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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

           Commission file number: 0-20971

EDGEWATER TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

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

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

None

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

Common Stock, $0.01 par value

(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant as required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  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.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934  ¨

The aggregate market value of the voting common stock of the registrant held by non-affiliates of the registrant (assuming for these purposes, but not conceding, that all executive officers and directors are “affiliates” of the registrant) was approximately $43.9 million as of March 18, 2003.

As of March 18, 2003, the number of shares outstanding of the registrant’s common stock was 11,431,265.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the registrant’s annual meeting of stockholders to be held on May 22, 2003 are incorporated by reference into Part III of this Annual Report on Form 10-K.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

The forward-looking statements included in this Form 10-K relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “believe,” “anticipate,” “future,” “forward,” “potential,” “estimate,” “encourage,” “opportunity,” “decide,” “goal,” “objective,” “quality,” “growth,” “leader,” “could,” “expect,” “intend,” “plan,” “expand,” “focus,” “build,” “through,” “strategy,” “expiration,” “provide,” “offer,” “maximize,” “meet,” “allow,” “allowed,” “represent,” “commitment,” “lend,” “create,” “implement,” “result,” “seek,” “increase,” “add,” “establish,” “pursue,” “feel,” “work,” “perform,” “make,” “continue,” “can,” “will,” “going,” “include,” or the negative of such terms or comparable terminology. These forward-looking statements inherently involve certain risks and uncertainties, although they are based on our current plans or assessments which are believed to be reasonable as of the date of this Form 10-K. Factors that may cause actual results, goals, targets or objectives to differ materially from those contemplated, projected, forecast, estimated, anticipated, planned or budgeted in such forward-looking statements include, among others, the following possibilities: (1) inability to effect a business combination, execute upon growth objectives, pay a dividend or repurchase shares in the future on terms acceptable to us; (2) changes in industry trends, such as a decline in the demand for Solutions services or delays in industry-wide IT spending, whether on a temporary or permanent basis and/or delays by customers in initiating new projects or continuing new project milestones; (3) adverse developments and volatility involving debt, equity, currency or technology market conditions; (4) the occurrence of lawsuits or adverse results in litigation or tax matters; (5) failure to obtain new customers or retain significant existing customers; (6) loss of key executives; (7) general economic and business conditions (whether foreign, national, state or local) which include, but are not limited to, changes in interest or currency exchange rates; (8) failure of the middle market and the needs of middle-market enterprises for IT Solutions services to develop as anticipated; (9) inability to recruit and retain professionals with the high level of information technology skills and experience needed to provide our services; (10) expanding outsourcing services to generate additional revenue; and/or (11) any changes in ownership that would result in a limitation on the use of the net operating loss carry-forward under applicable tax laws, which is included in the net deferred tax asset of approximately $22.9 million as of December 31, 2002 as referred to in this Form 10-K. In evaluating these statements, you should specifically consider various factors described above as well as the risks outlined under Item I “Business – Factors Affecting Finances, Business Prospects and Stock Volatility.” These factors may cause our actual results to differ materially from those contemplated, projected, anticipated, planned or budgeted in any such forward-looking statements.

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

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EDGEWATER TECHNOLOGY, INC.

Form 10-K

Annual Report

For the Year Ended December 31, 2002

TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

General

Edgewater Technology, Inc. (and subsidiaries are collectively referred to in this Form 10-K as “we”, “us”, “our”, “our Company”, “the Company”, or “Edgewater”) is an award-winning strategic consulting firm that specializes in providing technical consulting, custom software development and system integration services primarily to middle-market companies and divisions of Global 2000 companies. Our Company, formerly known as StaffMark, Inc., was incorporated in the State of Delaware in 1996. Our primary operating subsidiary is Edgewater Technology (Delaware), Inc., a Delaware corporation that was incorporated in 1992, acquired by our Company in 1999, and is sometimes referred to in this Form 10-K as “Edgewater Technology.” Since our Company engages in business activities under one operating segment, which provides technical consulting, custom software development and integration services, no separate segment disclosure is provided in this Form 10-K.

We develop scalable technology solutions, which expedite business processes and provide our customers with competitive advantages. Our consultants collaborate with customers to translate business goals into technology-driven strategies. Headquartered in Wakefield, Massachusetts, our Company has developed a partnership approach with our customers, targeting strategic, mission-critical applications. As of December 31, 2002, we had approximately 119 technical consulting professionals servicing our client base by leveraging a combination of our vertical industry knowledge with a broad base of key strategic technologies, along with proven reengineering techniques provided by our network of strategically positioned solutions centers.

Although our Company is not an “Accelerated Filer” under Rule 12b-2 of the Securities Exchange Act of 1934, as amended, our financial information, including the information in this Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; and any amendments to the above mentioned reports, may be viewed on the Internet at www.edgewater.com/site/investor_relations/index.html. Copies are also available, without charge, from Edgewater Technology, Corporate Investor Communications, 20 Harvard Mill Square, Wakefield, MA 01880. Alternatively, reports filed with the Securities & Exchange Commission (the “SEC”) may be viewed or obtained at the SEC Public Reference Room in Washington, D.C., or the SEC’s Internet site at www.sec.gov.

Overview of the Edgewater Technology Business

Edgewater Technology offers an end-to-end platform of technology-driven business solutions to help organizations tackle the barriers of technology transition, including:

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The following diagram illustrates our service offerings:

With a ten year operating history, Edgewater Technology has focused on five core values that differentiate it from the competition:

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Customers

We derive a significant portion of our revenues from large projects with a limited number of customers . In 2002, our five largest customers accounted for 88.0% of our revenues. In 2001, our five largest customers accounted for 70.7% of our revenues. During 2002, we developed relationships and recorded revenues from 19 new customers, as compared to 17 new customers in 2001.

The following is a partial list of customers who have engaged our services:

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Significant Customer

The Synapse Group, Inc., an AOL/Time Warner company (“Synapse”), is considered a related party as its President and Chief Executive Officer is also a member of our Board of Directors. Revenues from Synapse amounted to $12.3 million and $10.6 million for 2002 and 2001, respectively. Accounts receivable for Synapse were $1.9 million and $2.0 million as of December 31, 2002 and 2001, respectively, which amounts were on customary business terms. For more information with respect to our significant customers, see “Item 8 – Financial Statements and Supplementary Data – Note 17.”

We have a master agreement with Synapse which has been extended by our Company and Synapse by mutual written agreement through June 30, 2003 (the “Existing Synapse Agreement”). The Existing Synapse Agreement operates as a master services agreement over numerous statements of work that govern particular customer software, systems integration and hosting services projects. In the Existing Synapse Agreement and the various statements of work, both our Company and Synapse have the right to terminate this agreement and each statement of work with one hundred and twenty (120) days prior written notice. In addition, Synapse upon thirty (30) days prior written notice, under each statement of work, may alter our Company’s consultant staff assignments on each particular project.

Our Company and Synapse have been in negotiation with respect to a new master agreement, which based upon the most recent draft, is not materially different from the Existing Synapse Agreement. If finalized and executed between our Company and Synapse, the new master agreement would extend until December 31, 2004. There can be no assurance that a new master agreement will be entered into with Synapse. If Synapse were to terminate the Existing Synapse Agreement and/or the underlying statements of work, then such action or actions by Synapse could have a material adverse effect on our Company’s results of operations. See “Factors Affecting Finances, Business Prospects and Stock Volatility.”

Industry Dynamics

Today’s businesses utilize internal and external facing Internet technologies to enhance operations, reduce costs, increase market competitiveness, improve client productivity and create new revenue opportunities by enhancing their interactions with new and existing customers. Businesses are also using the Internet to increase efficiency in their internal operations through improved communications with suppliers and other business partners. In order to capitalize fully on these new opportunities, businesses need Internet-based applications that are integrated with their existing application infrastructure and deliver information far more effectively than static or stand-alone Web pages. IT Solutions providers such as our Company possess the skills and personnel to help businesses capitalize on Internet-based opportunities.

IT consulting companies that develop customized software applications can assist their customers to acquire new clients, conduct electronic commerce and consistently manage client relationships. These solutions can also dramatically improve a company’s ability to access, analyze and distribute important information to suppliers, business partners, employees and clients. While there are numerous benefits that may be gained by utilizing the Internet, the analysis, design and implementation of an effective software solution requires a range of skills and expertise, which few businesses possess. The successful design of an application requires careful analysis and definition of the strategic implications of the Internet for a business, the creative possibilities for brand, content and user experience and the technology required to support the solution. The rapid development and launch of information technology further requires substantial expertise to develop and integrate new business processes with existing capabilities, to design and execute Internet marketing communications plans and to evaluate, select and implement the appropriate technologies.

