 2009		29,736	$	297	$	213,354			(17,574	)	$	(126,382	)	$	-		$	(29,311	)	$	57,958		$	(47,018	)
Issuance of common stock related to employee stock plans		-		-		(1,102	)		192			1,533			-			-			431
Forfeitures of restricted stock awards		-		-		140			(18	)		(140	)		-			-			-
Repurchases of common stock		-		-		-			(204	)		(579	)		-			-			(579	)
Share-based compensation expense		-		-		1,139			-			-			-			-			1,139
Unrealized gain on available- for-sale marketable securities		-		-		-			-			-			6			-			6			6
Net loss		-		-		-			-			-			-			(3,839	)		(3,839	)		(3,839	)
BALANCE, December 31, 2009		29,736		297		213,531			(17,604	)		(125,568	)		6			(33,150	)		55,116			(3,833	)
Issuance of common stock related to employee stock plans		-		-		(1,007	)		181			1,448			-			-			441
Issuance of restricted stock awards		-		-		(232	)		29			232			-			-			-
Share-based compensation expense		-		-		1,034			-			-			-			-			1,034
Currency translation adjustment		-		-		-			-			-			(54	)		-			(54	)		(54	)
Net loss		-		-		-			-			-			-			(23,572	)		(23,572	)		(23,572	)
BALANCE, December 31, 2010		29,736		297		213,326			(17,394	)		(123,888	)		(48	)		(56,722	)		32,965			(23,626	)
Issuance of common stock related to employee stock plans		-		-		(1,365	)		231			1,848			-			-			483
Repurchases of common stock		-		-		-			(1,247	)		(3,229	)		-			-			(3,229	)
Forfeiture of restricted stock awards		-		-		120			(15	)		(120	)		-			-			-
Share-based compensation expense		-		-		1,201			-			-			-			-			1,201
Currency translation adjustment		-		-		-			-			-			(51	)		-			(51	)		(51	)
Net income		-		-		-			-			-			-			344			344			344
BALANCE, December 31, 2011		29,736	$	297	$	213,282			(18,425	)	$	(125,389	)	$	(99	)	$	(56,378	)	$	31,713		$	293

See notes to consolidated financial statements.

- 53 -

EDGEWATER TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

	Year Ended December 31,
	2011			2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	344		$	(23,572	)	$	(3,839	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities, net of acquisitions:
Depreciation and amortization		2,885			4,023			2,694
Provision for doubtful accounts		(295	)		113			113
Deferred income taxes		58			21,108			(1,156	)
Share-based compensation		1,201			1,034			1,139
Amortization of marketable securities discounts (premiums), net		-			(115	)		184
Excess tax benefits from stock options		-			(1	)		-
Loss on sale of marketable securities		-			4			7
Loss on disposal of fixed assets		11			-			34
Change in fair value of contingent earnout consideration		144			400			-
Lease abandonment		2,230			-			-
Changes in operating accounts:
Accounts receivable		(3,558	)		(1,398	)		2,859
Prepaid expenses and other assets		274			608			(814	)
Other assets		(63	)		(74	)		(42	)
Accounts payable and accrued liabilities		1,925			(2,335	)		(398	)
Accrued payroll and related liabilities		1,047			1,234			(1,255	)
Deferred revenue and other liabilities		(370	)		(331	)		231
Net cash provided by (used in) operating activities		5,833			698			(243	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash		-			702			-
Redemptions of marketable securities		-			6,877			21,463
Purchases of marketable securities		-			-			(17,472	)
Purchase of Fullscope Inc., net of cash acquired		(2,713	)		(1,415	)		(10,942	)
Purchase of Meridian Consulting International, net of cash acquired		-			(1,586	)		-
Purchase of Lynx Business Intelligence Consulting, Inc., including payment under earnouts		-			-			(140	)
Capitalization of product development costs		(267	)		(112	)		-
Purchases of property and equipment		(518	)		(368	)		(32	)
Net cash (used in) provided by investing activities		(3,498	)		4,098			(7,123	)
CASH FLOWS FROM FINANCING ACTIVITES:
Payments on capital leases		(148	)		(220	)		(215	)
Proceeds from employee stock purchase plans and stock option exercises		483			441			431
Excess tax benefits from stock options		-			1			-
Repurchases of common stock		(3,229	)		-			(579	)
Net cash (used in) provided by financing activities		(2,894	)		222			(363	)
Effects of exchange rates on cash		(11	)		(4	)		-
Net (decrease) increase in cash and cash equivalents		(570	)		5,014			(7,729	)
CASH AND CASH EQUIVALENTS, beginning of period		10,903			5,889			13,618
CASH AND CASH EQUIVALENTS, end of period	$	10,333		$	10,903		$	5,889
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	10		$	23		$	36
Cash paid for income taxes	$	450		$	1,933		$	428
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Goodwill adjustment	$	-		$	-		$	1,800
Unrealized gain on available for sale securities	$	-		$	-		$	6
Initial fair value estimate of contingent earnout consideration	$	-		$	1,200		$	1,200
Issuance (forfeiture) of restricted stock awards	$	(120	)	$	232		$	(140	)

See notes to consolidated financial statements.

- 54 -

EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION:

Edgewater Technology, Inc. (“Edgewater”, the “Company”, “we”, or “our”) is a strategic consulting firm that brings a synergistic blend of advisory and product-based consulting services to our customer base. Headquartered in Wakefield, Massachusetts, we typically go to market both vertically by industry and horizontally by product and technology specialty and provide our customers with a wide range of business and technology offerings. We work with customers, primarily within North America, to reduce costs, improve process and increase revenue through the judicious use of technology.

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.

Basis of Presentation –

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

The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. The Company did not identify any recognizable events during this period.

The Company has revised the balance sheet presentation of certain 2010 information in order to conform to 2011 presentation. Specifically, the Company has separately identified accounts payable on the face of the balance sheet while collapsing all accrued expense balances to a single line item (see Note 8 for required disclosure). Further, the Company has changed the 2010 caption “Deferred revenue and other liabilities” to “Deferred revenue” in 2011. As a result, the Company has reclassified $639 of deferred rent to accrued expenses in the year ended December 31, 2010.

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 consolidated 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.

Cash and Cash Equivalents –

Cash and cash equivalent balances consist of deposits and investments in money market funds. All highly liquid investments with remaining maturities of three months or less at the date of purchase are considered cash equivalents. The Company’s cash equivalents consisted of $4.1 million in money market funds as of December 31, 2011 and 2010.

- 55 -

EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Restricted Cash –

In connection with Edgewater’s December 31, 2009 acquisition of Fullscope, Inc. (“Fullscope”) (the “Fullscope Acquisition”), Fullscope, at the closing date of the acquisition, had $702 thousand of restricted cash. The restricted cash represented an escrow deposit made in connection with Fullscope’s sale of certain intellectual property in June 2009 and was released in June 2010. As provided for under the Agreement and Plan of Merger and Reorganization between Edgewater and Fullscope, the restricted cash was released from escrow during 2010 and deposited into a Fullscope Acquisition-related escrow account. Edgewater’s acquisition of Fullscope is described in further detail in Note 4 of the notes to consolidated financial statements.

Marketable Securities –

Marketable securities are classified as available-for-sale securities, which are recorded at fair market value with unrealized gains and losses recorded as part of accumulated and other comprehensive income, which is separate component of stockholders’ equity, until such gains and losses are realized. Marketable securities consist of marketable instruments, which include but are not limited to government obligations, including agencies, government sponsored entities and commercial paper. All marketable securities have original maturities greater than three months, but less than one year, at the date of purchase. The fair value of these securities is based upon quoted prices for identical or similar assets. If a decline in the fair value is considered other-than-temporary, based on available evidence, the unrealized loss is transferred from other comprehensive income (loss) to the consolidated statements of operations. Realized gains or losses are determined on the specific identification method and are included in interest income in the consolidated statements of operations.

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. Equipment held under capital leases is amortized utilizing the straight-line method over the lesser of the estimated useful life of the asset or the term of the lease. See Note 6 and Note 14. Additions that extend the lives of the assets are capitalized, while repairs and maintenance costs are expensed as incurred.

Product Development Costs –

The Company periodically develops software modules to be used within the Microsoft Dynamics AX environment. Capitalization of qualified product development costs begins upon the establishment of technological feasibility. Amortization of capitalized computer software development costs, which is recorded as a component of cost of revenue, is provided on a product-by-product basis, beginning upon commercial release of the product, and continuing over the remaining estimated economic life of the product, not to exceed three years. At each balance sheet date, the Company evaluates the unamortized capitalized software costs for potential impairment by comparing to the net realizable value of the products. The Company capitalized a total of $267 thousand and $112 thousand in product development costs during the years ended December 31, 2011 and 2010, respectively. These costs represent the entire amount of capitalized product development costs included in the Company’s consolidated balance sheet as of December 31, 2011 and 2010 under the caption “Intangible assets, net.” Amortization expense of $39 thousand has been recorded (within software costs on the consolidated statement of operations) during the year ended December 31, 2011. No amortization expense was recorded during the year ended December 31, 2010, as no products with capitalized costs had been released for commercial sale.

- 56 -

EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Impairment of Long-Lived Assets –

The Company evaluates its 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. 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.

Lease Abandonment –

In December 2011, the Company abandoned certain excess office space within its corporate headquarters in Wakefield, Massachusetts. As a result of the abandonment of such space, the Company incurred a fourth-quarter, non-cash operating expense charge of approximately $2.2 million and recorded a lease abandonment accrual (the short- and long-term portions of which are recorded within accrued expenses and other long term liabilities within the 2011 consolidated balance sheet, respectively). The lease abandonment accrual is carried at fair value (see Note 3) and remeasured at each balance sheet date (any change in fair value will be recorded as a period expense in the period the change is identified).

Goodwill and Intangible Assets –

Goodwill has an indefinite useful life and is not amortized but is evaluated for impairment annually (the “Annual Impairment Test”) or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company records intangible assets at historical cost. Intangible assets consist primarily of non-compete arrangements, customer relationships and trade names and trademarks. Intangible assets that have finite lives are amortized using either the straight-line method or based on estimated future cash flows to approximate the pattern in which the economic benefit of the asset will be utilized. Amortization is recorded over the estimated useful lives ranging from 1.5 to 7.5 years and is further described in Notes 4 and 7.

The Company engages in business activities in one operating segment, which combines management consulting, technical knowledge, and enterprise management solutions to develop custom technology and business process solutions. The chief operating decision maker formulates decisions about how to allocate resources and assess performance based on consolidated financial results. The Company has three reporting units for purposes of its allocation of goodwill and performance of its impairment evaluation.

Goodwill is tested for impairment annually at the reporting unit level utilizing the “fair value” methodology. The annual measurement date is December 2. Factors the Company considers important that could trigger an interim review for impairment include, but are not limited to, the following:

¡ Significant under-performance relative to historical or projected future operating results;

¡ Significant changes in the manner of its use of acquired assets or the strategy for its overall business;

¡ Significant negative industry or economic trends;

¡ Significant decline in its stock price for a sustained period; and

¡ Its market capitalization relative to net book value.

Goodwill is evaluated for impairment using a two-step process. The first step is to compare the fair value of the reporting unit to the carrying amount of the reporting unit (the “First Step”). If the carrying amount exceeds

- 57 -

EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

the fair value, a second step must be followed to calculate potential impairment (the “Second Step”). Otherwise, if the fair value of the reporting unit exceeds the carrying amount, the goodwill is not considered to be impaired as of the measurement date. In its review of the carrying value of the goodwill, the Company determines fair values for the reporting unit using the Income Approach, or more specifically the Discounted Cash Flow Method, and the Market Approach, utilizing the Guideline Company Method. These valuation methods require management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multi-year period, as well as determine the weighted average cost of capital to be used as a discount rate. The 2011 analysis confirmed that fair values exceeded carrying values and, therefore, no impairment existed.

Revenue Recognition –

Our Company recognizes revenue primarily through the provision of consulting services and the resale of third-party, off the shelf software and maintenance.

We recognize revenue by providing 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 retainer. Time and materials-based contracts represented 95.0%, 93.5% and 92.7% of service revenue for the years ended December 31, 2011, 2010 and 2009, respectively. Revenue related to service offerings is recognized as the services are performed and amounts are earned.

When a customer enters into a time and materials, fixed-price or a periodic retainer-based contract, the Company recognizes revenue in accordance with our evaluation of the deliverables in each contract. If the deliverables represent separate units of accounting, the Company then measures and allocates the consideration from the arrangement to the separate units, based on vendor specific objective evidence of the value for each deliverable.

The revenue under time and materials contracts is recognized as services are rendered and performed at contractually agreed upon rates. Revenue pursuant to fixed-price contracts is recognized under the proportional performance method of accounting. Fixed-price contracts represented 2.9%, 4.2% and 4.7% of service revenue for the years ended December 31, 2011, 2010 and 2009, respectively. Over the course of a fixed-price contract, we routinely evaluate whether revenue and profitability should be recognized in the current period. We estimate the proportional performance on our fixed-price contracts on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project. If we do not have a sufficient basis to measure progress toward completion, revenue is recognized upon completion of performance, 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 costs and revenue earned can be made, based on historical experience and milestones identified in any particular contract.

If our initial estimates of the resources required or the scope of work to be performed on a fixed-price contract are inaccurate, or we do not manage the project properly within the planned time period, a provision for estimated losses on incomplete projects is made. 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. No losses were recognized on fixed-price contracts during the years ended December 31, 2011, 2010 or 2009.

- 58 -

EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

We also perform services on a periodic retainer basis under infrastructure service contracts, which include monthly hosting and support services. Retainer-based contracts represented 2.1%, 2.3% and 2.6% of service revenues for the years ended December 31, 2011, 2010 and 2009, respectively. Revenue under periodic retainer-based contracts is recognized ratably over the contract period, as outlined within the respective contract. In the event additional services are required, above the minimum retained or contracted amount, then such services are billed on a time and materials basis.

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 defects. The warranty 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. Revenue related to the warranty provisions within our fixed-price contracts is recognized as the services are performed or the revenue is earned. The warranty period is typically for a 30-60 day period after the project is complete.

Customer prepayments, even if nonrefundable, are deferred (classified as a liability) and recognized over future periods as services are performed. As of December 31, 2011 and 2010, the Company has recorded a deferred liability of approximately $915 thousand and $418 thousand, respectively, which is included in the financial statement caption of “deferred revenue” related to customer prepayments.

Software revenue represents the resale of certain third-party off-the-shelf software and maintenance and is recorded on a gross basis provided we act as a principal in the transaction, which we have determined based upon the fact that we have credit risk and we set the price to the end user. In the event we do not meet the requirements to be considered a principal in the software sale transaction and act as an agent, software revenue will be recorded on a net basis. Revenue from software resale arrangements represented 12.8%,13.0% and 1.3% of total revenue for the years ended December 31, 2011, 2010 and 2009, respectively.

The majority of the software sold by the Company is delivered electronically. For software that is delivered electronically, we consider delivery to have occurred when the customer either (a) takes possession of the software via a download (that is, when the customer takes possession of the electronic data on its hardware), or (b) has been provided with access codes that allow the customer to take immediate possession of the software on its hardware pursuant to an agreement or purchase order for the software.

The Company enters into multiple element arrangements which typically include software, post-contract support (or maintenance), and consulting services. Consistent with the software described above, maintenance that is in the form of a pass through transaction is recognized upon delivery of the software, as all related warranty and maintenance is performed by the primary software vendor and not the Company. Maintenance fee revenue for the Company’s software products, which is inconsequential in all years presented, is recognized ratably over the term of the arrangements, which are generally for a one-year period. The Company has established vendor specific objective evidence (“VSOE”) with respect to the services provided based on the price charged when the services are sold separately. The Company has established VSOE for maintenance based upon the stated renewal rate method.

We consider amounts to be earned once evidence of an arrangement has been obtained, services are delivered, fees are fixed or determinable and collectability is reasonably assured. 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. Out-of-pocket reimbursable expenses charged to customers are reflected as revenue.

- 59 -

EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

We received royalty revenue in connection with the sale of Microsoft Dynamics AX-related discrete and process manufacturing modules (the “Software Modules”) developed by Fullscope, which were subsequently sold to Microsoft in June 2009. Royalty revenues earned are determined as a percentage of net receipts from the periodic sale of license keys and enhancements related to the Software Modules sold by Microsoft. Royalties were recognized as earned in accordance with the contract terms when royalties from licensees can be reasonably estimated and collectability is reasonably assured. The Software Modules contract expired in June 2011 and no revenue is expected to be recognized subsequent to the expiration of this contract.

Allowance for Doubtful Accounts –

The Company maintains an allowance for doubtful accounts related to its accounts receivable that have been deemed to have a high risk of uncollectability. Management reviews its accounts receivable balances on a monthly basis to determine if any receivables are potentially uncollectible. Management further analyzes historical collection trends and changes in its customer payment patterns, customer concentration and credit worthiness when evaluating the adequacy of its allowance for doubtful accounts. The Company includes any accounts receivable balances that are deemed to be potentially uncollectible, along with a general reserve, in its overall allowance for doubtful accounts.

Billed and unbilled receivables that are specifically identified as being at risk are provided for with a charge to revenue or bad debts as appropriate in the period the risk is identified.

Based on the information available, management believes the allowance for doubtful accounts is adequate; however, future write-offs could exceed the recorded allowance.

Cost of Services –

Our cost of services are composed primarily of project personnel costs, including direct salaries, payroll taxes, employee benefits, contractor costs and travel expenses for personnel dedicated to customer projects. These costs represent the most significant expense we incur in providing our services.

Other (Expense) Income, Net –

The following table represents the components of other (expense) income, net:

	Year Ended December 31,
	2011			2010			2009
	(In Thousands)
Interest income	$	5		$	32		$	192
Interest expense		(10	)		(15	)		(70	)
Gain (loss) on foreign exchange transactions		(122	)		17			-
Other (loss) income, net	$	(127	)	$	34		$	122

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. We evaluate the realizability of our deferred tax assets

- 60 -

EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

and assess the need for a valuation allowance on an ongoing basis. In evaluating our deferred tax assets, we consider whether it is more likely than not that the deferred income tax assets will be realized. The ultimate realization of our deferred tax assets depends upon generating sufficient future taxable income during the periods in which our temporary differences either become deductible or expire. This assessment requires significant judgment.

Any future changes in the valuation allowance could result in additional income tax expense (benefit) and reduce or increase stockholders’ equity, and such changes could have a significant impact upon our earnings in the future.

Income tax reserves are based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not realized based on the technical merits of the position. Potential interest and penalties associated with such uncertain tax position is recorded as a component of the income tax provision.

Earnings Per Share –

A reconciliation of net income (loss) and weighted average shares used in computing basic and diluted net income (loss) per share is as follows:

	Year Ended December 31,
	2011		2010			2009
	(In Thousands)
Basic net income (loss) per share:
Net income (loss) applicable to common shares	$	344	$	(23,572	)	$	(3,839	)
Weighted average common shares outstanding		12,038		12,195			12,067
Basic net income (loss) per share of common stock	$	0.03	$	(1.93	)	$	(0.32	)
Diluted net income (loss) per share:
Net income (loss) applicable to common shares	$	344	$	(23,572	)	$	(3,839	)
Weighted average common shares outstanding		12,038		12,195			12,067
Dilutive effects of stock options		10		-			-
Weighted average common shares, assuming dilutive effect of stock options		12,048		12,195			12,067
Diluted net income (loss) per share of common stock	$	0.03	$	(1.93	)	$	(0.32	)

Share-based awards, inclusive of all grants made under the Company’s equity plans, for which either the stock option exercise price, or the fair value of the restricted share award, exceeds the average market price over the period, have an anti-dilutive effect on earnings per share, and accordingly, are excluded from the diluted computations for all periods presented. Had such shares been included, shares for the diluted computation would have increased by approximately 3.6 million, 1.5 million and 4.2 million in the years ended December 31, 2011, 2010 and 2009, respectively. Options to purchase 34 thousand and 12 thousand shares of common stock that were outstanding during the years ended December 31, 2010 and 2009, respectively, were not included in the computation of diluted net loss per share due to the reported periodic loss. As of December 31, 2011 and 2010, there were approximately 3.7 million and 2.8 million share-based awards outstanding under the Company’s equity plans, respectively.

- 61 -

EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Fair Value of Financial Instruments –

Edgewater’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable and contingent earnout accruals. 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.

Concentrations of Credit Risk –

Financial instruments that potentially subject the Company to significant concentration of market or credit risk consist principally of cash equivalent instruments and accounts receivable. The Company places its cash balances with reputable financial institutions. 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.

Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. We have never experienced any losses related to these balances. All of our non-interest bearing cash balances were fully insured at December 31, 2011 due to a temporary federal program in effect from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning 2013, insurance coverage will revert to $250 thousand per depositor at each financial institution, and our non-interest bearing cash balances may again exceed federally insured limits.

The Company has historically incurred minimal credit losses. No customer balances were in excess of 10% of the Company’s total receivables balance as of December 31, 2011 or 2010.

For the years ended December 31, 2011, 2010, and 2009, no customer represented more than 10% of the Company’s total revenue or total service revenue. For the years ended December 31, 2011, 2010, and 2009, our five largest customers represented 11.1%, 15.3%, and 20.4% of our service revenue in the aggregate, respectively.

