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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 September 30, 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 12,954,621 as of October 25, 2007.

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



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##### Table of Contents

TABLE OF CONTENTS



|                              |  |                                                                                                                 |  |     
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                                 |  | Page
|                              | 
|PART I.
FINANCIAL INFORMATION |  | 3                                                                                                              
|                              |  |                                                                                                                
|ITEM 1.                       |  | Consolidated Financial Statements (Unaudited)                                                                   |  | 3   
|                              |  |                                                                                                                
|                              |  | Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006                            |  | 3   
|                              |  |                                                                                                                
|                              |  | Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2007 and 2006 |  | 4   
|                              |  |                                                                                                                
|                              |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006           |  | 5   
|                              |  |                                                                                                                
|                              |  | Notes to Condensed Consolidated Financial Statements                                                            |  | 6   
|                              |  |                                                                                                                
|ITEM 2.                       |  | Managements Discussion and Analysis or Plan of Operation                                                       |  | 16  
|                              |  |                                                                                                                
|ITEM 3.                       |  | Controls and Procedures                                                                                         |  | 35  
|                              | 
|PART II.
OTHER INFORMATION    |  | 36                                                                                                             
|                              |  |                                                                                                                
|ITEM 4.                       |  | Submission of Matters to a Vote of Security Holders                                                             |  | 36  
|                              |  |                                                                                                                
|ITEM 6.                       |  | Exhibits                                                                                                        |  | 36  
|                              | 
|SIGNATURES                    |  | 37                                                                                                             
|                              | 
|EXHIBIT INDEX                 |  | 38                                                                                                             



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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)



|                                                                                                                  |  |                   |         |   |                  |   |         |  
|----------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                  |  | September 30,2007 |         |   | December 31,2006 |  
|                                                                                                                  |  | (unaudited)       |         |   |                  |  
|ASSETS                                                                                                            |  |                   |         |   |                  |   |         |  
|Current Assets:                                                                                                   |  |                   |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                         |  | $                 | 8,491   |   |                  | $ | 7,320   |  
|Trade accounts receivable, net                                                                                    |  |                   | 2,844   |   |                  |   | 6,201   |  
|Short-term investments                                                                                            |  |                   | 1,890   |   |                  |   | 499     |  
|Other receivables                                                                                                 |  |                   | 413     |   |                  |   | 588     |  
|Prepaid expenses and other current assets                                                                         |  |                   | 580     |   |                  |   | 535     |  
|                                                                                                                  |  |                   |         |   |                  |   |         |  
|Total current assets                                                                                              |  |                   | 14,218  |   |                  |   | 15,143  |  
|Long-term investments                                                                                             |  |                   | 2,395   |   |                  |   | 2,361   |  
|Property and equipment, net                                                                                       |  |                   | 2,570   |   |                  |   | 2,757   |  
|Purchased technology, net                                                                                         |  |                   |        |   |                  |   | 49      |  
|Goodwill                                                                                                          |  |                   | 800     |   |                  |   | 800     |  
|Other assets                                                                                                      |  |                   | 110     |   |                  |   | 86      |  
|                                                                                                                  |  |                   |         |   |                  |   |         |  
|Total assets                                                                                                      |  | $                 | 20,093  |   |                  | $ | 21,196  |  
|                                                                                                                  |  |                   |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                              |  |                   |         |   |                  |   |         |  
|Current Liabilities:                                                                                              |  |                   |         |   |                  |   |         |  
|Accounts payable                                                                                                  |  |                   | 603     |   |                  |   | 745     |  
|Accrued payroll-related liabilities                                                                               |  |                   | 1,543   |   |                  |   | 2,184   |  
|Accrued expenses and other current liabilities                                                                    |  |                   | 370     |   |                  |   | 609     |  
|Deferred revenue - short term                                                                                     |  |                   | 5,647   |   |                  |   | 6,197   |  
|                                                                                                                  |  |                   |         |   |                  |   |         |  
|Total current liabilities                                                                                         |  |                   | 8,163   |   |                  |   | 9,735   |  
|Deferred revenue - long term                                                                                      |  |                   | 179     |   |                  |   | 51      |  
|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-12,951,621 and 12,813,842 shares at September 30, 2007 and December 31, 2006, respectively |  |                   | 130     |   |                  |   | 128     |  
|Additional paid-in capital                                                                                        |  |                   | 38,673  |   |                  |   | 37,843  |  
|Accumulated deficit                                                                                               |  |                   | (26,717 | ) |                  |   | (26,245 | )
|Other accumulated comprehensive loss                                                                              |  |                   | (335    | ) |                  |   | (316    | )
|                                                                                                                  |  |                   |         |   |                  |   |         |  
|Total stockholders equity                                                                                        |  |                   | 11,751  |   |                  |   | 11,410  |  
|                                                                                                                  |  |                   |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                        |  | $                 | 20,093  |   |                  | $ | 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 September 30, |        |   | Nine months ended September 30, |  
|                                                   |  | 2007                             |        |   | 2006                            |   |        | 2007 |  |   | 2006   |  
|Revenues:                                          |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Software licenses                                  |  | $                                | 1,587  |   |                                 | $ | 2,281  |      |  | $ | 5,348  |   |  | $ | 6,936  |  
|Software maintenance                               |  |                                  | 2,079  |   |                                 |   | 1,858  |      |  |   | 6,136  |   |  |   | 5,498  |  
|Professional services and other                    |  |                                  | 1,248  |   |                                 |   | 1,712  |      |  |   | 5,134  |   |  |   | 4,115  |  
|                                                   |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Total revenues                                     |  |                                  | 4,914  |   |                                 |   | 5,851  |      |  |   | 16,618 |   |  |   | 16,549 |  
|                                                   |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Cost of revenues:                                  |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Software related                                   |  |                                  | 236    |   |                                 |   | 395    |      |  |   | 840    |   |  |   | 1,249  |  
|Professional services and other                    |  |                                  | 1,325  |   |                                 |   | 971    |      |  |   | 4,068  |   |  |   | 2,826  |  
|                                                   |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Total cost of revenues                             |  |                                  | 1,561  |   |                                 |   | 1,366  |      |  |   | 4,908  |   |  |   | 4,075  |  
|                                                   |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Gross profit                                       |  |                                  | 3,353  |   |                                 |   | 4,485  |      |  |   | 11,710 |   |  |   | 12,474 |  
|                                                   |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Operating expenses:                                |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Sales and marketing                                |  |                                  | 2,523  |   |                                 |   | 2,180  |      |  |   | 7,921  |   |  |   | 6,580  |  
|Research and development                           |  |                                  | 1,847  |   |                                 |   | 1,744  |      |  |   | 5,901  |   |  |   | 5,049  |  
|LessFunded research                               |  |                                  | (455   | ) |                                 |   | (549   | )    |  |   | (1,471 | ) |  |   | (1,722 | )
|                                                   |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Research and development, net                      |  |                                  | 1,392  |   |                                 |   | 1,195  |      |  |   | 4,430  |   |  |   | 3,327  |  
|General and administrative                         |  |                                  | 1,112  |   |                                 |   | 989    |      |  |   | 3,663  |   |  |   | 3,123  |  
|                                                   |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Total operating expenses                           |  |                                  | 5,027  |   |                                 |   | 4,364  |      |  |   | 16,014 |   |  |   | 13,030 |  
|                                                   |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Gain on sale of intangible assets (note 10)        |  |                                  | 3,486  |   |                                 |   |       |      |  |   | 3,486  |   |  |   |       |  
|                                                   |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from operations                      |  |                                  | 1,812  |   |                                 |   | 121    |      |  |   | (818   | ) |  |   | (556   | )
|Other income, net                                  |  |                                  | 77     |   |                                 |   | 167    |      |  |   | 379    |   |  |   | 391    |  
|                                                   |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) before income taxes                  |  |                                  | 1,889  |   |                                 |   | 288    |      |  |   | (439   | ) |  |   | (165   | )
|Income tax expense                                 |  |                                  | (11    | ) |                                 |   | (1     | )    |  |   | (33    | ) |  |   | (6     | )
|                                                   |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                                  |  | $                                | 1,878  |   |                                 | $ | 287    |      |  | $ | (472   | ) |  | $ | (171   | )
|                                                   |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Basic net income (loss) per share                  |  | $                                | 0.15   |   |                                 | $ | 0.02   |      |  | $ | (0.04  | ) |  | $ | (0.01  | )
|Diluted net income (loss) per share                |  | $                                | 0.14   |   |                                 | $ | 0.02   |      |  | $ | (0.04  | ) |  | $ | (0.01  | )
|                                                   |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Basic weighted average common shares outstanding   |  |                                  | 12,944 |   |                                 |   | 12,751 |      |  |   | 12,887 |   |  |   | 12,637 |  
|Diluted weighted average common shares outstanding |  |                                  | 13,179 |   |                                 |   | 13,246 |      |  |   | 12,887 |   |  |   | 12,637 |  