Market Opportunity

The middle market continues to explore ways to capitalize on opportunities that leverage technology to drive business opportunities. Traditionally underserved by IT providers, the middle market is in need of technology systems and development that will support their plans for future growth, including:

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In order to stay competitive, middle-market enterprises need to get to market very quickly and often lack internal IT resources. Accordingly, they increasingly demand a single source provider of strategy, systems integration, hosting and support services focused on their specific needs. Large traditional IT firms that provide these service offerings have primarily focused on large enterprises, such as Global 2000 companies, while largely ignoring the middle market and its unique needs. Many boutique IT service providers that direct their offerings to the middle market do not offer a comprehensive suite of services. They also frequently lack the financial resources and employees to take on full service projects or to provide follow-up support and training.

We believe that Edgewater Technology is uniquely positioned to serve as an effective single source provider of services to satisfy the needs of the middle market and that neither traditional IT service providers nor boutique providers currently effectively meet this demand. We can efficiently service the needs of the middle market through the strategic positioning of our solutions centers in second-tier cities in which middle-market enterprises typically reside. By leveraging our solutions centers, we are able to create a virtual development environment that allows for efficiencies in staff management, while servicing clearly defined markets to leverage vertical and technology expertise to gain competitive advantage.

Our Competitive Advantages

Full Service Provider. Our ability to provide consulting services in combination with systems integration and custom application hosting provides Edgewater Technology with a unique competitive advantage. Middle-market enterprises often lack the internal IT resources needed to get to market quickly. Accordingly, they increasingly demand a single source provider of strategy, systems integration, hosting and support that is focused on their specific needs. Edgewater Technology offers the end-to-end services, from consulting and development to implementation and hosting, that customers demand.

Custom Hosting. Edgewater Technology’s ability to offer custom application hosting enables customers to focus their own resources on other development activities. In addition, it gives customers the time they need to build the knowledge base necessary for running newly established systems.

Regional Solutions Centers. By strategically placing our regional solutions centers in second-tier cities, we believe that Edgewater Technology is able to provide high quality systems integration of technology solutions more rapidly and cost-effectively.

Strategic Alliances. As part of our sales and marketing strategy, we have established strategic working relationships with a number of companies, including American Student Assistance, BEA, Document Sciences, IBM, Microsoft, Optical Image Technology, Oracle, Sun and Symbol Technologies. These alliances generally entail sharing sales leads, joint marketing efforts, making joint client 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 the subject of definitive written agreements. For those companies with whom we do have definitive written agreements, those agreements are either terminable at will by either party or are for terms of one year or less. We believe we have been successful in establishing alliances with a strong group of companies who are either industry leaders or well-regarded new entrants.

Human Resources. As a service provider, Edgewater Technology’s success depends upon our ability to recruit and more importantly retain talented, experienced professionals. Through a combination of professional support, intellectual challenge, and a strong corporate culture, we believe Edgewater Technology attracts and retains a particularly strong group of experienced IT professionals.

Delivery Excellence. With such dramatic changes in today’s economy, customers are focused more than ever on partnering with IT Solutions providers that can consistently deliver results and quantifiable solutions that provide their organization with measurable benefits and a return on their investment. Edgewater Technology has a proven record of delivery excellence, which is not only critical to attracting and winning customers, but also retaining them. Our strong delivery focus is built upon ten years of proven methodology and processes and by continually focusing on delivering solutions that work. Our record of delivery excellence is the result of a well-defined business plan, highly-trained professionals, strong technical and vertical expertise, established implementation and support methodologies and most importantly, effective and continued communication throughout the entire process. We are technology agnostic, and therefore, we evaluate both packaged and custom alternatives to solve a particular customer’s challenges. We formulate recommendations for using technology that works best for that particular customer’s needs. By being committed to successfully delivering solutions, Edgewater Technology has been able to build long-term relationships of trust with our customers who continue to turn to us for their IT needs, which is demonstrated by our better than 90% repeat business factor and the fact that our long-term client and now partner, American Student Assistance (ASA), has been with us for more than ten years.

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Business Strategy

Our business strategy is to become a leading provider of both single point and full enterprise scale technology solutions into the middle market. The middle market is in need of systems that streamline operations and reduce costs, while providing opportunities to increase revenue and market share. Edgewater Technology implements this business strategy through the key elements described below.

Further penetrate the underserved growing middle market. We plan to further penetrate the middle market by targeting middle-market companies that are located in second-tier (as opposed to major) metropolitan markets and catering to the relatively limited IT infrastructure middle-market companies (as compared to Global 2000 companies). Second-tier cities are fertile pastures for high retention and value-priced consulting staff not present in the key larger metropolitan cities. Limited IT infrastructure within middle-market companies facilitates Edgewater Technology’s entry into full-service custom application support and hosting offerings.

Provide delivery and operational excellence. Edgewater Technology’s strategy builds upon ten years of proven methodology, process, and delivery excellence. This expertise is being extended into the middle market via a virtual development environment that allows support to any client project from any and all delivery centers. Edgewater Technology’s virtual delivery capability allows us to operate with a highly utilized delivery staff focused by vertical industry experts and strategists.

Aggressively promote the Edgewater Technology brand. The middle market is a large, fragmented and geographically dispersed market. To leverage our direct selling efforts and reach this market effectively, we believe it is important to build awareness of the Edgewater Technology brand. To promote our brand, we have expanded our corporate marketing efforts, with the specific objective of targeting senior executives of certain customer accounts that influence the organizations decisions to outsource IT projects. Our goal is to create national recognition of the Edgewater Technology brand, along with our service offerings, positioning Edgewater Technology as a leading full-service provider of technology solutions that address the specific needs of the middle market.

Expand strategic alliances. The strategic partnerships that Edgewater Technology forms with leading and emerging technology companies are integral to the way we build our business. We partner with companies whose skill sets provide maximum synergy with Edgewater’s broad and evolving service offerings. By leveraging our individual and collective strengths through strategic working relationships, both organizations can capitalize on key market opportunities. Our partnerships enable us to deliver high-performance business and technology solutions that evolve from strategy development to solution creation and implementation to ongoing support.

Project Methodology and Technical Specialization

The components of our methodology act as building blocks that are used to construct a project life cycle tailored to the needs of the individual customer’s requirements. Key elements of our methodology that enables us to provide solutions are:

Our areas of technical specialization for which we deploy this methodology include: (1) Web-based solutions; (2) architecture strategy; (3) Web services; (4) data management; (5) transaction processing; and (6) legacy system integration.

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Representative Customer Engagements

The following three case studies represent a sampling of the more than 450 projects that Edgewater Technology has completed over the last ten years. The case studies highlight Strategy and Solutions services delivered within particular vertical markets we have served.

Insurance Vertical

The Customer’s Challenge. A life insurance carrier providing life, accident and health insurance needed to improve efficiency and accuracy of their policy documentation while decreasing the amount of time to bring new products to market.

The Customer’s Business Goals and Edgewater Technology’s Strategy Response. During a preliminary strategy session, Edgewater Technology conducted meetings with the company’s executive management team and listed key goals for our technology solution:

Edgewater Technology’s Solution. Edgewater Technology worked closely with key personnel within the organization and a set of technology partners to evaluate the client’s needs. Policy documents were analyzed and sorted to determine commonalities across product lines. Requirements for state regulated insurance filings were documented for application to the newly automated documents. Variable data was mapped to administrative system data stores to be merged into the new policy document automation system.

Prior to Edgewater Technology’s solution being implemented, the organization had a manual document production process. When an insurance policy was issued, it was posted to the administration system. The administration system printed a benefit summary, which triggered a manual “pull and sort” policy generation process. Preprinted sections, different based on product, effective date, jurisdiction, messaging, etc., were pulled from a store of bins and manually assembled for delivery to the customer. Manual quality assurance checks were common and necessary, as the system was prone to human error.

Edgewater Technology created an integrated, automated document assembly system by integrating the existing administration system with a rules-based content processing system and an enterprise-wide document imaging system. When non-existent variables necessary for document production were identified, Edgewater Technology designed a database and maintenance sub-system to bridge the system gap. The content processing system was used to define logic and text pieces and the rules to apply them. Integrated workflow and approval processing was set in place to ensure error-free, compliant documents.

A System that Works. In the new system, when a policy is issued and posted to the administration system, the benefit summary is captured and used to trigger the new process. Data from the administration system and the gap database are merged and processed by the document automation system. Jurisdictional, effective date and product-based rules are applied to generate the full document. Manual intervention is not required. The full package is generated straight through to the printer and delivered to the customer, seamlessly and automatically.

Benefits. The solution designed by Edgewater Technology provided multiple benefits. After system implementation, the new system enabled our client to better service their customers by increasing the quality, impact, accuracy and compliance of their policy documents. Specific benefits included:

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Retail Vertical

The Customer’s Challenges. To provide superior customer service, the nation’s third largest tradeshow services contractor required a more robust system that allows direct, secure customer access while handling increasing sales volumes. The customer wanted to leverage recent investments in hardware and operating systems.

