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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-QSB



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

For the Quarterly Period ended March 31, 2007

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 number 000-20992



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INSIGHTFUL CORPORATION

(Exact name of small business issuer as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 04-2842217                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. employer identification no.)

1700 Westlake Avenue North, Suite 500, Seattle, Washington 98109-3044

(Address of principal executive offices) (Zip code)

(206) 283-8802

Issuers telephone number, including area code



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Check whether the issuer (1) filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 shell company (as defined in Rule 12b-2 of the Exchange
Act).    YES ̈NO  x

The number of shares outstanding of the issuers Common Stock, $0.01 par value, was 12,867,167 as of May 4, 2007.

Transitional Small Business Disclosure Format (Check one)    YES ̈NO  x



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TABLE OF CONTENTS



|                              |  |         |  |                                                                                                    |  |     
|----------------------------- |  | ------- |  | -------------------------------------------------------------------------------------------------- |  | ----
|                              |  |         |  |                                                                                                    |  | Page
|                              | 
|PART I. FINANCIAL INFORMATION |  | 3      
|                              |  |         | 
|                              |  | ITEM 1. |  | Consolidated Financial Statements (Unaudited)                                                      |  | 3   
|                              |  |         | 
|                              |  |         |  | Condensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006                   |  | 3   
|                              |  |         | 
|                              |  |         |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006 |  | 4   
|                              |  |         | 
|                              |  |         |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006 |  | 5   
|                              |  |         | 
|                              |  |         |  | Notes to Condensed Consolidated Financial Statements                                               |  | 6   
|                              |  |         | 
|                              |  | ITEM 2. |  | Managements Discussion and Analysis or Plan of Operations                                         |  | 15  
|                              |  |         | 
|                              |  | ITEM 3. |  | Controls and Procedures                                                                            |  | 34  
|                              | 
|PART II. OTHER INFORMATION    |  | 35     
|                              |  |         | 
|                              |  | ITEM 4. |  | Submission of Matters to a Vote of Security Holders                                                |  | 35  
|                              |  |         | 
|                              |  | ITEM 6. |  | Exhibits                                                                                           |  | 35  
|                              | 
|SIGNATURES                    |  | 36     
|                              | 
|EXHIBIT INDEX                 |  | 37     



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PART I. FINANCIAL INFORMATION



|ITEM 1. | CONSOLIDATED FINANCIAL STATEMENTS
|------- | ---------------------------------

INSIGHTFUL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)



|                                                                                                              |  |                |         |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                              |  | March 31, 2007 |         |   | December 31, 2006 |  
|                                                                                                              |  | (unaudited)    |         |   |                   |  
|ASSETS                                                                                                        |  |                |         |   |                   |   |         |  
|Current Assets:                                                                                               |  |                |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                     |  | $              | 8,297   |   |                   | $ | 7,320   |  
|Trade accounts receivable, net                                                                                |  |                | 3,592   |   |                   |   | 6,201   |  
|Short-term investments                                                                                        |  |                | 643     |   |                   |   | 588     |  
|Other receivables                                                                                             |  |                | 500     |   |                   |   | 499     |  
|Prepaid expenses and other current assets                                                                     |  |                | 518     |   |                   |   | 535     |  
|                                                                                                              |  |                |         |   |                   |   |         |  
|Total current assets                                                                                          |  |                | 13,550  |   |                   |   | 15,143  |  
|Long-term investments                                                                                         |  |                | 2,855   |   |                   |   | 2,361   |  
|Property and equipment, net                                                                                   |  |                | 2,680   |   |                   |   | 2,757   |  
|Purchased technology, net                                                                                     |  |                |        |   |                   |   | 49      |  
|Goodwill                                                                                                      |  |                | 800     |   |                   |   | 800     |  
|Other assets                                                                                                  |  |                | 106     |   |                   |   | 86      |  
|                                                                                                              |  |                |         |   |                   |   |         |  
|Total assets                                                                                                  |  | $              | 19,991  |   |                   | $ | 21,196  |  
|                                                                                                              |  |                |         |   |                   |   |         |  
|                                                                                                              |  |               
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                          |  |                |         |   |                   |   |         |  
|Current Liabilities:                                                                                          |  |                |         |   |                   |   |         |  
|Accounts payable                                                                                              |  |                | 764     |   |                   |   | 745     |  
|Accrued payroll-related liabilities                                                                           |  |                | 1,524   |   |                   |   | 2,184   |  
|Accrued expenses and other current liabilities                                                                |  |                | 693     |   |                   |   | 609     |  
|Deferred revenue                                                                                              |  |                | 6,339   |   |                   |   | 6,248   |  
|                                                                                                              |  |                |         |   |                   |   |         |  
|Total current liabilities                                                                                     |  |                | 9,320   |   |                   |   | 9,786   |  
|Commitments and contingencies                                                                                 |  |                |        |   |                   |   |        |  
|Stockholders Equity:                                                                                         |  |                |         |   |                   |   |         |  
|Preferred stock, $0.01 par value:                                                                             |  |                |         |   |                   |   |         |  
|Authorized1,000,000 shares                                                                                   |  |                |         |   |                   |   |         |  
|Issued and outstandingnone                                                                                   |  |                |        |   |                   |   |        |  
|Common stock, $0.01 par value:                                                                                |  |                |         |   |                   |   |         |  
|Authorized30,000,000 shares                                                                                  |  |                |         |   |                   |   |         |  
|Issued and outstanding12,876,467 and 12,813,842 shares at March 31, 2007 and December 31, 2006, respectively |  |                | 128     |   |                   |   | 128     |  
|Additional paid-in capital                                                                                    |  |                | 38,199  |   |                   |   | 37,843  |  
|Accumulated deficit                                                                                           |  |                | (27,337 | ) |                   |   | (26,245 | )
|Other accumulated comprehensive loss                                                                          |  |                | (319    | ) |                   |   | (316    | )
|                                                                                                              |  |                |         |   |                   |   |         |  
|Total stockholders equity                                                                                    |  |                | 10,671  |   |                   |   | 11,410  |  
|                                                                                                              |  |                |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                    |  | $              | 19,991  |   |                   | $ | 21,196  |  
|                                                                                                              |  |                |         |   |                   |   |         |  

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



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INSIGHTFUL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(unaudited)



|                                                             |  |                              |        |   |      |   |        |  
|------------------------------------------------------------ |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                             |  | Three months ended March 31, |       
|                                                             |  | 2007                         |        |   | 2006 |  
|Revenues:                                                    |  |                              |        |   |      |   |        |  
|Software licenses                                            |  | $                            | 2,042  |   |      | $ | 2,424  |  
|Software maintenance                                         |  |                              | 2,013  |   |      |   | 1,811  |  
|Professional services and other                              |  |                              | 2,128  |   |      |   | 1,307  |  
|                                                             |  |                              |        |   |      |   |        |  
|Total revenues                                               |  |                              | 6,183  |   |      |   | 5,542  |  
|                                                             |  |                              |        |   |      |   |        |  
|Cost of revenues:                                            |  |                              |        |   |      |   |        |  
|Software related                                             |  |                              | 362    |   |      |   | 458    |  
|Professional services and other                              |  |                              | 1,467  |   |      |   | 904    |  
|                                                             |  |                              |        |   |      |   |        |  
|Total cost of revenues                                       |  |                              | 1,829  |   |      |   | 1,362  |  
|                                                             |  |                              |        |   |      |   |        |  
|Gross profit                                                 |  |                              | 4,354  |   |      |   | 4,180  |  
|                                                             |  |                              |        |   |      |   |        |  
|Operating expenses:                                          |  |                              |        |   |      |   |        |  
|Sales and marketing                                          |  |                              | 2,645  |   |      |   | 2,156  |  
|Research and development                                     |  |                              | 2,000  |   |      |   | 1,661  |  
|LessFunded research                                         |  |                              | (506   | ) |      |   | (579   | )
|                                                             |  |                              |        |   |      |   |        |  
|Research and development, net                                |  |                              | 1,494  |   |      |   | 1,082  |  
|General and administrative                                   |  |                              | 1,427  |   |      |   | 1,089  |  
|                                                             |  |                              |        |   |      |   |        |  
|Total operating expenses                                     |  |                              | 5,566  |   |      |   | 4,327  |  
|                                                             |  |                              |        |   |      |   |        |  
|Loss from operations                                         |  |                              | (1,212 | ) |      |   | (147   | )
|Other income, net                                            |  |                              | 132    |   |      |   | 112    |  
|                                                             |  |                              |        |   |      |   |        |  
|Loss before income taxes                                     |  |                              | (1,080 | ) |      |   | (35    | )
|Income tax expense                                           |  |                              | (12    | ) |      |   | (8     | )
|                                                             |  |                              |        |   |      |   |        |  
|Net loss                                                     |  | $                            | (1,092 | ) |      | $ | (43    | )
|                                                             |  |                              |        |   |      |   |        |  
|Basic and diluted net loss per share                         |  | $                            | (0.09  | ) |      | $ | (0.00  | )
|                                                             |  |                              |        |   |      |   |        |  
|Basic and diluted weighted average common shares outstanding |  |                              | 12,830 |   |      |   | 12,546 |  

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



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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)



|                                                                                |  |                              |        |   |      |   |        |  
|------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                |  | Three months Ended March 31, |       
|                                                                                |  | 2007                         |        |   | 2006 |  
|Operating activities:                                                           |  |                              |        |   |      |   |        |  
|Net loss                                                                        |  | $                            | (1,092 | ) |      | $ | (43    | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                              |        |   |      |   |        |  
|Depreciation and amortization                                                   |  |                              | 291    |   |      |   | 261    |  
|Stock-based compensation expense                                                |  |                              | 218    |   |      |   | 166    |  
|Changes in current assets and liabilities:                                      |  |                              |        |   |      |   |        |  
|Trade and other accounts receivable                                             |  |                              | 2,557  |   |      |   | 1,989  |  
|Prepaid expenses and other assets                                               |  |                              | (4     | ) |      |   | 44     |  
|Accounts payable                                                                |  |                              | 18     |   |      |   | 172    |  
|Accrued payroll-related liabilities and other accrued expenses                  |  |                              | (579   | ) |      |   | (499   | )
|Deferred revenue                                                                |  |                              | 82     |   |      |   | (360   | )
|                                                                                |  |                              |        |   |      |   |        |  
|Net cash provided by operating activities                                       |  |                              | 1,491  |   |      |   | 1,730  |  
|                                                                                |  |                              |        |   |      |   |        |  
|Investing activities:                                                           |  |                              |        |   |      |   |        |  
|Purchases of short- and long-term investments                                   |  |                              | (494   | ) |      |   | (392   | )
|Proceeds from sales and maturities of short- and long-term investments          |  |                              |       |   |      |   | 723    |  
|Purchases of property and equipment                                             |  |                              | (165   | ) |      |   | (453   | )
|                                                                                |  |                              |        |   |      |   |        |  
|Net cash used in investing activities                                           |  |                              | (659   | ) |      |   | (122   | )
|                                                                                |  |                              |        |   |      |   |        |  
|Financing activities:                                                           |  |                              |        |   |      |   |        |  
|Payments on debt                                                                |  |                              |       |   |      |   | (32    | )
|Proceeds from exercise of stock options and employee stock purchase plan        |  |                              | 138    |   |      |   | 8      |  
|                                                                                |  |                              |        |   |      |   |        |  
|Net cash provided by (used in) financing activities                             |  |                              | 138    |   |      |   | (24    | )
|                                                                                |  |                              |        |   |      |   |        |  
|Effect of exchange rate changes on cash and cash equivalents                    |  |                              | 7      |   |      |   | (14    | )
|                                                                                |  |                              |        |   |      |   |        |  
|Net increase in cash and cash equivalents                                       |  |                              | 979    |   |      |   | 1,570  |  
|                                                                                |  |                              |        |   |      |   |        |  
|Cash and cash equivalents, beginning of period                                  |  |                              | 7,320  |   |      |   | 9,185  |  
|                                                                                |  |                              |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                        |  | $                            | 8,297  |   |      | $ | 10,755 |  
|                                                                                |  |                              |        |   |      |   |        |  
|Supplemental disclosure of cash flow information:                               |  |                              |        |   |      |   |        |  
|Cash paid for:                                                                  |  |                              |        |   |      |   |        |  
|Interest                                                                        |  | $                            |       |   |      | $ | 1      |  
|Income taxes                                                                    |  | $                            | 54     |   |      | $ | 9      |  

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



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INSIGHTFUL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

March 31, 2007

(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

(a) Description of Business

Insightful Corporation and its subsidiaries (collectively, the
Company) provide enterprises with data and text analysis products and services designed to drive better decisions faster by revealing patterns, trends and relationships. The Company is a developer and supplier of software and services
for the statistical data mining, business analytics, knowledge management, and information retrieval industry segments, enabling customers to gain intelligence from numerical data and text. The Companys solutions include its S-PLUS® product family for data analysis and InFact® product for text analysis, as well as customized
software and consulting services and training for the design, development and deployment of customized analytics solutions. The Companys customers include primarily companies in financial services, life sciences, telecommunications and
manufacturing, as well as government and research institutions. Headquartered in Seattle, Washington, the Company also has offices in New York, North Carolina, France, Switzerland, and the United Kingdom, with distributors around the world.

(b) Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to accounting principles generally accepted in the United States and the rules and regulations of the
Securities and Exchange Commission (SEC) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
The balance sheet at December 31, 2006 has been derived from audited financial statements at that date, but does not include all disclosures required by generally accepted accounting principles for complete financial statements. These condensed
consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2006 included in the Companys Annual Report on Form 10-KSB. The accompanying
condensed consolidated financial statements reflect all adjustments (consisting solely of normal, recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of results for the interim periods presented. The
results of operations for the three months ended March 31, 2007 are not necessarily indicative of the results to be expected for the entire fiscal year or future periods.

(2) SIGNIFICANT ACCOUNTING POLICIES

(a) Principles of Consolidation

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

(b) Revenue Recognition

The Company offers a variety of data and text analysis software solutions, maintenance contracts, training and consulting services to its customers. The
Company records revenue in accordance with Statement of Position No. 97-2, Software Revenue Recognition, as amended by SOP No. 98-9, Software Revenue Recognition with Respect to Certain Transactions(SOP 98-9), as
well as related interpretations including Technical Practice Aids.

