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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2006

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File No. 0-24607



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Actuate Corporation

(Exact name of Registrant as specified in its charter)



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|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 94-3193197                          
|(State of incorporation) |  | (I.R.S. Employer Identification No.)

701 Gateway Boulevard

South San Francisco, California 94080

(650) 837-2000

(Address, including zip code, and telephone number,

including area code, of Registrants principal executive offices)

Former name, former
address and former fiscal year, if changed since last report: None



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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act.

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

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

Indicate the number of shares outstanding of each of the issuers classes of common stock as of the latest practicable
date.



|                                        |  |                                     
|--------------------------------------- |  | ------------------------------------
|Title of Class                          |  | Outstanding as of September 30, 2006
|Common Stock, par value $.001 per share |  | 60,234,593                          



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##### Table of Contents

Actuate Corporation

Table of Contents



|                                                                                                                |  |    |  | 
|--------------------------------------------------------------------------------------------------------------- |  | -- |  | 
|PART I  FINANCIAL INFORMATION                                                                                  |  |   
|                                                                                                                | 
|Item 1. Financial Statements (Unaudited)                                                                        |  | 3 
|                                                                                                                | 
|Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005                            |  | 3 
|                                                                                                                | 
|Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and 2005 |  | 4 
|                                                                                                                | 
|Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005           |  | 5 
|                                                                                                                | 
|Notes to Condensed Consolidated Financial Statements                                                            |  | 6 
|                                                                                                                | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                   |  | 20
|                                                                                                                | 
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                                              |  | 31
|                                                                                                                | 
|Item 4. Controls and Procedures                                                                                 |  | 31
|                                                                                                                | 
|PART II - OTHER INFORMATION                                                                                     |  |   
|                                                                                                                | 
|Item 1. Legal Proceedings                                                                                       |  | 31
|                                                                                                                | 
|Item 1A. Risk Factors                                                                                           |  | 32
|                                                                                                                | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                             |  | 41
|                                                                                                                | 
|Item 6. Exhibits                                                                                                |  | 42
|                                                                                                                | 
|Signature                                                                                                       |  | 43



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Part I. Financial Information

Item 1. Financial Statements

ACTUATE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands except share and per share data)

(unaudited)



|                                                                                                                                                                                 |  |                    |         |   |                   |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                                 |  | September 30, 2006 |         |   | December 31, 2005 |  
|ASSETS                                                                                                                                                                           |  |                    |         |   |                   |   |         |  
|Current assets:                                                                                                                                                                  |  |                    |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                                        |  | $                  | 15,340  |   |                   | $ | 12,490  |  
|Short-term investments                                                                                                                                                           |  |                    | 32,157  |   |                   |   | 41,907  |  
|Accounts receivable, net of allowance of $1,138 and $1,318 at September 30, 2006 and December 31, 2005, respectively                                                             |  |                    | 27,945  |   |                   |   | 26,798  |  
|Other current assets                                                                                                                                                             |  |                    | 4,369   |   |                   |   | 2,911   |  
|                                                                                                                                                                                 |  |                    |         |   |                   |   |         |  
|Total current assets                                                                                                                                                             |  |                    | 79,811  |   |                   |   | 84,106  |  
|Property and equipment, net                                                                                                                                                      |  |                    | 4,612   |   |                   |   | 4,716   |  
|Goodwill                                                                                                                                                                         |  |                    | 31,105  |   |                   |   | 20,990  |  
|Other purchased intangibles, net                                                                                                                                                 |  |                    | 6,082   |   |                   |   | 1,139   |  
|Other assets                                                                                                                                                                     |  |                    | 839     |   |                   |   | 630     |  
|                                                                                                                                                                                 |  |                    |         |   |                   |   |         |  
|                                                                                                                                                                                 |  | $                  | 122,449 |   |                   | $ | 111,581 |  
|                                                                                                                                                                                 |  |                    |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                             |  |                    |         |   |                   |   |         |  
|Current liabilities:                                                                                                                                                             |  |                    |         |   |                   |   |         |  
|Accounts payable                                                                                                                                                                 |  | $                  | 1,540   |   |                   | $ | 2,101   |  
|Current portion of restructuring liabilities                                                                                                                                     |  |                    | 2,887   |   |                   |   | 2,948   |  
|Accrued compensation                                                                                                                                                             |  |                    | 4,275   |   |                   |   | 5,306   |  
|Other accrued liabilities                                                                                                                                                        |  |                    | 3,678   |   |                   |   | 3,108   |  
|Income taxes payable                                                                                                                                                             |  |                    | 256     |   |                   |   | 279     |  
|Deferred revenue                                                                                                                                                                 |  |                    | 34,972  |   |                   |   | 31,475  |  
|                                                                                                                                                                                 |  |                    |         |   |                   |   |         |  
|Total current liabilities                                                                                                                                                        |  |                    | 47,608  |   |                   |   | 45,217  |  
|                                                                                                                                                                                 |  |                    |         |   |                   |   |         |  
|Long-term liabilities:                                                                                                                                                           |  |                    |         |   |                   |   |         |  
|Other long-term liabilities                                                                                                                                                      |  |                    | 102     |   |                   |   | 198     |  
|Long-term deferred revenue                                                                                                                                                       |  |                    | 1,465   |   |                   |   | 913     |  
|Restructuring liabilities and others, less current portion                                                                                                                       |  |                    | 8,494   |   |                   |   | 9,885   |  
|                                                                                                                                                                                 |  |                    |         |   |                   |   |         |  
|Total long-term liabilities                                                                                                                                                      |  |                    | 10,061  |   |                   |   | 10,996  |  
|                                                                                                                                                                                 |  |                    |         |   |                   |   |         |  
|Stockholders equity:                                                                                                                                                            |  |                    |         |   |                   |   |         |  
|Preferred stock, $0.001 par value, issuable in series: 5,000,000 shares authorized; none issued and outstanding                                                                  |  |                    |        |   |                   |   |        |  
|Common stock, $0.001 par value, 100,000,000 shares authorized; issued 68,531,927 and 67,536,651 shares, respectively; outstanding 60,234,593
and 60,170,503 shares, respectively |  |                    | 60      |   |                   |   | 60      |  
|Additional paid-in capital                                                                                                                                                       |  |                    | 117,663 |   |                   |   | 108,904 |  
|Treasury stock, at cost; 8,297,334 and 7,366,148 shares, respectively                                                                                                            |  |                    | (22,178 | ) |                   |   | (18,691 | )
|Accumulated other comprehensive loss                                                                                                                                             |  |                    | (43     | ) |                   |   | (555    | )
|Accumulated deficit                                                                                                                                                              |  |                    | (30,722 | ) |                   |   | (34,350 | )
|                                                                                                                                                                                 |  |                    |         |   |                   |   |         |  
|Total stockholders equity                                                                                                                                                       |  |                    | 64,780  |   |                   |   | 55,368  |  
|                                                                                                                                                                                 |  |                    |         |   |                   |   |         |  
|                                                                                                                                                                                 |  | $                  | 122,449 |   |                   | $ | 111,581 |  
|                                                                                                                                                                                 |  |                    |         |   |                   |   |         |  

The accompanying notes are an integral part of these condensed consolidated financial statements.



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ACTUATE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



|                                                              |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|------------------------------------------------------------- |  | -------------------------------- | ------ | ------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                                              |  | Three Months Ended September 30, |        | Nine months Ended September 30,
|                                                              |  | 2006                             |        | 2005                            |   | 2006   |  | 2005
|Revenues:                                                     |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|License fees                                                  |  | $                                | 11,585 |                                 | $ | 8,894  |  | $    | 32,756 |  | $ | 26,647
|Services                                                      |  |                                  | 20,344 |                                 |   | 17,951 |  |      | 60,689 |  |   | 50,593
|                                                              |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Total revenues                                                |  |                                  | 31,929 |                                 |   | 26,845 |  |      | 93,445 |  |   | 77,240
|                                                              |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Costs and expenses:                                           |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Cost of license fees (1)                                      |  |                                  | 465    |                                 |   | 489    |  |      | 1,431  |  |   | 1,804 
|Cost of services (1)                                          |  |                                  | 6,788  |                                 |   | 5,702  |  |      | 21,387 |  |   | 17,271
|Sales and marketing (1)                                       |  |                                  | 11,879 |                                 |   | 9,411  |  |      | 35,586 |  |   | 26,564
|Research and development (1)                                  |  |                                  | 5,166  |                                 |   | 4,011  |  |      | 15,776 |  |   | 12,370
|General and administrative (1)                                |  |                                  | 3,758  |                                 |   | 2,622  |  |      | 12,021 |  |   | 9,933 
|Amortization of other purchased intangibles                   |  |                                  | 237    |                                 |   | 17     |  |      | 711    |  |   | 487   
|In-process research and development                           |  |                                  |       |                                 |   |       |  |      | 900    |  |   |      
|Restructuring charges                                         |  |                                  | 16     |                                 |   | 4      |  |      | 16     |  |   | 751   
|                                                              |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Total costs and expenses                                      |  |                                  | 28,309 |                                 |   | 22,256 |  |      | 87,828 |  |   | 69,180
|                                                              |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Income from operations                                        |  |                                  | 3,620  |                                 |   | 4,589  |  |      | 5,617  |  |   | 8,060 
|Interest and other income, net                                |  |                                  | 636    |                                 |   | 376    |  |      | 1,314  |  |   | 909   
|                                                              |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Income before income taxes                                    |  |                                  | 4,256  |                                 |   | 4,965  |  |      | 6,931  |  |   | 8,969 
|Provision for income taxes                                    |  |                                  | 1,745  |                                 |   | 1,225  |  |      | 3,303  |  |   | 1,507 
|                                                              |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Net income                                                    |  | $                                | 2,511  |                                 | $ | 3,740  |  | $    | 3,628  |  | $ | 7,462 
|                                                              |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Basic net income per share                                    |  | $                                | 0.04   |                                 | $ | 0.06   |  | $    | 0.06   |  | $ | 0.12  
|                                                              |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Shares used in basic per share calculation                    |  |                                  | 60,317 |                                 |   | 60,513 |  |      | 60,280 |  |   | 61,351
|                                                              |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Diluted net income per share                                  |  | $                                | 0.04   |                                 | $ | 0.06   |  | $    | 0.05   |  | $ | 0.12  
|                                                              |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Shares used in diluted per share calculation                  |  |                                  | 66,157 |                                 |   | 62,313 |  |      | 66,191 |  |   | 63,366
|                                                              |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|____________                                                  |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|(1)    Includes stock based compensation expenses as follows: |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|                                                              |  |                                  |        |                                
|Cost of license fees                                          |  | $                                |       |                                 | $ |       |  | $    | 2      |  | $ |      
|Cost of services                                              |  |                                  | 221    |                                 |   |       |  |      | 585    |  |   |      
|Sales and marketing                                           |  |                                  | 588    |                                 |   |       |  |      | 1,723  |  |   |      
|Research and development                                      |  |                                  | 316    |                                 |   |       |  |      | 909    |  |   |      
|General and administrative                                    |  |                                  | 565    |                                 |   |       |  |      | 1,579  |  |   |      

The accompanying notes are an integral part of these condensed consolidated financial statements.



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ACTUATE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)



|                                                                                      |  |                                 |         |   |      |   |         |  
|------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                      |  | Nine months Ended September 30, |        
|                                                                                      |  | 2006                            |         |   | 2005 |  
|Operating activities                                                                  |  |                                 |         |   |      |   |         |  
|Net income                                                                            |  | $                               | 3,628   |   |      | $ | 7,462   |  
|Adjustments to reconcile net income to net cash provided by operating activities:     |  |                                 |         |   |      |   |         |  
|Stock based compensation expense related to stock options and employee stock purchase |  |                                 | 4,798   |   |      |   |        |  
|Amortization of other purchased intangibles                                           |  |                                 | 1,478   |   |      |   | 1,286   |  
|Depreciation                                                                          |  |                                 | 1,265   |   |      |   | 1,538   |  
|Tax benefit from exercise of stock options                                            |  |                                 |        |   |      |   | 1,513   |  
|Unrealized investment loss                                                            |  |                                 |        |   |      |   | 301     |  
|In-process research and development                                                   |  |                                 | 900     |   |      |   |        |  
|Net operating loss utilizations related to prior acquisitions                         |  |                                 | 464     |   |      |   |        |  
|Restructuring charges                                                                 |  |                                 | 16      |   |      |   | 751     |  
|Changes in operating assets and liabilities:                                          |  |                                 |         |   |      |   |         |  
|Accounts receivable                                                                   |  |                                 | (151    | ) |      |   | 4,210   |  
|Other current assets                                                                  |  |                                 | 1,463   |   |      |   | (495    | )
|Accounts payable                                                                      |  |                                 | (3,360  | ) |      |   | (153    | )
|Accrued compensation                                                                  |  |                                 | (1,550  | ) |      |   | (1,244  | )
|Other accrued liabilities                                                             |  |                                 | (99     | ) |      |   | (2,024  | )
|Deferred tax assets                                                                   |  |                                 | (147    | ) |      |   |        |  
|Income taxes payable                                                                  |  |                                 | (52     | ) |      |   | (211    | )
|Deferred rent liabilities                                                             |  |                                 | (130    | ) |      |   | (90     | )
|Restructuring liabilities                                                             |  |                                 | (1,468  | ) |      |   | (3,018  | )
|Deferred revenue                                                                      |  |                                 | 2,392   |   |      |   | (1,278  | )
|                                                                                      |  |                                 |         |   |      |   |         |  
|Net cash provided by operating activities                                             |  |                                 | 9,447   |   |      |   | 8,548   |  
|                                                                                      |  |                                 |         |   |      |   |         |  
|Investing activities                                                                  |  |                                 |         |   |      |   |         |  
|Purchases of property and equipment                                                   |  |                                 | (671    | ) |      |   | (136    | )
|Proceeds from maturity of short-term investments                                      |  |                                 | 57,352  |   |      |   | 60,099  |  
|Purchases of short-term investments                                                   |  |                                 | (47,524 | ) |      |   | (58,764 | )
|Purchases of minority shares of Actuate Japan                                         |  |                                 | (354    | ) |      |   |        |  
|Acquisition of performancesoft, Inc., net of cash acquired                            |  |                                 | (15,341 | ) |      |   |        |  
|Change in other current and non-current assets                                        |  |                                 | (965    | ) |      |   | (130    | )
|                                                                                      |  |                                 |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                                   |  |                                 | (7,503  | ) |      |   | 1,069   |  
|                                                                                      |  |                                 |         |   |      |   |         |  
|Financing activities                                                                  |  |                                 |         |   |      |   |         |  
|Tax benefit from exercise of stock options                                            |  |                                 | 1,898   |   |      |   |        |  
|Proceeds from issuance of common stock                                                |  |                                 | 2,061   |   |      |   | 1,667   |  
|Stock repurchases                                                                     |  |                                 | (3,487  | ) |      |   | (6,202  | )
|                                                                                      |  |                                 |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                                   |  |                                 | 472     |   |      |   | (4,535  | )
|                                                                                      |  |                                 |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                             |  |                                 | 2,416   |   |      |   | 5,082   |  
|Effect of exchange rates on cash and cash equivalents                                 |  |                                 | 434     |   |      |   | (157    | )
|Cash and cash equivalents at the beginning of the period                              |  |                                 | 12,490  |   |      |   | 7,341   |  
|                                                                                      |  |                                 |         |   |      |   |         |  
|Cash and cash equivalents at the end of the period                                    |  | $                               | 15,340  |   |      | $ | 12,266  |  
|                                                                                      |  |                                 |         |   |      |   |         |  

The accompanying notes are an integral part of these condensed consolidated financial statements.



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ACTUATE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Summary of Significant Accounting
Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements of Actuate Corporation (Actuate, the Company, We or Our) are unaudited and include all normal recurring adjustments and
non-recurring adjustments which we believe to be necessary for the fair presentation of the financial position, results of operations, and changes in cash flows for the periods presented. The preparation of the financial statements in conformity
with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reported period. Despite our best effort to establish good faith estimates and assumptions, actual results may differ.

The
interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2005 as filed with the
Securities and Exchange Commission on March 13, 2006. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission. Interim results of operations for the three and nine months ended September 30, 2006 are not necessarily indicative of operating results for any other future
interim period or the full fiscal year.

Revenue Recognition

Actuate generates revenues from sales of software licenses and related services. The Company receives software license revenues from licensing its products directly to end-users and indirectly through resellers,
system integrators and original equipment manufacturers (OEMs). The Company receives service revenues from maintenance contracts, consulting services and training that Actuate performs for customers.

Actuate recognizes revenues in accordance with AICPA Statement of Position (SOP) 97-2 (SOP 97-2), Software
Revenue Recognition,as amended and modified by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.For sales to end-user customers, Actuate recognizes
license revenues when a license agreement has been signed by both parties or a definitive agreement has been received from the customer, the product has been shipped, there are no unusual uncertainties surrounding the product acceptance, the fees
are fixed or determinable, collectibility is probable and vendor-specific objective evidence of fair value exists to allocate the fee to the undelivered elements of the arrangement. Vendor-specific objective evidence is based on the price charged
when an element is sold separately. Actuate has not established vendor-specific objective evidence of fair value for license fees. Therefore, the Company recognizes revenues from arrangements with multiple elements involving software licenses under
the residual method. If the license agreement contains payment terms that would indicate that the fee is not fixed or determinable, revenues are recognized as the payments become due and payable, assuming that all other revenue recognition criteria
are met.

Actuate enters into reseller and distributor arrangements that typically give such distributors and resellers the right to
distribute its products to end-users headquartered in specified territories. Actuate recognizes license revenues from arrangements with U.S. resellers and distributors when there is persuasive evidence of an arrangement with the reseller or
distributor, the product has been shipped, the fees are fixed or determinable and collectibility is probable. Actuate recognizes license revenues from arrangements with international resellers and distributors upon receipt of evidence of
sell-through and when all other revenue recognition criteria have been met. If it is not practical to obtain evidence of sell-through, the Company defers revenues until the end-user has been identified and cash has been received. In some instances
there is a timing difference between when a reseller completes its sale to the end-user and the period in which Actuate receives the documentation required for revenue recognition. Because Actuate delays revenue recognition until the reporting
period in which the required documentation is obtained, it may recognize revenue in a period subsequent to the period in which the reseller completes the sale to its end-user.

Actuate also enters into OEM arrangements that provide for license fees based on the bundling or embedding of its products with the OEMs products.
These arrangements generally provide for fixed, irrevocable royalty payments. Actuate recognizes license fee revenues from U.S. and International OEM arrangements when a license agreement has been executed by both parties, the product has been
shipped, there are no unusual uncertainties surrounding the product acceptance, the fees are fixed or determinable, collectibility is probable and vendor-specific objective evidence of fair value exists to allocate the fee to the undelivered
elements of the arrangement. Effective July 1, 2006, we changed our policy for sales through



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international OEMs to be consistent with U.S. OEM arrangements. Prior to this change, we deferred revenue on sales
through international OEMs until we received a royalty report or other evidence of sell-through from such OEM, assuming all other revenue recognition criteria was met. The impact of this change on revenue for the third quarter of fiscal year 2006
was not significant.

Credit-worthiness and collectibility for end-users are assessed based on payment history and current credit profile.
When a customer is not deemed credit-worthy, revenues are deferred and recognized upon cash receipt.

Actuate recognizes maintenance
revenues, which consist of fees for ongoing support and unspecified product updates, ratably over the term of the contract, typically one year. Consulting revenues are primarily related to standard implementation and configuration. Training revenues
are generated from classes offered at the Companys headquarters and customer locations. Revenues from consulting and training services are recognized as the services are performed. When a contract includes both, license and service elements,
the license fee is typically recognized on delivery of the software, assuming all other revenue recognition criteria are met, provided services do not include significant customization or modification of the product and are not otherwise essential
to the functionality of the software.

