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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-QSB



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

For the Quarterly Period ended June 30, 2006

OR



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

For the transition period from 
to

Commission file number 0-020992

INSIGHTFUL CORPORATION

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



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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

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
12,737,112 as of July 31, 2006.

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



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TABLE OF CONTENTS



|                              |  |                                                                                                 |  |     
|----------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                 |  | Page
|PART I. FINANCIAL INFORMATION |  |                                                                                                
|                              |  |                                                                                                
|ITEM 1.                       |  | Consolidated Financial Statements (Unaudited)                                                   |  |     
|                              |  |                                                                                                
|                              |  | Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005                 |  | 3   
|                              |  |                                                                                                
|                              |  | Condensed Consolidated Statements of Operations for the Six months Ended June 30, 2006 and 2005 |  | 4   
|                              |  |                                                                                                
|                              |  | Condensed Consolidated Statements of Cash Flows for the Six months Ended June 30, 2006 and 2005 |  | 5   
|                              |  |                                                                                                
|                              |  | Notes to Condensed Consolidated Financial Statements                                            |  | 6   
|                              |  |                                                                                                
|ITEM 2.                       |  | Managements Discussion and Analysis or Plan of Operations                                      |  | 17  
|                              |  |                                                                                                
|ITEM 3.                       |  | Controls and Procedures                                                                         |  | 38  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                
|                              |  |                                                                                                
|ITEM 6.                       |  | Exhibits                                                                                        |  | 39  
|                              |  |                                                                                                
|                              |  | SIGNATURES                                                                                      |  | 40  
|                              |  |                                                                                                
|                              |  | EXHIBIT INDEX                                                                                   |  | 41  





































































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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)



|                                                                                                               |  |               |         |   |                   |   |         |  
|-------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                               |  | June 30, 2006 |         |   | December 31, 2005 |  
|                                                                                                               |  | (unaudited)   |         |   |                   |  
|ASSETS                                                                                                         |  |               |         |   |                   |   |         |  
|Current Assets:                                                                                                |  |               |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                      |  | $             | 9,705   |   |                   | $ | 9,185   |  
|Trade accounts receivable, net                                                                                 |  |               | 3,159   |   |                   |   | 5,666   |  
|Short-term investments                                                                                         |  |               | 394     |   |                   |   | 724     |  
|Other receivables                                                                                              |  |               | 407     |   |                   |   | 364     |  
|Prepaid expenses and other current assets                                                                      |  |               | 448     |   |                   |   | 636     |  
|                                                                                                               |  |               |         |   |                   |   |         |  
|Total current assets                                                                                           |  |               | 14,113  |   |                   |   | 16,575  |  
|Long-term investments                                                                                          |  |               | 967     |   |                   |   |        |  
|Property and equipment, net                                                                                    |  |               | 2,307   |   |                   |   | 1,212   |  
|Purchased technology, net                                                                                      |  |               | 343     |   |                   |   | 637     |  
|Goodwill                                                                                                       |  |               | 800     |   |                   |   | 800     |  
|Other assets                                                                                                   |  |               | 54      |   |                   |   | 45      |  
|                                                                                                               |  |               |         |   |                   |   |         |  
|Total Assets                                                                                                   |  | $             | 18,584  |   |                   | $ | 19,269  |  
|                                                                                                               |  |               |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                           |  |               |         |   |                   |   |         |  
|Current Liabilities:                                                                                           |  |               |         |   |                   |   |         |  
|Current portion of long-term debt                                                                              |  | $             |        |   |                   | $ | 32      |  
|Accounts payable                                                                                               |  |               | 852     |   |                   |   | 701     |  
|Accrued payroll-related liabilities                                                                            |  |               | 1,260   |   |                   |   | 1,666   |  
|Accrued expenses and other current liabilities                                                                 |  |               | 408     |   |                   |   | 513     |  
|Deferred revenue                                                                                               |  |               | 5,695   |   |                   |   | 6,271   |  
|                                                                                                               |  |               |         |   |                   |   |         |  
|Total current liabilities                                                                                      |  |               | 8,215   |   |                   |   | 9,183   |  
|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 - 12,736,649 and 12,543,097 shares at June 30, 2006 and December 31, 2005, respectively |  |               | 126     |   |                   |   | 125     |  
|Additional paid-in capital                                                                                     |  |               | 37,362  |   |                   |   | 36,610  |  
|Accumulated deficit                                                                                            |  |               | (26,859 | ) |                   |   | (26,401 | )
|Other accumulated comprehensive loss                                                                           |  |               | (260    | ) |                   |   | (248    | )
|                                                                                                               |  |               |         |   |                   |   |         |  
|Total stockholders equity                                                                                     |  |               | 10,369  |   |                   |   | 10,086  |  
|                                                                                                               |  |               |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                     |  | $             | 18,584  |   |                   | $ | 19,269  |  
|                                                                                                               |  |               |         |   |                   |   |         |  

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 EndedJune 30, |        |   | Six Months Ended June 30, |  
|                                                                                                                                                                                                                              |  | 2006                       |        |   | 2005                      |   |        | 2006 |  |   | 2005   |  
|Revenues:                                                                                                                                                                                                                     |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Software licenses                                                                                                                                                                                                             |  | $                          | 2,231  |   |                           | $ | 2,140  |      |  | $ | 4,655  |   |  | $ | 4,667  |  
|Software maintenance                                                                                                                                                                                                          |  |                            | 1,830  |   |                           |   | 1,705  |      |  |   | 3,641  |   |  |   | 3,314  |  
|Professional services and other                                                                                                                                                                                               |  |                            | 1,095  |   |                           |   | 1,265  |      |  |   | 2,402  |   |  |   | 2,387  |  
|                                                                                                                                                                                                                              |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Total revenues                                                                                                                                                                                                                |  |                            | 5,156  |   |                           |   | 5,110  |      |  |   | 10,698 |   |  |   | 10,368 |  
|                                                                                                                                                                                                                              |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Cost of revenues:                                                                                                                                                                                                             |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Software related                                                                                                                                                                                                              |  |                            | 397    |   |                           |   | 437    |      |  |   | 855    |   |  |   | 841    |  
|Professional services and other                                                                                                                                                                                               |  |                            | 951    |   |                           |   | 673    |      |  |   | 1,855  |   |  |   | 1,435  |  
|                                                                                                                                                                                                                              |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Total cost of revenues (including stock based compensation expense of $7 and $0 during the three months ended June 30, 2006 and 2005, and
$12 and $0 during the six months ended June 30, 2006 and 2005, respectively)        |  |                            | 1,348  |   |                           |   | 1,110  |      |  |   | 2,710  |   |  |   | 2,276  |  
|                                                                                                                                                                                                                              |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Gross profit                                                                                                                                                                                                                  |  |                            | 3,808  |   |                           |   | 4,000  |      |  |   | 7,988  |   |  |   | 8,092  |  
|                                                                                                                                                                                                                              |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Operating expenses:                                                                                                                                                                                                           |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Sales and marketing (including stock based compensation expense of $21 and $0 during the three months ended June 30, 2006 and 2005, and
$57 and $0 during the six months ended June 30, 2006 and 2005, respectively)          |  |                            | 2,248  |   |                           |   | 2,035  |      |  |   | 4,404  |   |  |   | 3,900  |  
|Research and development (including stock based compensation expense of $23 and $0 during the three months ended June 30, 2006 and 2005,
and $46 and $0 during the six months ended June 30, 2006 and 2005, respectively)     |  |                            | 1,643  |   |                           |   | 1,462  |      |  |   | 3,304  |   |  |   | 2,714  |  
|Less-Funded research                                                                                                                                                                                                          |  |                            | (594   | ) |                           |   | (649   | )    |  |   | (1,173 | ) |  |   | (1,175 | )
|                                                                                                                                                                                                                              |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Research and development, net                                                                                                                                                                                                 |  |                            | 1,049  |   |                           |   | 813    |      |  |   | 2,131  |   |  |   | 1,539  |  
|General and administrative (including stock based compensation expense of $122 and $0 during the three months ended June 30, 2006 and
2005, and $224 and $0 during the six months ended June 30, 2006 and 2005, respectively) |  |                            | 1,040  |   |                           |   | 817    |      |  |   | 2,129  |   |  |   | 1,891  |  
|Total operating expenses                                                                                                                                                                                                      |  |                            | 4,337  |   |                           |   | 3,665  |      |  |   | 8,664  |   |  |   | 7,330  |  
|                                                                                                                                                                                                                              |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from operations                                                                                                                                                                                                 |  |                            | (529   | ) |                           |   | 335    |      |  |   | (676   | ) |  |   | 762    |  
|Other income (expense), net                                                                                                                                                                                                   |  |                            | 112    |   |                           |   | 5      |      |  |   | 224    |   |  |   | (69    | )
|                                                                                                                                                                                                                              |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) before income taxes                                                                                                                                                                                             |  |                            | (417   | ) |                           |   | 340    |      |  |   | (452   | ) |  |   | 693    |  
|Income tax (expense) benefit                                                                                                                                                                                                  |  |                            | 2      |   |                           |   | (6     | )    |  |   | (6     | ) |  |   | (25    | )
|                                                                                                                                                                                                                              |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                                                                                                                                                                                                             |  | $                          | (415   | ) |                           | $ | 334    |      |  | $ | (458   | ) |  | $ | 668    |  
|                                                                                                                                                                                                                              |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Basic and diluted net income (loss) per share                                                                                                                                                                                 |  | $                          | (0.03  | ) |                           | $ | 0.03   |      |  | $ | (0.04  | ) |  | $ | 0.05   |  
|                                                                                                                                                                                                                              |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Weighted average common shares outstanding                                                                                                                                                                                    |  |                            | 12,613 |   |                           |   | 12,445 |      |  |   | 12,579 |   |  |   | 12,405 |  
|Weighted average common shares assuming dilution                                                                                                                                                                              |  |                            | 12,613 |   |                           |   | 13,182 |      |  |   | 12,579 |   |  |   | 13,040 |  

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

























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INSIGHTFUL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)



|                                                                                         |  |                           |        |   |      |   |       |  
|---------------------------------------------------------------------------------------- |  | ------------------------- | ------ | - | ---- | - | ----- | -
|                                                                                         |  | Six Months Ended June 30, |       
|                                                                                         |  | 2006                      |        |   | 2005 |  
|Operating activities:                                                                    |  |                           |        |   |      |   |       |  
|Net income (loss)                                                                        |  | $                         | (458   | ) |      | $ | 668   |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                           |        |   |      |   |       |  
|Depreciation and amortization                                                            |  |                           | 539    |   |      |   | 601   |  
|Stock-based compensation expense                                                         |  |                           | 339    |   |      |   |      |  
|Changes in current assets and liabilities:                                               |  |                           |        |   |      |   |       |  
|Trade and other accounts receivable                                                      |  |                           | 2,580  |   |      |   | 803   |  
|Prepaid expenses and other assets                                                        |  |                           | 187    |   |      |   | (210  | )
|Accounts payable                                                                         |  |                           | 144    |   |      |   | (494  | )
|Accrued payroll-related liabilities and other accrued expenses                           |  |                           | (553   | ) |      |   | (256  | )
|Deferred revenue                                                                         |  |                           | (667   | ) |      |   | (384  | )
|                                                                                         |  |                           |        |   |      |   |       |  
|Net cash provided by operating activities                                                |  |                           | 2,111  |   |      |   | 728   |  
|                                                                                         |  |                           |        |   |      |   |       |  
|Investing activities:                                                                    |  |                           |        |   |      |   |       |  
|Purchases of short and long-term investments                                             |  |                           | (1,360 | ) |      |   |      |  
|Proceeds from sales and maturities of short and long-term investments                    |  |                           | 725    |   |      |   |      |  
|Purchases of property and equipment                                                      |  |                           | (1,328 | ) |      |   | (339  | )
|Payment made for purchase of technology                                                  |  |                           |       |   |      |   | (500  | )
|                                                                                         |  |                           |        |   |      |   |       |  
|Net cash used in investing activities                                                    |  |                           | (1,963 | ) |      |   | (839  | )
|                                                                                         |  |                           |        |   |      |   |       |  
|Financing activities:                                                                    |  |                           |        |   |      |   |       |  
|Payments on debt                                                                         |  |                           | (32    | ) |      |   | (65   | )
|Proceeds from exercise of stock options and employee stock purchase plan                 |  |                           | 414    |   |      |   | 167   |  
|                                                                                         |  |                           |        |   |      |   |       |  
|Net cash provided by financing activities                                                |  |                           | 382    |   |      |   | 102   |  
|                                                                                         |  |                           |        |   |      |   |       |  
|Effect of exchange rate changes on cash and cash equivalents                             |  |                           | (10    | ) |      |   | 3     |  
|                                                                                         |  |                           |        |   |      |   |       |  
|Net increase (decrease) in cash and cash equivalents                                     |  |                           | 520    |   |      |   | (6    | )
|                                                                                         |  |                           |        |   |      |   |       |  
|Cash and cash equivalents, beginning of period                                           |  |                           | 9,185  |   |      |   | 9,650 |  
|                                                                                         |  |                           |        |   |      |   |       |  
|Cash and cash equivalents, end of period                                                 |  | $                         | 9,705  |   |      | $ | 9,644 |  
|                                                                                         |  |                           |        |   |      |   |       |  
|Supplemental disclosure of cash flow information:                                        |  |                           |        |   |      |   |       |  
|Cash paid for:                                                                           |  |                           |        |   |      |   |       |  
|Interest                                                                                 |  | $                         |       |   |      | $ | 6     |  
|Income taxes                                                                             |  | $                         |       |   |      | $ | 9     |  

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































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INSIGHTFUL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

June 30, 2006

(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

(a) Description of Business

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

Insightfuls products include S-PLUS®
and S-PLUS Server, Insightful Miner, InFact®
and various toolkits for vertical market categories such as S+ArrayAnalyzer® for the life sciences sector, and S+FinMetrics® for the financial services sector. Insightfuls consulting services and training provide specialized expertise and processes for the design, development and deployment of analytical solutions.