Software license revenues consist principally of fees generated from
granting rights to use the Companys software products under perpetual and fixed-term license agreements. The Company also refers to fixed-term license agreements as subscription-based license agreements.

Perpetual software license fees are generally recognized upon delivery of the software after receipt of a definitive purchase order, if collection of the
resulting receivable is probable, the fee is fixed or determinable, and vendor-specific objective evidence (VSOE) of fair value exists for all undelivered elements if sold in a bundled arrangement. VSOE is based on the price charged when
an element is sold separately or, in case of an element not yet sold separately, the price established by authorized management, if it is probable that the price, once established, will not materially change before separate introduction into the
marketplace.



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Revenues under arrangements that include several different software products and services sold together
are allocated based on the residual method in accordance with SOP No. 98-9. Under the residual method, the fair value, as determined by VSOE, of the undelivered non-essential elements is deferred and subsequently recognized when earned.

The Company has established VSOE of fair value for professional services and training services. In addition, the Company has established
VSOE for maintenance related to most of its products. For software products sold with maintenance where VSOE for the maintenance element has not been established, such as the Companys text analysis product InFact, all revenue under the
arrangement is recognized over the initial maintenance term, provided all other revenue recognition criteria have been met.

Maintenance
revenues are recognized ratably over the term of the related maintenance contracts, which generally span one year or less. The initial one-year maintenance contract is bundled into the license fees for most of the Companys products.
Maintenance services, which include unspecified product updates on a when-and-if available basis, are generally priced based on a percentage of the current list price, or net license fees paid, of the licensed software products. Maintenance renewals
are optional.

Consulting revenues typically include providing customers assistance in developing complex software models and/or data and
text analysis techniques, and developing consultant-configured, vertical-specific solutions that are designed to enable the Company to sell the same, or similar, solutions to multiple customers with reduced incremental consulting efforts incurred by
the Company. In addition, consulting revenues include deployment assistance, project management, integration with existing customer applications, training services, and related services generally performed on a time-and-materials basis under
separate service arrangements. Training consists of fee-based courses offered on a per-attendee or a per-group rate. Revenues from consulting and training services are generally recognized as services are performed.

Fees from licenses sold together with consulting are generally recognized upon shipment of the software, provided that the above residual method criteria
are met, payment of the license fees are not dependent upon the performance of the services, and the consulting services are not essential to the functionality of the licensed software. If the services are essential to the functionality of the
software, or payment of the license fees is dependent upon the performance of the services, both the software license and consulting fees are recognized under the percentage of completion method of contract accounting.

If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer. If an acceptance period is required, revenues
are recognized upon the earlier of customer acceptance or the expiration of the acceptance period. An evaluation on the probability of collection is generally based upon the assessment of the customers financial condition. For existing
customers, this evaluation generally relies on a customers prior payment history.

The Company has an unconditional 30-day return
policy on software license purchases, and therefore provides for estimated returns at the time of sale based on historical experience.

Cash payments received or accounts receivable due in advance of revenue recognition are recorded as deferred revenue on the accompanying consolidated balance sheets.

(c) Stock-Based Compensation and Stockholders equity

Stock-Based Compensation Expense

On January 1, 2006, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R requires the measurement and recognition of compensation expense for all share-based payment awards made to
employees and directors, including employee stock options granted under the Companys stock plans and employee stock purchases made under the Companys 2003 Employee Stock Purchase Plan (the ESPP), based on estimated fair
values. SFAS 123R supersedes the Companys previous accounting under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), for periods beginning in fiscal 2006.
In its adoption of SFAS 123R, the Company has applied the provisions of the SECs Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107).

The Company adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of
January 1, 2006, the first day of the Companys fiscal year 2006. The Companys consolidated financial statements as of and for the three months ended March 31, 2007 and 2006 reflect the impact of SFAS 123R. Stock-based
compensation expense recognized under SFAS 123R for the three months ended March 31, 2007 and 2006 was approximately $218,000 and $166,000, respectively, which consisted of stock-based compensation expense related to employee stock options and
stock purchases under the ESPP.



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SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of
grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Companys statement of operations. The Company uses the
straight-line single-option method to recognize the value of stock-based compensation expense for all share-based payment awards. Stock-based compensation expense recognized in the statement of operations for the three months ended March 31,
2007 and 2006 has been reduced for estimated forfeitures, as it is based on awards ultimately expected to vest. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.

The following table summarizes stock-based compensation expense under SFAS 123R related to
employee stock options and the ESPP purchases for the three months ended March 31, 2007 and 2006, which was allocated as follows (in thousands):



|                                                                |  |                                   |     |                                   |   |    
|--------------------------------------------------------------- |  | --------------------------------- | --- | --------------------------------- | - | ---
|                                                                |  | Three Months Ended March 31, 2007 |     | Three Months Ended March 31, 2006
|Cost of revenues                                                |  | $                                 | 15  |                                   | $ | 5  
|Sales and marketing                                             |  |                                   | 58  |                                   |   | 37 
|Research and development, net                                   |  |                                   | 22  |                                   |   | 23 
|General and administrative                                      |  |                                   | 123 |                                   |   | 101
|                                                                |  |                                   |     |                                   |   |    
|Stock-based compensation expense included in operating expenses |  | $                                 | 218 |                                   | $ | 166
|                                                                |  |                                   |     |                                   |   |    

The weighted average fair value of employee stock options granted in the three months ended
March 31, 2007 and 2006 was $1.27 and $1.63, respectively. As of March 31, 2007, the total remaining unrecognized compensation cost related to unvested stock options amounted to $1.7 million, which will be amortized over the
weighted-average remaining requisite service period of 2.6 years.

The weighted-average estimated fair value of employee stock options
granted during the periods presented below was estimated at the date of grant using the Black-Scholes option-pricing model, with the following weighted average assumptions:



|                        |  |                              |   |  |            |  
|----------------------- |  | ---------------------------- | - |  | ---------- | -
|                        |  | Three months ended March 31, |  
|                        |  | 2007                         |   |  | 2006       |  
|Risk-free interest rate |  | 4.54                         | % |  | 4.83       | %
|Expected dividend yield |  | None                         |   |  | None       |  
|Expected life           |  | 3.71 years                   |   |  | 3.75 years |  
|Expected volatility     |  | 63.3                         | % |  | 67.6       | %

The risk-free interest rate used in the Black-Scholes valuation method is based on the implied
yield currently available in U.S. Treasury securities at maturity with an equivalent term. The Company has not declared or paid any dividends and does not currently expect to do so in the future. The expected term of options represents the period
that the Companys stock-based awards are expected to be outstanding and was determined based on historical weighted average holding periods and projected holding periods for the remaining unexercised shares. Consideration was given to the
contractual terms of the Companys stock-based awards, vesting schedules and expectations of future employee behavior. Expected volatility is based on the annualized daily historical volatility plus implied volatility of the Companys
stock price, including consideration of the implied volatility and market prices of traded options for comparable entities within the Companys industry.

The variables used for stock price volatility and option lives involve managements best estimates. Both of these variables impact the fair value of the option calculated under the Black-Scholes methodology and,
ultimately, the expense that will be recognized over the life of the option. SFAS 123R also requires that the Company recognize compensation expense for only the portion of options expected to vest. Therefore, the Company applied an estimated
forfeiture rate that the Company derived from historical employee termination behavior. If the actual number of forfeitures differs from the Companys estimates, additional adjustments to compensation expense may be required in future periods.



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Stockholders Equity and Stock Option Plans

Under the Companys 2001 Stock Option and Incentive Plan (the 2001 Plan), the Board of Directors may grant incentive stock options,
nonqualified stock options, awards of common stock and authorizations to make direct purchases of the Companys common stock to eligible employees and others defined in the 2001 Plan.

The 2001 Plan provides for the automatic increase in the number of shares reserved for issuance of stock options under the 2001 Plan on the first day of
each fiscal year, in an amount equal to the lesser of (a) 1,000,000 shares, (b) 7% of the outstanding shares in the last day of the prior fiscal year, or (c) an amount determined by the board of directors. Accordingly, approximately
885,000 additional option shares were made available for future grant under the 2001 Plan on January 1, 2006 and 905,000 additional option shares were made available for future grant on January 1, 2007. As of March 31, 2007, 1,988,283
option shares were available for future grant under the 2001 Plan. Option grants under the 2001 Plan are typically made at fair market value at the time of grant and vest over a four-year period. Each option expires 10 years from the date of grant,
subject to earlier termination if the optionee ceases to provide services to the Company, and is not transferable.

Under the
Companys 2001 Non-Employee Director Stock Option Plan (the 2001 Directors Plan), non-employee directors are eligible to receive annual grants of options to purchase shares of Company common stock. As of March 31, 2007,
514,333 option shares were available for future grant under the 2001 Directors Plan. All grants under the 2001 Directors Plan are made at fair market value at the time of grant and, for grants prior to March 16, 2007, were fully
vested upon grant. On March 16, 2007, the 2001 Directors Plan was amended to provide for a one-year vesting period for all future grants made under the plan. Each option expires 10 years from the date of grant, subject to earlier
termination if the optionee ceases to provide services to the Company, and is not transferable.

Under the Companys Non-Qualified,
Non-Officer Stock Option Plan (the 1996 Non-Officer Plan), Company employees and consultants were eligible to receive nonqualified options to purchase shares of Company common stock. Option grants under the 1996 Non-Officer Plan were
typically made at fair market value at the time of grant. Vesting was determined at the date of grant. Each option expires 10 years from the date of grant, subject to earlier termination if the optionee ceases to serve the Company other than by
reason of death or disability, and is not transferable. This plan expired during November 2006, and as a result no option shares were available for future grant under the 1996 Non-Officer Plan.

(d) Cash and Cash Equivalents

Cash equivalents consist of highly liquid investments with original maturities of less than three months at the time of purchase. As of March 31, 2007, and 2006, cash and cash equivalents amounted to $8.3 million and 7.3 million,
respectively. At March 31, 2007 and 2006, marketable securities classified as cash equivalents amount to $3.7 million and $6.3 million, respectively.

(e) Marketable Securities

The Companys marketable securities are accounted for under the
provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities(SFAS 115). Under SFAS 115, all of the Companys marketable securities are defined as available-for-sale securities and,
accordingly, are accounted for at fair value with any unrealized gains and losses reported in stockholders equity as other comprehensive income. Realized net gains and losses on sales and maturities of marketable securities are included in the
consolidated statement of income as other income. Marketable securities having maturities of 90 days or less are classified as cash and cash equivalents, those having maturities greater than 90 days and less than or equal to one year are classified
as short-term investments, and those with maturities exceeding one year are classified as long-term investments. As of March 31, 2007, the Companys total marketable securities were $7.0 million, of which $3.7 million were classified as
cash equivalents, $0.5 million were classified as short-term investments and $2.8 million were classified as long-term investments.

Of the
total $7.0 million in marketable securities, $6.0 million were corporate debt securities and $1.0 million were government and agency obligations. As of March 31, 2007, marketable securities had an unrealized gain of $2,800 and realized
gains and losses of zero.

(f) Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market and consist principally of CDs and user manuals.

(g) Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation
and amortization. Equipment and furniture is depreciated using the straight-line method over estimated useful lives ranging from three to five years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful
life.



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(h) Research and Development

The Company accounts for its software research and development costs in accordance with SFAS No. 86, Accounting for the Costs of Computer Software
to Be Sold, Leased or Otherwise Marketed. During the three months ended March 31, 2007 and 2006, the Company expensed all research and development costs, as those costs incurred from the date of technological feasibility
(defined as a working model) to the general release date were not material.

(i) Funded Research

The Company has a funded research group that receives funding from U.S. federal agencies for research work performed under government grants. Research
projects are focused primarily on extending the frontiers of data analysis for numeric, textual, signal, and image data. Research projects are primarily performed under cost reimbursement arrangements, which typically provide funding on a
time-and-materials basis based on agency-approved labor, overhead and profit rates. In some cases, grant contracts are structured on a fixed fee (payment) basis. Grant contracts generally require the submission of periodic progress and final finding
reports. Funding is generally received through cash requests or installment payments. Grant fees are generally recognized as the work is performed and/or the fees become billable. Because the grants received are generally aligned with the
Companys existing research activities, commercial initiatives, and product lines, the amounts earned from grants are recorded as an offset against total research and development costs. Receivables resulting from this activity are included in
other receivables on the balance sheets. Funding received under these grants is subject to audits for several years after the funding is received and, depending on the results of those audits, the Company could be obligated to repay a portion of the
funding. A liability for such potential repayment has not been recorded as the Company considers it neither probable nor reasonably estimable.

(j) Foreign Currency Translation

The functional currency of the Companys foreign subsidiaries is the local currency
in the country in which the subsidiary is located. Assets and liabilities of foreign locations are translated to U.S. dollars using the exchange rate at each balance sheet date. Income and expense accounts are translated using an average rate of
exchange during the period. Foreign currency translation adjustments are accumulated as a separate component of stockholders equity. The Company is subject to transaction gains and losses from period to period due to exchange rate
fluctuations. The effect of aggregate transaction gains and losses is included in other income. The aggregate realized transaction gain was $2,600 and $21,000 for the three months ended March 31, 2007 and 2006, respectively.

(k) Goodwill and Other Long-Lived Assets

Goodwill represents the excess of the purchase price over the fair value of net assets obtained in business acquisitions accounted for under the purchase method of accounting. The Company currently distinguishes three reporting units that
have goodwill, as follows: U.S. Data Analysis, Insightful United Kingdom, and Insightful Switzerland.

In accordance with SFAS
No. 142, Goodwill and Other Intangible Assets, goodwill and other indefinite-lived intangibles are tested for impairment at least annually and written down and charged to results of operations only in periods in which the recorded value
of those assets exceeds their fair value. SFAS 142 prescribes the use of the two-phase approach for testing goodwill for impairment. The first phase is a screen for potential impairment, while the second phase (if necessary) measures the amount of
impairment, if any. Current technology and other separable intangible assets that do not have indefinite lives are continued to be amortized over their useful lives.