Adoption of SFAS 123(R)

The Company has various types of stock-based compensation plans. These plans are administered by the compensation committee of the Board of Directors, which selects persons to receive awards and determines the number
of shares subject to each award and the terms, conditions, performance measures and other provisions of the award. Readers should refer to Note 9 of this document for additional information related to these stock-based compensation plans.

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment(SFAS 123(R)), which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. Prior to the adoption of SFAS 123R, the Company accounted for
its stock-based compensation plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, and accordingly, recognized
no compensation expense related to the stock-based plans as options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

The Company has elected to adopt the modified prospective transition method permitted by SFAS 123(R), which applies to new awards and to awards that were
outstanding on January 1, 2006 that are subsequently modified, repurchased or cancelled. Under the modified prospective approach, compensation cost recognized for the first nine months of fiscal year 2006 includes compensation cost for all
share-based payments granted prior to, but not yet vested as of, January 1, 2006. This cost is based on the grant-date fair value estimated at the time of the grant, in accordance with the pro forma provisions of SFAS 123. Compensation cost for
all shared-based payments granted subsequent to January 1, 2006, are based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Accordingly, prior periods were not restated to reflect the impact of adopting the
new standard. The fair value of option awards is estimated on the date of grant using the Black-Scholes-Merton option pricing model.

As a
result of adopting SFAS 123R on January 1, 2006, the Companys income before income taxes for the three and nine months ended September 30, 2006 was lower by $1.7 and $4.8 million, respectively, than if it had continued to account for
share-based compensation under APB 25. Also, net income for the three and nine months ended September 30, 2006 was lower by $2.2 and $5.9 million, respectively, than if it had continued to be accounted for under APB 25. Basic and
diluted net income per share for the three months ended September 30, 2006 would have been $0.08 and $0.07, respectively, if the Company had not adopted SFAS 123R. Basic and diluted net income per share for the nine months ended
September 30, 2006 would have been $0.16 and $0.14, respectively, if the Company had not adopted SFAS 123R.

Stock-Based
Compensation

Prior to the adoption of SFAS 123(R), we accounted for stock-based awards to employees and directors using the
intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). Under the intrinsic value method, no stock-based
compensation



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expense for employee stock options had been recognized in our Consolidated Statements of Operations, because the exercise
price of our stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant.

The table below reflects pro forma net income and net income per share for the three and nine months ended September 30, 2005 as if the Company had accounted for its stock options using the fair value method (in thousands, except
income per share amounts):



|                                                                                                                  |  |                    |        |   |                   |   |        |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | -
|                                                                                                                  |  | September 30, 2005 |       
|                                                                                                                  |  | Three months ended |        |   | Nine months ended |  
|Net income - as reported                                                                                          |  | $                  | 3,740  |   |                   | $ | 7,462  |  
|Less: Stock-based employee compensation expense determined under the fair value method for all awards, net of tax |  |                    | (1,476 | ) |                   |   | (4,368 | )
|                                                                                                                  |  |                    |        |   |                   |   |        |  
|Net income - pro forma                                                                                            |  | $                  | 2,264  |   |                   | $ | 3,094  |  
|                                                                                                                  |  |                    |        |   |                   |   |        |  
|Net income per share:                                                                                             |  |                    |        |   |                   |   |        |  
|Basic  as reported                                                                                               |  | $                  | 0.06   |   |                   | $ | 0.12   |  
|                                                                                                                  |  |                    |        |   |                   |   |        |  
|Basic  pro forma                                                                                                 |  | $                  | 0.04   |   |                   | $ | 0.05   |  
|                                                                                                                  |  |                    |        |   |                   |   |        |  
|Diluted  as reported                                                                                             |  | $                  | 0.06   |   |                   | $ | 0.12   |  
|                                                                                                                  |  |                    |        |   |                   |   |        |  
|Diluted  pro forma                                                                                               |  | $                  | 0.04   |   |                   | $ | 0.05   |  
|                                                                                                                  |  |                    |        |   |                   |   |        |  

The fair value of each option award and stock purchase right under our Employee Stock Purchase
Plan is estimated on the date of grant using the Black-Scholes-Merton option pricing model. We estimate the expected term of options granted by analyzing actual historical experience of exercises and cancellations under our plan. We also look at the
average length of time in which our current outstanding options are expected to be exercised or cancelled based on past experience and the vesting and contractual term. We estimate the volatility of our common stock by using historical volatility
over the calculated expected term. We base the risk-free interest rate that we use in the option valuation model on the published Treasury rate. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected
dividend yield of zero in the option valuation model.

Under SFAS 123R we estimate forfeitures when recognizing compensation expense, and
we will adjust our estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a
cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods.

The assumptions used to estimate the fair value of stock options granted and stock purchase rights granted under our Employee Stock Purchase Plan for the three and nine months ended September 30, 2006 and 2005 are as follows:



|                        |  |                    |  |                    |  |                    |  |                   
|----------------------- |  | ------------------ |  | ------------------ |  | ------------------ |  | ------------------
|                        |  | Options            |  | ESPP              
|                        |  | Three Months Ended |  | Three Months Ended
|                        |  | September 30, 2006 |  | September 30, 2005 |  | September 30, 2006 |  | September 30, 2005
|Volatility              |  | 83.57%             |  | 78.70%             |  | 46.05%             |  | 45.19%            
|Expected term (years)   |  | 4.5                |  | 3.0                |  | 0.5                |  | 0.5               
|Risk free interest rate |  | 4.50%              |  | 4.13%              |  | 5.08%              |  | 3.87%             
|Expected dividend yield |  | 0 %                |  | 0 %                |  | 0 %                |  | 0 %               
|Forfeiture rate         |  | 4 %                |  | N/A                |  | N/A                |  | N/A               



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|                        |  |                    |  |                    |  |                    |  |                   
|----------------------- |  | ------------------ |  | ------------------ |  | ------------------ |  | ------------------
|                        |  | Options            |  | ESPP              
|                        |  | Nine months Ended  |  | Nine months Ended 
|                        |  | September 30, 2006 |  | September 30, 2005 |  | September 30, 2006 |  | September 30, 2005
|Volatility              |  | 83.57 - 86.82%     |  | 78.70 - 97.38%     |  | 42.58 -  46.05%    |  | 45.19 - 46.36%    
|Expected term (years)   |  | 4.16 - 4.5         |  | 3.0                |  | 0.5                |  | 0.5               
|Risk free interest rate |  | 4.50 - 4.88%       |  | 3.38 - 4.13%       |  | 4.68 - 5.08%       |  | 3.03 - 3.87%      
|Expected dividend yield |  | 0%                 |  | 0%                 |  | 0%                 |  | 0%                
|Forfeiture rate         |  | 4%                 |  | N/A                |  | N/A                |  | N/A               

As of September 30, 2006, there was approximately $6.8 million of unrecognized compensation
cost, adjusted for estimated forfeitures, related to non-vested stock options granted to Actuate employees. These compensation expenses will be recognized over the appropriate amortization period of four years using the accelerated amortization
method as provided under Financial Accounting Standards Board Interpretation Number 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Awards Plans(FIN 28). Total unrecognized compensation
cost will be adjusted for future changes in estimated forfeitures.

Net Income Per Share

Basic net income per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net income
per share is computed using the weighted-average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of the shares issuable upon the exercise of stock options using the treasury
stock method.

The table below reconciles the weighted average common shares used to calculate basic net income per share with the
weighted-average common shares used to calculate diluted net income per share (in thousands):



|                                                                                    |  |                                  |  |                                 |  |        |  |       
|----------------------------------------------------------------------------------- |  | -------------------------------- |  | ------------------------------- |  | ------ |  | ------
|                                                                                    |  | Three Months Ended September 30, |  | Nine months Ended September 30,
|                                                                                    |  | 2006                             |  | 2005                            |  | 2006   |  | 2005  
|Weighted-average common shares outstanding                                          |  | 60,317                           |  | 60,513                          |  | 60,280 |  | 61,351
|Weighted-average dilutive stock options outstanding under the treasury stock method |  | 5,840                            |  | 1,800                           |  | 5,911  |  | 2,015 
|                                                                                    |  |                                  |  |                                 |  |        |  |       
|Weighted-average common shares used in computing diluted net income per share       |  | 66,157                           |  | 62,313                          |  | 66,191 |  | 63,366
|                                                                                    |  |                                  |  |                                 |  |        |  |       

We generated net income for the three and nine month periods ended September 30, 2006. Under
the treasury stock method, stock options with exercise prices exceeding the average share price of our Companys common stock during the applicable period are excluded from the diluted earnings per share computation. The weighted-average number
of shares excluded from the calculation of diluted net income was 4,932,307 and 4,679,932 in the three and nine months ended September 30, 2006, respectively. We also generated net income for the three and nine month periods ending
September 30, 2005. The weighted-average number of shares excluded from the calculation of diluted net income was 11,310,843 and 11,390,971 in the three and nine months ended September 30, 2005, respectively. These anti-dilutive options
could be dilutive in future periods.

The weighted average exercise price of excluded stock options was $4.96 and $5.03 for the three and
nine months ended September 30, 2006, respectively. The weighted average exercise price of excluded stock options was $3.84 and $3.87 for the three and nine months ended September 30, 2005, respectively.



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Comprehensive Income (Loss)

Other comprehensive income (loss) includes currency translation adjustments and unrealized gains and losses on short-term investments that are not included in net income, but rather are recorded directly in
stockholders equity. The following table represents changes in the components of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2006 and 2005, respectively, (in thousands):



|                                                        |  |                                  |       |      |                                 |       |      |  |      |       |  |   |       |  
|------------------------------------------------------- |  | -------------------------------- | ----- | ---- | ------------------------------- | ----- | ---- |  | ---- | ----- |  | - | ----- | -
|                                                        |  | Three Months Ended September 30, |       |      | Nine months Ended September 30, |      
|                                                        |  | 2006                             |       | 2005 |                                 |       | 2006 |  | 2005 |      
|Net income                                              |  | $                                | 2,511 |      | $                               | 3,740 |      |  | $    | 3,628 |  | $ | 7,462 |  
|Foreign currency translation adjustment gain (loss)     |  |                                  | 91    |      |                                 | (77   | )    |  |      | 434   |  |   | (98   | )
|Unrealized gain (loss) on available-for-sale-securities |  |                                  | 47    |      |                                 | (31   | )    |  |      | 78    |  |   | (35   | )
|                                                        |  |                                  |       |      |                                 |       |      |  |      |       |  |   |       |  
|Total comprehensive income                              |  | $                                | 2,649 |      | $                               | 3,632 |      |  | $    | 4,140 |  | $ | 7,329 |  
|                                                        |  |                                  |       |      |                                 |       |      |  |      |       |  |   |       |  

Recent Accounting Pronouncements

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when quantifying
Misstatements in Current Year Financial Statements (SAB 108). SAB 108 requires companies to evaluate the materiality of identified unadjusted errors on each financial statement and related financial statement disclosure using both
the rollover approach and the iron curtain approach. The rollover approach quantifies misstatements based on the amount of the error in the current year financial statement whereas the iron curtain approach quantifies misstatements based on the
effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatements year(s) of origin. Financial statements would require adjustment when either approach results in quantifying
a misstatement that is material. Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. SAB 108 is effective for interim periods of the first fiscal year ending after
November 15, 2006. The Company is currently evaluating the impact of SAB 108 on its consolidated results of operations and financial position.

In June 2006, the FASB ratified the consensus on Emerging Issues Task Force (EITF) Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement.
(EITF 06-03). The scope of EITF 06-03 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to, sales, use,
value added, Universal Service Fund (USF) contributions and some excise taxes. The Task Force affirmed its conclusion that entities should present these taxes in the income statement on either a gross or a net basis, based on their accounting
policy, which should be disclosed pursuant to APB Opinion No. 22, Disclosure of Accounting Policies. If such taxes are significant, and are presented on a gross basis, the amounts of those taxes should be disclosed. The consensus on
EITF 06-03 will be effective for interim and annual reporting periods beginning after December 15, 2006. The Company does not anticipate a significant impact from EITF 06-03 on its consolidated results of operations and financial
condition.

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109(FIN 48). This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement
No. 109, Accounting for Income Taxes. This interpretation prescribes that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the
more-likely-than-not recognition threshold should be measured in order to determine the tax benefit to be recognized in the financial statements. FIN 48 is effective in fiscal years beginning after December 15, 2006. The Company is currently
evaluating the impact of FIN 48 on its consolidated results of operations and financial condition.

2. Acquisition of performancesoft, Inc.

In January of fiscal year 2006, the Company acquired all of the outstanding shares of capital stock of performancesoft, Inc.
(performancesoft). performancesoft was a privately-held entity headquartered in Toronto, Canada, and a leading provider of performance management solutions software and services. The transaction was accounted for using the purchase
method of accounting in accordance with Statement of Financial Accounting Standards No. 141 (SFAS 141), Business Combinations. performancesoft provides a total performance management solution that helps organizations
measure their performance, manage their business, and helps them achieve more effective decision-making, efficient management reporting and increased accountability. The Company acquired performancesoft for the purpose of enhancing its current
product offering by adding performancesofts products and technology to its existing product line. The Company began including the operating results of performancesoft in its consolidated financial statements from the closing date of the
acquisition, which was January 5, 2006.

The acquisition principally consisted of an initial cash purchase price of $15.5 million and
additional contingent cash consideration of up to $13.5 million based on the achievement of certain revenue and operating margin targets for fiscal year

2006. This contingent consideration would be payable in fiscal year 2007. Due to the fact that the contingent consideration is currently not determinable beyond a reasonable doubt, the Company did not include this contingent consideration
in the



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acquisition accounting at the date of acquisition. Rather, it will be recorded when the contingency is resolved in 2007.
At that time, the Company will record the current fair value of any additional consideration as additional cost of the acquired enterprise. We expect that this additional cost would be allocated to goodwill.

In addition to the $15.5 million initial cash payment, the Company put $1.0 million in cash in escrow related to this transaction. This additional
payment was paid into an escrow account pending the resolution of specific items documented in the purchase agreement. The Company did not initially include this $1.0 million in the purchase price as the amount to be released from escrow was not
determinable beyond a reasonable doubt. As of September 30, 2006 the entire $1.0 million balance is classified in the other current assets line on the balance sheet. In October 2006, Actuate signed an agreement with the former shareholders of
performancesoft to resolve the pending items on which this $1.0 million payment depends. As a result of this agreement, the Company and the former shareholders agreed that of the $1.0 million still residing in escrow, $675,000 would be returned to
Actuate and the remaining $325,000 would be released to the former shareholders as further consideration for the acquisition. Since these pending items have now been resolved, Actuate will add the additional $325,000 to the purchase price of the
performancesoft acquisition in the fourth quarter of fiscal year 2006.

Assets acquired and liabilities assumed were recorded at their fair
values as of January 5, 2006. The total $15.6 million initial purchase price is comprised of the following:



|                             |  |   |           
|---------------------------- |  | - | ----------
|Cash                         |  | $ | 15,564,801
|Direct transaction costs     |  |   | 92,044    
|                             |  |   |           
|Total initial purchase price |  | $ | 15,656,845
|                             |  |   |           

Direct transaction costs of $92,044 include legal and accounting fees, appraisal fees, and other
external costs directly related to the acquisition.

Purchase Price Allocation

In accordance with SFAS No. 141, the total preliminary purchase price was allocated to performancesofts net tangible liabilities and
identifiable intangible assets based upon their estimated fair values as of January 5, 2006. The excess purchase price over the value of the net tangible liabilities and identifiable intangible assets was recorded as goodwill. We determined the
valuation of our identifiable intangible assets with the assistance of a third party valuation firm. The following represents the preliminary allocation of the initial purchase price to the acquired net assets of performancesoft and the associated
estimated useful lives (in thousands):



|                                     |  |        |        |   |                       |        
|------------------------------------ |  | ------ | ------ | - | --------------------- | -------
|                                     |  | Amount |        |   | Estimated Useful Life
|Net tangible assets and liabilities: |  |        |        |   |                       |        
|Accounts receivable, net             |  | $      | 996    |   |                       | N/A    
|Recoverable income tax               |  |        | 1,595  |   |                       | N/A    
|Accounts payable                     |  |        | (1,665 | ) |                       | N/A    
|Deferred revenue                     |  |        | (1,657 | ) |                       | N/A    
|Other net assets and liabilities     |  |        | 178    |   |                       | N/A    
|                                     |  |        |        |   |                       |        
|                                     |  |        | (553   | ) |                       | N/A    
|Identifiable intangible assets:      |  |        |        |   |                       |        
|Existing technology                  |  |        | 1,100  |   |                       | 5 years
|Customer and partner relationships   |  |        | 3,400  |   |                       | 5 years
|In-process research and development  |  |        | 900    |   |                       | N/A    
|Tradename                            |  |        | 800    |   |                       | 3 years
|Goodwill                             |  |        | 10,010 |   |                       | N/A    
|                                     |  |        |        |   |                       |        
|Total initial purchase price         |  | $      | 15,657 |   |                       |        
|                                     |  |        |        |   |                       |        

Identifiable intangible assetsExisting technology includes developed technology
related primarily to performancesofts main product, Views. The value of existing technology was determined using the excess earnings approach. The excess earnings approach considers the earnings attributable to a specific intangible asset of a
company to be those earnings in excess of fair returns on all of the contributory assets that are necessary to realize the earnings.

Customer contracts and relationships represent existing customer and partner relationships. The value of these relationships was determined using the cost savings method, which is an income approach methodology.



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Tradenames primarily relate to the performancesoft name and the Views product name. The value of the
tradenames was determined using a relief-of-royalty method of the income approach. Under this method the value of an intangible asset is determined by quantifying the cost savings a company enjoys by owning, as opposed to licensing, the intangible
asset.

In-process research and developmentAs of the acquisition date, $900,000 was allocated to in-process research and
development. In-process research and development is dependent on the status of new projects on the date the acquisition is consummated. At the date of acquisition the acquired company had two development projects that were in process, relating to
its Views product and a new product offering called Track. Both of these projects were completed by the end of the third quarter of fiscal year 2006. The value of in-process research and development was determined using the excess earnings approach.
The discount rates used were 18% to 19% and they take into consideration the stage of completion and the risk surrounding the successful development and commercialization of each of the purchased in-process technology projects that were valued. The
Company expensed the total value of these in-process research and development projects at the time of acquisition as they were determined to have no alternative future use. This expense is shown as a separate line item in the condensed consolidated
statement of operations.

GoodwillApproximately $10.0 million has been allocated to goodwill. Goodwill represents the excess
of the purchase price over the fair value of the underlying net tangible and intangible assets. In accordance with SFAS 142, goodwill will not be amortized but instead will be tested for impairment at least annually (more frequently if certain
indicators are present).

In connection with the performancesoft acquisition, Actuates Board of Directors duly authorized the
issuance of stock options to eligible employees from the Companys 1998 Equity Incentive Plan. A total of 530,200 non-statutory stock options were issued in January of 2006 at an exercise price of $3.36. Each grant shall fully vest in four
years with 25% vesting at the end of year one and the remaining balance to vest in thirty-six equal successive monthly installments. These shares were valued at their fair value in accordance with SFAS 123R and are being amortized over their vesting
period using the accelerated amortization method as provided under Financial Accounting Standards Board Interpretation Number 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Awards Plans(FIN
28).

Pro Forma Results

The
unaudited financial information in the table below summarizes the combined results of operations of Actuate and performancesoft, on a pro forma basis, as though the companies had been combined as of the beginning of the period presented. The pro
forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2005 or of results that may occur in the
future.