Insightfuls customers include primarily companies in financial services, pharmaceuticals, biotechnology, telecommunications and manufacturing, as
well as government and research institutions.

Headquartered in Seattle, Washington, Insightful also has offices in North Carolina, France,
Switzerland, and the United Kingdom, with distributors around the world.

(b) Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated financial statements have been prepared by Insightful pursuant to accounting principles generally
accepted in the United States and the rules and regulations of the Securities and Exchange Commission 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, 2005 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, 2005 included in
Insightfuls Annual Report on Form 10-KSB. The accompanying condensed consolidated financial statements reflect all adjustments (consisting solely of normal, recurring adjustments), which, in the opinion of management, are necessary for a fair
presentation of results for the interim periods presented. The results of operations for the six months ended June 30, 2006 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 Insightful and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

(b) Revenue Recognition

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

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

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



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established by authorized management, if it is probable that the price, once established, will not 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.

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

Maintenance revenue is 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 on most of the Companys products. Maintenance services, which include unspecified product
upgrades on a when-and-if available basis, are generally priced based on a percentage of the current list price of the licensed software products. Maintenance renewals are optional.

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

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

If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer. If an acceptance period is required, revenues
are recognized upon the earlier of customer acceptance or the expiration of the acceptance period. An evaluation on the probability of collection is generally based upon the assessment of the customers financial condition. For existing
customers, this evaluation leverages a customers prior payment history. Insightful has an unconditional 30-day return policy on software license purchases, and therefore provides for estimated returns at the time of sale based on historical
experience.

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

(c) Stock-Based Compensation and Stockholders equity

Stock-Based Compensation Expense

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (SFAS 123(R)) which 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 related to the Employee Stock Purchase Plan (employee stock purchases) based on estimated fair
values. SFAS 123(R) supersedes the Companys previous accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) for periods beginning in fiscal 2006. In March
2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of
January 1, 2006, the first day of the Companys fiscal year 2006. The Companys Consolidated Financial Statements as of and for the three and six months ended June 30, 2006 reflect the impact of SFAS 123(R). In accordance with
the modified prospective transition method, the Companys Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Stock-based compensation expense recognized under
SFAS 123(R) for the three and six months ended June 30, 2006 was $0.2 million and $0.3 million, which consisted of stock-based compensation expense related to employee stock options and the employee stock purchase



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plan. There was no stock-based compensation expense related to employee stock options and the employee stock purchase
plan recognized during the six months ended June 30, 2005.

SFAS 123(R) requires companies to estimate the fair value of share-based
payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Companys Consolidated Statement of
Operations. Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation (SFAS 123). Under the intrinsic value method, no stock-based compensation expense had been recognized in the Companys Consolidated Statement of Operations because
the exercise price of the Companys stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant.

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense
recognized in the Companys Consolidated Statement of Operations for the three and six months ended June 30, 2006 includes compensation expense for share-based payment awards granted prior to, but not yet vested as of December 31,
2005 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123 and compensation expense for the share-based payment awards granted subsequent to January 1, 2006 based on the grant date fair value
estimated in accordance with the provisions of SFAS 123(R). The Company uses the straight-line single-option method to recognize the value of stock-based compensation expense for all share-based payment awards. As stock-based compensation expense
recognized in the Consolidated Statement of Operations for the three and six months ended June 30, 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Companys pro forma information required under SFAS 123 for the periods prior to fiscal 2006, the Company
accounted for forfeitures as they occurred.

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



|                                                                |  |                                 |     |                             |   |     | 
|--------------------------------------------------------------- |  | ------------------------------- | --- | --------------------------- | - | --- | 
|                                                                |  | Three MonthsEnded June 30, 2006 |     | Six MonthsEndedJune 30,2006 |  
|Cost of revenues                                                |  | $                               | 7   |                             | $ | 12  | 
|                                                                |  |                                
|Sales and marketing                                             |  |                                 | 21  |                             |   | 57  | 
|                                                                |  |                                
|Research and development, net                                   |  |                                 | 23  |                             |   | 46  | 
|                                                                |  |                                
|General and administrative                                      |  |                                 | 122 |                             |   | 224 | 
|                                                                |  |                                 |     |                            
|Stock-based compensation expense included in operating expenses |  | $                               | 173 |                             | $ | 339 | 
|                                                                |  |                                 |     |                            

The weighted average fair value of employee stock options granted in the six months ended
June 30, 2006 and 2005 was $1.60 and $1.93, respectively.

The following table illustrates the pro forma effect on net income and
earnings per share for the three and six months ended June 30, 2005 under the provisions of SFAS 123 as if the Company had recognized compensation expense for all share-based payments to employees based on their fair values prior to the
adoption of SFAS 123(R) on January 1, 2006:





|                                                                                    |  |                           |      |                          |   |     
|----------------------------------------------------------------------------------- |  | ------------------------- | ---- | ------------------------ | - | ----
|                                                                                    |  | Three MonthsEndedJune 30, |      | Six MonthsEnded June 30,
|                                                                                    |  | 2005                      |      | 2005                    
|Net income, as reported                                                             |  | $                         | 334  |                          | $ | 668 
|Employee stock-based compensation, as reported                                      |  |                           |     |                          |   |    
|Employee stock-based compensation determined under the fair value method (Restated) |  |                           | 241  |                          |   | 432 
|                                                                                    |  |                           |      |                          |   |     
|Pro forma net income (restated)                                                     |  | $                         | 93   |                          | $ | 236 
|                                                                                    |  |                           |      |                          |   |     
|Basic and diluted net income per share                                              |  | $                         | 0.03 |                          | $ | 0.05
|Pro forma basic and diluted net income per share (Restated)                         |  | $                         | 0.01 |                          | $ | 0.02



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Pro forma stock-based compensation amounts reported above reflect the correction of certain errors
discovered in the Companys 2005 stock option disclosures. These errors resulted in an overstatement of pro forma stock-based compensation disclosed in periods prior to the fourth quarter of 2005. The errors related to improper amortization of
Board of Director grants, as well as the use of inappropriate stock prices in 2002 and 2003 in the calculation of the volatility assumption used in the Black-Scholes pricing model that resulted in an overstatement of the volatility variable. This
resulted in an overstatement of stock-based compensation. These errors had the effect of overstating pro forma stock-based compensation disclosed for the six months ended June 30, 2005 by $0.4 million.

A reconciliation of pro forma stock-based compensation amounts reported for the three and six months ended June 30, 2005 in the June 30, 2005
financial statement footnotes to the restated amounts is as follows:



|                                                       |  |                                          |      |   |                                                |   |       |  
|------------------------------------------------------ |  | ---------------------------------------- | ---- | - | ---------------------------------------------- | - | ----- | -
|Three months ended June 30, 2005                       |  | Pro Forma                                |      |   | Pro Forma                                      |  
|                                                       |  | Stock-Based Compensation (In Thousands): |      |   | Basic and Diluted Net Income (Loss) Per Share: |  
|As previously reported                                 |  | $                                        | 322  |   |                                                | $ |      |  
|Adjustments resulting from corrections to calculations |  | $                                        | (81  | ) |                                                | $ | 0.01  |  
|                                                       |  |                                          |      |   |                                                |   |       |  
|As currently reported                                  |  | $                                        | 241  |   |                                                | $ | 0.01  |  
|                                                       |  |                                          |      |   |                                                |   |       |  
|                                                       |  |                                         
|Six months ended June 30, 2005                         |  | Pro Forma                                |      |   | Pro Forma                                      |  
|                                                       |  | Stock-Based Compensation (In Thousands): |      |   | Basic and Diluted Net Income (Loss) Per Share: |  
|As previously reported                                 |  | $                                        | 821  |   |                                                | $ | (0.01 | )
|Adjustments resulting from corrections to calculations |  | $                                        | (389 | ) |                                                | $ | 0.03  |  
|                                                       |  |                                          |      |   |                                                |   |       |  
|As currently reported                                  |  | $                                        | 432  |   |                                                | $ | 0.02  |  
|                                                       |  |                                          |      |   |                                                |   |       |  



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:



|                        |  |                           |   |  |            |  
|----------------------- |  | ------------------------- | - |  | ---------- | -
|                        |  | Six months Ended June 30, |  
|                        |  | 2006                      |   |  | 2005       |  
|Risk-free interest rate |  | 5.13                      | % |  | 3.89       | %
|Expected dividend yield |  | None                      |   |  | None       |  
|Expected life           |  | 3.75 years                |   |  | 5.00 years |  
|Expected volatility     |  | 67.6                      | % |  | 84.0       | %

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 its industry.

The variables used for stock price volatility and option lives involve managements best estimates, 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. SFAS No. 123(R) 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











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derived from historical employee termination behavior. If the actual number of forfeitures differs from the
Companys estimates, additional adjustments to compensation expense may be required in future periods.

Stockholders
Equity and Stock Option Plans

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

In 2002, the stockholders approved an amendment to the 2001 Plan that allows for the automatic increase in the number of shares reserved for issuance of
stock options under this plan on the first day of each fiscal year by the lesser of (a) 1,000,000 shares, (b) 7% of the outstanding shares in the last day of the prior fiscal period, or (c) an amount determined by the board of
directors. Accordingly, the company added 885,000 option shares to this plan on January 1, 2006. As of June 30, 2006, the total options available for future grant under this Plan were 1,360,000. The options typically vest over various
time-based milestones within a four-year period.

The Company has a 2001 Non-Employee Director Stock Option Plan (the 2001
Directors Plan) under which its non-employee directors receive annual grants to purchase shares of Company common stock. All of the Companys option grants under the 2001 Directors Plan are made at or above fair market value
at the time of grant. These options are fully vested upon grant. At June 30, 2006, 631,000 options were available for future grant under the 2001 Directors Plan.

The Company also has a Non-Qualified, Non-Officer Stock Option Plan (the 1996 Non-Officer Plan) under which employees and consultants to Insightful can
be granted nonqualified options to purchase stock. The vesting of options granted under the 1996 Non-Officer Plan is 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 Insightful other than by reason of death or disability, and is not transferable. At June 30, 2006, 176,000 options were available for future grant under the 1996 Non-Officer Plan.

The following table summarizes stock option activity for all of stock option plans during the six months ended June 30, 2006:



|                                                                                                                                             |  |           |   |  |                                 |      |                                             |           |   |                                                  |   |      
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- | - |  | ------------------------------- | ---- | ------------------------------------------- | --------- | - | ------------------------------------------------ | - | -----
|                                                                                                                                             |  | Options   |   |  | Weighted Average Exercise Price |      | Weighted Average Remaining Contractual Term |           |   | Aggregate Intrinsic Value (Thousands)           
|Outstanding December 31, 2005                                                                                                                |  | 2,920,000 |   |  | $                               | 2.27 |                                             |           |   |                                                  |   |      
|Granted                                                                                                                                      |  | 567,000   |   |  | $                               | 2.94 |                                             |           |   |                                                  |   |      
|Exercised                                                                                                                                    |  | (167,000  | ) |  | $                               | 2.14 |                                             |           |   |                                                  | $ | 149  
|Cancelled                                                                                                                                    |  | (160,000  | ) |  | $                               | 2.99 |                                             |           |   |                                                  |   |      
|                                                                                                                                             |  |           |   |  |                                 |      |                                             |           |   |                                                  |   |      
|Outstanding June 30, 2006                                                                                                                    |  | 3,160,000 |   |  | $                               | 2.36 |                                             | 7.5       |   |                                                  | $ | 2,478
|Estimated forfeitures at June 30, 2006                                                                                                       |  | (424,000  | ) |  |                                 |      |                                             |           |   |                                                  |   |      
|                                                                                                                                             |  |           |   |  |                                 |      |                                             |           |   |                                                  |   |      
|Vested or expected to vest at June 30, 2006                                                                                                  |  | 2,736,000 |   |  | $                               | 2.31 |                                             | 8.7       |   |                                                  | $ | 2,285
|Exercisable at June 30, 2006                                                                                                                 |  | 1,761,000 |   |  | $                               | 2.22 |                                             | 6.5       |   |                                                  | $ | 1,684
|A summary of the status of unvested employee
stock options as of June 30, 2006 and changes during the period then ended, is presented below:
|                                                                                                                                             |  |           |   | 
|                                                                                                                                             |  |           |   |  |                                 |      | Options                                     |           |   | Weighted Average Grant Date Fair Value Per Share
|Unvested at December 31, 2005                                                                                                                |  |           |   |  |                                 |      |                                             | 1,361,000 |   |                                                  | $ | 1.59 
|Granted                                                                                                                                      |  |           |   |  |                                 |      |                                             | 567,000   |   |                                                  | $ | 1.60 
|Vested                                                                                                                                       |  |           |   |  |                                 |      |                                             | (375,000  | ) |                                                  | $ | 1.48 
|Forfeited                                                                                                                                    |  |           |   |  |                                 |      |                                             | (154,000  | ) |                                                  | $ | 1.96 
|                                                                                                                                             |  |           |   |  |                                 |      |                                             |           |   |                                                  |   |      
|Unvested at June 30, 2006                                                                                                                    |  |           |   |  |                                 |      |                                             | 1,399,000 |   |                                                  | $ | 1.58 
|                                                                                                                                             |  |           |   |  |                                 |      |                                             |           |   |                                                  |   |      

As of June 30, 2006, the total remaining unrecognized compensation cost related to unvested
stock options amounted to $1.5 million, which will be amortized over the weighted-average remaining requisite service period of 1.5 years.