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)



|                                                                                |  |                                |        |   |      |   |        |  
|------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                |  | Nine months endedSeptember 30, |       
|                                                                                |  | 2007                           |        |   | 2006 |  
|Operating activities:                                                           |  |                                |        |   |      |   |        |  
|Net loss                                                                        |  | $                              | (472   | ) |      | $ | (171   | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                                |        |   |      |   |        |  
|Depreciation and amortization                                                   |  |                                | 812    |   |      |   | 847    |  
|Stock-based compensation expense                                                |  |                                | 571    |   |      |   | 484    |  
|Gain on sale of intangible assets                                               |  |                                | (3,486 | ) |      |   |       |  
|Changes in current assets and liabilities:                                      |  |                                |        |   |      |   |        |  
|Trade and other accounts receivable                                             |  |                                | 3,628  |   |      |   | 2,403  |  
|Prepaid expenses and other assets                                               |  |                                | (61    | ) |      |   | 220    |  
|Accounts payable                                                                |  |                                | (159   | ) |      |   | 26     |  
|Accrued payroll-related liabilities and other accrued expenses                  |  |                                | (921   | ) |      |   | (520   | )
|Deferred revenue                                                                |  |                                | (511   | ) |      |   | (1,078 | )
|                                                                                |  |                                |        |   |      |   |        |  
|Net cash (used in) provided by operating activities                             |  |                                | (599   | ) |      |   | 2,211  |  
|                                                                                |  |                                |        |   |      |   |        |  
|Investing activities:                                                           |  |                                |        |   |      |   |        |  
|Purchases of short- and long-term investments                                   |  |                                | (3,398 | ) |      |   | (3,260 | )
|Proceeds from sales and maturities of short- and long-term investments          |  |                                | 1,972  |   |      |   | 725    |  
|Purchases of property and equipment                                             |  |                                | (565   | ) |      |   | (1,838 | )
|Net proceeds from sale of intangible assets                                     |  |                                | 3,486  |   |      |   |       |  
|                                                                                |  |                                |        |   |      |   |        |  
|Net cash provided by (used in) investing activities                             |  |                                | 1,495  |   |      |   | (4,373 | )
|                                                                                |  |                                |        |   |      |   |        |  
|Financing activities:                                                           |  |                                |        |   |      |   |        |  
|Payments on debt                                                                |  |                                |       |   |      |   | (32    | )
|Proceeds from exercise of stock options and employee stock purchase plan        |  |                                | 261    |   |      |   | 459    |  
|                                                                                |  |                                |        |   |      |   |        |  
|Net cash provided by financing activities                                       |  |                                | 261    |   |      |   | 427    |  
|                                                                                |  |                                |        |   |      |   |        |  
|Effect of exchange rate changes on cash and cash equivalents                    |  |                                | 14     |   |      |   | (18    | )
|                                                                                |  |                                |        |   |      |   |        |  
|Net increase in cash and cash equivalents                                       |  |                                | 1,171  |   |      |   | (1,753 | )
|                                                                                |  |                                |        |   |      |   |        |  
|Cash and cash equivalents, beginning of period                                  |  |                                | 7,320  |   |      |   | 9,185  |  
|                                                                                |  |                                |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                        |  | $                              | 8,491  |   |      | $ | 7,432  |  
|Supplemental disclosure of cash flow information:                               |  |                                |        |   |      |   |        |  
|Cash paid for:                                                                  |  |                                |        |   |      |   |        |  
|Interest                                                                        |  | $                              |       |   |      | $ |       |  
|Income taxes                                                                    |  | $                              | 63     |   |      | $ | 3      |  

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)

September 30,
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 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 data. The Companys solutions
include its S-PLUS® product family for data analysis and, until August 2, 2007, its 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 has customers in a broad range of industries, with a concentration in life sciences and
financial services. 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.

On August 2, 2007, the Company sold its InFact-related technology and associated intellectual property rights. See Note 10.

(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 and nine months ended September 30, 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 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 (also known as subscription-based) license agreements.

Perpetual software license fees are generally recognized upon delivery of the software after receipt of a 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.

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.



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The Company has established VSOE of fair value for professional services and training services. In
addition, the Company has established VSOE for software maintenance related to most of its software products. For software products sold with maintenance where VSOE for the maintenance element has not been established, such as the InFact text
analysis product formerly sold by the Company, 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 analysis techniques, and developing consultant-configured, vertical-specific products 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 of 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 standard 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 as of January 1, 2006, using the modified prospective transition
method. The Companys consolidated financial statements as of and for the three and nine months ended September 30, 2007 and 2006 reflect the impact of SFAS 123R.

SFAS 123R requires the Company 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 and nine months ended September 30, 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.



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The following table summarizes stock-based compensation expense under SFAS 123R related to employee stock
options and the ESPP purchases for the three and nine months ended September 30, 2007 and 2006, which was allocated as follows (in thousands):



|                                                                |  |                                      |     |                                      |   |                                     |  |                                     |     |  |   |    
|--------------------------------------------------------------- |  | ------------------------------------ | --- | ------------------------------------ | - | ----------------------------------- |  | ----------------------------------- | --- |  | - | ---
|                                                                |  | Three months endedSeptember 30, 2007 |     | Three months endedSeptember 30, 2006 |   | Nine months endedSeptember 30, 2007 |  | Nine months endedSeptember 30, 2006
|Cost of revenues                                                |  | $                                    | 3   |                                      | $ | 8                                   |  | $                                   | 20  |  | $ | 20 
|Sales and marketing                                             |  |                                      | 36  |                                      |   | 17                                  |  |                                     | 138 |  |   | 75 
|Research and development, net                                   |  |                                      | 16  |                                      |   | 23                                  |  |                                     | 55  |  |   | 69 
|General and administrative                                      |  |                                      | 117 |                                      |   | 97                                  |  |                                     | 358 |  |   | 320
|                                                                |  |                                      |     |                                      |   |                                     |  |                                     |     |  |   |    
|Stock-based compensation expense included in operating expenses |  | $                                    | 172 |                                      | $ | 145                                 |  | $                                   | 571 |  | $ | 484
|                                                                |  |                                      |     |                                      |   |                                     |  |                                     |     |  |   |    

The weighted average fair value of employee stock options granted in the nine months ended
September 30, 2007 and 2006 was $1.24 and $1.54, respectively. As of September 30, 2007, the total remaining unrecognized compensation cost related to unvested stock options amounted to $1.3 million, which will be amortized over the
weighted-average remaining requisite service period of 2.3 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 endedSeptember 30, |   |  | Nine months endedSeptember 30, |  
|                        |  | 2007                            |   |  | 2006                           |   |  | 2007       |   |  | 2006       |  
|Risk-free interest rate |  | 4.03                            | % |  | 4.62                           | % |  | 4.53       | % |  | 4.82       | %
|Expected dividend yield |  | None                            |   |  | None                           |   |  | None       |   |  | None       |  
|Expected life           |  | 3.50 years                      |   |  | 3.66 years                     |   |  | 3.68 years |   |  | 3.71 years |  
|Expected volatility     |  | 62.0                            | % |  | 66.0                           | % |  | 63.1       | % |  | 67.0       | %

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 in the determination of stock price volatility and option lives require the application of 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, adjustments to compensation expense
may be required in future periods.



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##### Table of Contents

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 stock appreciation rights 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, 884,601 additional option shares were made available for future grant under the 2001 Plan on
January 1, 2006 and 905,405 additional option shares were made available for future grant on January 1, 2007. As of September 30, 2007, 2,048,224 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 September 30, 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, with vesting schedules 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 in November
2006, and as a result no option shares are 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 September 30, 2007 and December 31, 2006, cash and cash equivalents amounted to $8.5 million and $7.3 million, respectively. At September 30, 2007 and December 31, 2006, marketable securities classified as
cash equivalents amounted to $5.5 million and $4.1 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 September 30, 2007, the Companys total marketable securities were $9.8 million, of which $5.5 million were classified as cash equivalents, $1.9 million were classified as short-term investments
and $2.4 million were classified as long-term investments.

As of September 30, 2007, the total $9.8 million in marketable securities
consisted of $7.8 million in corporate debt securities and $2.0 million in government and agency obligations, which are classified within cash and cash equivalents and short- and long-term investments. As of September 30, 2007, unrealized
and realized gains and losses on marketable securities were less than $2,000.

(f) 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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(g) 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. Accordingly, all such costs incurred up to the point of technological feasibility (defined as a working model) are to be expensed as incurred, and those costs incurred up to the point when
the software is available for general release to customers, are to be capitalized. During the nine months ended September 30, 2007 and 2006, the costs incurred from the date of technological feasibility to the general release date
were not material, and as such, the Company expensed all research and development costs.