The Company performs a goodwill impairment test annually, using a measurement basis date of October 1st. Additional tests are performed when events occur or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying amount. No impairment was determined in the annual impairment test for 2006, nor did any such events occur or circumstances exist during the three months ended March 31, 2007 that
would indicate that impairment existed as of March 31, 2007.

(l) Long-Lived Assets

Other intangibles with definite lives are stated at cost less accumulated amortization and are amortized on a straight-line basis over a time frame that
approximates the pattern in which the economic benefits of the intangible asset are consumed. The Companys purchased technology met this classification and was ratably amortized to expense over three years ending as of January 31, 2007.
See Note 3.

In accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, the Company considers
the existence of facts or circumstances, both internal and external, that may suggest that the carrying amount of



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long-lived assets may not be recoverable. If such facts and circumstances were to exist, recoverability of assets held and used would be measured by
comparing the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount were higher, the impairment loss would be measured by the amount, if any, by which the carrying
amount of the assets exceeds their fair value based on the present value of estimated expected future cash flows.

(m) Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates used in preparing the
financial statements relate to areas that include, but are not limited to, (i) revenue recognition, (ii) provision for bad debt, (iii) useful lives for property and equipment and intangibles, (iv) fair values and impairment
analysis of goodwill and intangible assets with definite lives, (v) tax assets and liabilities and other tax exposure items, and (vi) valuation of stock options using the Black-Scholes option pricing model.

(n) Financial Instruments

At
March 31, 2007, the Company had the following financial instruments: cash and cash equivalents, short and long-term investments, accounts receivable, other receivables, accounts payable, and accrued liabilities. The carrying value of cash and
cash equivalents, short-term investments, receivables, payables and accrued liabilities approximates fair value based on the liquidity of these financial instruments or based on their short-term nature.

(o) Taxes

Income taxes

The Company follows the asset and liability method of accounting for income taxes as set forth by SFAS No. 109, Accounting for
Income Taxes, and the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109(FIN
48). FIN 48 clarifies the accounting and disclosure for uncertainty in income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also
provides guidance on derecognition, measurement, classification, interest and penalties, accounting for interim periods, disclosure and transition, and clearly scopes income taxes out of FASB Statement No. 5, Accounting for
Contingencies.

Under SFAS 109 and FIN 48, certain assumptions are made that represent significant estimates. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis, net of operating loss and tax credit
carryforwards. 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. FIN 48 requires a company to
recognize the impact of a tax position in its financial statements if that position is more likely than not to be sustained upon audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning
after December 31, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The adoption of FIN 48 did not have a material effect on the Companys results of operations
or financial condition.

Historically, the Company has not incurred any interest or penalties associated with income tax matters and no
interest or penalties were recognized during the three months ended March 31, 2007. However, the Company has adopted a policy whereby amounts related to interest and penalties associated with income tax matters are classified as general and
administrative expense when incurred.

The Company has incurred net operating losses. The Company continues to maintain a valuation
allowance for the full amount of the net deferred tax asset balance associated with its net operating losses because sufficient uncertainty exists regarding its ability to realize such tax assets in the future. There were no unrecognized tax
benefits as of January 1, or March 31, 2007.

Tax years 2003, 2004, 2005, and 2006 are still subject to potential examination
under the applicable federal and state statutes of limitations. In addition, tax years 1993 to 2002 may be subject to examination in the event that the Company utilizes the net operating loss carryforwards from those years in its current or future
year tax returns. The Company is not currently under income tax examination by any tax jurisdiction.



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Sales taxes

During the ordinary course of business, there are many transactions and for which the ultimate sales tax determination is uncertain. If necessary, the Company establishes accruals for sales tax-related uncertainties
based on estimates of whether, and to the extent which, additional sales taxes, interest, and penalties will be due. These accruals are adjusted in light of changing facts and circumstances, such as the closing of a sales tax audit or the expiration
of a related statute of limitations.

The Company generates sales in almost every state in the United States. There is a great variation in
the tax rules from state to state, including the rules that determine whether a company has a sufficient presence in a particular jurisdiction such that it is required to register and collect and pay taxes in that jurisdiction. The Company is
registered in several states and local jurisdictions and the Company remits required state and local taxes on related business operations in those states. In the second quarter of 2006, the Company began a comprehensive examination of the tax rules
for each of the various jurisdictions where the Company generates sales. In the course of this examination, the Company concluded that some jurisdictions in which the Company generated sales but had not been registered or paid taxes may have a basis
to claim that, for a period of time, the Company should have levied, collected, and remitted required sales taxes on applicable sales transactions. As a result, the Company recorded an estimated tax liability, net of estimated amounts to be
collected from customers, of $125,000 at December 31, 2006. This net estimated tax liability was included in accrued expenses and other current liabilities in the Companys consolidated balance sheet dated December 31, 2006, and in
general and administrative expense in the Companys consolidated statement of income for the twelve months ended 2006. As of March 31, 2007, the liability remains at $125,000. The Companys estimate was based on the following factors:
the Companys ability to successfully collect reimbursement from its customers for sales tax payments the Company makes on their behalf as part of the process of registering in a particular jurisdiction, the Companys ability to determine
whether the underlying sales tax obligations were previously discharged directly by the applicable customers through other means, and the likelihood of the Companys success in qualifying for various amnesties, settlements, or exemptions
available in the applicable states.

The provision for sales taxes includes the impact of potential sales tax claims and changes to
accruals and valuation allowances that the Company considers appropriate, as well as the related interest expense and penalties. In addition to the Companys judgments and use of estimates, there are inherent uncertainties surrounding taxes
that could result in actual amounts that differ materially from the Companys estimates. For example, additional jurisdictions besides the ones that the Company determined may assert a claim with respect to sales taxes, and the Company may be
less successful than it has anticipated at collecting reimbursement from its customers for sales taxes that such customers should have been required to remit and that were not discharged directly by such customers through other means. Accordingly,
the Companys actual sales tax obligation may exceed the estimate established as of March 31, 2007. Any changes in circumstances related to these contingencies could have a material effect on the Companys financial condition, results
of operations and cash flows.

(p) Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities(SFAS 159).
SFAS 159 permits entities to choose, at specified election dates, to measure eligible items at fair value and to report in earnings unrealized gains and losses on those items for which the fair value option has been elected. SFAS 159 also requires
entities to display the fair value of those assets and liabilities on the face of the balance sheet. SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities. SFAS 159 is effective as of the beginning of an entitys first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal
year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS 157. The Company is currently evaluating the impact of this pronouncement on its financial condition and
results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS
157 clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company does not anticipate this statement will have a material effect on its financial condition or
results of operations.

In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB
Statement No. 109, which clarifies the accounting for uncertainty in tax positions. FIN 48 requires a company to recognize the impact of a tax position in its financial statements if that position is more likely than not to be sustained
upon audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 31, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to
opening retained earnings. The adoption did not have a material impact on the Companys financial condition or results of operations.



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In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assetsan
amendment of FASB Statement No. 140 (SFAS 156). SFAS 156 requires a company to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing
contract in specific situations. The servicing asset or servicing liability must be initially measured at fair value, but an entity may elect the amortization method or fair value method for subsequent balance sheet reporting
periods. SFAS 156 is effective for fiscal years beginning after September 15, 2006. The adoption did not have a material impact on the Companys financial condition or results of operations.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements
No. 133 and 140 (SFAS 155). SFAS 155 simplifies accounting for certain hybrid instruments currently governed by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), by
allowing fair value remeasurement of hybrid instruments that contain an embedded derivative that otherwise would require bifurcation. SFAS 155 also eliminates the guidance in SFAS 133 Implementation Issue No. D1, Application of Statement 133 to
Beneficial Interests in Securitized Financial Assets, which provides that such beneficial interests are not subject to SFAS 133. SFAS 155 amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilitiesa Replacement of FASB Statement No. 125, by eliminating the restriction on passive derivative instruments that a qualifying special-purpose entity may hold. SFAS 155 is effective for all financial instruments acquired,
issued, or subject to a remeasurement (new basis) event occurring after the beginning of an entitys first fiscal year that begins after September 15, 2006. The adoption did not have a material impact on the Companys financial
condition or results of operations.

(3) PURCHASED TECHNOLOGY

In January 2004, the Company acquired title to the software code underlying the S programming language from Lucent Technologies Inc. The $2.0 million purchase price included settlement in full for all royalties owed
by the Company to Lucent at the date of the acquisition, in the amount of $235,000. Under the agreement, $1.5 million of the purchase price was paid in the first quarter of 2004 and the remaining $0.5 million was paid in the first quarter of 2005.

As a result of this transaction, the Company capitalized $1,765,000 as purchased technology. This amount was ratably amortized to
software-related cost of revenues over a three-year estimated life. Accordingly, the Company recorded $49,000 and $147,000 in amortization expense related to this technology in the three months ended March 31, 2007 and 2006, respectively. The
remaining balance of the capitalized asset was fully amortized as of January 31, 2007.

(4) FINANCING ARRANGEMENTS

In May 2007, the Company renewed a working capital revolving line of credit and security agreement with Silicon Valley Bank. The terms provide for up to
$3.0 million in borrowing availability through May 30, 2008. This facility is secured by the Companys accounts receivable and allows the Company to borrow up to the lesser of 75% of its eligible accounts receivable or $3.0 million.
Borrowings under the facility bear interest at the prime rate. No amounts were outstanding at March 31, 2007 under the Companys previous line of credit facility with Silicon Valley Bank, and no amounts have been borrowed under the renewed
line of credit facility.

In May 2007, the Company entered into a new equipment loan facility with Silicon Valley Bank. This facility
allows a maximum of $750,000 to be borrowed through December 31, 2007, with the loan secured by the underlying assets. The Company is entitled to take up to six advances through December 31, 2007 for qualifying equipment purchased in the
preceding 90 days of the advance request (or 180 days for the initial advance), with each advance having a minimum borrowing amount of $75,000. Each borrowing under the equipment loan will bear interest at the prime rate plus 0.25% and will be
repaid over a 36-month payment period beginning 30 days after the applicable advance. The final maturity date will be no later than December 31, 2010. No amounts were outstanding at March 31, 2007 under the Companys previous
equipment loan facility with Silicon Valley Bank, and no amounts have been borrowed under the new equipment loan facility.



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These credit facilities contain covenants that limit the Companys net losses and restrict the
amount of capital expenditures not financed through the equipment term loan. In addition, the Company is prohibited under these facilities from paying dividends.

(5) NET LOSS PER SHARE

The following is a reconciliation of the number of shares used in the basic and diluted net loss per
share computations for the periods presented (in thousands):



|                                                             |  |                              |  |       
|------------------------------------------------------------ |  | ---------------------------- |  | ------
|                                                             |  | Three Months Ended March 31,
|                                                             |  | 2007                         |  | 2006  
|Shares used in basic net loss per share computation          |  | 12,830                       |  | 12,546
|Effect of dilutive common stock equivalents(1)               |  |                             |  |      
|                                                             |  |                              |  |       
|Shares used in diluted net income loss per share computation |  | 12,830                       |  | 12,546

---

|(1) | Common stock equivalents totaling 494,000 and 654,000 were excluded from dilutive net loss per share for the three months ended March 31, 2007 and 2006, respectively, as their
inclusion would have been anti-dilutive.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The dilutive effect of the Companys stock options is calculated using the
treasury stock method, based on the average share price of the Companys common stock. Under the treasury stock method, the proceeds that would be hypothetically received from the exercise of all stock options with exercise prices below the
average share price of the Companys common stock are assumed to be used to repurchase shares of the Companys common stock.

The
Company excludes all potentially dilutive securities from its diluted net income per share computation when their effect would be anti-dilutive. The following common stock equivalents were excluded from the earnings per share computation because the
exercise prices of the stock options and rights were greater than or equal to the average price of the common shares, and therefore their inclusion would have been anti-dilutive (in thousands):



|                                                                                                                                                                  |  |                              |  |      
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- |  | -----
|                                                                                                                                                                  |  | Three Months Ended March 31,
|                                                                                                                                                                  |  | 2007                         |  | 2006 
|Stock options excluded from the computation of diluted net loss per share, other than those used in the determination of common stock
equivalents disclosed above |  | 1,508                        |  | 1,141

(6) OTHER COMPREHENSIVE INCOME (LOSS)

SFAS No. 130, Reporting Comprehensive Income, establishes standards for reporting and display of comprehensive income and its components in
the financial statements. As of March 31, 2007, comprehensive loss consisted of net loss, foreign currency translation adjustments, and unrealized gains on short-term investments in marketable securities. Total comprehensive loss for the three
months ended March 31, 2007 and 2006 was as follows (in thousands):



|                                            |  |                              |        |   |      |   |     |  
|------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | --- | -
|                                            |  | Three Months Ended March 31, |       
|                                            |  | 2007                         |        |   | 2006 |  
|Net loss                                    |  | $                            | (1,092 | ) |      | $ | (43 | )
|Unrealized loss on investments              |  |                              | (1     | ) |      |   |    |  
|Change in cumulative translation adjustment |  |                              | (2     | ) |      |   | (13 | )
|                                            |  |                              |        |   |      |   |     |  
|Comprehensive loss                          |  | $                            | (1,095 | ) |      | $ | (56 | )
|                                            |  |                              |        |   |      |   |     |  

As March 31, 2007, total cumulative translation loss amounted a ($322,000), and total
cumulative unrealized gain on investments amounted to $3,000.

