**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**
| **x**      | ** ** | **Quarterly report  pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for  the quarterly period ended September 30, 2006** |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                      |
| ** ** | ** ** | **or**                                                                                                                                          |
| ** ** | ** ** | ** **                                                                                                                                      |
| **o**      | ** ** | **Transition report  pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                   |

 

**Commission file number:  0-26994**

**ADVENT SOFTWARE, INC.**

(Exact name of registrant as specified in its charter)

| **Delaware**                                                    |   | **94-2901952**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (IRS Employer  Identification Number) |

 

**600 Townsend Street, San Francisco, California 94103**

(Address of principal executive offices and zip code)

**(415) 543-7696**

(Registrant’s telephone number, including area code)

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

Yes x  No o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large acceleratedfiler o    Acceleratedfiler x    Non-accelerated filer o

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

Thenumber of shares of the registrant’s Common Stock outstanding as of October 31,2006 was 27,676,350.

 

----

**INDEX**
| **PART I. FINANCIAL  INFORMATION** | ** ** |
|------------------------------------|------------|
| Item 1.                            |       | Financial  Statements |   |
|                               |       | Condensed Consolidated  Balance Sheets |   |
|                               |       | Condensed Consolidated  Statements of Operations |   |
|                               |       | Condensed Consolidated  Statements of Cash Flows |   |
|                               |       | Notes to Condensed  Consolidated Financial Statements |   |
| Item 2.                            |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
| Item 3.                            |       | Quantitative  and Qualitative Disclosures About Market Risk |   |
| Item 4.                            |       | Controls  and Procedures |   |
| **PART  II. OTHER INFORMATION**    | ** ** |
| Item 1.                            |       | Legal  Proceedings |   |
| Item 1A.                           |       | Risk Factors |   |
| Item 2.                            |       | Unregistered  Sales of Equity Securities and Use of Proceeds |   |
| Item 3.                            |       | Defaults  Upon Senior Securities |   |
| Item 4.                            |       | Submission  of Matters to a Vote of Security Holders |   |
| Item 5.                            |       | Other  Information |   |
| Item 6.                            |       | Exhibits |   |
| **Signatures**                     | ** ** |

 

2

----

 

**PART I.FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**ADVENT SOFTWARE, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Inthousands)**

**(Unaudited)**
| ** **                                      | ** ** | **September 30  2006** | ** ** | **December 31  2005** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| **ASSETS**                                      | ** ** | ** **                  | ** ** | ** **                 | ** ** |
| Current assets:                                 |       |                        |       |                       |       |
| Cash and cash  equivalents                      |       | $                           | 32,628     |                       | $          | 70,941 |   |
| Marketable securities                           |       | 28,222                      |       | 92,491                     |       |
| Accounts receivable,  net                       |       | 33,930                      |       | 33,507                     |       |
| Prepaid expenses and  other                     |       | 15,177                      |       | 12,403                     |       |
| Total current assets                            |       | 109,957                     |       | 209,342                    |       |
| Property and equipment,  net                    |       | 25,225                      |       | 16,009                     |       |
| Goodwill                                        |       | 96,784                      |       | 94,335                     |       |
| Other intangibles, net                          |       | 5,929                       |       | 8,758                      |       |
| Other assets                                    |       | 12,578                      |       | 12,131                     |       |
|                                            |       |                        |       |                       |       |
| Total assets                                    |       | $                           | 250,473    |                       | $          | 340,575 |   |
|                                            |       |                        |       |                       |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**  | ** ** | ** **                  | ** ** | ** **                 | ** ** |
| Current liabilities:                            |       |                        |       |                       |       |
| Accounts payable                                |       | $                           | 5,242      |                       | $          | 3,945 |   |
| Accrued liabilities                             |       | 17,494                      |       | 20,637                     |       |
| Deferred revenues                               |       | 72,442                      |       | 64,839                     |       |
| Income taxes payable                            |       | 683                         |       | 2,801                      |       |
| Total current  liabilities                      |       | 95,861                      |       | 92,222                     |       |
| Deferred income taxes                           |       | 416                         |       | 1,122                      |       |
| Other long-term  liabilities                    |       | 9,784                       |       | 5,252                      |       |
|                                            |       |                        |       |                       |       |
| Total liabilities                               |       | 106,061                     |       | 98,596                     |       |
|                                            |       |                        |       |                       |       |
| Commitments and  contingencies (See Note 11)    |       |                        |       |                       |       |
|                                            |       |                        |       |                       |       |
| Stockholders’ equity:                      |       |                        |       |                       |       |
| Common stock                                    |       | 276                         |       | 311                        |       |
| Additional paid-in  capital                     |       | 308,383                     |       | 331,530                    |       |
| Accumulated deficit                             |       | (173,417                    | )          | (95,828                    | )          |
| Accumulated other  comprehensive income         |       | 9,170                       |       | 5,966                      |       |
| Total stockholders’  equity                |       | 144,412                     |       | 241,979                    |       |
|                                            |       |                        |       |                       |       |
| Total liabilities and stockholders’ equity |       | $                           | 250,473    |                       | $          | 340,575 |   |