The Customer’s Business Goals and Edgewater Technology’s Strategy and Solution Response. Planning and hosting exhibitions requires the ability to frequently share information easily and efficiently, both internally and externally. Several departments within this organization can be involved in any given show. Traditionally, the customer has communicated with its clients in a variety of ways including the Web site, which was difficult to update with the latest information, branding and style. Sharing and reviewing documents with show managers was cumbersome and in addition, service kits, a collection of show details such as regulations, order forms and union guidelines, were provided to exhibitors via hard copy. The customer’s legacy application was limiting its ability to support online ordering, as well as new pricing and marketing initiatives such as volume pricing or package discounts for bundling items together. With a unique pricing structure for each show and the legacy system’s inability to facilitate replicating prices from one show to another, a great deal of time was spent manually updating prices.

The customer’s goal was to streamline customer service while facilitating efficient internal communication. The customer had set clear objectives for the project:

With the results of the strategy analysis in hand, Edgewater Technology worked with the customer to gather requirements for a system that would address their highest priority goals. The resulting application consists of two main elements: the external, customer-facing Internet site and the client’s intranet. Each element contains static content and dynamic database driven content. Both sites were specifically designed to be maintained directly by the business users rather than by technical IT staff. This delivers a key benefit to the client to support future growth and timely customer service. The static content for both the Internet site and intranet was created using Adobe GoLive, a graphical Web authoring tool, which enables the client to make frequent changes to content, site structure and look-and-feel. For example, background colors can be changed in one place and propagated throughout the site. The result is a more cohesive site with clear branding and up-to-date content. The new intranet can be used for posting human resources information, company activities, newsletters and more.

A System that Works. Edgewater Technology developed a new application utilizing a multi-tier architecture developed with Microsoft’s .NET technologies. The system consists of three layers: Presentation, Business and Data Access and Storage. The separation of the Presentation logic from the Business logic allows for use of one set of business objects for both the Internet and intranet applications. Likewise, the separate Data Access and Storage layer allows the business objects to consume and provide data from multiple sources. In this way, the application leverages the customer’s legacy database in conjunction with the newly designed database.

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Health Care Vertical

The Customer’s Challenges. Edgewater Technology partnered with a national association for not-for-profit, community-based home health organizations. In order to continually provide quality educational health care information to home health professionals and consumers, this association envisioned creating a robust and scalable next generation Web site that would provide the highest level of service to their members.

The Customer’s Business Goals and Edgewater Technology’s Strategy Response and the Solution. The association outlined specific project goals to meet their objectives to create an innovative and informational Web site for their members and consumers:

In order to provide accurate and up-to-date home health care information, the association required a flexible and scalable technology foundation that could support its need to provide timely home health care information to its three primary audiences: the 500+ member organizations it serves; the non-members of the health care community being pursued for membership; and the general public.

Edgewater Technology created a flexible and scalable technology foundation that leverages innovative technologies, including those that are based on Microsoft’s .NET platform. The Web site not only supports the organization’s current needs, but also provides them with an infrastructure and architecture to support future plans.

Benefits. The new Web site and underlying foundation enables the organization to foster community-based home health care education while providing local health care providers the tools to better meet the home health care needs of their communities and the people they serve. The next generation site includes the following components:

A System that Works. By creating a flexible and scalable technology foundation that leverages innovative technologies, including those that are based on Microsoft’s .NET platform, the organization now has a robust Web site that not only meets their current needs but also their future vision to continually provide quality health care and educational content to the members of their organization and those in need.

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Professional Recruitment, Retention and Development

Our success depends in part upon our ability to recruit and retain professionals with the high level of IT skills and experience needed to provide our sophisticated services. We believe that the combination of professional support, intellectual challenge, corporate culture and compensation we offer will continue to be attractive to these IT professionals.

Recruiting. 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 interesting work environment, greater opportunities for professional development and a dynamic corporate culture, enhances our ability to attract and retain top professionals.

Professional Development. We believe that providing our professionals with a wide variety of challenging projects and 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 establishing career paths. We also believe that the working relationships foster valuable formal and informal mentoring and knowledge sharing.

Culture. Our culture is critically important to hiring and retaining IT professionals. We have a competitive compensation plan that ties to the achievement of individual performance goals, team goals and more importantly, company financial performance goals.

Employees. As of December 31, 2002, Edgewater Technology employed approximately 152 employees, of which 119 were billable. The average tenure of our employees is 4.3 years and the average years of experience is approximately 12 years. Our employees are not represented by a collective bargaining agreement. We believe that our employee relations are strong.

Marketing, Sales and Strategic Alliances

Marketing. The primary goal of all of our marketing efforts is to generate sales opportunities by increasing Edgewater Technology’s brand awareness and value proposition among the middle market and divisions of Global 2000 organizations. In 2002, our marketing efforts were closely aligned with our vertical go-to-market strategy. We target primary vertical markets where we have developed core competencies to deliver our services including: Financial Services (Retail Banking, Portfolio/Asset Management) with an emphasis on Insurance; Health Care (Managed Care, Life Sciences); Higher Education, Retail and various Emerging Markets that comprise of untapped verticals who are just beginning to leverage the use of technology. We also focus on horizontal service offerings that cross each vertical such as Customer Service, Supply Chain and Web services. To focus our marketing efforts and to increase the efficiency of our marketing expenditures, we target specific areas of content each quarter for each of our vertical focus areas. Marketing has built campaigns around each content area, which includes: marketing collateral, Webinars, sell sheets, tradeshow/conference participation, speaking engagements, direct mail and public relations activities.

Sales. We have a “two-pronged” approach for our sales organization. Our sales force is comprised of direct sales professionals and inside sales professionals. Both work closely with our vertical and service offering directors to identify potential opportunities with each engagement. Using a consultative selling methodology, target prospects are researched and a pursuit plan is developed for each key account. When contact with a target is established, we utilize our blended sales model, combining consultative selling with traditional sales methods, which typically consists of a business development manager, a practice leader and a technology consultant. This team approach to selling allows Edgewater Technology to demonstrate from the initial contact point its expertise in both the specific industry as well as technology. Once the customer has engaged Edgewater Technology, our sales professionals maintain their relationships with the customer by working collaboratively with our service 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: American Student Assistance, BEA, Document Sciences, IBM, Microsoft, Optical Image Technology, Oracle, Sun and Symbol Technologies. 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 the subject of definitive written agreements. For those companies with whom we do have definitive written agreements, those agreements are either terminable at will by either party or are for terms of one year or less. We believe we have been successful in establishing alliances with a strong group of companies who are either industry leaders or well-regarded new entrants.

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Competition

Our service offerings consist of strategy consulting, solutions development and application hosting and outsourcing. Our competitors include IT solutions providers, in-house technical staff of our prospective customers, software product companies with extended service organizations, international outsourcers of IT development, application hosting firms and Web hosting firms. Traditionally, barriers to entry in the strategy consulting and systems integration markets have been relatively low, thus, competition is intense. See “Factors Affecting Finances, Business Prospects and Volatility” regarding entities that we compete with for delivery of our various services offerings in different vertical markets.

Strategy Consulting. We believe that the principal competitive factors in the strategy consulting market are quality of services, technical and strategic expertise and ability to provide services in a timely and cost-effective manner. We believe that we compete successfully in all of these competitive factors because of the strong experience and expertise of our professionals and our focus on key technology solutions. We also believe that our ability to provide consulting services in combination with systems integration and application hosting and support provides us with a competitive advantage.

Solutions Development. In the systems integration market, we believe that the principal competitive factors are the ability to implement high-quality solutions rapidly and cost-effectively in terms of both implementation and ongoing costs. Through the use of our regional solution centers, we believe that we are able to provide high-quality systems integration of information-based business solutions on a rapid, cost-effective basis.

Support/Outsourcing. We believe our ability to offer custom application hosting is a distinct competitive advantage. Our customer can take adequate time to gain the knowledge to run the system or concentrate its resources on other development activities.

Intellectual Property

We consider our intellectual property to be a principal 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, and continue to seek registration of other service marks, for “Edgewater” and “Edgewater Technology.” We believe we have all rights to trademarks and trade names necessary for the conduct of our business.

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

Potential Future Strategies, Transactions and Changes

Critical to our ability to create long-term stockholder value, the Company will continue to pursue organic growth initiatives and appropriate business combination alternatives to achieve growth. From time to time, we have engaged and we may continue to engage in preliminary discussions with various persons regarding potential business combination transactions.