The unaudited pro forma financial information for the year ended December 31, 2005 combines the historical results for
Actuate for the twelve months ended December 31, 2005 and the historical results for performancesoft for the twelve months ended October 31, 2005. We have not presented pro forma results for fiscal year 2006 as any differences from the
2006 actual results would be immaterial, due to the timing of the acquisition.



|                             |  |                                                                                |         |          |   |        
|---------------------------- |  | ------------------------------------------------------------------------------ | ------- | -------- | - | -------
|                             |  | Year Ended December 31, 2005 (in thousands, except per share data) (Unaudited)
|                             |  | As Reported                                                                    |         | Proforma
|Total revenues               |  | $                                                                              | 106,401 |          | $ | 120,143
|Net income                   |  | $                                                                              | 11,591  |          | $ | 11,809 
|Basic net income per share   |  | $                                                                              | .19     |          | $ | .19    
|Diluted net income per share |  | $                                                                              | .18     |          | $ | .19    

3. Investment in Actuate Japan

The minority shareholders of Actuate Japan have the option to put their equity interest (Minority Interest) in Actuate Japan and Actuate has
the option to call the Minority Interest. In February 2006, a minority shareholder of Actuate Japan notified the Company that it wished to exercise its right to put its equity interest in Actuate Japan. This minority shareholder exercised its right
on March 15, 2006 resulting in a payment of approximately $354,000 for this interest during the first quarter of fiscal year 2006. This payment was recorded as additional goodwill related to Actuate Japan. The remaining minority interest as of
September 30, 2006 was approximately 12%. If the minority interest shareholder chose to put these remaining shares, Actuate would be required to pay approximately $411,000 to purchase these shares. As of the date of this filing, the remaining
minority shareholder has not notified the Company of any intent to exercise their put option, and accordingly, the Company has not accounted for the potential exercise.



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4. Restructuring Charges

2004 Restructuring Plan

During fiscal year 2004, the Company underwent a restructuring that was
carried out in two phases. The first occurred in the first quarter of fiscal year 2004 when the Company initiated a restructuring of its worldwide sales operations. This restructuring consisted primarily of a workforce reduction of approximately
five people and associated severance benefits and related legal costs of $586,000 during the first quarter of fiscal year 2004.

In early
October 2004, Actuate implemented an additional restructuring. The costs associated with this restructuring totaled $1.4 million in the fourth quarter of fiscal year 2004 and were primarily comprised of severance and related costs. The restructuring
plan resulted in the elimination of approximately 9% of the Companys worldwide workforce or 53 positions across all levels and functions. The Company incurred additional expenditures of approximately $665,000 during fiscal year 2005 related to
this restructuring.

2002 Restructuring Plan

In response to the continuing global economic slowdown, Actuate developed a workforce reduction and a facility exit plan in the third quarter of fiscal year 2002. As a result of this restructuring plan, Actuate
recorded a charge of $27.1 million (consisting of a $24.8 million idle facility charge and a $2.3 million workforce reduction charge) in the third quarter of fiscal year 2002. The initial restructuring charges were based on assumptions and related
estimates that were deemed appropriate for the economic environment that existed at the time these estimates were made.

Actuate initially
recorded a charge of $24.8 million related to the exit of its idle facility. The facility exit charge was calculated using managements best estimates and included $21.5 million of estimated future obligations for non-cancelable lease payments
(net of $10.2 million of estimated sublease income) and estimated costs associated with subleasing the property (e.g., leasing commissions). The remaining $3.3 million was related to the write-off of furniture and fixtures associated with the 801
Gateway facilities. Actuate made an adjustment of $188,000 to increase this facility exit liability during the second quarter of fiscal year 2003. As of September 30, 2006, approximately $10.9 million of lease exit costs, net of anticipated
sublease income, remain accrued and are expected to be fully utilized by fiscal year 2011. In calculating the facility exit charge, certain assumptions were made relating to such factors as the estimated time periods of vacancy and sublease rates
and opportunities. Our current calculations include an estimate of future sublease income. This estimate is comprised of current contractual future sublease income under existing arrangements, as well as an additional $2.9 million of estimated
sublease income. Actual future cash requirements may differ materially from the accrual at September 30, 2006, particularly if the actual sublease income is significantly different from current estimates or if the Company is unsuccessful in its
efforts to sublease its facility. The facility exit charge also included a $3.4 million write-off of property and equipment (primarily leaseholds improvements) as a result of the abandonment of leased facilities.

The following table summarizes the restructuring accrual activity during the nine months ended September 30, 2006 (in thousands):



|                                                         |  |                      |      |   |                  |   |        |       |  |   |        |  
|-------------------------------------------------------- |  | -------------------- | ---- | - | ---------------- | - | ------ | ----- |  | - | ------ | -
|                                                         |  | Severance & Benefits |      |   | Facility Related |   |        | Total | 
|Balance at December 31, 2005                             |  | $                    | 465  |   |                  | $ | 12,368 |       |  | $ | 12,833 |  
|Cash payments, net of rents collected on sublease for Q1 |  |                      | (16  | ) |                  |   | (609   | )     |  |   | (625   | )
|Cash payments, net of rents collected on sublease for Q2 |  |                      | (4   | ) |                  |   | (335   | )     |  |   | (339   | )
|Changes in estimate (Q1 to Q3).                          |  |                      | 45   |   |                  |   | (29    | )     |  |   | 16     |  
|Cash payments, net of rents collected on sublease for Q3 |  |                      | (60  | ) |                  |   | (444   | )     |  |   | (504   | )
|                                                         |  |                      |      |   |                  |   |        |       |  |   |        |  
|                                                         |  |                      | 430  |   |                  |   | 10,951 |       |  |   | 11,381 |  
|Less: current portion                                    |  |                      | (430 | ) |                  |   | (2,457 | )     |  |   | (2,887 | )
|                                                         |  |                      |      |   |                  |   |        |       |  |   |        |  
|Long-term portion at September 30, 2006                  |  | $                    |     |   |                  | $ | 8,494  |       |  | $ | 8,494  |  
|                                                         |  |                      |      |   |                  |   |        |       |  |   |        |  

5. Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.



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The tax provision for the three and nine months ended September 30, 2006 and September 30, 2005
consists of federal, state and foreign income taxes and was computed based on the estimated annual effective tax rates applicable to such operations. The annual effective tax rate in fiscal year 2006 is higher due to higher projected domestic
pre-tax income for 2006, which allows for the usage of NOLs and R&D tax credits, a higher effective tax as a result of adopting SFAS 123R and the write off of in-process R&D of $900,000 treated as a discrete event. The book expenses as
a result of SFAS 123R lowers our pre-tax net income, however, the amounts are not deductible for tax purposes, which produces a higher effective tax rate.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the historical income, projected future income, the expected timing of the
reversals of existing temporary differences and the implementation of tax-planning strategies in making this assessment. Based upon the level of historical tax losses, management believes it is more likely than not that the Company will not realize
a majority of the benefits of these deductible differences. Therefore, a valuation allowance has been established to offset the deferred tax assets where these benefits may not be realized.

The Company, however, may determine it will be able to realize all or a portion of its deferred tax assets in the U.S. in the foreseeable future. Upon
such determination a reduction in the valuation allowance related to its deferred tax assets would cause a material increase to net earnings in the period in which such determination is made. Significant management judgment is required in
determining the period in which the reversal of a valuation allowance should occur. The Company considers all available evidence, both positive and negative, in making this determination, including historical income, projected future income, the
expected timing of the reversals of existing temporary differences and the implementation of tax-planning strategies.

6. Geographic Information

Our primary operations are located in the United States. Revenues from international sources related to export sales, primarily to
Europe and Asia. Our revenues by geographic area were as follows (in thousands):



|                        |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|----------------------- |  | -------------------------------- | ------ | ------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                        |  | Three Months Ended September 30, |        | Nine months Ended September 30,
|                        |  | 2006                             |        | 2005                            |   | 2006   |  | 2005
|Revenues:               |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|North America           |  | $                                | 24,322 |                                 | $ | 20,815 |  | $    | 71,554 |  | $ | 59,736
|Europe                  |  |                                  | 6,168  |                                 |   | 4,561  |  |      | 18,475 |  |   | 13,858
|Asia Pacific and others |  |                                  | 1,439  |                                 |   | 1,469  |  |      | 3,416  |  |   | 3,646 
|                        |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|                        |  | $                                | 31,929 |                                 | $ | 26,845 |  | $    | 93,445 |  | $ | 77,240
|                        |  |                                  |        |                                 |   |        |  |      |        |  |   |       

As of September 30, 2006, we operated solely in one reportable segment, which is the
development, marketing and support of our Enterprise Reporting and performance management Application Platform. There were no customers that accounted for more than 10% of total revenues in the three and nine months ended September 30, 2006 or
2005. No customer accounted for more than 10% of our outstanding net accounts receivable balance at September 30, 2006.

7. Goodwill and Other
Purchased Intangible Assets

Goodwill

In accordance with SFAS 142, the Company performs its annual impairment test of goodwill on October 1 of each year. The Company completed its annual assessment of goodwill on October 1, 2006, and no impairment of goodwill was
determined as a result of this assessment. Following is a roll-forward of the activity that affected goodwill during the nine months ended September 30, 2006 (in thousands):



|                                                                       |  |   |        |  
|---------------------------------------------------------------------- |  | - | ------ | -
|Goodwill as of December 31, 2005                                       |  | $ | 20,990 |  
|Acquisition of performancesoft (preliminary purchase price allocation) |  |   | 10,010 |  
|True-up purchase price allocation for performancesoft                  |  |   | 184    |  
|Repurchase of Japan minority interest                                  |  |   | 354    |  
|Acquired net operating losses utilized                                 |  |   | (433   | )
|                                                                       |  |   |        |  
|Goodwill as of September 30, 2006                                      |  | $ | 31,105 |  
|                                                                       |  |   |        |  



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##### Table of Contents

During the third quarter of fiscal year 2006, the Company made several revisions to the initial purchase
price allocation related to the performancesoft acquisition. These revisions resulted in a total net increase of $184,000 to the performancesoft goodwill balance.

Intangibles

Other purchased intangible assets consist of the following (in thousands):



|                       |  |                       |        |                          |   |         |                     |  |                       |       |                          |   |        |                     |   |         |   |  |   |      
|---------------------- |  | --------------------- | ------ | ------------------------ | - | ------- | ------------------- |  | --------------------- | ----- | ------------------------ | - | ------ | ------------------- | - | ------- | - |  | - | -----
|                       |  | September 30, 2006    |        | December 31, 2005       
|                       |  | Gross Carrying Amount |        | Accumulated Amortization |   |         | Net Carrying Amount |  | Gross Carrying Amount |       | Accumulated Amortization |   |        | Net Carrying Amount
|Customer list          |  | $                     | 14,000 |                          | $ | (11,110 | )                   |  | $                     | 2,890 |                          | $ | 10,600 |                     | $ | (10,600 | ) |  | $ |     
|Workforce              |  |                       | 408    |                          |   | (408    | )                   |  |                       |      |                          |   | 408    |                     |   | (408    | ) |  |   |     
|Purchased technologies |  |                       | 8,410  |                          |   | (5,818  | )                   |  |                       | 2,592 |                          |   | 6,189  |                     |   | (5,050  | ) |  |   | 1,139
|Non-compete agreements |  |                       | 1,030  |                          |   | (1,030  | )                   |  |                       |      |                          |   | 1,030  |                     |   | (1,030  | ) |  |   |     
|Trademark              |  |                       | 1,500  |                          |   | (900    | )                   |  |                       | 600   |                          |   | 700    |                     |   | (700    | ) |  |   |     
|                       |  |                       |        |                          |   |         |                     |  |                       |       |                          |   |        |                     |   |         |   |  |   |      
|                       |  | $                     | 25,348 |                          | $ | (19,266 | )                   |  | $                     | 6,082 |                          | $ | 18,927 |                     | $ | (17,788 | ) |  | $ | 1,139
|                       |  |                       |        |                          |   |         |                     |  |                       |       |                          |   |        |                     |   |         |   |  |   |      

As discussed further in Note 2, in January 2006, the Company acquired all of the outstanding
shares of capital stock of performancesoft. The total initial purchase price of $15.6 million was allocated to various tangible and identifiable intangible assets, which consisted primarily of goodwill of $10.2 million, purchased in-process research
and development of $900,000, trademark of $800,000, customer and distribution relationship of $3.4 million and core technology of $1.1 million. The trademarks intangible asset is being amortized on a straight-line basis over a three year period, as
the Company intends to phase out the use of the trademarks, while customer list and core technology is being amortized on a straight-line basis over five years. Purchased in-process research and development was expensed in the quarter ended
March 31, 2006 as it had not reached technological feasibility and had no alternative future uses.

Amortization expense of purchased
intangible assets was approximately $509,000 and $133,000 for the three months ended September 30, 2006 and 2005, respectively. Amortization expense of purchased intangible assets was approximately $1.5 million and $1.3 million for the nine
months ended September 30, 2006 and 2005, respectively. These charges are included in cost of license fees and amortization of purchased intangibles in the accompanying condensed consolidated statements of operations. The expected remaining
annual amortization expense is summarized as follows (in thousands):



|                         |  |                                      |      
|------------------------ |  | ------------------------------------ | -----
|Fiscal Year              |  | Purchased Technology and Intangibles
|2006 (remainder of year) |  | $                                    | 508  
|2007                     |  |                                      | 2,031
|2008                     |  |                                      | 1,743
|2009                     |  |                                      | 900  
|2010                     |  |                                      | 900  
|                         |  |                                      |      
|                         |  | $                                    | 6,082
|                         |  |                                      |      

In February 2006, a minority shareholder of Actuate Japan notified the Company that it wished to
exercise its rights to put its equity interest in Actuate Japan. The Company paid approximately $354,000 for this interest during the first quarter of fiscal year 2006. As a result of this payment the Company adjusted its investment in Actuate Japan
and increased goodwill by the amount equal to the payment made on March 15, 2006.



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##### Table of Contents

During the first nine months of the fiscal year 2006, the Company also made adjustments to goodwill and
purchased technology related to the tax affected portion of the net operating losses (NOLs) utilized with respect to the Tidestone and Nimble acquisitions, respectively. These adjustments resulted in reductions of approximately $433,000 and $30,000
to the Companys goodwill and purchased intangibles balances, respectively. As of September 30, 2006, the carrying amount of the Companys goodwill was $31.1 million.

Third Party Source Code

In December of 2005 Actuate agreed to purchase source code from a
third-party technology vendor for $1,150,000 in cash. Prior to this purchase, Actuate had been paying royalties to this vendor for the right to use and sell this underlying technology in its products. Under this purchase agreement, royalties are no
longer required to be paid. The source code fee was capitalized as the product that the technology was embedded in had reached technological feasibility. The amount is being amortized to cost of license fees at the greater of 1) the ratio that
current gross revenues for the associated product bear to the total current and estimated future gross revenues for that product, and 2) the straight-line method over the estimated three year economic life of the product.

8. Contingencies

General

We are engaged in certain legal actions arising in the ordinary course of business. Although there can be no assurance as to the outcome of such
litigation, we believe we have adequate legal defenses and we believe that the ultimate outcome of any of these actions will not have a material effect on our consolidated financial position or results of operations.

9. Stock Benefit Plans

Stock Option Plans

Amended and Restated 1998 Equity Incentive Plan. In May 1998, the Board of Directors adopted the Amended and Restated
1998 Equity Incentive Plan (the 1998 Plan), which was approved by the stockholders in July 1998. Employees, consultants and directors are eligible for awards under the 1998 Plan. Initially, a total of 5,200,000 shares of common stock
were reserved for issuance under the 1998 Plan. As of January 1 of each year, the number of shares reserved for issuance under the 1998 Plan will be increased automatically by the lesser of (i) 5% of the total number of shares of common
stock then outstanding or (ii) 2,800,000 shares. The 1998 Plan has been amended and restated to account for stock splits.

Under the
1998 Plan, eligible participants may be awarded options to purchase shares of common stock, stock appreciation rights (SARs), restricted shares or stock units (collectively, the Awards). Options under the 1998 Plan may be
incentive stock options designed to satisfy Section 422 of the Internal Revenue Code of 1986, as amended (the Code) or non-statutory stock options not designed to meet such requirements. If restricted shares or shares issued upon
the exercise of options granted under the 1998 Plan are forfeited, then such shares will again become available for awards under the 1998 Plan. If stock units, options or SARs granted under the 1998 Plan are forfeited or terminated for any other
reason before being exercised, then the corresponding shares will again become available for awards under the 1998 Plan. The exercise price for non-statutory and incentive stock options granted under the 1998 Plan may not be less than 85% or 100%,
respectively, of the fair market value of the common stock on the option grant date. The Board may amend or terminate the 1998 Plan at any time. Amendments may be subject to stockholder approval to the extent required by applicable law.

Options granted under the 1998 Plan are exercisable when vested. Shares generally vest at the rate of 20% or 25% after one year from the date of grant
and the remaining balance vests monthly over the next four or three years. Upon a change in control, an Award under the 1998 Plan will become fully vested as to all shares subject to such Award if such Award is not assumed by the surviving
corporation or its parent and the surviving corporation or its parent does not substitute such Award with another award of substantially the same terms. In the event of an involuntary termination of a participant within 12 months following a change
in control, the vesting of an Award under the 1998 Plan will accelerate in full. All outstanding repurchase rights under the 1998 Plan shall terminate automatically upon the occurrence of any merger, consolidation, or disposition of all or
substantially all of the Companys assets, except to the extent the repurchase rights are expressly assigned to the successor corporation. As of September 30, 2006, 11,178,660 shares of common stock were reserved and available for future
grants under the 1998 Option Plan.

2001 Supplemental Stock Plan. In January 2001, the Board of Directors adopted the 2001
Supplemental Stock Plan (the 2001 Plan). A total of 2,700,000 shares of common stock were reserved for issuance under the 2001 Plan. Employees and consultants are eligible for awards under the 2001 Plan. Members of the Board of Directors
and officers of Actuate are not eligible to receive awards under the 2001 Plan. Under the 2001 Plan, eligible participants may be awarded options to purchase shares of common stock and restricted shares only.



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##### Table of Contents

All options granted under the 2001 Plan are non-statutory stock options. If restricted shares or shares
issued upon the exercise of options granted under the 2001 Plan are forfeited, then such shares will again become available for awards under the 2001 Plan. The exercise price for non-statutory and incentive stock options granted under the 2001 Plan
may not be less than 85% or 100%, respectively, of the fair market value of the common stock on the option grant date. The Board may amend or terminate the 2001 Plan at any time. Amendments may be subject to stockholder approval to the extent
required by applicable law.

Options granted under the 2001 Plan are exercisable when vested. Shares generally vest at the rate of 25%
after one year from the date of grant and the remaining balance vests monthly over the next four years. Upon a change in control, an Award under the 2001 Plan will become fully vested as to all shares subject to such Award if such Award is not
assumed by the surviving corporation or its parent and the surviving corporation or its parent does not substitute such Award with another award of substantially the same terms. In the event of an involuntary termination of a participant within 12
months following a change in control, the vesting of an Award under the 2001 Plan will accelerate in full. All outstanding repurchase rights under the 2001 Plan shall terminate automatically upon the occurrence of any merger, consolidation, or
disposition of all or substantially all of the Companys assets, except to the extent the repurchase rights are expressly assigned to the successor corporation. As of September 30, 2006, 689,704 shares of common stock were reserved and
available for future grants under the 2001 Option Plan.

Tidestone Technologies Stock Option Plans. Tidestone Technologies,
Inc.s 1998 Incentive Stock Option Plan (T-98 Option Plan) and Non-qualified Stock Option Plan of 1999 (T-99 Option Plan) were assumed by the Company on May 30, 2001, in connection with the acquisition of Tidestone.
The T-98 Option Plan and the T-99 Option Plan are collectively known as the Tidestone Option Plans. Each option under the Tidestone Option Plans was converted into a right to receive an option to purchase shares of Actuates common
stock. A total of 77,968 and 70,509 shares of common stock have been authorized for issuance under the T-98 Option Plan and T-99 Option Plan, respectively.