 

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

3

----

 

**ADVENT SOFTWARE, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(Inthousands, except per share data)**

**(Unaudited)**
| ** **                                                     | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                                | ** ** | **2005**                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Net revenues:**                                              | ** ** | ** **                                              | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| License and development  fees                                  |       | $                                                       | 8,610      |                                                   | $          | 9,169 |   | $ | 26,589 |   | $ | 28,343 |   |
| Maintenance and other  recurring                               |       | 32,535                                                  |       | 27,771                                                 |       | 94,121 |   | 79,030 |   |
| Professional services  and other                               |       | 4,732                                                   |       | 5,836                                                  |       | 13,183 |   | 15,719 |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Total net revenues                                             |       | 45,877                                                  |       | 42,776                                                 |       | 133,893 |   | 123,092 |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| **Cost of revenues:**                                          | ** ** | ** **                                              | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| License and development  fees                                  |       | 356                                                     |       | 328                                                    |       | 1,141 |   | 968 |   |
| Maintenance and other  recurring                               |       | 7,740                                                   |       | 7,314                                                  |       | 23,680 |   | 21,951 |   |
| Professional services  and other                               |       | 6,894                                                   |       | 4,249                                                  |       | 16,967 |   | 12,729 |   |
| Amortization of  developed technology                          |       | 251                                                     |       | 641                                                    |       | 909 |   | 1,869 |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Total cost of revenues                                         |       | 15,241                                                  |       | 12,532                                                 |       | 42,697 |   | 37,517 |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Gross margin                                                   |       | 30,636                                                  |       | 30,244                                                 |       | 91,196 |   | 85,575 |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| **Operating expenses:**                                        | ** ** | ** **                                              | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales and marketing                                            |       | 12,115                                                  |       | 9,453                                                  |       | 36,466 |   | 29,990 |   |
| Product development                                            |       | 8,849                                                   |       | 6,800                                                  |       | 25,599 |   | 22,567 |   |
| General and  administrative                                    |       | 8,262                                                   |       | 7,947                                                  |       | 23,911 |   | 24,108 |   |
| Amortization of other  intangibles                             |       | 1,028                                                   |       | 997                                                    |       | 3,027 |   | 3,064 |   |
| Restructuring charges                                          |       | 54                                                      |       | 116                                                    |       | 320 |   | 1,719 |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Total operating  expenses                                      |       | 30,308                                                  |       | 25,313                                                 |       | 89,323 |   | 81,448 |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Income from operations                                         |       | 328                                                     |       | 4,931                                                  |       | 1,873 |   | 4,127 |   |
| Interest income and  other, net                                |       | 656                                                     |       | 977                                                    |       | 3,054 |   | 6,586 |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Income before income  taxes                                    |       | 984                                                     |       | 5,908                                                  |       | 4,927 |   | 10,713 |   |
| Provision for (benefit  from) income taxes                     |       | 32                                                      |       | 62                                                     |       | (1,030 | ) | 192 |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| **Net income**                                                 | ** ** | $                                                       | 952        |                                                   | $          | 5,846 |   | $ | 5,957 |   | $ | 10,521 |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Net income per share:                                          |       |                                                    |       |                                                   |       |   |   |   |   |
| Basic                                                          |       | $                                                       | 0.03       |                                                   | $          | 0.19 |   | $ | 0.20 |   | $ | 0.34 |   |
| Diluted                                                        |       | $                                                       | 0.03       |                                                   | $          | 0.18 |   | $ | 0.19 |   | $ | 0.33 |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Weighted average shares  used to compute net income per share: |       |                                                    |       |                                                   |       |   |   |   |   |
| Basic                                                          |       | 27,937                                                  |       | 30,602                                                 |       | 29,491 |   | 31,047 |   |
| Diluted                                                        |       | 29,448                                                  |       | 32,301                                                 |       | 30,882 |   | 32,091 |   |