(7) SEGMENT REPORTING

SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, establishes standards for reporting information about
operating segments in annual financial statements. It also establishes standards for related disclosures about products, services, geographical areas and major customers. The Company has two business segments: Domestic and International. The Company
measures segment performance based on revenues and contribution margin, which



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is a measure of profitability that allocates only direct and controllable costs to a segment. Assets are not allocated to segments for internal reporting
presentations. Intercompany transactions have been eliminated from the segment information. Non-operating income and expenses are not tracked by segment. Segment information is provided below (in thousands):



|                                  |  |              |       |               |   |       |  |   |        |  
|--------------------------------- |  | ------------ | ----- | ------------- | - | ----- |  | - | ------ | -
|                                  |  | Domestic (1) |       | International |   | Total | 
|Three months ended March 31, 2007 |  |              |       |               |   |       |  |   |        |  
|Revenues                          |  | $            | 3,093 |               | $ | 3,090 |  | $ | 6,183  |  
|Contribution margin               |  |              | 788   |               |   | 1,055 |  |   | 1,843  |  
|Unallocated costs and expenses    |  |              |       |               |   |       |  |   | (3,055 | )
|                                  |  |              |       |               |   |       |  |   |        |  
|Income from operations            |  |              |       |               |   |       |  | $ | (1,212 | )
|                                  |  |              |       |               |   |       |  |   |        |  
|Three months ended March 31, 2006 |  |              |       |               |   |       |  |   |        |  
|Revenues                          |  | $            | 3,375 |               | $ | 2,167 |  | $ | 5,542  |  
|Contribution margin               |  |              | 1,288 |               |   | 848   |  |   | 2,136  |  
|Unallocated costs and expenses    |  |              |       |               |   |       |  |   | (2,283 | )
|                                  |  |              |       |               |   |       |  |   |        |  
|Income from operations            |  |              |       |               |   |       |  | $ | (147   | )
|                                  |  |              |       |               |   |       |  |   |        |  

---

|(1) | The Domestic operations segment includes all U.S. and Canadian transactions.
|--- | ----------------------------------------------------------------------------

Prior to January 1, 2007, the Company reported results in three segments: North American Data Analysis, International Data Analysis, and Text Analysis (InFact). As previously disclosed, the Company historically
focused its InFact-related efforts on products and partnerships geared towards utilizing InFact for content vertical portals such as online book search, but the strategic partnerships that were explored in this area did not come to fruition. As a
result, the Company believes that the greatest opportunities are with its data analysis product line. To direct the Companys focus and resources accordingly, beginning in the first quarter of 2007, the Company no longer treats Text Analysis as
a separate business segment.

(9) REVENUE CONCENTRATION

Only one customer accounted for more than 10% of the Companys total consolidated revenues, accounting for 17% (or $1.1 million) of total consolidated revenues for the three months ended March 31, 2007. No
customer accounted for more than 10% of the Companys total consolidated revenues for the three months ended March 31, 2006.

Only one customer accounted for 10% or more of the companys total consolidated accounts receivable balance as of March 31, 2007, accounting for 19.6%. No customers accounted for more than 10% of the Companys total
consolidated accounts receivable balance as of March 31, 2006.

(8) COMMITMENTS AND CONTINGENCIES

In certain of its licensing agreements, the Company provides intellectual property infringement indemnifications. These indemnifications are excluded from
the initial recognition and measurement requirements of FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees. Including Indirect Guarantees of Indebtedness of Others.The Companys
policy is to record any obligation under such indemnification when a required payment under such indemnification is probable and the amount of the future loss is estimable. At March 31, 2007 there were no such indemnifications for which a
required payment was deemed to be probable or estimable; therefore, no accrual has been made for potential losses associated with these indemnifications.



|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
|------- | ----------------------------------------------------------

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements included in Part 1, Item 1 of this report.

Our disclosure and analysis in this report contain forward-looking statements, which provide our current expectations or forecasts of future events.
Forward-looking statements in this report include, without limitation:



| |  |  | information concerning possible or assumed future results of operations, trends in financial results and business plans, including those relating to earnings growth
and revenue growth;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | statements about the level of our costs and operating expenses relative to our revenues, and about the expected composition of our revenues;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | statements about expected future trends for development and sales of our products and services;
| | - |  | -----------------------------------------------------------------------------------------------



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| |  |  | statements about the long-term potential of the data analysis market;
| | - |  | ---------------------------------------------------------------------



| |  |  | statements about our future capital requirements and the sufficiency of our cash, cash equivalents, investments and available bank borrowings to meet these
requirements;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | information about the anticipated release dates of new products;
| | - |  | ----------------------------------------------------------------



| |  |  | other statements about our plans, objectives, expectations and intentions; and
| | - |  | ------------------------------------------------------------------------------



| |  |  | other statements that are not historical facts.
| | - |  | -----------------------------------------------

Words such as believe, anticipate, expect and intend and similar expressions are intended to identify forward-looking statements, but the absence of these words does not
necessarily mean that a statement is not forward-looking. Forward-looking statements are based on the judgment and opinions of management at the time the statements are made. Forward-looking statements are subject to known and unknown risks and
uncertainties and are based on potentially inaccurate assumptions that could affect their accuracy. Our actual results could differ materially from those expressed or implied in the forward-looking statements for many reasons, including the factors
described in the section entitled Managements Discussion and Analysis or Plan of Operation  Important Factors That May Affect Our Business, Our Operating Results and Our Stock Pricein Part I, Item 2 of this
report. Other factors besides those described in this report could also affect actual results.

You should not unduly rely on these
forward-looking statements, which speak only as of the date of this report. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this report, or to reflect the occurrence of
unanticipated events.

Description of Our Business

We provide enterprises with data and text analysis solutions designed to drive better decisions faster by revealing patterns, trends and relationships. We are a developer and supplier of software and services for the
statistical data mining, business analytics, knowledge management, and information retrieval industry segments, enabling our customers to gain intelligence from numerical data and text.

Our products include our data analysis products S-PLUS®and S-PLUS Server, Insightful Miner, IDRS (Insightful Dynamic Reporting Suite), various S-PLUS toolkits for vertical market categories, such as S+ArrayAnalyzer®for the life sciences sector and S+FinMetrics®for the financial services sector, and our text analysis product InFact®. Our consulting services and training provide specialized expertise and processes for the design, development and deployment of
customized analytical solutions.

Our customers include primarily companies in financial services, life sciences, telecommunications and
manufacturing, as well as government agencies and research institutions.

Headquartered in Seattle, Washington, we also have offices in
North Carolina, New York, France, Switzerland, and the United Kingdom, with distributors around the world. As of March 31, 2007, we employed 110 full-time and 8 part-time employees in the United States, and 40 full-time and 1 part-time
employees in Europe. Formerly Mathsoft, Inc., we reincorporated as Insightful Corporation in Delaware in 2001.

Critical Accounting Policies and
Estimates

We have based our discussion and analysis or plan of operations on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our critical accounting policies and estimates, including those related to revenue recognition, bad debts, intangible assets, restructuring,
and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We derive our revenues primarily from three sources: license revenues, which consist of perpetual and fixed term software license fees; maintenance
revenues, which consist of fees for maintenance and support; and professional services revenues, which consist of fees for consulting and training.



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We follow very specific and detailed guidelines, discussed in Note 2 of our consolidated financial
statements, in recognizing and measuring revenues. The revenue recognition rules for software companies are complex and require our management to exercise judgment and make a number of estimates. For example, many of our contracts contain multiple
element arrangements, which require us to make assumptions and judgments in order to allocate the total price among the various elements we must deliver, to determine whether vendor specific objective evidence of fair value exists for each element,
to determine if undelivered elements are deemed essential, and to determine whether and when each element has been delivered. We also evaluate whether there is any material risk of customer non-payment or product returns. Deferred revenues are
recognized over time as the applicable revenue recognition criteria are satisfied.

A change in any of these assumptions or judgments,
which are made based upon all of the information available to us at the time, could cause a material increase or decrease in the amount of revenue that we report in a particular period.

Stock-Based Compensation Expense

On January 1, 2006, we adopted Statement of Financial
Accounting Standards, or SFAS, No. 123 (revised 2004), Share-Based Payment, or SFAS 123R. SFAS 123R requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors,
including employee stock options and employee stock purchases under our employee stock purchase plan, based on estimated fair values. SFAS 123R supersedes our previous accounting under Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, for periods beginning in fiscal 2006. We have applied the provisions of the Securities and Exchange Commission, or SEC, Staff Accounting Bulletin No. 107, Share-Based Payment, or SAB 107, in our
adoption of SFAS 123R.

We adopted SFAS 123R using the modified prospective transition method, which requires the application of the
accounting standard as of January 1, 2006, the first day of our fiscal year 2006. Our consolidated financial statements reflect the impact of SFAS 123R for the three months ended March 31, 2007 and 2006.

Under the provisions of SFAS 123R, stock-based compensation cost is estimated at the grant date based on the fair-value of the award and is recognized as
expense ratably over the requisite service period of the award. Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the grant date requires considerable judgment, including estimating stock price
volatility, expected option life and forfeiture rates. We develop our estimates based on historical data and market information, which can change significantly over time. A small change in the estimates used can have a relatively large change in the
estimated valuation, and consequently, a material effect of the results of operations.

We calculate the fair value of our stock options
granted to employees using the Black-Scholes valuation method, which requires us to make assumptions about risk-free interest rate, expected dividend, expected term (in years), expected volatility and weighted-average fair value. The risk-free
interest rate used is based on the implied yield currently available in U.S. Treasury securities at maturity with an equivalent term. We have not declared or paid any dividends and do not currently expect to do so in the future. The expected term of
options represents the period that our stock-based awards are expected to be outstanding and is determined based on historical weighted average holding periods and projected holding periods for the remaining unexercised shares. In determining the
expected term of options, we consider the vesting schedules and other contractual terms of the awards and expectations of future employee behavior. Expected volatility is based on the annualized daily historical volatility plus implied volatility of
our stock price, including consideration of the implied volatility and market prices of traded options for comparable entities within our industry.

Our determination of stock price volatility and option lives, both of which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the life of the option,
involve managements best estimates. SFAS 123R also requires that we recognize compensation expense for only the portion of options expected to vest. Therefore, we applied an estimated forfeiture rate that we derived from historical employee
termination behavior. If the actual number of forfeitures differs from our estimates, additional adjustments to compensation expense may be required in future periods.

Income Taxes

We follow the asset and liability method of accounting for income taxes as set
forth by SFAS No. 109, Accounting for Income Taxes, or SFAS 109, and the provisions of Financial Accounting Standard Board, or FASB, Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB
Statement No. 109, or FIN 48. FIN 48 clarifies the accounting and disclosure for uncertainty in income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial
statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting for interim periods, disclosure and transition, and clearly scopes income taxes out of FASB Statement No. 5, Accounting for
Contingencies.



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Under SFAS 109 and FIN 48, certain assumptions are made that represent significant estimates. Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis, net of operating loss and tax
credit carryforwards. 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. FIN 48 requires a company
to recognize the impact of a tax position in its financial statements if that position is more likely than not to be sustained upon audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years
beginning after December 31, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The adoption of FIN 48 did not have a material effect on our results of operations or
financial condition.

Historically, we have not incurred any interest or penalties associated with income tax matters and no interest or
penalties were recognized during the three months ended March 31, 2007. However, we have adopted a policy whereby amounts related to interest and penalties associated with income tax matters are classified as general and administrative expense
when incurred.

We have incurred net operating losses. We continue to maintain a valuation allowance for the full amount of the net
deferred tax asset balance associated with its net operating losses because sufficient uncertainty exists regarding its ability to realize such tax assets in the future. There were no unrecognized tax benefits as of January 1, or March 31,
2007.

Tax years 2003, 2004, 2005, and 2006 are still subject to potential examination under the applicable federal and state statute of
limitations. In addition, tax years 1993 to 2002 may be subject to examination in the event we utilize the net operating loss carryforwards from those years in its current or future year tax returns. We are not currently under income tax examination
by any tax jurisdiction.

Sales Returns

We provide an estimated reserve for return rights at the time of sale. We offer our customers a 30-day return policy on all of our products. Generally, refunds are provided to customers upon return to us of the complete product package,
including all original materials, CD-ROM or other media. Our provision for sales returns is estimated based on historical returns experience and our judgment of the likelihood of future returns.

Bad Debts

A considerable amount of judgment
is required when we assess the ultimate realization of receivables, including assessing the aging of the amounts and reviewing the current creditworthiness of our customers. Customer creditworthiness is subject to many business and finance risks
facing each customer and is subject to sudden changes.

Impairment of Goodwill and Other Long-Lived Assets

We evaluate goodwill arising from acquired businesses for potential impairment on an annual basis, using an October 1 measurement date. This
evaluation requires significant judgment and estimation. In addition, throughout the year we consider whether there are impairment indicators that would require an immediate evaluation of impairment. Our judgments regarding the existence of
impairment indicators are based on legal factors, market conditions and operational performance of our acquired businesses. Future events could cause us to conclude that impairment indicators exist and that goodwill associated with our acquired
business is impaired. Impairment losses, if any, will be charged to earnings in the period in which they are identified.

Contingencies

We are periodically engaged in various claims, legal proceedings or other circumstances arising in the ordinary course of business
for which the outcome is not currently known. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of possible losses. A determination of the amount of reserves required, if any,
for these contingencies are made after careful analysis of each individual matter. The required reserves, if any, may change in the future due to new developments in each matter or changes in approach.



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Results of Operations

Revenues by Type

We have three classifications of revenue on our statement of income: software licenses,
maintenance, and professional services and other. Revenues by type are as follows:



|                                           |  |                              |       |   |                             |   |       |   |  |     |   
|------------------------------------------ |  | ---------------------------- | ----- | - | --------------------------- | - | ----- | - |  | --- | --
|                                           |  | Three Months Ended March 31, |       |   | Percent Increase (Decrease) |  
|                                           |  | 2007                         |       |   | 2006                        |   |      
|Revenues (in thousands):                   |  |                              |       |   |                             |   |       |   |  |     |   
|Software licenses                          |  | $                            | 2,042 |   |                             | $ | 2,424 |   |  | (16 | )%
|Software maintenance                       |  |                              | 2,013 |   |                             |   | 1,811 |   |  | 11  | % 
|Professional services and other            |  |                              | 2,128 |   |                             |   | 1,307 |   |  | 63  | % 
|                                           |  |                              |       |   |                             |   |       |   |  |     |   
|Total                                      |  | $                            | 6,183 |   |                             | $ | 5,542 |   |  | 12  | % 
|                                           |  |                              |       |   |                             |   |       |   |  |     |   
|Revenues by type (as % of total revenues): |  |                              |       |   |                             |   |       |   |  |     |   
|Software licenses                          |  |                              | 33    | % |                             |   | 43    | % |  |     |   
|Software maintenance                       |  |                              | 33    | % |                             |   | 33    | % |  |     |   
|Professional services and other            |  |                              | 34    | % |                             |   | 24    | % |  |     |   
|                                           |  |                              |       |   |                             |   |       |   |  |     |   
|Total                                      |  |                              | 100   | % |                             |   | 100   | % |  |     |   
|                                           |  |                              |       |   |                             |   |       |   |  |     |   

Total Revenues

Total revenues for the three months ended March 31, 2007 increased by 12% ($0.6 million), as compared to the corresponding period of 2006.
Geographically, and for the corresponding period of 2006, total Domestic revenue decreased by 8% ($0.3 million), and was offset by an increase of 43% ($0.9 million) in International revenue. Total revenues associated with our core data analysis
product line increased by 16%, or $0.8 million, while total revenues associated with our text analysis product decreased by 53%, or $0.2 million.