Comprehensive Income (Loss) –

Comprehensive income (loss) consists of periodic currency translation adjustments and net unrealized gains (losses) on our available-for-sale marketable securities.

Share-Based Compensation –

The Company recognizes the total fair value of share-based awards as compensation expense, over the requisite employee service period (generally the vesting period of the grant). We have used the Black-Scholes option-pricing model to compute the estimated fair value of stock option grants on the date of the award. The Black-Scholes option-pricing model includes assumptions regarding dividend yields, expected volatility, expected option term and risk-free interest rates. We estimate expected volatility based upon historical volatility. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Restricted stock awards are valued at the price of our common stock on the date of the award.

The assumptions used in computing the fair value of share-based awards reflect management’s best estimates but involve uncertainties relating to market and other conditions, many of which are outside of the

- 62 -

EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

Company’s control. As a result, if other assumptions or estimates had been used, the share-based compensation expense that was recorded for the years ended December 31, 2011, 2010, and 2009 could have been materially different. Furthermore, if different assumptions are used in future periods, share-based compensation expense could be materially impacted in the future.

Foreign Currency Translation –

The financial statements for Edgewater’s non-U.S. operations use the local currency as the functional currency and are translated to U.S. dollars. For assets and liabilities, the year-end rate is used. For revenues, expenses, gains and losses, the average rate for the period is used. Unrealized currency adjustments in our financial statements are accumulated in equity as a component of accumulated other comprehensive income (loss). Realized net gains (losses) on foreign currency transactions are immaterial and are reflected in earnings.

Recent Accounting Pronouncements –

Accounting Standards Update (“ASU”) 2011-5, “Comprehensive Income” and ASU 2011-12, “Comprehensive Income” require entities to elect the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single, continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not believe that the adoption of this ASU will have a material impact on its consolidated financial statements.

ASU 2011-04, “Fair Value Measurements and Disclosures” requires expanded disclosure of certain fair value measurements categorized in Level 3 of the fair value hierarchy. The ASU is effective prospectively for fiscal years, and interim periods within those years beginning after December 12, 2011. The Company is currently evaluating the impact of adopting this ASU.

3. FAIR VALUE MEASUREMENTS:

The following valuation hierarchy is used for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

¡ Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

¡ Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

¡ Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

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EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

3. FAIR VALUE MEASUREMENTS: (Continued):

As of December 31, 2011 and December 31, 2010, the Company’s only financial assets and liabilities required to be measured on a recurring basis were its money market funds and the accrued contingent earnout consideration payable in connection with the Fullscope Acquisition and the Meridian Acquisition, which are more fully described in Note 4.

The following table represents the Company’s fair value hierarchy for its financial assets and liabilities required to be measured on a recurring basis:

	Basis of Fair Value Measurements
	Balance		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands)
Balance at December 31, 2011:
Financial assets:
Money market investment	$	4,084	$	4,084	$	-	$	-
Total financial assets	$	4,084	$	4,084	$	-	$	-
Financial liabilities:
Contingent earnout consideration	$	231	$	-	$	-	$	231
Total financial liabilities	$	231	$	-	$	-	$	231
Balance at December 31, 2010:
Financial assets:
Money market investment	$	4,084	$	4,084	$	-	$	-
Total financial assets	$	4,084	$	4,084	$	-	$	-
Financial liabilities:
Contingent earnout consideration	$	2,800	$	-	$	-	$	2,800
Total financial liabilities	$	2,800	$	-	$	-	$	2,800

The Company has classified its liabilities for contingent earnout consideration relating to its acquisitions of Fullscope and Meridian within Level 3 of the fair value hierarchy because the fair values are determined using significant unobservable inputs, which included probability weighted cash flows.

- 64 -

EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

3. FAIR VALUE MEASUREMENTS: (Continued):

The Company has not transferred any financial instruments into or out of Level 3 classification during 2010 or 2011. A reconciliation of the beginning and ending Level 3 liabilities for the years ended December 31, 2010 and 2011 is as follows:

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	(In Thousands)
Balance at January 1, 2010	$	1,200
Initial fair value of contingent earnout consideration related to Meridian Acquisition		1,200
Change in fair value of earnout consideration (included within selling, general and administrative expense)		400
Balance at December 31, 2010	$	2,800
Funding of Fullscope contingent earnout consideration escrow		(2,713	)
Change in fair value of earnout consideration (included within selling, general and administrative expense)		144
Balance at December 31, 2011	$	231

4. BUSINESS COMBINATIONS:

Acquisition of Meridian Consulting International:    On May 17, 2010, the Company acquired substantially all of the assets and liabilities of Meridian, pursuant to the terms of an Asset Purchase Agreement (the “Meridian Acquisition”). Headquartered in Chicago, Illinois, Meridian is a specialty solution provider of Oracle’s Hyperion Strategic Finance (“HSF”) product which encompasses strategic planning and forecasting, scenario modeling and mergers and acquisitions analysis. Meridian has delivered its services to organizations across various vertical markets including Energy, Higher Education, Retail and Healthcare. The acquisition of Meridian continues the investment in EPM-related service offerings and aligns with the Company’s product-centric service offering model.

The Company initially estimated total fair value of the purchase price consideration to be $2.8 million. The initial cash consideration paid at close was $1.6 million. The cash paid at closing consisted of the $1.75 million purchase price less $164 thousand attributable to a net working capital adjustment. The initial cash consideration paid by the Company was increased by $1.2 million, representing the adjusted fair value estimate of additional contingent earnout consideration that may be earned by the former stockholders of Meridian, which is described in more detail below.

In May 2011, Meridian completed its first twelve-month earnout period, during which the required performance measurements were not achieved. The former Meridian stockholders did not receive any additional contingent consideration related to the first earnout period. The Company, as of December 31, 2011, has accrued $231 thousand in potential future contingent earnout consideration payable to the former Meridian stockholders related to the completion of the second and third twelve-month earnout periods. As of December 31, 2011, the maximum amount of contingent earnout consideration that the former stockholders of Meridian can earn during the final two earnout periods is capped at $1.8 million.

- 65 -

EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

4. BUSINESS COMBINATIONS (Continued):

In addition to the above payments, the Company incurred approximately $394 thousand in direct transaction costs, which was expensed (within selling, general and administrative expense on the consolidated statement of operations) as incurred.

The Meridian measurement period was completed by December 31, 2010. Accordingly, subsequent adjustments to the original fair value estimates are reported as a periodic operating expense. In connection with its routine periodic assessment of performance against contractually defined earnout criteria, the Company recognized credits of $400 thousand and $1.1 million (reported within selling, general and administrative expenses) relating to the changes in fair value of contingent earnout consideration, due to the underperformance of Meridian during the first and second earnout periods.

The Company allocated the purchase price between assets, liabilities and identified intangible assets based upon their estimated fair value. The allocation of the purchase price was as follows:

	Total			Life (In Years)
	(In Thousands)
Net fair value of accounts receivable	$	175
Net fair value of other assets		26
Net fair value of liabilities		(91	)
Acquired intangible assets		550			5 Years
Goodwill (deductible for tax purposes)		2,126
Total purchase price	$	2,786

The Meridian Acquisition was accounted for as a purchase transaction, and accordingly, the results of operations, commencing May 18, 2010, are included in the Company’s accompanying consolidated statement of operations.

The Company recorded total revenues of $601 thousand and a net loss of $(274) in its statement of operations for the year ended December 31, 2010 related to the Meridian business.

The following table sets forth supplemental pro forma financial information that assumes the acquisition of Meridian was completed at the beginning of 2010. The information for the year ended December 31, 2010 includes the historical results of Edgewater and Meridian. The pro forma results include estimates and assumptions regarding the amortization of intangible assets recognized as part of the acquisition and income taxes. 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 Ended December 31, 2010
	(In Thousands)
Pro forma revenue	$	88,820
Pro forma net loss	$	(23,678	)
Pro forma diluted net loss per share	$	(1.94	)

- 66 -

EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

4. BUSINESS COMBINATIONS (Continued):

Acquisition of Fullscope, Inc.    In December 2009, the Company acquired all the outstanding stock of Fullscope for approximately $15.1 million cash paid at closing increased by $1.2 million representing the fair value estimate of additional contingent earnout consideration which may be earned by the former Fullscope stockholders. The Fullscope Acquisition provides Edgewater with ERP integration and related consulting service capabilities, discrete and process manufacturing expertise and extends the reach of the Company’s strategic data and analytics offerings into the upper middle market.

An earnout agreement was entered into in connection with the Fullscope Acquisition under which the former Fullscope stockholders are eligible to receive additional contingent consideration. Contingent earnout consideration to be paid, if any, to the former Fullscope stockholders will be based upon the generation of positive, after-tax income, which will be determined, periodically, over an eighteen-month period from the date of acquisition and concluding on June 30, 2011. The Company has increased total purchase price consideration described above by $1.2 million, which represents our initial fair value estimate of the contingent consideration to be paid under the earnout agreement. In connection with the routine periodic assessment of actual performance against contractually defined earnout criteria, the Company recognized $1.2 million and $300 thousand of expense in 2011 and 2010, respectively (reported as a part of selling, general and administrative expenses), relating to the change in fair value of the contingent earnout consideration, due to the performance of Fullscope during the earnout period.

During the years ended December 31, 2011 and 2010, we incurred certain non-routine professional service-related expenses associated with our identification of embezzlement activities at Fullscope, one of our wholly-owned subsidiaries (the “Fullscope Embezzlement Issue”). We incurred the majority of our embezzlement-related expenses during fiscal 2010 in connection with our identification and investigation of the embezzlement activity.

During the fourth quarter of 2011, the Company made a cash payment, in full settlement of the Fullscope contingent earnout, of $2.7 million. The payment was made to an escrow account established to facilitate the finalization of the earnout. No amounts are expected to be released to the former Fullscope stockholders prior to the conclusion of the Fullscope Embezzlement Issue and the related escrow reimbursement claims filed by the Company.

Following is a summary of the potential contingent consideration the Company may be required to pay in connection with completed acquisitions as of December 31, 2011:

		Maximum Contingent Consideration Due As of December 31, 2011
Acquisition	Original Range of Potential Undiscounted Payments	2012		2013		Total
	(In Thousands)
Meridian	$  0-$2,750	$	917	$	917	$	1,834

Following is a summary of the changes in the recorded amount of contingent consideration liabilities from December 31, 2010 to December 31, 2011 for each acquisition:

Acquisition	Beginning Balance December 31, 2010		2011 Additions/ (Payments)			Changes in Fair Value of Contingent Consideration			Ending Balance December 31, 2011
(In Thousands)
Fullscope	$	1,500	$	(2,713	)	$	1,213		$	-
Meridian		1,300		-			(1,069	)		231
Total	$	2,800	$	(2,713	)	$	144		$	231

- 67 -

EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

5. ACCOUNTS RECEIVABLE:

Included in accounts receivable are unbilled amounts totaling approximately $2.2 million and $2.9 million at December 31, 2011 and 2010, respectively, which relate to services performed during the year and billed in the subsequent year. The Company maintains allowances for potential losses which management believes are adequate to absorb any probable 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:

	Year Ended December 31,
	2011			2010			2009
	(In Thousands)
Balance at beginning of year	$	595		$	490		$	437
Provisions for doubtful accounts		-			113			113
Charge-offs, net of recoveries		(295	)		(8	)		(60	)
Balance at end of year	$	300		$	595		$	490

6. PROPERTY AND EQUIPMENT:

Components of property and equipment consisted of the following:

	December 31,
	2011			2010
	(In Thousands)
Furniture, fixtures and equipment	$	1,541		$	1,431
Computer equipment and software		1,198			1,233
Leasehold improvements		3,153			3,566
		5,892			6,230
Less accumulated depreciation and amortization		(3,463	)		(3,433	)
Total	$	2,429		$	2,797

Depreciation expense related to property and equipment for the years ended December 31, 2011, 2010, and 2009 totaled approximately $875 thousand, $879 thousand, and $905 thousand, respectively. The Company disposed of $856 thousand and $643 thousand of equipment that was no longer in use during the years ended 2011 and 2010, respectively. A loss on disposal of property and equipment of $11 thousand was recognized in the year ended December 31, 2011. The assets disposed of in the year ended December 31, 2010 were fully depreciated at the time of disposal and therefore no gain or loss was recognized.

The above table of property and equipment includes assets under capital leases as listed below.

	December 31,
	2011			2010
	(In Thousands)
Furniture, fixtures and equipment	$	999		$	999
Less accumulated depreciation and amortization		(951	)		(649	)
Total	$	48		$	350

- 68 -

EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

7. GOODWILL AND INTANGIBLE ASSETS:

The changes in the carrying amount of goodwill are as follows:

	Goodwill
	(In Thousands)
Balance at January 1, 2010	$	9,923
Acquisitions consummated and adjustments during 2010		2,126
Balance at December 31, 2010		12,049
Adjustments to goodwill in 2011		-
Balance at December 31, 2011	$	12,049

Significant changes impacting the carrying value of goodwill during the year ended December 31, 2011 and 2010 included the following:

¡ The Company increased the gross carrying value of goodwill by $2.1 million during the year ended December 31, 2010 in connection with the Meridian Acquisition. The Meridian Acquisition and the related fair value allocation of purchase price between assets, liabilities, intangible assets and goodwill is described further detail in Note 4.

As of December 31, 2011, the net carrying amount of intangible assets consists of amounts related to business combination transactions consummated by the Company from 2007 to 2011. These transactions include the Meridian, Fullscope, Vertical Pitch, and Alecian acquisitions.

The Fullscope, Vertical Pitch and Alecian transactions were completed prior to 2010 and are discussed in greater detail in the Company’s previously filed reports with the SEC.

Other net intangibles amounted to $2.1 million and $3.8 million as of December 31, 2011 and 2010, respectively. Following is a summary of the Company’s identifiable intangible assets that are subject to amortization:

	December 31, 2011
	Gross Carrying Amount		Impairment Charges		Accumulated Amortization		Net Carrying Amount
	(In Thousands)
Identifiable intangibles:
Non-compete agreements	$	3,860	$	-	$	3,149	$	711
Customer relationships		10,378		-		9,463		915
Asset purchase agreement		1,400		-		1,400		-
Trade name and trademark		600		-		481		119
Capitalized product development costs		373		-		39		334
	$	16,611	$	-	$	14,532	$	2,079

- 69 -

EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

7. GOODWILL AND INTANGIBLE ASSETS (Continued):

	December 31, 2010
	Gross Carrying Amount		Impairment Charges		Accumulated Amortization		Net Carrying Amount
	(In Thousands)
Identifiable intangibles:
Non-compete agreements	$	3,860	$	-	$	2,788	$	1,072
Customer relationships		10,378		-		8,459		1,919
Asset purchase agreement		1,400		-		975		425
Trade name and trademark		600		-		307		293
Capitalized product development costs		112		-		-		112
	$	16,350	$	-	$	12,529	$	3,821

The Company increased the gross carrying value of intangible assets by $550 thousand during the year ended December 31, 2010 in connection with the Meridian acquisition. The Meridian Acquisition and the related fair value allocation of purchase price among assets, liabilities, intangible assets and goodwill is described further detail in Note 4.

The intangible assets were identified and valued by the Company. The original estimated useful lives of the acquired identifiable intangible assets are as follows:

Non-compete agreements	4 to 5 years
Customer relationships	4 to 7.5 years
Asset purchase agreement	1.5 years
Trade name and trademark	5 years
Capitalized product development costs	3 years

Intangible assets are amortized assuming no expected residual value over the periods in which the economic benefit of these assets is consumed. The weighted average amortization period for all intangible assets subject to amortization was 3.0 years, 3.5 years and 3.9 years as of December 31, 2011, 2010 and 2009, respectively. Amortization expense related to all intangible assets was $2.0 million, $3.1 million and $1.8 million in 2011, 2010 and 2009, respectively.

Amortization of $39 thousand related to capitalized product development costs were included within cost of revenue (specifically within Software expense) on the consolidated statement of operations for the year ended December 31, 2011. There was no amortization associated with capitalized product development costs during the year ended December 31, 2010.

Estimated annual amortization expense for the next five years ending December 31, which encompasses the remaining useful life of the intangible assets, is as follows:

	Amortization
	Expense
	(In Thousands)
2012	$	1,055
2013		531
2014		378
2015		115
2016		-

- 70 -

EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

8. ACCRUED EXPENSES:

Components of accrued expenses consisted of the following:

	December 31,
	2011		2010
	(In Thousands)
Accrued commissions	$	2,598	$	2,191
Accrued bonuses		2,562		2,292
Accrued vacation		1,741		1,530
Accrued payroll related liabilities		1,222		853
Accrued sales and use tax		1,026		1,063
Short-term portion of lease abandonment accrual		580		-
Income tax related accruals		605		390
Deferred rent		439		639
Accrued contractor expense		437		248
Other accrued expenses		2,724		3,185
Total	$	13,934	$	12,391

9. INCOME TAXES:

We are subject to U.S. federal tax as well as income tax in multiple states, local and foreign jurisdictions. The Company’s 2003 through 2011 tax years are open and may be subject to examination by these taxing authorities. Such examinations, if any, could result in challenges to tax positions taken and, accordingly, we may record adjustments to our tax provision based on the outcome of such matters.

The Company has elected to recognize interest and penalties related to income tax matters as a part of the income tax provision (benefit).

Significant components of the Company’s income tax provision (benefit) consisted of the following:

	Year Ended December 31,
	2011			2010			2009
	(In Thousands)
Current tax expense (benefit):
Federal	$	-		$	20		$	(32	)
State		650			90			(366	)
Foreign		57			98			(164	)
		707			208			(562	)
Deferred tax (benefit) expense:
Federal		333			(930	)		(1,667	)
State		49			(203	)		1,151
Foreign		0			360			-
Change in valuation allowance		(324	)		21,881			-
		58			21,108			(516	)
Unrecognized tax benefit		78			79			31
Income tax provision (benefit)	$	843		$	21,395		$	(1,047	)

- 71 -

EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

9. INCOME TAXES (Continued):

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2011 and 2010 are as follows:

	December 31,
	2011			2010
	(In Thousands)
Deferred income tax assets:
Net operating loss carryforwards and credits	$	25,588		$	27,530
Acquired intangible assets		8,943			9,686
Reserves and accruals		2,779			1,414
Share-based compensation		1,938			1,515
Depreciation		160			154
Total deferred income tax assets		39,408			40,299
Deferred income tax liabilities:
Acquired intangible assets		(405	)		(896	)
Other		(12	)		(30	)
Total deferred income tax liabilities		(417	)		(926	)
Valuation allowance		(39,049	)		(39,373	)
Deferred income tax liability, net	$	(58	)	$	-

Components of the net deferred tax assets (liabilities) reported in the accompanying consolidated balance sheets are as follows:

	December 31, 2011						December 31, 2010
	Current			Long-term			Current			Long-term
	(In Thousands)
Assets	$	2,401		$	37,162		$	865		$	39,442
Liabilities		(6	)		(566	)		(17	)		(917	)
Valuation allowance		(2,395	)		(36,654	)		(848	)		(38,525	)
Net deferred tax liability	$	-		$	(58	)	$	-		$	-

Significant deferred tax attributes and current activity within the Company’s deferred tax accounts included the following:

Net Operating Loss Carryforwards and Credits:    As of December 31, 2011, we had tax affected net operating loss carryforwards for federal income tax purposes of approximately $21.8 million and alternative minimum, worker’s opportunity and foreign tax credits of approximately $2.1 million, which expire at various intervals through 2030. However, $17.3 million of the Company’s federal net operating loss carryforwards and $1.0 million of workers opportunity tax credits are set to expire in 2020. Additionally, the Internal Revenue Code contains provisions that limit the amount of 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. These limitations may result in the expiration of our historical net operating loss carryforwards and tax credits prior to their utilization. The Company has various tax affected net operating loss carryforwards for state income tax purposes of approximately $1.2 million which expire at various intervals through 2031.

- 72 -

EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

9. INCOME TAXES (Continued):

Fullscope Acquisition-Related Deferred Tax Attributes:    As discussed in Note 4, on December 31, 2009, the Company acquired the outstanding stock of Fullscope, Inc. In connection with the Fullscope Acquisition, the Company assumed Fullscope’s deferred tax attributes as of the date of the acquisition. In connection with our initial fair value assessments of assets, liabilities, intangible assets and goodwill, the Company reviewed the carrying value of the acquired deferred tax attributes. Each of our initial fair value assessments related to the Fullscope Acquisition was subject to subsequent adjustment as the Company obtained additional information (the “Fullscope Measurement Period”). The Fullscope Measurement Period was completed during the third quarter of 2010. The Company, in connection with the completion of the measurement period process, recognized gross deferred tax assets of $6.5 million.

A significant portion of the deferred tax attributes assumed in connection with the acquisition are related to Fullscope’s federal net operating loss carryforwards. The Company acquired $4.6 million in tax affected federal net operating loss carryforwards. Prior to the acquisition, these federal net operating loss carryforwards were subject to Internal Revenue Code Section 382 Limitations (“Section 382 Limitations”). As a result of our acquisition, the future use of Fullscope’s federal net operating loss carryforwards will be subject to further Section 382 Limitations. The Company’s ability to utilize Fullscope’s historical net operating loss carryforwards is significantly limited. We anticipate that we will only utilize $14 thousand of the acquired Fullscope net operating loss carryforwards prior to their expiration. The Company, as part of its purchase accounting, applied a full valuation allowance against the gross carrying value of Fullscope’s net operating loss carryforwards and the other net deferred tax attributes due to uncertainty with respect to our ability to realize a future tax benefit related to these attributes.