We believe that our current cash reserves and our anticipated cash flow from our operations will be, taken together, adequate for our working capital needs for at least the next twelve months. However, our actual experience may differ significantly from our expectation, particularly if we pursue growth through business combination transactions, which we presently believe will be advantageous to building long-term stockholder value, or if we pursue repurchase or dividend strategies, as described below. 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, continue to purchase common stock in the open market, in private transactions or otherwise, pursuant to our previously extended repurchase program. We may elect, in the alternative, or in addition to repurchases, to return value to our stockholders through a tender offer or the declaration of a special dividend, if such dividend is prudent relative to existing cash balances and growth objectives. Any future purchases or dividends by us will depend on many factors, including:

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Factors Affecting Finances, Business Prospects and Stock Volatility

Our success depends on a limited number of significant customers, and our service revenues could be negatively affected by the loss of a major customer or significant project. We generate a significant portion of our service revenues from a limited number of customers. As a result, if we were to lose a major customer or large project, our service revenues could be materially and adversely affected. In 2002, our five largest customers accounted for 88.0% of our service revenues. In 2001, our five largest customers accounted for approximately 70.7% of our service revenues. We perform varying amounts of work for specific customers from year to year. A major customer in one year may not use our services in another year. In addition, we may derive revenues from a major customer that constitutes a large portion of a particular quarter’s total revenues. If we lose any major customers or any of our customers cancel or significantly reduce a large project’s scope, including but not limited to Synapse, our results of operations and financial condition could be materially and adversely affected. Further, if we fail to collect a large accounts receivable balance, we could be subjected to a material financial expense and decrease in cash flow.

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

If we 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 not generate enough income this year or in future years to maintain the current net carrying value of our Deferred Tax Asset. We have a deferred tax asset of $22.9 million, net of applicable valuation allowances as of December 31, 2002. If we are unable to generate enough income this year or in future years, the valuation allowances regarding our deferred tax asset may have to be revised upward, which would reduce the carrying value of this asset on our balance sheet under generally accepted accounting principles. An increase in the valuation allowances and a reduction in the carrying value of this asset would increase our provision for income taxes, reduce our total assets and depending on the amount of any such change or changes, could otherwise have a material adverse effect on our results of operations and/or our financial position.

We may have lower margins, or lose money, on fixed-price contracts. As part of our strategy, we intend to continue to grow our Solutions business with both time-and-materials contracts and fixed-price contracts. In 2002, fixed-price contracts represented approximately 5.6% of our revenues. We assume greater financial risk on fixed-price contracts than on time-and-materials engagements, and we cannot assure you that we will be able to successfully price our larger fixed-price contracts. If we fail to estimate accurately the resources and time required for an engagement, to manage customer expectations effectively or to complete fixed-price engagements within our budget, 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.

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Competition in the IT services market is intense and, therefore, we may lose projects to, or face pricing pressure from, our competitors or prospective customers’ internal IT departments. The market for IT Solutions providers is highly competitive. In many cases we compete for project work with the in-house technical staff of our prospective customers, software product companies with extended service organizations and other international IT Solutions firms. In addition, there are many small, boutique IT services 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 reduce their price for IT 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 Solutions that provide significant technological, creative, performance, price or other advantages over the services we offer.

The following is a representative list of competitors in the IT Solutions space:

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

Our future Solutions business success will depend on the continued development of the IT Services market and the use of the Internet as a means of business communication, which remains uncertain. Our future success will depend upon our customers’ utilizing the Internet as an effective delivery channel to support their businesses. The Internet has rapidly moved from an e-commerce medium, to a communication channel for sales, service and delivery. Such rapid change has slowed down the development of e-commerce solutions and in turn, increased the development of customer service and information portals. We cannot predict growth in the use of the Internet or the demand for services to support continued development of the Internet. In addition, a number of factors effect the viability of the commercial marketplace for the development of technology solutions that assist in the use of the Internet as a delivery channel. Such factors include:

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 and 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.

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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. In addition, if any of our key personnel join a competitor or form a competing company, some of our customers might choose to use the services of that competitor or those of a new company instead of our own. Furthermore, other companies seeking to develop in-house business capabilities may hire away some of our key personnel.

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

Breaches of security and computer viruses on the Internet may adversely affect our business . The need to securely transmit confidential information, such as credit card and other personal information, over the Internet has been a barrier to Internet communications. Any well-publicized compromise of security could deter consumers and businesses from using the Internet to conduct transactions that involve transmitting confidential information, such as purchases of goods or services. Furthermore, computer viruses that spread over the Internet could disable or damage the systems we develop for our customers. Decreased Internet traffic or sales as a result of general security concerns or viruses could cause companies to reduce their amount of technology spending, which could adversely effect our results of operations.

Our comparable publicly-traded Solutions peers have experienced extreme volatility in trading prices over the last two-and-one-half years and the value of our common stock could become highly volatile. As a result of the decline in spending for IT Services, many Solutions peers and competitors have experienced extreme volatility in their common stock. As a result, their stock may continue to be highly volatile, and it is possible that our common stock price, whether due to market events affecting the Solutions sector or operating results or other factors affecting us specifically, could trade with great volatility. Such volatility could be compounded by our: (i) growth initiatives, the result of which could be largely affected depending upon whether those initiatives are primarily executed through organic growth, on the one hand, or through business combination transactions with third parties, on the other hand; or (ii) failure to execute targeted growth initiatives.

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

We may not be able to protect our intellectual property rights, 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:

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.

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

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

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

A Sizable Portion of Our Assets are Intangible. On December 31, 2002, approximately $11.6 million, or 13.4% of our total assets were intangible assets. These intangible assets represent amounts attributable to goodwill recorded in connection with our acquisition of the Edgewater Technology Solutions business effective April 1, 1999. In January 2002, we recorded as a change in accounting principle, a non-cash impairment of goodwill charge of $12.5 million. We recorded an additional non-cash charge of $7.4 million, related to a further impairment in December 2002. See Note 2 and Note 8 of the consolidated financial statements included elsewhere herein. Any future impairment in the value of such assets could have a material adverse effect on our financial condition and/or results of operations.

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

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ITEM 2. PROPERTIES

We lease 30,904 square feet of office space for our principal executive offices currently located at 20 Harvard Mill Square, Wakefield, Massachusetts 01880. The lease for our corporate headquarters expires June 30, 2005. We also have office facilities in New Hampshire, Arkansas, and Minnesota. Our corporate offices and Solutions center offices are all leased properties. We do not own any real estate. During 2001, we relocated our principal corporate offices from 302 East Millsap Road, Fayetteville, Arkansas 72703 to the Wakefield address listed above. The Fayetteville, Arkansas location, is a leased property, for which we sublet the premises to a third party on July 1, 2002 until June 30, 2007. This Arkansas lease expires on June 30, 2009.

ITEM 3. LEGAL PROCEEDINGS

We are a party to litigation incidental to our business. We maintain insurance in amounts, with coverages and deductibles that we believe are reasonable. As of the date of the filing of this Form 10-K, our Company is not a party to any existing material litigation matters. A description of a prior litigation matter involving the Stephens Group, Inc. and Staffmark Investment, LLC that was resolved on February 11, 2003 is described below.

On August 15, 2001, we filed a lawsuit in Delaware Chancery Court (the “Delaware Action”) against Staffmark Investment, LLC and a number of its Delaware subsidiaries (collectively, the “LLC”). The LLC is a majority owned subsidiary of Stephens Group, Inc. (the “Stephens Group”), which purchased our company’s commercial staffing business on June 28, 2000 pursuant to a purchase agreement dated May 16, 2000 (the “Purchase Agreement”) involving our company and the Stephens Group. In the Delaware Action, we requested the Delaware Chancery Court to interpret the Purchase Agreement and agree with our conclusion that our Company has no contractual or other responsibility to the LLC or the Stephens Group under or in connection with the Purchase Agreement. In the Delaware Action, we also requested the court to prohibit and otherwise enjoin any claims by the LLC and the Stephens Group under or in connection with the Purchase Agreement, which is governed by Delaware law. On January 10, 2002, the Delaware Chancery Court transferred the Delaware Action to Delaware Superior Court, which is a court that adjudicates legal claims, as opposed to equitable claims.

On August 23, 2001, the LLC and the Stephens Group filed a lawsuit in Washington County Circuit Court in Arkansas against our Company (the “Arkansas Action”), seeking in excess of $13 million of alleged actual, incidental and consequential damages and not less than $25 million in punitive damages concerning alleged breaches and alleged misrepresentations, respectively, under and in connection with the Purchase Agreement. On December 21, 2001, the Judge in Washington County Circuit Court in Arkansas granted our motion to stay the Arkansas Action in favor of the Delaware Action. On March 8, 2002, the Stephens Group and the LLC dismissed the Arkansas Action and on the same day filed an answer to the Delaware Action and a counterclaim in Delaware Superior Court against our Company alleging misrepresentations and breaches under and in connection with the Purchase Agreement and requesting damages in an amount to be proved at the trial (the “Counterclaim”).