(h) 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 and have been focused primarily on extending the frontiers of data analysis for numeric, textual, signal, and image data. In most cases, research projects are performed under cost reimbursement arrangements, which provide funding on a
time-and-materials basis based on agency-approved labor, overhead and profit rates, subject to a cap on total fees allowable under the applicable grant. In some cases, grant contracts are paid on a fixed fee (payment) basis, regardless of the number
of hours and costs incurred. 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.

(i) Foreign Currency Accounting

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 foreign currency transaction gains and losses is included in other income. For the three-month periods ended September 30, 2007 and
2006, the aggregate foreign currency transaction gains and (losses) were ($71,000) and $18,000, respectively. For the nine-month periods ended September 30, 2007 and 2006, the aggregate foreign currency transaction gains and (losses) were
($28,000) and $31,000, respectively.

(j) 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 (SFAS 142), 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 screens 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 1. Additional tests are performed when events occur or circumstances change that would give reason to suspect or indicate that such events will 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 nine months ended September 30, 2007 that would indicate that impairment existed as of
September 30, 2007.

(k) 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 was ratably amortized to expense over three years ending January 31, 2007. See Note 3.



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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 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.

(l) 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) allowance for doubtful accounts, (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.

(m) Financial Instruments

At September 30, 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.

(n) 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(SFAS 109), 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 nine months ended September 30, 2007. However, the Company has adopted a policy of classifying amounts related to interest and penalties associated with
income tax matters 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, 2007 or September 30, 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 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, a change in the
determination of whether the Company has nexus in a particular state, or the expiration of a relevant statute of limitations.

The Company
sells to customers 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 multiple states and local jurisdictions and the Company remits required state and local taxes on related business operations in those states.

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. Accordingly, the Companys actual sales tax obligation may exceed the estimate established at any point in time. 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.

(o) 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 for fiscal years 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 (described below). The Company is currently evaluating the impact of SFAS 159 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 that SFAS 157 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 Companys adoption of FIN 48 did not have a material impact on its financial condition or results of operations.

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 Companys
adoption of SFAS 156 did not have a material impact on its 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 in fiscal years beginning after September 15, 2006. The
Companys adoption of SFAS 155 did not have a material impact on its financial condition or results of operations.



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(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 $441,000 in amortization expense related to this technology in the nine months ended September 30, 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 September 30, 2007 under this line of credit facility or the Companys previous line of credit facility with Silicon Valley Bank.

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 90 days preceding 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 September 30, 2007 under this equipment loan facility or the Companys previous equipment loan facility
with Silicon Valley Bank.

The prime rate was 7.75% at September 30, 2007. These credit facilities contain covenants that limit the
Companys net losses and require certain minimum liquidity. In addition, the Company is prohibited under these facilities from paying dividends.

(5) NET INCOME (LOSS) PER SHARE

The Company excludes all potentially dilutive securities from its diluted net income per
share computation when their effect would be anti-dilutive. The following is a reconciliation of the number of shares used in the basic and diluted net income (loss) per share computations for the periods presented (in thousands):



|                                                               |  |                                 |  |                                |  |        |  |       
|-------------------------------------------------------------- |  | ------------------------------- |  | ------------------------------ |  | ------ |  | ------
|                                                               |  | Three months endedSeptember 30, |  | Nine months endedSeptember 30,
|                                                               |  | 2007                            |  | 2006                           |  | 2007   |  | 2006  
|Shares used in basic net income (loss) per share computation   |  | 12,944                          |  | 12,751                         |  | 12,887 |  | 12,637
|Effect of dilutive common stock equivalents(1)                 |  | 235                             |  | 495                            |  |       |  |      
|                                                               |  |                                 |  |                                |  |        |  |       
|Shares used in diluted net income (loss) per share computation |  | 13,179                          |  | 13,246                         |  | 12,887 |  | 12,637

---

|(1) | Dilutive common stock equivalents have been excluded from the computations of diluted net (loss) per share because their inclusion would have been anti-dilutive. For the nine months
ended September 30, 2007 and 2006, these exclusions totaled 360,000 shares and 616,000 shares, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.



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The following common stock equivalents are also 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 endedSeptember 30, |  | Nine months endedSeptember 30,
|                                                                                                                                                                                       |  | 2007                            |  | 2006                           |  | 2007  |  | 2006
|Stock options excluded from the computation of diluted net loss per share on the basis that their exercise prices were greater than or equal
to the average price of the common shares |  | 2,394                           |  | 1,064                          |  | 2,149 |  | 574 

(6) OTHER COMPREHENSIVE INCOME (LOSS)

SFAS No. 130, Reporting Comprehensive Income, establishes standards for reporting and display of comprehensive income and loss and its
components in the financial statements. Comprehensive income (loss) consists of net income (loss), foreign currency translation adjustments, and unrealized gains (losses) on short-term investments in marketable securities. Total comprehensive income
(loss) for the three and nine months ended September 30, 2007 and 2006 was as follows (in thousands):



|                                            |  |                                 |       |      |                                |     |      |  |   |      |   |  |   |      |  
|------------------------------------------- |  | ------------------------------- | ----- | ---- | ------------------------------ | --- | ---- |  | - | ---- | - |  | - | ---- | -
|                                            |  | Three months endedSeptember 30, |       |      | Nine months endedSeptember 30, |    
|                                            |  | 2007                            |       | 2006 |                                |     | 2007 |  |   | 2006 |  
|Net income (loss)                           |  | $                               | 1,878 |      | $                              | 287 |      |  | $ | (472 | ) |  | $ | (171 | )
|Unrealized gain (loss) on investments       |  |                                 | 2     |      |                                | 2   |      |  |   | (2   | ) |  |   | 5    |  
|Change in cumulative translation adjustment |  |                                 | 47    |      |                                | (21 | )    |  |   | (17  | ) |  |   | (36  | )
|                                            |  |                                 |       |      |                                |     |      |  |   |      |   |  |   |      |  
|Comprehensive income (loss)                 |  | $                               | 1,927 |      | $                              | 268 |      |  | $ | (491 | ) |  | $ | (202 | )
|                                            |  |                                 |       |      |                                |     |      |  |   |      |   |  |   |      |  

As of September 30, 2007 and 2006, total cumulative translation loss amounted to ($336,000)
and ($284,000), and total cumulative unrealized gain on investments was $2,000 and $5,000.

(7) SEGMENT REPORTING

FAS 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 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 September 30, 2007                             |  |              |       |               |   |       |  |   |        |  
|Revenues                                                          |  | $            | 2,542 |               | $ | 2,372 |  | $ | 4,914  |  
|Contribution margin                                               |  |              | 554   |               |   | 425   |  |   | 979    |  
|Unallocated costs, expenses and gain on sale of intangible assets |  |              |       |               |   |       |  |   | 833    |  
|                                                                  |  |              |       |               |   |       |  |   |        |  
|Income from operations                                            |  |              |       |               |   |       |  | $ | 1,812  |  
|                                                                  |  |              |       |               |   |       |  |   |        |  
|Nine months ended September 30, 2007                              |  |              |       |               |   |       |  |   |        |  
|Revenues                                                          |  | $            | 8,534 |               | $ | 8,084 |  | $ | 16,618 |  
|Contribution margin                                               |  |              | 2,039 |               |   | 2,219 |  |   | 4,258  |  
|Unallocated costs, expenses and gain on sale of intangible assets |  |              |       |               |   |       |  |   | (5,076 | )
|                                                                  |  |              |       |               |   |       |  |   |        |  
|Loss from operations                                              |  |              |       |               |   |       |  | $ | (818   | )
|                                                                  |  |              |       |               |   |       |  |   |        |  



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##### Table of Contents

|                                      |  |              |       |               |   |       |  |   |        |  
|------------------------------------- |  | ------------ | ----- | ------------- | - | ----- |  | - | ------ | -
|                                      |  | Domestic (1) |       | International |   | Total | 
|Three months ended September 30, 2006 |  |              |       |               |   |       |  |   |        |  
|Revenues                              |  | $            | 3,361 |               | $ | 2,490 |  | $ | 5,851  |  
|Contribution margin                   |  |              | 1,401 |               |   | 980   |  |   | 2,381  |  
|Unallocated costs and expenses        |  |              |       |               |   |       |  |   | (2,260 | )
|                                      |  |              |       |               |   |       |  |   |        |  
|Income from operations                |  |              |       |               |   |       |  | $ | 121    |  
|                                      |  |              |       |               |   |       |  |   |        |  



|                                     |  |              |        |               |   |       |  |   |        |  
|------------------------------------ |  | ------------ | ------ | ------------- | - | ----- |  | - | ------ | -
|                                     |  | Domestic (1) |        | International |   | Total | 
|Nine months ended September 30, 2006 |  |              |        |               |   |       |  |   |        |  
|Revenues                             |  | $            | 10,029 |               | $ | 6,520 |  | $ | 16,549 |  
|Contribution margin                  |  |              | 3,902  |               |   | 2,268 |  |   | 6,170  |  
|Unallocated costs and expenses       |  |              |        |               |   |       |  |   | (6,726 | )
|                                     |  |              |        |               |   |       |  |   |        |  
|Loss from operations                 |  |              |        |               |   |       |  | $ | (556   | )
|                                     |  |              |        |               |   |       |  |   |        |  

---

|(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). Beginning in the first quarter of 2007, the Company
ceased treating Text Analysis as a separate business segment. On August 2, 2007, the Company sold its InFact-related technology and associated intellectual property rights. See Note 10.