Deferred tax liability:    The Company’s deferred tax liability is created by goodwill as a result of the Meridian Acquisition. In accordance with ASC 350, deferred tax liabilities resulting from the different treatment of goodwill for book and tax purposes cannot offset deferred tax assets in determining the valuation allowance. As a result, a deferred tax provision is required to increase the Company’s valuation allowance. The deferred tax liability as a result of the goodwill associated with the Meridian Acquisition is $58 thousand as of December 31, 2011. No deferred tax liability was established as of December 31, 2010. For tax purposes, goodwill generated from the Meridian Acquisition amounted to $1.3 million and is deductible over a 15-year period.

Annual changes to the deferred tax valuation allowance are as follows:

	Year Ended December 31,
	2011			2010		2009
	(In Thousands)
Balance, beginning of year	$	39,373		$	17,492	$	11,021
Additions		-			21,881		-
Reductions, net		(324	)		-		-
Fullscope Acquisition		-			-		6,471
Balance, end of year	$	39,049		$	39,373	$	17,492

We have net deferred tax assets that have arisen primarily as a result of timing differences, net operating loss carryforwards and tax credits.

Our ability to realize a deferred tax asset is based on our ability to generate sufficient future taxable income within the applicable carryforward period and subject to any applicable limitations. We assess, on a routine periodic basis, the estimated future realizability of the gross carrying value of our net deferred tax assets on a

- 73 -

EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

9. INCOME TAXES (Continued):

more likely than not basis. Our periodic assessments take into consideration both positive evidence (future profitability projections for example) and negative evidence (recent and historical financial performance for example) as it relates to evaluating the future recoverability of our deferred tax assets.

During the third quarter of 2010, in connection with such a review, we recorded a non-cash charge of $21.9 million in connection with an increase to the previously established valuation allowance recorded against the gross carrying value of our deferred tax assets. Subsequent to this adjustment, the recorded valuation allowance represents a full valuation reserve against the total gross carrying value of our net deferred tax assets.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against the deferred tax assets. The Company’s historical financial performance and, to a lesser extent, forecasts and projections were key measurements utilized in our review. As of December 31, 2009 and through the period ended June 30, 2010, the Company recorded an income tax benefit. At those times management determined that the recovery of the deferred tax assets were considered more likely than not, primarily due to positive evidence in the form of historical earnings adjusted for items of a non-recurring nature that would not be indicative of our future operations and projected taxable income. However, as a result of operating loss in the quarter ended September 30, 2010, our assessment of our adjusted and cumulative loss positions, and uncertainty as to the timing of profitability in future periods, we recorded a full valuation allowance against our deferred tax assets during the quarter ended September 30, 2010, as we determined that it was not more than likely that the Company would be able to fully realize future economic benefit from its deferred tax assets.

During 2011, we have continued, on a routine periodic basis, to evaluate the future recoverability of our deferred tax assets. In our periodic assessments of positive evidence (improved financial performance and profitability) and negative evidence (cumulative loss position on a trailing three-year basis), we concluded that it was not more than likely that the Company would be able to fully realize future economic benefit from our deferred tax assets and accordingly, continue to apply a full valuation allowance against our deferred tax attributes as of December 31, 2011.

The establishment of a full valuation allowance against the gross carrying value of our net deferred tax assets does not prohibit or limit the Company’s ability to realize a tax benefit in future periods. All existing deferred tax assets, net operating loss carryforwards and credits will be fully available to reduce certain future federal and state income tax obligations.

During 2009, the Company weighed both positive (projections and the acquisition of Fullscope) and negative (recent financial results) evidence in assessing the recoverability of our deferred tax assets. Our judgment in assessing the evidence was that the negative and positive evidence were effectively offset and our valuation allowance levels were appropriate.

- 74 -

EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

9. INCOME TAXES (Continued):

The differences in income taxes determined by applying the statutory federal tax rate of 34% to income (loss) from continuing operations before income taxes and the amounts recorded in the accompanying consolidated statements of operations result from the following:

	Year Ended December 31,
	2011						2010						2009
	Amount			Rate			Amount			Rate			Amount			Rate
	(Dollar Amounts In Thousands)
Income tax at statutory rate	$	404			34.0	%	$	(740	)		34.0	%	$	(1,662	)		34.0	%
Add (deduct):
State income taxes, net of federal tax benefit		435			36.6			60			(2.7	)		(279	)		5.7
Tax rate difference on foreign income taxes		222			18.7			(54	)		2.4			-			-
Foreign income taxes		-			-			-			-			(223	)		4.6
Revaluation of deferred tax attributes due to change in effective state income tax rate		-			-			-			-			929			(19.0	)
Non-deductible transaction costs, intangible assets and goodwill amortization charges and other permanent items		76			6.5			79			(3.6	)		173			(3.5	)
Increase (decrease) in valuation allowance against certain deferred tax assets		(324	)		(27.3	)		21,881			(1005.2	)		-			-
Unrecognized tax benefits		78			6.6			79			(3.6	)		31			(0.6	)
Other, net		(48	)		(4.1	)		90			(4.1	)		(16	)		0.3
	$	843			71.0	%	$	21,395			(982.8	)%	$	(1,047	)		21.5	%

In accordance with our evaluation of unrecognized tax benefits, we have established a liability representing our estimated amount of unrecognized tax benefits, plus an additional provision for penalties and interest. A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:

	Year Ended December 31,
	2011			2010		2009
	(In Thousands)
Gross unrecognized tax benefits at beginning of year	$	203		$	155	$	162
Increases in tax positions in the current year		-			48		-
Settlements		(48	)		-		(7	)
Gross unrecognized tax benefits at end of year	$	155		$	203	$	155

The Company’s policy is to recognize accrued interest and penalties related to unrecognized tax benefits and income tax liabilities, when applicable, as part of income tax expense in its Consolidated Statements of Operations. As of December 31, 2011, 2010 and 2009, accrued interest and penalties was $285 thousand, $158 thousand and $127 thousand, respectively.

As of December 31, 2011, the $440 thousand tax benefit, if recognized, would reduce our effective tax rate. We do not expect our unrecognized tax benefits to change significantly over the next twelve months.

10. 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 $490 thousand, $411 thousand and $357 thousand in each of the years ended December 31, 2011, 2010, and 2009.

- 75 -

EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

11. EMPLOYEE SHARE-BASED COMPENSATION PLANS:

Overview

The total fair value of share-based awards is recognized as a compensation expense, over the requisite employee service period (generally the vesting period of the grant). The Company has used the Black-Scholes option-pricing model to compute the estimated fair value of share-based awards on the date of grant. The Black-Scholes option pricing model includes assumptions regarding dividend yields, expected volatility, expected option term and risk-free interest rates. Expected volatility is estimated based upon a combination of historical and implied volatility. The risk-free interest rate is based on the U.S. treasury yield curve in effect at the time of grant.

Share-Based Compensation Plans

The Company has four share-based compensation plans which are described below: the Amended and Restated 1996 Stock Option Plan (“1996 Plan”), the Amended and Restated 2000 Stock Option Plan (“2000 Plan”), the 2003 Equity Incentive Plan (“2003 Plan”), and the 2008 Omnibus Incentive Plan (“2008 Plan”), collectively the “Equity Plans.” Specifics related to each plan are as follows:

1996 Plan: Grants for shares under the 1996 Plan were limited to 15% of the Company’s outstanding common stock. The only grants outstanding under the 1996 Plan are non-qualified stock option grants, with total qualified stock option grants under the 1996 Plan limited to 650,000 shares of the Company’s common stock. No grants of qualified stock options were ever issued under the 1996 Plan. The 1996 Plan expired on June 30, 2006; thus, no further grants have been awarded after June 30, 2006, but options awarded prior to that date remain outstanding subject to the terms of the 1996 Plan and any related option agreements.

2000 Plan: The 2000 Plan provides for grants of non-qualified stock options of the Company’s common stock. The 2000 Plan is limited to grants covering up to 4.0 million shares of the Company’s common stock.

2003 Plan: The 2003 Plan provides for grants of non-qualified stock options and awards of restricted shares of the Company’s common stock. The 2003 Plan is limited to stock option grants and restricted stock awards covering up to 500,000 shares of the Company’s common stock.

2008 Plan: The 2008 Plan provides for a broad range of awards, including non-qualified stock options and awards of restricted shares of the Company’s common stock. The 2008 Plan authorizes the issuance of 1.5 million shares of the Company’s common stock plus certain authorized awards or shares under other Company share-based compensation plans to the extent the awards or shares are not utilized or forfeited. The 2008 Plan became effective on June 11, 2008.

As of December 31, 2011, there are 461,961; 36,950; and 62,098 shares available for future grant under the 2000 Plan, 2003 Plan and 2008 Plan, respectively. No shares were available for issuance under the 1996 Plan, as it expired on June 30, 2006.

Option Plans (Excluding Restricted Share Awards)

The Company’s Equity Plans authorize the granting of qualified and non-qualified stock options to officers, employees and certain persons who are not employees on the date of grant, including certain non-employee members of the Board of Directors. All such options are for shares of the Company’s common stock.

The Equity Plans provide that the exercise price of the stock options will be determined based upon the fair market value of the Company’s common stock on the NASDAQ Global Market System as of the date of grant. Options granted to officers and employees generally vest in three-, four- or five-year periods, dependent upon the plan or award, and expire on the seventh anniversary of the grant date. Annual options granted to non-employee

- 76 -

EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

11. EMPLOYEE SHARE-BASED COMPENSATION PLANS (Continued):

members of the Company’s Board of Directors generally vest in equal quarterly increments and expire on the fifth anniversary of the grant date, and option grants issued upon their initial election to the Company’s Board of Directors vest in equal one-third increments as of the date of grant and the first and second anniversary of the date of grant.

During the year ended December 31, 2011, the Company granted options to purchase 1,136,540 shares of common stock (excluding issuances of restricted share awards issuable under either the 2003 Plan or the 2008 Plan), principally as part of a long-term incentive program and in connection with the Company’s Board of Director compensation program. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model utilizing the assumptions noted in the following table. Expected volatility is based upon historical volatility of the Company’s common stock. The expected life (period of time the award will be outstanding) was estimated using the historical exercise behavior of the Company’s employees. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company applied an estimated forfeiture rate of 26.5% (in all periods presented) to the calculated fair value of each option. The applied forfeiture rate utilized by the Company was based upon the historical forfeiture experience of the Equity Plans.

The share-based compensation expense and its classification in the statements of operations were as follows:

	Year Ended December 31,
	2011		2010		2009
	(In Thousands)
Project and personnel costs	$	343	$	323	$	269
Selling, general and administrative		858		711		870
Total share-based compensation expense	$	1,201	$	1,034	$	1,139

The fair value of each option award granted during 2011, 2010, and 2009, was based upon the following weighted-average assumptions:

	Year Ending December 31,
	2011			2010			2009
Expected volatility		53.8	%		50.5	%		52.0	%
Expected dividend yield		-	%		-	%		-	%
Expected life (in years)		3.61			3.62			3.36
Risk-free interest rate		1.1	%		1.3	%		1.4	%

The weighted-average grant-date fair value of all options granted (excluding restricted share awards) during the year ended December 31, 2011, 2010 and 2009 was $1.25, $1.14 and $1.11 per share, respectively.

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EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

11. EMPLOYEE SHARE-BASED COMPENSATION PLANS (Continued):

A summary of stock option activity under the Equity Plans (excluding restricted share awards) is presented below:

Stock Options:	Shares Under Options			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
	(In Thousands)
Outstanding at January 1, 2010		4,105,658		$	5.20
Granted		578,287			2.96
Exercised		(5,000	)		2.60
Forfeited or expired		(1,905,780	)		5.90
Outstanding at December 31, 2010		2,773,165			4.25		4.43	$	-
Granted		1,136,540			3.11
Exercised		-			-
Forfeited or expired		(179,132	)		4.68
Outstanding at December 31, 2011		3,730,573		$	3.88		4.35	$	29
Vested and expected to vest at December 31, 2011		3,302,135		$	3.90		4.08	$	28
Exercisable at December 31, 2011		2,116,264		$	4.31		3.06	$	28

The total intrinsic value of stock options exercised during 2010 was approximately $2 thousand. No stock options were exercised during 2011 or 2009.

2003 Equity Incentive Plan and 2008 Omnibus Incentive Plan – Restricted Share Awards

The 2003 Plan and the 2008 Plan also authorize the granting of restricted share awards to officers, employees and certain non-employee members of the Board of Directors (the “Restricted Share Plans”). Restricted share awards are made at prices determined by the Compensation Committee of the Company’s 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, which historically has equaled the par value per share the Company’s common stock ($0.01 per share). Shares of restricted stock generally vest over a 5-year period, during which time the Company has the right to repurchase any unvested shares at the amount paid if the relationship between the employee and the Company ceases. As of December 31, 2011, 15 thousand restricted share awards were subject to repurchase by the Company under the restricted stock agreements. The Company records compensation expense related to restricted share awards on a straight-line basis over the vesting term of the award.

No restricted share awards were issued to employees during the year ended December 31, 2011 or 2009. During the year ended December 31, 2010, the Company issued 30,000 restricted share awards to employees at a purchase price of $0.01 per share. Additionally, the Company recognized share-based compensation expense of $56 thousand, $235 thousand and $338 thousand during the years ended December 31, 2011, 2010 and 2009, respectively related to restricted share awards.

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EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

11. EMPLOYEE SHARE-BASED COMPENSATION PLANS (Continued):

A summary of non-vested restricted share activity under the Restricted Share Plans is presented below:

Restricted Share Awards:	Non-vested Restricted Shares			Weighted Average Grant Date Fair Value
Non-vested at January 1, 2010		71,230		$	6.23
Granted		30,000			2.97
Vested		(44,760	)		5.84
Forfeited or expired		(1,000	)		4.14
Non-vested at December 31, 2010		55,470			4.83
Granted		-			-
Vested		(25,010	)		6.25
Forfeited or expired		(15,000	)		2.97
Non-vested at December 31, 2011		15,460		$	4.33
Expected to vest at December 31, 2011		15,460		$	4.33

The total fair value of stock awards vested during the years ended December 31, 2011, 2010 and 2009 was $72 thousand, $133 thousand and $395 thousand, respectively.

Employee Stock Purchase Plan

In June 2008, in connection with the Company’s Annual Meeting of Stockholders, the stockholders of the Company approved, and the Company adopted, the Edgewater Technology, Inc. 2008 Employee Stock Purchase Plan (the “2008 ESPP Plan”). The 2008 ESPP Plan became effective on October 1, 2008. The 2008 ESPP Plan, which was amended in June 2011, allows a maximum of 1,200,000 shares of the Company’s common stock to be purchased by Edgewater employees.

Prior to the effective date of the 2008 ESPP Plan, the Company offered eligible employees the option to purchase the Company’s common stock under the 1999 Employee Stock Purchase Plan (the “1999 ESPP Plan”). The 1999 ESPP Plan allowed a maximum of 700,000 shares to be purchased by employees and as of December 31, 2008, no shares were available for future issuance. The 2008 ESPP Plan and the 1999 ESPP Plan are collectively referred to in this document as the “ESPP Plans.”

The ESPP Plans offer eligible employees the option to purchase the Company’s common stock at 85% of the lower of the closing price, as quoted on NASDAQ, on either the first trading day or the last trading day of the quarterly purchase period. Enrollment periods occur on January 1 and July 1. Purchases occur every three months. The amount each employee can purchase is limited to the lesser of (i) 10% of an employee’s annual base salary or (ii) $25,000 of stock value on an annual basis. The ESPP is designed to qualify for certain tax benefits for employees under section 423 of the Internal Revenue Code.

During the year ended December 31, 2011, 2010, and 2009, the Company issued 231,004; 199,144 and 179,901 shares, respectively, to employees under the ESPP Plans.

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EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

11. EMPLOYEE SHARE-BASED COMPENSATION PLANS (Continued):

The fair value of each ESPP offering was estimated on the date of grant using the Black-Scholes option pricing model that uses the weighted-average assumptions noted in the following table. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility was based on historical volatility.

	Year Ending December 31,
	2011			2010			2009
Expected volatility		53.4	%		32.7	%		74.5	%
Expected dividend yield		-	%		-	%		-	%
Expected life (in years)		0.25			0.25			0.25
Risk-free interest rate		0.1	%		0.1	%		0.1	%

The weighted-average fair value of the shares issued under the ESPP Plans in 2011, 2010, and 2009, based upon the assumptions in the preceding table, was $0.69, $0.76 and $0.80, respectively.

Compensation Expense

Share-based compensation expense under all of the Company’s share-based plans was $1.2 million, $1.0 million and $1.1 million in the years ended December 31, 2011, 2010 and 2009, respectively.

Cash received from stock option and ESPP exercises under all share-based payment arrangements was $483 thousand, $441 thousand and $431 thousand during the years ended December 31, 2011, 2010 and 2009, respectively. The Company recognized related tax benefits, which were offset by a full valuation allowance, of $424 thousand, $308 thousand and $264 thousand for the years ended December 31, 2011, 2010 and 2009, respectively.

As of December 31, 2011, unrecognized compensation expense, net of estimated forfeitures, related to the unvested portion of all share-based compensation arrangements was approximately $1.8 million and is expected to be recognized over a weighted average period of 1.6 years.

The Company is using previously purchased treasury shares for all shares issued for options, restricted share awards and ESPP issuances. Shares may also be issued from unissued share reserves.

12. CAPITAL STOCK:

Common and Preferred Stock -

The Company’s stockholders had authorized 48.0 million shares of common stock available for issuance as of December 31, 2011 and 2010, and had 2.0 million shares of preferred stock available for issuance as of December 31, 2011 and 2010.

Stockholder Rights Plan -

The Company had a stockholder rights plan, commonly referred to as a “poison pill,” intended to discourage an attempt to obtain control by means of a tender offer, merger, proxy contest or otherwise. Under the plan, our Board of Directors could have issued preferred stock in one or more series without stockholder action. If a person acquired 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 have been triggered, which would have significantly diluted the voting rights of any such acquiring person. The Company’s stockholder rights plan expired in August 2010. No preferred stock was issued under the stockholder rights plan.

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EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

12. CAPITAL STOCK (Continued):

Certain provisions of the General Corporation Law of Delaware may also discourage someone from acquiring or merging with us.

Stock Repurchase Program -

In December 2007, our Board of Directors (the “Board”) authorized a stock repurchase program for up to $5.0 million of common stock on the open market or through privately negotiated transactions from time-to-time through December 31, 2008 (the “Stock Repurchase Program”). The Board subsequently amended the Stock Repurchase Program, authorizing both an increase to and an extension of the Stock Repurchase Program. The Stock Repurchase Program, as amended, had a maximum purchase value of shares of $8.5 million (the “Purchase Authorization”) and expired on September 23, 2011 (the “Repurchase Period”). On September 9, 2011, the Board approved both a $5.0 million increase to the Purchase Authorization, to $13.5 million, and an extension of the Repurchase Period to September 21, 2012.

The timing and amount of the purchases will be based upon market conditions, securities law considerations and other factors. The Stock Repurchase Program does not obligate the Company to acquire a specific number of shares in any period and may be modified, suspended, extended or discontinued at any time, without prior notice.

The Company purchased 1.2 million shares and 204 thousand shares at aggregate purchase prices of $3.2 million and $579 thousand in 2011 and 2009, respectively. No shares were repurchased in 2010. The Company has repurchased a total of 2,795,551 shares of common stock since the inception of the Stock Repurchase Program at an aggregate purchase price of $8.9 million.

13. LEASE ABANDONMENT:

In December 2011, the Company abandoned certain excess office space within its corporate headquarters in Wakefield, Massachusetts. As a result of the abandonment of such space, the Company incurred a non-cash operating charge of $2.2 million in the fourth quarter of 2011 and recorded a lease abandonment accrual (the short- and long-term portions of which are recorded within accrued expenses and other long-term liabilities within the 2011 consolidated balance sheet, respectively). The lease abandonment charge was calculated based on the net of future contractually obligated lease payments and an estimate of potential sub-lease income (which took into account current market rates and occupancy levels).

14. COMMITMENTS AND CONTINGENCIES:

Commitments.    We have lease financing arrangements (the “Capital Lease Arrangements”) with a bank related to certain property and equipment, as further described in Note 6. Payments under the Capital Lease Arrangements are to be made over a period of 48 to 60 months and have a blended interest rate of 6.03% per annum on the outstanding principal balances. As of December 31, 2011 and 2010, our outstanding obligations under the Capital Lease Arrangements totaled $52 thousand and $200 thousand, respectively. During the years ended December 31, 2011, 2010 and 2009, the Company made payments of principal and interest totaling $148 thousand, $215 thousand and $251 thousand, respectively, under the Capital Lease Arrangements.