All options granted under the T-98 Option Plan are incentive stock options qualified under Section 422 of the Code, with a vesting term of five years while the options granted under the T-99 Option Plan are
non-statutory stock options with a vesting term of three years. Options granted under the Tidestone Option Plans are generally exercisable upon grant, subject to repurchase rights by us until vested. Under the T-99 Option Plan, shares generally vest
at the rate 33% annually. Under the T-98 Option Plan, shares generally vest at the rate of 20% annually. Upon a change in control, an Award under the Tidestone Option Plans will become fully vested as to all shares subject to such Award if such
Award is not assumed by the surviving corporation or its parent and the surviving corporation or its parent does not substitute such Award with another award of substantially the same terms. As of September 30, 2006, 31,987 and 2,055 shares of
common stock were reserved and available for future grants under the T-98 Option and T-99 Option Plan, respectively.

1998 Non-Employee
Director Option Plan. The 1998 Non-Employee Directors Option Plan (the Directors Option Plan) was adopted by the Board of Directors in May 1998, and approved by the stockholders in July 1998. The Director Option Plan provides
for non-employee members of the Board of Directors to be eligible for automatic option grants. 800,000 shares of common stock have been authorized for issuance under the Directors Option Plan. Each individual who first joins the Board as a
non-employee director, whether through election or appointment, will receive at that time an automatic option grant for 80,000 shares of common stock. With respect to the initial automatic option grant, the option will become exercisable as to 25%
of the shares after one year of Board service, with the balance of the shares becoming exercisable ratably in 36 monthly installments over the remaining period of optionees Board service. At each annual stockholders meeting beginning in
fiscal year 1999, each current non-employee director will automatically be granted a stock option to purchase 10,000 shares of common stock, whether or not he or she is standing for re-election at that particular meeting, which will become fully
vested and exercisable on the first anniversary of such meeting. Each option will have an exercise price equal to the fair market value of the common stock on the automatic grant date and a maximum term of ten years, subject to earlier termination
following the optionees cessation of Board service.

The Board may amend or modify the Directors Option Plan at any time. Amendments
may be subject to stockholder approval to the extent required by law. The Directors Option Plan will terminate on the earlier of: May 27, 2008 or when all shares reserved for issuance have been issued, unless terminated sooner by the Board.
However, vesting will automatically accelerate in full upon (i) an acquisition of Actuate by merger, consolidation or asset sale, (ii) a tender offer for more than 50% of the outstanding voting stock or proxy contest for Board membership
or (iii) the death or disability of the optionee while serving as a Board member. As of September 30, 2006, 329,700 shares of common stock were reserved and available for future grants under the Directors Option Plan.



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##### Table of Contents

Activity under all option plans was as follows:



|                              |  |                            |   |  |                     |   |                                  |   |             |  |   |     
|----------------------------- |  | -------------------------- | - |  | ------------------- | - | -------------------------------- | - | ----------- |  | - | ----
|                              |  | Shares Available For
Grant |   |  | Outstanding Options |   | Weighted- Average Exercise Price
|                              |  | Number of Shares           |   |  | Price Per Share     |  
|Balance at December 31, 2005  |  | 11,573,471                 |   |  | 19,292,404          |   |                                  | $ | 0.16-$31.19 |  | $ | 2.83
|Additional authorization      |  | 2,800,000                  |   |  |                    |   |                                  |   |            |  |   |    
|Options granted               |  | (3,047,000                 | ) |  | 3,047,000           |   |                                  | $ | 3.65-$4.27  |  | $ | 3.88
|Options exercised             |  |                           |   |  | (775,647            | ) |                                  | $ | 0.31-$4.14  |  | $ | 2.09
|Options forfeited             |  | 905,635                    |   |  | (905,635            | ) |                                  | $ | 1.04-$17.25 |  | $ | 3.71
|                              |  |                            |   |  |                     |   |                                  |   |             |  |   |     
|Balance at September 30, 2006 |  | 12,232,106                 |   |  | 20,658,122          |   |                                  | $ | 0.16-$31.19 |  | $ | 2.94
|                              |  |                            |   |  |                     |   |                                  |   |             |  |   |     

The weighted average grant date fair value of options granted during the quarter ended
September 30, 2006 was $2.54 per option. Upon the exercise of options, the Company issues new common stock from its authorized shares. The total intrinsic value of options exercised during the quarter ended September 30, 2006 was $316,711.



|                         |  |                     |  |                                             |  |                                 |  |                  |  |                                
|------------------------ |  | ------------------- |  | ------------------------------------------- |  | ------------------------------- |  | ---------------- |  | -------------------------------
|                         |  | Options Outstanding |  | Options Exercisable                        
|Range of Exercise Prices |  | Number of Shares    |  | Weighted-Average Remaining Contractual
Life |  | Weighted-Average Exercise Price |  | Number of Shares |  | Weighted-Average Exercise Price
|$0.16-$1.25              |  | 380,788             |  | 1.21 years                                  |  | $0.63                           |  | 380,767          |  | $0.63                          
|$1.27-$1.49              |  | 6,772,810           |  | 6.07 years                                  |  | $1.49                           |  | 6,712,351        |  | $1.49                          
|$1.56-$2.99              |  | 4,853,853           |  | 7.77 years                                  |  | $2.57                           |  | 2,499,676        |  | $2.60                          
|$3.00-$3.68              |  | 4,130,957           |  | 6.81 years                                  |  | $3.53                           |  | 1,718,108        |  | $3.53                          
|$3.71-$31.19             |  | 4,519,714           |  | 5.73 years                                  |  | $5.17                           |  | 3,803,738        |  | $5.37                          
|                         |  |                     |  |                                             |  |                                 |  |                  |  |                                
|$0.16-$31.19             |  | 20,658,122          |  | 6.46 years                                  |  | $2.94                           |  | 15,114,640       |  | $2.86                          
|                         |  |                     |  |                                             |  |                                 |  |                  |  |                                

At September 30, 2006, 20,369,635 options were vested and expected to vest, with an aggregate
intrinsic value of $34,974,705. The aggregate intrinsic value and weighted-average remaining contractual term of options currently exercisable at September 30, 2006 were $28,363,885 and 5.63 years, respectively.

Amended and Restated 1998 Employee Stock Purchase Plan

The 1998 Amended and Restated Employee Stock Purchase Plan (the Purchase Plan) was adopted by the Board of Directors in May 1998, and approved by the stockholders in July 1998. A total of 1,000,000 shares
of common stock were initially reserved for issuance under the Purchase Plan. On January 1 of each year, the number of shares reserved for issuance under the Purchase Plan is automatically increased by 600,000 shares. The Purchase Plan is
intended to qualify under Section 423 of the Code. Each calendar year, two overlapping 24-month offering periods will commence on February 1 and August 1. Each offering period contains four six-month accumulation periods, with
purchases occurring at the end of each six-month accumulation period. If the market price of Actuates stock at the end of any six-month purchase period is lower than the stock price at the original grant date, the plan is cancelled immediately
after that purchase date. A new 24-month offering period is established using the then-current stock price as the base purchase price. The Purchase Plan permits each eligible employee to purchase common stock through payroll deductions, which may
not exceed 15% of an employees cash compensation. Starting with the August 1, 2006 offering period, the amount of shares purchasable per accumulation period will be 1,000 shares per participant. The price of each share of common stock
purchased under the Purchase Plan will be 85% of the lower of (i) the fair market value per share of common stock on the date immediately prior to the first date of the applicable offering period or (ii) the date at the end of the
applicable accumulation period. Employees may end their participation in the Purchase Plan at any time during the accumulation period, and participation ends automatically upon termination of employment. The Purchase Plan has been amended and
restated to account for stock splits. On July 29, 2006, the Company issued 122,702 common shares under the Purchase Plan, with a weighted-average purchase price of $2.32. As of September 30, 2006, 4,559,056 shares had been purchased under
the Purchase Plan and 1,240,944 shares of common stock were reserved and available for future issuance.

As of September 30, 2006, the
number of shares of common stock reserved for future issuance under all option plans and the Purchase Plan was 13,473,050.



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##### Table of Contents

10. Deferred Revenue

Deferred revenue consists of the following (in thousands):



|                           |  |                    |         |   |                   |   |         |  
|-------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                           |  | September 30, 2006 |         |   | December 31, 2005 |  
|Maintenance and support    |  | $                  | 30,224  |   |                   | $ | 24,948  |  
|Other                      |  |                    | 6,213   |   |                   |   | 7,440   |  
|                           |  |                    |         |   |                   |   |         |  
|                           |  | $                  | 36,437  |   |                   | $ | 32,388  |  
|Less: Current portion      |  |                    | (34,972 | ) |                   |   | (31,475 | )
|                           |  |                    |         |   |                   |   |         |  
|Long-term deferred revenue |  | $                  | 1,465   |   |                   | $ | 913     |  
|                           |  |                    |         |   |                   |   |         |  

Maintenance and support consists of first year maintenance and support services associated with
the initial purchase of Actuates software, and the renewal of annual maintenance and support services from customers who purchased Actuates software in prior periods. The maintenance and support period is generally 12 months and revenues
are typically recognized on a straight-line basis over the term of the maintenance and support period.

Other deferred revenue consists of
deferred license, training and consulting fees generated from arrangements, which did not meet some or all of the revenue recognition criteria of SOP No. 97-2 and are, therefore, deferred until all revenue recognition criteria have been met.

11. Subsequent Events

In January of
2006, Actuate paid an initial cash purchase price of $15.5 million for the acquisition of performancesoft, Inc. In addition to this initial cash payment, the acquisition further consisted of an additional contingent cash consideration of up to $13.5
million based on the achievement of certain revenue and operating margin targets for fiscal year 2006. Furthermore, Actuate paid $1.0 million in additional cash at the time of acquisition to an escrow account pending the resolution of specific items
documented in the purchase agreement. In October 2006, Actuate signed an agreement with the former shareholders of performancesoft. This agreement served to adjust the revenue and operating margin targets on which the contingent consideration is
based. It also served to resolve the pending items on which the $1.0 million payment depends. As a result of this agreement, the Company and the former shareholders agreed that of the $1.0 million still residing in escrow, $675,000 would be returned
to Actuate and the remaining $325,000 would be released to the former shareholders as further consideration for the acquisition. As of September 30, 2006, the entire $1.0 million balance is classified in other current assets on the balance
sheet. Since these pending items have now been resolved, Actuate will add the additional $325,000 to the purchase price of the performancesoft acquisition in the fourth quarter of 2006.

In October 2006, the Board of Directors approved an on-going extension of the Companys stock repurchase program, which was originally announced in
September 2001 and has been extended from time to time. This extension authorized management to make additional repurchases. Under this repurchase program, the Company is authorized to repurchase Actuate common stock at varying amounts, in an amount
not to exceed cash flow from operations during the prior quarter. The actual amount to be repurchased is approved in advanced each quarter by the Board. From the end of the third quarter of fiscal year 2006 through November 8, 2006, the Company
has repurchased a total of 29,988 shares in the open market under this repurchase plan for a value totaling approximately $157,000.



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

The
following information should be read in conjunction with the historical financial information and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto and the
related Managements Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on
March 13, 2006.

The statements contained in this Form 10-Q that are not purely historical are forward looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, including statements regarding Actuates expectations, beliefs, hopes, intentions, plans or strategies regarding the future. All forward-looking statements in this
Form 10-Q are based upon information available to Actuate as of the date hereof, and Actuate assumes no obligation to update any such forward-looking statements. Actual results could differ materially from Actuates current expectations.
Factors that could cause or contribute to such differences include, but are not limited to, the risks discussed in Part II, Item 1ARisk Factors of this Form 10-Q, and in other filings made by the Company with the Securities and Exchange
Commission.

Overview

We are a
leading provider of Enterprise Reporting and Performance Management Applications that empower 100% of users to achieve breakthrough corporate performance. We began shipping our first product in January 1996. Actuates Enterprise Reporting
Application Platform provides the most scalable, reliable, flexible and high-performing reporting capabilities for every application in the enterprise. Customers use Actuate to deliver information in context to users inside and outside the firewall
as Customer Interaction and Operational Performance Reporting applications, managed spreadsheet applications and Java reporting applications. Actuates performancesoft Suite helps high performing organizations drive strategy at all levels,
improve decision making, and ensure better operational performance and execution. Organizations have benefited from performancesoft solutions to achieve better results utilizing a number of private and public sector Performance Management
frameworks, including but not limited to: the Balanced Scorecard, Malcolm Baldrige, Six Sigma, JCAHO, and The Presidents Management Agenda.

In September 2006, we released and began shipping version 9 of the Actuate products. This Actuate 9 Collaborative Reporting Architecture combines open source technologies from the Eclipse Foundation BIRT (Business Intelligence and Reporting
Tools) project with the scalability, performance, reliability and security of the Actuate iServer and the interactivity of AJAX (Asynchronous JavaScript and XML). With Actuates Collaborative Reporting Architecture, companies can shift
from a closed BI model where information access and analysis is siloed, to an open BI model that speeds report development by supporting collaboration among people of every skill level. Actuate 9 applies open source
principles, including participation, iterative development and modularity, for the benefit of an organizations Business Intelligence initiatives. The Collaborative Reporting Architecture drives enterprise reporting costs down by
leveraging the versatility of the Java development community, the speed and flexibility of Actuates Information Object metadata layer, and a revolutionary reusable design structure that encourages collaboration among users of every skill
level, for every reporting project.

We sell software products through two primary means: (i) directly to end-user customers through
our direct sales force and (ii) indirectly through channel partners such as OEMs, resellers and system integrators. OEMs generally integrate our products with their applications and either provide hosting services or resell them with their
products. Our other indirect channel partners resell our software products to end-user customers. Our total revenues are derived from license fees for software products and fees for services relating to such products, including software maintenance
and support, consulting and training.

Our total revenues for the third quarter of fiscal 2006 were $31.9 million, a 19%, or approximately
$5.1 million increase over the third quarter of fiscal 2005. This increase was primarily due to incremental revenue of $3.2 million generated from new products associated with our acquisition of performancesoft in January 2006. Income from
operations decreased from $4.6 million, or 17% of total revenues, in the third quarter of fiscal year 2005 to $3.6 million, or 11% of total revenues, in the third quarter of fiscal year 2006. This decline is primarily attributable to
(i) the decline in operating margin as a result of the adoption of SFAS 123R, which resulted in the recognition of $1.7 million in stock-based compensation for the third quarter of fiscal 2006, and (ii) the impact of the addition of
performancesoft to the Companys total operations. These decreases were offset by the increases in revenues described above.

North
American total revenues increased from $20.8 million in the third quarter of fiscal year 2005 to $24.3 million in the third quarter of fiscal year 2006. Revenues from international regions also increased from $6.0 million in the third quarter of
fiscal year 2005 to approximately $7.6 million in the third quarter of fiscal year 2006. North American total revenues increased from $59.7 million in the first nine months of fiscal year 2005 to $71.5 million in the first nine months of fiscal



20



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year 2006. Revenues from international regions increased by $4.4 million or approximately 25% from $17.5 million for the
first nine months of fiscal year 2005 to approximately $21.9 million for the first nine months of fiscal year 2006. During the third quarter of fiscal year 2006, we derived 24% of our total revenues from sales outside of North America versus 22% in
the same period last year. For the first nine months of fiscal years 2006 and 2005, we derived 23% of our total revenues from sales outside of North America.

Excluding results from performancesoft, North American total revenues increased from $20.8 million in the third quarter of fiscal year 2005 to $21.9 million in the third quarter of fiscal year 2006 and revenues from
international regions also increased from $6.0 million in the third quarter of fiscal year 2005 to $6.8 million in the third quarter of fiscal year 2006. If performancesoft results are excluded, North American total revenues increased from $59.7
million in the first nine months of fiscal year 2005 to $65.7 million in first nine months of fiscal year 2006. Revenues from international regions also increased from $17.5 million in the first nine months of fiscal year 2005 to $19.5 million in
the first nine months of fiscal year 2006 if performancesoft results are excluded.

Three trends continue to have a significant impact on
results of our operations. We currently believe that corporate IT budgets will grow only modestly in the remainder of fiscal year 2006. Second, we continue to witness corporations consolidating their business intelligence, Enterprise Reporting
software and Performance Management application purchases into fewer suppliers. Corporations were reluctant to buy software from new vendors. Finally, we continue to experience vigorous competition in the Enterprise Reporting market. Several of our
competitors have released products that are marketed to be directly competitive with our Enterprise Reporting Application Platform. The existence of these competitive products required additional sales and marketing efforts to differentiate our
products, which resulted in extended sales cycles. We believe that competition in the enterprise reporting market will continue to be vigorous in the near future.

During 2004, we announced four strategic initiatives to help improve the sale of our software products in the future. These initiatives are as follows:



| |  |  | Selling to IT ManagementWe are re-focusing our sales efforts on selling our products to IT managers who we believe generally recognize the technical advantages of our
products. We hope this initiative will result in increased license revenue in the short term.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Solution Selling to Line-of-Business ManagementWe are creating software solutions to market to line-of-business managers. These solutions are in the areas of financial
management and customer self service reporting. We hope this initiative will result in increased license revenue over the medium-to-long term.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Investing in the Business Intelligence Reporting Tool (BIRT)We are continuing to make a significant investment in creating a new open source code reporting tool,
known as BIRT. We hope that BIRT will eventually become widely adopted by Java developers and will create demand for our other commercially available products. The BIRT project is a long-term initiative.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Selling to Global 9000 Corporations in the Financial Services SectorWe are continuing to focus on selling our products to Global 9000 financial services companies in an effort
to increase our substantive market share in this sector.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During 2005 and the first nine months of fiscal 2006, we continued
to pursue these initiatives started in 2004 and we will continue to do so for the remainder of 2006. We have added the following strategic initiative resulting from our acquisition of performancesoft:

Delivering a highly differentiated Performance Management offeringwe intend to combine performancesofts leading Performance Management
applications and Actuates Enterprise Reporting Application Platform to provide capabilities for distributing accountability throughout the enterprise. We hope this initiative will result in increased license revenue in the short-to-medium
term.



21



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##### Table of Contents

We have a limited ability to forecast future revenues and expenses, thus the prediction of future
operating results is difficult. In addition, historical growth rates in our revenues and earnings should not be considered indicative of future revenue or earnings growth rates or operating results. There can be no assurance that any of our business
strategies will be successful or that we will be able to achieve and maintain profitability on a quarterly or annual basis. It is likely that in some future quarter our operating results will be below the expectations of public market analysts and
investors, and in such event the price of our common stock could decline.

Actuate was incorporated in November 1993 in the State of
California and reincorporated in the State of Delaware in July 1998. Actuates principal executive offices are located at 701 Gateway Boulevard, South San Francisco, California. Actuates telephone number is 650-837-2000. Actuate maintains
a Web site at www.actuate.com.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Our critical accounting policies are described under Item 7 to the annual consolidated financial statements as of and for the year ended
December 31, 2005, filed on Form 10-K with the SEC on March 13, 2006. We have added an accounting policy for stock-based compensation in fiscal year 2006 due to the adoption of SFAS 123(R). This new accounting policy is described below.
Other than the addition of this new policy, our critical accounting policies have not changed since December 31, 2005.