(8) REVENUE CONCENTRATION

One customer accounted for
more than 10% of the Companys total consolidated revenues for the three and nine months ended September 30, 2007. This customer accounted for 15% ($0.8 million) and 13% ($0.7 million) of total revenues for the three months ended
September 30, 2007 and 2006, respectively. This same customer accounted for 16% ($2.7 million) and 10% ($1.6 million) of total revenues for the nine months ended September 30, 2007 and 2006, respectively.

This same customer accounted for 13% of the Companys total consolidated accounts receivable balance as of September 30, 2007, and less than
10% of the Companys total consolidated accounts receivable balance as of September 30, 2006.

(9) 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 September 30, 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.



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##### Table of Contents

(10) GAIN ON SALE OF INTANGIBLE ASSET

At the beginning of 2007, the Company integrated its text analysis (InFact) business more closely with its data analysis business, no longer treating Text
Analysis as a separate business segment. On August 2, 2007, the Company sold its InFact search technology and associated intellectual property rights to Hypertext Solutions Inc. (Hypertext) for $3.7 million in cash. The Company recorded a gain
of $3.5 million, which represented the difference between the proceeds from the sale of the net intangible assets and the net transaction costs of $0.2 million.

The Company retained a limited support license to the InFact technology as part of the transaction to allow it to continue to support its current InFact customers for up to three years. The Company will not be
licensing the InFact product to new customers. Also as part of the agreement with Hypertext, Hypertext employed certain Company employees who were members of the Companys InFact team.



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

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;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | statements about expected future trends for development and sales of our products and services, including 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 credit to meet these requirements;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | statements about our anticipated use of cash and cash equivalents, including the use of proceeds from the sale of our InFact technology;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



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



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

Words such as plan, 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 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.

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 September 30, 2007, we employed 114 employees in the United States, and 38 employees in Europe. Formerly Mathsoft, Inc., we reincorporated as Insightful Corporation in Delaware in 2001.



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##### Table of Contents

Our products include S-PLUS® and S-PLUS Server, Insightful Miner, IDRS (Insightful Dynamic Reporting Suite), and 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. Until
August 2, 2007, we also sold a text analysis product line, InFact. Our consulting services and training provide specialized expertise and processes for the design, development and deployment of customized analytical solutions. We have customers
in a broad range of industries, with a concentration in life sciences and financial services. We report results in two business segments: Domestic (which includes all U.S. and Canadian transactions) and International (which includes all other
transactions).

Prior to January 1, 2007, we reported results in three segments: North American Data Analysis, International Data
Analysis, and Text Analysis (InFact). At the beginning of 2007, we integrated our InFact business more closely with our data analysis business, no longer treating Text Analysis as a separate segment. On August 2, 2007, after exploring multiple
strategic alternatives for InFact, we sold our InFact search technology and associated intellectual property rights to Hypertext Solutions Inc., or Hypertext, for $3.7 million in cash. We recorded a gain of $3.5 million, which represented the
difference between the proceeds from the sale of the net intangible assets and the net transaction costs of $0.2 million. We retained a limited support license to the InFact technology as part of the transaction so that we can continue to support
our existing InFact customers (who may expand their licenses only in limited ways and in limited circumstances) for up to three years, but we will not be licensing the InFact product to new customers. Also as part of the agreement with Hypertext,
Hypertext employed certain Insightful employees who were members of our former InFact team. We anticipate that the sale of the InFact-related technology and our continued support of existing InFact customers will neither result in a significant
decrease in revenues nor generate significant revenues for 2007 or subsequent years.

Critical Accounting Policies and Estimates

We have based our discussion and analysis or plan of operation 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 (subscription) 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.

We follow 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.



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We adopted SFAS 123R as of January 1, 2006 using the modified prospective transition method. Our
consolidated financial statements reflect the impact of SFAS 123R for the three and nine months ended September 30, 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, 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 excludes income taxes from the scope 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 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
nine months ended September 30, 2007. However, we have adopted a policy of classifying amounts related to interest and penalties associated with income tax matters 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 our net operating losses because sufficient uncertainty exists regarding our ability to realize such tax assets in the future. There were no unrecognized tax benefits as of January 1, 2007 or September 30, 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.



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##### Table of Contents

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 standard software license purchases. Generally, refunds are provided to customers upon
return to us of the complete product package, including all original materials and 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 suggest an immediate evaluation of impairment is warranted. 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.

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 endedSeptember 30, |       |   | PercentIncrease(Decrease) |   |       | Nine months endedSeptember 30, |      |     | PercentIncrease(Decrease) |     
|                                           |  | 2007                            |       |   | 2006                      |   |       |                                | 2007 |     |                           | 2006 |   |       
|Revenues (in thousands):                   |  |                                 |       |   |                           |   |       |                                |      |     |                           |      |   |        |   |  |   |        |   |  |     |   
|Software licenses                          |  | $                               | 1,587 |   |                           | $ | 2,281 |                                |      | (30 | )%                        |      | $ | 5,348  |   |  | $ | 6,936  |   |  | (23 | )%
|Software maintenance                       |  |                                 | 2,079 |   |                           |   | 1,858 |                                |      | 12  | %                         |      |   | 6,136  |   |  |   | 5,498  |   |  | 12  | % 
|Professional services and other            |  |                                 | 1,248 |   |                           |   | 1,712 |                                |      | (27 | )%                        |      |   | 5,134  |   |  |   | 4,115  |   |  | 25  | % 
|                                           |  |                                 |       |   |                           |   |       |                                |      |     |                           |      |   |        |   |  |   |        |   |  |     |   
|Total                                      |  | $                               | 4,914 |   |                           | $ | 5,851 |                                |      | (16 | )%                        |      | $ | 16,618 |   |  | $ | 16,549 |   |  | 0.4 | % 
|                                           |  |                                 |       |   |                           |   |       |                                |      |     |                           |      |   |        |   |  |   |        |   |  |     |   
|Revenues by type (as % of total revenues): |  |                                 |       |   |                           |   |       |                                |      |     |                           |      |   |        |   |  |   |        |   |  |     |   
|Software licenses                          |  |                                 | 32    | % |                           |   | 39    | %                              |      |     |                           |      |   | 32     | % |  |   | 42     | % |  |     |   
|Software maintenance                       |  |                                 | 43    | % |                           |   | 32    | %                              |      |     |                           |      |   | 37     | % |  |   | 33     | % |  |     |   
|Professional services and other            |  |                                 | 25    | % |                           |   | 29    | %                              |      |     |                           |      |   | 31     | % |  |   | 25     | % |  |     |   
|                                           |  |                                 |       |   |                           |   |       |                                |      |     |                           |      |   |        |   |  |   |        |   |  |     |   
|Total                                      |  |                                 | 100   | % |                           |   | 100   | %                              |      |     |                           |      |   | 100    | % |  |   | 100    | % |  |     |   
|                                           |  |                                 |       |   |                           |   |       |                                |      |     |                           |      |   |        |   |  |   |        |   |  |     |   



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Total Revenues

Total revenues for the three and nine months ended September 30, 2007 decreased by 16% ($0.9 million) and increased by 0.4% ($0.1 million), as
compared to the corresponding periods of 2006. The decrease for the three-month period reflects a 15% ($0.8 million) decrease in our data analysis revenues and a 47% ($0.1 million) decrease in our text analysis (InFact) revenues. The increase for
the nine-month period reflects a 4% ($0.6 million) increase in data analysis revenues, offset by a 57% ($0.5 million) decrease in text analysis (InFact) revenues. As discussed above, we sold our InFact-related technology and associated intellectual
property on August 2, 2007.

We believe the decreases in both license and service revenues during the three months ended
September 30, 2007 is due primarily to poor sales productivity resulting from turnover in our sales force, including both our North American and European sales vice presidents, the fact that our life science sales team began focusing too early
on selling products that have not yet been released, and weaknesses in our ability to quickly train and support new sales people. Because of the relatively small number of quota carrying sales representatives we have, given our small size, excessive
turnover results in a high ratio of sales representatives who are not yet fully productive. We are currently recruiting a Vice President of Sales and Professional services whose primary objective will be to address these retention, sales execution,
and training issues.