We lease office space and certain equipment under capital and operating leases that expire at various times through 2016. Annual future minimum lease payments required under capital leases, together with the present value of such payments, and future minimum lease payments required under operating leases that have initial or

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EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

14. COMMITMENTS AND CONTINGENCIES (Continued):

remaining non-cancelable lease terms in excess of one year as of December 31, 2011, were as follows:

Year Ending December 31,	Capital Leases		Abandoned Lease		Operating Leases
	(In Thousands)
2012	$	53	$	580	$	848
2013		-		591		783
2014		-		626		736
2015		-		626		705
2016		-		469		529
Thereafter		-		-		-
		53	$	2,892	$	3,601
Less amounts representing interest		1
	$	52

Rent payments under operating leases were $1.6 million, $1.6 million and $1.7 million for the years ended December 31, 2011, 2010 and 2009, respectively.

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 are not involved in any active, pending, or (to the best of our knowledge) threatened legal proceedings which would be material to our consolidated financial statements. We maintain insurance in amounts with coverage’s and deductibles that we believe are reasonable. However, there can be no assurance that such coverage’s will continue to be available on reasonable terms or will be available in sufficient amounts to cover possible claims that may arise in the future, or that our insurers will not disclaim coverage as to any future claim. The successful assertion of one or more claims against the Company that exceed available insurance coverages or changes in the Company’s insurance policies, including premium increases or the imposition of a large deductible or co-insurance requirements, could have a material adverse effect on the Company’s business, results of operations and financial condition.

The Company had approximately $439 thousand and $361 thousand of unrecognized tax benefits, penalties and interest expense related to uncertain tax positions as of December 31, 2011 and 2010, respectively.

During the fourth quarter of 2010, in connection with the Company’s review of the impact of a discovered embezzlement activity upon Fullscope’s historical financial statements, the Company recorded a $950 thousand liability associated with potential pre-acquisition sales and use tax obligations. The recorded liability is unchanged and remains at $950 thousand at December 31, 2011. The potential sales and use tax-related liability was created by the methods employed by a former employee of Fullscope to conceal a fraudulent activity. The Company believes that this amount is recoverable from an existing escrow account established at the time of the acquisition as management believes it qualifies as an undisclosed liability at the time of our acquisition of Fullscope. The Company has accounted for this pre-acquisition liability as a period expense. Any amounts actually paid to settle this liability may be recoverable from an existing, fully funded escrow account which was established in connection with our acquisition of Fullscope. Future amounts recovered, if any, will be recorded by the Company in the period in which they are determined to be probable of recovery from escrow.

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EDGEWATER TECHNOLOGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

15. UNAUDITED SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION:

The following tables set forth certain unaudited supplementary quarterly financial information for the years ended December 31, 2011 and 2010. The quarterly operating results are not necessarily indicative of future results of operations.

	2011
	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter			Total
	(In Thousands, Except Per Share Data)
Total revenue	$	23,594		$	27,396		$	25,048		$	26,405		$	102,443
Gross profit		8,598			10,827			9,366			9,906			38,697
Net income (loss) (1)		310			395			1,545			(1,906	)		344
Basic income (loss) per share	$	0.03		$	0.03		$	0.13		$	(0.17	)	$	0.03
Diluted income (loss) per share	$	0.03		$	0.03		$	0.13		$	(0.17	)	$	0.03
	2010
	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter			Total
Total revenue	$	20,270		$	23,355		$	21,384		$	23,536		$	88,545
Gross profit		6,708			8,583			7,830			8,954			32,075
Net loss (2)		(639	)		(90	)		(22,686	)		(157	)		(23,572	)
Basic loss per share	$	(0.05	)	$	(0.01	)	$	(1.86	)	$	(0.01	)	$	(1.93	)
Diluted loss per share	$	(0.05	)	$	(0.01	)	$	(1.86	)	$	(0.01	)	$	(1.93	)

(1) Net loss for the fourth quarter of 2011 was impacted by a $2.2 million non-cash lease abandonment charge.

(2) Quarterly loss for the third quarter of 2010 was impacted by an increase of the deferred tax asset valuation allowance of $21.9 million.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

(a) 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 applicable laws and 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.

(b) Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of control procedures. The objectives of internal control include providing management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with management’s authorization and recorded properly to permit the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment under those criteria, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2011.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

(c) Changes in Controls and Procedures

There were no changes in the Company’s internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act during the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

On March 9, 2012, the Company and Robin Ranzal-Knowles entered into an indemnification agreement in connection with Ms. Ranzal-Knowles’ role as an executive officer of the Company. Ms. Ranzal-Knowles has served as President of Edgewater Technology-Ranzal, Inc., a subsidiary of the Company, since October 2004.

- 84 -

The indemnification agreement entered into between the Company and Ms. Ranzal-Knowles is the Company’s standard form of indemnification agreement, a copy of which is filed as Exhibit 10.1 to this Annual Report on Form 10-K. The indemnification agreement provides indemnity, including the advancement of expenses, to the directors and certain officers of the company against liabilities incurred in the performance of their duties to the fullest extent permitted by the General Corporation Law of the State of Delaware.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information required by Part III of the Annual Report on 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 29, 2012. These items include:

(a) The information called for by Item 10 of the Annual Report on Form 10-K, involving Item 401 of Regulation S-K is incorporated by reference to the material under the captions “Election of Directors – Nominees for Election” and “Executive Officers” in our proxy statement for our Annual Meeting of Stockholders to be held on June 6, 2012.

(b) The information called for by Item 10 of the Annual Report on 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, 2012.

(c) The information called for by Item 10 of the Annual Report on Form 10-K involving Item 406 of Regulation S-K is incorporated by reference to the material under the caption “Corporate Governance - Code of Ethics” in our proxy statement for our Annual Meeting of Stockholders to be held on June 6, 2012.

(d) The information called for by Item 10 of the Annual Report on Form 10-K involving paragraphs (c) (3), (d) (4) and (d) (5) of Item 407 of Regulation S-K is incorporated by reference to the material under caption “Corporate Governance – Board and Board Committee Matters” in our proxy statement for our Annual Meeting of Stockholders to be held on June 6, 2012.

ITEM 11. EXECUTIVE COMPENSATION

The information called for by Item 11 of the Annual Report on Form 10-K for management remuneration involving Item 402 of Regulation S-K and paragraphs (e)(4) and (e)(5) of Item 407 of Regulation S-K is incorporated herein by reference to the material under the captions “Corporate Governance—Compensation of Outside Directors”, “Corporate Governance – Compensation Committee Interlocks and Insider Participation,” “Report of the Compensation Committee on Executive Compensation,” “Compensation Discussion and Analysis” and “Compensation of Named Executive Officers” in our proxy statement for our Annual Meeting of Stockholders to be held on June 6, 2012.

The “Report of the Compensation Committee on Executive Compensation” contained in our proxy statement shall not be deemed “soliciting material” or “filed” with the SEC or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Exchange Act, except to the extent we specifically request that such information be treated as soliciting material or specifically incorporate such information by reference into a document filed under the Securities Act or Exchange Act.

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

The information called for by Item 12 of the Annual Report on 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 captions “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, 2012.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information called for by Item 13 of the Annual Report on Form 10-K involving Item 404 of Regulation S-K and Item 407(a) of Regulation S-K is incorporated herein by reference to the material under the captions “Certain Relationships and Related Transactions” and “Corporate Governance – Board and Board Committee Matters” in our proxy statement for our Annual Meeting of Stockholders to be held on June 6, 2012.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information called for by Item 9(e) of Schedule 14A is incorporated herein by reference to the material under the captions “Corporate Governance - Board and Board Committee Matters – Audit Committee”, “Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Auditor” and “Audit Fees and Non-Audit Services” in our proxy statement for our Annual Meeting of Stockholders to be held on June 6, 2012.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)	1.	Financial Statements required by Item 15 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.

- 88 -

(a) 3. Exhibits

EXHIBIT INDEX

Exhibit Number	Description
2.1	Asset Purchase Agreement dated as of December 10, 2007, by and among Edgewater Technology-Ranzal, Inc., Vertical Pitch, LLC and Daniel Gudal (Incorporated by reference from Exhibit 2.1 to the Company’s Form 8-K filed with the SEC on December 12, 2007).
2.2	Agreement and Plan or Merger and Reorganization dated as of December 31, 2009, by and among Edgewater Technology, Inc., Edgewater Technology-Fullscope, Inc., Fullscope, Inc. and Rurik G. Vandevenne (Incorporated by reference from Exhibit 2.1 to the Company’s Form 8-K filed with the SEC on January 5, 2010).
2.3	Earnout Agreement dated as of December 31, 2009, by and among Edgewater Technology, Inc., Edgewater Technology-Fullscope, Inc., Fullscope, Inc. and the Designated Agent, on behalf of the Agent Committee and the Stockholders (Incorporated by reference from Exhibit 2.3 to the Company’s Form 10-K filed with the SEC on March 31, 2010).
2.4	Asset Purchase Agreement dated as of May 17, 2010, by and among Edgewater Technology-Meridian, Inc., Meridian Consulting International LLC and Andrew Starks, Ryan Meester and Ricardo Rasche (Incorporated by reference from Exhibit 2.1 to the Company’s Form 8-K filed with the SEC on May 18, 2010).
3.1	Restated Certificate of Incorporation of the Company (Incorporated by reference from Exhibit 3.1 to the Company’s Form 10-Q filed with the SEC on May 13, 2011).
3.2	Amended and Restated By-Laws of the Company, as amended to date (Incorporated by reference from Exhibit 3.1 to the Company’s Form 8-K filed with the SEC on September 28, 2007).
4.1	Form of certificate evidencing ownership of common stock of the Company.*
4.2	Article Four of the Certificate of Incorporation of the Company (included in Exhibit 3.1).
10.1	Form of Indemnity Agreement between the Company and each of its directors and executive officers.*
10.2	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)
10.3	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)
10.4	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)

(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(b).

* Filed herewith

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(a) 3. Exhibits (Continued)

EXHIBIT INDEX

Exhibit Number	Description
10.5	Edgewater Technology, Inc. 2008 Employee Stock Purchase Plan, as amended. (Incorporated by reference from Appendix A to the Company’s Proxy statement on Schedule 14A (File No. 000-20971) filed on April 25, 2011). (1)
10.6	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)
10.7	Third Amendment to Lease between Edgewater Technology (Delaware), Inc. and Harvard Mills Limited Partnership, dated March 21, 2006 and effective as of May 3, 2006 for Edgewater Technology, Inc.’s corporate headquarters at 20 Harvard Mill Square, Wakefield, Massachusetts. (Incorporated by reference from Exhibit 99.1 to the Company’s Form 8-K filed with the SEC on May 3, 2006).
10.8	Employment Agreement by and among the Company, Edgewater Technology (Delaware), Inc. (“Edgewater Delaware”) and Shirley Singleton dated as of June 12, 2007, which supersedes and terminates that certain employment agreement dated as of June 12, 2003 by and between Edgewater Delaware and Shirley Singleton. (Incorporated by reference from Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on June 15, 2007). (1)
10.9	Employment Agreement by and among the Company, Edgewater Technology (Delaware), Inc. (“Edgewater Delaware”) and David Clancey dated as of June 12, 2007, which supersedes and terminates that certain employment agreement dated as of June 12, 2003 by and between Edgewater Delaware and David Clancey. (Incorporated by reference from Exhibit 10.2 to the Company’s Form 8-K filed with the SEC on June 15, 2007). (1)
10.10	Change in Control Agreement by and among the Company and Timothy R. Oakes dated as of July 21, 2008 (Incorporated by reference from Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on July 23, 2008). (1)
10.11	Edgewater Technology, Inc. 2008 Omnibus Incentive Plan, incorporated by reference to Exhibit 10.1 of Form S-8, File No. 333-153740, filed with the SEC on September 30, 2008. (1)
10.12	Change in Control Agreement by and among the Company and Robin Ranzal Knowles dated as of September 15, 2010 (Incorporated by reference from Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on September 20, 2010). (1)
10.13	First Amendment to Employment Agreement by and among Edgewater Technology, Inc. and Shirley Singleton dated as of December 17, 2010, which amends that certain employment agreement dated as of June 12, 2007 (Incorporated by reference from Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on December 22, 2010). (1)

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

- 90 -

(a) 3. Exhibits (Continued)

EXHIBIT INDEX

Exhibit Number	Description
10.14	First Amendment to Employment Agreement by and among Edgewater Technology, Inc. and David Clancey dated as of December 17, 2010, which amends that certain employment agreement dated as of June 12, 2007 (Incorporated by reference from Exhibit 10.2 to the Company’s Form 8-K filed with the SEC on December 22, 2010). (1)
21.1	Subsidiaries of Edgewater Technology, Inc.*
23.1	Consent of BDO USA, LLP Independent Registered Public Accounting Firm.*
23.2	Consent of Deloitte & Touche LLP 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*
101	Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of December 31, 2011 and 2010, (ii) Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009, (iii) Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009 and (iv) Notes to the Consolidated Financial Statements.* (2)

* Filed herewith

(2) Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

- 91 -

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, Commonwealth of Massachusetts, on March 12, 2012.

Edgewater Technology, Inc.

/s/ SHIRLEY SINGLETON

Shirley Singleton

Chairman, 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 Timothy R. Oakes 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 Shirley Singleton	Chairman, President and Chief Executive Officer (Principal Executive Officer)	March 12, 2012
/s/ TIMOTHY R. OAKES Timothy R. Oakes	Chief Financial Officer (Principal Financial and Accounting Officer)	March 12, 2012
/s/ PAUL E. FLYNN Paul E. Flynn	Director	March 12, 2012
/s/ PAUL GUZZI Paul Guzzi	Director	March 12, 2012
/s/ NANCY L. LEAMING Nancy Leaming	Director	March 12, 2012
/s/ MICHAEL R. LOEB Michael R. Loeb	Director	March 12, 2012
/s/ DANIEL O’CONNELL Daniel O’Connell	Director	March 12, 2012
/s/ WAYNE WILSON Wayne Wilson	Director	March 12, 2012

- 92 -

EX-4.1

Exhibit 4.1

016570| 003590|127C|RESTRICTED||4|057-423 COMMON STOCK PAR VALUE $0.01 COMMON STOCK THIS CERTIFICATE IS TRANSFERABLE IN CANTON, MA AND JERSEY CITY, NJ Certificate Number ZQ 000000 Shares * * 6 0 0 6 2 0 * * * * * * * * * 6 0 0 6 2 0 * * * * * * * * * 6 0 0 6 2 0 * * * * * * * * * 6 0 0 6 2 0 * * * * * * * * * 6 0 0 6 2 0 * * EDGEWATER TECHNOLOGY, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE THIS CERTIFIES THAT is the owner of ** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample MR. **** Mr. Alexander SAMPLE David Sample **** Mr. Alexander David &Sample MRS. **** Mr. Alexander David SAMPLE Sample **** Mr. Alexander David & Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander MR. David Sample SAMPLE **** Mr. Alexander David Sample & **** Mr. Alexander MRS. David Sample **** SAMPLE Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Sample **** Mr. Sample **600620**Shares****600620**Shares****600620**Shares****600620**Shares****600620**Shares

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*600620**Shares****600620**Shares****600620**Sh CUSIP 280358 10 2 SEE REVERSE FOR CERTAIN DEFINITIONS FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $0.01 PAR VALUE OF EDGEWATER TECHNOLOGY, INC. transferable on the books of the Corporation by the holder in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. CFO, Treasurer & Secretary DATED <<Month Day, Year>> COUNTERSIGNED AND REGISTERED: COMPUTERSHARE TRUST COMPANY, N.A. TRANSFER AGENT AND REGISTRAR, By AUTHORIZED SIGNATURE Edgewater Technology, Inc. PO BOX 43004, Providence, RI 02940-3004 MR A SAMPLE DESIGNATION (IF ANY) ADD 1 ADD 2 ADD 3 ADD 4 CUSIP 201280358 Holder ID XXXXXXXXXX Insurance Value 00.1,000,000 Number of Shares 123456 DTC 12345678901234512345678 Certificate Numbers Num/No Denom. Total. 1234567890/1234567890 111 1234567890/1234567890 222 1234567890/1234567890 333 1234567890/1234567890 444 1234567890/1234567890 555 1234567890/1234567890 666 Total Transaction 7 EDGEWATER TECHNOLOGY SEAL EDGEWATER TECHNOLOGY, INC. DELAWARE SECURITY INSTRUCITONS ON REVERSE Printed BY DATA BUSINESS FORMS 1234567

. EDGEWATER TECHNOLOGY, INC. The Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock of the Corporation or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Such requests shall be made to the Corporation’s Secretary at the principal office of the Corporation. This certificate also evidences and entitles the holder hereof to certain rights as set forth in a Rights Agreement between the Corporation and Computershare Trust Company, N.A., Successor Rights Agent to EquiServe Trust Company, N.A. as Rights Agent (the “Rights Agent”), dated as of July 21, 2000, as amended from time to time (the “Rights Agreement”), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of the Corporation. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. The Corporation will mail to the holder of this certificate a copy of the Rights Agreement without charge after receipt of a written request therefor. As described in the Rights Agreement, Rights issued to any Person who becomes an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement) and certain related persons, whether currently held by or on behalf of such Person or by any subsequent holder, shall become null and void. KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED THE CORPORATION WILL REQUIRE A BOND OF IDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship UNIF GIFT MIN ACT UNIF TRF MIN ACT Custodian (Cust) under Uniform Gifts to Minors Act (Minor) (State) Custodian (until age (Cust) under Uniform Transfers to Minors Act (Minor) (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, Hereby sell, assign and transfer unto (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF ASSIGNEE) Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Attorney Dated: 20 Signature: THE SIGNATURE(S) Signature(s) MUST BE GUARANTEED Guaranteed: BY Medallion AN ELIGIBLE Guarantee GUARANTOR Stamp INSTITUTION (BANKS, AN STOCKBROKERS, APPROVED SIGNATURE SAVINGS GUARANTEE AND LOAN ASSOCIATIONS MEDALLION PROGRAM, AND CREDIT PURSUANT UNIONS) TO WITH S.E. C. MEMBERSHIP RULE 17Ad-15. IN Signature: NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER. 1234567 SECURITY INSTRUCTIONS THIS IS WATERMARKED PAPER, DO NOT ACCEPT WTHOUT NOTING WATERMARK. HOLD TO LIGHT TO VERYFY WATERMARK.

EX-10.1

Exhibit 10.1

INDEMNITY AGREEMENT

This Indemnity Agreement (this “Agreement”) dated as of is made by and between Edgewater Technology, Inc., a Delaware corporation (the “Company”), and (the “Indemnitee”).

RECITALS

A. The Company is aware that competent and experienced persons are increasingly reluctant to serve as directors, officers or agents of corporations unless they are protected by comprehensive liability insurance or indemnification, due to increased exposure to litigation costs and risks resulting from their service to such corporations, and due to the fact that the exposure frequently bears no reasonable relationship to the compensation of such directors, officers and other agents.

B. The statutes and judicial decisions regarding the duties of directors and officers are often difficult to apply, ambiguous, or conflicting, and therefore fail to provide such directors, officers and agents with adequate, reliable knowledge of legal risks to which they are exposed or information regarding the proper course of action to take.

C. Plaintiffs often seek damages in such large amounts and the costs of litigation may be so enormous (whether or not the case is meritorious), that the defense and/or settlement of such litigation is often beyond the personal resources of directors, officers and other agents.

D. The Company believes that it is unfair for its directors, officers and agents and the directors, officers and agents of its subsidiaries to assume the risk of huge judgments and other expenses, which may occur in cases in which the director, officer or agent received no personal profit and in cases where the director, officer or agent was not culpable.

E. The Company recognizes that the issues in controversy in litigation against a director, officer or agent of a corporation such as the Company or its subsidiaries are often related to the knowledge, motives and intent of such director, officer or agent, that he is usually the only witness with knowledge of the essential facts and exculpating circumstances regarding such matters, and that the long period of time which usually elapses before the trial or other disposition of such litigation often extends beyond the time that the director, officer or agent can reasonably recall such matters; and may extend beyond the normal time for retirement for such director, officer or agent with the result that he, after retirement or in the event of his death, his spouse, heirs, executors or administrators, may be faced with limited liability and undue hardship in maintaining an adequate defense, which may discourage such a director, officer or agent from serving in that position.

F. Based upon their experience as business managers, the Board of Directors of the Company (the “Board”) has concluded that, to retain and attract talented and experienced individuals to serve as directors, officers and agents of the Company and its subsidiaries and to encourage such individuals to take the business risks necessary for the success of the Company and its subsidiaries, it is necessary for the Company to contractually indemnify its directors, officers and agents and the directors, officers and agents of its subsidiaries, and to assume for itself maximum

liability for expenses and damages in connection with claims against such directors, officers and agents in connection with their service to the Company and its subsidiaries, and has further concluded that the failure to provide such contractual indemnification could result in great harm to the Company and its subsidiaries and the Company’s stockholders.

G. Section 145 of the General Corporation Law of Delaware, under which the Company is organized (“Section 145”), empowers the Company to indemnify its directors, officers, employees and agents by agreement and to indemnify persons who serve, at the request of the Company, as the directors, officers, employees or agents of other corporations or enterprises, and expressly provides that the indemnification provided by Section 145 is not exclusive.

H. The Company desires and has requested the Indemnitee to serve or continue to serve as a director, officer or agent of the Company and/or one or more subsidiaries of the Company free from undue concern for claims for damages arising out of or related to such services to the Company and/or one or more subsidiaries of the Company.