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(d) Cash & Cash Equivalents

Cash equivalents consist of highly liquid investments with original maturities of less than three months at the time of purchase. As of June 30,
2006, and December 31, 2005 cash and cash equivalents amounted to $9.7 million and $9.2 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. Under SFAS 115, all of the Companys marketable securities are defined as available-for-sale securities and, accordingly, they 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. Additionally,
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 June 30, 2006, the companys total marketable securities were $6.8 million, of which $0.4 million were classified as short-term investments and $1.0 million as
long-term investments.

Of the total $6.8 million in marketable securities, $5.9 million were corporate debt securities, and
$0.9 million were government and agency obligations. As of June 30, 2006, marketable securities had an unrealized loss of approximately $3,000, and realized gains and losses of zero.

(f) Inventories

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

(g) Property and Equipment

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

(h) Research and Development

Insightful accounts for its software research and development costs in accordance with Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed. During the six months ended June 30, 2006, and 2005, the Company expensed all research and development costs, as those costs incurred from the date of technological feasibility (defined as a working model) to the
general release date, were not material.

(i) Funded Research

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

(j) Foreign Currency Translation

The functional currency of the Companys foreign subsidiaries is the local currency
in the country in which the subsidiary is located. Assets and liabilities of foreign locations are translated to U.S. dollars using the exchange rate at each balance sheet date. Income and expense accounts are translated using an average rate of
exchange during the period. Foreign currency translation adjustments are accumulated as a separate component of stockholders equity. The Company is subject to transaction gains and losses from period to period due to exchange rate
fluctuations. The effect of aggregate transaction gains and losses is included in other income. The aggregate transaction loss was approximately ($8,000) and ($59,000) for



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the three month periods ended June 30, 2006 and 2005, respectively. The aggregate transaction gain and (loss) was
approximately $13,000 and ($177,000) for the six month periods ended June 30, 2006 and 2005, respectively.

(k) Goodwill and Other
Long-Lived Assets

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

In accordance with SFAS 142, Goodwill and Other Intangible Assets, goodwill and other indefinite lived intangibles are tested for impairment at
least annually and written down and charged to results of operations only in periods in which the recorded value of those assets exceeds their fair value. SFAS 142 prescribes the use of the two-phase approach for testing goodwill for impairment. The
first phase is a screen for potential impairment, while the second phase (if necessary) measures the amount of impairment, if any. Current technology and other separable intangible assets that do not have indefinite lives are continued to be
amortized over their useful lives.

Insightful performs an annual goodwill impairment test, with additional tests performed when events
occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. No impairment existed upon performing the annual impairment test in October 2005, nor did any such events occur or
circumstances exist during the six months ended June 30, 2006 that would indicate impairment existed as of June 30, 2006.

(l)
Long-Lived Assets

Other intangibles with definite lives are stated at cost less accumulated amortization and are amortized on a
straight-line basis over a time frame that approximates the pattern in which the economic benefits of the intangible asset are consumed. As of June 30, 2006, the Companys Purchased Technology meets this classification and is being
amortized to expense over three years.

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 there were such facts and circumstances, recoverability
of assets held and used would be measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount were higher, the impairment loss would be measured
by the amount, if any, by which the carrying amount of the assets exceeds their fair value based on the present value of estimated expected future cash flows.

(m) Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from
those estimates. Significant estimates used in preparing the financial statements relate to areas such as (i) revenue recognition, (ii) provision for bad debt, (iii) useful lives for property and equipment and intangibles,
(iv) fair values and impairment analysis of goodwill and intangible assets with definite lives, (v) tax assets and liabilities and other tax exposure items, and (vi) valuation of stock options using the Black Scholes option pricing
model.

(n) Financial Instruments

At June 30, 2006, Insightful had the following financial instruments: cash and cash equivalents, short and long-term investments, accounts receivable, other receivables, accounts payable, accrued liabilities, and
equipment financing debt. 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. The carrying value of equipment financing debt approximates fair value based on the market interest rates available to the Company for debt of similar risk and maturities.

(o) Taxes

The Company follows the
asset and liability method of accounting for income taxes as set forth by SFAS No. 109, Accounting for Income Taxes, and the provisions of SFAS No. 5 Accounting for Contingencies. Under these rules, certain assumptions are made which
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 operating loss and tax credit carryforwards, and tax contingencies. Deferred tax assets and



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liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.

The Company is required to estimate its potential tax obligations and
claims in each of the jurisdictions in which it operates as part of the process of preparing its consolidated financial statements. Significant judgment is required in evaluating its tax positions and in determining its provision for income taxes
and accruals for income and other tax exposures such as sales taxes. The Company has established a valuation allowance to reduce deferred tax assets as the Company believes it is not more likely than not that it will generate sufficient taxable
income to allow for the realization of its deferred net tax assets in the foreseeable future.

During the ordinary course of business,
there are many transactions and calculations for which the ultimate tax determination is uncertain. If necessary, the Company establishes accruals for tax-related uncertainties based on estimates of whether, and to the extent which, additional taxes
and interest will be due. These accruals would be established when, despite the Companys belief that its tax return positions are fully supportable, the Company believes that certain positions are likely to be challenged and may not be
sustained on review by tax authorities. These accruals would be adjusted in light of changing facts and circumstances, such as the closing of a tax audit or the expiration of a statute of limitations.

The Company generates sales in almost every state. There is a great variation in the tax rules from state to state, including the rules that determine
whether a company has established nexus in a particular jurisdiction. The Company is currently registered in several states and local jurisdictions and the Company remits required state and local taxes on related business operations in those
states. In the second quarter of 2006, the Company began a comprehensive examination of the tax rules for the various jurisdictions where the Company generates sales. In the course of this investigation, the Company preliminarily concluded that
some jurisdictions may have a basis to claim that the Company had taxable nexus for a period of time and the Company may not have appropriately registered for business nor collected and remitted required sales taxes for business activities. The
Company has begun to further analyze current and past business activities for a more definitive conclusion on any potentially uncollected and unpaid sales taxes and to ensure the Company is appropriately registered for future business activities.
The Company expects that as a result of the further examination the Company will conclude that there were taxes that the Company should have collected and remitted. If this is the case, the Company may seek payment from its customers or otherwise
verify that the customers paid the appropriate taxes through other means, thereby, if successful, eliminating the Companys obligation to collect and remit the taxes. Additionally, as a remedy, the Company may apply for amnesty, settlements or
exemption from previously unpaid taxes that may reduce the amounts owing, if any. In states where the Company is not currently registered, The Company has not received any notification of uncollected and unpaid taxes, and the Company has not
recorded any provisions for any potentially related obligations. Depending on the results of the examination and subsequent efforts to minimize amounts owed, the Company could be obligated to pay significant amounts of state and local taxes, plus
related interest and penalties, however, the amount is not estimable at this time due to the early state of our examination and the numerous factors, jurisdictions and assumptions involved.

The provision for income taxes includes the impact of potential tax claims and changes to accruals and valuation allowances that the Company considers
appropriate, as well as the related interest expense. 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. Any changes in circumstances related to these contingencies could have a material effect on the Companys financial condition, results of operations and cash flows.

(p) Recent Accounting Pronouncements

In November 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Nos. FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. FSP Nos. FAS 115-1
and FAS 124-1 amend SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, SFAS No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations, as well as APB Opinion No. 18, The Equity
Method of Accounting for Investments in Common Stock. This guidance nullifies certain requirements of EITF 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. FSP Nos. FAS 115-1 and FAS 124-1 include
guidance for evaluating and recording impairment losses on debt and equity investments, as well as new disclosure requirements for investments that are deemed to not be other-than-temporarily impaired. FSP Nos. FAS 115-1 and FAS 124-1 also require
other-than-temporary impaired debt securities to be written down to their impaired value, which becomes the new cost basis. FSP Nos. FAS 115-1 and FAS 124-1 are effective for fiscal periods beginning after December 15, 2005. The adoption did
not have a material impact on its results of operations or financial position.

In May 2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20 and SFAS Statement No. 3. SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principle. It



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also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including
in net income of the period of the change the cumulative effect of changing to the new accounting principle. This statement requires retrospective application to prior periods financial statements of changes in accounting principle, unless it
is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be
accounted for as a change in accounting estimate effected by a change in accounting principle. This statement carries forward without changing the guidance contained in Opinion 20 for reporting the correction of an error in previously issued
financial statements and a change in accounting estimate. This statement also carries forward the guidance in Opinion 20 requiring justification of a change in accounting principle on the basis of preferability. The provisions of SFAS No. 154
are effective for accounting changes made in fiscal years beginning after December 15, 2005. The adoption did not have a material impact on the Companys results of operations or financial position.

On January 1, 2006 the Company adopted SFAS 123R Accounting for Share Based Payments, see footnote 2c.

(3) PURCHASED TECHNOLOGY

In January 2004, the
Company acquired title to the software code underlying the S programming language from Lucent Technologies Inc. for $2.0 million. 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. As a result of this transaction, $1,765,000 was capitalized as purchased technology. This amount is being amortized to software related cost of revenues over a 3-year estimated life. The
Company recorded $147,000 in amortization expense related to this technology during the three months ended June 30, 2006 and 2005, and $294,000 during the six months ended June 30, 2006 and 2005. This technology is scheduled to be fully
amortized by January 31, 2007 with corresponding amortization estimated to be $588,000 and $49,000 in 2006 and 2007, respectively.

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.

(4) FINANCING ARRANGEMENTS

In March 2006, 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 March 31, 2007. This facility is secured by the Companys accounts receivable and allows it to borrow up to
the lesser of 75% of its eligible accounts receivable or $3.0 million and bears interest at the prime rate plus 1%. At June 30, 2006, the prime rate was 8.25%, and no amounts had been borrowed under the line of credit facility.

The Company also has an equipment loan facility with Silicon Valley Bank, secured by underlying assets. The Company originally borrowed $450,000 under
this facility in 2002. The Company entered the first quarter of 2006 with a $32,000 outstanding balance, which was fully paid as of March 31, 2006. This loan called for interest equal to prime rate plus 1%, and was repaid over a 42-month
period, ending in March 2006.

These credit facilities contain covenants that limit the Companys net losses and restrict the amount
of capital expenditures not financed through the equipment term loan. In addition, the Company is prohibited under these facilities from paying dividends. The Company was in compliance with these covenants as of June 30, 2006.

(5) NET INCOME PER SHARE

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 EndedJune 30, |  | Six Months Ended June 30,
|                                                               |  | 2006                       |  | 2005                      |  | 2006   |  | 2005  
|Shares used in basic net income (loss) per share computation   |  | 12,613                     |  | 12,445                    |  | 12,579 |  | 12,405
|                                                               |  |                            |  |                          
|Effect of dilutive common stock equivalents1                   |  |                           |  | 737                       |  |       |  | 635   
|                                                               |  |                            |  |                           |  |        |  |       
|Shares used in diluted net income (loss) per share computation |  | 12,613                     |  | 13,182                    |  | 12,579 |  | 13,040



|1 | Common stock equivalents totaling 698,000 and 676,000 were excluded from dilutive net income
(loss) per share for the three and six month periods ended June 30, 2006, respectively, as their inclusion would have been anti-dilutive.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

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



|                                                                                                                                                                           |  |                            |  |                           |  |       |  |     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- |  | ------------------------- |  | ----- |  | ----
|                                                                                                                                                                           |  | Three Months EndedJune 30, |  | Six Months Ended June 30,
|                                                                                                                                                                           |  | 2006                       |  | 2005                      |  | 2006  |  | 2005
|Stock options excluded from the computation of diluted net income (loss) per share, other than those used in the determination of common stock equivalents disclosed above |  | 1,253                      |  | 314                       |  | 1,245 |  | 426 





(6) OTHER COMPREHENSIVE INCOME (LOSS)

SFAS No. 130, Reporting Comprehensive
Income, establishes standards for reporting and display of comprehensive income (loss) and its components in the financial statements. As of June 30, 2006, comprehensive income (loss) included foreign currency translation adjustments,
and unrealized gains and losses on investments held in marketable securities. Total comprehensive income (loss) is as follows (in thousands):



|                                                                              |  |                            |      |                          |      |   |      |  |   |      |   |  |   |    
|----------------------------------------------------------------------------- |  | -------------------------- | ---- | ------------------------ | ---- | - | ---- |  | - | ---- | - |  | - | ---
|                                                                              |  | Three Months EndedJune 30, |      | Six Months EndedJune 30,
|                                                                              |  | 2006                       |      |                          | 2005 |   | 2006 |  |   | 2005
|Net income (loss)                                                             |  | $                          | (415 | )                        |      | $ | 334  |  | $ | (458 | ) |  | $ | 667
|Change in cumulative translation adjustment                                   |  |                            | 3    |                          |      |   | 12   |  |   | (9   | ) |  |   | 42 
|Unrealized losses on short and long-term investments in marketable securities |  |                            | (3   | )                        |      |   |     |  |   | (3   | ) |  |   |   
|                                                                              |  |                            |      |                          |      |   |      |  |   |      |   |  |   |    
|Comprehensive income (loss)                                                   |  | $                          | (415 | )                        |      | $ | 346  |  | $ | (470 | ) |  | $ | 709
|                                                                              |  |                            |      |                          |      |   |      |  |   |      |   |  |   |    