In late September 2002, we filed a summary judgment motion with respect to the Counterclaim and the LLC and the Stephens Group filed a partial summary judgment motion with respect to the Delaware Action. During October 2002, each party filed response briefs and reply briefs with respect to these summary judgment motions. On November 6, 2002, the judge in the Delaware Superior Court heard oral arguments on the respective motions and granted our Company’s summary judgment motion dismissing the Counterclaim and denied the summary judgment motion of the LLC and the Stephens Group in connection with the Delaware Action (the “Ruling”). The effect of the Ruling was that the case was taken off the trial calendar for November 18, 2002.

On February 11, 2003, we entered into a mutual Settlement and Release Agreement with the Stephens Group, the LLC and their affiliates to dismiss, terminate and retain intact the substance of the Ruling (the “Litigation Resolution”). In accordance with the Litigation Resolution, the Delaware Action and the Counterclaim were finally dismissed on February 12, 2003, the date that the Stipulation and Order of Dismissal was entered by the Delaware Superior Court. As part of the Litigation Resolution, we agreed to pay the Stephens Group $950,000. This amount was accrued as of December 31, 2002 in the loss for discontinued operations. The accrued amount of $950,000 is recorded as Litigation settlement on the accompanying December 31, 2002 consolidated balance sheets. In the Litigation Resolution, the parties agreed that the existence of the mutual Settlement and Release Agreement and all of its terms, including any payment, were not evidence of any wrongdoing or liability related to the sale of our Company’s commercial staffing business in June 2000.

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

No matters were submitted to a vote of security holders during the fourth quarter of 2002.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Stock Price Information

Our common stock, which has a par value of $0.01 per share, trades on the Nasdaq National Market under the symbol “EDGW.” On March 18, 2003, there were 2,464 holders of record of our common stock and 11.4 million shares of our common stock were outstanding. The number of record holders indicated above does not reflect persons or entities who hold their shares of stock in nominee or “street” name through various bankers or brokerage firms. Based on our company’s solicitations of proxies in May 2002, we estimate that there are approximately 10,000 holders of our Company’s common stock. The following table sets forth the range of high and low trading prices for our common stock as reported by the Nasdaq National Market for each quarter in 2001 and 2002 and the first quarter of 2003 through March 18, 2003.

Other Stockholder Matters

We have not paid dividends in the past and intend to retain earnings to finance the expansion and operations of our business. Subject to the items discussed in “Item I – Business – Potential Future Strategies, Transactions and Changes,” we do not anticipate paying any cash dividends with regard to cash generated through our normal operations in the foreseeable future. The trading price of our common stock is subject to wide fluctuations in response to quarterly variations in operating results, announcements of acquisitions, performance by our competitors, and other market events or factors. In addition, the stock market has, from time to time, experienced extreme 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.

In September 2002, our Board of Directors reauthorized a stock purchase program for up to $20.0 million of common stock through December 31, 2003. The repurchase program may be shortened or extended by the Board of Directors. Under this program, the repurchases have been and may be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market. As part of the most recently authorized stock repurchase program, effective February 14, 2003, our company entered into a SEC Rule 10b5-1 purchase program with a broker that allows purchases of our common stock through traditional blackout periods. The Rule 10b5-1 repurchase program, like the overall stock repurchase program, extends until December 31, 2003, unless earlier terminated by us or the broker. From the inception of our stock repurchase program in 2000 for up to $30 million of our common stock and through March 18, 2003, we repurchased 2.1 million shares of our common stock for an aggregate purchase price of approximately $10.7 million.

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The following table presents the aggregate quarterly repurchases under this program during 2000 and through March 18, 2003 with the aggregate amount of shares purchased each quarter and with the high and low prices for shares repurchased each quarter.

On December 21, 2000, we commenced an issuer tender offer, which expired on January 23, 2001, and effective January 31, 2001, we acquired, 16.25 million shares of our common stock at a price of $8.00 per share (the “Tender Offer Price”) for aggregate consideration of $130.0 million, excluding fees and expenses, and common stock subject to certain vested in-the-money stock options for aggregate consideration of $0.2 million (the “Tender Offer”).

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ITEM 6. SELECTED FINANCIAL DATA

The 2002, 2001, and 2000 selected consolidated financial data presented below has been derived from our audited consolidated financial statements. Our former operating businesses, consisting of the StaffMark commercial staffing division, Robert Walters, Strategic Legal, IntelliMark and ClinForce are presented as discontinued operations. The 1999 selected financial data presents the period April 1, 1999 (date of acquisition of the Edgewater Technology Solutions business) through December 31, 1999. The 1999 selected financial data has been derived from the Company’s audited consolidated financial statements not included elsewhere herein. As a result of reporting discontinued operations in 1998, there are no continuing operations to report for the 1998 fiscal year. We believe that this information should be read in conjunction with our audited consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form10-K.

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

The following discussion should be read in conjunction with the “Selected Financial Data,” and audited consolidated financial statements and the related notes thereto under “Financial Statements and Supplementary Data” in this Form 10-K.

Background

Edgewater Technology, Inc. is an award-winning strategic consulting firm that specializes in providing technical consulting, custom software development and system integration services to middle-market companies and divisions of large Global 2000 companies. We develop scalable technology solutions, which expedite business processes and provide our customers with competitive advantages. Our consultants collaborate with clients to translate business goals into technology-driven strategies. Headquartered in Wakefield, Massachusetts, Edgewater Technology has developed a partnership approach with our clients, targeting strategic, mission-critical applications. With approximately 119 technical consulting professionals at the end of 2002, Edgewater Technology services our client base by leveraging a combination of leading-edge technologies and proven reengineering techniques provided by our network of strategically positioned solutions centers throughout the United States.

Recent Events

New 10b5-1 Program. On February 12, 2003, we established a stock repurchase program with a broker under the Securities and Exchange Commission (“SEC”) Rule 10b5-1. This program will supplement our existing stock repurchase program to purchase shares of up to $20 million of our common stock even during traditional blackout periods. This trading program became effective on February 14, 2003 and will expire on December 31, 2003, unless earlier terminated by the broker or us or upon certain specified events. See, “Item 5 – Market For Registrant’s Common Stock and Related Stockholder Matters.”

Stephens Group/Staffmark Investment Litigation Matter. On February 11, 2003, our Company entered into a mutual Settlement and Release Agreement with the Stephens Group, Inc., Staffmark Investment, LLC, a majority owned subsidiary of Stephens Group, Inc. and its subsidiaries (collectively, the “Stephens Group”) to terminate, dismiss and retain intact our Company’s favorable summary judgment ruling with respect to the litigation matter in Delaware Superior Court. In addition to the mutual releases, the mutual Settlement and Release Agreement required our Company to pay $950,000 to the Stephens Group. The parties agreed that the existence of the settlement agreement and all of its terms, including any payment, were not evidence of any wrongdoing or liability related to the sale of our Company’s commercial staffing business in June 2000. The settlement amount of $950,000 was charged to discontinued operations in the 2002 statement of operations and such amount was subsequently paid in February 2003. See “Item 3 – Legal Proceedings” and Note 15 to the consolidated financial statements included elsewhere herein.

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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:

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

Revenue Recognition. A substantial portion of our Company’s contracts are billed on a time and materials basis. Revenues pursuant to time and materials contracts are generally recognized as services are provided. Revenues pursuant to fixed price contracts are generally recognized as services are rendered using the percentage-of-completion method of accounting, based on the ratio of costs incurred to total estimated costs. Revenues and earnings may fluctuate from quarter to quarter based on the number, size and scope of projects in which we are engaged, the contractual terms and degree of completion of such projects, any delays incurred in connection with a project, employee utilization rates, the adequacy of holdback reserves, the use of estimates of resources required to complete ongoing projects, general economic conditions and other factors. Certain significant estimates include percentage-of-completion estimates used for fixed price contracts and the allowance for doubtful accounts. These items are frequently monitored and analyzed by management for changes in facts and circumstances and the effect, if any, on prior estimates. See Note 2 of the consolidated financial statements included elsewhere herein.

Accounting for Income Taxes. As part of the process of preparing our consolidated financial statements, significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and the valuation allowance recorded against our net deferred tax assets. We have recorded a valuation allowance against our net deferred tax assets of $15.7 million and $15.3 million, as of December 31, 2002 and 2001, respectively, due to potential uncertainty related to our ability to utilize some of our deferred tax assets, primarily consisting of certain net operating losses carried forward and foreign tax credits, before they expire. We consider scheduled reversals of deferred tax liabilities, projected future taxable income, ongoing tax planning strategies and other matters, including the period over which our deferred tax assets will be recoverable in assessing the need for and the amount of the valuation allowance. In the event that actual results differ from these estimates or we adjust these estimates in future periods, adjustments to the deferred tax assets may be recorded, which could materially impact our financial position and net income (loss) in the period. See Note 10 of the consolidated financial statements included elsewhere herein.