Valuation
of Stock-Based Compensation. Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment (SFAS 123(R)). SFAS 123(R) establishes
standards for accounting for transactions in which an entity exchanges its equity instruments, such as stock options, for goods or services, such as the services of the entitys employees. SFAS 123(R) also addresses transactions in which
an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entitys equity instruments or that may be settled by the issuance of those equity instruments. SFAS 123(R) eliminates the ability to
account for stock-based compensation transactions using the intrinsic value method under APB 25 and generally requires instead that such transactions be accounted for using a fair-value based method. Accordingly, we measure stock-based
compensation cost at the grant date, based on the fair value of the award, and recognize the expense over the employees requisite service period using the modified prospective method. The measurement of stock-based compensation cost is
based on several criteria including, but not limited to, the valuation model used and associated input factors such as expected term of the award, stock price volatility, dividend rate, risk free interest rate, and award forfeiture rate. The
input factors to use in the valuation model are based on subjective future expectations combined with management judgment. If there is a difference between the assumptions used in determining stock-based compensation cost and the actual factors
which become known over time, we may change the input factors used in determining stock-based compensation costs. These changes may materially impact our results of operations in the period such change are made.

Results of Operations

The following table sets forth
certain consolidated statement of operations data as a percentage of total revenues for the periods indicated.



|                                            |  |                                  |   |  |                                 |   |  |      |   |  |      |  
|------------------------------------------- |  | -------------------------------- | - |  | ------------------------------- | - |  | ---- | - |  | ---- | -
|                                            |  | Three Months Ended September 30, |   |  | Nine months Ended September 30, |  
|                                            |  | 2006                             |   |  | 2005                            |   |  | 2006 |   |  | 2005 |  
|Revenues:                                   |  |                                  |   |  |                                 |   |  |      |   |  |      |  
|License fees                                |  | 36                               | % |  | 33                              | % |  | 35   | % |  | 34   | %
|Services                                    |  | 64                               |   |  | 67                              |   |  | 65   |   |  | 66   |  
|                                            |  |                                  |   |  |                                 |   |  |      |   |  |      |  
|Total revenues                              |  | 100                              |   |  | 100                             |   |  | 100  |   |  | 100  |  
|                                            |  |                                  |   |  |                                 |   |  |      |   |  |      |  
|Costs and expenses:                         |  |                                  |   |  |                                 |   |  |      |   |  |      |  
|Cost of license fees                        |  | 1                                |   |  | 2                               |   |  | 2    |   |  | 2    |  
|Cost of services                            |  | 21                               |   |  | 21                              |   |  | 23   |   |  | 22   |  
|Sales and marketing                         |  | 37                               |   |  | 35                              |   |  | 38   |   |  | 34   |  
|Research and development                    |  | 16                               |   |  | 15                              |   |  | 17   |   |  | 16   |  
|General and administrative                  |  | 12                               |   |  | 10                              |   |  | 13   |   |  | 13   |  
|Amortization of other purchased intangibles |  | 1                                |   |  |                                |   |  |     |   |  | 1    |  
|In-process research and development         |  |                                 |   |  |                                |   |  | 1    |   |  |     |  
|Restructuring charges                       |  |                                 |   |  |                                |   |  |     |   |  | 1    |  
|                                            |  |                                  |   |  |                                 |   |  |      |   |  |      |  
|Total costs and expenses                    |  | 88                               |   |  | 83                              |   |  | 94   |   |  | 89   |  
|                                            |  |                                  |   |  |                                 |   |  |      |   |  |      |  
|Income from operations                      |  | 12                               |   |  | 17                              |   |  | 6    |   |  | 11   |  
|Interest and other income, net              |  | 2                                |   |  | 1                               |   |  | 1    |   |  | 1    |  
|                                            |  |                                  |   |  |                                 |   |  |      |   |  |      |  
|Income before income taxes                  |  | 14                               |   |  | 18                              |   |  | 7    |   |  | 12   |  
|Provision for income taxes                  |  | (5                               | ) |  | (4                              | ) |  | (3   | ) |  | (2   | )
|                                            |  |                                  |   |  |                                 |   |  |      |   |  |      |  
|Net income                                  |  | 9                                | % |  | 14                              | % |  | 4    | % |  | 10   | %
|                                            |  |                                  |   |  |                                 |   |  |      |   |  |      |  



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##### Table of Contents

Revenues

Our revenues are derived from license fees and services, which include software maintenance and support, consulting and training. Total revenues increased 19% from $26.8 million for the quarter ended
September 30, 2005 to $31.9 million for the quarter ended September 30, 2006. A large portion of this increase was due to continued increase in new and repeat business from a number of Global 9000 customers (companies with annual revenues
greater than $1.0 billion) and further expansion of our product and services into financial and government sectors. As a result of these positive trends, we experienced improvements in our license, maintenance and support revenues for a combined
increase of 19% or approximately $5.1 million over the same period last year. Of this increase, approximately 12% or $3.2 million was associated with our acquisition of performancesoft that was completed in January of fiscal year 2006.

For the nine months of fiscal year 2006, total revenues were $93.4 million, a 21% or approximately $16.2 million increase over the same period last
year. This increase was seen across all revenue categories. Actuates business, excluding performancesoft, experienced a 10% or approximately $8.0 million increase over the same period last year, while performancesoft accounted for an increase
of 11%, or approximately $8.2 million.

Sales outside of North America were $7.6 million or 24% of total revenues for the third quarter of
fiscal year 2006, compared to $6.0 million or 22% of total revenues for the third quarter of fiscal year 2005. For the nine months ended September 30, 2006, sales outside of North America were $21.9 million, or 23% of total revenues as compared
to $17.5 million, or 23% of total revenues as compared to the nine months ended September 30, 2005. No single customer accounted for more than 10% of our revenues for any of the periods presented.



|               |  |                                   |        |   |                                  |   |            |   |  |               |       |  |              |   |            |   |        |   |  |   |        |   |  |   |        |  |    |  
|-------------- |  | --------------------------------- | ------ | - | -------------------------------- | - | ---------- | - |  | ------------- | ----- |  | ------------ | - | ---------- | - | ------ | - |  | - | ------ | - |  | - | ------ |  | -- | -
|               |  | Three Months Ended (In thousands) |        |   | Nine months Ended (In thousands) |  
|               |  | September 30,                     |        |   | Variance $s                     |   | Variance % |   |  | September 30, |       |  | Variance $s |   | Variance % |  
|               |  | 2006                              |        |   | 2005                             |   |            |   |  | 2006          |       |  | 2005         |   |            |  
|Revenues       |  |                                   |        |   |                                  |   |            |   |  |               |       |  |              |   |            |   |        |   |  |   |        |   |  |   |        |  |    |  
|License fees   |  | $                                 | 11,585 |   |                                  | $ | 8,894      |   |  | $             | 2,691 |  | 30           | % |            | $ | 32,756 |   |  | $ | 26,647 |   |  | $ | 6,109  |  | 23 | %
|Services       |  |                                   | 20,344 |   |                                  |   | 17,951     |   |  |               | 2,393 |  | 13           | % |            |   | 60,689 |   |  |   | 50,593 |   |  |   | 10,096 |  | 20 | %
|               |  |                                   |        |   |                                  |   |            |   |  |               |       |  |              |   |            |   |        |   |  |   |        |   |  |   |        |  |    |  
|Total Revenues |  | $                                 | 31,929 |   |                                  | $ | 26,845     |   |  | $             | 5,084 |  | 19           | % |            | $ | 93,445 |   |  | $ | 77,240 |   |  | $ | 16,205 |  | 21 | %
|               |  |                                   |        |   |                                  |   |            |   |  |               |       |  |              |   |            |   |        |   |  |   |        |   |  |   |        |  |    |  
|% of Revenue   |  |                                   |        |   |                                  |   |            |   |  |               |       |  |              |   |            |   |        |   |  |   |        |   |  |   |        |  |    |  
|License fees   |  |                                   | 36     | % |                                  |   | 33         | % |  |               |       |  |              |   |            |   | 35     | % |  |   | 34     | % |  |   |        |  |    |  
|Services       |  |                                   | 64     | % |                                  |   | 67         | % |  |               |       |  |              |   |            |   | 65     | % |  |   | 66     | % |  |   |        |  |    |  
|               |  |                                   |        |   |                                  |   |            |   |  |               |       |  |              |   |            |   |        |   |  |   |        |   |  |   |        |  |    |  
|Total Revenues |  |                                   | 100    | % |                                  |   | 100        | % |  |               |       |  |              |   |            |   | 100    | % |  |   | 100    | % |  |   |        |  |    |  
|               |  |                                   |        |   |                                  |   |            |   |  |               |       |  |              |   |            |   |        |   |  |   |        |   |  |   |        |  |    |  



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##### Table of Contents

License fees. The increase in license revenues for the third quarter of fiscal year 2006 as
compared to the same period in the prior year was primarily due to our acquisition of performancesoft, which added approximately $1.7 million to license revenue in the third quarter of fiscal year 2006. Additionally, in the third quarter of fiscal
year 2006 we recorded an order for $1.3 million in license revenue resulting from the conclusion of a license royalty compliance issue, which included royalty revenues accrued since the fourth quarter of fiscal year 2005. The increase in license
revenues for the first nine months of fiscal year 2006 was primarily due to our acquisition of performancesoft, which represented approximately $4.5 million of revenue and an increase in the total number of recognized high-dollar product license
transactions, such as the royalty compliance issue described above. No single customer accounted for more than 10% of our revenues for any of the periods presented.

The regions that realized the most significant license revenue growth were the North America and the EMEA regions, which accounted for a $2.3 million and $500,000 increase in license revenues, respectively, over the
third quarter of fiscal year 2005. These increases were offset by Asia Pacific which experienced a 10% or approximately $100,000 decrease in license revenue over the third quarter of fiscal year 2005. By region, North America accounted for
approximately 77% of the total license revenue while the Europe and Asia Pacific regions accounted for 17% and 6% of the total license revenues, respectively. For the same period last year, North America accounted for approximately 75% of the total
license revenue while the Europe and Asia Pacific regions accounted for 16% and 9% of the total license revenues, respectively. As a percentage of total revenues, license fee revenues increased from 33% in the third quarter of fiscal year 2005 to
36% in the third quarter of fiscal year 2006.

Excluding the acquisition of performancesoft, the region that realized the most significant
license revenue growth was the North America region, which accounted for an 15% or approximately $1.0 million increase in license revenues over the third quarter of fiscal year 2005, while EMEA region, excluding performancesoft, experienced a modest
growth of 5% or approximately $100,000. These increases were offset by the Asia Pacific region which experienced a 10% or approximately $100,000 decrease in license revenues (excluding performancesoft) over the third quarter of fiscal year 2005.
Excluding performancesoft, the North America region accounted for approximately 78% of the total license revenue while the Europe and Asia Pacific regions accounted for 15% and 7% of the total license revenues, respectively. Excluding
performancesoft, and for the same period last year, North America accounted for approximately 75% of the total license revenue while the Europe and Asia Pacific regions accounted for 16% and 9% of the total license revenues, respectively.

Services.The increase in services revenues was primarily driven by the growth in our maintenance and support revenues, which
increased in the third quarter of fiscal year 2006 by 17% or $2.3 million over the same quarter last year. The primary contributor to the growth came from continued expansion in our installed base of customers under maintenance plans, as well as a
continued implementation of an aggressive renewal campaign by our maintenance renewal group. Maintenance and support revenues related to performancesoft accounted for approximately $1.0 million of the total increase. We also experienced modest
growth in our professional services and training revenues, which increased by approximately 2% or $100,000 over the three months ended September 30, 2005. This was primarily attributed to revenues from performancesoft which showed an increase
in services revenues of approximately $450,000. Excluding the acquisition of performancesoft, professional services revenues decreased by 9%. This decrease was primarily attributed to two significant engagements during the third quarter of fiscal
year 2005 that resulted in higher consulting revenues over the third quarter of fiscal year 2006. Service margins decreased from 68% in the third quarter of fiscal year 2005 to 67% in the third quarter of fiscal year 2006. By region, North America
continued to account for approximately 76% of the total services revenue while the Europe and Asia Pacific regions accounted for 21% and 3% of the total services revenues, respectively. For the same period last year, North America accounted for
approximately 79% of the total services revenue while the Europe and Asia Pacific regions accounted for 17% and 4% of the total services revenues, respectively.

The growth in services revenues for the nine months ended September 30, 2006 was primarily attributed to the increase in our maintenance and support revenues of approximately 20% or $7.8 million, driven by a
continued growth in our installed base of customers under maintenance plans and our continued implementation of an aggressive renewal campaign by our maintenance renewal group. Of the total increase in maintenance and support revenues, $2.4 million
was attributed to our acquisition of performancesoft in January of 2006. Consulting services revenues also increased by 19% or $2.3 million during the first nine months of fiscal year 2006. This increase was primarily due to the acquisition of
performancesoft which accounted for $1.3 million of the growth while the remaining increase of approximately $1.0 million was attributed to our business excluding performancesoft.



24



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##### Table of Contents

Operating Expenses

Cost of license fees



|                     |  |                                   |     |   |                                  |   |     |            |  |      |               |   |      |              |    |  |            |       |   |  |   |       |   |  |   |      |   |  |     |   
|-------------------- |  | --------------------------------- | --- | - | -------------------------------- | - | --- | ---------- |  | ---- | ------------- | - | ---- | ------------ | -- |  | ---------- | ----- | - |  | - | ----- | - |  | - | ---- | - |  | --- | --
|                     |  | Three Months Ended (In thousands) |     |   | Nine months Ended (In thousands) |  
|                     |  | September 30,                     |     |   | Variance $s                     |   |     | Variance % |  |      | September 30, |   |      | Variance $s |    |  | Variance % |      
|                     |  | 2006                              |     |   | 2005                             |   |     |            |  | 2006 |               |   | 2005 |              |    | 
|Cost of license fees |  | $                                 | 465 |   |                                  | $ | 489 |            |  | $    | (24           | ) |      | (5           | )% |  | $          | 1,431 |   |  | $ | 1,804 |   |  | $ | (373 | ) |  | (21 | )%
|% of license revenue |  |                                   | 4   | % |                                  |   | 5   | %          |  |      |               |   |      |              |    |  |            | 4     | % |  |   | 7     | % |  |   |      |   |  |     |   

Cost of license fees consists primarily of product packaging, documentation, production costs and
the amortization of purchased technology. The decrease in costs of license fees in absolute dollars for the third quarter of fiscal year 2006, compared to the corresponding period in the prior year, was not significant. For the nine months ended
September 30, 2006 the decrease in cost of license fees compared to the corresponding period in the prior year, was primarily due to reduced compensation, printing and production related costs as well as amortization of the purchased
technologies associated with the acquisition of Tidestone and Nimble which had been fully amortized in fiscal year 2006 which more than offset the increase in amortization of purchased intangibles derived from the performancesoft acquisition. We
expect our cost of license fees, as a percentage of revenues from license fees, to remain between 4% and 7% of revenues from license fees for the remainder of fiscal year 2006.

Cost of services



|                      |  |                                   |       |   |                                  |   |            |   |  |               |       |  |              |   |            |   |        |   |  |   |        |   |  |   |       |  |    |  
|--------------------- |  | --------------------------------- | ----- | - | -------------------------------- | - | ---------- | - |  | ------------- | ----- |  | ------------ | - | ---------- | - | ------ | - |  | - | ------ | - |  | - | ----- |  | -- | -
|                      |  | Three Months Ended (In thousands) |       |   | Nine months Ended (In thousands) |  
|                      |  | September 30,                     |       |   | Variance $s                     |   | Variance % |   |  | September 30, |       |  | Variance $s |   | Variance % |  
|                      |  | 2006                              |       |   | 2005                             |   |            |   |  | 2006          |       |  | 2005         |   |            |  
|Cost of services      |  | $                                 | 6,788 |   |                                  | $ | 5,702      |   |  | $             | 1,086 |  | 19           | % |            | $ | 21,387 |   |  | $ | 17,271 |   |  | $ | 4,116 |  | 24 | %
|% of services revenue |  |                                   | 33    | % |                                  |   | 32         | % |  |               |       |  |              |   |            |   | 35     | % |  |   | 34     | % |  |   |       |  |    |  

Cost of services consists primarily of personnel and related costs, stock-based compensation,
facilities costs incurred in providing software maintenance and support, training and consulting services, as well as third-party costs incurred in providing training and consulting services. The increase in cost of services for the third quarter of
fiscal year 2006, compared to the corresponding period in the prior year, was primarily due to a (i) 32% increase to our headcount driven primarily by the acquisition of performancesoft in January of 2006, and (ii) the expensing of
stock options related to the adoption of SFAS 123R as of January 1, 2006 (see Note 1 to the condensed consolidated financial statements) which increased cost of services expense by approximately $200,000 for the three months ended
September 30, 2006.

For the nine months ended September 30, 2006 the increase in cost of services was primarily due to
(i) a 32% increase to our headcount driven primarily by the acquisition of performancesoft in January 2006, (ii) an increase in third party consulting fees of approximately $1.5 million driven by the use of consultants to compensate for
unusually high employee consultant turnover in North America during fiscal year 2006, as well as heavy use of consultants to support high e.Service revenue growth in Europe during fiscal year 2006, and (iii) the expensing of stock options
related to the adoption of SFAS 123R as of January 1, 2006 (see Note 1 to the condensed consolidated financial statements) which increased cost of services expense by approximately $600,000 for the nine months ended September 30, 2006.
These increases were offset by decreases in employee compensation and related costs, excluding performancesoft of approximately $200,000. We currently expect our cost of services expenses as a percentage of total services revenues to be in the range
of 33% to 38% of total services revenues for the remainder of fiscal year 2006.



25



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##### Table of Contents

Sales and marketing



|                    |  |                                   |        |   |                                  |   |            |   |  |               |       |  |              |   |            |   |        |   |  |   |        |   |  |   |       |  |    |  
|------------------- |  | --------------------------------- | ------ | - | -------------------------------- | - | ---------- | - |  | ------------- | ----- |  | ------------ | - | ---------- | - | ------ | - |  | - | ------ | - |  | - | ----- |  | -- | -
|                    |  | Three Months Ended (In thousands) |        |   | Nine months Ended (In thousands) |  
|                    |  | September 30,                     |        |   | Variance $s                     |   | Variance % |   |  | September 30, |       |  | Variance $s |   | Variance % |  
|                    |  | 2006                              |        |   | 2005                             |   |            |   |  | 2006          |       |  | 2005         |   |            |  
|Sales and marketing |  | $                                 | 11,879 |   |                                  | $ | 9,411      |   |  | $             | 2,468 |  | 26           | % |            | $ | 35,586 |   |  | $ | 26,564 |   |  | $ | 9,022 |  | 34 | %
|% of total revenue  |  |                                   | 37     | % |                                  |   | 35         | % |  |               |       |  |              |   |            |   | 38     | % |  |   | 34     | % |  |   |       |  |    |  

Sales and marketing expenses consist primarily of salaries, commissions, stock-based compensation
and bonuses earned by sales and marketing personnel, promotional expenses, travel, entertainment and facilities costs. The increase in sales and marketing expenses in both absolute dollars and as a percentage of total revenues for the third quarter
of fiscal year 2006 was primarily due to (i) a 22% increase to our headcount driven primarily by the acquisition of performancesoft in January of 2006, which increased sales and marketing expenses by approximately $2.0 million, and
(ii) the expensing of stock options related to the adoption of SFAS 123R as of January 1, 2006 (see Note 1 to the condensed consolidated financial statements) which increased sales and marketing expenses by approximately $600,000 for the
three months ended September 30, 2006. These increases were offset by decreases of approximately $200,000 in other marketing and promotional related costs.

For the nine months ended September 30, 2006 the increase in sales and marketing expenses was primarily due to an increase of $5.5 million in compensation, travel and other employee related expenses. This
increase was primarily the result of a 22% increase to our sales and marketing related headcount, which was driven mainly by the acquisition of performancesoft. The increase in overall sales and marketing expenses was also a result of higher
commissions driven by increased sales in fiscal year 2006, as well as merit increases which were approved in the first quarter of the year. In addition to the increase in employee related expenses, total sales and marketing expenses also increased
as a result of the expensing of stock options related to the adoption of SFAS 123R as of January 1, 2006 (see Note 1 to the condensed consolidated financial statements) which increased sales and marketing expenses by approximately $1.7 million
for the nine months ended September 30, 2006. We currently expect our sales and marketing expenses as a percentage of total revenues to be in the range of 37% to 40% of total revenues for the remainder of fiscal year 2006.