(7) SEGMENT REPORTING

SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products, services, geographical areas and major customers. Business segment information includes the segments of North American Data Analysis, International Data Analysis and Text Analysis. The
Company measures segment performance based on their revenues and contribution margin, which is a measure of profitability that allocates only direct and controllable costs to a segment. Depreciation expense is not allocated by 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):



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|                                 |  |                            |       |                            |   |                |  |   |       |   |  |   |        |  
|-------------------------------- |  | -------------------------- | ----- | -------------------------- | - | -------------- |  | - | ----- | - |  | - | ------ | -
|                                 |  | NorthAmericanData Analysis |       | InternationalData Analysis |   | Text Analysis1 |  |   | Total |  
|Three months ended June 30, 2006 |  |                            |       |                            |   |                |  |   |       |   |  |   |        |  
|Revenues                         |  | $                          | 3,039 |                            | $ | 1,828          |  | $ | 289   |   |  | $ | 5,156  |  
|Contribution margin              |  |                            | 1,287 |                            |   | 329            |  |   | (66   | ) |  |   | 1,549  |  
|Unallocated costs and expenses   |  |                            |       |                            |   |                |  |   |       |   |  |   | (2,078 | )
|                                 |  |                            |       |                            |   |                |  |   |       |   |  |   |        |  
|                                 |  |                            |       |                           
|Loss from operations             |  |                            |       |                            |   |                |  |   |       |   |  | $ | (529   | )
|                                 |  |                            |       |                            |   |                |  |   |       |   |  |   |        |  
|                                 |  |                            |       |                           
|Three months ended June 30, 2005 |  |                            |       |                            |   |                |  |   |       |   |  |   |        |  
|Revenues                         |  | $                          | 2,835 |                            | $ | 1,983          |  | $ | 292   |   |  | $ | 5,110  |  
|Contribution margin              |  |                            | 1,261 |                            |   | 764            |  |   | (10   | ) |  |   | 2,015  |  
|Unallocated costs and expenses   |  |                            |       |                            |   |                |  |   |       |   |  |   | (1,680 | )
|                                 |  |                            |       |                            |   |                |  |   |       |   |  |   |        |  
|                                 |  |                            |       |                           
|Income from operations           |  |                            |       |                            |   |                |  |   |       |   |  | $ | 335    |  
|                                 |  |                            |       |                            |   |                |  |   |       |   |  |   |        |  



|1 | Text analysis revenues consisted of $212,000 from the United States and $77,000 from Europe during the three months ended June 30, 2006, and $209,000 from the
United States and $83,000 from Europe during the three months ended June 30, 2005.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                               |  |                            |       |                            |   |                |  |   |       |   |  |   |        |  
|------------------------------ |  | -------------------------- | ----- | -------------------------- | - | -------------- |  | - | ----- | - |  | - | ------ | -
|                               |  | NorthAmericanData Analysis |       | InternationalData Analysis |   | Text Analysis2 |  |   | Total |  
|Six months ended June 30, 2006 |  |                            |       |                            |   |                |  |   |       |   |  |   |        |  
|Revenues                       |  | $                          | 6,118 |                            | $ | 3,938          |  | $ | 642   |   |  | $ | 10,698 |  
|Contribution margin            |  |                            | 2,606 |                            |   | 1,052          |  |   | (97   | ) |  |   | 3,561  |  
|Unallocated costs and expenses |  |                            |       |                            |   |                |  |   |       |   |  |   | (4,237 | )
|                               |  |                            |       |                            |   |                |  |   |       |   |  |   |        |  
|                               |  |                            |       |                           
|Income from operations         |  |                            |       |                            |   |                |  |   |       |   |  | $ | (676   | )
|                               |  |                            |       |                            |   |                |  |   |       |   |  |   |        |  
|                               |  |                            |       |                           
|Six months ended June 30, 2005 |  |                            |       |                            |   |                |  |   |       |   |  |   |        |  
|Revenues                       |  | $                          | 5,632 |                            | $ | 3,909          |  | $ | 827   |   |  | $ | 10,368 |  
|Contribution margin            |  |                            | 2,654 |                            |   | 1,414          |  |   | 251   |   |  |   | 4,319  |  
|Unallocated costs and expenses |  |                            |       |                            |   |                |  |   |       |   |  |   | (3,557 | )
|                               |  |                            |       |                            |   |                |  |   |       |   |  |   |        |  
|                               |  |                            |       |                           
|Income from operations         |  |                            |       |                            |   |                |  |   |       |   |  | $ | 762    |  
|                               |  |                            |       |                            |   |                |  |   |       |   |  |   |        |  



|2 | Text analysis revenues consisted of $507,000 from the United States and $135,000 from Europe during the six months ended June 30, 2006, and $744,000 from the
United States and $83,000 from Europe during the six months ended June 30, 2005.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(9) REVENUE CONCENTRATION

No customer accounted for 10% or more of revenues for the three and six months ended June 30, 2006. One customer accounted for $546,000 or 11% of
revenues for the three months ended June 30, 2005. No customer accounted for 10% or more of revenues for the six months ended June 30, 2005.

(8) COMMITMENTS AND CONTINGENCIES

In certain of its licensing agreements, the Company provides intellectual property infringement
indemnifications. These indemnifications are excluded from the initial recognition and measurement requirements of FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. The Companys policy is to record any obligation under such indemnification when a required payment under such indemnification is probable and the amount of the future loss is estimable. At
June 30, 2006, there were no such







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indemnifications for which a required payment was deemed to be probable or estimable; therefore, no accrual has been made
for potential losses associated with these indemnifications.

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

The
following discussion and analysis should be read in conjunction with our condensed consolidated financial statements included elsewhere in this report.

Forward-Looking Statements

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



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



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



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



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



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



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



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



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

Words
such as believes, anticipates and intends may 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
subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. Our actual results could
differ materially from those anticipated in the forward-looking statements for many reasons, including the factors described in the section entitled Important factors that may affect our business, our operating results, and our stock pricein
this report. Other factors besides those described in this report could also affect actual results. You should carefully consider the factors described in the section entitled Important factors that may affect our business, our operating results,
and our stock pricein evaluating our forward-looking statements.

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

Our products include S-PLUS® and S-PLUS
Server, Insightful Miner, InFact® 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. Our consulting services and training provide specialized expertise and processes for the design, development and deployment of analytical solutions.

Our customers include primarily companies in financial services, pharmaceuticals, biotechnology, telecommunications and manufacturing, as well as
government and research institutions.

Headquartered in Seattle, Washington, we also have an office in North Carolina and offices in
France, Switzerland, and the United Kingdom, with distributors around the world. At June 30, 2006, we employed 103 persons in the United States, and 29 persons in Europe. We were originally incorporated in Massachusetts in 1984 as Mathsoft,
Inc. and reincorporated in Delaware in 2001.





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Products

Data Analysis Products

S-PLUS®

S-PLUS is our flagship software product for statistical data analysis. The software offers technical professionals a flexible, extensible and productive platform for data analysis and visualization. S-PLUS is based on our object-oriented
S programming language. S-PLUS offers a wide range of analytic methods for extracting intelligence from large data sets, and allow its users to create customized analytical applications that operate in the Windows® and UNIX® environments.

Insightful Miner

Insightful
Miner is a scalable data analysis workbench for predictive modeling, data mining and statistical data analysis. It has a drag-and-drop interface intended to make it easy to create self-documenting visual workmaps. Insightful Miner provides data
miners, business analysts and data analysis professionals with a suite of scalable components for data access, management and modeling, and its pipeline architecture is designed to allow the user to process large data sets. Insightful Miner is an
open and extensible tool that offers full integration with the S-PLUS programming language. Insightful Miner offers deployment capabilities via batch mode, predictive model markup language or generated C code. Insightful Miner is designed to have a
low cost of ownership, with a desktop entry-level version and multiple server versions offered under perpetual licenses rather than annual subscription-based agreements.

Toolkits for Vertical Markets

To complement S-PLUS and Insightful Miner, we offer toolkits for the
financial services and life sciences markets to allow users to perform specialized data analysis. For example, S+FinMetrics® is designed to provide the financial services market with comprehensive software for modeling, analyzing and visualizing financial market data,
offering a modern and flexible analytic environment for reliable and robust predictive econometric modeling. S+ArrayAnalyzer® is designed to enable pharmaceutical companies to obtain statistically rigorous information from microarray technology, helping to shorten
time-to-discovery for competitive advantage.

Server Products

Our S-PLUS Server products are designed to enable our customers to deploy statistical data analysis throughout an organization, leveraging existing
Web-based or client/server technologies using server computers running Windows and UNIX operating systems. Our server products are designed to be data warehouse-independent and integrate with standard database and file formats. With our server
products, statistical models and data visualization capabilities are built and stored in a central server for access by non-technical users, who can apply these analytical techniques using a Web browser interface or dedicated graphical user
interfaces written using Java® technology. Our
server products are designed to enable end-users to analyze and understand technical or business information without requiring expertise in statistics or statistical tools.

Text Analysis Products

InFact®

InFact is our software product for advanced text analysis and relationship search. InFact combines statistical text mining methods with linguistic
techniques that apply natural language processing, such as full sentence deep syntactic parsing, to text search and analysis.

InFact has
been historically targeted at the defense/intelligence and pharmaceutical markets, where researchers are able to utilize its natural language tabular exploratory search interfaces and text query language in a manner designed to efficiently uncover
information for which they are searching. InFact is designed to enable researchers to experience higher levels of productivity, and to improve the quality of their research.

We are now also marketing InFact to the high value vertical search portal market with the intent of enabling our potential customers to provide a richer,
more precise search experience, and, therefore, enable them to increase their advertising revenues.

Maintenance and Support

We provide product updates and unspecified product upgrades and customer support services under maintenance agreements. Maintenance and support is
included as part of our annual subscription-based licenses. The initial one-year maintenance contract is bundled into the license fees on most of our perpetual license agreements.



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Technical support for our products is provided by a staff of engineers located in Seattle and in Europe.
Support is only available to customers who purchase our annual maintenance service. Customers who purchase products from distributors may receive first-line technical support from their respective local distributors, with further support and
escalation provided by our staff.

Services

Our consulting and training organization provides fee-based services. These services include assisting our customers in developing complex statistical models and data or text analysis techniques, as well as developing consultant-configured
vertical-specific solutions that are designed to enable us to sell the same, or similar, solutions to multiple customers with reduced incremental consulting efforts incurred by us. Services also include deployment assistance, project management,
integration with existing customer applications, and related services generally performed on a time-and-materials basis under separate service arrangements. We also offer a series of fee-based training courses to our customers. Courses can be taken
at Insightfuls offices, at the customers site, or at other prearranged sites for larger customer groups.

Critical Accounting Policies and
Estimates

We have based our discussion and analysis of our financial condition and results of operations upon 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 on-going 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 follow very specific and detailed guidelines, discussed in Note 2 of the condensed consolidated financial
statements, in recognizing and measuring revenues.

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

If we were to change any of these assumptions or judgments, which are made based upon all of the information available to us at the time; it could cause a material increase or decrease in the amount of revenue that we report in a particular
period. Deferred revenue is recognized over time as the applicable revenue recognition criteria are satisfied.

Stock-Based Compensation Expense

On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment, (SFAS 123(R)) which 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 related
to the Employee Stock Purchase Plan (employee stock purchases) based on estimated fair values. SFAS 123(R) supersedes our previous accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) for periods beginning in fiscal 2005. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123(R). We have applied the
provisions of SAB 107 in its adoption of SFAS 123(R).

We adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of January 1, 2006, the first day of our fiscal year 2006. Our Consolidated Financial Statements as of





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and for the six months ended June 30, 2006 reflect the impact of SFAS 123(R). In accordance with the modified
prospective transition method, our Consolidated Financial Statements for periods prior to the first quarter of 2006 have not been restated to reflect, and do not include, the impact of SFAS 123(R).

Under the provisions of SFAS No. 123(R), 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.

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. 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 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 our 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 our stock price, including consideration of the implied volatility and market prices of traded options for comparable entities within our industry.

Our stock price volatility and option lives involve managements best estimates, 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. SFAS No. 123R also requires that we recognize compensation expense for only the portion of options expected to vest. Therefore, we applied an estimated forfeiture rate that we derived from
historical employee termination behavior. If the actual number of forfeitures differs from our estimates, additional adjustments to compensation expense may be required in future periods.

Stock-based compensation expense recognized under SFAS 123(R) for the six months ended June 30, 2006 was $0.3 million, which consisted of
stock-based compensation expense related to employee stock options and employee stock purchases. There was no stock-based compensation expense related to employee stock options and employee stock purchases recognized during the six months ended
June 30, 2005. Had we recognized compensation expense for the six months ended June 30, 2005 for all share-based payments to employees based on their fair values, as is now required by SFAS 123(R), net income would have been lower by $0.4
million, or $0.03 per basic and diluted share.

As of June 30, 2006, the total remaining unrecognized compensation cost related to
unvested stock options amounted to $1.5 million, which will be amortized over the weighted-average remaining requisite service period of 1.5 years.

See Note 2 in the Consolidated Financial Statements for additional information on stock-based compensation expense and stock option related data.

Taxes

We follow the asset and liability method of accounting for income taxes as set forth by SFAS No. 109,
Accounting for Income Taxes, and the provisions of SFAS No. 5 Accounting for Contingencies. Under these rules, certain assumptions are made which 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 operating loss and tax credit carryforwards, and tax contingencies. 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.