Valuation of Long-Lived and Intangible Assets. We assess the impairment of identifiable intangibles, long-lived assets and related goodwill annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important, which could trigger an impairment review include: significant negative industry or economic trends, significant operating underperformance relative to expected historical or projected future results, significant decline in our stock price or the stock price of our industry peers and/or a decline in our market capitalization relative to our net book value. Our judgments regarding the existence of impairment indicators are based upon legal factors, market conditions and operational performance. Our Company adopted SFAS No. 142 in 2002 and in accordance therewith recorded as a change in accounting principle a non-cash charge of $12.5 million upon the adoption on January 1, 2002 due to an impairment of goodwill. On December 2, 2002, our selected annual measurement date, our Company recorded an additional non-cash charge of $7.4 million due to a further impairment of goodwill. See Note 2 of the consolidated financial statements included elsewhere herein.

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Results for the Year Ended December 31, 2002 Compared to Results for the Year Ended December 31, 2001

Service Revenues. Revenues decreased $7.9 million, or 29.8%, to $18.7 million for 2002 compared to $26.6 million in 2001. Revenues decreased primarily due to an economic slowdown that has affected spending for information technology services. Revenues from a related party amounted to $12.3 million in 2002, compared to $10.6 million in 2001. For the year ended December 31, 2002, one additional customer contributed more than 10% of revenues. For the year ended December 31, 2002 and 2001, our three largest customers, including the related party, represented 82.9% and 57.3% of our revenues in the aggregate, respectively. See Note 14 and Note 17 of the consolidated financial statements included elsewhere herein.

Cost of Services. Cost of services consists of project personnel 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. Project personnel costs decreased $3.8 million, or 24.3%, to $11.9 million for 2002 compared to $15.7 million for 2001 due to a reduction in headcount. Headcount for project personnel was reduced from 157 at December 31, 2001 to 119 at December 31, 2002. Utilization is a function of our ability to utilize our billable professionals and generate revenues. Our utilization rates for 2002 and 2001 amounted to 67.0% and 72.2%, respectively.

Gross Profit. Gross profit for 2002 decreased $4.0 million, or 37.6%, to $6.8 million compared to $10.8 million for 2001. The decrease in gross profit directly relates to the decrease in revenues and utilization during the period, which is discussed above. Gross profit margin for 2002 was 36.2% compared to 40.8% for 2001. The decrease in gross profit was due primarily to the decrease in revenues and utilization discussed above.

Selling, General and Administrative Expense (“SG&A”). SG&A decreased $1.7 million, or 16.3%, to $8.8 million for 2002 compared to $10.5 million for 2001. SG&A as a percentage of revenue was 47.3% and 39.7% for 2002 and 2001, respectively, and this percentage increase is attributable to lower revenue levels during the relevant 2002 period referenced above. SG&A costs decreased primarily as a result of lower payroll and bonus expense of $0.9 million, a decrease in bad debt expense of $0.4 million, a reduction in recruiting expense of $0.3 million, and other expenses of $0.1 million.

Depreciation and Amortization Expense. Depreciation and amortization expense decreased $4.5 million to $1.0 million for 2002 compared to $5.5 million for 2001. This decrease is a direct result of the implementation of SFAS No. 142, in which goodwill is determined to have an indefinite life and is no longer amortized. Accordingly, as of January 1, 2002, we discontinued amortizing goodwill. Our goodwill amortization expense for 2001 amounted to $4.3 million.

Impairment of Goodwill. As discussed above, we adopted SFAS No. 142 on January 1, 2002 and in accordance therewith, recorded as a change in accounting principle a non-cash charge of $12.5 million relating to an impairment of recorded goodwill. On December 2, 2002, our selected annual measurement date, we recorded an additional non-cash charge of $7.4 million, relating to a further impairment of goodwill. See Note 2 of the consolidated financial statements included elsewhere herein. Our net unamortized goodwill as of December 31, 2002 and December 31, 2001 was $10.8 million and $30.7 million, respectively.

Restructuring. We implemented a workforce reduction in February 2002 to better align our consultant base to our expected revenues. The Company reduced headcount by nineteen percent (19%), or approximately 38 positions, which resulted in a restructuring charge of approximately $349,000, which consisted primarily of severance and similar employee payroll related termination expenses. All amounts were paid as of December 31, 2002.

Interest Income and Other, Net. We earned net interest income of $0.8 million for 2002, as compared to net interest income of $2.1 million for 2001. This decrease is due primarily to the decrease in interest rates, and a slightly lower average cash balance during 2002.

Tax Provision. There was no income tax provision in 2002 primarily as a result of the net loss and management’s assumptions on the recorded valuation allowance relating to our net deferred tax assets. The tax provision for 2001 represents certain state taxes. For all other jurisdictions, the estimated effective tax rate for 2002 and 2001 was 0% and 19.2%, respectively. We have recorded a valuation allowance against a portion of our net deferred tax assets of approximately $15.7 million and $15.3 million, respectively, as of December 31, 2002 and 2001 due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily consisting of certain net operating losses carried forward and foreign tax credits, before they expire.

Net Loss from Continuing Operations. Net loss from continuing operations increased $6.4 million, to ($10.1) million in 2002 compared to ($3.7) million in 2001. This increase was primarily a result of the restructuring of $349,000 and the non-cash charge of $7.4 million relating to further goodwill impairment, partially offset by a decrease in SG&A and other factors described above. Net loss from continuing operations as a percentage of revenue, was (53.9%) for 2002 and (13.8%) for 2001.

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Results for the Year Ended December 31, 2002 Compared to Results for the Year Ended December 31, 2001 (continued)

Discontinued Operations. In 2002, we recorded a $950,000 charge relating to a settlement with the Stephens Group, a component of discontinued operations. On February 11, 2003, we executed a definitive mutual Settlement and Release Agreement with the Stephens Group to terminate, dismiss and retain intact the Company’s favorable summary judgment ruling with respect to the litigation matter in Delaware Superior Court. The parties agreed that the existence of the settlement agreement and all of its terms, including any payment, were not evidence of any wrongdoing or liability related to the sale of the Company’s commercial staffing business in June 2000. The Company paid the $950,000 in February 2003. See “Item 3—Legal Proceedings” and Note 15 of the consolidated financial statements included elsewhere herein.

Extraordinary Item. In 2001, the Company recorded $27,000 of costs associated with the Wakefield tragedy, as an extraordinary item in the financial statements. No such costs were incurred in 2002. See Note 5 of the consolidated financial statements included elsewhere herein.

Change in Accounting Principle. As discussed above, we adopted SFAS No. 142 on January 1, 2002 and, in accordance therewith, recorded as a change in accounting principle a non-cash charge of $12.5 million relating to an impairment of recorded goodwill. See Note 2 of the consolidated financial statements included elsewhere herein.

Net (Loss) Income. We recognized a net loss of ($23.5) million for 2002 compared to a net income of $1.9 million for 2001. The net loss increased substantially in 2002 due to the adoption of SFAS No. 142, which required our goodwill to be revalued, resulting in total impairment charges of $19.9 million for 2002. Net income for 2001 included a gain on the sale of our non-Solutions division, ClinForce, of $6.5 million and a net loss from operations of this discontinued division of ($0.9) million.

Results for the Year Ended December 31, 2001 Compared to Results for the Year Ended December 31, 2000

ServiceRevenues. Revenues decreased $5.2 million, or 16.4%, to $26.6 million for 2001 compared to $31.8 million for 2000. Revenues decreased primarily due to an economic slow down that has affected spending for information technology services resulting in postponed or delayed customer projects. Revenues from a related party amounted to $10.6 million in 2001 compared to $8.5 million in 2000. For the year ended December 31, 2001 and 2000, our three largest customers, including a related party, represented 57.3% and 64.9% of our revenues in the aggregate, respectively. See Note 14 and Note 17 to the consolidated financial statements included elsewhere herein.

Cost of Services. Project personnel costs consist principally of 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. Project personnel costs remained fairly consistent at $15.7 million for 2001 compared to $15.8 million for 2000. However, as a percentage of revenue, cost of sales increased 9.4% to 59.2% in 2001 from 49.8% in 2000. Utilization is a function of our ability to utilize our billable professionals and generate revenues. Utilization rates declined from 84.6% in 2000 to 72.2% in 2001, resulting in lower gross profit as compared to the prior year. This decrease is primarily the result of lower revenues and the retention of our non-utilized consultant base in order to provide for growth, which did not materialize during 2001. As a result, we implemented a workforce reduction on February 28, 2002 to better align our consultant base to our expected revenues.

Gross Profit. Gross profit decreased $5.2 million, or 32.1%, to $10.8 million for 2001 compared to $16.0 million for 2000. Gross profit decreased due to lower revenue and lower utilization rates. Gross profit as a percentage of revenue decreased from 50.2% in 2000 to 40.8% in 2001.

