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.