Software License Revenues

Software license revenues consist principally of fees generated from granting rights to
use our software products under both perpetual and fixed-term (subscription) license agreements.

Total software revenues decreased by 16%
($0.4 million) for the three months ended March 31, 2007, as compared to the corresponding period of 2006. This decrease was made up of a 32% ($0.5 million) decrease in Domestic software revenues, offset by an 18% ($0.1 million) increase in
International software revenues. License revenues from our data analysis product line decreased by 11% ($0.2 million), while license revenues from our InFact product decreased by 53% ($0.2 million) in the first quarter of 2007, as compared to the
corresponding period of 2006. This decrease in data analysis license revenues was partly attributable to our strong performance in during the fourth quarter of 2006, during which we closed a significant number of the domestic data analysis license
transactions in our life sciences pipeline. We believe that our inability to rebuild the sales pipeline quickly enough and close enough new orders in the first quarter of 2007 contributed to our inability to maintain or increase our data analysis
license revenues in the first quarter of 2007 as compared to the first quarter of 2006.

Prior to January 1, 2007, we focused our
InFact efforts on products and partnerships geared towards utilizing InFact for content vertical portals such as online book search, but the strategic partnerships we explored in this area did not come to fruition. As a result, we believe that the
greatest opportunities for Insightful are from our data analysis product line. To direct our focus and resources accordingly, beginning in the first quarter of 2007, we no longer treat Text Analysis as a separate business segment. Instead, we now
view and treat InFact as a software product in our portfolio of software products. Consequently, we do not expect to generate significant revenue from our InFact product in the future.

Maintenance Revenue

We
provide product updates and customer support services under maintenance agreements. Maintenance and support is included as part of our annual subscription-based licenses. For products under perpetual licenses, software maintenance is generally
included in the initial purchase and the related revenue is typically recognized as maintenance revenue ratably over



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the initial contractual maintenance period, which is generally one year following the initial product sale. Maintenance renewals are optional, and are also
recognized ratably over the contractual maintenance renewal period, which is generally one year following the renewal sale. Maintenance services are generally priced based on a percentage of the current list price, or net license fees paid, of the
related licensed software products.

Software maintenance revenues increased by 11% ($0.2 million) for the three months ended
March 31, 2007, as compared to the corresponding period of 2006. This increase was due to an increase in maintenance bookings from 2004 through 2006 resulting from an increase in license bookings, and an increase in subsequent renewals for
maintenance. The increase in maintenance renewals was due in part to success in 2006 in getting customers to renew maintenance that had lapsed in previous quarters.

Because a certain percentage of our maintenance customers do not renew their maintenance contracts with us each quarter, in order to maintain or increase our future maintenance revenues we must maintain a certain
level of new license revenue bookings.

Professional Services and Other Revenue

Professional services and other revenue is generated from performing consulting and training activities.

Professional services and other revenues increased by 63% ($0.8 million) for the three months ended March 31, 2007, as compared to the corresponding
period of 2006. This increase was due to an increase of 27% ($0.1 million) in Domestic professional services and other revenues and an 86% ($0.7 million) increase in our International professional services and other revenue. These increases were
primarily due to the following factors:



| |  |  | We continue to perform consulting work for a large international financial services customer that accounted for 17% of our total revenues and 48% of professional
services revenues for the three months ended March 31, 2007. We expect this customer to continue to account for a substantial proportion of our revenues in 2007.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In general, we are seeing larger professional services engagements with multiple customers as a result of successfully implementing our strategy of marketing
larger, more complex customer-specific solutions to a broader user base and higher levels within the hierarchy of an organization.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Revenues by Segment and Geography

We report results in two segments: Domestic and International. Our Domestic
segment includes the United States and Canada. We have international business operations primarily in Europe and sales activities in other parts of the world. Revenues by segment and geography are as follows:



|                                   |  |                              |       |   |                             |   |       |   |  |    |   
|---------------------------------- |  | ---------------------------- | ----- | - | --------------------------- | - | ----- | - |  | -- | --
|                                   |  | Three Months Ended March 31, |       |   | Percent Increase (Decrease) |  
|                                   |  | 2007                         |       |   | 2006                        |   |      
|Revenues (in thousands):           |  |                              |       |   |                             |   |       |   |  |    |   
|Domestic                           |  | $                            | 3,093 |   |                             | $ | 3.375 |   |  | (8 | )%
|International                      |  |                              | 3,090 |   |                             |   | 2,167 |   |  | 43 | % 
|                                   |  |                              |       |   |                             |   |       |   |  |    |   
|Total                              |  | $                            | 6,183 |   |                             | $ | 5,542 |   |  | 12 | % 
|                                   |  |                              |       |   |                             |   |       |   |  |    |   
|Revenues (as % of total revenues): |  |                              |       |   |                             |   |       |   |  |    |   
|Domestic                           |  |                              | 50    | % |                             |   | 61    | % |  |    |   
|International                      |  |                              | 50    | % |                             |   | 39    | % |  |    |   
|                                   |  |                              |       |   |                             |   |       |   |  |    |   
|Total                              |  |                              | 100   | % |                             |   | 100   | % |  |    |   
|                                   |  |                              |       |   |                             |   |       |   |  |    |   

Prior to January 1, 2007, we reported results in three segments: North American Data
Analysis, International Data Analysis, and Text Analysis (InFact). As previously discussed, we historically focused our InFact related efforts on products and partnerships geared towards utilizing InFact for content vertical portals such as online
book search, but the strategic partnerships we explored in this area did not come to fruition. As a result, we believe that the greatest opportunities for Insightful are with our data analysis product line. To direct our focus and resources
accordingly, beginning in the first quarter of 2007, we no longer treat Text Analysis as a separate business segment.



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##### Table of Contents

Domestic Revenues

Domestic revenues decreased by 8% ($0.3 million) for the three months ended March 31, 2007, as compared to the corresponding period of 2006. This
decrease was made up of a 32% ($0.6 million) decrease in software revenues, offset by an 8% ($0.1 million) increase in maintenance revenue, and a 27% ($0.2 million) increase in professional services revenues.

International Revenues

International revenues increased by 43% ($0.9 million) for the three months ended March 31, 2007, as compared to the corresponding period of 2006. This increase was made up of an 18% ($0.1 million) increase in software revenues, a 17%
($0.1 million) increase in maintenance revenue, and an 86% ($0.6 million) increase in professional services revenues.

One international
Data Analysis customer accounted for 17% ($1.1 million) of our total revenues for the three months ended March 31, 2007. This same customer accounted for 8% ($0.4 million) of total revenues for the three months ended March 31, 2006.

Cost of Revenues



|                                                                                                    |  |                              |       |   |                             |   |       |   |  |     |   
|--------------------------------------------------------------------------------------------------- |  | ---------------------------- | ----- | - | --------------------------- | - | ----- | - |  | --- | --
|                                                                                                    |  | Three Months Ended March 31, |       |   | Percent Increase (Decrease) |  
|                                                                                                    |  | 2007                         |       |   | 2006                        |   |      
|Cost of revenues (in thousands):                                                                    |  |                              |       |   |                             |   |       |   |  |     |   
|Software-related                                                                                    |  | $                            | 362   |   |                             | $ | 458   |   |  | (21 | )%
|Professional services and other                                                                     |  |                              | 1,467 |   |                             |   | 904   |   |  | 62  | % 
|                                                                                                    |  |                              |       |   |                             |   |       |   |  |     |   
|Total                                                                                               |  | $                            | 1,829 |   |                             | $ | 1,362 |   |  | 34  | % 
|                                                                                                    |  |                              |       |   |                             |   |       |   |  |     |   
|Cost of software-related revenues as a % of software-related revenues                               |  |                              | 9     | % |                             |   | 11    | % |  |     |   
|Cost of professional services and other revenues as a % of professional services and other revenues |  |                              | 69    | % |                             |   | 69    | % |  |     |   
|                                                                                                    |  |                              |       |   |                             |   |       |   |  |     |   
|Total                                                                                               |  |                              | 30    | % |                             |   | 25    | % |  |     |   
|                                                                                                    |  |                              |       |   |                             |   |       |   |  |     |   

Cost of Software-Related Revenues

Cost of software-related revenues consists of royalties for third-party software, product media, product duplication, manuals, and maintenance and
technical support costs, and amortization of the costs of the software code underlying the S programming language purchased from Lucent Technologies Inc. in January 2004.

For the three months ended March 31, 2007, the cost of software-related revenues decreased in absolute dollars by 21% ($0.1 million), and decreased as a percentage of software-related revenues by two percentage
points, as compared to the corresponding period of 2006. These decreases were due to a decrease in intellectual property expense related to final amortization of the S programming language as of January 31, 2007, whereby only one month of
amortization occurred in the three months ended March 31, 2007, as compared to three months of amortization that occurred in the corresponding period of the prior year.

Cost of software-related revenues fluctuates from period to period depending on the mix and level of revenues, and depending on whether a particular
quarter includes the costs, such as materials and distribution costs, of a license upgrade to existing maintenance customers. Significant components of software-related costs of revenues are fixed, including amortization of the software code
purchased from Lucent and costs associated with technical support.

Cost of Professional Services and Other Revenues

Cost of professional services and other revenues consist primarily of the following:



| |  |  | Direct headcount-related costs, such as salaries, stock-based compensation expense and direct employee benefits;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | Indirect headcount-related costs, such as recruiting fees, employee travel costs, office supplies, and headcount-based allocation of facilities, information
technology, and human resource costs; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Temporary labor and consulting costs, including costs related to training.
| | - |  | --------------------------------------------------------------------------

For the three months ended March 31, 2007, the cost of professional services and other revenues increased in absolute dollars by 62% ($0.6 million)
and remained flat at 69% as a percentage of professional services and other, as compared to the corresponding period in 2006. The increases in absolute dollars reflects the increase in direct and indirect headcount related costs necessary to support
the corresponding increase in professional services and other revenues. These increased headcount costs were incurred in both our Domestic and International operations, and included the hiring of our head of European professional services in July
2006.

Cost of professional services and other revenues are predominantly made up of headcount-related costs, which are relatively fixed in
the short term. Consequently, these costs as a percent of revenues, and gross margins, can fluctuate from quarter to quarter and year to year, based primarily on the utilization levels of our consultants, the profitability of our consulting
contracts, and our consulting revenue levels.

We are implementing a strategy of creating, marketing, and implementing vertical-specific
solutions targeted at larger customers. These solutions combine our technology with our consulting expertise, which we believe will make each sale and implementation of a particular solution incrementally more efficient and bring more value to our
customers.

Operating Expenses

Sales and Marketing



|                                                               |  |                              |       |   |                  |   |       |   |  |    |  
|-------------------------------------------------------------- |  | ---------------------------- | ----- | - | ---------------- | - | ----- | - |  | -- | -
|                                                               |  | Three Months Ended March 31, |       |   | Percent Increase |  
|                                                               |  | 2007                         |       |   | 2006             |   |      
|Sales and marketing expenses (in thousands)                    |  | $                            | 2,645 |   |                  | $ | 2,154 |   |  | 23 | %
|Sales and marketing expenses (as percentage of total revenues) |  |                              | 43    | % |                  |   | 39    | % |  |    |  

Sales and marketing expenses consist primarily of the following:



| |  |  | Direct headcount-related costs, such as salaries, stock-based compensation expense, and direct employee benefits;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | Indirect headcount-related costs, such as recruiting fees, employee travel costs, office supplies, and headcount-based allocation of facilities, information
technology, and human resource costs;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Temporary labor and consulting costs; and
| | - |  | -----------------------------------------



| |  |  | Promotional activities, such as the costs of advertising and trade shows.
| | - |  | -------------------------------------------------------------------------

For the three months ended March 31, 2007, sales and marketing expenses increased in absolute dollars by 23% ($0.5 million) and increased as a
percentage of total revenues by four percentage points, as compared to the corresponding period of 2006. Direct and indirect headcount-related costs resulting from the hiring of additional sales and marketing personnel, as well as increases in
compensation of existing personnel in both the United States and Europe, accounted for approximately $450,000 of the increase, and promotional activities such as trade shows made up the remaining difference of approximately $50,000.

We expect sales and marketing expenses to increase in future periods as we recruit and hire additional personnel and expand our sales and marketing
programs.

Research and Development, Net



|                                                                     |  |                              |       |    |                             |   |       |    |  |     |   
|-------------------------------------------------------------------- |  | ---------------------------- | ----- | -- | --------------------------- | - | ----- | -- |  | --- | --
|                                                                     |  | Three Months Ended March 31, |       |    | Percent Increase (Decrease) |  
|                                                                     |  | 2007                         |       |    | 2006                        |   |      
|Research and development expenses (in thousands):                    |  |                              |       |    |                             |   |       |    |  |     |   
|Research and development                                             |  | $                            | 2,000 |    |                             | $ | 1,661 |    |  | 20  | % 
|Lessfunded research                                                 |  |                              | (506  | )  |                             |   | (579  | )  |  | (13 | )%
|                                                                     |  |                              |       |    |                             |   |       |    |  |     |   
|Research and development, net                                        |  | $                            | 1,494 |    |                             | $ | 1,082 |    |  | 38  | % 
|                                                                     |  |                              |       |    |                             |   |       |    |  |     |   
|Research and development expenses (as percentage of total revenues): |  |                              |       |    |                             |   |       |    |  |     |   
|Research and development                                             |  |                              | 32    | %  |                             |   | 30    | %  |  |     |   
|Lessfunded research                                                 |  |                              | (8    | )% |                             |   | (10   | )% |  |     |   
|                                                                     |  |                              |       |    |                             |   |       |    |  |     |   
|Research and development, net                                        |  |                              | 24    | %  |                             |   | 20    | %  |  |     |   
|                                                                     |  |                              |       |    |                             |   |       |    |  |     |   



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Research and development expenses consist primarily of the following:



| |  |  | Direct headcount-related costs, such as salaries, stock-based compensation expense and direct employee benefits;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | Indirect headcount-related costs, such as recruiting fees, employee travel costs, office supplies, and headcount-based allocation of facilities, information
technology, and human resource costs; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Temporary labor and consulting costs.
| | - |  | -------------------------------------

Our research and development is split into two teams: Research and Development. The Research team is generally focused on performing work relating to government grants and contracts, and the Development team is generally focused on work
that is geared toward commercial applications that are intended to be immediately deployed. Funded research amounts result from fees generated from Research work performed under government grants, which fees are netted against total research and
development costs.