Selling, General and Administrative Expense (“SG&A”). SG&A decreased $3.8 million, or 26.8%, to $10.6 million for 2001, compared to $14.4 million for 2000. SG&A as a percentage of revenue was 39.7% and 45.3% for 2001 and 2000, respectively. SG&A decreased as a result of lower payroll and bonus expense and a reduction in recruiting expense and associated costs of hiring new staff, partially offset by an increase in provision of bad debt of $0.5 million.

Depreciation and Amortization Expense. Depreciation and amortization expense increased $0.4 million to $5.5 million for 2001, as compared to $5.1 million for 2000. This increase is a result of the reallocation of Edgewater Technology’s purchase price between goodwill and intangible assets during the fall of 2000, with the intangible assets having a shorter amortization period than the amortization period for our goodwill. As discussed previously, the Company adopted SFAS No. 142 in 2002, and no longer amortizes goodwill. Goodwill amortization recorded in 2001 and 2000 was $4.3 million.

Interest Income and Other, Net. We earned net interest income of $2.1 million for 2001 as compared to $2.3 million for 2000. Interest expense in 2000 was primarily related to borrowings on our credit facility to fund working capital requirements, the cash portion of our acquisitions and additions to property and equipment. Using the proceeds from the sale of our various non-Solutions business and divisions, all borrowings were repaid in July 2000 and excess cash amounts were placed in short-term investments, used to fund the Tender Offer, repurchase shares of our common stock under our stock purchase program and for general corporate purposes. Interest income is primarily related to interest generated from the investment of excess cash amounts.

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Results for the Year Ended December 31, 2001 Compared to Results for the Year Ended December 31, 2000 (continued)

Tax Provision. The tax provision for 2001 represents certain state taxes. For all other jurisdictions, the estimated effective tax rate for 2001 and 2000 was 19.2% and 260.6%, respectively. We have recorded a valuation allowance against our net deferred tax assets of approximately $15.3 million and $13.6 million, as of December 31, 2001 and 2000, respectively, due to uncertainties related to our ability to utilize some of our deferred tax assets, primarily consisting of certain net operating losses carried forward and foreign tax credits, before they expire.

Net Loss from Continuing Operations. Net loss from continuing operations increased $2.0 million, to ($3.7) million for 2001, as compared to ($1.7) million in 2000. In addition to the issues discussed above, such as the increase in amortization, the net loss from continuing operations for 2001 increased as a result of a required tax provision of $0.6 million due to non-deductible goodwill amortization. These taxes will not be paid out in cash, as we will utilize net operating losses to offset such taxes. Our net operating tax losses relate to the sale of our non-Solutions businesses and divisions and resulted in a deferred tax asset of approximately $22.0 million for use to offset taxable income in future years.

Discontinued Operations. During the first quarter of 1999, market values for publicly-traded staffing companies began to decline. For many staffing companies, this downward trend subsequently continued or deteriorated further and was compounded by a Year 2000-related slowdown in demand for IT staffing. These circumstances contributed to depressed market valuations for publicly traded entities and in response to these developments our Company decided to undergo a comprehensive program to refocus future growth initiatives on our systems integration and consulting business and to this effect, commit to divestures of each of our staffing businesses. See Note 3 of the consolidated financial statements included elsewhere herein.

Extraordinary Item. On December 26, 2000, a tragedy occurred at our Wakefield, Massachusetts office, where seven employees were murdered. We incurred expenses totaling approximately $1.0 million through December 31, 2002, for items such as legal fees, foundation costs, family and employee counselors, and property and facility expenses. These costs are presented as an extraordinary item, net of insurance proceeds and the applicable tax effect, in the accompanying consolidated statements of operations. For the year ended December 31, 2001, amounts recorded as extraordinary item represent additional accruals, net of insurance proceeds, and the applicable income tax effect.

Net Income (Loss). We recognized net income of $1.9 million for 2001 compared to a net loss of ($51.2) million for 2000. The substantial improvement in net income relates primarily to the change in loss from discontinued operations offset by the gain on sale of divisions. Net income for 2001 included a gain on the sale of our non-solutions division, ClinForce, of $6.5 million and a net loss from operations of the discontinued division of ($0.9) million. Net loss for 2000 included a gain on the sale of divisions of $64.4 million and a net loss from operations of the discontinued divisions of ($113.5) million.

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Liquidity and Capital Resources

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

As of December 31, 2002, we had cash, cash equivalents and short-term investments of $46.8 million, a 9.1% decrease from the December 31, 2001 balance of $51.5 million. Working capital decreased to $46.0 million at December 31, 2002, a 6.3% decrease from the December 31, 2001 balance of $49.1 million.

Our primary historical sources of funds are from operations, bank borrowings and the proceeds from equity offerings and sales of businesses. Our principal historical uses of cash have been to fund acquisitions, working capital requirements and capital expenditures. We generally pay our consultants and associates bi-weekly for their services, while receiving payments from customers 30 to 60 days from the date of the invoice.

Net cash (used in) provided by continuing operating activities was ( $0.1) million, $19.2 million and $5.5 million for 2002, 2001 and 2000, respectively. The net cash provided by continuing operating activities for the periods presented primarily reflects the net loss from continuing operations, offset by significant non-cash expenses related to depreciation, amortization and impairment of goodwill and sale of discontinued divisions, as well as changes in operating assets and liabilities, including the receipt of a $16.1 million income tax refund related to operating loss carrybacks in 2001.

Net cash (used in) provided by continuing investing activities was ($6.5) million, $22.0 million and $444.6 million for 2002, 2001 and 2000, respectively. Cash (used in) provided by continuing investing activities was primarily attributable to purchases of short-term investments in 2002 and in 2001. In 2001 and 2000, cash provided by continuing investing activities was primarily attributable to the proceeds from the sale of our non-Solutions divisions offset by cash paid for additional contingent consideration for acquisitions completed during prior periods and purchases of short-term investments. As of December 31, 2002 we have no commitments for capital expenditures. Capital expenditures are discretionary.

Net cash (used in) provided by continuing financing activities was ($0.8) million, ($134.7) million and ($297.3) million for 2002, 2001 and 2000, respectively. Cash used in continuing financing activities in 2002 and 2000 was primarily attributable to the repurchase of stock and payments on borrowings. Cash used in 2001 was primarily related to repurchases of stock, including the Tender Offer in January 2001, when we repurchased 16.25 million shares for aggregate consideration of $130.0 million, excluding fees and expenses.

Net cash (used in) discontinued operations was ($3.6) million, ($11.5) million and ($11.1) million for 2002, 2001 and 2000, respectively. These cash disbursements related to the Company’s decision to undergo a comprehensive program to refocus future growth initiatives on our systems integration and consulting business and to this effect, commit to divestures of each of our staffing businesses. See Note 3 of the consolidated financial statements included elsewhere herein. Net cash (used in) extraordinary item was ($0.1) million and ($0.4) million during 2002 and 2001, respectively. See Note 5 of the consolidated financial statements included elsewhere herein.

As a result of the above, and as a result of cash flows from discontinued operations, our combined cash and cash equivalents decreased $11.0 million and $105.5 million in 2002 and 2001, respectively, and increased $141.6 million in 2000. The aggregate cash and cash equivalents and short-term investments were $46.8 million, $51.5 million and $145.6 million, as of December 31, 2002, 2001 and 2000, respectively.

Our Board of Directors, in September 2002, authorized management, subject to legal requirements, to use up to $20.0 million to repurchase our common stock over a period, as amended, to expire December 31, 2003. Repurchases have been and will be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market. Under this repurchase program, during 2002, 2001 and 2000 we repurchased 150,190 shares, 922,500 shares and 944,000 shares of our common stock, respectively, for $0.6 million, $3.7 million and $6.2 million, respectively. As part of this repurchase program, effective February 14, 2003, our Board authorized an SEC Rule 10b5-1 repurchase program with a broker that allows more consistent repurchases of our common stock even during traditional blackout periods.

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Liquidity and Capital Resources (continued)

In January 2001, the Company closed the Tender Offer and acquired 16.25 million shares of our common stock at the Tender Offer Price for aggregate consideration of $130.0 million, excluding fees and expenses, and common stock subject to certain vested in-the-money stock options for aggregate consideration of $0.2 million.

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

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

We lease office space and certain equipment under noncancellable operating and capital lease arrangements through 2009. Rent expense, including amounts paid to related parties for discontinued operations, was approximately $0.9 million, $1.3 million and $12.3 million for the years ended December 31, 2002, 2001 and 2000, respectively. The Company entered into a sublease agreement on July 1, 2002 with a third party to occupy our former corporate headquarters in Fayetteville, Arkansas. The sublease commenced on July 15, 2002 and will end on June 30, 2007. Under the sublease agreement, the sub-tenant shall pay base rent to Edgewater in the amount of $0.2 million for the years 2003, 2004, 2005 and 2006, and will pay $0.1 million in 2007.