 

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

4

----

 

**ADVENT SOFTWARE, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Inthousands)**

**(Unaudited)**
| ** **                                                                         | ** ** | **Nine Months Ended September 30** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
| **Cash flows from operating activities:**                                          | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                                      | 5,957      |   | $ | 10,521 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                   |       |   |   |
| Stock based  compensation                                                          |       | 10,097                                                 |       | — |   |
| Depreciation and  amortization                                                     |       | 10,109                                                 |       | 11,824 |   |
| Loss on dispositions of  fixed assets                                              |       | 138                                                    |       | 143 |   |
| Provision for (reversal  of) doubtful accounts                                     |       | 618                                                    |       | (191 | ) |
| Provision for (reversal  of) sales returns                                         |       | (1,390                                                 | )          | 1,957 |   |
| Deferred income taxes                                                              |       | (706                                                   | )          | (246 | ) |
| Unrealized loss (gain)  on investments                                             |       | 210                                                    |       | (3,384 | ) |
| Other                                                                              |       | (91                                                    | )          | 195 |   |
| Changes in operating  assets and liabilities:                                      |       |                                                   |       |   |   |
| Accounts receivable                                                                |       | (1,041                                                 | )          | 4,870 |   |
| Prepaid and other  assets                                                          |       | (1,850                                                 | )          | (116 | ) |
| Accounts payable                                                                   |       | 1,297                                                  |       | (35 | ) |
| Accrued liabilities                                                                |       | (3,143                                                 | )          | 2,598 |   |
| Deferred revenues                                                                  |       | 8,992                                                  |       | (822 | ) |
| Income taxes payable                                                               |       | (1,977                                                 | )          | (1,725 | ) |
| Other long-term  liabilities                                                       |       | 4,532                                                  |       | (1,138 | ) |
|                                                                               |       |                                                   |       |   |   |
| Net cash provided by  operating activities                                         |       | 31,752                                                 |       | 24,451 |   |
|                                                                               |       |                                                   |       |   |   |
| **Cash flows from investing  activities:**                                         | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| Net cash used in  acquisitions                                                     |       | —                                                 |       | (1,028 | ) |
| Purchases of property  and equipment                                               |       | (15,474                                                | )          | (4,460 | ) |
| Capitalized software  development costs                                            |       | (800                                                   | )          | (1,280 | ) |
| Purchases of marketable  securities                                                |       | (42,952                                                | )          | (105,187 | ) |
| Sales and maturities of  marketable securities                                     |       | 107,420                                                |       | 157,248 |   |
| Proceeds from sale of  other investments                                           |       | —                                                 |       | 3,791 |   |
| Change in restricted  cash                                                         |       | (1,256                                                 | )          | — |   |
| Other                                                                              |       | —                                                 |       | 3 |   |
|                                                                               |       |                                                   |       |   |   |
| Net cash provided by  investing activities                                         |       | 46,938                                                 |       | 49,087 |   |
|                                                                               |       |                                                   |       |   |   |
| **Cash flows from financing  activities:**                                         | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| Proceeds from issuance  of common stock                                            |       | 10,845                                                 |       | 13,505 |   |
| Repurchase of common  stock                                                        |       | (127,933                                               | )          | (52,585 | ) |
|                                                                               |       |                                                   |       |   |   |
| Net cash used in  financing activities                                             |       | (117,088                                               | )          | (39,080 | ) |
|                                                                               |       |                                                   |       |   |   |
| Effect of exchange rate  changes on cash and cash equivalents                      |       | 85                                                     |       | (99 | ) |
|                                                                               |       |                                                   |       |   |   |
| **Net change in cash and cash  equivalents**                                       |       | (38,313                                                | )          | 34,359 |   |
| **Cash and cash equivalents at  beginning of period**                              |       | 70,941                                                 |       | 21,177 |   |
| ** **                                                                         | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| **Cash and cash equivalents at end of period**                                     |       | $                                                      | 32,628     |   | $ | 55,536 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

5

----

 

**ADVENT SOFTWARE, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

**Note 1—Basis ofPresentation**

The condensed consolidated financial statements includethe accounts of Advent Software, Inc. and its wholly owned subsidiaries (“Advent”or the “Company”). All intercompany balances and transactions have beeneliminated.