I. Indemnitee is willing to serve, or to continue to serve, the Company and/or one or more subsidiaries of the Company, provided that he is furnished the indemnity provided for herein.

AGREEMENT

NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows:

1. Definitions.

(a) Agent. For the purposes of this Agreement, “agent” of the Company means any person who is or was a director, officer, employee or other agent of the Company or a subsidiary of the Company; or is or was serving at the request of, for the convenience of, or to represent the interests of the Company or a subsidiary of the Company as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise; or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation.

(b) Expenses. For purposes of this Agreement, “expenses” include all out-of-pocket costs of any type or nature whatsoever (including, without limitation, all attorneys’ fees and related disbursements), actually and reasonably incurred by the Indemnitee in connection with either the investigation, defense or appeal of a proceeding or establishing or enforcing a right to indemnification under this Agreement or Section 145 or otherwise; provided, however, that “expenses” shall not include any judgments, fines, ERISA excise taxes or penalties, or amounts paid in settlement of a proceeding.

(c) Proceeding. For the purposes of this Agreement, “proceeding,” means any threatened, pending or contemplated action, suit or other proceeding, whether civil, criminal, administrative or investigative.

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(d) Subsidiary. For purposes of this Agreement, “subsidiary” means any corporation of which more than 50% of the outstanding voting securities is owned directly or indirectly by the Company, by the Company and one or more other subsidiaries, or by one or more other subsidiaries.

2. Agreement to Serve. The Indemnitee agrees to serve and/or continue to serve as agent of the Company, at its will (or under separate agreement, if such agreement exists), in the capacity Indemnitee currently serves as an agent of the Company, so long as he is duly appointed or elected and qualified in accordance with the applicable provisions of the Bylaws of the Company or any subsidiary of the Company or until such time as he tenders his resignation in writing provided, however, that nothing contained in this Agreement is intended to create any right to continued employment by Indemnitee.

3. Liability Insurance.

(a) Maintenance of D&O Insurance. The Company hereby covenants and agrees that, so long as the Indemnitee shall continue to serve as an agent of the Company and thereafter so long as the Indemnitee shall be subject to any possible proceeding by reason of the fact that the Indemnitee was an agent of the Company, the Company, subject to Section 3(c), shall promptly obtain and maintain in full force and effect directors’ and officers’ liability insurance (“D&O Insurance”) in reasonable amounts from established and reputable insurers.

(b) Rights and Benefits. In all policies of D&O Insurance, the Indemnitees shall be named as an insured in such a manner as to provide the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company’s directors, if the Indemnitee is a director; or of the Company’s officers, if the Indemnitee is not a director of the Company but is an officer; or of the Company’s key employees, if the Indemnitee is not a director or officer but is a key employee.

(c) Limitation on Required Maintenance of D&O Insurance. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines in good faith that such insurance is not reasonably available, the premium costs for such insurance are disproportionate to the amount of coverage provided, the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or the Indemnitee is covered by similar insurance maintained by a subsidiary of the Company.

4. Mandatory Indemnification. Subject to Section 9 below, the Company shall indemnify the Indemnitee as follows:

(a) Successful Defense. To the extent the Indemnitee has been successful on the merits or otherwise in defense of any proceeding (including, without limitation, an action by or in the right of the Company) to which the Indemnitee was a party by reason of the fact that he is or was an Agent of the Company at any time, against all expenses of any type whatsoever actually and reasonably incurred by him in connection with the investigation, defense or appeal of such proceeding.

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(b) Third Party Actions. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the Company) by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, the Company shall indemnify the Indemnitee against any and all expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) actually and reasonably incurred by him in connection with the investigation, defense, settlement or appeal of such proceeding, provided the Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and its stockholders, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.

(c) Derivative Actions. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding by or in the right of the Company by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, the Company shall indemnify the Indemnitee against all expenses actually and reasonably incurred by him in connection with the investigation, defense, settlement, or appeal of such proceeding, provided the Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and its stockholders; except that no indemnification under the subsection 4(c) shall be made in respect to any claim, issue or matter as to which such person shall have been finally adjudged to be liable to the Company by a court of competent jurisdiction unless and only to the extent that the court in which such proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnify for such amounts which the court shall deem proper.

(d) Actions where the Indemnitee is Deceased. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, and if prior to, during the pendency of after completion of such proceeding Indemnitee becomes deceased, the Company shall indemnify the Indemnitee’s heirs, executors and administrators against any and all expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA, excise taxes and penalties, and amounts paid in settlement) actually and reasonably incurred to the extent Indemnitee would have been entitled to indemnification pursuant to Sections 4(a), 4(b), or 4(c) above were the Indemnitee still alive.

(e) Notwithstanding the foregoing, the Company shall not be obligated to indemnify the Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) for which payment is actually made to or on behalf of Indemnitee under a valid and collectible insurance policy of D&O Insurance, or under a valid and enforceable indemnity clause, by-law or agreement.

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5. Partial Indemnification. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) incurred by him in the investigation, defense, settlement or appeal of a proceeding, but not entitled, however, to indemnification for all of the total amount hereof, the Company shall nevertheless indemnify the Indemnitee for such total amount except as to the portion hereof to which the Indemnitee is not entitled.

6. Mandatory Advancement of Expenses. Subject to Section 8(a) below, the Company shall advance all expenses incurred by the Indemnitee in connection with the investigation, defense, settlement or appeal of any proceeding to which the Indemnitee is a party or is threatened to be made a party by reason of the fact that the Indemnitee is or was an agent of the Company. Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall be determined ultimately that the Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to the Indemnitee within twenty (20) days following delivery of a written request therefor by the Indemnitee to the Company.

7. Notice and Other Indemnification Procedures.

(a) Promptly after receipt by the Indemnitee of notice of the commencement of or the threat of commencement of any proceeding, the Indemnitee shall, if the Indemnitee believes that indemnification with respect thereto may be sought from the Company under this Agreement, notify the Company of the commencement or threat of commencement thereof.

(b) If, at the time of the receipt of a notice of the commencement of a proceeding pursuant to Section 7(a) hereof, the Company has D&O Insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.

(c) In the event the Company shall be obligated to pay the expenses of any proceeding against the Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by the Indemnitee, upon the delivery to the Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by the Indemnitee and the retention of such counsel by the Company, the Company will not be liable to the Indemnitee under this Agreement for any fees of counsel subsequently incurred by the Indemnitee with respect to the same proceeding, provided that: (i) the Indemnitee shall have the right to employ his counsel in any such proceeding at the Indemnitee’s expense; and (ii) if (A) the employment of counsel

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by the Indemnitee has been previously authorized by the Company, (B) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of any such defense, or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee’s counsel shall be at the expense of the Company.

8. Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement:

(a) Claims Initiated by the Indemnitee. To indemnify or advance expenses to the Indemnitee with respect to proceedings or claims initiated or brought voluntarily by the Indemnitee and not by way of defense, unless: (i) such indemnification is expressly required to be made by law; (ii) the proceeding was authorized by the Board; (iii) such indemnification is provided by the Company, in its sole discretion, pursuant to the powers vested in the Company under the General Corporate Law of Delaware; or (iv) the proceeding is brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145.;

(b) Lack of Good Faith. To indemnify the Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by the Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous.; or

(c) Unauthorized Settlements. To indemnify the Indemnitee under this Agreement for any amounts paid in settlement of a proceeding unless the Company consents to such settlement, which consent shall not be unreasonably withheld.

9. Non-Exclusivity. The provisions for indemnification and advancement of expenses set forth in this Agreement shall not be deemed exclusive of any other rights which the Indemnitee may have under any provisions of law, the Company’s Certificate of Incorporation or Bylaws, the vote of the Company’s stockholders or disinterested directors, other agreements, or otherwise, both as to action in his official capacity and to action in another capacity while occupying his position as an agent of the Company, and the Indemnitee’s rights hereunder shall continue after the Indemnitee has ceased acting as an agent of the Company and shall inure to the benefit of the heirs, executors and administrators of the Indemnitee.

10. Enforcement. Any right to indemnification or advances granted by this Agreement to the Indemnitee shall be enforceable by or on behalf of Indemnitee in any court of competent jurisdiction if: (i) the claim for indemnification or advances is denied, in whole or in part; or (ii) no disposition of such claim is made within ninety (90) days of request therefor. The Indemnitee, in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. It shall be a defense to any action for which a claim for indemnification is made under this Agreement (other than an action brought to enforce a claim for expenses pursuant to Section 6 hereof, provided that the required undertaking has been tendered to the Company) that the Indemnitee is not entitled to indemnification because of the limitations set

6

forth in Sections 4 and 8 hereof. Neither the failure of the Company (including its Board of Directors or its stockholders) to have made a determination prior to the commencement of such enforcement action that indemnification of Indemnitee is proper in the circumstances, nor an actual determination by the Company (including its Board of Directors or its stockholders) that such indemnification is improper, shall be a defense to the action or create a presumption that Indemnitee is not entitled to indemnification under this Agreement or otherwise.

11. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights.

12. Survival of Rights.

(a) All agreements and obligations of the company contained herein shall continue during the period the Indemnitee is an agent of the Company and shall continue thereafter so long as the Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative, by reason of the fact that Indemnitee was serving in the capacity referred to herein.

(b) The Company shall require any successor to the Company (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place.

13. Interpretation of Agreement. It is understood that the parties hereto intend this Agreement to be interpreted and enforced so as to provide indemnification to the Indemnitee to the fullest extent permitted by law including those circumstances in which indemnification would otherwise be discretionary.

14. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (i) the validity, legality and enforceability of the remaining provisions of the Agreement (including without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (ii) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable and to give effect in Section 13 hereof.

15. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

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16. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given: (i) if delivered by hand and receipted for by the party addresses; or (ii) if mailed by certified or registered mail with postage prepaid, on the third business day after the mailing date. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice.

17. Governing Law. This Agreement shall be governed exclusively by and construed according to the laws of the State of Delaware as applied to contracts between Delaware residents entered into and to be performed entirely within Delaware.

THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK

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The parties hereto have entered into this Agreement effective as of the date first above written.

        EDGEWATER TECHNOLOGY, INC.:

By :

Name:

Title:

        THE INDEMNITEE:

Name:

9

Schedule of Omitted Information

Name of Indemnitee	Date of Agreement	Person Signing on behalf of the Company
Michael Loeb	March 30, 2000	Clete T. Brewer Chairman & Chief Executive Officer
Shirley Singleton	June 6, 2001	Clete T. Brewer Chairman & Chief Executive Officer
David Clancey	June 6, 2001	Clete T. Brewer Chairman & Chief Executive Officer
Wayne Wilson	May 22, 2003	Kevin R. Rhodes Chief Financial Officer, Treasurer & Corporate Secretary
Paul Guzzi	April 1, 2004	Kevin R. Rhodes Chief Financial Officer, Treasurer & Corporate Secretary
Kristin Zaepfel	June 2, 2004	Shirley Singleton President & Chief Executive Officer
Paul Flynn	July 21, 2005	Kevin R. Rhodes Chief Financial Officer, Treasurer & Corporate Secretary
Nancy Leaming	December 1, 2005	Kevin R. Rhodes Chief Financial Officer, Treasurer & Corporate Secretary
Timothy R. Oakes	July 21, 2008	Shirley Singleton President & Chief Executive Officer
Daniel O’Connell	August 12, 2009	Kevin R. Rhodes Chief Financial Officer, Treasurer & Corporate Secretary
Robin Ranzal-Knowles	March 9, 2012	Timothy R. Oakes Chief Financial Officer, Treasurer & Corporate Secretary

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EX-21.1

EXHIBIT 21.1

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-Ranzal, Inc.	Delaware, USA
Edgewater Technology Securities Corp.	Massachusetts, USA
Fullscope, Inc.	Delaware, USA
Edgewater Technology-Meridian, Inc.	Delaware, USA

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-175660, 333-50912, 333-88313, 333-106325, 333-153740 and 333-153741) of Edgewater Technology, Inc. of our report dated March 12, 2012, relating to the consolidated financial statements, which appears in this Form 10-K.

/s/ BDO USA, LLP

Boston, Massachusetts

March 12, 2012

EX-23.2

EXHIBIT 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 333-175660, 333-50912, 333-88313, 333-106325, 333-153740 and 333-153741 on Form S-8 of our report dated March 31, 2011, relating to the 2010 and 2009 financial statements of Edgewater Technology, Inc., appearing in this Annual Report on Form 10-K of Edgewater Technology, Inc. for the year ended December 31, 2011.

/s/ Deloitte & Touche LLP

Boston, Massachusetts

March 12, 2012

EX-31.1

EXHIBIT 31.1

13a-14 CERTIFICATION

I, Shirley Singleton, 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 operations and cash flows of the Company as of, and for, the periods presented in this report;

4. The Company’s other certifying officer(s) 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 Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer(s) 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 12, 2012	/s/ SHIRLEY SINGLETON
	Shirley Singleton
	Chairman, President and Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

13a-14 CERTIFICATION

I, Timothy R. Oakes, 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 operations and cash flows of the Company as of, and for, the periods presented in this report;

4. The Company’s other certifying officer(s) 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 Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer(s) 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 12, 2012	/s/ TIMOTHY R. OAKES
	Timothy R. Oakes
	Chief Financial Officer (Principal Financial and Accounting Officer)

EX-32

EXHIBIT 32

1350 CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350, as adopted), Shirley Singleton, the Chairman, President and Chief Executive Officer of Edgewater Technology, Inc. (the “Company”), and Timothy R. Oakes, 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, 2011, 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 and results of operations of the Company.

Date: March 12, 2012	/s/ SHIRLEY SINGLETON
	Shirley Singleton
	Chairman, President and Chief Executive Officer (Principal Executive Officer)
Date: March 12, 2012	/s/ TIMOTHY R. OAKES
	Timothy R. Oakes
	Chief Financial Officer (Principal Financial and Accounting Officer)

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

XML

FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2011

FAIR VALUE MEASUREMENTS

3. FAIR VALUE MEASUREMENTS:

The following valuation hierarchy is used for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

¡ Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

¡ Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

¡ Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

As of December 31, 2011 and December 31, 2010, the Company’s only financial assets and liabilities required to be measured on a recurring basis were its money market funds and the accrued contingent earnout consideration payable in connection with the Fullscope Acquisition and the Meridian Acquisition, which are more fully described in Note 4.

The following table represents the Company’s fair value hierarchy for its financial assets and liabilities required to be measured on a recurring basis:

	Basis of Fair Value Measurements
	Balance		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In Thousands)
Balance at December 31, 2011:
Financial assets:
Money market investment	$	4,084	$	4,084	$	-	$	-
Total financial assets	$	4,084	$	4,084	$	-	$	-
Financial liabilities:
Contingent earnout consideration	$	231	$	-	$	-	$	231
Total financial liabilities	$	231	$	-	$	-	$	231
Balance at December 31, 2010:
Financial assets:
Money market investment	$	4,084	$	4,084	$	-	$	-
Total financial assets	$	4,084	$	4,084	$	-	$	-
Financial liabilities:
Contingent earnout consideration	$	2,800	$	-	$	-	$	2,800
Total financial liabilities	$	2,800	$	-	$	-	$	2,800

The Company has classified its liabilities for contingent earnout consideration relating to its acquisitions of Fullscope and Meridian within Level 3 of the fair value hierarchy because the fair values are determined using significant unobservable inputs, which included probability weighted cash flows.

The Company has not transferred any financial instruments into or out of Level 3 classification during 2010 or 2011. A reconciliation of the beginning and ending Level 3 liabilities for the years ended December 31, 2010 and 2011 is as follows:

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	(In Thousands)
Balance at January 1, 2010	$	1,200
Initial fair value of contingent earnout consideration related to Meridian Acquisition		1,200
Change in fair value of earnout consideration (included within selling, general and administrative expense)		400
Balance at December 31, 2010	$	2,800
Funding of Fullscope contingent earnout consideration escrow		(2,713	)
Change in fair value of earnout consideration (included within selling, general and administrative expense)		144
Balance at December 31, 2011	$	231

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Dec. 31, 2011

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

Basis of Presentation –

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

The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. The Company did not identify any recognizable events during this period.

The Company has revised the balance sheet presentation of certain 2010 information in order to conform to 2011 presentation. Specifically, the Company has separately identified accounts payable on the face of the balance sheet while collapsing all accrued expense balances to a single line item (see Note 8 for required disclosure). Further, the Company has changed the 2010 caption “Deferred revenue and other liabilities” to “Deferred revenue” in 2011. As a result, the Company has reclassified $639 of deferred rent to accrued expenses in the year ended December 31, 2010.

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 consolidated 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.

Cash and Cash Equivalents –

Cash and cash equivalent balances consist of deposits and investments in money market funds. All highly liquid investments with remaining maturities of three months or less at the date of purchase are considered cash equivalents. The Company’s cash equivalents consisted of $4.1 million in money market funds as of December 31, 2011 and 2010.

Restricted Cash –

In connection with Edgewater’s December 31, 2009 acquisition of Fullscope, Inc. (“Fullscope”) (the “Fullscope Acquisition”), Fullscope, at the closing date of the acquisition, had $702 thousand of restricted cash. The restricted cash represented an escrow deposit made in connection with Fullscope’s sale of certain intellectual property in June 2009 and was released in June 2010. As provided for under the Agreement and Plan of Merger and Reorganization between Edgewater and Fullscope, the restricted cash was released from escrow during 2010 and deposited into a Fullscope Acquisition-related escrow account. Edgewater’s acquisition of Fullscope is described in further detail in Note 4 of the notes to consolidated financial statements.

Marketable Securities –

Marketable securities are classified as available-for-sale securities, which are recorded at fair market value with unrealized gains and losses recorded as part of accumulated and other comprehensive income, which is separate component of stockholders’ equity, until such gains and losses are realized. Marketable securities consist of marketable instruments, which include but are not limited to government obligations, including agencies, government sponsored entities and commercial paper. All marketable securities have original maturities greater than three months, but less than one year, at the date of purchase. The fair value of these securities is based upon quoted prices for identical or similar assets. If a decline in the fair value is considered other-than-temporary, based on available evidence, the unrealized loss is transferred from other comprehensive income (loss) to the consolidated statements of operations. Realized gains or losses are determined on the specific identification method and are included in interest income in the consolidated statements of operations.

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. Equipment held under capital leases is amortized utilizing the straight-line method over the lesser of the estimated useful life of the asset or the term of the lease. See Note 6 and Note 14. Additions that extend the lives of the assets are capitalized, while repairs and maintenance costs are expensed as incurred.

Product Development Costs –

The Company periodically develops software modules to be used within the Microsoft Dynamics AX environment. Capitalization of qualified product development costs begins upon the establishment of technological feasibility. Amortization of capitalized computer software development costs, which is recorded as a component of cost of revenue, is provided on a product-by-product basis, beginning upon commercial release of the product, and continuing over the remaining estimated economic life of the product, not to exceed three years. At each balance sheet date, the Company evaluates the unamortized capitalized software costs for potential impairment by comparing to the net realizable value of the products. The Company capitalized a total of $267 thousand and $112 thousand in product development costs during the years ended December 31, 2011 and 2010, respectively. These costs represent the entire amount of capitalized product development costs included in the Company’s consolidated balance sheet as of December 31, 2011 and 2010 under the caption “Intangible assets, net.” Amortization expense of $39 thousand has been recorded (within software costs on the consolidated statement of operations) during the year ended December 31, 2011. No amortization expense was recorded during the year ended December 31, 2010, as no products with capitalized costs had been released for commercial sale.

Impairment of Long-Lived Assets –

The Company evaluates its 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. 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.

Lease Abandonment –

In December 2011, the Company abandoned certain excess office space within its corporate headquarters in Wakefield, Massachusetts. As a result of the abandonment of such space, the Company incurred a fourth-quarter, non-cash operating expense charge of approximately $2.2 million and recorded a lease abandonment accrual (the short- and long-term portions of which are recorded within accrued expenses and other long term liabilities within the 2011 consolidated balance sheet, respectively). The lease abandonment accrual is carried at fair value (see Note 3) and remeasured at each balance sheet date (any change in fair value will be recorded as a period expense in the period the change is identified).

Goodwill and Intangible Assets –

Goodwill has an indefinite useful life and is not amortized but is evaluated for impairment annually (the “Annual Impairment Test”) or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company records intangible assets at historical cost. Intangible assets consist primarily of non-compete arrangements, customer relationships and trade names and trademarks. Intangible assets that have finite lives are amortized using either the straight-line method or based on estimated future cash flows to approximate the pattern in which the economic benefit of the asset will be utilized. Amortization is recorded over the estimated useful lives ranging from 1.5 to 7.5 years and is further described in Notes 4 and 7.

The Company engages in business activities in one operating segment, which combines management consulting, technical knowledge, and enterprise management solutions to develop custom technology and business process solutions. The chief operating decision maker formulates decisions about how to allocate resources and assess performance based on consolidated financial results. The Company has three reporting units for purposes of its allocation of goodwill and performance of its impairment evaluation.

Goodwill is tested for impairment annually at the reporting unit level utilizing the “fair value” methodology. The annual measurement date is December 2. Factors the Company considers important that could trigger an interim review for impairment include, but are not limited to, the following:

¡ Significant under-performance relative to historical or projected future operating results;

¡ Significant changes in the manner of its use of acquired assets or the strategy for its overall business;

¡ Significant negative industry or economic trends;

¡ Significant decline in its stock price for a sustained period; and

¡ Its market capitalization relative to net book value.