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

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Recent Accounting Pronouncements

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements SFAS Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections.” SFAS 145 rescinds Statement No. 4, “Reporting Gains and Losses from Extinguishments of Debt,” and an amendment of that Statement, FASB Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” SFAS No. 145 also rescinds FASB Statement No. 44, “Accounting for Intangible Assets of Motor Carriers.” SFAS No. 145 amends SFAS No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provision of SFAS No. 145 related to the rescission of Statement No. 4 shall be applied in fiscal years beginning after May 15, 2002. The provisions of SFAS No. 145 related to Statement No. 13 should be effective for transactions occurring after May 15, 2002. Early application of the provisions of this Statement is encouraged. The Company does not expect that the adoption of SFAS No. 145, in 2003, will have a material impact on its consolidated results of operations, financial position or cash flows.

In July 2002, FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 supercedes EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity,” which required a liability be recognized at the commitment date to an exit plan. The Company is required to adopt the provisions of SFAS No. 146 effective for exit or disposal activities initiated after December 31, 2002. The Company does not expect that the adoption of SFAS No. 146, in 2003, will have a material impact on its consolidated results of operations, financial position or cash flows.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” which addresses financial accounting and reporting for recording expenses for the fair value of stock options. SFAS No. 148 provides alternative methods of transition for a voluntary change to fair value-based method of accounting for stock-based employee compensation. Additionally, SFAS No. 148 requires more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The provisions of this Statement are effective for fiscal years ending after December 15, 2002, with early application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. We will continue to account for our stock-based compensation under the intrinsic value method prescribed under Accounting Principles Board Opinion (APB) No. 25. The reporting requirements under SFAS No. 148 have been adopted in the consolidated financial statements included elsewhere herein and certain disclosures pertaining to interim information will be included beginning in the first quarter of fiscal 2003.

In November 2002, the FASB issued Financial Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. “ FIN No. 45 requires certain guarantees to be recorded at fair value and requires a guarantor to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote. In addition, FIN No. 45 requires disclosures for product warranties which include disclosures on the guarantor’s accounting and methodology used in determining its liability and a tabular reconciliation of the changes in the guarantor’s product warranty liability for the reporting period. The Company warrants its services for a limited period beyond the dates the services are provided. There are no warranty accruals recorded and the Company is not a guarantor under any agreements. We have complied with the disclosure requirements under FIN No. 45 in these notes to the consolidated financial statements. We do not expect that FIN No. 45 will have a material effect on our financial condition, results of operations or cash flows prospectively.

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Related Party Transactions

The Synapse Group, Inc. (“Synapse”), one of our significant customers discussed in Notes 14 and 17 of the consolidated financial statements included elsewhere herein, is considered a related party as its President and Chief Executive Officer is also a member of our Board of Directors. Revenues from Synapse amounted to $12.3 million, $10.6 million and $8.5 million, respectively, for 2002, 2001 and 2000. Payments received from Synapse for 2002, 2001 and 2000 amounted to $12.4 million, $10.2 million and $10.0 million, respectively. Outstanding accounts receivable for Synapse were $1.9 million and $2.0 million, as of December 31, 2002 and 2001, respectively, which balances were within the Company’s normal business terms.

Our Company entered into a lease agreement in 1999, which was modified in June 2000, with a stockholder who is a former officer and director, to lease certain parcels of land and buildings in Fayetteville, Arkansas for its former corporate headquarters that were included in our Company’s discontinued operations. Rent payments related to these facilities totaled approximately $0.2 million, $0.2 million, and $0.4 million for the years ended December 31, 2002, 2001 and 2000, respectively. Future related party lease obligations relate to this lease agreement. As our Company’s corporate headquarters moved to Wakefield, Massachusetts during 2001, the Company subleased the Fayetteville facility to a third party in 2002. See Note 16 of the consolidated financial statements included elsewhere herein.

Included in the “Certain Transactions” section of our 2003 Proxy Statement for our May 22, 2003 Annual Stockholders’ Meeting are additional related party transactions. Our Proxy Statement will be filed with the SEC on or before April 30, 2003.

Other Tax Matters

During the second quarter of 2002, our Company was notified by the Internal Revenue Service (the “IRS”) that it would be auditing our consolidated income tax returns for the 1998, 1999 and 2000 fiscal years. Our Company has responded to various IRS information requests by delivering documents and answering questions. For the period of the fiscal years covered by the audit, we owned non-Solutions staffing related businesses, which were sold during the 2000 and 2001 fiscal years, as described in Note 3 of the consolidated financial statements included elsewhere herein. The results of the IRS audit could have an impact on our deferred tax asset, however as of the date of the filing of this Form 10-K, we do not believe any such impact would be material to our financial position.

In 2002, the Internal Revenue Code (the “IRC”) was amended to allow corporations to carry-back tax losses for up to five years, as opposed to two years and obtain income tax refunds if otherwise available. As a result of this change in the IRC, we believe our Company will file an income tax refund claim during 2003 for prior years’ income taxes for an amount, which has not yet been determined. The receipt of an income tax refund, if any, would be subject to the administrative procedures of the IRS, as well as the resolution of the IRS audit reference above.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary financial instruments include investments in money market funds, short-term municipal bonds, commercial paper and U.S. government securities that are sensitive to market risks and interest rates. The investment portfolio is used to preserve our capital until it is required to fund operations, strategic acquisitions or distributions to stockholders. None of our market-risk sensitive instruments are held for trading purposes. We did not purchase derivative financial instruments in 2002 and 2001. 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. The yield on the Company’s financial securities in 2002 and 2001 ranged from 1.3% to 5.5%.

In 1998, we entered into fixed interest rate swap agreements with a notional amount of $60.0 million related to borrowings under the Credit Facility to hedge against increases in interest rates which would increase the cost of variable rate borrowings under the Credit Facility. In May 2000, we terminated the agreements and recognized the proceeds as an asset to be amortized over the original life of the contracts. These swaps did not have a material impact on recorded interest expense during 2000. In July 2000, in conjunction with the repayment and termination of the Credit Facility, we wrote off the unamortized balance and recognized a gain of approximately $1.0 million on these swaps in the accompanying financial statements. Our involvement with derivative financial instruments was limited to the interest rate swap agreements discussed above.

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(a) Consolidated Financial Statements: The following consolidated financial statements are included in this Form 10-K:

(b) Not Covered by Above Report:

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INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders of

Edgewater Technology, Inc.:

We have audited the accompanying consolidated balance sheet of Edgewater Technology, Inc. and subsidiaries (the “Company”) as of December 31, 2002, and the related consolidated statements of operations, stockholders’ equity, 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 the 2002 financial statements based on our audit. The financial statements of Edgewater Technology, Inc. and subsidiaries as of December 31, 2001 and for each of the years in the two-year period then ended, before the reclassification and inclusion of the disclosures discussed in Note 8 to the financial statements, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated January 29, 2002.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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, such December 31, 2002 consolidated financial statements present fairly, in all material respects, the financial position of Edgewater Technology, Inc. and subsidiaries as of December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

As discussed above, the consolidated financial statements of the Company as of December 31, 2001, and for the years ended December 31, 2001 and 2000, were audited by other auditors who have ceased operations. As described in Note 8, these consolidated financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 8 with respect to 2001 and 2000 included (1) comparing the previously reported income (loss) before extraordinary item and net income (loss) to the previously issued consolidated financial statements and the adjustments to reported income (loss) before extraordinary item and net income (loss) representing amortization expense recognized in those periods related to goodwill that is no longer being amortized as a result of initially applying SFAS 142 to the Company’s underlying analysis obtained from management, and (2) testing the mathematical accuracy of the reconciliation of adjusted income (loss) before extraordinary item and net income (loss) to reported income (loss) before extraordinary item and net loss and the related income (loss) per share amounts. In our opinion, the disclosures for 2001 and 2000 in Note 8 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 or 2000 consolidated financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 or 2000 consolidated financial statements taken as a whole.

/s/    Deloitte & Touche LLP

Boston, Massachusetts

February 12, 2003

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This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with Edgewater Technology, Inc.’s filing of an Annual Report on Form 10-K for the year ended December 31, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this Form 10-K. See Exhibit 23.2 to this Form 10-K for further discussion. The consolidated balance sheet as of December 31, 2000 and the consolidated statements of operations, stockholders’ equity and cash flows for the year ended December 31, 1999 referred to in this report have not been included in the accompanying financial statements.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of Edgewater Technology, Inc.:

We have audited the accompanying consolidated balance sheets of Edgewater Technology, Inc. (the “Company”, a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years ended December 31, 2001. 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 auditing standards generally accepted in the 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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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, the financial statements referred to above present fairly, in all material respects, the financial position of Edgewater Technology, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

/S/    ARTHUR ANDERSEN LLP

Boston, Massachusetts

January 29, 2002

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EDGEWATER TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Per Share Data)

See notes to consolidated financial statements.

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EDGEWATER TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)