Gross research and development expenses.

For the three months ended March 31, 2007, gross research and development expenses increased in absolute dollars by approximately 20% ($0.3 million)
and increased as a percentage of total revenues by two percentage points, as compared to the corresponding period of 2006. These increases were due primarily to an increase in direct and indirect headcount-related costs resulting from the hiring of
additional development personnel.

Funded research.

For the three months ended March 31, 2007, funded research decreased in absolute dollars by 13% ($73,000) and decreased as a percentage of total revenues by two percentage points, as compared to the corresponding
period of 2006. These decreases resulted from a decrease of $150,000 in text analysis (Infact)-related funded research, offset by an increase of $78,000 in our data analysis-related funded research. Our funded research related to text analysis has
decreased, in part, due to the focusing of our efforts and resources on our data analysis product line.

Research and development,
net.

As a result of the combined effects of the increase in gross research and development costs and the decrease in the
offsetting fees generated from funded research, total net research and development costs increased in absolute dollars by approximately 38% ($0.4 million) and increased as a percentage of total revenues by four percentage points, as compared to the
corresponding period of 2006.

During the remainder of 2007, we expect to increase our net research and development expenses as we invest
in development of our solutions and our platform in order to set the foundation for future growth.

General and Administrative



|                                                       |  |                              |       |   |                  |   |       |   |  |    |  
|------------------------------------------------------ |  | ---------------------------- | ----- | - | ---------------- | - | ----- | - |  | -- | -
|                                                       |  | Three Months Ended March 31, |       |   | Percent Increase |  
|                                                       |  | 2007                         |       |   | 2006             |   |      
|General and administrative (in thousands)              |  | $                            | 1,427 |   |                  | $ | 1,092 |   |  | 31 | %
|General and administrative (as percentage of revenues) |  |                              | 23    | % |                  |   | 20    | % |  |    |  

General and administrative expenses consist primarily of the following costs associated with
finance, accounting, legal, corporate governance, investor relations and administration, including the office of the chief executive officer and the board of directors:



| |  |  | Direct headcount-related costs, such as salaries, stock-based compensation expense and direct employee benefits;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | General corporate costs, such as audit fees, legal fees, operating taxes and licenses, and fees associated with compliance with various government regulations;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Indirect headcount-related costs, such as recruiting fees, employee travel costs, office supplies, and headcount-based allocation of facilities, information
technology, and human resource costs; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Temporary labor and consulting costs.
| | - |  | -------------------------------------

For the three months ended March 31, 2007, general and administrative expenses increased in absolute dollars by 31% ($334,000) and increased as a percentage of total revenues by three percentage points, as compared to the corresponding
period of 2006. These increases were due to a change in bad debt expense resulting from a write-down of the bad debt allowance in the three months ended March 31, 2006 that was not replicated in the three months ended March 31, 2007, an
increase in compensation to existing general and administrative personnel, and increases in various other general and administrative expenses.

We are required to comply with SOX 404 as of December 31, 2007. We will therefore incur related and significant expenses during 2007 and beyond, in our efforts to satisfy the compliance requirements.

In general, we expect to incur expenses in connection with our efforts to enhance our information technology resources and improve our financial and
managerial systems. Because some of these costs are allocated to the income statement expense line items based on headcount, all the expense line items in the statement of income will be affected by some of these added costs.

Other Income (Expense)

Other income (expense)
consists of the following:



|                                   |  |                              |     |      |   |    
|---------------------------------- |  | ---------------------------- | --- | ---- | - | ---
|                                   |  | Three Months Ended March 31,
|                                   |  | 2007                         |     | 2006
|Interest income                    |  | $                            | 129 |      | $ | 91 
|Foreign exchange transaction gains |  |                              | 3   |      |   | 21 
|                                   |  |                              |     |      |   |    
|                                   |  | $                            | 132 |      | $ | 112
|                                   |  |                              |     |      |   |    

Interest income

The increase in interest income for the three months ended March 31, 2007, as compared to the corresponding period of 2006, was a result of both
increased invested cash balances and the investment of a greater portion of our cash reserves into higher-yielding instruments.

Foreign
exchange transaction gains (losses)

Foreign exchange transaction gains and losses result from changes in exchange rates on transactions
denominated and or settled in currencies other than that of an entitys functional currency. This includes the effect that foreign exchange rate fluctuations have on intercompany amounts due from our international subsidiaries to the U.S.
parent company, or to the other international subsidiaries, that are expected to be settled within the foreseeable future. Foreign currency gains or losses resulting from intercompany amounts due from our international subsidiaries to the U.S.
parent company, or to the other international subsidiaries, that are not expected to be settled within the foreseeable future are included in stockholders equity in Other Comprehensive Income (Loss) during the period in which the
exchange rates fluctuate.

Foreign exchange transaction gains were $3,000 and $21,000 for the three months ended March 31, 2007
and 2006. This change is due to changes in foreign currency exchange rates and changes in the strength of the U.S. dollar, which impacts U.S. dollar-denominated intercompany balances, specifically those intercompany amounts due from our
international subsidiaries to the U.S. parent company that are expected to be settled within the foreseeable future.

Because we are
subject to foreign currency exchange rate fluctuations, and because such fluctuations are part of the global economic environment, we expect foreign currency gains and losses to continue to fluctuate in future quarters and years.

Income Tax Benefit (Expense)

Income tax
expense for the three months ended March 31, 2007 was minor and changed only slightly as compared to the corresponding period of 2006. Changes in income tax expense and benefit from period to period are attributed primarily to relative changes
in the mix of operating income and loss generated in the various tax jurisdictions in which we operate.



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Liquidity and Capital Resources

Cash, cash equivalents, and short and long-term investments increased from $10.2 million at December 31, 2006 to $11.7 million at March 31, 2007. Our working capital decreased from $5.4 million at
December 31, 2006 to $4.2 million at March 31, 2007, which was primarily due to our net loss during the quarter ended March 31, 2007 as well as purchases of long-term investments and property and equipment.

Cash Flows

We generated $1.5 million in cash
from operating activities during the three months ended March 31, 2007, compared to $1.7 million generated during the corresponding period of 2006. The decrease in operating cash inflows primarily relates to our net loss, offset by beneficial
changes in accounts receivable and deferred revenues.

The difference between our net loss and our operating cash inflows is attributable
to non-cash expenses included in net loss and changes in operating assets and liabilities, as presented below (in thousands):



|                                                        |  |                              |        |   |      |   |       |  
|------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ----- | -
|                                                        |  | Three months ended March 31, |       
|                                                        |  | 2007                         |        |   | 2006 |  
|Net loss                                                |  | $                            | (1,092 | ) |      | $ | (43   | )
|Add: non-cash expenses                                  |  |                              | 509    |   |      |   | 427   |  
|Adjust for: changes in operating assets and liabilities |  |                              | 2,074  |   |      |   | 1,346 |  
|                                                        |  |                              |        |   |      |   |       |  
|Net cash provided by operating activities               |  | $                            | 1,491  |   |      | $ | 1,730 |  
|                                                        |  |                              |        |   |      |   |       |  

Non-cash expenses consist of the amortization of intangible assets, including purchased
technology, depreciation and amortization of property and equipment, and stock-based compensation charges.

Investing activities resulted
in net cash outflows of $0.7 million for the three months ended March 31, 2007, compared to $0.1 million for the corresponding period of 2006. The increase in cash used in investing activities was due to a decrease of $0.7 million in proceeds
resulting from the sale of investments, an increase of $0.1 million for the purchase of investments, offset by a $0.3 million decrease in capital expenditures.

Financing activities resulted in a net cash inflow of $0.1 million in the three months ended March 31, 2007, compared to a $24,000 cash outflow in the corresponding period of 2006. The increase relates primarily
to an increase in the proceeds received from the exercise of employee stock options during the three months ended March 31, 2007, as compared to the corresponding period of 2006.

Sources of Liquidity

In May 2007, we renewed a working capital revolving line of credit and
security agreement with Silicon Valley Bank. The terms provide for up to $3.0 million in borrowing availability through May 30, 2008. This facility is secured by our accounts receivable and allows us to borrow up to the lesser of 75% of our
eligible accounts receivable or $3.0 million. Borrowings under the facility bear interest at the prime rate. No amounts were outstanding at March 31, 2007 under our previous line of credit facility with Silicon Valley Bank, and no amounts have
been borrowed under the renewed line of credit facility.

In May 2007, we entered into a new equipment loan facility with Silicon Valley
Bank. This facility allows a maximum of $750,000 to be borrowed through December 31, 2007, with the loan secured by the underlying assets. We are entitled to take up to six advances through December 31, 2007 for qualifying equipment
purchased in the preceding 90 days of the advance request (or 180 days for the initial advance), with each advance having a minimum borrowing amount of $75,000. Each borrowing under the equipment loan will bear interest at the prime rate plus 0.25%
and will be repaid over a 36-month payment period beginning on 30 days after the applicable advance. The final maturity date will be no later than December 31, 2010. No amounts were outstanding at March 31, 2007 under our previous
equipment loan facility with Silicon Valley Bank, and no amounts have been borrowed under the new equipment loan facility.

These credit
facilities contain covenants that limit our net losses and restrict the amount of capital expenditures not financed through the equipment term loan. In addition, we are prohibited under these facilities from paying dividends.



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At March 31, 2007, our principal unused sources of liquidity consisted of cash, cash equivalents,
short and long-term investments totaling $11.7 million. Our liquidity needs are principally financing of accounts receivable, capital assets, strategic investments, and product development, and flexibility in a dynamic and competitive operating
environment.

We believe that our existing cash and cash equivalents and available bank borrowings will be sufficient to meet the capital
requirements of our business for the foreseeable future. However, we intend to make significant investments in our data analysis and text analysis products in the next twelve months. If during that time the market for our products worsens, or if we
otherwise suffer significant operating losses, we may need to raise additional funds through public or private equity financing or from other sources in order to fund our operations. Presently, we have no commitments for any additional financing. If
funding does become necessary, we may be unable to obtain it on favorable terms, if at all.

Commitments

As of March 31, 2007, our contractual commitments associated with operating leases, primarily for our office space in Seattle, Washington, and other
domestic and international locations, as well as equipment leases and financing are as follows (in thousands):



|                            |  |      |     |      |   |      |  |      |     |      |   |       |  |   |   |  |   |      
|--------------------------- |  | ---- | --- | ---- | - | ---- |  | ---- | --- | ---- | - | ----- |  | - | - |  | - | -----
|                            |  | 2007 |     | 2008 |   | 2009 |  | 2010 |     | 2011 |   | Total
|Operating lease obligations |  | $    | 568 |      | $ | 297  |  | $    | 261 |      | $ | 81    |  | $ | 4 |  | $ | 1,211

Rent expense under the Companys operating leases was approximately $236,000 and $169,000 for
the three months ended March 31, 2007 and 2006.

Off- Balance Sheet Arrangements

We provide indemnifications of varying scope and size to certain customers against certain claims made by third parties arising from the use of our
products. We evaluate estimated losses for such indemnifications under SFAS 5, Accounting for Contingencies, as interpreted by FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. We consider such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, we have not encountered
material costs as a result of such obligations and have not accrued any liabilities in our financial statements related to such indemnifications.

Important Factors That May Affect Our Business, Our Operating Results and Our Stock Price

In addition to the other
information contained in this report, you should carefully read and consider the following risk factors. If any of these risks is actually realized, our business, financial condition or operating results could be adversely affected and the trading
price of our common stock could decline.

Our operating results fluctuate and could fall below our expectations and those of securities analysts and
investors, resulting in a decrease in our stock price.

Our operating results have varied widely in the past, and we expect that
they could continue to fluctuate in the future. Our stock price could decrease if our operating results for a particular quarter or year fall below our expectations or those of securities analysts and investors. Some of the factors that could affect
the amount and timing of our revenues and related expenses and cause our operating results to fluctuate include:



| |  |  | our primary reliance on one product family;
| | - |  | -------------------------------------------



| |  |  | our ability to compete in the highly competitive statistics and data analysis markets;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | market acceptance of open source alternatives to our products and services;
| | - |  | ---------------------------------------------------------------------------



| |  |  | our ability to penetrate new markets;
| | - |  | -------------------------------------



| |  |  | market awareness and acceptance of our existing and potential products and services;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | our ability to expand our sales and support infrastructure;
| | - |  | -----------------------------------------------------------



| |  |  | our ability to maintain our relationships with key partners;
| | - |  | ------------------------------------------------------------



| |  |  | elongated sales cycles and potential sales delays;
| | - |  | --------------------------------------------------



| |  |  | fluctuations in foreign currency exchange rates;
| | - |  | ------------------------------------------------



| |  |  | losses resulting from expected increases in our expenses;
| | - |  | ---------------------------------------------------------



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| |  |  | our ability to maintain effective internal financial and managerial systems, controls and procedures;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | costs associated with being a public company, such as the cost of complying with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to attract and retain key employees or management team members;
| | - |  | ---------------------------------------------------------------------------



| |  |  | our ability to obtain funding that may be necessary to support the operation or expansion of our business;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | our ability to obtain government contracts and research grants;
| | - |  | ---------------------------------------------------------------



| |  |  | our ability to successfully expand our international operations;
| | - |  | ----------------------------------------------------------------



| |  |  | general economic conditions, which may affect our customers purchasing decisions;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | integration of our new key employees, including our senior management team members;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | rapid changes in technology and our ability to develop, introduce and market new products on a timely basis;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | our ability to protect our intellectual property rights;
| | - |  | --------------------------------------------------------



| |  |  | our ability to maintain third-party licenses;
| | - |  | ---------------------------------------------



| |  |  | potential tax charges if a taxing authority in a jurisdiction in which we have not paid taxes deems that we are required to do so; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | defects or errors in our software, which may result in losses of customers or revenues.
| | - |  | ---------------------------------------------------------------------------------------

Because we cannot predict our revenues and expenses with certainty, our expectations of future profits or losses may differ from actual results. It is
particularly difficult to predict the timing or amount of our license revenues because:



| |  |  | our sales cycles are variable, typically ranging between one and twelve months from our initial contact with a current or potential data analysis product customer,
and much longer for current or potential text analysis customers;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a substantial portion of our sales are completed at the end of the quarter and, as a result, a substantial portion of our license revenues are recognized in the
last days of a quarter;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the amount of unfulfilled orders for our products is typically small; and
| | - |  | -------------------------------------------------------------------------



| |  |  | delay of new product releases can result in a customers decision to delay execution of a contract or, for contracts that include the new release as an element
of the contract, will result in deferral of revenue recognition until such release.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Even though our revenues are
difficult to predict with certainty, we base our decisions regarding many of our operating expenses on anticipated revenue trends. Many of our expenses are relatively fixed, and we cannot quickly reduce spending if our revenues are lower than
expected. As a result, revenue shortfalls could result in significantly lower income or greater loss than anticipated for any given period, which could result in a decrease in our stock price.