We are required to estimate our potential tax obligations and claims in each of the jurisdictions in which we operates as part of the process of
preparing our consolidated financial statements. Significant judgment is required in evaluating our tax positions and in determining our provision for income taxes and accruals for income and other tax exposures. During the ordinary course of
business, there are many transactions and calculations for which the ultimate tax determination is uncertain. If necessary, we establish accruals for tax-related uncertainties based on estimates of whether, and to the extent which, additional taxes
and interest will be due. These accruals would be established when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are likely to be challenged and may not be sustained on review by tax
authorities. These accruals would be adjusted in light of changing facts and circumstances, such as the closing of a tax audit or the expiration of a statute of limitations. We have established a valuation allowance to reduce deferred tax assets as
we believe it is not more likely than not that we will generate sufficient taxable income to allow for the





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realization of our deferred net tax assets in the foreseeable future. The provision for income taxes includes the impact
of potential tax claims and changes to accruals and valuation allowances that we consider appropriate, as well as the related interest expense. In addition to our judgments and use of estimates, there are inherent uncertainties surrounding taxes
that could result in actual amounts that differ materially from our estimates. Any changes in circumstances related to these contingencies could have a material effect on our financial condition, results of operations and cash flows.

We generate sales in almost every state. There is a great variation in the tax rules from state to state, including the rules that determine whether a
company has established nexus in a particular jurisdiction. We are registered in several states and local jurisdictions and we remit required state and local taxes on related business operations in those states. In the second quarter of 2006,
we began a comprehensive examination of the tax rules for the various jurisdictions where we generate sales. In the course of this investigation, we preliminarily concluded that some jurisdictions may have a basis to claim that we had taxable nexus
for a period of time and we may not have appropriately registered for business nor collected and remitted required sales taxes for business activities. We have begun to further analyze current and past business activities for a more definitive
conclusion on any potentially uncollected and unpaid sales taxes and to ensure we are appropriately registered for future business activities. We expect that as a result of the further examination we will conclude that there were taxes that we
should have collected and remitted. If this is the case, we may seek payment from our customers or otherwise verify that they paid the appropriate taxes through other means, thereby, if successful, eliminating our obligation to collect and remit the
taxes. Additionally, as a remedy, we may apply for amnesty, settlements or exemption from previously unpaid taxes that may reduce the amounts owing, if any. In states where we are not currently registered, we have not received any notification of
uncollected and unpaid taxes, and we have not recorded any provisions for any potentially related obligations. Depending on the results of our examination and subsequent efforts to minimize amounts owed, we could be obligated to pay significant
amounts of state and local taxes, plus related interest and penalties, however, the amount is not estimable at this time due to the early state of our examination and the numerous factors, jurisdictions and assumptions involved

Sales Returns

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

Bad
Debts

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

Impairment of Goodwill and Other Long Lived Assets

We evaluate goodwill arising from acquired businesses for potential impairment on an annual basis, during the fourth quarter. This evaluation requires significant judgment and estimation. In addition, throughout the year we consider whether
there are impairment indicators that would require an immediate evaluation of impairment. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our acquired
businesses. Future events could cause us to conclude that impairment indicators exist and that goodwill associated with our acquired business is impaired.

Impairment losses, if any, will be charged to earnings in the period in which they are identified.

Contingencies

We are engaged in legal actions arising in the ordinary course of business. We are required to assess the likelihood of any adverse
judgments or outcomes to these matters as well as potential ranges of possible losses. A determination of the amount of reserves required, if any, for these contingencies are made after careful analysis of each individual matter. The required
reserves, if any, may change in the future due to new developments in each matter or changes in approach.













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Results of Operations for the Three and Six Months Ended June 30, 2006 and 2005

Revenues by Type



|                                           |  |                             |       |   |      |   |       |                           |  |     |      |  |   |        |   |  |                           |        |   |  |    |  
|------------------------------------------ |  | --------------------------- | ----- | - | ---- | - | ----- | ------------------------- |  | --- | ---- |  | - | ------ | - |  | ------------------------- | ------ | - |  | -- | -
|                                           |  | Three Months Ended June 30, |       |   |      |   |       | Six Months EndedJune 30,  |  |     |      | 
|                                           |  | 2006                        |       |   | 2005 |   |       | PercentIncrease(Decrease) |  |     | 2006 |  |   | 2005   |   |  | PercentIncrease(Decrease) |       
|Revenues (in thousands):                   |  |                             |       |   |      |   |       |                           |  |     |      |  |   |        |   |  |                           |        |   |  |    |  
|Software licenses                          |  | $                           | 2,231 |   |      | $ | 2,140 |                           |  | 4   | %    |  | $ | 4,655  |   |  | $                         | 4,667  |   |  | 0  | %
|Software maintenance                       |  |                             | 1,830 |   |      |   | 1,705 |                           |  | 7   | %    |  |   | 3,641  |   |  |                           | 3.314  |   |  | 10 | %
|Professional services and other            |  |                             | 1,095 |   |      |   | 1,265 |                           |  | (13 | )%   |  |   | 2,402  |   |  |                           | 2,387  |   |  | 1  | %
|                                           |  |                             |       |   |      |   |       |                           |  |     |      |  |   |        |   |  |                           |        |   |  |    |  
|Total                                      |  | $                           | 5,156 |   |      | $ | 5,110 |                           |  | 1   | %    |  | $ | 10,698 |   |  | $                         | 10,368 |   |  | 3  | %
|                                           |  |                             |       |   |      |   |       |                           |  |     |      |  |   |        |   |  |                           |        |   |  |    |  
|                                           |  |                             |       |   |      |  
|Revenues by type (as % of total revenues): |  |                             |       |   |      |   |       |                           |  |     |      |  |   |        |   |  |                           |        |   |  |    |  
|Software licenses                          |  |                             | 43    | % |      |   | 42    | %                         |  |     |      |  |   | 44     | % |  |                           | 45     | % |  |    |  
|Software maintenance                       |  |                             | 35    | % |      |   | 33    | %                         |  |     |      |  |   | 34     | % |  |                           | 32     | % |  |    |  
|Professional services and other            |  |                             | 21    | % |      |   | 25    | %                         |  |     |      |  |   | 22     | % |  |                           | 23     | % |  |    |  
|                                           |  |                             |       |   |      |   |       |                           |  |     |      |  |   |        |   |  |                           |        |   |  |    |  
|Total                                      |  |                             | 100   | % |      |   | 100   | %                         |  |     |      |  |   | 100    | % |  |                           | 100    | % |  |    |  
|                                           |  |                             |       |   |      |   |       |                           |  |     |      |  |   |        |   |  |                           |        |   |  |    |  

Software license revenue

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

Software license revenues increased by 4% for the three months ended June 30, 2006, as compared to the corresponding period of 2005.
This increase was primarily due to an increase in the average size of our larger Data Analysis license sales that began in 2005, which, in part, is due and made possible by the release of S-Plus 7.0 Enterprise Server in April 2005, which was
designed to process much larger data sets and address larger statistical data analysis problems. In addition, our strategic focus has been to sell larger, more value added deals, to higher levels in our customers organizational hierarchy. This
has allowed us to engage in larger sales opportunities and licensing arrangements.

Software license revenues remained flat for the six
months ended June 30, 2006, as compared to the corresponding period of 2005. Although the average deal size increased during the six months ended June 30, 2006, as compared to the corresponding period of 2005, for the same reason as
described above, this increase was offset by the recognition in March 2005 of Text Analysis license revenue in the amount of $120,000 that related to a license sale booked in August of 2004. The revenue recognition for six months of this term
license was delayed until its unique acceptance criteria were met in March of 2005. This term license had been sold and deferred prior to 2005 due to revenue recognition requirements. Were it not for this deferral, license revenue would have
increased for the six months ended June 30, 2006, as compared to the corresponding period of 2005.

Maintenance revenue

Software maintenance is generally included with the initial purchase of products under perpetual licenses, 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 license sale.

Software maintenance revenues increased by 7% and 10% for the three and six months ended June 30, 2006, respectively, as compared to the corresponding periods of 2005. These increases were primarily due to the following factors:



| | · | An increase in our ongoing maintenance revenue stream driven by an ongoing increase in the size of our average license sale during the twelve-month period preceding the quarter
ended June 30, 2006, as compared to the corresponding periods in prior years. Higher license revenues drive an increase in our ongoing maintenance revenue stream because each Data Analysis license sale typically includes one year of software
maintenance that is amortized over a twelve-month period following the initial license sale.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | An increase in our overall pricing of our products and services that occurred in the beginning of the second quarter of 2005.
| | - | -----------------------------------------------------------------------------------------------------------------------------





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If we are unable to maintain our current level of renewals for our Data Analysis software maintenance, or
sales of our Data Analysis software products, our future maintenance revenue streams generated by our Data Analysis products may decrease.

Professional
services and other revenue

Professional services and other revenue is generated from performing consulting and training activities, as
well as selling consultant-configured vertical-specific solutions. Professional services and other revenue decreased by 13% for the three and six months ended June 30, 2006, respectively, as compared to the corresponding periods of 2005. These
increases were primarily due to the following factors:



| |  |  | We strategically diverted consulting resources away from billable, and immediately recognizable, consulting projects in order to develop a consultant-configured solution targeted at
the life sciences vertical.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Services performed at one large European Data Analysis customer decreased during the first two quarters of 2006 as compared to 2005, which was due in part to difficulties
experienced in project management execution, which we believe has since been resolved.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Revenues by Segment

We review results from three segments: North American Data Analysis, International Data Analysis, and Text Analysis and 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 EndedJune 30, |       |   |      |   |       | Six Months EndedJune 30,  |  |    |      | 
|                                   |  | 2006                       |       |   | 2005 |   |       | PercentIncrease(Decrease) |  |    | 2006 |  |   | 2005   |   |  | PercentIncrease(Decrease) |       
|Revenues (in thousands):           |  |                            |       |   |      |   |       |                           |  |    |      |  |   |        |   |  |                           |        |   |  |     |   
|North American Data Analysis       |  | $                          | 3,039 |   |      | $ | 2,835 |                           |  | 7  | %    |  | $ | 6,118  |   |  | $                         | 5,632  |   |  | 9   | % 
|International Data Analysis        |  |                            | 1,828 |   |      |   | 1,983 |                           |  | (8 | )%   |  |   | 3,938  |   |  |                           | 3,909  |   |  | 1   | % 
|Text Analysis                      |  |                            | 289   |   |      |   | 292   |                           |  | (1 | )%   |  |   | 642    |   |  |                           | 827    |   |  | (22 | )%
|                                   |  |                            |       |   |      |   |       |                           |  |    |      |  |   |        |   |  |                           |        |   |  |     |   
|Total                              |  | $                          | 5,156 |   |      | $ | 5,110 |                           |  | 1  | %    |  | $ | 10,698 |   |  | $                         | 10,368 |   |  | 3   | % 
|                                   |  |                            |       |   |      |   |       |                           |  |    |      |  |   |        |   |  |                           |        |   |  |     |   
|                                   |  |                            |       |   |      |  
|Revenues (as % of total revenues): |  |                            |       |   |      |   |       |                           |  |    |      |  |   |        |   |  |                           |        |   |  |     |   
|North American Data Analysis       |  |                            | 59    | % |      |   | 55    | %                         |  |    |      |  |   | 57     | % |  |                           | 54     | % |  |     |   
|International Data Analysis        |  |                            | 35    | % |      |   | 39    | %                         |  |    |      |  |   | 37     | % |  |                           | 38     | % |  |     |   
|Text Analysis                      |  |                            | 6     | % |      |   | 6     | %                         |  |    |      |  |   | 6      | % |  |                           | 8      | % |  |     |   
|                                   |  |                            |       |   |      |   |       |                           |  |    |      |  |   |        |   |  |                           |        |   |  |     |   
|Total                              |  |                            | 100   | % |      |   | 100   | %                         |  |    |      |  |   | 100    | % |  |                           | 100    | % |  |     |   
|                                   |  |                            |       |   |      |   |       |                           |  |    |      |  |   |        |   |  |                           |        |   |  |     |   

North American Data Analysis revenue

North American Data Analysis revenues increased by 7% and 9% for the three and six months ended June 30, 2006, respectively, as compared to the
corresponding periods of 2005. The following factors predominantly drove these increases:



| |  |  | As discussed above under Software license revenue, we experienced an increase in the average size of our larger Data Analysis software sales during the three and six
months ended June 30, 2006, as compared to the corresponding periods in 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As discussed above under Maintenance revenue, we experienced an increase in our North American Data Analysis maintenance revenue during the three and six months ended
June 30, 2006, as compared to the corresponding periods in 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

International Data Analysis revenue

International Data Analysis revenues decreased by approximately $155,000 (or 8%) for the three months ended June 30, 2006, and remained relatively
flat for the six months ended June 30, 2006, as compared to the corresponding periods of





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##### Table of Contents

2005. The decrease in the three months ended June 30, 2006, as compared to the corresponding period of 2005 was
primarily due to a decrease in professional services revenue of approximately $209,000 (or 28%), offset by an increase in license revenue of approximately $48,000 (or 11%).

The decrease in International professional services revenue is primarily attributable to a decrease in consulting services performed during the three and
six months ended June 30, 2006, as compared to the corresponding periods of 2005 (see discussion above under professional services and other revenues). The increase in international license sales during the three months ended
June 30, 2006, as compared to the corresponding period of 2005 was due to an increase in the size of our average license sale during the same corresponding period of 2005, as discussed above under Software license revenue.