Research and development



|                         |  |                                   |       |   |                                  |   |            |   |  |               |       |  |              |   |            |   |        |   |  |   |        |   |  |   |       |  |    |  
|------------------------ |  | --------------------------------- | ----- | - | -------------------------------- | - | ---------- | - |  | ------------- | ----- |  | ------------ | - | ---------- | - | ------ | - |  | - | ------ | - |  | - | ----- |  | -- | -
|                         |  | Three Months Ended (In thousands) |       |   | Nine months Ended (In thousands) |  
|                         |  | September 30,                     |       |   | Variance $s                     |   | Variance % |   |  | September 30, |       |  | Variance $s |   | Variance % |  
|                         |  | 2006                              |       |   | 2005                             |   |            |   |  | 2006          |       |  | 2005         |   |            |  
|Research and development |  | $                                 | 5,166 |   |                                  | $ | 4,011      |   |  | $             | 1,155 |  | 29           | % |            | $ | 15,776 |   |  | $ | 12,370 |   |  | $ | 3,406 |  | 28 | %
|% of total revenue       |  |                                   | 16    | % |                                  |   | 15         | % |  |               |       |  |              |   |            |   | 17     | % |  |   | 16     | % |  |   |       |  |    |  

Research and development costs consist primarily of personnel and related costs associated with
the development of new products, stock-based compensation costs, enhancement of existing products, and quality assurance and testing. The increase in research and development expenses in the third quarter of fiscal year 2006 was primarily attributed
to a 16% increase to our headcount driven primarily by the acquisition of performancesoft in January of 2006, which increased research and development expenses by approximately $700,000, and the expensing of stock options related to the
adoption of SFAS 123R as of January 1, 2006 (see Note 1 to the condensed consolidated financial statements) which increased research and development costs by approximately $300,000 for the three months ended September 30, 2006.

For the nine months ended September 30, 2006 the increase in research and development expenses was primarily due to (i) an increase of $1.7
million in compensation, travel and other employee related expenses. This increase was primarily the result of a 16% increase to our research and development related headcount, which was primarily driven by the acquisition of performancesoft in
January of 2006. The increase in overall research and development expenses was also a result of higher expenses related to professional services in support of the release of version 9 of our products in the third quarter of this year, as well as
merit increases which were approved in the first quarter of the year. In addition to these increases, total research and development expenses further increased as a result of the expensing of stock options related to the adoption of SFAS 123R as of
January 1, 2006 (see Note 1 to the condensed consolidated financial statements) which increased research and development costs by approximately $900,000 for the nine months ended September 30, 2006. We believe that continued investments in
technology and product development are essential for us to remain competitive in the markets we serve, and expect our research and development expenses as a percentage of total revenues to be in the range of 16% to 19% of total revenues for the
remainder of fiscal year 2006.



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General and administrative



|                           |  |                                   |       |   |                                  |   |            |   |  |               |       |  |              |   |            |   |        |   |  |   |       |   |  |   |       |  |    |  
|-------------------------- |  | --------------------------------- | ----- | - | -------------------------------- | - | ---------- | - |  | ------------- | ----- |  | ------------ | - | ---------- | - | ------ | - |  | - | ----- | - |  | - | ----- |  | -- | -
|                           |  | Three Months Ended (In thousands) |       |   | Nine months Ended (In thousands) |  
|                           |  | September 30,                     |       |   | Variance $s                     |   | Variance % |   |  | September 30, |       |  | Variance $s |   | Variance % |  
|                           |  | 2006                              |       |   | 2005                             |   |            |   |  | 2006          |       |  | 2005         |   |            |  
|General and administrative |  | $                                 | 3,758 |   |                                  | $ | 2,622      |   |  | $             | 1,136 |  | 43           | % |            | $ | 12,021 |   |  | $ | 9,933 |   |  | $ | 2,088 |  | 21 | %
|% of total revenue         |  |                                   | 12    | % |                                  |   | 10         | % |  |               |       |  |              |   |            |   | 13     | % |  |   | 13    | % |  |   |       |  |    |  

General and administrative expenses consist primarily of personnel costs, stock-based compensation
costs and related costs for finance, human resources, information systems and general management, as well as legal, bad debt and accounting expenses. The increase in general and administrative expenses in both absolute dollars and as a percentage of
total revenues for the third quarter of fiscal year 2006 was primarily due to (i) the expensing of stock options related to the adoption of SFAS 123R as of January 1, 2006 (see Note 1 to the condensed consolidated financial statements)
which increased general and administrative expenses by approximately $600,000 for the three months ended September 30, 2006, (ii) a $500,000 increase in employee compensation and related costs, which was driven by a 15% increase in
headcount primarily related to the acquisition of performancesoft in January of 2006. The three months ended September 30, 2006 and 2005 also reflected a reduction in the bad debt reserve of $220,000 and $240,000, respectively.

For the nine months ended September 30, 2006 the increase in general and administrative expenses was primarily due to (i) the expensing of
stock options related to the adoption of SFAS 123R as of January 1, 2006 (see Note 1 to the condensed consolidated financial statements) which increased general and administrative expenses by approximately $1.6 million for the nine months ended
September 30, 2006, and (ii) a $1.4 million increase in employee related costs which was driven by a 15% increase in our headcount primarily related to the acquisition of performancesoft in January of 2006. These increased
expenses were offset by decreases in (i) accounting and other professional fees of approximately $1.2 million due to lower Section 404 compliance audit fees and legal fees associated with the MicroStrategy case, and (ii) a decrease of
approximately $200,000 in total bad debt expense. We expect our general and administrative expenses to be in the range of 12% to 15% of total revenues for the remainder of the fiscal year 2006.

Amortization of other intangibles



|                                  |  |                                   |     |              |                                  |            |    |  |               |     |      |              |   |            |   |     |  |   |     |   |  |   |     |  |    |  
|--------------------------------- |  | --------------------------------- | --- | ------------ | -------------------------------- | ---------- | -- |  | ------------- | --- | ---- | ------------ | - | ---------- | - | --- |  | - | --- | - |  | - | --- |  | -- | -
|                                  |  | Three Months Ended (In thousands) |     |              | Nine months Ended (In thousands) |           
|                                  |  | September 30,                     |     | Variance $s |                                  | Variance % |    |  | September 30, |     |      | Variance $s |   | Variance % |  
|                                  |  | 2006                              |     |              | 2005                             |            |    |  | 2006          |     | 2005 |              |   |           
|Amortization of other intangibles |  | $                                 | 237 |              |                                  | $          | 17 |  | $             | 220 |      | 1,294        | % |            | $ | 711 |  | $ | 487 |   |  | $ | 224 |  | 46 | %
|% of total revenue                |  |                                   | 1   | %            |                                  |            |   |  |               |     |      |              |   |            |   |    |  |   | 1   | % |  |   |     |  |    |  

The increase in amortization of other purchased intangibles in both absolute dollars and as a
percentage of total revenues for the third quarter of fiscal year 2006 was due to increases in amortization costs of $237,000 related to our acquisition of performancesoft in January of fiscal year 2006. This increase was offset by the fact that we
fully amortized the other intangibles associated with our acquisitions of Tidestone and Nimble Technology by the second and third quarter of fiscal year 2005, respectively. For the first nine months of fiscal year 2006, amortization of other
intangibles increased by



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$711,000 primarily due to the amortization of intangibles recorded in connection with our acquisition of performancesoft
in January of fiscal year 2006, offset by full amortization of other intangibles associated with our acquisitions of Tidestone and Nimble Technology.

Purchased in-process research and development

For the first nine months of fiscal year 2006 and in
connection with the acquisition of performancesoft, we recorded a charge to operations of $900,000 for purchased in-process research and development. This charge was recorded during the first quarter of fiscal year 2006 and was expensed because it
had not reached technological feasibility and had no alternative future uses. The value of the purchased in-process research and development was computed using the excess earnings approach analysis, which is based on the theory that all assets must
contribute to the profitability of an enterprise. We determined the valuation of the purchased in-process research and development with the assistance of an independent third party.

Interest and other income, net



|                               |  |                                   |     |   |                                  |   |            |   |  |               |     |  |              |   |            |   |       |   |  |   |     |   |  |   |     |  |    |  
|------------------------------ |  | --------------------------------- | --- | - | -------------------------------- | - | ---------- | - |  | ------------- | --- |  | ------------ | - | ---------- | - | ----- | - |  | - | --- | - |  | - | --- |  | -- | -
|                               |  | Three Months Ended (In thousands) |     |   | Nine months Ended (In thousands) |  
|                               |  | September 30,                     |     |   | Variance $s                     |   | Variance % |   |  | September 30, |     |  | Variance $s |   | Variance % |  
|                               |  | 2006                              |     |   | 2005                             |   |            |   |  | 2006          |     |  | 2005         |   |            |  
|Interest and other income, net |  | $                                 | 636 |   |                                  | $ | 376        |   |  | $             | 260 |  | 69           | % |            | $ | 1,314 |   |  | $ | 909 |   |  | $ | 405 |  | 45 | %
|% of total revenue             |  |                                   | 2   | % |                                  |   | 1          | % |  |               |     |  |              |   |            |   | 1     | % |  |   | 1   | % |  |   |     |  |    |  

Interest and other income, net, is comprised primarily of interest income earned by the Company on
cash and short-term investments as well as the effects of foreign currency fluctuation. Interest income increased by approximately $140,000 during the third quarter of fiscal year 2006 compared to the same period last year due primarily to a higher
weighted average interest rate on our investments. We also experienced an increase of approximately $100,000 in other income due to an increase in the expected refund of investment tax credits related to our research and development operations in
Canada.

For the nine months ended September 30, 2006, the 45% increase was primarily due to a higher weighted average interest rate
on our investments which resulted in higher interest income in fiscal year 2006, an increase in the expected refund of investment tax credits related to our research and development operations in Canada, as well as the fact that we incurred a
$300,000 asset impairment charge in fiscal year 2005. These changes were partially offset by increased foreign exchange losses in fiscal year 2006.

Provision for income taxes



|                           |  |                                   |       |    |                                  |   |            |    |  |               |     |  |              |   |            |   |       |    |  |   |       |    |  |   |       |  |     |  
|-------------------------- |  | --------------------------------- | ----- | -- | -------------------------------- | - | ---------- | -- |  | ------------- | --- |  | ------------ | - | ---------- | - | ----- | -- |  | - | ----- | -- |  | - | ----- |  | --- | -
|                           |  | Three Months Ended (In thousands) |       |    | Nine months Ended (In thousands) |  
|                           |  | September 30,                     |       |    | Variance $s                     |   | Variance % |    |  | September 30, |     |  | Variance $s |   | Variance % |  
|                           |  | 2006                              |       |    | 2005                             |   |            |    |  | 2006          |     |  | 2005         |   |            |  
|Provision for income taxes |  | $                                 | 1,745 |    |                                  | $ | 1,225      |    |  | $             | 520 |  | 42           | % |            | $ | 3,303 |    |  | $ | 1,507 |    |  | $ | 1,796 |  | 119 | %
|% of total revenue         |  |                                   | (5    | )% |                                  |   | (4         | )% |  |               |     |  |              |   |            |   | (3    | )% |  |   | (2    | )% |  |   |       |  |     |  

We recorded an income tax provision of $1.7 million in the three months ended September 30,
2006 as compared to an income tax provision of $1.2 million in the three months ended September 30, 2005. For the nine months ended September 30, 2006, we recorded an income tax provision of $3.3 million, as compared to an income tax
provision of $1.5 million for the same period of fiscal year 2005. The increase in the income tax provision for 2006 as compared to 2005 is due to higher projected domestic pre-tax income for 2006, which allows for the usage of NOLs and R
& D tax credits, a higher effective tax as a result of adopting SFAS 123R and the write off of in-process R & D of $900,000 treated as a discrete event. The book expenses as a result of SFAS 123R lowers our pre-tax net income, however, the
amounts are not deductible for tax purposes, which produces a higher effective tax rate.

In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized on a jurisdiction by jurisdiction basis. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the historical income, projected future income, the expected timing of the reversals of existing



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temporary differences and the implementation of tax-planning strategies in making this assessment. Based upon the level
of historical tax losses, management believes it is more likely than not that the Company will not realize a majority of the benefits of these deductible differences. Therefore, a valuation allowance has been established to offset the deferred tax
assets where these benefits may not be realized.

The Company, however, may determine it will be able to realize all or a portion of its
deferred tax assets in the U.S. in the foreseeable future. Upon such determination a reduction of valuation allowance related to its deferred tax assets would cause a material increase to net earnings in the period in which such determination is
made. Significant management judgment is required in determining the period in which the reversal of a valuation allowance should occur. The Company considers all available evidence, both positive and negative, in making this determination,
including historical income, projected future income, the expected timing of the reversals of existing temporary differences and the implementation of tax-planning strategies.

The Companys ability to utilize the net operating losses and tax credit carry-forwards in the future may be subject to an annual limitation in the
event of past or future ownership changes as defined in Section 382 of the Internal Revenue Code and similar state tax laws. The annual limitation may result in the expiration of net operating losses and tax credits before utilization.

Liquidity and Capital Resources

Our
sources of cash, cash equivalents and short-term investments are funds generated from our business operations and funds that may be drawn down under our credit facility.

At September 30, 2006, we had cash, cash equivalents and short-term investments of $47.5 million, a decrease of approximately $6.9 million from $54.4 million at December 31, 2005. This decrease was largely
due to our cash outlay for the acquisition of performancesoft in the first quarter of fiscal year 2006. We also had $32.2 million in net working capital at September 30, 2006, representing a decrease of approximately $6.7 million from $38.9
million at December 31, 2005. The decrease in working capital was primarily due to our acquisition of performancesoft in the first quarter of fiscal year 2006 which resulted in a reduction to cash and cash equivalents.

Net cash provided by operating activities during the nine months ended September 30, 2006 was $9.4 million, resulting from a net income of $3.6
million, adjusted for non-cash charges, including $4.8 million in stock-based compensation, $2.7 million of depreciation and amortization, purchased in-process research and development of $900,000 related to our acquisition of performancesoft, and
an increase in our deferred revenues of $2.4 million primarily due to increased sales. These increases were offset by a decrease of approximately $150,000 from accounts receivables due to higher days sales outstanding, which increased from 70 days
at September 30, 2005 to 81 days at September 30, 2006 as well as decreases totaling approximately $5.0 million in accounts payable, accrued compensation and other associated liabilities.

Our primary source of operating cash flows is the collection of accounts receivable from our customers, including maintenance, which is typically billed
annually in advance. Our operating cash flows are also impacted by the timing of payments to our vendors for accounts payable. We generally pay our vendors and service providers in accordance with the invoice terms and conditions. The timing of cash
payments in future periods will be impacted by the terms of accounts payable arrangements and the timing of our cash inflows.

Cash used in
investing activities was $7.5 million for the nine months ended September 30, 2006 compared to approximately $1.1 million provided in the same period in fiscal 2005. The primary driver for this decrease during the first nine months of fiscal
year 2006 was the acquisition of performancesoft, which resulted in a net cash payment of approximately $15.3 million. Due to this acquisition, we liquidated our investments by a total of approximately $13.2 million to accommodate the funding of
this transaction. In addition, during February 2006, a minority shareholder of Actuate Japan notified us that it wished to exercise its rights to put its equity interest in Actuate Japan and as a result we paid approximately $354,000 for this
minority interest during the first quarter of 2006.

Cash provided by financing activities was approximately $470,000 for the nine months
ended September 30, 2006 compared to $4.5 million used for the same period in fiscal year 2005. The increase in cash provided was primarily the result of the tax benefits realized from exercise of stock options and higher proceeds from the
issuance of common stock during the first nine months of fiscal year 2006, offset by lower level of stock repurchases.

We believe that our
current cash balances and cash generated from operations will be sufficient to meet our working capital and capital expenditures requirements for at least the next twelve months. Thereafter, if cash generated from operations is insufficient to
satisfy our liquidity requirements, we may find it necessary to sell additional equity, draw down under our existing credit facility or obtain additional credit facilities. The sale of additional equity could result in additional



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dilution to our current stockholders. A portion of our cash may be used to acquire or invest in complementary businesses,
including the acquisition of the minority interest in our 88% owned subsidiary in Japan, or complementary products or to obtain the right to use complementary technologies.

Contractual Obligations and Commercial Commitments.

The following table summarizes our contractual obligations as of September 30, 2006 (in thousands):



|                         |  |       |        |                  |   |             |  |             |       |            |   |       |  |   |    
|------------------------ |  | ----- | ------ | ---------------- | - | ----------- |  | ----------- | ----- | ---------- | - | ----- |  | - | ---
|                         |  | Total |        | Less than 1 year |   | 1  3 years |  | 3  5 years |       | Thereafter
|Obligations:             |  |       |        |                  |   |             |  |             |       |            |   |       |  |   |    
|Operating lease (1)      |  | $     | 19,207 |                  | $ | 5,654       |  | $           | 7,478 |            | $ | 5,931 |  | $ | 144
|Purchase obligations (2) |  |       | 2,816  |                  |   | 2,816       |  |             |      |            |   |      |  |   |   
|                         |  |       |        |                  |   |             |  |             |       |            |   |       |  |   |    
|Total                    |  | $     | 22,023 |                  | $ | 8,470       |  | $           | 7,478 |            | $ | 5,931 |  | $ | 144
|                         |  |       |        |                  |   |             |  |             |       |            |   |       |  |   |    

---

|(1) | Our future contractual obligations include minimum lease payments under operating leases at September 30, 2006, net of contractual sublease proceeds. Of the remaining net
future minimum lease payments, approximately $10.9 million is included in restructuring liabilities on the Companys consolidated balance sheet as of September 30, 2006.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Purchase obligations represent an estimate of all open purchase orders and contractual obligations in the ordinary course of business for which we have not received the goods or
services as of September 30, 2006. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the
delivery of goods or performance of services.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In connection with the office building leases in South San Francisco,
California, we initially provided the landlord with letters of credit in the amount of $3.9 million as a security deposit. We have provided a security interest in all of our assets as collateral for the letter of credit. These letters of credit have
been reduced at pre-determined intervals. As of September 30, 2006 the amounts remaining under these letters of credit total approximately $700,000.



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk. Market risk
represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of credit risk, fluctuations in interest rates and foreign exchange rates.

Foreign Currency Exchange Risk. During the first nine months of fiscal years 2006 and 2005 we derived 23% and 23%, respectively, of
our total revenues from sales outside of North America. We face exposure to market risk on these receivables with respect to fluctuations in the relative value of currencies. Our international revenues and expenses are denominated in foreign
currencies, principally the Euro and the British Pound Sterling. The functional currency of each of our foreign subsidiaries is the local currency. We are also exposed to foreign exchange rate fluctuations as the financial results of foreign
subsidiaries are translated into U.S. dollars in consolidation. As exchange rates vary, transaction gains and losses may vary from expectations and adversely impact overall expected profitability. Our realized losses due to foreign exchange rate
fluctuations were approximately $120,000 for the first nine months of fiscal 2006 compared to realized gains of approximately $124,000 during the same period last year.

Interest Rate Risk. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we
invest in highly liquid and high quality debt securities. Due to the nature of our investments, we believe that there is no material risk exposure.