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 30% ($0.7 million) and 23% ($1.6 million) for the three and nine months ended September 30, 2007, as compared
to the corresponding periods of 2006. The decrease in total software revenues for the three-month period reflects a 42% ($0.6 million) decrease in Domestic software revenues, and a decrease of 8% ($0.1 million) in International software revenues.
The decrease in total software revenues for the nine-month period reflects a 38% ($1.8 million) decrease in Domestic software revenues, offset by a 8% ($0.2 million) increase in International software revenues.

The decreases in Domestic software license revenues were attributable to decreases in sales for both our text analysis (InFact) product, due to our
decision to no longer focus on this product, and data analysis products, for the reasons described above.

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 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 fees are generally 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 12% ($0.2 million) and 12% ($0.6 million) for the three and nine months ended September 30, 2007, as compared to the corresponding periods of 2006. These increases were
legacy effects of an increase in license sales (which typically include one year of maintenance) on a year-over-year basis through the first quarter of 2007, a slight increase in software maintenance renewals during 2006 followed by a relatively
constant renewal rate during the first half of 2007, and general increases in our maintenance pricing. However, our maintenance renewal rate declined during the three months ended September 30, 2007, as compared to the corresponding period of
2006. As a result, unless we experience an increase in software license sales in the near future, or our maintenance renewal rates increase, or we effectively increase our maintenance prices, our maintenance revenues may decrease in future periods.

Professional Services and Other Revenues

Professional services and other revenues are generated from performing consulting and training activities.



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##### Table of Contents

Professional services and other revenues decreased by 27% ($0.5 million) for the three months ended
September 30, 2007 and increased by 25% ($1.0 million) for the nine months ended September 30, 2007, as compared to the corresponding periods of 2006. The decrease in revenues for the three-month period reflects a decrease of 42% ($0.3
million) in our Domestic segment and a decrease of 18% ($0.2 million) in our International segment. These decreases were caused by the factors discussed above as well as, for our international business, a reduction in consulting work performed for
our largest customer, an international financial services firm, which resulted from this customer delaying the start of a planned project. The increase in revenues for the nine-month period reflects an increase of 43% ($1.1 million) in our
International segment, offset by a 2% ($0.1 million) decrease in our Domestic segment. The increase for the nine-month period in our International segment was primarily due to increases in consulting work performed for the international financial
services firm discussed above during the first half of the year, as compared to the first half of 2006.

Professional services
revenues from this financial services customer were $0.7 million and $2.5 million for the three and nine months ended September 30, 2007, compared to $0.8 million and $1.7 million for the three and nine months ended September 30, 2006. On
a percentage basis, total revenues generated by this customer accounted for 14% of our total revenues and 57% of our professional services revenues for the three months ended September 30, 2007, and 15% of our total revenues and 49% of our
professional services revenues for the nine months ended September 30, 2007.We expect this customer to continue to account for a substantial proportion of our revenues for at least the fourth quarter of 2007 and for 2008.

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 endedSeptember 30, |       |   | PercentIncrease(Decrease) |   |       | Nine months endedSeptember 30, |      |     | PercentIncrease(Decrease) |     
|                                   |  | 2007                            |       |   | 2006                      |   |       |                                | 2007 |     |                           | 2006 |   |       
|Revenues (in thousands):           |  |                                 |       |   |                           |   |       |                                |      |     |                           |      |   |        |   |  |   |        |   |  |     |   
|Domestic                           |  | $                               | 2,542 |   |                           | $ | 3,361 |                                |      | (24 | )%                        |      | $ | 8,534  |   |  | $ | 10,029 |   |  | (15 | )%
|International                      |  |                                 | 2,372 |   |                           |   | 2,490 |                                |      | (5  | )%                        |      |   | 8,084  |   |  |   | 6,520  |   |  | 24  | % 
|                                   |  |                                 |       |   |                           |   |       |                                |      |     |                           |      |   |        |   |  |   |        |   |  |     |   
|Total                              |  | $                               | 4,914 |   |                           | $ | 5,851 |                                |      | (16 | )%                        |      | $ | 16,618 |   |  | $ | 16,549 |   |  | 0.4 | % 
|                                   |  |                                 |       |   |                           |   |       |                                |      |     |                           |      |   |        |   |  |   |        |   |  |     |   
|Revenues (as % of total revenues): |  |                                 |       |   |                           |   |       |                                |      |     |                           |      |   |        |   |  |   |        |   |  |     |   
|Domestic                           |  |                                 | 52    | % |                           |   | 57    | %                              |      |     |                           |      |   | 51     | % |  |   | 61     | % |  |     |   
|International                      |  |                                 | 48    | % |                           |   | 43    | %                              |      |     |                           |      |   | 49     | % |  |   | 39     | % |  |     |   
|                                   |  |                                 |       |   |                           |   |       |                                |      |     |                           |      |   |        |   |  |   |        |   |  |     |   
|Total                              |  |                                 | 100   | % |                           |   | 100   | %                              |      |     |                           |      |   | 100    | % |  |   | 100    | % |  |     |   
|                                   |  |                                 |       |   |                           |   |       |                                |      |     |                           |      |   |        |   |  |   |        |   |  |     |   

Prior to January 1, 2007, we reported results in three segments: North American Data
Analysis, International Data Analysis, and Text Analysis (InFact). Beginning in the first quarter of 2007, we ceased treating Text Analysis as a separate business segment. As discussed above, we sold our InFact technology and associated intellectual
property rights on August 2, 2007.

Domestic Revenues

Domestic revenues decreased by 24% ($0.8 million) and 15% ($1.5 million) for the three and nine months ended September 30, 2007, as compared to the
corresponding periods of 2006. The decrease for the three-month period reflects a 42% ($0.6 million) decrease in software revenues and a 42% ($0.3 million) decrease in professional services revenues, offset by a 6% ($0.1 million) increase in
maintenance revenues. The decrease for the nine-month period reflects a 38% ($1.8 million) decrease in software revenues and a 2% ($0.1 million) decrease in professional services revenues, offset by a 9% ($0.3 million) increase in maintenance
revenues.



21



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##### Table of Contents

International Revenues

International revenues decreased by 5% ($0.1 million) for the three months ended September 30, 2007 and increased by 24% ($1.6 million) for the nine
months ended September 30, 2007, as compared to the corresponding periods of 2006. The decrease for the three-month period reflects an 8% ($0.1 million) decrease in software revenues and an 18% ($0.2 million) decrease in professional services
revenues, offset by a 24% ($0.2 million) increase in maintenance revenues. The increase for the nine-month period reflects a 8% ($0.2 million) increase in software revenues, an 18% ($0.3 million) increase in maintenance revenues, and a 43% ($1.1
million) increase in professional services revenues.

As discussed above, one international data analysis customer accounted for 14% of our
total revenues and 57% of our professional services revenues for the three months ended September 30, 2007, and 15% of our total revenues and 49% of our professional services revenues for the nine months ended September 30, 2007. We expect
this customer to continue to account for a substantial proportion of our revenues for at least the fourth quarter of 2007 and for 2008.

Cost of
Revenues



|                                                                                                    |  |                                 |       |   |                    |   |       |                                |      |     |                    |      |   |       |   |  |   |       |   |  |     |   
|--------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----- | - | ------------------ | - | ----- | ------------------------------ | ---- | --- | ------------------ | ---- | - | ----- | - |  | - | ----- | - |  | --- | --
|                                                                                                    |  | Three months endedSeptember 30, |       |   | Increase(Decrease) |   |       | Nine months endedSeptember 30, |      |     | Increase(Decrease) |     
|                                                                                                    |  | 2007                            |       |   | 2006               |   |       |                                | 2007 |     |                    | 2006 |   |      
|Cost of revenues (in thousands):                                                                    |  |                                 |       |   |                    |   |       |                                |      |     |                    |      |   |       |   |  |   |       |   |  |     |   
|Software-related                                                                                    |  | $                               | 236   |   |                    | $ | 395   |                                |      | (40 | )%                 |      | $ | 840   |   |  | $ | 1,249 |   |  | (33 | )%
|Professional services and other                                                                     |  |                                 | 1,325 |   |                    |   | 971   |                                |      | 36  | %                  |      |   | 4,068 |   |  |   | 2,826 |   |  | 44  | % 
|                                                                                                    |  |                                 |       |   |                    |   |       |                                |      |     |                    |      |   |       |   |  |   |       |   |  |     |   
|Total                                                                                               |  | $                               | 1,561 |   |                    | $ | 1,366 |                                |      | 14  | %                  |      | $ | 4,908 |   |  | $ | 4,075 |   |  | 20  | % 
|                                                                                                    |  |                                 |       |   |                    |   |       |                                |      |     |                    |      |   |       |   |  |   |       |   |  |     |   
|Cost of software-related revenues as a % of software-related revenues                               |  |                                 | 6     | % |                    |   | 10    | %                              |      |     |                    |      |   | 7     | % |  |   | 10    | % |  |     |   
|Cost of professional services and other revenues as a % of professional services and other revenues |  |                                 | 106   | % |                    |   | 57    | %                              |      |     |                    |      |   | 79    | % |  |   | 69    | % |  |     |   
|                                                                                                    |  |                                 |       |   |                    |   |       |                                |      |     |                    |      |   |       |   |  |   |       |   |  |     |   
|Total                                                                                               |  |                                 | 32    | % |                    |   | 23    | %                              |      |     |                    |      |   | 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 and nine months ended September 30, 2007, the cost of software-related revenues decreased in absolute dollars by 40% ($0.2 million) and 33% ($0.4 million), and decreased as a percentage of total
revenues by two and three percentage points, as compared to the corresponding periods of 2006. These decreases were due to a decrease in amortization expense related to full and final amortization of the purchase price for the S programming language
as of January 31, 2007, whereby only one month of amortization was recorded in the nine months ended September 30, 2007, as compared to nine months of amortization in the corresponding period of 2006.