Advent has prepared these condensed consolidatedfinancial statements in accordance with the rules and regulations of theSecurities and Exchange Commission (“SEC”) applicable to interim financialinformation. Certain information and footnote disclosures included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been omitted in these interim statements,pursuant to such SEC rules and regulations. These interim financial statementsshould be read in conjunction with the audited financial statements and relatednotes included in Advent’s Annual Report on Form 10-K for the year endedDecember 31, 2005. Interim results are not necessarily indicative of theresults to be expected for the full year, and no representation is madethereto.

These condensed consolidated financial statements includeall adjustments necessary to state fairly the financial position and results ofoperations for each interim period shown. All such adjustments occur in theordinary course of business and are of a normal, recurring nature. Certainprior year amounts have been reclassified to conform to the current yearpresentation. These reclassifications do not affect net revenues, net income orstockholders’ equity.

**Note 2—RecentAccounting Pronouncements**

InJune 2006, the Financial Accounting Standards Board (“FASB”) issued FASBInterpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes—AnInterpretation of FASB Statement No. 109, which prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax provision taken or expected to be taken in a tax return.FIN 48 will be effective beginning in the first quarter of 2007. The Company iscurrently evaluating the impact of FIN 48 on the Company’s condensedconsolidated financial statements.

InSeptember 2006, the FASB issued Statement of Financial Accounting Standards No.157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value,establishes a framework for measuring fair value in accordance with generallyaccepted accounting principles, and expands disclosures about fair valuemeasurements. The provisions of SFAS 157 will be effective in the first quarterof 2008. The Company is currently evaluating the impact of the provisions ofSFAS 157.

InSeptember 2006, the U.S. Securities and Exchange Commission issued StaffAccounting Bulletin (SAB) No. 108, “Considering the Effects of Prior YearMisstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 doesnot change the staff’s previous guidance in SAB 99 on evaluating themateriality of misstatements. SAB 108 requires companies to evaluate themateriality of identified unadjusted errors on each financial statement andrelated financial statement disclosure using both the “rollover” approach andthe “iron curtain” approach. The rollover approach quantifies misstatementsbased on the amount of the error in the current year financial statementwhereas the iron curtain approach quantifies misstatements based on the effectsof correcting the misstatement in the balance sheet at the end of the currentyear, irrespective of the misstatement’s year(s) of origin. Financialstatements would require adjustment when either approach results in quantifyinga misstatement that is material. Correcting prior year financial statements forimmaterial errors would not require previously filed reports to be amended. SAB108 is effective for interim periods of the first fiscal year ending afterNovember 15, 2006. The provisions of SAB 108 currently have no impact on theCompany’s condensed consolidated financial statements.

**Note3—Stock-Based Compensation**

**Description of Plans**

**Stock Option Plans**

Adventhas three stock option plans, the 2002 Stock Plan (the “Plan”), the 1998Non-statutory Stock Option Plan (the “Non-statutory Plan”) and the 1995Director Option Plan (the “Director Plan”).

**ThePlan.**   On May 18, 2005, the Company’sstockholders approved the amendment and restatement of Advent’s 2002 StockPlan, originally approved by the Board of Directors (the “Board”) andstockholders in February and May, respectively, of 2002. Under the Plan, theCompany may grant options to purchase common stock to employees, consultants

6

----

and directors. Options granted may be incentive stockoptions or non-statutory stock options and shall be granted at a price not lessthan fair market value on the date of grant. Fair market value (as defined inthe Plan) and the vesting of these options shall be determined by the Board ofDirectors. The options generally vest over 5 years and expire no later than 10years from the date of grant. Non-employee directors were eligible to receiveoption grants under the Director Plan, which terminated in November 2005.Effective April 1, 2005, each non-employee director became eligible to receiveawards under the 2002 Plan of (i) an initial option grant of 30,000 shares uponjoining the Board, which shall vest over four years with 25% of such sharesvesting after one year of service and in equal monthly installments over theensuing three years, and (ii) an annual grant of 12,000 shares vesting intwelve equal monthly installments. Unvested options on termination ofemployment are canceled and returned to the Plan.