Goodwill is evaluated for impairment using a two-step process. The first step is to compare the fair value of the reporting unit to the carrying amount of the reporting unit (the “First Step”). If the carrying amount exceeds the fair value, a second step must be followed to calculate potential impairment (the “Second Step”). Otherwise, if the fair value of the reporting unit exceeds the carrying amount, the goodwill is not considered to be impaired as of the measurement date. In its review of the carrying value of the goodwill, the Company determines fair values for the reporting unit using the Income Approach, or more specifically the Discounted Cash Flow Method, and the Market Approach, utilizing the Guideline Company Method. These valuation methods require management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multi-year period, as well as determine the weighted average cost of capital to be used as a discount rate. The 2011 analysis confirmed that fair values exceeded carrying values and, therefore, no impairment existed.

Revenue Recognition –

Our Company recognizes revenue primarily through the provision of consulting services and the resale of third-party, off the shelf software and maintenance.

We recognize revenue by providing 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 retainer. Time and materials-based contracts represented 95.0%, 93.5% and 92.7% of service revenue for the years ended December 31, 2011, 2010 and 2009, respectively. Revenue related to service offerings is recognized as the services are performed and amounts are earned.

When a customer enters into a time and materials, fixed-price or a periodic retainer-based contract, the Company recognizes revenue in accordance with our evaluation of the deliverables in each contract. If the deliverables represent separate units of accounting, the Company then measures and allocates the consideration from the arrangement to the separate units, based on vendor specific objective evidence of the value for each deliverable.

The revenue under time and materials contracts is recognized as services are rendered and performed at contractually agreed upon rates. Revenue pursuant to fixed-price contracts is recognized under the proportional performance method of accounting. Fixed-price contracts represented 2.9%, 4.2% and 4.7% of service revenue for the years ended December 31, 2011, 2010 and 2009, respectively. Over the course of a fixed-price contract, we routinely evaluate whether revenue and profitability should be recognized in the current period. We estimate the proportional performance on our fixed-price contracts on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project. If we do not have a sufficient basis to measure progress toward completion, revenue is recognized upon completion of performance, 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 costs and revenue earned can be made, based on historical experience and milestones identified in any particular contract.

If our initial estimates of the resources required or the scope of work to be performed on a fixed-price contract are inaccurate, or we do not manage the project properly within the planned time period, a provision for estimated losses on incomplete projects is made. 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. No losses were recognized on fixed-price contracts during the years ended December 31, 2011, 2010 or 2009.

We also perform services on a periodic retainer basis under infrastructure service contracts, which include monthly hosting and support services. Retainer-based contracts represented 2.1%, 2.3% and 2.6% of service revenues for the years ended December 31, 2011, 2010 and 2009, respectively. Revenue under periodic retainer-based contracts is recognized ratably over the contract period, as outlined within the respective contract. In the event additional services are required, above the minimum retained or contracted amount, then such services are billed on a time and materials basis.

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 defects. The warranty 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. Revenue related to the warranty provisions within our fixed-price contracts is recognized as the services are performed or the revenue is earned. The warranty period is typically for a 30-60 day period after the project is complete.

Customer prepayments, even if nonrefundable, are deferred (classified as a liability) and recognized over future periods as services are performed. As of December 31, 2011 and 2010, the Company has recorded a deferred liability of approximately $915 thousand and $418 thousand, respectively, which is included in the financial statement caption of “deferred revenue” related to customer prepayments.

Software revenue represents the resale of certain third-party off-the-shelf software and maintenance and is recorded on a gross basis provided we act as a principal in the transaction, which we have determined based upon the fact that we have credit risk and we set the price to the end user. In the event we do not meet the requirements to be considered a principal in the software sale transaction and act as an agent, software revenue will be recorded on a net basis. Revenue from software resale arrangements represented 12.8%,13.0% and 1.3% of total revenue for the years ended December 31, 2011, 2010 and 2009, respectively.

The majority of the software sold by the Company is delivered electronically. For software that is delivered electronically, we consider delivery to have occurred when the customer either (a) takes possession of the software via a download (that is, when the customer takes possession of the electronic data on its hardware), or (b) has been provided with access codes that allow the customer to take immediate possession of the software on its hardware pursuant to an agreement or purchase order for the software.

The Company enters into multiple element arrangements which typically include software, post-contract support (or maintenance), and consulting services. Consistent with the software described above, maintenance that is in the form of a pass through transaction is recognized upon delivery of the software, as all related warranty and maintenance is performed by the primary software vendor and not the Company. Maintenance fee revenue for the Company’s software products, which is inconsequential in all years presented, is recognized ratably over the term of the arrangements, which are generally for a one-year period. The Company has established vendor specific objective evidence (“VSOE”) with respect to the services provided based on the price charged when the services are sold separately. The Company has established VSOE for maintenance based upon the stated renewal rate method.

We consider amounts to be earned once evidence of an arrangement has been obtained, services are delivered, fees are fixed or determinable and collectability is reasonably assured. 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. Out-of-pocket reimbursable expenses charged to customers are reflected as revenue.

We received royalty revenue in connection with the sale of Microsoft Dynamics AX-related discrete and process manufacturing modules (the “Software Modules”) developed by Fullscope, which were subsequently sold to Microsoft in June 2009. Royalty revenues earned are determined as a percentage of net receipts from the periodic sale of license keys and enhancements related to the Software Modules sold by Microsoft. Royalties were recognized as earned in accordance with the contract terms when royalties from licensees can be reasonably estimated and collectability is reasonably assured. The Software Modules contract expired in June 2011 and no revenue is expected to be recognized subsequent to the expiration of this contract.

Allowance for Doubtful Accounts –

The Company maintains an allowance for doubtful accounts related to its accounts receivable that have been deemed to have a high risk of uncollectability. Management reviews its accounts receivable balances on a monthly basis to determine if any receivables are potentially uncollectible. Management further analyzes historical collection trends and changes in its customer payment patterns, customer concentration and credit worthiness when evaluating the adequacy of its allowance for doubtful accounts. The Company includes any accounts receivable balances that are deemed to be potentially uncollectible, along with a general reserve, in its overall allowance for doubtful accounts.

Billed and unbilled receivables that are specifically identified as being at risk are provided for with a charge to revenue or bad debts as appropriate in the period the risk is identified.

Based on the information available, management believes the allowance for doubtful accounts is adequate; however, future write-offs could exceed the recorded allowance.

Cost of Services –

Our cost of services are composed primarily of project personnel costs, including direct salaries, payroll taxes, employee benefits, contractor costs and travel expenses for personnel dedicated to customer projects. These costs represent the most significant expense we incur in providing our services.

Other (Expense) Income, Net –

The following table represents the components of other (expense) income, net:

	Year Ended December 31,
	2011			2010			2009
	(In Thousands)
Interest income	$	5		$	32		$	192
Interest expense		(10	)		(15	)		(70	)
Gain (loss) on foreign exchange transactions		(122	)		17			-
Other (loss) income, net	$	(127	)	$	34		$	122

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. We evaluate the realizability of our deferred tax assets and assess the need for a valuation allowance on an ongoing basis. In evaluating our deferred tax assets, we consider whether it is more likely than not that the deferred income tax assets will be realized. The ultimate realization of our deferred tax assets depends upon generating sufficient future taxable income during the periods in which our temporary differences either become deductible or expire. This assessment requires significant judgment.

Any future changes in the valuation allowance could result in additional income tax expense (benefit) and reduce or increase stockholders’ equity, and such changes could have a significant impact upon our earnings in the future.

Income tax reserves are based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not realized based on the technical merits of the position. Potential interest and penalties associated with such uncertain tax position is recorded as a component of the income tax provision.

Earnings Per Share –

A reconciliation of net income (loss) and weighted average shares used in computing basic and diluted net income (loss) per share is as follows:

	Year Ended December 31,
	2011		2010			2009
	(In Thousands)
Basic net income (loss) per share:
Net income (loss) applicable to common shares	$	344	$	(23,572	)	$	(3,839	)
Weighted average common shares outstanding		12,038		12,195			12,067
Basic net income (loss) per share of common stock	$	0.03	$	(1.93	)	$	(0.32	)
Diluted net income (loss) per share:
Net income (loss) applicable to common shares	$	344	$	(23,572	)	$	(3,839	)
Weighted average common shares outstanding		12,038		12,195			12,067
Dilutive effects of stock options		10		-			-
Weighted average common shares, assuming dilutive effect of stock options		12,048		12,195			12,067
Diluted net income (loss) per share of common stock	$	0.03	$	(1.93	)	$	(0.32	)

Share-based awards, inclusive of all grants made under the Company’s equity plans, for which either the stock option exercise price, or the fair value of the restricted share award, exceeds the average market price over the period, have an anti-dilutive effect on earnings per share, and accordingly, are excluded from the diluted computations for all periods presented. Had such shares been included, shares for the diluted computation would have increased by approximately 3.6 million, 1.5 million and 4.2 million in the years ended December 31, 2011, 2010 and 2009, respectively. Options to purchase 34 thousand and 12 thousand shares of common stock that were outstanding during the years ended December 31, 2010 and 2009, respectively, were not included in the computation of diluted net loss per share due to the reported periodic loss. As of December 31, 2011 and 2010, there were approximately 3.7 million and 2.8 million share-based awards outstanding under the Company’s equity plans, respectively.

Fair Value of Financial Instruments –

Edgewater’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable and contingent earnout accruals. 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.

Concentrations of Credit Risk –

Financial instruments that potentially subject the Company to significant concentration of market or credit risk consist principally of cash equivalent instruments and accounts receivable. The Company places its cash balances with reputable financial institutions. 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.

Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. We have never experienced any losses related to these balances. All of our non-interest bearing cash balances were fully insured at December 31, 2011 due to a temporary federal program in effect from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning 2013, insurance coverage will revert to $250 thousand per depositor at each financial institution, and our non-interest bearing cash balances may again exceed federally insured limits.

The Company has historically incurred minimal credit losses. No customer balances were in excess of 10% of the Company’s total receivables balance as of December 31, 2011 or 2010.

For the years ended December 31, 2011, 2010, and 2009, no customer represented more than 10% of the Company’s total revenue or total service revenue. For the years ended December 31, 2011, 2010, and 2009, our five largest customers represented 11.1%, 15.3%, and 20.4% of our service revenue in the aggregate, respectively.

Comprehensive Income (Loss) –

Comprehensive income (loss) consists of periodic currency translation adjustments and net unrealized gains (losses) on our available-for-sale marketable securities.

Share-Based Compensation –

The Company recognizes the total fair value of share-based awards as compensation expense, over the requisite employee service period (generally the vesting period of the grant). We have used the Black-Scholes option-pricing model to compute the estimated fair value of stock option grants on the date of the award. The Black-Scholes option-pricing model includes assumptions regarding dividend yields, expected volatility, expected option term and risk-free interest rates. We estimate expected volatility based upon historical volatility. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Restricted stock awards are valued at the price of our common stock on the date of the award.

The assumptions used in computing the fair value of share-based awards reflect management’s best estimates but involve uncertainties relating to market and other conditions, many of which are outside of the Company’s control. As a result, if other assumptions or estimates had been used, the share-based compensation expense that was recorded for the years ended December 31, 2011, 2010, and 2009 could have been materially different. Furthermore, if different assumptions are used in future periods, share-based compensation expense could be materially impacted in the future.

Foreign Currency Translation –

The financial statements for Edgewater’s non-U.S. operations use the local currency as the functional currency and are translated to U.S. dollars. For assets and liabilities, the year-end rate is used. For revenues, expenses, gains and losses, the average rate for the period is used. Unrealized currency adjustments in our financial statements are accumulated in equity as a component of accumulated other comprehensive income (loss). Realized net gains (losses) on foreign currency transactions are immaterial and are reflected in earnings.

Recent Accounting Pronouncements –

Accounting Standards Update (“ASU”) 2011-5, “Comprehensive Income” and ASU 2011-12, “Comprehensive Income” require entities to elect the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single, continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not believe that the adoption of this ASU will have a material impact on its consolidated financial statements.

ASU 2011-04, “Fair Value Measurements and Disclosures” requires expanded disclosure of certain fair value measurements categorized in Level 3 of the fair value hierarchy. The ASU is effective prospectively for fiscal years, and interim periods within those years beginning after December 12, 2011. The Company is currently evaluating the impact of adopting this ASU.

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Current assets:
Cash and cash equivalents	$ 10,333	$ 10,903
Accounts receivable, net of allowance of $300 and $595, respectively	23,307	19,496
Prepaid expenses and other current assets	763	1,035
Total current assets	34,403	31,434
Property and equipment, net	2,429	2,797
Intangible assets, net	2,079	3,821
Goodwill	12,049	12,049
Other assets	238	175
Total assets	51,198	50,276
Current liabilities:
Accounts payable	1,858	604
Accrued liabilities	13,934	12,391
Accrued contingent earnout consideration	126	2,800
Deferred revenue	1,569	1,301
Capital lease obligations, current	52	148
Total current liabilities	17,539	17,244
Other liabilities	1,841	15
Accrued contingent earnout consideration	105
Capital lease obligations		52
Total liabilities	19,485	17,311
Commitments and contingencies (Note 14)
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 and 11,311 and 12,342 shares outstanding as of December 31, 2011 and 2010, respectively	297	297
Paid-in capital	213,282	213,326
Treasury stock, at cost, 18,425 and 17,394 shares at December 31, 2011 and 2010, respectively	(125,389)	(123,888)
Accumulated other comprehensive loss	(99)	(48)
Accumulated deficit	(56,378)	(56,722)
Total stockholders' equity	31,713	32,965
Total liabilities and stockholders' equity	$ 51,198	$ 50,276

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$ 344	$ (23,572)	$ (3,839)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities, net of acquisitions:
Depreciation and amortization	2,885	4,023	2,694
Provision for doubtful accounts	(295)	113	113
Deferred income taxes	58	21,108	(1,156)
Share-based compensation	1,201	1,034	1,139
Amortization of marketable securities discounts (premiums), net		(115)	184
Excess tax benefits from stock options		(1)
Loss on sale of marketable securities		4	7
Loss on disposal of fixed assets	11		34
Change in fair value of contingent earnout consideration	144	400
Lease abandonment	2,230
Changes in operating accounts:
Accounts receivable	(3,558)	(1,398)	2,859
Prepaid expenses and other assets	274	608	(814)
Other assets	(63)	(74)	(42)
Accounts payable and accrued liabilities	1,925	(2,335)	(398)
Accrued payroll and related liabilities	1,047	1,234	(1,255)
Deferred revenue and other liabilities	(370)	(331)	231
Net cash provided by (used in) operating activities	5,833	698	(243)
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash		702
Redemptions of marketable securities		6,877	21,463
Purchases of marketable securities			(17,472)
Purchase of Fullscope Inc., net of cash acquired	(2,713)	(1,415)	(10,942)
Purchase of Meridian Consulting International, net of cash acquired		(1,586)
Purchase of Lynx Business Intelligence Consulting, Inc., including payment under earnouts			(140)
Capitalization of product development costs	(267)	(112)
Purchases of property and equipment	(518)	(368)	(32)
Net cash (used in) provided by investing activities	(3,498)	4,098	(7,123)
CASH FLOWS FROM FINANCING ACTIVITES:
Payments on capital leases	(148)	(220)	(215)
Proceeds from employee stock purchase plans and stock option exercises	483	441	431
Excess tax benefits from stock options		1
Repurchases of common stock	(3,229)		(579)
Net cash (used in) provided by financing activities	(2,894)	222	(363)
Effects of exchange rates on cash	(11)	(4)
Net (decrease) increase in cash and cash equivalents	(570)	5,014	(7,729)
CASH AND CASH EQUIVALENTS, beginning of period	10,903	5,889	13,618
CASH AND CASH EQUIVALENTS, end of period	10,333	10,903	5,889
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	10	23	36
Cash paid for income taxes	450	1,933	428
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Goodwill adjustment			1,800
Unrealized gain on available for sale securities			6
Initial fair value estimate of contingent earnout consideration		1,200	1,200
Issuance (forfeiture) of restricted stock awards	$ (120)	$ 232	$ (140)

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NATURE OF BUSINESS AND BASIS OF PRESENTATION

12 Months Ended

Dec. 31, 2011

NATURE OF BUSINESS AND BASIS OF PRESENTATION

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION:

Edgewater Technology, Inc. (“Edgewater”, the “Company”, “we”, or “our”) is a strategic consulting firm that brings a synergistic blend of advisory and product-based consulting services to our customer base. Headquartered in Wakefield, Massachusetts, we typically go to market both vertically by industry and horizontally by product and technology specialty and provide our customers with a wide range of business and technology offerings. We work with customers, primarily within North America, to reduce costs, improve process and increase revenue through the judicious use of technology.

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Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Per Share data, unless otherwise specified	Dec. 31, 2011	Dec. 31, 2010
Accounts receivable, allowance	$ 300	$ 595
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	2,000	2,000
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	48,000	48,000
Common stock, shares issued	29,736	29,736
Common stock, shares outstanding	11,311	12,342
Treasury stock, shares	18,425	17,394

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EMPLOYEE SHARE-BASED COMPENSATION PLANS

12 Months Ended

Dec. 31, 2011

EMPLOYEE SHARE-BASED COMPENSATION PLANS

11. EMPLOYEE SHARE-BASED COMPENSATION PLANS:

Overview

The total fair value of share-based awards is recognized as a compensation expense, over the requisite employee service period (generally the vesting period of the grant). The Company has used the Black-Scholes option-pricing model to compute the estimated fair value of share-based awards on the date of grant. The Black-Scholes option pricing model includes assumptions regarding dividend yields, expected volatility, expected option term and risk-free interest rates. Expected volatility is estimated based upon a combination of historical and implied volatility. The risk-free interest rate is based on the U.S. treasury yield curve in effect at the time of grant.

Share-Based Compensation Plans

The Company has four share-based compensation plans which are described below: the Amended and Restated 1996 Stock Option Plan (“1996 Plan”), the Amended and Restated 2000 Stock Option Plan (“2000 Plan”), the 2003 Equity Incentive Plan (“2003 Plan”), and the 2008 Omnibus Incentive Plan (“2008 Plan”), collectively the “Equity Plans.” Specifics related to each plan are as follows:

1996 Plan: Grants for shares under the 1996 Plan were limited to 15% of the Company’s outstanding common stock. The only grants outstanding under the 1996 Plan are non-qualified stock option grants, with total qualified stock option grants under the 1996 Plan limited to 650,000 shares of the Company’s common stock. No grants of qualified stock options were ever issued under the 1996 Plan. The 1996 Plan expired on June 30, 2006; thus, no further grants have been awarded after June 30, 2006, but options awarded prior to that date remain outstanding subject to the terms of the 1996 Plan and any related option agreements.

2000 Plan: The 2000 Plan provides for grants of non-qualified stock options of the Company’s common stock. The 2000 Plan is limited to grants covering up to 4.0 million shares of the Company’s common stock.

2003 Plan: The 2003 Plan provides for grants of non-qualified stock options and awards of restricted shares of the Company’s common stock. The 2003 Plan is limited to stock option grants and restricted stock awards covering up to 500,000 shares of the Company’s common stock.

2008 Plan: The 2008 Plan provides for a broad range of awards, including non-qualified stock options and awards of restricted shares of the Company’s common stock. The 2008 Plan authorizes the issuance of 1.5 million shares of the Company’s common stock plus certain authorized awards or shares under other Company share-based compensation plans to the extent the awards or shares are not utilized or forfeited. The 2008 Plan became effective on June 11, 2008.

As of December 31, 2011, there are 461,961; 36,950; and 62,098 shares available for future grant under the 2000 Plan, 2003 Plan and 2008 Plan, respectively. No shares were available for issuance under the 1996 Plan, as it expired on June 30, 2006.

Option Plans (Excluding Restricted Share Awards)

The Company’s Equity Plans authorize the granting of qualified and non-qualified stock options to officers, employees and certain persons who are not employees on the date of grant, including certain non-employee members of the Board of Directors. All such options are for shares of the Company’s common stock.

The Equity Plans provide that the exercise price of the stock options will be determined based upon the fair market value of the Company’s common stock on the NASDAQ Global Market System as of the date of grant. Options granted to officers and employees generally vest in three-, four- or five-year periods, dependent upon the plan or award, and expire on the seventh anniversary of the grant date. Annual options granted to non-employee members of the Company’s Board of Directors generally vest in equal quarterly increments and expire on the fifth anniversary of the grant date, and option grants issued upon their initial election to the Company’s Board of Directors vest in equal one-third increments as of the date of grant and the first and second anniversary of the date of grant.

During the year ended December 31, 2011, the Company granted options to purchase 1,136,540 shares of common stock (excluding issuances of restricted share awards issuable under either the 2003 Plan or the 2008 Plan), principally as part of a long-term incentive program and in connection with the Company’s Board of Director compensation program. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model utilizing the assumptions noted in the following table. Expected volatility is based upon historical volatility of the Company’s common stock. The expected life (period of time the award will be outstanding) was estimated using the historical exercise behavior of the Company’s employees. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company applied an estimated forfeiture rate of 26.5% (in all periods presented) to the calculated fair value of each option. The applied forfeiture rate utilized by the Company was based upon the historical forfeiture experience of the Equity Plans.