The revenue recognition rules for software companies are complex and require us to exercise judgment and make a number of estimates. If we were to change
any of these assumptions or judgments, which are made based on the information available to us at the time, the amount of revenue that we report in a particular period could materially increase or decrease.

We have incurred losses in past periods and may again incur losses in future periods, which could cause a decrease in our stock price.

We posted net losses for each fiscal quarter from the fourth quarter of 2001 through the third quarter of 2003, during the first and second quarters of
2006, and during the first quarter of 2007. We achieved only slight profits during the third and fourth quarters of 2006. As of March 31, 2007, we had an accumulated deficit of over $27 million. In 2007, we plan to continue making investments
in sales, marketing and development in order to expand our market position, create new product and service offerings, and further increase acceptance and sales of our solutions. As a result of these investments and the costs of complying with the
internal control provisions of SOX 404, we expect our expenses to be higher in 2007 than in 2006 and we may incur losses in the second quarter of 2007 and possibly beyond.

As our expenses increase, we may experience additional losses and negative cash flows in the near term, even if revenues from our products and services
continue to grow. We may be unable to increase our revenues sufficiently to keep pace with these growing expenditures, if at all, and as a result we may be unable to achieve or maintain profitability in the future. In addition, if we are unable to
increase our revenues, we may be forced to discontinue certain research and/or development projects, which could limit our future product offerings.



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Furthermore, in 2006 we began to recognize stock option and stock purchase awards as compensation expense
in accordance with FAS 123R. Our reported expenses may increase as a result of this practice, and because the calculations we must use to determine the amount of expense are based, in part, on many factors beyond our control, our ability to predict
the amount of expense associated with FAS 123R requirements will be limited.

If we are unable to increase our customer base through our current and
future products and services, or if we experience declines in our existing markets and are unable to timely enter new markets, the growth of our business will be limited and our operating results could be negatively affected.

We focus our statistics business primarily on two vertical markets: financial services and life sciences. In order to grow our business, we will need to
increase our customer base and provide additional products and services to existing customers within these two vertical markets. In addition, we must simultaneously develop and sell new products and services that address these and other markets. We
will need to simultaneously invest in the further development and enhancement, including scalability and deployability, of our current product offerings. These simultaneous investments may strain our financial resources and diffuse managements
time and attention. If any of these initiatives fails, our business may not grow and could fail. To the extent that we experience declines in our existing markets and we are unable to enter new markets and timely deliver new products and services,
our operating results will be harmed.

If we do not attract and retain key employees and management, our ability to execute our business strategy
will be limited.

Our future performance will depend largely on the efforts and abilities of our key technical, sales, consulting,
customer support, accounting and managerial personnel and on our ability to attract and retain them. As we have stated, we have plans to add significantly to our headcount. As a result, our ability to execute our business strategy will depend on our
ability to recruit personnel and retain our existing personnel, including executive management. Departures of key executives could adversely impact our reputation and our ability to execute our business strategy. Due to competition for qualified
employees, we may have difficulty recruiting personnel with appropriate skills, and we may be required to increase the level of compensation paid to existing and new employees, which could materially increase our operating expenses.

In addition, our ability to attract and retain employees may be adversely affected by the market price of our common stock, which has fluctuated widely
in the past. Consequently, potential employees may perceive our equity incentives, such as stock options, as less attractive, and current employees whose options are no longer priced below market value may choose not to remain employed by us.
Because our key employees are not obligated to continue their employment with us, they could leave at any time.

If potential customers do not
purchase the S-PLUS product family, or if current customers do not continue to renew maintenance or license subscriptions, our revenues and operating results will be adversely affected.

License and maintenance revenues from the S-PLUS product and add-on modules account for a significant portion of our license revenues. Other products,
such as InFact and Insightful Miner, have not contributed consistent revenues to date. We expect license and maintenance revenues from the S-PLUS product family to continue to account for the substantial majority of our revenues in the near future.
As a result, factors adversely affecting the pricing of or demand for the S-PLUS product family, such as competition or technological change, could dramatically affect our operating results. If we are unable to successfully deploy current versions
of the S-PLUS product family and to develop, introduce and establish customer acceptance of new and enhanced versions of S-PLUS products, our revenues and operating results will be adversely affected. For example, a significant delay in making our
new S-PLUS 8.0 product generally available or the failure of S-PLUS 8.0 to meet customer expectations would cause our revenues to be lower than expected and harm our operating results. In addition, if we are unable to maintain the expected level of
renewals for maintenance or license subscriptions on our products or if we are unable to generate new license revenue bookings to make up for the maintenance customers that do not renew their maintenance contracts with us each quarter, then we may
be unable to maintain or increase our future maintenance revenue streams generated by our products.

If we are unable to compete successfully in the
statistics and data analysis markets and we are unable to find other sources of revenue, our business will fail.

Our S-PLUS product
suite targets the statistics and data analysis market. This market is highly competitive, fragmented and mature. We face competition in the statistics and data analysis market primarily from large enterprise software vendors and from our potential
customers information technology departments, which may seek to develop their own solutions. The dominant competitor in our industry is SAS. Other companies with which we compete include, but are not limited to, SPSS, Inc., StatSoft Inc., The
Mathworks and Minitab, Inc. In addition to competition from other statistical software companies, we face competition from providers of software for specific statistical applications. We also face competition from R, an open- source software package
that performs operations similar to the S language that forms the core of our S-PLUS product. Many of our competitors are much larger than we are.



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In addition, as we develop other new products, or attempt to expand our sales into new vertical and
end-user markets, we may begin competing with companies with whom we have not previously competed. It is also possible that new competitors will enter our markets. For example, we could also experience competition from companies in other sectors of
the broader market for business intelligence software, such as providers of on-line analytical processing, business intelligence and analytical application software, as well as from companies in other sectors. If we are unable to maintain our
current level of pricing or renewals for our products, future revenue streams generated by out software products may decrease.

Many of our
competitors have longer operating histories, greater name recognition, greater market share, larger customer bases and significantly greater financial, technical, marketing and other resources than we do.

Market acceptance of open source alternatives to proprietary software, particularly R, poses a threat to our future operating results.

Our business model has been based upon customers agreeing to pay a fee to license software that we develop and distribute. In recent years, the
open-source, non-commercial software model has presented a growing challenge to the commercial software model. Under this non-commercial software model, open source software produced by loosely associated groups of unpaid programmers and made
available for license to end users without charge is distributed at nominal cost by firms that earn revenue on complementary services and products, without having to bear the full costs of research and development for the open-source software. The
most notable example of open source software is the Linux operating system, which has presented a competitive challenge to leading vendors of proprietary operating systems. In the data analytics market, we face similar challenges because of the
availability of R, an open source implementation of the S language that forms the core of our S-PLUS product. While we believe our products provide customers with significant advantages, the popularization of the non-commercial software model
continues to pose a significant challenge to our business model. To the extent open-source software gains increasing market acceptance, sales of our products may decline, we may have to reduce the prices we charge for our products, and revenues and
operating margins may consequently decline.

We may be required to raise additional funding if we suffer operating losses, and this funding may be
unavailable on acceptable terms, if at all.

Our future revenues may be insufficient to support the expenses of our operations and
the expansion of our business. We may therefore need additional equity or debt capital to finance our operations. If we are unable to generate sufficient cash flow from operations or to obtain funds through additional financing, we may have to
reduce some or all of our development and sales and marketing efforts and limit the expansion of our business or cease operations.

We
believe that our existing cash and cash equivalents and available bank borrowings will be sufficient to meet the capital requirements of our core business for the foreseeable future. However, during 2007 we intend to make significant investments in
sales and marketing and research and development in order to position the company for future revenue growth, and we will be incurring significant expenditures to comply with SOX 404. If during that time the market for our products worsens, or if we
otherwise suffer significant operating losses, we may need additional funds through public or private equity financing or from other sources in order to fund our operations. We have no commitment for additional financing, and, if funding does become
necessary, we may experience difficulty in obtaining it on favorable terms, if at all.

Our credit line contains covenants that require us
to maintain a certain level of profitability. Any additional financing we obtain may contain covenants that restrict our freedom to operate our business or may require us to issue securities that have rights, preferences or privileges senior to our
common stock and may dilute your ownership interest in us.

Our business is sensitive to the risks associated with government funding decisions.

We regularly apply for and are granted research contracts from a variety of government agencies and funding programs. These
contracts generated $0.5 million in the first quarter of 2007, $2.3 million in 2006 and $2.2 million in 2005 in offsets to our research and development expenses. Reductions in these offsets would negatively affect our operating results. We may not
receive new funded research contracts or any renewals of government-funded projects currently in process, and we may decide to cancel or reassign certain ongoing projects that are not aligned with our core business needs. The personnel and other
costs associated with these programs are relatively fixed in the short term, and a sudden cancellation or non-renewal of a major funding program or multiple smaller programs would be harmful to our operating results. A substantial portion of the
research grant money we receive is granted to us based on our status as a small business, the definition of which varies depending on the individual contract terms. If the number of our employees or the amount of our revenues ever grows beyond the
limits prescribed in any of these contracts, we will no longer be eligible for such research contracts and we will have to incur certain research and development expenses without the benefit of offsets.



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Furthermore, a portion of our license revenues comes from U.S. government entities, as well as research
institutions, healthcare organizations and private businesses that contract with or are funded by government entities. Government appropriations processes are often slow and unpredictable and may be affected by factors outside of our control.
Reductions in government expenditures and termination or renegotiation of government-funded programs or contracts could adversely affect our revenues and operating results. Funding received under government grants is subject to audits for several
years after the funding is received and, depending on the audit results, we could be obligated to repay a portion of the funding.

If we are unable
to maintain and expand our direct sales organization and develop and maintain successful long-term relationships with channel partners, our ability to expand our business could be limited.

We believe our future revenue growth will depend in large part on recruiting, training and retaining direct sales personnel. Competition for such
personnel in the software industry is intense. Our growth will also depend on expanding our indirect distribution channels, which are important to international sales and marketing of our products. These indirect channels include distributors,
value-added resellers, or VARs, original equipment manufacturer, or OEM, partners, system integrators and consultants, many of whom have similar, and often more established, relationships with our competitors. These existing and potential channel
partners may in the future market software products that compete with our solution or reduce or discontinue their relationships with us or their support of our products. If we experience difficulty in recruiting and retaining qualified direct sales
personnel and in establishing and maintaining third-party relationships with VARs, distributors, OEM partners and systems integrators and consultants, our sales could be reduced or our sales growth limited. Even if we successfully expand our sales
force and other distribution channels, the expansion may not result in expected revenue growth.

Our sales cycle is variable and has been lengthening
as we sell larger and more complex solutions, and our limited ability to predict revenues could cause our operating results to fluctuate, which could cause a decline in our stock price.

An enterprises decision to purchase our software and services is discretionary, involves a significant commitment of its resources and is influenced
by its budget cycles. Our sales cycles are variable, typically ranging between one and twelve months from our initial contact with a potential data analysis customer to the issuance of a purchase order or signing of a license or services agreement.
The amount of time varies substantially from customer to customer, making our revenues difficult to predict in the short term. Occasionally sales require substantially more time, and sales cycles have recently shown to be substantially longer for
higher-priced orders and for our text analysis product, InFact. In addition, sales delays could cause our operating results for any given period to fall below the expectations of securities analysts or investors, which could result in a decrease in
our stock price.

One large customer accounts for a significant proportion of our revenues. The unexpected loss of this customer or one or more
significant projects for this customer would affect our operating results and could cause a decline in our stock price.

We perform
consulting projects primarily on a time-and-materials basis, under which a customer may order us to cease work at any time. When the magnitude of any such project requires us to allocate a significant portion of our consulting time to its
performance during a reporting period, the unplanned or untimely cessation of the project would create a shortfall in revenues that would result in a negative impact on operating results. We are currently engaged with one customer that accounted for
17% of total revenues during the first quarter of 2007, 9% of total revenues during 2005 and 11% during 2006, and we expect this customer to continue to account for a substantial proportion of our revenues in 2007. We have allocated resources to
this customer that have limited, and may continue to limit, our ability to pursue other opportunities. If we cease work on this customer (or other significant customers) earlier than planned, we would suffer significant reductions in our expected
level of revenue and would continue to bear the generally fixed costs associated with our professional services staff. This would have a negative impact on our operating results.

We will be required to expend significant effort and expense in achieving SOX 404 compliance, which will divert resources and management attention and may put us at a disadvantage with respect to private
companies and public companies that are not subject to the provisions of SOX 404.