Text Analysis revenue

Text Analysis revenues remained relatively flat for the three months ended June 30, 2006, and decreased by approximately $185,000 (or 22%) for the six months ended June 30, 2006, as compared to the corresponding periods of 2005.
The decrease for the six months ended June 30, 2006, as compared to the corresponding periods of 2005 was due to a decrease in Text Analysis professional services revenue of approximately $137,000 (or 62%), and to a smaller degree, by a
decrease in Text Analysis license revenues of approximately $48,000 (or 8%).

The decrease in Text Analysis professional services revenue
during the six months ended June 30, 2006, as compared to the corresponding period of 2005, was primarily attributable to the completion of a large consulting engagement during the six months ended June 30, 2005. Text Analysis consulting
engagements serviced during the six months ended June 30, 2006 were all of a smaller size.

Text Analysis license revenues decreased
for the six months ended June 30, 2006, as compared to the corresponding six month period of 2005, due to the recognition in March 2005 of Text Analysis license revenue in the amount of $120,000 that related to a license sale booked in August
of 2004, as discussed above under Software License Revenue. Were it not for this deferral, Text Analysis license revenue would have increased for the six months ended June 30, 2006, as compared to the corresponding period of 2005,
and the decrease in total text analysis revenues during the six months ended June 30, 2006, as compared to the corresponding period of 2005, would have been less.

Cost of Revenues



|                                                                                                    |  |                            |       |   |      |   |       |                           |  |    |      |  |   |       |   |  |                           |       |   |  |    |   
|--------------------------------------------------------------------------------------------------- |  | -------------------------- | ----- | - | ---- | - | ----- | ------------------------- |  | -- | ---- |  | - | ----- | - |  | ------------------------- | ----- | - |  | -- | --
|                                                                                                    |  | Three Months EndedJune 30, |       |   |      |   |       | Six Months EndedJune 30,  |  |    |      | 
|                                                                                                    |  | 2006                       |       |   | 2005 |   |       | PercentIncrease(Decrease) |  |    | 2006 |  |   | 2005  |   |  | PercentIncrease(Decrease) |      
|Cost of revenues (in thousands):                                                                    |  |                            |       |   |      |   |       |                           |  |    |      |  |   |       |   |  |                           |       |   |  |    |   
|Software-related                                                                                    |  | $                          | 397   |   |      | $ | 437   |                           |  | (9 | )%   |  | $ | 855   |   |  | $                         | 841   |   |  | 2  | % 
|Professional services and other                                                                     |  |                            | 951   |   |      |   | 673   |                           |  | 41 | %    |  |   | 1,855 |   |  |                           | 1,435 |   |  | 29 | % 
|                                                                                                    |  |                            |       |   |      |   |       |                           |  |    |      |  |   |       |   |  |                           |       |   |  |    |   
|Total                                                                                               |  | $                          | 1,348 |   |      | $ | 1,110 |                           |  | 21 | %    |  | $ | 2,710 |   |  | $                         | 2,276 |   |  | 19 | % 
|                                                                                                    |  |                            |       |   |      |   |       |                           |  |    |      |  |   |       |   |  |                           |       |   |  |    |   
|Cost of software related revenues as a % of software related revenues                               |  |                            | 10    | % |      |   | 11    | %                         |  | (1 | )%   |  |   | 10    | % |  |                           | 11    | % |  | (1 | )%
|Cost of professional services and other revenues as a % of professional services and other revenues |  |                            | 87    | % |      |   | 53    | %                         |  | 34 | %    |  |   | 77    | % |  |                           | 60    | % |  | 17 | % 
|                                                                                                    |  |                            |       |   |      |   |       |                           |  |    |      |  |   |       |   |  |                           |       |   |  |    |   
|Total                                                                                               |  |                            | 26    | % |      |   | 22    | %                         |  |    |      |  |   | 25    | % |  |                           | 22    | % |  |    |   
|                                                                                                    |  |                            |       |   |      |   |       |                           |  |    |      |  |   |       |   |  |                           |       |   |  |    |   

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.

Although the cost of software-related revenue decreased by 9% and increased by 2% during the three and six months ended June 30, 2006, as compared to the corresponding periods of 2005, the cost of software
related revenues as percentage



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##### Table of Contents

of software related revenues remained relatively flat during the same three and six month periods ended June 30,
2006 and 2005.

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 revenues

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



| | · | Direct headcount-related costs such as salaries 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, including costs related to training.
| | - | --------------------------------------------------------------------------

The cost of professional services and other revenues increased by 41% and 29% during the three and six months ended June 30, 2006, respectively, as compared to the corresponding periods of 2005. This increase was
due to an increase in our professional services fixed-cost structure led by increases in headcount in both the United States and Europe, including the hiring of a Vice President of Professional Services in March 2006. The cost of professional
services and other revenues as a percentage of professional services and other revenues increased by 34% and 17% during the three and six months ended June 30, 2006, respectively, as compared to the corresponding periods of 2005. This increase
was due to the decrease in our professional services and other revenues combined with the increase in our fixed cost structure (as described above).

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 EndedJune 30, |       |   |      |   |       | Six Months EndedJune 30, |  |    |      | 
|                                                               |  | 2006                       |       |   | 2005 |   |       | PercentIncrease          |  |    | 2006 |  |   | 2005  |   |  | PercentIncrease |      
|Sales and marketing expenses (in thousands)                    |  | $                          | 2,248 |   |      | $ | 2,035 |                          |  | 10 | %    |  | $ | 4,404 |   |  | $               | 3,900 |   |  | 13 | %
|Sales and marketing expenses (as percentage of total revenues) |  |                            | 44    | % |      |   | 40    | %                        |  | 4  | %    |  |   | 41    | % |  |                 | 38    | % |  | 3  | %

Sales and marketing expenses consist primarily of the following:



| | · | Direct headcount-related costs such as salaries 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.
| | - | ------------------------------------------------------------------------

Sales and marketing expenses increased by approximately $213,000 (or 10%), and $504,000 (or 13%) during the three and six months ended June 30, 2006, respectively, as compared to the corresponding periods of
2005. As a percentage of total revenues, sales and marketing expenses increased by 4% and 3% during the three and six months ended June 30, 2006, respectively, as compared to the corresponding periods of 2005. These increases were due primarily
to the increase in direct and indirect headcount-related costs resulting from the hiring of additional sales and marketing personnel in both the United States and Europe, including the hiring of our Vice President of Marketing in the second quarter
of 2005, and our General Manager of Text Analysis in the fourth quarter of 2005, as well as higher costs for temporary labor and promotional



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##### Table of Contents

activities. Additionally, beginning January 1, 2006, sales and marketing expenses reflect stock-based compensation
expense related to employee stock options and employee stock purchases under SFAS 123(R), which amounted to $21,000 and $57,000 during the three and six months ended June 30, 2006, respectively. Prior to 2006, stock-based compensation expense
was not included in our statement of operations.

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

Research and Development, Net



|                                                            |  |                            |       |    |         |   |       |                          |  |    |         |  |   |        |    |  |                    |        |    |  |    |  
|----------------------------------------------------------- |  | -------------------------- | ----- | -- | ------- | - | ----- | ------------------------ |  | -- | ------- |  | - | ------ | -- |  | ------------------ | ------ | -- |  | -- | -
|                                                            |  | Three Months EndedJune 30, |       |    | Percent |   |       | Six Months EndedJune 30, |  |    | Percent | 
|                                                            |  | 2006                       |       |    | 2005    |   |       | Increase(Decrease)       |  |    | 2006    |  |   | 2005   |    |  | Increase(Decrease) |       
|Research and development (in thousands):                    |  |                            |       |    |         |   |       |                          |  |    |         |  |   |        |    |  |                    |        |    |  |    |  
|Research and development                                    |  | $                          | 1,643 |    |         | $ | 1,462 |                          |  | 12 | %       |  | $ | 3,304  |    |  | $                  | 2,714  |    |  | 22 | %
|Less - funded research                                      |  |                            | (594  | )  |         |   | (649  | )                        |  | (8 | )%      |  |   | (1,173 | )  |  |                    | (1,175 | )  |  | 0  | %
|                                                            |  |                            |       |    |         |   |       |                          |  |    |         |  |   |        |    |  |                    |        |    |  |    |  
|Research and development, net                               |  | $                          | 1,050 |    |         | $ | 813   |                          |  | 29 | %       |  | $ | 2,131  |    |  | $                  | 1,539  |    |  | 38 | %
|                                                            |  |                            |       |    |         |   |       |                          |  |    |         |  |   |        |    |  |                    |        |    |  |    |  
|Research and development (as percentage of total revenues): |  |                            |       |    |         |   |       |                          |  |    |         |  |   |        |    |  |                    |        |    |  |    |  
|Research and development                                    |  |                            | 32    | %  |         |   | 29    | %                        |  | 3  | %       |  |   | 31     | %  |  |                    | 26     | %  |  | 5  | %
|Less - funded research                                      |  |                            | (12   | )% |         |   | (13   | )%                       |  | (1 | )%      |  |   | (11    | )% |  |                    | (11    | )% |  | 0  | %
|                                                            |  |                            |       |    |         |   |       |                          |  |    |         |  |   |        |    |  |                    |        |    |  |    |  
|Research and development, net                               |  |                            | 20    | %  |         |   | 16    | %                        |  | 4  | %       |  |   | 20     | %  |  |                    | 15     | %  |  | 5  | %
|                                                            |  |                            |       |    |         |   |       |                          |  |    |         |  |   |        |    |  |                    |        |    |  |    |  





Research and development expenses consist primarily of the following:



| | · | Direct headcount-related costs such as salaries 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.
| | - | -------------------------------------

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

Gross research and development expenses

Gross research and development expenses increased by approximately $181,000 (or 12%) and $590,000 (or 22%) during the three and six months ended June 30, 2006, respectively, as compared to the corresponding
periods of 2005. As a percentage of total revenues, gross research and development expenses increased by 3% and 5% during the three and six months ended June 30, 2006, as compared to the corresponding periods of 2005. These increases were due
primarily to the increase in direct and indirect headcount-related costs resulting from the hiring of additional development personnel, as well as higher costs for temporary labor. Additionally, beginning January 1, 2006, research and
development expenses reflect stock-based compensation expense related to employee stock options and employee stock purchases under SFAS 123(R), which amounted to $23,000 and $46,000 during the three and six months ended June 30, 2006,
respectively. Prior to 2006, stock-based compensation expense was not included in our statement of operations.

We expect our combined
research and development expenses to increase in future periods as we place increased efforts toward further product development.

Funded research



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##### Table of Contents

Funded research decreased by $55,000 (or 8%) and remained flat during the three and six months ended
June 30, 2006, respectively, as compared to the corresponding periods of 2005. As a percentage of total revenues, funded research remained flat during the three and six months ended June 30, 2006, as compared to the corresponding periods
of 2005. The decrease during the three months ended June 30, 2006, as compared to the corresponding period of 2005 was due to the voluntary termination of certain billable research staff and the completion of several research projects during
the quarter just ended.

Research and development, net

As a result of the increase in gross research and development costs and the decrease in the offsetting fees generated from funded research, total net
research and development costs decreased during the three and six months ended June 30, 2006, as compared to the corresponding period of 2005.

During the remainder of 2006, we expect to increase our research and development expenses by investing in development of our product lines in order to set the foundation for future growth.

General and Administrative



|                                                       |  |                            |       |   |      |   |     |                          |  |    |      |  |   |       |   |  |                 |       |   |  |    |  
|------------------------------------------------------ |  | -------------------------- | ----- | - | ---- | - | --- | ------------------------ |  | -- | ---- |  | - | ----- | - |  | --------------- | ----- | - |  | -- | -
|                                                       |  | Three Months EndedJune 30, |       |   |      |   |     | Six Months EndedJune 30, |  |    |      | 
|                                                       |  | 2006                       |       |   | 2005 |   |     | PercentIncrease          |  |    | 2006 |  |   | 2005  |   |  | PercentIncrease |      
|General and administrative (in thousands)              |  | $                          | 1,040 |   |      | $ | 817 |                          |  | 27 | %    |  | $ | 2,129 |   |  | $               | 1,891 |   |  | 13 | %
|General and administrative (as percentage of revenues) |  |                            | 20    | % |      |   | 16  | %                        |  | 4  | %    |  |   | 20    | % |  |                 | 18    | % |  | 2  | %



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 CEO, and the Board of Directors:



| | · | Direct headcount-related costs such as salaries and direct employee benefits,
| | - | -----------------------------------------------------------------------------



| | · | General corporate costs such as audit fees, legal fees, operating taxes and licenses,
| | - | -------------------------------------------------------------------------------------



| | · | 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.
| | - | -------------------------------------

General and
administrative expenses increased by $223,000 (or 27%) and $238,000 (or 13%) during the three and six months ended June 30, 2006, respectively, as compared to the corresponding periods of 2005. As a percentage of total revenues, general and
administrative expenses increased by 4% and 2% during the three and six months ended June 30, 2006, respectively, as compared to the corresponding periods of 2005. The increase in dollars was due primarily to the following offsetting factors:



| | · | Beginning January 1, 2006, general and administrative expenses reflect stock-based compensation expense related to employee stock options and employee stock purchases under
SFAS 123(R), which amounted to $122,000 and $224,000 during the three and six months ended June 30, 2006. Previously, stock-based compensation expense was not included in the statement of operations.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | An increase of approximately $100,000 in headcount-related costs such as salaries and direct employee benefits.
| | - | ---------------------------------------------------------------------------------------------------------------

Currently, we will be required to comply with of section 404 of the Sarbanes-Oxley as of December 31, 2007, however, regulators are discussing
potential changes to the current rules and regulations under Sarbanes-Oxley for non-accelerated and small-business filers, which may delay or remove the requirements currently in place. We are proceeding under the expectation that we will be
required to comply as of December 31, 2007, and therefore, we will incur some expenses during the remainder of 2006 in meeting the anticipated compliance requirements.