The share-based compensation expense and its classification in the statements of operations were as follows:

	Year Ended December 31,
	2011		2010		2009
	(In Thousands)
Project and personnel costs	$	343	$	323	$	269
Selling, general and administrative		858		711		870
Total share-based compensation expense	$	1,201	$	1,034	$	1,139

The fair value of each option award granted during 2011, 2010, and 2009, was based upon the following weighted-average assumptions:

	Year Ending December 31,
	2011			2010			2009
Expected volatility		53.8	%		50.5	%		52.0	%
Expected dividend yield		-	%		-	%		-	%
Expected life (in years)		3.61			3.62			3.36
Risk-free interest rate		1.1	%		1.3	%		1.4	%

The weighted-average grant-date fair value of all options granted (excluding restricted share awards) during the year ended December 31, 2011, 2010 and 2009 was $1.25, $1.14 and $1.11 per share, respectively.

A summary of stock option activity under the Equity Plans (excluding restricted share awards) is presented below:

Stock Options:	Shares Under Options			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
	(In Thousands)
Outstanding at January 1, 2010		4,105,658		$	5.20
Granted		578,287			2.96
Exercised		(5,000	)		2.60
Forfeited or expired		(1,905,780	)		5.90
Outstanding at December 31, 2010		2,773,165			4.25		4.43	$	-
Granted		1,136,540			3.11
Exercised		-			-
Forfeited or expired		(179,132	)		4.68
Outstanding at December 31, 2011		3,730,573		$	3.88		4.35	$	29
Vested and expected to vest at December 31, 2011		3,302,135		$	3.90		4.08	$	28
Exercisable at December 31, 2011		2,116,264		$	4.31		3.06	$	28

The total intrinsic value of stock options exercised during 2010 was approximately $2 thousand. No stock options were exercised during 2011 or 2009.

2003 Equity Incentive Plan and 2008 Omnibus Incentive Plan – Restricted Share Awards

The 2003 Plan and the 2008 Plan also authorize the granting of restricted share awards to officers, employees and certain non-employee members of the Board of Directors (the “Restricted Share Plans”). Restricted share awards are made at prices determined by the Compensation Committee of the Company’s 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, which historically has equaled the par value per share the Company’s common stock ($0.01 per share). Shares of restricted stock generally vest over a 5-year period, during which time the Company has the right to repurchase any unvested shares at the amount paid if the relationship between the employee and the Company ceases. As of December 31, 2011, 15 thousand restricted share awards were subject to repurchase by the Company under the restricted stock agreements. The Company records compensation expense related to restricted share awards on a straight-line basis over the vesting term of the award.

No restricted share awards were issued to employees during the year ended December 31, 2011 or 2009. During the year ended December 31, 2010, the Company issued 30,000 restricted share awards to employees at a purchase price of $0.01 per share. Additionally, the Company recognized share-based compensation expense of $56 thousand, $235 thousand and $338 thousand during the years ended December 31, 2011, 2010 and 2009, respectively related to restricted share awards.

A summary of non-vested restricted share activity under the Restricted Share Plans is presented below:

Restricted Share Awards:	Non-vested Restricted Shares			Weighted Average Grant Date Fair Value
Non-vested at January 1, 2010		71,230		$	6.23
Granted		30,000			2.97
Vested		(44,760	)		5.84
Forfeited or expired		(1,000	)		4.14
Non-vested at December 31, 2010		55,470			4.83
Granted		-			-
Vested		(25,010	)		6.25
Forfeited or expired		(15,000	)		2.97
Non-vested at December 31, 2011		15,460		$	4.33
Expected to vest at December 31, 2011		15,460		$	4.33

The total fair value of stock awards vested during the years ended December 31, 2011, 2010 and 2009 was $72 thousand, $133 thousand and $395 thousand, respectively.

Employee Stock Purchase Plan

In June 2008, in connection with the Company’s Annual Meeting of Stockholders, the stockholders of the Company approved, and the Company adopted, the Edgewater Technology, Inc. 2008 Employee Stock Purchase Plan (the “2008 ESPP Plan”). The 2008 ESPP Plan became effective on October 1, 2008. The 2008 ESPP Plan, which was amended in June 2011, allows a maximum of 1,200,000 shares of the Company’s common stock to be purchased by Edgewater employees.

Prior to the effective date of the 2008 ESPP Plan, the Company offered eligible employees the option to purchase the Company’s common stock under the 1999 Employee Stock Purchase Plan (the “1999 ESPP Plan”). The 1999 ESPP Plan allowed a maximum of 700,000 shares to be purchased by employees and as of December 31, 2008, no shares were available for future issuance. The 2008 ESPP Plan and the 1999 ESPP Plan are collectively referred to in this document as the “ESPP Plans.”

The ESPP Plans offer eligible employees the option to purchase the Company’s common stock at 85% of the lower of the closing price, as quoted on NASDAQ, on either the first trading day or the last trading day of the quarterly purchase period. Enrollment periods occur on January 1 and July 1. Purchases occur every three months. The amount each employee can purchase is limited to the lesser of (i) 10% of an employee’s annual base salary or (ii) $25,000 of stock value on an annual basis. The ESPP is designed to qualify for certain tax benefits for employees under section 423 of the Internal Revenue Code.

During the year ended December 31, 2011, 2010, and 2009, the Company issued 231,004; 199,144 and 179,901 shares, respectively, to employees under the ESPP Plans.

The fair value of each ESPP offering was estimated on the date of grant using the Black-Scholes option pricing model that uses the weighted-average assumptions noted in the following table. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility was based on historical volatility.

	Year Ending December 31,
	2011			2010			2009
Expected volatility		53.4	%		32.7	%		74.5	%
Expected dividend yield		-	%		-	%		-	%
Expected life (in years)		0.25			0.25			0.25
Risk-free interest rate		0.1	%		0.1	%		0.1	%

The weighted-average fair value of the shares issued under the ESPP Plans in 2011, 2010, and 2009, based upon the assumptions in the preceding table, was $0.69, $0.76 and $0.80, respectively.

Compensation Expense

Share-based compensation expense under all of the Company’s share-based plans was $1.2 million, $1.0 million and $1.1 million in the years ended December 31, 2011, 2010 and 2009, respectively.

Cash received from stock option and ESPP exercises under all share-based payment arrangements was $483 thousand, $441 thousand and $431 thousand during the years ended December 31, 2011, 2010 and 2009, respectively. The Company recognized related tax benefits, which were offset by a full valuation allowance, of $424 thousand, $308 thousand and $264 thousand for the years ended December 31, 2011, 2010 and 2009, respectively.

As of December 31, 2011, unrecognized compensation expense, net of estimated forfeitures, related to the unvested portion of all share-based compensation arrangements was approximately $1.8 million and is expected to be recognized over a weighted average period of 1.6 years.

The Company is using previously purchased treasury shares for all shares issued for options, restricted share awards and ESPP issuances. Shares may also be issued from unissued share reserves.

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Document and Entity Information (USD $)	12 Months Ended
	Dec. 31, 2011	Mar. 01, 2012	Jun. 30, 2011
Document Information [Line Items]
Document Type	10-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	FY
Trading Symbol	EDGW
Entity Registrant Name	EDGEWATER TECHNOLOGY INC/DE/
Entity Central Index Key	0001017968
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		11,370,578
Entity Public Float			$ 33,600,000

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CAPITAL STOCK

12 Months Ended

Dec. 31, 2011

CAPITAL STOCK

12. CAPITAL STOCK:

Common and Preferred Stock -

The Company’s stockholders had authorized 48.0 million shares of common stock available for issuance as of December 31, 2011 and 2010, and had 2.0 million shares of preferred stock available for issuance as of December 31, 2011 and 2010.

Stockholder Rights Plan -

The Company had a stockholder rights plan, commonly referred to as a “poison pill,” intended to discourage an attempt to obtain control by means of a tender offer, merger, proxy contest or otherwise. Under the plan, our Board of Directors could have issued preferred stock in one or more series without stockholder action. If a person acquired 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 have been triggered, which would have significantly diluted the voting rights of any such acquiring person. The Company’s stockholder rights plan expired in August 2010. No preferred stock was issued under the stockholder rights plan.

Certain provisions of the General Corporation Law of Delaware may also discourage someone from acquiring or merging with us.

Stock Repurchase Program -

In December 2007, our Board of Directors (the “Board”) authorized a stock repurchase program for up to $5.0 million of common stock on the open market or through privately negotiated transactions from time-to-time through December 31, 2008 (the “Stock Repurchase Program”). The Board subsequently amended the Stock Repurchase Program, authorizing both an increase to and an extension of the Stock Repurchase Program. The Stock Repurchase Program, as amended, had a maximum purchase value of shares of $8.5 million (the “Purchase Authorization”) and expired on September 23, 2011 (the “Repurchase Period”). On September 9, 2011, the Board approved both a $5.0 million increase to the Purchase Authorization, to $13.5 million, and an extension of the Repurchase Period to September 21, 2012.

The timing and amount of the purchases will be based upon market conditions, securities law considerations and other factors. The Stock Repurchase Program does not obligate the Company to acquire a specific number of shares in any period and may be modified, suspended, extended or discontinued at any time, without prior notice.

The Company purchased 1.2 million shares and 204 thousand shares at aggregate purchase prices of $3.2 million and $579 thousand in 2011 and 2009, respectively. No shares were repurchased in 2010. The Company has repurchased a total of 2,795,551 shares of common stock since the inception of the Stock Repurchase Program at an aggregate purchase price of $8.9 million.

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CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2011	Dec. 31, 2010	Dec. 31, 2009
Revenue:
Service revenue	$ 79,239	$ 68,843	$ 46,120
Software revenue	13,064	11,508	664
Royalty revenue	2,734	2,341
Reimbursable expenses	7,406	5,853	3,301
Total revenue	102,443	88,545	50,085
Cost of revenue:
Project and personnel costs	48,078	42,640	30,190
Software costs	8,262	7,977	496
Reimbursable expenses	7,406	5,853	3,301
Total cost of revenue	63,746	56,470	33,987
Gross profit	38,697	32,075	16,098
Operating expenses:
Selling, general and administrative	32,307	30,263	18,412
Lease abandonment expense	2,230
Depreciation and amortization	2,846	4,023	2,694
Total operating expenses	37,383	34,286	21,106
Operating income (loss)	1,314	(2,211)	(5,008)
Other (expense) income, net	(127)	34	122
Income (loss) before income taxes	1,187	(2,177)	(4,886)
Tax provision (benefit)	843	21,395	(1,047)
Net income (loss)	$ 344	$ (23,572)	$ (3,839)
Income (loss) per share:
Basic net income (loss) per share of common stock	$ 0.03	$ (1.93)	$ (0.32)
Diluted net income (loss) per share of common stock	$ 0.03	$ (1.93)	$ (0.32)
Shares used in computing basic net income (loss) per share of common stock	12,038	12,195	12,067
Shares used in computing diluted net income (loss) per share of common stock	12,048	12,195	12,067

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PROPERTY AND EQUIPMENT

12 Months Ended

Dec. 31, 2011

PROPERTY AND EQUIPMENT

6. PROPERTY AND EQUIPMENT:

Components of property and equipment consisted of the following:

	December 31,
	2011			2010
	(In Thousands)
Furniture, fixtures and equipment	$	1,541		$	1,431
Computer equipment and software		1,198			1,233
Leasehold improvements		3,153			3,566
		5,892			6,230
Less accumulated depreciation and amortization		(3,463	)		(3,433	)
Total	$	2,429		$	2,797

Depreciation expense related to property and equipment for the years ended December 31, 2011, 2010, and 2009 totaled approximately $875 thousand, $879 thousand, and $905 thousand, respectively. The Company disposed of $856 thousand and $643 thousand of equipment that was no longer in use during the years ended 2011 and 2010, respectively. A loss on disposal of property and equipment of $11 thousand was recognized in the year ended December 31, 2011. The assets disposed of in the year ended December 31, 2010 were fully depreciated at the time of disposal and therefore no gain or loss was recognized.

The above table of property and equipment includes assets under capital leases as listed below.

	December 31,
	2011			2010
	(In Thousands)
Furniture, fixtures and equipment	$	999		$	999
Less accumulated depreciation and amortization		(951	)		(649	)
Total	$	48		$	350

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ACCOUNTS RECEIVABLE

12 Months Ended

Dec. 31, 2011

ACCOUNTS RECEIVABLE

5. ACCOUNTS RECEIVABLE:

Included in accounts receivable are unbilled amounts totaling approximately $2.2 million and $2.9 million at December 31, 2011 and 2010, respectively, which relate to services performed during the year and billed in the subsequent year. The Company maintains allowances for potential losses which management believes are adequate to absorb any probable 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:

	Year Ended December 31,
	2011			2010			2009
	(In Thousands)
Balance at beginning of year	$	595		$	490		$	437
Provisions for doubtful accounts		-			113			113
Charge-offs, net of recoveries		(295	)		(8	)		(60	)
Balance at end of year	$	300		$	595		$	490

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LEASE ABANDONMENT

12 Months Ended

Dec. 31, 2011

LEASE ABANDONMENT

13. LEASE ABANDONMENT:

In December 2011, the Company abandoned certain excess office space within its corporate headquarters in Wakefield, Massachusetts. As a result of the abandonment of such space, the Company incurred a non-cash operating charge of $2.2 million in the fourth quarter of 2011 and recorded a lease abandonment accrual (the short- and long-term portions of which are recorded within accrued expenses and other long-term liabilities within the 2011 consolidated balance sheet, respectively). The lease abandonment charge was calculated based on the net of future contractually obligated lease payments and an estimate of potential sub-lease income (which took into account current market rates and occupancy levels).

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INCOME TAXES

12 Months Ended

Dec. 31, 2011

INCOME TAXES

9. INCOME TAXES:

We are subject to U.S. federal tax as well as income tax in multiple states, local and foreign jurisdictions. The Company’s 2003 through 2011 tax years are open and may be subject to examination by these taxing authorities. Such examinations, if any, could result in challenges to tax positions taken and, accordingly, we may record adjustments to our tax provision based on the outcome of such matters.

The Company has elected to recognize interest and penalties related to income tax matters as a part of the income tax provision (benefit).

Significant components of the Company’s income tax provision (benefit) consisted of the following:

	Year Ended December 31,
	2011			2010			2009
	(In Thousands)
Current tax expense (benefit):
Federal	$	-		$	20		$	(32	)
State		650			90			(366	)
Foreign		57			98			(164	)
		707			208			(562	)
Deferred tax (benefit) expense:
Federal		333			(930	)		(1,667	)
State		49			(203	)		1,151
Foreign		0			360			-
Change in valuation allowance		(324	)		21,881			-
		58			21,108			(516	)
Unrecognized tax benefit		78			79			31
Income tax provision (benefit)	$	843		$	21,395		$	(1,047	)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2011 and 2010 are as follows:

	December 31,
	2011			2010
	(In Thousands)
Deferred income tax assets:
Net operating loss carryforwards and credits	$	25,588		$	27,530
Acquired intangible assets		8,943			9,686
Reserves and accruals		2,779			1,414
Share-based compensation		1,938			1,515
Depreciation		160			154
Total deferred income tax assets		39,408			40,299
Deferred income tax liabilities:
Acquired intangible assets		(405	)		(896	)
Other		(12	)		(30	)
Total deferred income tax liabilities		(417	)		(926	)
Valuation allowance		(39,049	)		(39,373	)
Deferred income tax liability, net	$	(58	)	$	-

Components of the net deferred tax assets (liabilities) reported in the accompanying consolidated balance sheets are as follows:

	December 31, 2011						December 31, 2010
	Current			Long-term			Current			Long-term
	(In Thousands)
Assets	$	2,401		$	37,162		$	865		$	39,442
Liabilities		(6	)		(566	)		(17	)		(917	)
Valuation allowance		(2,395	)		(36,654	)		(848	)		(38,525	)
Net deferred tax liability	$	-		$	(58	)	$	-		$	-

Significant deferred tax attributes and current activity within the Company’s deferred tax accounts included the following:

Net Operating Loss Carryforwards and Credits:    As of December 31, 2011, we had tax affected net operating loss carryforwards for federal income tax purposes of approximately $21.8 million and alternative minimum, worker’s opportunity and foreign tax credits of approximately $2.1 million, which expire at various intervals through 2030. However, $17.3 million of the Company’s federal net operating loss carryforwards and $1.0 million of workers opportunity tax credits are set to expire in 2020. Additionally, the Internal Revenue Code contains provisions that limit the amount of 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. These limitations may result in the expiration of our historical net operating loss carryforwards and tax credits prior to their utilization. The Company has various tax affected net operating loss carryforwards for state income tax purposes of approximately $1.2 million which expire at various intervals through 2031.

Fullscope Acquisition-Related Deferred Tax Attributes:    As discussed in Note 4, on December 31, 2009, the Company acquired the outstanding stock of Fullscope, Inc. In connection with the Fullscope Acquisition, the Company assumed Fullscope’s deferred tax attributes as of the date of the acquisition. In connection with our initial fair value assessments of assets, liabilities, intangible assets and goodwill, the Company reviewed the carrying value of the acquired deferred tax attributes. Each of our initial fair value assessments related to the Fullscope Acquisition was subject to subsequent adjustment as the Company obtained additional information (the “Fullscope Measurement Period”). The Fullscope Measurement Period was completed during the third quarter of 2010. The Company, in connection with the completion of the measurement period process, recognized gross deferred tax assets of $6.5 million.

A significant portion of the deferred tax attributes assumed in connection with the acquisition are related to Fullscope’s federal net operating loss carryforwards. The Company acquired $4.6 million in tax affected federal net operating loss carryforwards. Prior to the acquisition, these federal net operating loss carryforwards were subject to Internal Revenue Code Section 382 Limitations (“Section 382 Limitations”). As a result of our acquisition, the future use of Fullscope’s federal net operating loss carryforwards will be subject to further Section 382 Limitations. The Company’s ability to utilize Fullscope’s historical net operating loss carryforwards is significantly limited. We anticipate that we will only utilize $14 thousand of the acquired Fullscope net operating loss carryforwards prior to their expiration. The Company, as part of its purchase accounting, applied a full valuation allowance against the gross carrying value of Fullscope’s net operating loss carryforwards and the other net deferred tax attributes due to uncertainty with respect to our ability to realize a future tax benefit related to these attributes.

Deferred tax liability:    The Company’s deferred tax liability is created by goodwill as a result of the Meridian Acquisition. In accordance with ASC 350, deferred tax liabilities resulting from the different treatment of goodwill for book and tax purposes cannot offset deferred tax assets in determining the valuation allowance. As a result, a deferred tax provision is required to increase the Company’s valuation allowance. The deferred tax liability as a result of the goodwill associated with the Meridian Acquisition is $58 thousand as of December 31, 2011. No deferred tax liability was established as of December 31, 2010. For tax purposes, goodwill generated from the Meridian Acquisition amounted to $1.3 million and is deductible over a 15-year period.

Annual changes to the deferred tax valuation allowance are as follows:

	Year Ended December 31,
	2011			2010		2009
	(In Thousands)
Balance, beginning of year	$	39,373		$	17,492	$	11,021
Additions		-			21,881		-
Reductions, net		(324	)		-		-
Fullscope Acquisition		-			-		6,471
Balance, end of year	$	39,049		$	39,373	$	17,492

We have net deferred tax assets that have arisen primarily as a result of timing differences, net operating loss carryforwards and tax credits.

Our ability to realize a deferred tax asset is based on our ability to generate sufficient future taxable income within the applicable carryforward period and subject to any applicable limitations. We assess, on a routine periodic basis, the estimated future realizability of the gross carrying value of our net deferred tax assets on a more likely than not basis. Our periodic assessments take into consideration both positive evidence (future profitability projections for example) and negative evidence (recent and historical financial performance for example) as it relates to evaluating the future recoverability of our deferred tax assets.

During the third quarter of 2010, in connection with such a review, we recorded a non-cash charge of $21.9 million in connection with an increase to the previously established valuation allowance recorded against the gross carrying value of our deferred tax assets. Subsequent to this adjustment, the recorded valuation allowance represents a full valuation reserve against the total gross carrying value of our net deferred tax assets.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against the deferred tax assets. The Company’s historical financial performance and, to a lesser extent, forecasts and projections were key measurements utilized in our review. As of December 31, 2009 and through the period ended June 30, 2010, the Company recorded an income tax benefit. At those times management determined that the recovery of the deferred tax assets were considered more likely than not, primarily due to positive evidence in the form of historical earnings adjusted for items of a non-recurring nature that would not be indicative of our future operations and projected taxable income. However, as a result of operating loss in the quarter ended September 30, 2010, our assessment of our adjusted and cumulative loss positions, and uncertainty as to the timing of profitability in future periods, we recorded a full valuation allowance against our deferred tax assets during the quarter ended September 30, 2010, as we determined that it was not more than likely that the Company would be able to fully realize future economic benefit from its deferred tax assets.

During 2011, we have continued, on a routine periodic basis, to evaluate the future recoverability of our deferred tax assets. In our periodic assessments of positive evidence (improved financial performance and profitability) and negative evidence (cumulative loss position on a trailing three-year basis), we concluded that it was not more than likely that the Company would be able to fully realize future economic benefit from our deferred tax assets and accordingly, continue to apply a full valuation allowance against our deferred tax attributes as of December 31, 2011.