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;
| | - |  | ----------------------------------------------------------------------------------------------------------------



22



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##### Table of Contents

| |  |  | 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, including costs related to training.
| | - |  | --------------------------------------------------------------------------

For the three and nine months ended September 30, 2007, the cost of professional services and other revenues increased in absolute dollars by 36%
($0.4 million) and 44% ($1.2 million), and increased as a percentage of total revenues by 10 and 8 percentage points, as compared to the corresponding periods of 2006. These increases reflect increases in direct and indirect headcount-related costs.
These increased headcount costs were incurred predominantly in our International operations, including the hiring of our head of European professional services in July 2006. In part, the increased headcount was in anticipation of higher consulting
revenues throughout Europe and with our largest customer in particular. Because these higher revenues did not occur, we reduced headcount in our European consulting organization during the three months ended September 30, 2007. As a result, we
expect our direct and indirect headcount costs to decrease for the remainder of 2007, as compared to earlier in the year.

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.

Operating Expenses

Sales and Marketing



|                                                               |  |                                 |       |   |                 |   |       |                                |      |    |                 |      |   |       |   |  |   |       |   |  |    |  
|-------------------------------------------------------------- |  | ------------------------------- | ----- | - | --------------- | - | ----- | ------------------------------ | ---- | -- | --------------- | ---- | - | ----- | - |  | - | ----- | - |  | -- | -
|                                                               |  | Three months endedSeptember 30, |       |   | PercentIncrease |   |       | Nine months endedSeptember 30, |      |    | PercentIncrease |     
|                                                               |  | 2007                            |       |   | 2006            |   |       |                                | 2007 |    |                 | 2006 |   |      
|Sales and marketing expenses (in thousands)                    |  | $                               | 2,523 |   |                 | $ | 2,180 |                                |      | 16 | %               |      | $ | 7,921 |   |  | $ | 6,580 |   |  | 20 | %
|Sales and marketing expenses (as percentage of total revenues) |  |                                 | 51    | % |                 |   | 37    | %                              |      |    |                 |      |   | 48    | % |  |   | 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 and nine months ended September 30, 2007, sales and marketing expenses increased in absolute dollars by 16% ($0.3 million) and 20%
($1.3 million), and increased as a percentage of total revenues by fourteen and nine percentage points, as compared to the corresponding periods of 2006. These increases were primarily due to direct and indirect headcount-related costs resulting
from the hiring of additional sales and marketing personnel, as well as increases in compensation for existing sales and marketing personnel in both the United States and Europe.

Research and Development, Net



|                                                            |  |                                 |       |    |                           |   |       |                                |      |     |                           |      |   |        |    |  |   |        |    |  |     |   
|----------------------------------------------------------- |  | ------------------------------- | ----- | -- | ------------------------- | - | ----- | ------------------------------ | ---- | --- | ------------------------- | ---- | - | ------ | -- |  | - | ------ | -- |  | --- | --
|                                                            |  | Three months endedSeptember 30, |       |    | PercentIncrease(Decrease) |   |       | Nine months endedSeptember 30, |      |     | PercentIncrease(Decrease) |     
|                                                            |  | 2007                            |       |    | 2006                      |   |       |                                | 2007 |     |                           | 2006 |   |       
|Research and development (in thousands):                    |  |                                 |       |    |                           |   |       |                                |      |     |                           |      |   |        |    |  |   |        |    |  |     |   
|Research and development                                    |  | $                               | 1,847 |    |                           | $ | 1,744 |                                |      | 6   | %                         |      | $ | 5,901  |    |  | $ | 5,049  |    |  | 17  | % 
|Less - funded research                                      |  |                                 | (455  | )  |                           |   | (549  | )                              |      | (17 | )%                        |      |   | (1,471 | )  |  |   | (1,722 | )  |  | (15 | )%
|                                                            |  |                                 |       |    |                           |   |       |                                |      |     |                           |      |   |        |    |  |   |        |    |  |     |   
|Research and development, net                               |  | $                               | 1,392 |    |                           | $ | 1,195 |                                |      | 17  | %                         |      | $ | 4,430  |    |  | $ | 3,327  |    |  | 33  | % 
|                                                            |  |                                 |       |    |                           |   |       |                                |      |     |                           |      |   |        |    |  |   |        |    |  |     |   
|Research and development (as percentage of total revenues): |  |                                 |       |    |                           |   |       |                                |      |     |                           |      |   |        |    |  |   |        |    |  |     |   
|Research and development                                    |  |                                 | 38    | %  |                           |   | 30    | %                              |      |     |                           |      |   | 36     | %  |  |   | 31     | %  |  |     |   
|Less - funded research                                      |  |                                 | (9    | )% |                           |   | (9    | )%                             |      |     |                           |      |   | (9     | )% |  |   | (10    | )% |  |     |   
|                                                            |  |                                 |       |    |                           |   |       |                                |      |     |                           |      |   |        |    |  |   |        |    |  |     |   
|Research and development, net                               |  |                                 | 28    | %  |                           |   | 20    | %                              |      |     |                           |      |   | 27     | %  |  |   | 20     | %  |  |     |   
|                                                            |  |                                 |       |    |                           |   |       |                                |      |     |                           |      |   |        |    |  |   |        |    |  |     |   



23



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##### Table of Contents

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 research grants and contracts, and the Development team is generally focused on
commercial applications that are intended to be deployed in the near future. Funded research amounts result from fees generated from research work performed under government grants and contracts, which fees are netted against total research and
development costs.

Gross research and development expenses.

For the three and nine months ended September 30, 2007, gross research and development expenses increased in absolute dollars by 6% ($0.1 million)
and 17% ($0.9 million), and increased as a percentage of total revenues by eight and five percentage points, as compared to the corresponding periods 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, offset by the reduction in research personnel resulting from the sale of InFact discussed above.

Funded research.

Funded research is recorded as an offset to research and development expense in our
income statement. For the three and nine months ended September 30, 2007, funded research decreased in absolute dollars by 17% ($0.1 million) and 15% ($0.3 million), as compared to the corresponding periods of 2006. As a percentage of total
revenues, funded research remained flat for the three months ended September 30, 2007 and decreased by one percentage point for the nine months ended September 30, 2007, as compared to the corresponding periods of 2006. The net decreases
in funded research reflect decreases of 86% ($0.3 million) and 68% ($0.6 million) in text analysis (InFact)-related funded research for the three and nine months ended September 30, 2007, offset by increases of 66% ($0.2 million) and 41% ($0.3
million) in data analysis-related funded research, as compared to the corresponding periods of 2006. The decrease in our funded research for text analysis resulted from the following factors:



| |  |  | Effective January 1, 2007, we redirected our efforts and resources away from text analysis research and into data analysis research.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As discussed above, we sold our InFact technology and associated intellectual property rights on August 2, 2007. We have finished the work to be performed by
Insightful on our one remaining grant involving InFact-related technology and we do not expect to perform additional funded research related to text analysis in the future. We do not expect this to have a material impact on our net research and
development costs.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Research and development, net.

For the three and nine months ended September 30, 2007, total net research and development costs increased in absolute dollars by 17% ($0.2 million)
and 33% ($1.1 million), and increased as a percentage of total revenues by eight and seven percentage points, as compared to the corresponding periods of 2006. As discussed above, the primary reason for the increase in net research and development
was increased headcount in our development organization.