Credit Risk.Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, investments in marketable securities, trade accounts receivable. We have policies that
limit investments in investment grade securities and the amount of credit exposure to any one issuer. We perform ongoing credit evaluations of our customers and maintain an allowance for potential credit losses. We do not require collateral or other
security to support client receivables. Our credit risk is also mitigated because our customer base is diversified by geography and no single customer has accounted for more than 10% of our consolidated revenue on an annual basis. We generally do
not use foreign exchange contracts to hedge the risk in receivables denominated in foreign currencies. We do not hold or issue derivative financial instruments for trading or speculative purposes.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report (the Evaluation Date), the Company carried out an evaluation under the supervision and with
the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Companys disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based on an evaluation under the supervision and with the participation of the Companys management, the Companys principal executive
officer and principal financial officer have concluded that the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)) were effective as of September 30, 2006 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Companys management, including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There were no changes in Actuates internal control over financial reporting during the three months ended September 30, 2006 that have
materially affected, or are reasonably likely to materially affect, Actuates internal control over financial reporting.

In January
2006, the Company acquired all of the outstanding shares of capital stock of performancesoft, Inc., a privately-held entity headquartered in Toronto, Canada. Subsequent to the acquisition, the Company has instituted changes to performancesoft
internal control over financial reporting and we are currently aligning performancesofts internal controls over financial reporting with the Companys controls over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

The Company is engaged in certain legal actions arising in the ordinary course
of business, including international employment litigation arising out of restructuring activities. Although there can be no assurance as to the outcome of such litigation, the Company believes that it has adequate legal defenses and that the
ultimate outcome of any of these actions will not have a material effect on the Companys financial position or results of operations.



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Item 1A. Risk Factors

Investors should carefully consider the following risk factors and warnings
before making an investment decision. The risks described below are not the only ones facing Actuate. Additional risks that we do not yet know of or that we currently think are immaterial may also materially impair our business operations. If any of
the following risks, currently unknown risks, or currently known risks that are mistakenly believed to be immaterial, actually occur, our business, operating results or financial condition could be materially harmed. In such case, the trading price
of our common stock could decline and you may lose all or part of your investment. Investors should also refer to the other information set forth in this Quarterly Report on Form 10-Q, including the financial statements and the notes thereto.

THE COMPANYS OPERATING RESULTS MAY BE VOLATILE AND DIFFICULT TO PREDICT. IF IT FAILS TO MEET ITS ESTIMATES OF QUARTERLY AND ANNUAL OPERATING
RESULTS OR IT FAILS TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE OF ITS STOCK MAY DECREASE SIGNIFICANTLY.

The susceptibility of the Companys operating results to significant fluctuations makes any prediction, including the Companys estimates of future operating results, difficult. In addition, the Company believes that
period-to-period comparisons of its operating results are not necessarily meaningful and you should not rely on them as indications of the Companys future performance. The Companys operating results have in the past varied, and may in
the future vary significantly due to factors such as the following:



| |  |  | Demand for its products;
| | - |  | ------------------------



| |  |  | The size and timing of significant orders for its products;
| | - |  | -----------------------------------------------------------



| |  |  | A slowdown or a decrease in spending on information technology by its current and/or prospective customers;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | Competition from products that are directly competitive with its products;
| | - |  | --------------------------------------------------------------------------



| |  |  | Lost revenue from introduction or market acceptance of open source products that are directly competitive with its products;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | The management, performance and expansion of its international operations;
| | - |  | --------------------------------------------------------------------------



| |  |  | Foreign currency exchange rate fluctuations;
| | - |  | --------------------------------------------



| |  |  | Customers desire to consolidate their purchases of enterprise reporting and business intelligence software to one or a very small number of vendors from which a customer has
already purchased software;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | General domestic and international economic and political conditions, including war, terrorism, and the threat of war or terrorism;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Sales cycles and sales performance of its indirect channel partners;
| | - |  | --------------------------------------------------------------------



| |  |  | Changes in the way it and its competitors price their respective products and services, including maintenance and transfer fees;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continued successful relationships and the establishment of new relationships with OEMs;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | Changes in its level of operating expenses and its ability to control costs;
| | - |  | ----------------------------------------------------------------------------



| |  |  | The outcome or publicity surrounding any pending or threatened lawsuits;
| | - |  | ------------------------------------------------------------------------



| |  |  | Ability to make new products and product enhancements commercially available in a timely manner;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | Ability to effectively launch new or enhanced products, including the timely education of the Companys sales, marketing and consulting personnel with respect to such new or
enhanced products.;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Customers delaying purchasing decisions in anticipation of new products or product enhancements;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | Budgeting cycles of its customers;
| | - |  | ----------------------------------



| |  |  | Failure to successfully manage its acquisitions;
| | - |  | ------------------------------------------------



| |  |  | Defects in its products and other product quality problems;
| | - |  | -----------------------------------------------------------



| |  |  | Failure to successfully meet hiring needs including for qualified professional services employees and unexpected personnel changes;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in the market segments and types of customers at which it focuses its sales and marketing efforts;
| | - |  | ----------------------------------------------------------------------------------------------------------



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| |  |  | Changes in perpetual licensing models to term- or subscription-based models with respect to which license revenue is not fully recognizable at the time of initial sale; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in service models with respect to which consulting services are performed on a fixed-fee, rather than variable fee, basis.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------

Because the Companys software products are typically shipped shortly after orders are received, total revenues in any quarter are substantially
dependent on orders booked and shipped throughout that quarter. Furthermore, several factors may require the Company, in accordance with accounting principles generally accepted in the United States, to defer recognition of license fee revenue for a
significant period of time after entering into a license agreement, including:



| |  |  | Whether the license agreement includes both software products that are then currently available and software products or other enhancements that are still under development;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Whether the license agreement relates entirely or partly to software products that are currently not available;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | Whether the license agreement requires the performance of services that may preclude revenue recognition until successful completion of such services;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Whether the license agreement includes acceptance criteria that may preclude revenue recognition prior to customer acceptance; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Whether the license agreement includes undelivered elements (including limited terms or durations) that may preclude revenue recognition prior to customer acceptance.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, the Company may in the future experience fluctuations in its gross and operating margins due to changes in the
mix of its domestic and international revenues, changes in the mix of its direct sales and indirect sales and changes in the mix of license revenues and service revenues, as well as changes in the mix among the indirect channels through which its
products are offered.

A significant portion of the Companys total revenues in any given quarter is derived from existing customers.
The Companys ability to achieve future revenue growth, if any, will be substantially dependent upon its ability to increase revenues from license fees and services from existing customers, to expand its customer base and to increase the
average size of its orders. To the extent that such increases do not occur in a timely manner, the Companys business, operating results and financial condition would be harmed.

The Companys expense levels and any plans for expansion, are based in significant part on its expectations of future revenues and are relatively
fixed in the short-term. If revenues fall below its expectations and it is unable to reduce its spending in response quickly, the Companys business, operating results, and financial condition are likely to be harmed.

The Company has implemented changes to its license pricing structure. If these changes are not accepted by the Companys current customers or future
customers, its business, operating results, and financial condition could be harmed.

Based upon all of the factors described above, the
Company has a limited ability to forecast the amount and mix of future revenues and expenses and it is likely that at some time, the Companys operating results will be below its estimates or the expectations of public market analysts and
investors. In the event that operating results are below its estimates or other expectations, the price of the Companys common stock is likely to decline.

THE COMPANY HAS MADE, AND MAY IN THE FUTURE MAKE, ACQUISITIONS, WHICH INVOLVE NUMEROUS RISKS.

The Companys business
is highly competitive, and as such, its growth is dependent upon market growth and its ability to enhance its existing products, introduce new products on a timely basis and expand its distribution channels and professional services organization.
One of the ways the Company has addressed and will continue to address these issues is through acquisitions of other companies. On January 5, 2006, the Company purchased all of the outstanding capital stock of performancesoft, Inc., a privately
held company located in Toronto, Canada (performancesoft).

Specifically, the acquisition of performancesoft involves numerous
risks, including the following:



| |  |  | The Companys ability to maintain or achieve performancesoft revenue growth or to anticipate a decline in performancesoft revenue from any of its products or services;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Companys ability to develop and introduce performancesoft products (including the product known as Track which was released in the Companys third quarter) and
enhancements that respond to its customer requirements and rapid technological change;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | The Companys ability to maintain or select and implement appropriate business models and strategies for performancesoft;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | The risks inherent in international operations, such as currency exchange rate fluctuations and economic and political conditions in Canada;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The performancesoft transaction was completed without the benefit of audited financial statements from performancesoft;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | performancesoft must transition its sales process to take into account revenue recognition requirements under US GAAP and slowness in doing so could impact the Companys
revenue and earnings and result in increased deferred revenue;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The performancesoft stock purchase agreement includes large escrow ($2.65 million, of which $1.0 million was paid out subsequent to September 30, 2006) and earnout or
contingent consideration (up to $13.5 million) provisions that could be the subject of disputes between the Company and certain former performancesoft shareholders; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The performancesoft stock purchase agreement includes a covenant whereby the Company has agreed to keep the performancesoft subsidiary separate through fiscal 2006.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

Generally, acquisitions (including that of performancesoft) involve numerous risks, including the following:



| |  |  | The benefits of the acquisition not materializing as planned or not materializing within the time periods or to the extent anticipated;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Companys ability to manage acquired entities people and processes that are headquartered in separate geographical locations from the Companys headquarters;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The possibility that the Company will pay more than the value it derives from the acquisition;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | Difficulties in integration of the operations, technologies, and products of the acquired companies;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | The assumption of certain known and unknown liabilities of the acquired companies;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | Difficulties in retaining key relationships with customers, partners and suppliers of the acquired company;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | The risk of diverting managements attention from normal daily operations of the business;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | The Companys ability to issue new releases of the acquired companys products on existing or other platforms;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | Negative impact to the Companys financial condition and results of operations and the potential write down of impaired goodwill and intangible assets resulting from combining
the acquired companys financial condition and results of operations with its financial statements;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Risks of entering markets in which the Company has no or limited direct prior experience; and
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | The potential loss of key employees of the acquired company.
| | - |  | ------------------------------------------------------------

Mergers and acquisitions of high-technology companies are inherently risky, and the Company cannot be certain that any acquisition will be successful and will not materially harm the Companys business, operating results or financial
condition.

INTELLECTUAL PROPERTY CLAIMS AGAINST THE COMPANY CAN BE COSTLY AND COULD RESULT IN THE LOSS OF SIGNIFICANT RIGHTS.

Third parties may claim that the Companys current or future products infringe their intellectual property rights. The Company has been subject to
infringement claims in the past and it expects that companies in the Business Intelligence software market will increasingly be subject to infringement claims as the number of products and/or competitors in its industry segment grows and the
functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming to defend, result in costly litigation and expenses, divert managements attention and resources, cause product
shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all. A successful claim of product infringement
against the Company and its failure or inability to license the infringed or similar technology could harm the Companys business, operating results and financial condition.



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IF THE COMPANY FAILS TO GROW REVENUE FROM INTERNATIONAL OPERATIONS AND EXPAND ITS INTERNATIONAL OPERATIONS ITS
BUSINESS WOULD BE SERIOUSLY HARMED.

The Companys total revenues derived from sales outside North America were 23%, 23%
and 22% for the first nine months of fiscal years 2006, 2005 and 2004, respectively. Its ability to achieve revenue growth in the future will depend in large part on its success in increasing revenues from international sales. The Company intends to
continue to invest significant resources to expand its sales and support operations outside North America and to enter additional international markets. In order to expand international sales, the Company must establish additional foreign
operations, expand its international channel management and support organizations, hire additional personnel, recruit additional international resellers and increase the productivity of existing international resellers. If it is not successful in
expanding international operations in a timely and cost-effective manner, the Companys business, operating results and financial condition could be harmed.

IF THE COMPANY DOES NOT SUCCESSFULLY EXPAND ITS DISTRIBUTION CHANNELS AND DEVELOP AND MAINTAIN RELATIONSHIPS WITH OEMs, ITS BUSINESS WOULD BE SERIOUSLY HARMED.

To date, the Company has sold its products principally through our direct sales force, as well as through indirect sales channels, such as its OEMs,
resellers and systems integrators. The Companys revenues from license fees resulting from sales through indirect channel partners were approximately 33%, 38%, and 31% of total revenues from license fees for the first nine months of fiscal
years 2006, 2005 and 2004, respectively. The Companys ability to achieve significant revenue growth in the future will depend in large part on the success of its sales force in further establishing and maintaining relationships with indirect
channel partners. In particular, a significant element of the Companys strategy is to embed its technology in products offered by OEMs for resale or as a hosted application to such OEMs customers and end-users. The Company also intends
to establish and expand its relationships with resellers and systems integrators so that such resellers and systems integrators will increasingly recommend its products to their clients. The Companys future success will depend on the ability
of its indirect channel partners to sell and support its products. If the sales and implementation cycles of its indirect channel partners are lengthy or variable or its OEMs experience difficulties embedding its technology into their products or it
fails to train the sales and customer support personnel of such indirect channel partners in a timely or effective fashion, the Companys business, operating results and financial condition would be harmed.

Although the Company is currently investing, and plans to continue to invest, significant resources to expand and develop relationships with OEMs, it has
at times experienced and continues to experience difficulty in establishing and maintaining these relationships. If the Company is unable to successfully expand this distribution channel and secure license agreements with additional OEMs on
commercially reasonable terms, including significant up-front payments of minimum license fees, and extend existing license agreements with existing OEMs on commercially reasonable terms, the Companys operating results would be adversely
affected. Any inability by the Company to maintain existing or establish new relationships with indirect channel partners, including systems integrators and resellers, or, if such efforts are successful, a failure of the Companys revenues to
increase correspondingly with expenses incurred in pursuing such relationships, would harm the Companys business, operating results and financial condition.

THE COMPANY MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST ITS CURRENT AND FUTURE COMPETITORS.

The Companys market
is intensely competitive and characterized by rapidly changing technology, evolving standards and product releases by the Companys competitors that are marketed to compete directly with the Companys products. The Companys
competition comes in four principal forms:



| |  |  | Competition from current or future business intelligence software vendors such as Business Objects, Cognos, Hyperion, Information Builders, and MicroStrategy, each of which offers
enterprise reporting products;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Competition from other large software vendors such as IBM, Microsoft, Oracle and SAP, to the extent they include reporting functionality with their applications or databases;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Competition from other software vendors and software development tool vendors including providers of open-source software products; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Competition from the IT departments of current or potential customers that may develop scalable Enterprise Reporting Applications internally, which applications may be cheaper and
more customized than the Companys products.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Most of the Companys current and potential competitors have
significantly greater financial, technical, marketing and other resources than it does. These competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the
development, promotion and sales of their products than the Company may. Also, most current and potential competitors have greater name recognition and the ability to leverage a significant installed customer base. These companies have released and
can continue to release competing enterprise reporting software products or significantly increase the functionality of their existing reporting software products, either of



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which could result in a loss of market share for the Company. The Company expects additional competition as other
established and emerging companies enter the Enterprise Reporting Application market and new products and technologies are introduced. Increased competition could result in price reductions, fewer customer orders, reduced gross margins, longer sales
cycles and loss of market share, any of which would harm the Companys business, operating results and financial condition.

Current
and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing their ability to address the needs of the Companys prospective customers. Also, the
Companys current or future channel partners may have established in the past, or may in the future, establish cooperative relationships with the Companys current or potential competitors, thereby limiting the Companys ability to
sell its products through particular distribution channels. It is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. Such competition could reduce the Companys
revenues from license fees and services from new or existing customers on terms favorable to us. If the Company is unable to compete successfully against current and future competitors, the Companys business, operating results and financial
condition would be harmed.

IF THE MARKET FOR ENTERPRISE REPORTING AND PERFORMANCE MANAGEMENT APPLICATION SOFTWARE DOES NOT GROW AS THE COMPANY EXPECTS,
ITS BUSINESS WOULD BE SERIOUSLY HARMED.

The market for Enterprise Reporting and Performance Management Application software products is
still emerging and the Company cannot be certain that such market will continue to grow or that, even if the market does grow, businesses will purchase the Companys products. If the market for Enterprise Reporting and Performance Management
Application software products fails to grow or grows more slowly than the Company expects, its business, operating results and financial condition would be harmed. To date, all of the Companys revenues have been derived from licenses for its
enterprise reporting and software and Performance Management application related products and services, and it expects this to continue for the foreseeable future. The Company has spent, and intends to continue to spend, considerable resources
educating potential customers and indirect channel partners about Enterprise Reporting and Performance Management Applications and its products. However, if such expenditures do not enable its products to achieve any significant degree of market
acceptance, the Companys business, operating results and financial condition would be harmed.

BECAUSE THE SALES CYCLES OF THE COMPANYS
PRODUCTS ARE LENGTHY AND VARIABLE, ITS QUARTERLY RESULTS MAY FLUCTUATE.

The purchase of the Companys products by its end-user
customers for deployment within the customers organization typically involves a significant commitment of capital and other resources, and is therefore subject to delays that are beyond the Companys control. These delays can arise from a
customers internal procedures to approve large capital expenditures, budgetary constraints, the testing and acceptance of new technologies that affect key operations and general economic and political events. The sales cycle for initial orders
and larger follow-on orders for the Companys products can be lengthy and variable. Additionally, sales cycles for sales of the Companys products to OEMs tend to be longer, ranging from 6 to 24 months or more, and may involve convincing
the OEMs entire organization that the Companys products are the appropriate software for their applications. This time period does not include the sales and implementation cycles of such OEMs own products, which can be longer than
the Companys sales and implementation cycles. Certain of the Companys customers have in the past, or may in the future, experience difficulty completing the initial implementation of Actuates products. Any difficulties or delays in
the initial implementation by the Companys end-user customers or indirect channel partners could cause such customers to reject the Companys software or lead to the delay or non-receipt of future orders for the large-scale deployment of
its products, in which case the Companys business, operating results and financial condition would be harmed.

ADVANCES IN HARDWARE TECHNOLOGY MAY
CAUSE OUR SOFTWARE REVENUE TO DECLINE.

In the past, the Company has licensed software for a certain number of processors or
CPUs to many of its customers. Advances in hardware technology, including, but not limited to, greater CPU clock speeds, multiple-core processors and virtualization, have afforded software performance gains to some customers, causing
them to defer additional software purchases from the Company. The occurrence of any of these events, and other future advances, could seriously harm the Companys business, operating results and financial condition. Furthermore, in many cases,
use of the software on such advanced hardware without payment of a transfer fee is prohibited by the terms of applicable license agreements or Company policies. The Company intends to require compliance with such terms and as a result of its
enforcement efforts, customers may defer or cease purchasing additional software or maintenance and support. The occurrence of any of these events could seriously harm the Companys business, operating results and financial condition.



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IF THE COMPANY IS UNABLE TO FAVORABLY ASSESS THE EFFECTIVENESS OF ITS INTERNAL CONTROL OVER FINANCIAL REPORTING, IN
FUTURE PERIODS, OR IF THE COMPANYS INDEPENDENT AUDITORS ARE UNABLE TO PROVIDE AN UNQUALIFIED ATTESTATION REPORT ON SUCH ASSESSMENT, THE COMPANYS STOCK PRICE COULD BE ADVERSELY AFFECTED.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404), the Companys management is required to report on, and its
independent auditors are required to attest to, the effectiveness of the Companys internal controls over financial reporting on an ongoing basis. The Companys assessment, testing and evaluation of the design and operating effectiveness
of its internal control over financial reporting are ongoing. The Company identified one material weakness, which was disclosed in Item 9A of the Companys Annual Report on Form 10-K for the year ended December 31, 2004 as filed with
the Securities and Exchange Commission on March 16, 2005, as amended by Form 10-K/A filed with the Securities and Exchange Commission on May 2, 2005. The Company cannot predict the outcome of its testing in future periods. If in future
periods the Company concludes that its internal control over financial reporting is not effective, it may be required to change its internal control over financial reporting to remediate deficiencies, and investors may lose confidence in the
reliability of its financial statements, causing the Companys stock price to decline.