We will be required to comply with the provisions
of SOX 404 for the fiscal year ending December 31, 2007. In order to furnish the required report on managements assessment of the design and effectiveness of our internal controls, we must implement improvements of our internal controls,
and our management must document both the design of our internal controls and the testing processes that support managements evaluation and conclusion. As a result, we began incurring costs of compliance in the second half of 2006 and will
incur significant SOX 404 compliance-related expenditures in 2007 and beyond. For example, this process has required us to engage outside contractors, which has resulted and will continue to



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result in additional accounting and legal expenses, and we continue to incur expenditures to enhance our information technology resources. Additionally,
during our assessment of internal controls, certain deficiencies may be discovered that will require remediation. This remediation may require implementing additional controls, the costs of which could have a material adverse effect on our results
of operations.

Compliance with SOX 404 will also require a significant amount of management and executive management effort and attention
that could otherwise be focused on issues directly impacting our non-compliance-related operations and business strategy. The requirements of SOX 404 and the effort and expense necessary to achieve compliance may put us at a disadvantage with
respect to private companies and public companies that are not subject to the provisions of SOX 404, such as those registered in other countries.

We
may have difficulty implementing in a timely manner the internal controls necessary to allow our management to report on the effectiveness of our internal controls, and our testing may not reveal all material weaknesses or significant deficiencies
with our internal controls.

We have implemented efforts to improve our internal controls, and continue to evaluate our operational,
financial and accounting systems and our managerial controls and procedures for potential improvements, but our internal controls might not prove sufficient. In addition, the evaluation and attestation processes required by SOX 404 are new for small
companies and neither small companies nor auditing firms have significant experience in interpreting the guidance that has recently been provided for small companies. Accordingly, we may encounter problems or delays in completing the review and
evaluation, the implementation of improvements, or both. If we are unable to implement the requirements of SOX 404 in a timely manner and with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities. Any such
action could adversely affect our business and financial results.

Further, our testing may not reveal all material weaknesses or
significant deficiencies in our internal controls. Material weaknesses or significant deficiencies in our internal controls could have a material adverse effect on our results of operations.

Rapid changes in technology could render our products obsolete or unmarketable. If we are unable to introduce new products and services successfully and in a
timely and cost-effective manner, our operating results would be harmed.

The business software market is characterized by rapid
change due to changing customer needs, rapid technological developments and advances introduced by competitors. Existing products can become obsolete and unmarketable when products using new technologies are introduced and new industry standards
emerge. New technologies, including the rapid growth of the Internet and commercial acceptance of open source software, such as R, could result in changes in the way software is sold or delivered. In addition, we may need to modify our products when
third parties change software that we integrate into our products. As a result, the life cycles of our products are difficult to estimate.

To be successful, we must continue to enhance our current product line and develop new products that successfully respond to changing customer needs, technological developments and competitive product offerings. We may be unable to
successfully develop or license the applications necessary to respond to these changes, or to integrate new applications with our existing products. Past or future reductions in our research and development personnel may harm our ability to innovate
and compete. We may be unable to introduce enhancements or new products successfully or in a timely manner in the future. If we delay release of our products and product enhancements, or if they fail to achieve market acceptance when released, it
could harm our reputation and our ability to attract and retain customers, and our revenues may decline. In addition, customers may defer or forego purchases of our products if competitors, our major hardware, systems or software vendors or we
introduce or announce new products or product enhancements. If we are unable to develop such new products or product enhancements cost-effectively, we may be unable to realize all or a portion of our investment. Finally, delays in any new research
or development efforts could cause delays in our general product development schedule, including causing delays in the release of new product versions, which could materially harm our maintenance revenues.

Economic conditions could adversely affect our revenue growth and ability to forecast revenues.

We focus our data analysis business primarily on the financial services and life sciences markets and are thus sensitive to changes in the specific
economic conditions that affect those markets. A substantial change in the economic condition of either or both of these markets will affect our ability to sell our products and to forecast sales.

In addition, our revenue growth and potential for profitability depend on the overall demand for statistics and data analysis software and services.
Because our sales are primarily to corporate customers, our business also depends on general economic and business conditions. Changes in demand for computer software caused by a weakened economy, either domestic, international or both, may affect
our sales and may result in decreased revenues. As a result of inconsistent and weakened economic conditions, we may also experience difficulties in collecting outstanding receivables from our customers.



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If we do not successfully overcome the risks inherent in international business activities, the growth of our
business will be limited.

We plan to increase our revenues by expanding our international operations and entering new international
markets. If we do expand internationally, it will require significant management attention and financial resources to successfully translate and localize our software products to various languages and to develop direct and indirect international
sales and support channels. Even if we successfully translate our software and develop new channels, we may be unable to maintain or increase international market demand for our products and services. We, or our VARs or distributors, may be unable
to sustain or increase international revenues from licenses or from professional services and customer support. In addition, our international sales are subject to the risks inherent in international business activities, including:



| |  |  | costs of customizing products for foreign countries;
| | - |  | ----------------------------------------------------



| |  |  | export and import restrictions, tariffs and other trade barriers;
| | - |  | -----------------------------------------------------------------



| |  |  | the need to comply with multiple, conflicting and changing laws and regulations;
| | - |  | --------------------------------------------------------------------------------



| |  |  | separate management information systems and control procedures;
| | - |  | ---------------------------------------------------------------



| |  |  | reduced protection of intellectual property rights and increased liability exposure; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | regional economic, cultural and political conditions, including the direct and indirect effects of terrorist activity and armed conflict in countries in which we do
business.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our foreign subsidiaries operate primarily in local currencies, and their results are translated into U.S.
dollars. We do not currently engage in foreign currency contracts that are designed to hedge foreign currency risk, but we may do so in the future. Future currency exchange rate fluctuations may have an adverse effect on our results of operations in
future periods. Our operating results could be materially harmed if we enter into license or service agreements providing for significant amounts of foreign currencies with extended payment terms or extended implementation timeframes if the values
of those currencies fall in relation to the U.S. dollar over the payment period of the agreement.

We may be unable to adequately protect our
proprietary rights, which may limit our ability to compete effectively.

Our success depends in part on our ability to protect our
proprietary rights, including our patents and our rights in the software code underlying the S programming language that we purchased from Lucent. To protect our proprietary rights, we rely primarily on a combination of patent, copyright, trade
secret and trademark laws, confidentiality agreements with employees and third parties and protective contractual provisions such as those contained in license agreements with consultants, vendors and customers, although we have not signed these
agreements in every case. Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products and obtain and use information that we regard as proprietary. Historically, our products have not been physically
copy-protected. In order to retain exclusive ownership rights to all software developed by us, we license all software and provide it in executable code only, with contractual restrictions on copying, disclosure and transferability. The source code
for most of our products is protected as a trade secret and as unpublished copyrighted work. As is customary in the industry, we generally license our products to end-users by use of a shrink-wrap license. For custom software, we may
execute a signed license agreement with the customer. Other parties may breach confidentiality agreements and other protective contracts into which we have entered, and we may not become aware of, or have adequate remedies in the event of, a breach.
We face additional risk when conducting business in countries that have poorly developed or inadequately enforced intellectual property laws. While we are unable to determine the extent to which piracy of our software products exists, we expect
piracy to be a continuing concern, particularly in international markets and as a result of the growing use of the Internet. In any event, competitors may independently develop similar or superior technologies or duplicate the technologies we have
developed, which could substantially limit the value of our intellectual property.

Intellectual property claims and litigation could be costly,
divert management attention, subject us to significant liability for damages and result in invalidation of our proprietary rights.

In the future, we may have to resort to litigation to protect our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Any litigation, regardless of its
success, would probably be costly and require significant time and attention of our key management and technical personnel. Although we have not been sued for intellectual property infringement, we may face infringement claims from third parties in
the future. The software industry has seen frequent litigation over intellectual property rights, and we expect that participants in the industry will be increasingly subject to infringement claims as the number of products, services and competitors
grows and the functionality of products and services overlap. Infringement litigation could also force us to:



| |  |  | stop or delay selling, incorporating or using products that incorporate the challenged intellectual property;
| | - |  | -------------------------------------------------------------------------------------------------------------



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| |  |  | pay damages;
| | - |  | ------------



| |  |  | enter into licensing or royalty agreements, which may be unavailable on acceptable terms; or
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | redesign products or services that incorporate infringing technology, which we might not be able to do at an acceptable price, in a timely fashion or at all.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

Our products may suffer from defects or errors, which could result in loss of revenues, delayed or limited market acceptance of
our products, increased costs and damage to our reputation.

Software products as complex as ours frequently contain errors or
defects, especially when first introduced or when new versions are released. Our customers are particularly sensitive to such defects and errors because of the importance of accuracy in software used in analyzing data. We have had to delay
commercial release of past versions of our products until software problems were corrected, and in some cases have provided product updates to correct errors in released products. Our new products or releases may not be free from errors after
commercial shipments have begun. Any errors that are discovered after commercial release could result in loss of revenues or delay in market acceptance, diversion of development resources, damage to our reputation, increased service and warranty
costs or claims against us.

In addition, the operation of our products could be compromised as a result of errors in the third-party
software we incorporate into our software. It may be difficult for us to correct errors in third-party software because that software is not in our control.

Delivery of our products may be delayed if we cannot continue to license third-party technology that is important to the functionality of our solution.

We incorporate into our products software that is licensed to us by third-party software developers. The third-party software currently offered in
conjunction with our products may become obsolete or incompatible with future versions of our products. Further, numerous individual and institutional licensors have contributed software code to S-PLUS in exchange for little or no consideration, and
some of these third parties may choose to revise or revoke their licensing terms with us. A significant interruption in the supply of this technology could delay our sales until we can find, license and integrate equivalent technology. This could
take a significant amount of time, perhaps several months, which would cause our operating results to fall below the expectations of securities analysts or investors and result in a decrease in our stock price.

We face potential liability with respect to sales taxes.

We generate sales in almost every state in the United States. There is a great variation in the tax rules from state to state, including the rules that determine whether a company has a sufficient presence in a
particular jurisdiction such that it is required to register and collect and pay taxes in that jurisdiction. We are registered in several states and local jurisdictions and we remit required state and local taxes on related business operations in
those states. In the second quarter of 2006, we began a comprehensive examination of the tax rules for each of the various jurisdictions where we generate sales. In the course of this examination, we concluded that some jurisdictions in which we
generated sales but had not been registered or paid taxes may have a basis to claim that, for a period of time, we should have levied, collected, and remitted required sales taxes on applicable sales transactions. As a result, we have recorded an
estimated tax liability, net of estimated amounts to be collected from customers, of $125,000 as of March 31, 2007. Because the underlying facts used in determining this estimate may change in the course of further examination, and because
there are inherent uncertainties surrounding taxes that could result in actual amounts that differ from our estimates, our actual sales tax obligation may exceed this estimate. For example, additional jurisdictions besides the ones that we
determined may assert a claim with respect to sales taxes, and we may be less successful than we have anticipated at receiving reimbursement from our customers for sales tax payments we make on their behalf as part of the process of registering in a
particular jurisdiction.

Market risks may affect the value of our assets, cash flows and financial results.

We make worldwide sales of products that are developed in the U.S. We operate international offices in the United Kingdom, France and Switzerland, where
we incur expenses and generate billings denominated in the local currency. As a result, the value of our assets, cash flows and financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. In addition, interest income and expense are sensitive to changes in the general level of U.S. interest rates, particularly since our investments are in short-term instruments that may fluctuate in value over time.



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Our stock price may be volatile.

The price of our common stock has been volatile. In 2006, the price of a share of our common stock reached a high of $3.68 and a low of $2.09. The trading
price of our common stock could be subject to fluctuations for a number of reasons, including the reasons that may cause our operating results to fluctuate. In addition, stock prices for many technology companies fluctuate widely for reasons that
may be unrelated to operating results of these companies. These fluctuations, as well as general economic, market and political conditions, such as national or international currency and stock market volatility, recessions or military conflicts, may
materially and adversely affect the market price of our common stock, regardless of our operating performance. As a result of fluctuations in the price of our common stock, investors may be unable to sell their shares at or above the price paid for
them.

Volatility in our stock price may also expose us to class action securities litigation that, even if unsuccessful, would be costly
to defend and distracting to management. In the past, following periods of volatility in the market price of a companys securities, securities class action litigation has often been instituted against these companies. Litigation brought
against us could result in substantial costs and a diversion of managements attention and resources, which could have a material adverse effect on our business, financial condition and operating results.



|ITEM 3. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

The term disclosure controls and procedures is defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, or the Exchange Act. These rules refer to the controls and other procedures of a company that are designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within required time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our
Exchange Act reports is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Our chief executive officer and our chief financial officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of
the period covered by this report, and they have concluded that, as of that date, our disclosure controls and procedures were effective.



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PART II. OTHER INFORMATION



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

No matters were submitted to a vote of security holders in the quarter ended March 31, 2007.



|ITEM 6. | EXHIBITS
|------- | --------

(a) See Index to Exhibits.



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SIGNATURES

In accordance with the requirements of the Exchange Act the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

May 15, 2007



INSIGHTFUL CORPORATIONBy:

/s/ Jeffrey E. CoombsJeffrey E. CoombsPresident and Chief Executive Officer (Principal
Executive Officer)By:

/s/ Richard P. BarberRichard P. BarberChief Financial Officer(Principal Financial and Accounting Officer)




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EXHIBIT INDEX



|               |  |                                                                                                                                              
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                  
|3.1            |  | Amended and Restated Certificate of Incorporation of the registrant (Exhibit 3.1) (A)                                                        
|               | 
|3.2            |  | Amended and Restated Bylaws of the registrant (Exhibit 3.2) (A)                                                                              
|               | 
|3.3            |  | Certificate of Amendment of Certificate of Incorporation of the registrant (Exhibit 3.3) (B)                                                 
|               | 
|10.1*          |  | Eighth Amendment to Loan and Security Agreement, dated May 7, 2007, by and between the registrant and Silicon Valley Bank                    
|               | 
|31.1*          |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                           
|               | 
|31.2*          |  | Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002                                               
|               | 
|32.1*          |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002
|               | 
|32.2*          |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002

---

|* | Filed herewith
|- | --------------

|(A) | Incorporated by reference to the designated exhibit included in the registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 (SEC File No.
0-20992), filed on November 14, 2001.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | Incorporated by reference to the designated exhibit included in the registrants Annual Report on Form 10-KSB for the year ended December 31, 2005 (SEC File No. 0-20992),
filed on March 31, 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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