24



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##### Table of Contents

General and Administrative



|                                                       |  |                                 |       |   |                 |   |     |                                |      |    |                 |      |   |       |   |  |   |       |   |  |    |  
|------------------------------------------------------ |  | ------------------------------- | ----- | - | --------------- | - | --- | ------------------------------ | ---- | -- | --------------- | ---- | - | ----- | - |  | - | ----- | - |  | -- | -
|                                                       |  | Three months endedSeptember 30, |       |   | PercentIncrease |   |     | Nine months endedSeptember 30, |      |    | PercentIncrease |     
|                                                       |  | 2007                            |       |   | 2006            |   |     |                                | 2007 |    |                 | 2006 |   |      
|General and administrative (in thousands)              |  | $                               | 1,112 |   |                 | $ | 989 |                                |      | 12 | %               |      | $ | 3,663 |   |  | $ | 3,123 |   |  | 17 | %
|General and administrative (as percentage of revenues) |  |                                 | 23    | % |                 |   | 17  | %                              |      |    |                 |      |   | 22    | % |  |   | 19    | % |  |    |  

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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 and nine months ended September 30, 2007, general and administrative expenses increased in absolute dollars by 12% ($0.1 million) and 17% ($0.5 million), and increased as a percentage of total revenues by six and three
percentage points, as compared to the corresponding periods of 2006. The increases were due to increases in compensation to existing general and administrative personnel, increases in consulting costs related to compliance with Section 404 of
the Sarbanes Oxley Act of 2002, or SOX 404, minor increases in multiple other general and administrative expenses and, for the nine-month period ended September 30, 2007, an increase in external legal fees incurred in the ordinary course of
business.

We are required to comply with the provisions of SOX 404 as of December 31, 2007. During 2007 and beyond we will continue
to incur costs in our efforts to satisfy the related compliance requirements.

Other Income (Expense)

Other income (expense) consists of the following:



|                                            |  |                                 |     |                                |      |   |      |  |   |      |   |  |   |    
|------------------------------------------- |  | ------------------------------- | --- | ------------------------------ | ---- | - | ---- |  | - | ---- | - |  | - | ---
|                                            |  | Three months endedSeptember 30, |     | Nine months endedSeptember 30,
|                                            |  | 2007                            |     |                                | 2006 |   | 2007 |  |   | 2006
|Interest income                             |  | $                               | 148 |                                |      | $ | 149  |  | $ | 407  |   |  | $ | 360
|Foreign exchange transaction gains (losses) |  |                                 | (71 | )                              |      |   | 18   |  |   | (28  | ) |  |   | 31 
|                                            |  |                                 |     |                                |      |   |      |  |   |      |   |  |   |    
|                                            |  | $                               | 77  |                                |      | $ | 167  |  | $ | 379  |   |  | $ | 391
|                                            |  |                                 |     |                                |      |   |      |  |   |      |   |  |   |    

Interest income

Interest income remained flat for the three months ended September 30, 2007 and increased by $47,000 for the nine months ended September 30,
2007, as compared to the corresponding periods of 2006. The increase 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.



25



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##### Table of Contents

For the three month periods ended September 30, 2007 and 2006, the aggregate foreign currency
transaction gains and (losses) were ($71,000) and $18,000. For the nine month periods ended September 30, 2007 and 2006, the aggregate foreign currency transaction gains and (losses) were ($28,000) and $31,000. These changes were due to changes
in foreign currency exchange rates and changes in the relative strength of the U.S. dollar and the effect these changes have on the carrying amounts of U.S. dollar-denominated intercompany operating loans due from our international subsidiaries to
the U.S. parent company that are expected to be settled within the foreseeable future, and the U.S. dollar-denominated cash equivalents held by each international subsidiary, as well the relative balance between the U.S. dollar-denominated
intercompany loans and cash equivalents.

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 and nine months ended September 30, 2007 was
minor and changed only slightly as compared to the corresponding periods of 2006. Changes in income tax expense and benefit from period to period result primarily from changes in the relative mix of taxable income and loss generated in the various
tax jurisdictions in which we operate.

Liquidity and Capital Resources

Cash, cash equivalents, and short and long-term investments increased from $10.2 million at December 31, 2006 to $12.8 million at September 30,
2007. Our working capital increased from $5.4 million at December 31, 2006 to $6.0 million at September 30, 2007. Both of these increases were due primarily to the receipt of $3.7 million resulting from the sale of our InFact-related
technology and associated intellectual property rights on August 2, 2007.

Cash Flows

We used $0.6 million in cash from operating activities during the nine months ended September 30, 2007, compared to generating $2.2 million during
the corresponding period of 2006. The decrease in operating cash inflows is primarily due to our net loss (excluding the gain on sale of the Infact intangible assets) during the nine months ended September 30, 2007.

The difference between our net loss and our operating cash inflow or outflow is attributable to non-cash expenses included in net loss, gains on sales of
intangible assets and changes in operating assets and liabilities, as presented below (in thousands):



|                                                        |  |                                |        |   |      |   |       |  
|------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ----- | -
|                                                        |  | Nine months endedSeptember 30, |       
|                                                        |  | 2007                           |        |   | 2006 |  
|Net loss                                                |  | $                              | (472   | ) |      | $ | (171  | )
|Add: non-cash expenses                                  |  |                                | 1,383  |   |      |   | 1,331 |  
|Subtract gain on sale of intangible assets              |  |                                | (3,486 | ) |      |   |      |  
|Adjust for: changes in operating assets and liabilities |  |                                | 1,976  |   |      |   | 1,051 |  
|                                                        |  |                                |        |   |      |   |       |  
|Net cash (used in) provided by operating activities     |  | $                              | (599   | ) |      | $ | 2,211 |  
|                                                        |  |                                |        |   |      |   |       |  

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

Investing activities resulted in net cash inflow of $1.5 million for the
nine months ended September 30, 2007, compared to an outflow of $4.4 million for the corresponding period of 2006. This increase in cash provided by investing activities for the nine months ended September 30, 2007, as compared to the
corresponding period of 2006, was due primarily to the proceeds received on the sale of our InFact-related technology and associated intellectual property rights on August 2, 2007.



26



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##### Table of Contents

Financing activities resulted in a net cash inflow of $0.3 million in the nine months ended
September 30, 2007, compared to $0.4 million for the corresponding period of 2006. The decrease relates primarily to a decrease in proceeds received from the exercise of employee stock options during the nine months ended September 30,
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 September 30, 2007 under this line of credit facility or our previous line of credit facility with Silicon Valley Bank.

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 90 days preceding 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 September 30, 2007 under this equipment loan facility or our previous equipment loan facility with Silicon Valley Bank.

The prime rate was 7.75% at September 30, 2007. These credit facilities contain covenants that limit our net losses and require
certain minimum liquidity. In addition, we are prohibited under these facilities from paying dividends.

At September 30, 2007, our
principal sources of liquidity consisted of cash, cash equivalents, short and long-term investments all totaling $12.8 million, as well as available credit. Our liquidity needs are principally financing of accounts receivable, capital assets,
strategic investments, and product development, as well as flexibility in a dynamic and competitive operating environment.

We believe that
our existing cash and cash equivalents and available credit will be sufficient to meet the capital requirements of our business for the foreseeable future. However, if for whatever reason we were to need to raise additional funds through public or
private equity financing or from other sources in order to fund our operations, we may be unable to obtain it on favorable terms, if at all.

Commitments

As of September 30, 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 |  | $    | 270 |      | $ | 919  |  | $    | 920 |      | $ | 632   |  | $ | 4 |  | $ | 2,745

Rent expense under our operating leases was $242,000 and $187,000 for the three months ended
September 30, 2007 and 2006, and $723,000 and $530,000 for the nine months ended September 30, 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.



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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 reliance on one product family;
| | - |  | -----------------------------------



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



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



| |  |  | 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;
| | - |  | ------------------------------------------------------------



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



| |  |  | market risks, including fluctuations in foreign currency exchange rates and U.S. interest rates;
| | - |  | ------------------------------------------------------------------------------------------------



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



| |  |  | 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 and management team members and successfully and timely integrate new employees and management team members into our
business;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | our ability to obtain additional government contracts and research grants, or the loss or termination of one or more of our current government grants without a
concomitant reduction in related personnel or other costs;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | 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 customer;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 for the nine months ended September 30, 2007. We achieved only small profits during the third and fourth quarters of 2006. As of
September 30, 2007, we had an accumulated deficit of $26.7 million. We believe we will incur a loss in the fourth quarter of 2007. We may experience additional losses and negative cash flows in the near term, even if revenues from our products
and services grow.

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 or a number of projects for a particular customer requires us to allocate a significant portion
of our consulting time to the customer during a reporting period, the unplanned or untimely cessation of the project(s), or the failure of the customer to engage us for additional anticipated projects, would create a shortfall in revenues that would
result in a negative impact on operating results. We are currently engaged with one international financial services customer that accounted for 15% of total revenues for the nine months ended September 30 2007, 11% during 2006 and 9% during
2005, and we expect this customer to continue to account for a substantial proportion of our revenues for at least the fourth quarter of 2007 and for 2008. 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, or if we perform fewer consulting projects than we anticipate, 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.