The establishment of a full valuation allowance against the gross carrying value of our net deferred tax assets does not prohibit or limit the Company’s ability to realize a tax benefit in future periods. All existing deferred tax assets, net operating loss carryforwards and credits will be fully available to reduce certain future federal and state income tax obligations.

During 2009, the Company weighed both positive (projections and the acquisition of Fullscope) and negative (recent financial results) evidence in assessing the recoverability of our deferred tax assets. Our judgment in assessing the evidence was that the negative and positive evidence were effectively offset and our valuation allowance levels were appropriate.

The differences in income taxes determined by applying the statutory federal tax rate of 34% to income (loss) from continuing operations before income taxes and the amounts recorded in the accompanying consolidated statements of operations result from the following:

	Year Ended December 31,
	2011						2010						2009
	Amount			Rate			Amount			Rate			Amount			Rate
	(Dollar Amounts In Thousands)
Income tax at statutory rate	$	404			34.0	%	$	(740	)		34.0	%	$	(1,662	)		34.0	%
Add (deduct):
State income taxes, net of federal tax benefit		435			36.6			60			(2.7	)		(279	)		5.7
Tax rate difference on foreign income taxes		222			18.7			(54	)		2.4			-			-
Foreign income taxes		-			-			-			-			(223	)		4.6
Revaluation of deferred tax attributes due to change in effective state income tax rate		-			-			-			-			929			(19.0	)
Non-deductible transaction costs, intangible assets and goodwill amortization charges and other permanent items		76			6.5			79			(3.6	)		173			(3.5	)
Increase (decrease) in valuation allowance against certain deferred tax assets		(324	)		(27.3	)		21,881			(1005.2	)		-			-
Unrecognized tax benefits		78			6.6			79			(3.6	)		31			(0.6	)
Other, net		(48	)		(4.1	)		90			(4.1	)		(16	)		0.3
	$	843			71.0	%	$	21,395			(982.8	)%	$	(1,047	)		21.5	%

In accordance with our evaluation of unrecognized tax benefits, we have established a liability representing our estimated amount of unrecognized tax benefits, plus an additional provision for penalties and interest. A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:

	Year Ended December 31,
	2011			2010		2009
	(In Thousands)
Gross unrecognized tax benefits at beginning of year	$	203		$	155	$	162
Increases in tax positions in the current year		-			48		-
Settlements		(48	)		-		(7	)
Gross unrecognized tax benefits at end of year	$	155		$	203	$	155

The Company’s policy is to recognize accrued interest and penalties related to unrecognized tax benefits and income tax liabilities, when applicable, as part of income tax expense in its Consolidated Statements of Operations. As of December 31, 2011, 2010 and 2009, accrued interest and penalties was $285 thousand, $158 thousand and $127 thousand, respectively.

As of December 31, 2011, the $440 thousand tax benefit, if recognized, would reduce our effective tax rate. We do not expect our unrecognized tax benefits to change significantly over the next twelve months.

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GOODWILL AND INTANGIBLE ASSETS

12 Months Ended

Dec. 31, 2011

GOODWILL AND INTANGIBLE ASSETS

7. GOODWILL AND INTANGIBLE ASSETS:

The changes in the carrying amount of goodwill are as follows:

	Goodwill
	(In Thousands)
Balance at January 1, 2010	$	9,923
Acquisitions consummated and adjustments during 2010		2,126
Balance at December 31, 2010		12,049
Adjustments to goodwill in 2011		-
Balance at December 31, 2011	$	12,049

Significant changes impacting the carrying value of goodwill during the year ended December 31, 2011 and 2010 included the following:

¡ The Company increased the gross carrying value of goodwill by $2.1 million during the year ended December 31, 2010 in connection with the Meridian Acquisition. The Meridian Acquisition and the related fair value allocation of purchase price between assets, liabilities, intangible assets and goodwill is described further detail in Note 4.

As of December 31, 2011, the net carrying amount of intangible assets consists of amounts related to business combination transactions consummated by the Company from 2007 to 2011. These transactions include the Meridian, Fullscope, Vertical Pitch, and Alecian acquisitions.

The Fullscope, Vertical Pitch and Alecian transactions were completed prior to 2010 and are discussed in greater detail in the Company’s previously filed reports with the SEC.

Other net intangibles amounted to $2.1 million and $3.8 million as of December 31, 2011 and 2010, respectively. Following is a summary of the Company’s identifiable intangible assets that are subject to amortization:

	December 31, 2011
	Gross Carrying Amount		Impairment Charges		Accumulated Amortization		Net Carrying Amount
	(In Thousands)
Identifiable intangibles:
Non-compete agreements	$	3,860	$	-	$	3,149	$	711
Customer relationships		10,378		-		9,463		915
Asset purchase agreement		1,400		-		1,400		-
Trade name and trademark		600		-		481		119
Capitalized product development costs		373		-		39		334
	$	16,611	$	-	$	14,532	$	2,079

	December 31, 2010
	Gross Carrying Amount		Impairment Charges		Accumulated Amortization		Net Carrying Amount
	(In Thousands)
Identifiable intangibles:
Non-compete agreements	$	3,860	$	-	$	2,788	$	1,072
Customer relationships		10,378		-		8,459		1,919
Asset purchase agreement		1,400		-		975		425
Trade name and trademark		600		-		307		293
Capitalized product development costs		112		-		-		112
	$	16,350	$	-	$	12,529	$	3,821

The Company increased the gross carrying value of intangible assets by $550 thousand during the year ended December 31, 2010 in connection with the Meridian acquisition. The Meridian Acquisition and the related fair value allocation of purchase price among assets, liabilities, intangible assets and goodwill is described further detail in Note 4.

The intangible assets were identified and valued by the Company. The original estimated useful lives of the acquired identifiable intangible assets are as follows:

Non-compete agreements	4 to 5 years
Customer relationships	4 to 7.5 years
Asset purchase agreement	1.5 years
Trade name and trademark	5 years
Capitalized product development costs	3 years

Intangible assets are amortized assuming no expected residual value over the periods in which the economic benefit of these assets is consumed. The weighted average amortization period for all intangible assets subject to amortization was 3.0 years, 3.5 years and 3.9 years as of December 31, 2011, 2010 and 2009, respectively. Amortization expense related to all intangible assets was $2.0 million, $3.1 million and $1.8 million in 2011, 2010 and 2009, respectively.

Amortization of $39 thousand related to capitalized product development costs were included within cost of revenue (specifically within Software expense) on the consolidated statement of operations for the year ended December 31, 2011. There was no amortization associated with capitalized product development costs during the year ended December 31, 2010.

Estimated annual amortization expense for the next five years ending December 31, which encompasses the remaining useful life of the intangible assets, is as follows:

	Amortization
	Expense
	(In Thousands)
2012	$	1,055
2013		531
2014		378
2015		115
2016		-

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ACCRUED EXPENSES

12 Months Ended

Dec. 31, 2011

ACCRUED EXPENSES

8. ACCRUED EXPENSES:

Components of accrued expenses consisted of the following:

	December 31,
	2011		2010
	(In Thousands)
Accrued commissions	$	2,598	$	2,191
Accrued bonuses		2,562		2,292
Accrued vacation		1,741		1,530
Accrued payroll related liabilities		1,222		853
Accrued sales and use tax		1,026		1,063
Short-term portion of lease abandonment accrual		580		-
Income tax related accruals		605		390
Deferred rent		439		639
Accrued contractor expense		437		248
Other accrued expenses		2,724		3,185
Total	$	13,934	$	12,391

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EMPLOYEE BENEFIT PLANS

12 Months Ended

Dec. 31, 2011

EMPLOYEE BENEFIT PLANS

10. 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 $490 thousand, $411 thousand and $357 thousand in each of the years ended December 31, 2011, 2010, and 2009.

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UNAUDITED SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION

12 Months Ended

Dec. 31, 2011

UNAUDITED SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION

15. UNAUDITED SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION:

The following tables set forth certain unaudited supplementary quarterly financial information for the years ended December 31, 2011 and 2010. The quarterly operating results are not necessarily indicative of future results of operations.

	2011
	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter			Total
	(In Thousands, Except Per Share Data)
Total revenue	$	23,594		$	27,396		$	25,048		$	26,405		$	102,443
Gross profit		8,598			10,827			9,366			9,906			38,697
Net income (loss) (1)		310			395			1,545			(1,906	)		344
Basic income (loss) per share	$	0.03		$	0.03		$	0.13		$	(0.17	)	$	0.03
Diluted income (loss) per share	$	0.03		$	0.03		$	0.13		$	(0.17	)	$	0.03
	2010
	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter			Total
Total revenue	$	20,270		$	23,355		$	21,384		$	23,536		$	88,545
Gross profit		6,708			8,583			7,830			8,954			32,075
Net loss (2)		(639	)		(90	)		(22,686	)		(157	)		(23,572	)
Basic loss per share	$	(0.05	)	$	(0.01	)	$	(1.86	)	$	(0.01	)	$	(1.93	)
Diluted loss per share	$	(0.05	)	$	(0.01	)	$	(1.86	)	$	(0.01	)	$	(1.93	)

(1) Net loss for the fourth quarter of 2011 was impacted by a $2.2 million non-cash lease abandonment charge.

(2) Quarterly loss for the third quarter of 2010 was impacted by an increase of the deferred tax asset valuation allowance of $21.9 million.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (USD $) In Thousands	Total	Common Stock	Paid-in Capital	Treasury Stock	Accumulated Other Comprehensive Income (loss)	Retained Earnings/ (Deficit)	Comprehensive Income (loss)
BEGINNING BALANCE at Dec. 31, 2007
Comprehensive income net of tax							$ (47,018)
ENDING BALANCE at Dec. 31, 2008	57,958	297	213,354	(126,382)		(29,311)
ENDING BALANCE (in shares) at Dec. 31, 2008		29,736		(17,574)
Issuance of common stock related to employee stock plans	431		(1,102)	1,533
Issuance of common stock related to employee stock plans (in shares)				192
Forfeiture of restricted stock awards			140	(140)
Forfeiture of restricted stock awards (in shares)				(18)
Repurchases of common stock	(579)			(579)
Repurchases of common stock (in shares)				(204)
Share-based compensation expense	1,139		1,139
Unrealized gain on available- for-sale marketable securities	6				6		6
Net income\loss	(3,839)					(3,839)	(3,839)
Comprehensive income net of tax							(3,833)
ENDING BALANCE at Dec. 31, 2009	55,116	297	213,531	(125,568)	6	(33,150)
ENDING BALANCE (in shares) at Dec. 31, 2009		29,736		(17,604)
Issuance of common stock related to employee stock plans	441		(1,007)	1,448
Issuance of common stock related to employee stock plans (in shares)				181
Issuance of restricted stock awards			(232)	232
Issuance of restricted stock awards (in shares)				29
Share-based compensation expense	1,034		1,034
Currency translation adjustment	(54)				(54)		(54)
Net income\loss	(23,572)					(23,572)	(23,572)
Comprehensive income net of tax							(23,626)
ENDING BALANCE at Dec. 31, 2010	32,965	297	213,326	(123,888)	(48)	(56,722)
ENDING BALANCE (in shares) at Dec. 31, 2010		29,736		(17,394)
Issuance of common stock related to employee stock plans	483		(1,365)	1,848
Issuance of common stock related to employee stock plans (in shares)				231
Forfeiture of restricted stock awards			120	(120)
Forfeiture of restricted stock awards (in shares)				(15)
Repurchases of common stock	(3,229)			(3,229)
Repurchases of common stock (in shares)				(1,247)
Share-based compensation expense	1,201		1,201
Currency translation adjustment	(51)				(51)		(51)
Net income\loss	344					344	344
Comprehensive income net of tax							293
ENDING BALANCE at Dec. 31, 2011	$ 31,713	$ 297	$ 213,282	$ (125,389)	$ (99)	$ (56,378)
ENDING BALANCE (in shares) at Dec. 31, 2011		29,736		(18,425)

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BUSINESS COMBINATIONS

12 Months Ended

Dec. 31, 2011

BUSINESS COMBINATIONS

4. BUSINESS COMBINATIONS:

Acquisition of Meridian Consulting International:    On May 17, 2010, the Company acquired substantially all of the assets and liabilities of Meridian, pursuant to the terms of an Asset Purchase Agreement (the “Meridian Acquisition”). Headquartered in Chicago, Illinois, Meridian is a specialty solution provider of Oracle’s Hyperion Strategic Finance (“HSF”) product which encompasses strategic planning and forecasting, scenario modeling and mergers and acquisitions analysis. Meridian has delivered its services to organizations across various vertical markets including Energy, Higher Education, Retail and Healthcare. The acquisition of Meridian continues the investment in EPM-related service offerings and aligns with the Company’s product-centric service offering model.

The Company initially estimated total fair value of the purchase price consideration to be $2.8 million. The initial cash consideration paid at close was $1.6 million. The cash paid at closing consisted of the $1.75 million purchase price less $164 thousand attributable to a net working capital adjustment. The initial cash consideration paid by the Company was increased by $1.2 million, representing the adjusted fair value estimate of additional contingent earnout consideration that may be earned by the former stockholders of Meridian, which is described in more detail below.

In May 2011, Meridian completed its first twelve-month earnout period, during which the required performance measurements were not achieved. The former Meridian stockholders did not receive any additional contingent consideration related to the first earnout period. The Company, as of December 31, 2011, has accrued $231 thousand in potential future contingent earnout consideration payable to the former Meridian stockholders related to the completion of the second and third twelve-month earnout periods. As of December 31, 2011, the maximum amount of contingent earnout consideration that the former stockholders of Meridian can earn during the final two earnout periods is capped at $1.8 million.

In addition to the above payments, the Company incurred approximately $394 thousand in direct transaction costs, which was expensed (within selling, general and administrative expense on the consolidated statement of operations) as incurred.

The Meridian measurement period was completed by December 31, 2010. Accordingly, subsequent adjustments to the original fair value estimates are reported as a periodic operating expense. In connection with its routine periodic assessment of performance against contractually defined earnout criteria, the Company recognized credits of $400 thousand and $1.1 million (reported within selling, general and administrative expenses) relating to the changes in fair value of contingent earnout consideration, due to the underperformance of Meridian during the first and second earnout periods.

The Company allocated the purchase price between assets, liabilities and identified intangible assets based upon their estimated fair value. The allocation of the purchase price was as follows:

	Total			Life (In Years)
	(In Thousands)
Net fair value of accounts receivable	$	175
Net fair value of other assets		26
Net fair value of liabilities		(91	)
Acquired intangible assets		550			5 Years
Goodwill (deductible for tax purposes)		2,126
Total purchase price	$	2,786

The Meridian Acquisition was accounted for as a purchase transaction, and accordingly, the results of operations, commencing May 18, 2010, are included in the Company’s accompanying consolidated statement of operations.

The Company recorded total revenues of $601 thousand and a net loss of $(274) in its statement of operations for the year ended December 31, 2010 related to the Meridian business.

The following table sets forth supplemental pro forma financial information that assumes the acquisition of Meridian was completed at the beginning of 2010. The information for the year ended December 31, 2010 includes the historical results of Edgewater and Meridian. The pro forma results include estimates and assumptions regarding the amortization of intangible assets recognized as part of the acquisition and income taxes. 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 Ended December 31, 2010
	(In Thousands)
Pro forma revenue	$	88,820
Pro forma net loss	$	(23,678	)
Pro forma diluted net loss per share	$	(1.94	)

Acquisition of Fullscope, Inc.    In December 2009, the Company acquired all the outstanding stock of Fullscope for approximately $15.1 million cash paid at closing increased by $1.2 million representing the fair value estimate of additional contingent earnout consideration which may be earned by the former Fullscope stockholders. The Fullscope Acquisition provides Edgewater with ERP integration and related consulting service capabilities, discrete and process manufacturing expertise and extends the reach of the Company’s strategic data and analytics offerings into the upper middle market.

An earnout agreement was entered into in connection with the Fullscope Acquisition under which the former Fullscope stockholders are eligible to receive additional contingent consideration. Contingent earnout consideration to be paid, if any, to the former Fullscope stockholders will be based upon the generation of positive, after-tax income, which will be determined, periodically, over an eighteen-month period from the date of acquisition and concluding on June 30, 2011. The Company has increased total purchase price consideration described above by $1.2 million, which represents our initial fair value estimate of the contingent consideration to be paid under the earnout agreement. In connection with the routine periodic assessment of actual performance against contractually defined earnout criteria, the Company recognized $1.2 million and $300 thousand of expense in 2011 and 2010, respectively (reported as a part of selling, general and administrative expenses), relating to the change in fair value of the contingent earnout consideration, due to the performance of Fullscope during the earnout period.

During the years ended December 31, 2011 and 2010, we incurred certain non-routine professional service-related expenses associated with our identification of embezzlement activities at Fullscope, one of our wholly-owned subsidiaries (the “Fullscope Embezzlement Issue”). We incurred the majority of our embezzlement-related expenses during fiscal 2010 in connection with our identification and investigation of the embezzlement activity.

During the fourth quarter of 2011, the Company made a cash payment, in full settlement of the Fullscope contingent earnout, of $2.7 million. The payment was made to an escrow account established to facilitate the finalization of the earnout. No amounts are expected to be released to the former Fullscope stockholders prior to the conclusion of the Fullscope Embezzlement Issue and the related escrow reimbursement claims filed by the Company.

Following is a summary of the potential contingent consideration the Company may be required to pay in connection with completed acquisitions as of December 31, 2011:

		Maximum Contingent Consideration Due As of December 31, 2011
Acquisition	Original Range of Potential Undiscounted Payments	2012		2013		Total
	(In Thousands)
Meridian	$  0-$2,750	$	917	$	917	$	1,834

Following is a summary of the changes in the recorded amount of contingent consideration liabilities from December 31, 2010 to December 31, 2011 for each acquisition:

Acquisition	Beginning Balance December 31, 2010		2011 Additions/ (Payments)			Changes in Fair Value of Contingent Consideration			Ending Balance December 31, 2011
(In Thousands)
Fullscope	$	1,500	$	(2,713	)	$	1,213		$	-
Meridian		1,300		-			(1,069	)		231
Total	$	2,800	$	(2,713	)	$	144		$	231

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COMMITMENTS AND CONTINGENCIES

12 Months Ended

Dec. 31, 2011

COMMITMENTS AND CONTINGENCIES

14. COMMITMENTS AND CONTINGENCIES:

Commitments.    We have lease financing arrangements (the “Capital Lease Arrangements”) with a bank related to certain property and equipment, as further described in Note 6. Payments under the Capital Lease Arrangements are to be made over a period of 48 to 60 months and have a blended interest rate of 6.03% per annum on the outstanding principal balances. As of December 31, 2011 and 2010, our outstanding obligations under the Capital Lease Arrangements totaled $52 thousand and $200 thousand, respectively. During the years ended December 31, 2011, 2010 and 2009, the Company made payments of principal and interest totaling $148 thousand, $215 thousand and $251 thousand, respectively, under the Capital Lease Arrangements.

We lease office space and certain equipment under capital and operating leases that expire at various times through 2016. Annual future minimum lease payments required under capital leases, together with the present value of such payments, and future minimum lease payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2011, were as follows:

Year Ending December 31,	Capital Leases		Abandoned Lease		Operating Leases
	(In Thousands)
2012	$	53	$	580	$	848
2013		-		591		783
2014		-		626		736
2015		-		626		705
2016		-		469		529
Thereafter		-		-		-
		53	$	2,892	$	3,601
Less amounts representing interest		1
	$	52

Rent payments under operating leases were $1.6 million, $1.6 million and $1.7 million for the years ended December 31, 2011, 2010 and 2009, respectively.

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 are not involved in any active, pending, or (to the best of our knowledge) threatened legal proceedings which would be material to our consolidated financial statements. We maintain insurance in amounts with coverage’s and deductibles that we believe are reasonable. However, there can be no assurance that such coverage’s will continue to be available on reasonable terms or will be available in sufficient amounts to cover possible claims that may arise in the future, or that our insurers will not disclaim coverage as to any future claim. The successful assertion of one or more claims against the Company that exceed available insurance coverages or changes in the Company’s insurance policies, including premium increases or the imposition of a large deductible or co-insurance requirements, could have a material adverse effect on the Company’s business, results of operations and financial condition.

The Company had approximately $439 thousand and $361 thousand of unrecognized tax benefits, penalties and interest expense related to uncertain tax positions as of December 31, 2011 and 2010, respectively.

During the fourth quarter of 2010, in connection with the Company’s review of the impact of a discovered embezzlement activity upon Fullscope’s historical financial statements, the Company recorded a $950 thousand liability associated with potential pre-acquisition sales and use tax obligations. The recorded liability is unchanged and remains at $950 thousand at December 31, 2011. The potential sales and use tax-related liability was created by the methods employed by a former employee of Fullscope to conceal a fraudulent activity. The Company believes that this amount is recoverable from an existing escrow account established at the time of the acquisition as management believes it qualifies as an undisclosed liability at the time of our acquisition of Fullscope. The Company has accounted for this pre-acquisition liability as a period expense. Any amounts actually paid to settle this liability may be recoverable from an existing, fully funded escrow account which was established in connection with our acquisition of Fullscope. Future amounts recovered, if any, will be recorded by the Company in the period in which they are determined to be probable of recovery from escrow.