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



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Other Income (Expense)

Other income (expense) consists of the following:



|                                            |  |                            |     |   |                          |   |     |      |  |      |     |  |   |      |  
|------------------------------------------- |  | -------------------------- | --- | - | ------------------------ | - | --- | ---- |  | ---- | --- |  | - | ---- | -
|                                            |  | Three Months EndedJune 30, |     |   | Six Months EndedJune 30, |  
|                                            |  |                            |     |  
|                                            |  | 2006                       |     |   | 2005                     |   |     | 2006 |  | 2005 |    
|Interest income                             |  | $                          | 120 |   |                          | $ | 66  |      |  | $    | 211 |  | $ | 107  |  
|Interest expense                            |  |                            |    |   |                          |   | (2  | )    |  |      |    |  |   | (8   | )
|Foreign exchange transaction gains (losses) |  |                            | (8  | ) |                          |   | (59 | )    |  |      | 13  |  |   | (177 | )
|Other                                       |  |                            |    |   |                          |   |    |      |  |      |    |  |   | 9    |  
|                                            |  |                            |     |   |                          |   |     |      |  |      |     |  |   |      |  
|                                            |  | $                          | 112 |   |                          | $ | 5   |      |  | $    | 224 |  | $ | 69   |  
|                                            |  |                            |     |   |                          |   |     |      |  |      |     |  |   |      |  

Interest income

The increase in interest income for the three and six months ended June 30, 2006, as compared to the corresponding periods of 2005, was a result of both increased invested cash balances and the investment of a
greater portion of our cash reserves into higher yielding instruments.

Interest expense

The decrease in interest expense for the three and six months ended June 30, 2006, as compared to the corresponding periods of 2005, was due to the
reduction in the outstanding balance of our equipment loan with Silicon Valley Bank, which was fully paid as of March 31, 2006.

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 Other Comprehensive Income (Loss) during the period in which the exchange rates fluctuate.

We incurred a foreign
exchange transaction loss of $8,000 during the three months ended June 30, 2006, as compared to a $59,000 loss during the same period in the prior year. We incurred a foreign exchange transaction gain of $13,000 during the six months ended
June 30, 2006, as compared to a $177,000 loss during the same period in the prior year. These changes in foreign exchange transaction gains and losses are due to changes in foreign currency exchange rates, and changes in the strength of the
U.S. dollar which impacts U.S. dollar denominated intercompany balances, specifically those intercompany amounts due from our international subsidiaries to the U.S. parent company that are expected to be settled within the foreseeable future.

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

Income Tax Expense

Income tax benefit and expense for the three and six months ended June 30, 2006 were minor and changed slightly as compared to
the corresponding periods of 2005, which is due to the incurrence of net losses in the three and six months ended June 30, 2006. Changes in income tax expense and benefit from period to period are attributed primarily to relative changes in the
mix of operating income and loss generated in the various tax jurisdictions in which we operate.

The Internal Revenue Code contains
provisions that limit the net operating loss and credit carryforwards available to be used in any given year upon the occurrence of certain events, including significant changes in ownership interests.

Deferred tax assets, which have arisen primarily as a result of these net operating losses and other tax credits, also reflect the effect of temporary
differences between the tax basis of assets and liabilities and the corresponding financial statement amounts.



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Due to the uncertainty of our ability to utilize our deferred tax assets, a valuation allowance has been
established for financial reporting purposes equal to the amount of the net deferred tax assets. In the future, we will continue to evaluate the need for, and the amount of, any valuation allowance on deferred tax assets based on whether the facts
and circumstances at the time indicate it is more likely than not that a portion or all of the deferred tax assets will ultimately be realized.

Liquidity and Capital Resources

Cash, cash equivalents, and short and long-term investments increased from $9.9 million at
December 31, 2005 to $11.1 million at June 30, 2006. Our working capital decreased from $7.4 million at December 31, 2005 to $5.9 million at June 30, 2006. This decrease was due to the movement of $1.0 in marketable securities
from being short-term investments to that of long-term investments, which was purely a result of the underlying maturities of the investments. The remaining decrease in working capital was a result of an increase in spending on our information
technology infrastructure, and the incurrence of a net loss during the three and six months ended June 30, 2006.

We generated $2.1
million in cash from operating activities during the six months ended June 30, 2006 compared to $0.7 million generated from operating activities in corresponding period of 2005. The increase in operating cash inflows primarily relates to the
decrease in accounts receivable, net, which was mainly due to collections on the unusually high December 31, 2005 accounts receivable balance that resulted in part from the large license sale made in the fourth quarter of 2005, as well as
increases in other net working capital components, other than cash and accounts receivable.

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



|                                                        |  |                           |       |   |      |   |      |  
|------------------------------------------------------- |  | ------------------------- | ----- | - | ---- | - | ---- | -
|                                                        |  | Six Months Ended June 30, |      
|                                                        |  | 2006                      |       |   | 2005 |  
|Net income (loss)                                       |  | $                         | (458  | ) |      | $ | 668  |  
|Add: non-cash expenses                                  |  |                           | 878   |   |      |   | 601  |  
|Adjust for: changes in operating assets and liabilities |  |                           | 1,691 |   |      |   | (541 | )
|                                                        |  |                           |       |   |      |   |      |  
|Net cash provided by operating activities               |  | $                         | 2,111 |   |      | $ | 728  |  
|                                                        |  |                           |       |   |      |   |      |  

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

Investing activities resulted
in net cash outflows of $2.0 million for the six months ended June 30, 2006 compared to $0.8 million for the corresponding period in 2005. The higher use of cash in investing activities in the six months ended June 30, 2006 as compared to
corresponding period in 2005 was due to an increase in capital expenditures of $1.0 million, an increase of 0.6 million in marketable securities having maturities greater than 90 days, offset by a $0.5 million payment made in the corresponding
period of 2005 to Lucent Technologies Inc. in acquiring title to the software code underlying the S programming language. The increase in capital expenditures was predominantly related to investments we made in our information technology
infrastructure, and we expect this investment to continue in future quarters of 2006.

Financing activities resulted in a net cash inflow
of $382,000 in the six months ended June 30, 2006, compared to a $102,000 cash inflow in the corresponding period of 2005. The increase in cash flows from financing activities relates to an increase in the proceeds received from the exercise of
employee stock options and contributions to our employee stock purchase plan during the six months ended June 30, 2006, as compared to the corresponding period in 2005.

In March 2006, 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 March 24, 2007. 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 and bears interest at the prime
rate plus 1%. At June 30, 2006, the prime rate was 8.25%, and no amounts had been borrowed under the line of credit facility.

We also
have an equipment loan facility with Silicon Valley Bank, secured by underlying assets. We originally borrowed $450,000 under this facility in 2002. We entered the first quarter of 2006 with a $32,000 outstanding balance, which was fully paid as of
March 31, 2006. This loan called for interest equal to prime rate plus 1%, and was repaid over a 42-month period, ending in March 2006. As of June 30, 2006, future maturities of debt under these arrangements were zero.

These credit facilities contain covenants that limit our net losses and restrict the amount of capital expenditures not financed through the equipment
term loan. In addition, we are prohibited under these facilities from paying dividends. We were in compliance with these covenants as of June 30, 2006.



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At June 30, 2006, our principal unused sources of liquidity consisted of cash, cash equivalents,
short and long-term investments totaling $11.1 million, and our bank line of credit. Our liquidity needs are principally for financing of accounts receivable, capital assets, strategic investments, product development, and flexibility in a dynamic
and competitive operating environment.

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

Commitments

As of June 30, 2006, our contractual commitments associated with our operating
leases, primarily for our office space in Seattle, Washington, as well as other domestic and international locations, are as follows (in thousands):



|                            |  |                   |     |      |   |      |  |      |    |      |   |       |  |   |   |  |   |      
|--------------------------- |  | ----------------- | --- | ---- | - | ---- |  | ---- | -- | ---- | - | ----- |  | - | - |  | - | -----
|                            |  | Remainder of 2006 |     | 2007 |   | 2008 |  | 2009 |    | 2010 |   | Total
|Operating lease obligations |  | $                 | 345 |      | $ | 531  |  | $    | 69 |      | $ | 63    |  | $ | 5 |  | $ | 1,013
|                            |  |                   |     |      |   |      |  |      |    |      |   |       |  |   |   |  |   |      

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

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

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

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



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



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



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



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



| |  |  | market awareness and acceptance of our products;
| | - |  | ------------------------------------------------



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



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



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



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



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



| |  |  | losses associated with expected 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 The Sarbanes-Oxley Act of 2002, or SOX;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



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



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



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



| |  |  | we could incur tax charges in the future if a taxing authority in a jurisdiction in which we have not registered to pay taxes deems that we have established nexus.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 eight months from our initial contact with a current or potential data analysis product customer, and much longer
for current or potential text analysis customers;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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

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

We may incur losses in future periods, which could decrease our cash position and cause a decrease in our stock price.

As of June 30, 2006, we had an accumulated deficit of almost $27 million. We incurred net losses in the first and second quarters of 2006 and had quarters in 2005 and 2004 in which we achieved only slight profits. Because of this, and
the fact that we are increasing our spending, we may experience losses and negative cash flows in the near term, even if sales of our products and services continue to grow.

We expect our expenses to grow at a higher rate in 2006 than they did in 2005, in part due to our decision to increase our product development, sales and
professional services personnel costs to expand our market position, create new product and service offerings, and further increase acceptance and sales of our solutions as well as our efforts to enhance our information technology resources and
improve our internal controls.We may not be able to increase our revenues sufficiently to keep pace with these growing expenditures, if at all, and as a result we may be unable to achieve or maintain profitability in the future.

Further, in 2006 we have begun to recognize stock option and stock purchase awards as compensation expense in accordance with FAS 123(R). Our reported
expenses will increase as a result of this practice, and because the calculations we must use to determine the amount of expense consider many factors beyond our control, our ability to predict the amount of expense associated with FAS 123(R)
requirements will be limited.

In addition, if we are unable to grow our revenues, we may be forced to discontinue certain development
projects, which could limit our future product development opportunities.

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

Our future performance depends largely on the efforts and abilities of
our key technical, sales, customer support, accounting and managerial personnel and on our ability to attract and retain them. We have recently announced plans to add significantly to our headcount. As a result, our ability to execute our business
strategy will depend on our ability to recruit personnel and retain our existing personnel, including executive officers. Departures of key executives could adversely impact our reputation and our ability to execute our business strategy. Due to
competition for qualified employees, we may have difficulty recruiting officers and employees 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.







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

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

License and maintenance revenues from the S-PLUS product and add-on modules account for a significant portion of our license
revenues. Other products, such as InFact and Insightful Miner, have not contributed consistent revenues to date. We expect license and maintenance revenues from the S-PLUS product family to continue to account for a 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 the S-PLUS product family, our revenues and operating results will be adversely affected.

If we are unable to compete successfully in the statistics, data mining and text 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 Institute. 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.

In the data mining and text analysis market, we face competition from many companies, including SAS Institute, SPSS, IBM, NCR, Autonomy, FAST, Inxight,
ClearForest and Attensity, many of which 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, like 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.

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, like providers of on-line analytical processing,
business intelligence and analytical application software, as well as from companies in other sectors. An increase in competitive pressures in our market or our failure to compete effectively may result in pricing reductions, reduced gross margins
and loss of market share.

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

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

Our business model has been based
upon customers agreeing to pay a fee to license software developed and distributed by us. In recent years, there has been a growing challenge to the commercial software model. Under the non-commercial software model, open source software produced by
loosely associated groups of unpaid programmers and made available for license to end users without charge is distributed at nominal cost by firms that earn revenue on complementary services and products, without having to bear the full costs of
research and development for the open-source software. The most notable example of open source software is the Linux operating system, which has presented a competitive challenge to leading vendors of proprietary operating systems. In the markets we
serve, we face similar challenges because of the availability of R, an open source implementation of the S language that forms the core of our S-PLUS product. While we believe our products provide customers with significant advantages, the
popularization of the non-commercial software model continues



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to pose a significant challenge to our business model. To the extent open-source software gains increasing market
acceptance, sales of our products may decline, we may have to reduce the prices we charge for our products, and revenue and operating margins may consequently decline.

If we do not expand our international operations and successfully overcome the risks inherent in international business activities, our operating results could be negatively affected.

To be successful, we must continue to expand our international operations and enter new international markets. This expansion may be delayed as a result
of operating expense reduction measures and general economic conditions. 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 not be able to maintain or increase international market demand for our
solutions. We, or our VARs or distributors, may be unable to sustain or increase international revenues from licenses or from consulting 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.

If we are unable to penetrate new end-user markets with our
current and future products, the growth of our business will be limited, and, to the extent we need to enter new markets to offset declines in existing markets, our operating results could be negatively affected.

We focus our statistics business on two vertical markets: financial services and life sciences. In order to grow our business, we will need to expand into
new end-user markets within these two vertical markets for our statistics software and services, and we must simultaneously develop and sell new products that address these and other markets. We will need to simultaneously invest in the scalability
and deployability of our statistics product offerings and in the further development and enhancement of our data mining and text analysis products. These simultaneous investments may strain our financial resources and diffuse managements time
and attention. If any of these initiatives fails, our business will not grow and could fail.