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.

Our S-PLUS product and add-on modules account for the substantial majority of our license revenues. Other products, such
as InFact (the technology we sold on August 2, 2007) and Insightful Miner, have not contributed consistently to our revenues. 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 upcoming clinical reporting product generally available or the failure of our recently released S-PLUS 8.0 Enterprise Developer or S-PLUS 8.0 Server products 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 introduce new products and services successfully and in a timely and cost-effective manner, our operating results will be harmed.

The business software market is characterized by rapid change due to changing customer needs, rapid technological developments and advances
introduced by competitors. Changing business needs of current and potential customers create opportunities for new product and service offerings from us and our 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.



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To be successful, we must continue to enhance our current product line and timely develop new products
that successfully respond to changing customer needs, technological developments and competitive product offerings. Among other investments, we are currently focusing research and development efforts on developing vertically-oriented solutions and
enhancing the scalability and deployability of our current product offerings. These investments may strain our financial resources and diffuse managements time and attention. We ultimately may be unable to successfully and efficiently enhance
these key features of our products to the extent necessary to achieve market acceptance. To the extent any enhancements require us to license third party technology, we may be unable to do so on acceptable terms or to integrate such technology with
our existing products. If we are unable to develop new products or product enhancements cost-effectively, we may be unable to realize all or a portion of our research and development investments and sales of our products could decline.

We may be unable to introduce new products or enhancements 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. 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.

If our
products do not achieve market acceptance in new vertical markets, the growth of our business will be limited.

We currently focus
our statistics business primarily on two vertical markets: financial services and life sciences. In order to grow our business, we will need to expand our customer base by entering into new vertical markets. To successfully sell our products in new
vertical markets, we will need to develop new product versions that address the particular needs of these markets. If we are unable to develop new products that compete effectively in these markets, or if our products once developed do not achieve
market acceptance in these new vertical markets, our business may not grow and could fail.

If we are unable to compete successfully
in the statistics and data analysis markets, 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.

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 R, the open source alternative to our proprietary S-PLUS
software, 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 is
produced by loosely associated groups of unpaid programmers and made available for license to end users without charge. Some open source software is distributed at nominal cost by companies 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. The information technology
departments of



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some of our potential customers are developing data analysis solutions using R, and some companies like the ones described above are distributing R and
offering complementary products and services for R. While we believe our products provide customers with significant advantages, the popularization of R continues to pose a significant challenge to our business model. To the extent that products
utilizing the R language gain increasing market acceptance, sales of our S-PLUS products may decline, we may have to reduce the prices we charge for our products, and revenues and operating margins may consequently decline.

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. Our ability to execute our business strategy will depend on our ability to recruit personnel and retain our existing personnel, including executive management. For example, in the second half of 2007 we experienced turnover in
our sales organization, including the loss of our vice president of Europe and our vice president of North American sales, and the loss of these employees harmed our ability to generate revenues in the third quarter and, potentially, the fourth
quarter of 2007. Departures of, or failure to recruit and retain replacements of, key executives and other employees could harm our reputation and our ability to execute our business strategy and generate revenues. For example, failure to attract
and retain research and development personnel, or reductions in our existing personnel, could harm our ability to develop and introduce new products and enhancements successfully or in a timely manner. 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.

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 shown to be substantially longer for
higher-priced orders. On the other hand, if our sales personnel focus their efforts on selling not-yet-released products in anticipation of a long sales cycle for those products, our sales of already-released products may suffer. 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.

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 other
companies.

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 have expended significant effort in documenting the design of our internal controls and testing the processes that support
managements evaluation and conclusion. We will continue to incur costs for SOX 404 compliance in the fourth quarter of 2007 and in 2008 and beyond. For example, this process has required us to engage outside contractors, which has resulted and
will continue to result in additional accounting and information technology expenses. Additionally, during our assessment of our 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 operations and business strategy that are unrelated to compliance. 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 already have demonstrated compliance or that are not subject to the
provisions of SOX 404, such as those registered in other countries.



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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. If a failure to implement and maintain effective internal control over financial reporting results
in material misstatements in our financial statements that require us to restate our financial statements, investors could lose confidence in the reliability of our financial statements, which in turn could negatively impact the trading price of
stock, result in stockholder litigation, or otherwise harm our reputation.

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.

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.



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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. 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 modifications, 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 click-through 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;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | 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.

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 and distributors, or VARs, original equipment manufacturer, or OEM, partners,



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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.

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 sell to customers 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 established a sufficient presence (also known as nexus) in a particular jurisdiction such that it is required to register and collect and pay taxes in that jurisdiction. We
have registered for sales tax purposes in a number of states and local jurisdictions, and we remit state and local taxes as may be required with respect to our business operations in those jurisdictions. Additional jurisdictions besides the ones
with which we have registered may attempt to claim that we had sufficient presence in certain time periods to require registration and that, as a result, we should have levied, collected, and remitted required sales taxes on applicable sales
transactions over those periods. Should we be unsuccessful in defending our current positions with respect to nexus-generating activities, we would be obligated to pay the related sales taxes, and in many states this would also include paying
interest and penalties.

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 $1.5
million in the nine months ended September 30, 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. For example, we recently
finished our work on our one remaining government research grant involving the InFact-related search technology that we recently sold to a third party, and we do not expect to perform additional text analysis-related funded research in the future.
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 without a concomitant reduction in personnel and
other costs 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. 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.

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.

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.



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We believe that our existing cash and cash equivalents and available credit will be sufficient to meet
the capital requirements of our business for the foreseeable future. However, if for whatever reason we were to need to raise additional funds through public or private equity financing or from other sources in order to fund our operations, we may
be unable to obtain it on favorable terms, if at all. 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 our stockholders ownership interest in us.

Our credit lines contain covenants that require us to
keep our operating losses below a certain level. As a result, we may be unable to access these credit lines if our operating losses increase in future periods.

We will incur greater and more unpredictable expenses as a result of the adoption of new accounting rules with respect to equity compensation awards, which could increase our losses.

In 2006, we began to recognize compensation expense associated with stock options and restricted stock awards, as required by FAS 123R. Our reported
expenses may increase as a result of this practice. In addition, the calculations we must use to determine the amount of expense are based, in part, on many factors beyond our control, such as stock price volatility and forfeiture rates.As a
result, our ability to predict for future periods, the amount of expense associated with FAS 123R requirements will be limited. Increases in expenses associated with equity incentive awards could result in enhanced losses in future periods.

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, and for the nine months ended September 30, 2007, the price reached a high of $3.18 and a
low of $1.86. 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
|------- | -----------------------

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.
|------- | ----------------------------------------------------

Our annual meeting of stockholders was held on
July 16, 2007. The following matters were voted upon at the meeting:

Proposal 1: Election of Directors

Jeffrey E. Coombs and Samuel R. Meshberg were elected as Class II directors, each to serve for a term expiring in 2010. The directors received the following votes:



|                   |  |           |  |          
|------------------ |  | --------- |  | ---------
|Director           |  | For       |  | Withheld 
|Jeffrey E. Coombs  |  | 9,705,220 |  | 2,118,947
|Samuel R. Meshberg |  | 9,622,387 |  | 2,201,780

Ronald M. Stevens and Sachin Chawla are serving as Class I Directors until their terms expire on the date of the
2009 annual meeting. Mark C. Ozur is serving as a Class III Director until his term expires on the date of the 2008 annual meeting.

Proposal 2:
Ratification of Independent Public Accountant

The selection of Moss Adams LLP as our independent registered public accounting firm for the fiscal
year ending December 31, 2007 was ratified. The proposal received the following votes:



|        |  |           
|------- |  | ----------
|For     |  | 11,642,929
|Against |  | 19,742    
|Abstain |  | 161,496   



|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.

November 14, 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



|              |  |                                                                                                                                              
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                  
|              | 
|2.1           |  | Asset Purchase Agreement, dated as of August 2, 2007, between Hypertext Solutions Inc. and Insightful Corporation (Exhibit 2.1) (A)          
|              | 
|3.1           |  | Amended and Restated Certificate of Incorporation of the registrant (Exhibit 3.1) (B)                                                        
|              | 
|3.2           |  | Amended and Restated Bylaws of the registrant (Exhibit 3.2) (B)                                                                              
|              | 
|3.3           |  | Certificate of Amendment of Certificate of Incorporation of the registrant (Exhibit 3.3) (C)                                                 
|              | 
|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 Current Report on Form 8-K (SEC File No. 0-20992), filed on August 8, 2007.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------



|(B) | 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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(C) | 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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