SECTION 404 AND OTHER RECENTLY ENACTED REGULATORY CHANGES
HAVE CAUSED THE COMPANY TO INCUR INCREASED COSTS AND OPERATING EXPENSES AND MAY MAKE IT MORE DIFFICULT FOR THE COMPANY TO ATTRACT AND RETAIN QUALIFIED OFFICERS AND DIRECTORS.

The Sarbanes-Oxley Act of 2002 and recently enacted rules of the SEC and Nasdaq have caused the Company to incur significant increased costs as it
implements and responds to new requirements. In particular, the rules governing the standards that must be met for management to assess its internal controls over financial reporting under Section 404 are new and complex, and require
significant documentation, testing and possible remediation. This ongoing process of reviewing, documenting and testing the Companys internal controls over financial reporting has resulted in, and will likely continue to result in, a
significant strain on the Companys management, information systems and resources. Furthermore, achieving and maintaining compliance with Sarbanes-Oxley and other new rules and regulations has required the Company to hire additional personnel
and has and will continue to require it to use additional outside legal, accounting and advisory services.

Any acquisitions made by the
Company will also put a significant strain on its management, information systems and resources. In addition, any expansion of the Companys international operations will lead to increased financial and administrative demands associated with
managing its international operations and managing an increasing number of relationships with foreign partners and customers and expanded treasury functions to manage foreign currency risks, all of which will require implementation of any changes
necessary to maintain effective internal controls over financial reporting.

Any failure to satisfy the new rules could make it more
difficult for the Company to obtain certain types of insurance, including director and officer liability insurance, and it may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar
coverage. Alternatively, the Company may determine that it should reduce its director and officer liability insurance policy limits. The impact of any of these events could also make it more difficult for the Company to attract and retain qualified
persons to serve on its Board of Directors, or as executive officers.

IF THE COMPANY DOES NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, ITS PRODUCTS
COULD BECOME OBSOLETE.

The market for the Companys products is characterized by rapid technological changes, frequent new product
introductions and enhancements, changing customer demands, and evolving industry standards. Any of these factors can render existing products obsolete and unmarketable. The Company believes that its future success will depend in large part on its
ability to support current and future releases of popular operating systems and computer programming languages, databases and software applications, to timely develop new products that achieve market acceptance and to meet an expanding range of
customer requirements. If the announcement or introduction of new products by the Company or its competitors or any change in industry standards causes customers to defer or cancel purchases of existing products, the Companys business,
operating results and financial condition would be harmed.

As a result of the complexities inherent in Enterprise Reporting Applications
and Performance Management Applications, major new products and product enhancements can require long development and testing periods. In addition, customers may delay their purchasing decisions in anticipation of the general availability of new or
enhanced versions of the Companys products. As a result, significant delays in the general availability of such new releases or significant problems in the installation or implementation of such new releases could harm the Companys
business, operating results and financial condition. If the Company fails to successfully develop, on a timely and cost effective basis, product enhancements or new products that respond to technological change, evolving industry standards or
customer requirements or such new products and product enhancements fail to achieve market acceptance, the Companys business, operating results and financial condition would be harmed.



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IF THE COMPANY DOES NOT RELEASE NEW PRODUCTS AND ENHANCEMENTS TO EXISTING PRODUCTS IN A TIMELY MANNER OR IF SUCH NEW
PRODUCTS AND ENHANCEMENTS, INCLUDING THE COMPANYS OPEN SOURCE PROJECT, FAIL TO ACHIEVE MARKET ACCEPTANCE, THE COMPANYS BUSINESS COULD BE SERIOUSLY HARMED.

The Company believes that its future success will depend in large part on the success of new products and enhancements to its products that it makes generally available. Prior to the release of any new products or
enhancements, the products must undergo a long development and testing period. To date, the development and testing of new products and enhancements have taken longer than expected. In the event the development and testing of new products and
enhancements continue to take longer than expected, the release of new products and enhancements will be delayed. If the Company fails to release new products and enhancements in a timely manner, its business, operating results and financial
condition would be harmed. In addition, if such new products and enhancements do not achieve market acceptance, the Companys business, operating results and financial condition would be harmed.

The Company has developed a Business Intelligence Reporting Tools (BIRT) open source code project as part of the Eclipse open source code
foundation. The Company hopes that BIRT and a commercialized version of BIRT will be widely adopted by Java developers and will result in such developers recommending to their companies that they license the Companys commercially available
products. If BIRT does not achieve market acceptance and result in promoting sales of commercially available products, the Companys business, operating results and financial condition may be harmed.

The Company has released performancesoft Track and portions of Actuate 9 and plans to release additional portions of Actuate 9 in the fourth
quarter of 2006 and the first half of 2007. The Company hopes that our new product (Track) and the enhanced product (Actuate 9) will be introduced in a timely fashion and will be widely adopted and accepted by the Companys existing and new
customers and OEM partners. If they are not, the Companys business, operating results and financial condition may be adversely affected.

THE
SUCCESS OF THE COMPANYS OPEN-SOURCE BIRT INITIATIVE IS DEPENDENT ON BUILDING A DEVELOPER COMMUNITY AROUND BIRT.

The success of
the Companys BIRT initiative is dependent on the open source contributions of third-party programmers and corporations, and if they cease to make these contributions to the Eclipse open source project, the BIRT project, or the general open
source movement, the Companys BIRT product strategy could be adversely affected. If key members, or a significant percentage, of this group of developers or corporations decides to cease development of Eclipse, BIRT or other open source
applications, the Company would have to either rely on another party (or parties) to develop these technologies, develop them itself or adapt its open source product strategy accordingly. This could increase the Companys development expenses,
delay its product releases and upgrades or adversely impact customer acceptance of open source offerings.

THE COMPANYS INTERNATIONAL OPERATIONS
ARE SUBJECT TO SIGNIFICANT RISKS.

A substantial portion of the Companys revenues is derived from international sales.
International operations are subject to a number of risks, any of which could harm our business, operating results and financial conditions. These risks include the following:



| |  |  | Economic and political instability, including war and terrorism or the threat of war and terrorism;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | Difficulty of managing an organization spread across many countries;
| | - |  | --------------------------------------------------------------------



| |  |  | Multiple and conflicting tax laws and regulations;
| | - |  | --------------------------------------------------



| |  |  | Costs of localizing products for foreign countries;
| | - |  | ---------------------------------------------------



| |  |  | Difficulty in hiring employees and difficulties and high costs associated with terminating employees and restructuring operations in foreign countries;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Trade laws and business practices favoring local competition;
| | - |  | -------------------------------------------------------------



| |  |  | Dependence on local vendors;
| | - |  | ----------------------------



| |  |  | Compliance with multiple, conflicting and changing government laws and regulations;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Weaker intellectual property protection in foreign countries and potential loss of proprietary information due to piracy or misappropriation;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Longer sales cycles;
| | - |  | --------------------



| |  |  | Import and export restrictions and tariffs;
| | - |  | -------------------------------------------



| |  |  | Difficulties in staffing and managing foreign operations;
| | - |  | ---------------------------------------------------------



| |  |  | The significant presence of some of our competitors in certain international markets;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Greater difficulty or delay in accounts receivable collection; and
| | - |  | ------------------------------------------------------------------



| |  |  | Foreign currency exchange rate fluctuations.
| | - |  | --------------------------------------------

The Company
believes that, over time, an increasing portion of its revenues and costs will be denominated in foreign currencies. To the extent such denomination in foreign currencies does occur, gains and losses on the conversion to U.S. dollars of accounts
receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in the Companys results of operations. Although the Company may in the future decide to undertake
foreign exchange hedging transactions to cover a portion of its foreign currency transaction exposure, it currently does not attempt to cover any foreign currency exposure. If it is not effective in any future foreign exchange hedging transactions
in which it engages, the Companys business, operating results and financial condition could be harmed.

THE COMPANYS EXECUTIVE OFFICERS AND
CERTAIN KEY PERSONNEL ARE CRITICAL TO ITS BUSINESS AND IT MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL IT NEEDS.

The
Companys future success depends upon the continued service of its executive officers and other key engineering, sales, marketing and customer support personnel. None of its officers or key employees is bound by an employment agreement for any
specific term. If the Company loses the service of one or more of our key employees, or if one or more of our executive officers or key employees decide to join a competitor or otherwise compete directly or indirectly with it, this could have a
significant adverse effect on the Companys business.

In addition, because experienced personnel in our industry are in high demand
and competition for their talents is intense, the Company has relied on its ability to grant stock options as one mechanism for recruiting and retaining this highly skilled talent. Accounting regulations that have recently taken effect require the
expensing of stock options, which will impair our future ability to provide these incentives without incurring significant compensation costs. There can be no assurance that the Company will continue to successfully attract and retain key personnel
in the future.

CHANGES IN, OR INTERPRETATIONS OF, ACCOUNTING RULES AND REGULATIONS COULD RESULT IN UNFAVORABLE ACCOUNTING CHARGES.

The Company prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America.
These principles are subject to interpretation by the Securities and Exchange Commission (the SEC) and various bodies formed to interpret and create appropriate accounting policies. A change in these policies can have a significant
effect on the Companys reported results and may even retroactively affect previously reported transactions. The Companys accounting policies that recently have been or may be affected by changes in the accounting rules are as follows:



| |  |  | Software revenue recognition;
| | - |  | -----------------------------



| |  |  | Accounting for income taxes;
| | - |  | ----------------------------



| |  |  | Accounting for business combinations and related goodwill; and
| | - |  | --------------------------------------------------------------



| |  |  | Accounting for stock issued to employees.
| | - |  | -----------------------------------------

THE COMPANY MAY BE UNABLE
TO SUSTAIN OR INCREASE ITS PROFITABILITY.

While the Company was profitable in its last two fiscal years, it incurred net losses during
fiscal year 2003 and 2002. Its ability to sustain or increase profitability on a quarterly or annual basis will be affected by changes in its business. It expects its operating expenses to increase as its business grows, and it anticipates that it
will make investments in its business. Therefore, the Companys results of operations will be harmed if its revenues do not increase at a rate equal to or greater than increases in its expenses or are insufficient for it to sustain
profitability.



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IF THE COMPANY OVERESTIMATES REVENUES, IT MAY BE UNABLE TO REDUCE ITS EXPENSES TO AVOID OR MINIMIZE A NEGATIVE IMPACT
ON ITS RESULTS OF OPERATIONS.

The Companys revenues are difficult to forecast and are likely to fluctuate significantly from
period to period. The Company bases its operating expense budgets on expected revenue trends. The Companys estimates of sales trends may not correlate with actual revenues in a particular quarter or over a longer period of time. Variations in
the rate and timing of conversion of the Companys sales prospects into actual licensing revenues could cause it to plan or budget inaccurately and those variations could adversely affect the Companys financial results. In particular,
delays, reductions in amount or cancellation of customers purchases would adversely affect the overall level and timing of the Companys revenues and its business, results of operations and financial condition could be harmed. In
addition, many of its expenses, such as office and equipment leases and certain personnel costs, are relatively fixed. It may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. Accordingly, any shortfall in
revenue may cause significant variation in operating results in any period.

IF THE COMPANYS PRODUCTS CONTAIN MATERIAL DEFECTS, ITS REVENUES MAY
DECLINE.

Software products as complex as those offered by the Company often contain errors or defects, particularly when first
introduced, when new versions or enhancements are released and when configured to individual customer computing systems. The Company currently has known errors and defects in its products. Despite testing conducted by the Company, if additional
defects and errors are found in current versions, new versions or enhancements of its products after commencement of commercial shipment, this could result in the loss of revenues or a delay in market acceptance or an increase in the rate of return
of the Companys products. The occurrence of any of these events could seriously harm the Companys business, operating results and financial condition.

THE COMPANY MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS.

Although license agreements with our customers typically contain
provisions designed to limit the Companys exposure to potential product liability claims, it is possible that such limitation of liability provisions may not be effective as a result of existing or future laws or unfavorable judicial
decisions. The sale and support of the Companys products may entail the risk of such claims, which are likely to be substantial in light of the use of its products in business-critical applications. A product liability claim brought against
the Company could seriously harm its business, operating results and financial condition.

THE PROTECTION OF OUR PROPRIETARY RIGHTS MAY BE INADEQUATE.

The Company has a small number of issued and pending U.S. patents expiring at varying times ranging from 2015 to 2019. The Company
relies primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary technology. For example, the Company licenses its software pursuant to shrink- or
click-wrap or signed license agreements that impose certain restrictions on licensees ability to utilize the software. In addition, the Company seeks to avoid disclosure of its intellectual property, including by requiring those persons with
access to its proprietary information to execute confidentiality agreements with the Company and by restricting access to its source code. The Company takes precautions to protect our software, certain documentation, and other written materials
under trade secret and copyright laws, which afford only limited protection.

Despite the Companys efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of its products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Companys products is difficult, and while it is unable to
determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of many countries do not protect the Companys proprietary rights to as great an extent as
do the laws of the United States. If the Companys means of protecting its proprietary rights is not adequate or its competitors independently develop similar technology, the Companys business could be seriously harmed.

THE COMPANYS COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR STOCKHOLDERS.

The market price of shares of the Companys common stock has been and is likely to continue to be highly volatile and may be significantly affected
by factors such as the following:



| |  |  | Actual or anticipated fluctuations in its operating results;
| | - |  | ------------------------------------------------------------



| |  |  | Changes in the economic and political conditions in the United States and abroad;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | Terrorist attacks, war or the threat of terrorist attacks and war;
| | - |  | ------------------------------------------------------------------



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| |  |  | The announcement of mergers or acquisitions by the Company or its competitors;
| | - |  | ------------------------------------------------------------------------------



| |  |  | Developments in ongoing or threatened litigation;
| | - |  | -------------------------------------------------



| |  |  | Announcements of technological innovations;
| | - |  | -------------------------------------------



| |  |  | Failure to comply with the requirements of Section 404 of the Sarbanes-Oxley Act;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | New products, including open source products, or new contracts announced by it or its competitors;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Developments with respect to copyrights or proprietary rights;
| | - |  | --------------------------------------------------------------



| |  |  | Price and volume fluctuations in the stock market;
| | - |  | --------------------------------------------------



| |  |  | Changes in corporate purchasing of Enterprise Reporting Application software;
| | - |  | -----------------------------------------------------------------------------



| |  |  | Adoption of new accounting standards affecting the software industry (including stock option-expensing roles); and
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in financial estimates by securities analysts.
| | - |  | ------------------------------------------------------

In addition, following periods of volatility in the market price of a particular companys securities, securities class action litigation has often been brought against such companies. If the Company is involved in such litigation, it
could result in substantial costs and a diversion of managements attention and resources and could harm the Companys business, operating results and financial condition.

CHANGES IN TAX RATES OR NEGATIVE TAX RULINGS COULD ADVERSELY IMPACT THE COMPANYS FINANCIAL RESULTS.

The Company is taxable principally in the United States and certain jurisdictions in Europe and Asia/Pacific. All of these jurisdictions have in the past and may in the future make changes to their corporate income tax rates and other
income tax laws, which could increase the Companys future income tax provision. While the Company believes that all material income tax liabilities are reflected properly in its balance sheet, it has no assurance that it will prevail in all
cases in the event the taxing authorities disagree with its interpretations of the tax law. Future levels of research and development spending will impact the Companys entitlement to related tax credits, which generally lower its effective
income tax rate. Future effective income tax rates could be adversely affected if earnings are lower than anticipated in jurisdictions where the Company has statutory tax rates lower than in the United States.

CERTAIN OF THE COMPANYS CHARTER PROVISIONS AND DELAWARE LAW MAY PREVENT OR DETER A CHANGE IN CONTROL OF ACTUATE.

The Companys Certificate of Incorporation, as amended and restated (the Certificate of Incorporation), and Bylaws, as amended and
restated (Bylaws), contain certain provisions that may have the effect of discouraging, delaying or preventing a change in control of the Company or unsolicited acquisition proposals that a stockholder might consider favorable, including
provisions authorizing the issuance of blank check preferred stock and eliminating the ability of stockholders to act by written consent. In addition, certain provisions of Delaware law and the Companys stock option plans may also
have the effect of discouraging, delaying or preventing a change in control or unsolicited acquisition proposals. The anti-takeover effect of these provisions may also have an adverse effect on the public trading price of the Companys common
stock

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below sets forth
information regarding repurchases of Actuate common stock by Actuate during the three months ended September 30, 2006.



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Issuer Purchases of Equity Securities



|                                             |  |                                  |  |                              |      |                                                                             |         |                                                                                |  
|-------------------------------------------- |  | -------------------------------- |  | ---------------------------- | ---- | --------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------------ | -
|Period                                       |  | Total Number of Shares Purchased |  | Average price paid per
share |      | Total number of shares purchased as part of publicly announced programs (1) |         | Maximum dollar value of shares that may yet be purchased under the program (1)
|Month #1                                     |  |                                  |  |                              |      |                                                                             |         |                                                                                |  
|July 1, 2006 through July 31, 2006           |  |                                 |  |                              |     |                                                                             |        |                                                                                | 
|Month #2                                     |  |                                  |  |                              |      |                                                                             |         |                                                                                |  
|August 1, 2006 through August 31, 2006       |  | 393,186                          |  | $                            | 3.78 |                                                                             | 393,186 |                                                                                | 
|Month #3                                     |  |                                  |  |                              |      |                                                                             |         |                                                                                |  
|September 1, 2006 through September 30, 2006 |  |                                 |  |                              |     |                                                                             |        |                                                                                | 
|                                             |  |                                  |  |                              |      |                                                                             |         |                                                                                |  
|Total                                        |  | 393,186                          |  | $                            | 3.78 |                                                                             | 393,186 |                                                                                | 
|                                             |  |                                  |  |                              |      |                                                                             |         |                                                                                |  

---

|(1) | On September 19, 2001, the Companys Board of Directors authorized a stock repurchase program of up to $6.0 million of our common stock. On October 24, 2002 and
April 28, 2004 Actuates Board of Directors extended the stock repurchase program by authorizing management to repurchase up to an additional $3.0 million and $1.5 million worth of Companys common stock, respectively. On
July 28, 2004, the Companys Board of Directors authorized management to repurchase, on an on-going basis, up to $1.5 million Actuate common stock each calendar quarter. During the fourth quarter of 2004, the Board of Directors suspended
the repurchase program.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | In January 2005, pursuant to the stock repurchase program announced in September 2001, and extended from time to time by the Companys Board of Directors, the Board of
Directors approved an on-going extension of the Companys stock repurchase program. This was further confirmed in April 2005, July 2005 and October 2005 when the Board of Directors authorized management to proceed with the repurchases. The
Company is authorized to repurchase Actuate common stock in an amount not to exceed cash flow from operations during the prior quarter, with the actual amount to be approved in advance by the Board.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 6. Exhibits



| | 31.1 | Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer
| | ---- | ---------------------------------------------------------------------



| | 31.2 | Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer
| | ---- | ---------------------------------------------------------------------



| | 32.1 | Section 1350 Certifications
| | ---- | ---------------------------



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Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                        |  |  |  |     |  |                                  |  |                                                                                                       
|----------------------- |  |  |  | --- |  | -------------------------------- |  | ------------------------------------------------------------------------------------------------------
|                        |  |  |  |     |  | Actuate Corporation (Registrant)
|                        |  |  | 
|Dated: November 9, 2006 |  |  |  | By: |  | /s/ DANIEL A. GAUDREAU          
|                        |  |  |  |     |  |                                  |  | Daniel A. Gaudreau                                                                                    
|                        |  |  |  |     |  |                                  |  | Chief Financial Officer, Senior Vice President of
Finance (Principal Financial and Accounting Officer)



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