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

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

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





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

Many potential customers are not yet aware of the benefits of text analysis solutions
utilizing relationship search capabilities, and our product may not achieve market acceptance.

Our text analysis product, InFact,
was released in 2002 and has not contributed substantial revenues to date. The market for relationship search solutions like InFact is still emerging, with many competitors coming to market with alternative solutions. Growth in demand for and
acceptance of these solutions, if any, remains uncertain. Even if this market grows, businesses may purchase our competitors solutions or develop their own. If InFact does not achieve market acceptance, our business may not grow. If we are
unable to maintain our current level of pricing or renewals for our InFact, future revenue streams generated by our Text Analysis products may decrease.

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. During the fiscal years 2001 through 2003, these contracts generated from $4.3 to $4.8 million annually in offsets to our research and development expenses.
During 2004, we began realigning our research and development efforts to ensure that we only pursue projects that directly support our business strategy. As a result of this realignment, we have applied for and received fewer government research
contracts, and research contracts generated $2.9 million and $2.2 million in 2004 and 2005, respectively. Further reductions in these offsets to our research and development expenses are possible and would negatively affect our operating results. We
may not receive new funded research contracts or any renewals of government-funded projects currently in process, and we may decide to cancel or reassign certain ongoing projects that are not aligned with our core business needs. The personnel and
other costs associated with these programs are relatively fixed in the short run, and a sudden cancellation or non-renewal of a major funding program or multiple smaller programs would be harmful to our operating results. A substantial portion of
the research grant money we receive is granted to us based on our status as a small business, the definition of which varies depending on the individual contract terms. If the number of our employees or the amount of our revenues ever grows beyond
the limits prescribed in any of these contracts, we will no longer be eligible for such research contracts and we will have to incur certain research and development expenses without the benefit of offsets.

Furthermore, a significant portion of our license revenues come from U.S. government entities, as well as 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 unable
to expand our sales organization, which could harm our ability to expand our business.

To date, we have taken smaller orders for
our desktop products primarily through our telesales department while we have relied on our field sales force to sell our server-based solutions and generate orders for multiple desktop licenses. We believe our future revenue growth will depend in
large part on recruiting, training and retaining both telesales and direct sales personnel. Competition for such personnel in the software industry is intense. Our growth will further depend on expanding our indirect distribution channels. These
indirect channels include value added resellers, or VARs, distributors, original equipment manufacturer, or OEM, partners, system integrators and consultants. If we experience difficulty in recruiting and retaining qualified telesales and direct
sales personnel and in establishing third-party relationships with VARs, distributors, OEM partners and systems integrators and consultants, our sales could be reduced or our sales growth limited. Even if we successfully expand our sales force and
other distribution channels, the expansion may not result in expected revenue growth.

Our sales cycle is variable, and 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 statistics, data mining and text analysis software and services is discretionary, involves a significant commitment of its resources and is influenced by its budget cycles. Our sales cycles can be variable,
typically ranging between one and eight months from our initial contact with a potential customer to the issuance of a purchase order or signing of a license or services agreement, although the amount of time varies substantially from customer to
customer, making our revenues difficult to predict in the short term. Occasionally sales require substantially more time, and sales cycles have recently shown to be substantially longer for higher-priced orders and for our text analysis product,



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InFact. In addition, sales delays could cause our operating results for any given period to fall below the expectations
of securities analysts or investors, which could result in a decrease in our stock price.

Our services business can be dependent on a few large
customers, the unexpected loss of which would affect our operating results and could cause a decline in our stock price.

We perform
consulting projects primarily on a time-and-materials basis, under which a customer may order us to cease work at any time. When the magnitude of any such project requires us to allocate a significant portion of our consulting time to its
performance during a reporting period, the unplanned or otherwise untimely cessation of the project would create a shortfall in revenue that would result in a negative impact on operating results for the services segment. We currently perform
consulting services for one customer that accounted for 8.9% of total revenues during 2005 and continues to contribute a large amount to our revenues in 2006. Revenues to this or other customers may comprise a significant portion of our total
revenue in future quarters. We have allocated resources to performing services for this customer such that we have limited, and may continue to limit, our ability to pursue other opportunities. If we cease performing services for this customer prior
to the time that we expect these services to cease, 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.

Although regulators are discussing potential changes to the current rules and regulations under
Sarbanes-Oxley for non-accelerated and small-business filers which may delay or remove the requirements currently in place, we are proceeding with the expectation that small companies such as ours will be required to comply with the provisions of
Section 404 of the Sarbanes-Oxley Act of 2002 (SOX 404) for the fiscal year ending December 31, 2007, therefore we will begin to incur costs of compliance in the second half of 2006 and, unless there are regulatory changes before then, we
will incur significant compliance related expenditures in 2007 and beyond, putting us at a disadvantage with private companies and public companies that are not subject to the provisions of SOX 404, such as those registered in other countries.

SOX 404 requires that we furnish an internal controls report of managements assessment of the design and effectiveness of our
internal controls as part of our Annual Report. Our auditors will then be required to attest to, and report on, managements assessment. In order to issue our report, our management must document both the design of our internal controls and the
testing processes that support managements evaluation and conclusion. This process will likely require us to hire additional personnel and engage outside advisory services, which will result in additional accounting and legal expenses. 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 requirements that have been applied to large
companies. Accordingly, we may encounter problems or delays in completing the review and evaluation, the implementation of improvements and the receipt of an attestation by our independent auditors.

Compliance with SOX 404 will require a significant amount of management, including executive, effort and attention that could otherwise be focused on
issues directly impacting the non-compliance related operations and business strategy of the company.

We may have difficulty implementing in a
timely manner the internal controls necessary to allow our management to report, in accordance with SOX 404, on the effectiveness of our internal controls, and these reports may not reveal all material weaknesses or significant deficiencies with our
internal controls.

We have implemented efforts to improve our internal controls, but they might not prove sufficient. We continue
to evaluate our operational, financial and accounting systems and our managerial controls and procedures to determine what additional changes, if any, might help us to manage our current operations better. We have incurred significant expenditures
to enhance our information technology resources. Even with these additional expenditures, we might not be able to sufficiently enhance our systems, procedures and controls.

Additionally, during our assessment of internal controls, certain deficiencies may be discovered that will require remediation. This remediation may
require implementing additional controls, the costs of which could have a material adverse effect on our results of operations. If we are unable to implement the requirements of Section 404 in a timely manner or with adequate compliance, in
addition to receiving an adverse opinion from our auditors, 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.

We could incur charges in the future if a taxing authority in a jurisdiction in which we have not registered to pay taxes deems that we have established nexus.



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We generate sales in almost every state. There is a great variation in the tax rules from state to state,
including the rules that determine whether a company has established nexus in a particular jurisdiction. We are registered in several states and local jurisdictions and we remit required state and local taxes on related business operations in those
states. In the second quarter of 2006, we began a comprehensive examination of the tax rules for the various jurisdictions where we generate sales. In the course of this investigation, we preliminarily concluded that some jurisdictions may have
a basis to claim that we had taxable nexus for a period of time and we may not have appropriately registered for business nor collected and remitted required sales taxes for business activities. We have begun to further analyze current and past
business activities for a more definitive conclusion on any potentially uncollected and unpaid sales taxes and to ensure we are appropriately registered for future business activities. We expect that as a result of the further examination we will
conclude that there were taxes that we should have collected and remitted. If this is the case, we may seek payment from our customers or otherwise verify that they paid the appropriate taxes through other means, thereby, if successful, eliminating
our obligation to collect and remit the taxes. Additionally, as a remedy, we may apply for amnesty, settlements or exemption from previously unpaid taxes that may reduce the amounts owing, if any. In states where we are not currently registered, we
have not received any notification of uncollected and unpaid taxes, and we have not recorded any provisions for any potentially related obligations. Depending on the results of our examination and subsequent efforts to minimize amounts owed, we
could be obligated to pay significant amounts of state and local taxes, plus related interest and penalties, however, the amount is not estimable at this time due to the early state of our examination and the numerous factors, jurisdictions and
assumptions involved

Rapid changes in technology could render our products obsolete or unmarketable, and we may be unable to introduce new products
and services successfully and in a timely manner which would be detrimental to our operating results.

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

To be successful, we must continue to enhance our current product line and develop new products that successfully respond to changing customer needs, technological developments and competitive product offerings. We
may not be able to successfully develop or license the applications necessary to respond to these changes, or to integrate new applications with our existing products. Past or future reductions in our research and development personnel may harm our
ability to innovate and compete. We may not be able to introduce enhancements or new products successfully or in a timely manner in the future. If we delay release of our products and product enhancements, or if they fail to achieve market
acceptance when released, it could harm our reputation and our ability to attract and retain customers, and our revenues may decline. In addition, customers may defer or forego purchases of our products if competitors, our major hardware, systems or
software vendors or we introduce or announce new products or product enhancements. 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.

General or specific economic conditions could adversely affect our
revenue growth and ability to forecast revenue.

We focus our statistics business primarily on the financial services and life
sciences markets and are thus sensitive to changes in the specific economic conditions that affect them. A substantial change in the economic condition of either of these markets or other markets into which we sell our products 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, data mining and text 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 experience difficulties in
collecting outstanding receivables from our customers.

If we are unable to develop and maintain effective long-term relationships with our key
partners, or if our key partners fail to perform, our ability to sell our solution will be limited.

We rely on our existing
relationships with a number of key partners, including distributors and third-party technology vendors that are important to worldwide sales and marketing of our solutions. In addition, to be successful and to more effectively sell our products to
larger customers, we must develop successful new relationships with other key partners. These key partners often provide enterprise software, consulting, implementation and customer support services, and endorse





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our solution during the competitive evaluation stage of the sales cycle. Although we seek to maintain relationships with
our key partners, and to develop relationships with new partners, many of these existing and potential key partners have similar, and often more established, relationships with our competitors. These existing and potential partners, many of which
have significantly greater resources than we have, 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 solution.

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 on InFact technology and our rights in the software
code underlying the S programming language that we purchased from Lucent Technologies Inc. in January 2004. To protect our proprietary rights, we rely primarily on a combination of patent, copyright, trade secret and trademark laws,
confidentiality agreements with employees and third parties and protective contractual provisions such as those contained in license agreements with consultants, vendors and customers, although we have not signed these agreements in every case.
Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products and obtain and use information that we regard as proprietary. Historically, our products have not been physically copy-protected. In order
to retain exclusive ownership rights to all software developed by us, we license all software and provide it in executable code only, with contractual restrictions on copying, disclosure and transferability. As is customary in the industry, we
generally license our products to end-users by use of a shrink-wrap license. Certain specialized products may utilize a written, signed license agreement with the customer. The source code for most of our products is protected as a trade
secret and as unpublished copyrighted work. Other parties may breach confidentiality agreements and other protective contracts we have entered into, 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.

Delivery of our solutions 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 solution 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.

Intellectual property claims and litigation could 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



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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.

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

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

Our stock price may be volatile.

The price of our common stock has been volatile over the past two years. Our common stock reached a high of $5.20 per share on May 14, 2004 and
traded as low as $1.13 per share on September 1, 2004. As a result of fluctuations in the price of our common stock, you may be unable to sell your shares at or above the price you paid for them. The trading price of our common stock could be
subject to fluctuations for a number of reasons, including



| |  |  | future announcements concerning us or our competitors;
| | - |  | ------------------------------------------------------



| |  |  | actual or anticipated quarterly variations in operating results;
| | - |  | ----------------------------------------------------------------



| |  |  | changes in analysts earnings projections or recommendations;
| | - |  | -------------------------------------------------------------



| |  |  | announcements of technological innovations;
| | - |  | -------------------------------------------



| |  |  | the introduction of new products;
| | - |  | ---------------------------------



| |  |  | changes in product pricing policies by us or our competitors;
| | - |  | -------------------------------------------------------------



| |  |  | loss of key personnel;
| | - |  | ----------------------



| |  |  | deficiencies in our internal controls;
| | - |  | --------------------------------------



| |  |  | proprietary rights litigation or other litigation; or
| | - |  | -----------------------------------------------------



| |  |  | changes in accounting standards that adversely affect our revenues and earnings.
| | - |  | --------------------------------------------------------------------------------

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

ITEM 3.        CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and
Procedures

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



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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.

PART II. OTHER INFORMATION

ITEM 6.        Exhibits

(a) See Index to Exhibits.





































































































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SIGNATURES

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



|                |  | 
|--------------- |  | 
|August 14, 2006 |  | 



INSIGHTFUL CORPORATIONBy:

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






By:

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
















































































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EXHIBIT INDEX



|               |  |                                                                                                                                                    
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                        
|3.1            |  | Amended and Restated Certificate of Incorporation of the registrant (Exhibit 3.1) (A)                                                              
|               | 
|3.2            |  | Amended and Restated Bylaws of the registrant (Exhibit 3.2) (A)                                                                                    
|               | 
|31.1           |  | Certification of Chief Executive Officer of Insightful Corporation as Required by Section 302 of Sarbanes-Oxley Act of 2002                        
|               | 
|31.2           |  | Certification of Chief Financial Officer of Insightful Corporation as Required by Section 302 of Sarbanes-Oxley Act of 2002                        
|               | 
|32.1           |  | Certification of Financial Statements by Chief Executive Officer Insightful Corporation as Required by Section 906 of Sarbanes-Oxley Act of 2002   
|               | 
|32.2           |  | Certification of Financial Statements by Chief Financial Officer of Insightful Corporation as Required by Section 906 of Sarbanes-Oxley Act of 2002



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



















































































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