The Plan permits theaward of restricted stock, restricted stock units (“RSU”), stock appreciationrights (“SAR”), performance shares, and performance units under the Plan.During the first nine months of 2006, Advent granted stock-settled RSU’s and SAR’s.The RSU’s are awards of restricted stock units that generally vest over fouryears in two equal installments on the second and fourth anniversaries of thedate of grant. Upon vesting, the RSU’s will convert into an equivalent numberof shares of common stock. The value of the RSU’s is based on the closingmarket price of the Company’s common stock on the date of grant and isamortized on a straight-line basis over the four-year requisite service period.A SAR is the right to receive the appreciation in fair market value of commonstock between the exercise date and the date of grant and generally vests over5 years.  Upon exercise, SAR’s will besettled in shares of Advent common stock. Unvested RSU’s and SAR’s ontermination of employment are canceled and returned to the Plan.

**Non-StatutoryPlan.**    In November 1998, the Boardapproved the 1998 Non-statutory Stock Option Plan and reserved 300,000 sharesof common stock for issuance thereunder. Under the Company’s 1998 Non-statutoryPlan, Advent may grant options to purchase common stock to employees andconsultants, excluding persons who are executive officers and directors.Options granted are non-statutory stock options and shall be granted at a pricenot less than fair market value on the date of grant. Fair market value (asdefined in the Non-statutory Plan) and the vesting of these options shall bedetermined by the Board. The options generally vest over 5 years and expire nolater than 10 years from the date of grant. Unvested options on termination ofemployment are canceled and returned to the Non-statutory Plan.

**Director Plan.**    Advent’s Director Plan which expired on November 16, 2005, provided for thegrant of non-statutory stock options to the Company’s non-employee directors (“outsidedirectors”). As noted above, effective April 1, 2005, option grants to outsidedirectors are issued under the 2002 Stock Plan.

A summary of the status of the Company’s stock optionand SAR’s activity for the nine months ended September 30, 2006 is as follows:
|                                     | ** ** | ** **              | ** ** | ** **   | ** ** | **Weighted**              | ** ** | ** **              | ** ** |
|-------------------------------------|------------|-------------------------|------------|--------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | ** **              | ** ** | **Weighted** | ** ** | **Average**               | ** ** | ** **              | ** ** |
| ** **                          | ** ** | ** **              | ** ** | **Average**  | ** ** | **Remaining**             | ** ** | **Aggregate**           | ** ** |
| ** **                          | ** ** | **Number of**      | ** ** | **Exercise** | ** ** | **Contractual Life** | ** ** | **Intrinsic**           | ** ** |
| ** **                          | ** ** | **Shares**              | ** ** | **Price**    | ** ** | **(in years)**       | ** ** | **Value**               | ** ** |
| ** **                          | ** ** | **(in thousands)** | ** ** | ** **   | ** ** | ** **                | ** ** | **(in thousands)** | ** ** |
| Outstanding at December  31, 2005   |       | 5,489                   |       | $            | 19.26      |                      |       |                    |       |   |
| Options & SAR’s  granted   |       | 847                     |       | $            | 28.71      |                      |       |                    |       |   |
| Options & SAR’s  exercised |       | (541                    | )          | $            | 17.39      |                      |       |                    |       |   |
| Options & SAR’s  canceled  |       | (351                    | )          | $            | 33.90      |                      |       |                    |       |   |
| Outstanding at  September 30, 2006  |       | 5,444                   |       | $            | 19.97      |                      | 6.40       |                    | $          | 89,408 |   |
| Exercisable at September 30, 2006   |       | 2,907                   |       | $            | 17.89      |                      | 4.64       |                    | $          | 54,198 |   |

 

Theaggregate intrinsic value is calculated as the difference between the exerciseprice of the underlying awards and the Company’s closing stock price of $36.21as of September 30, 2006 for options that were in-the-money as of that date.

Theweighted average grant date fair value of options & SAR’s, as determinedunder SFAS 123R, granted during the nine months ended September 30, 2006 was$13.84 per share. The total intrinsic value of options exercised duringthe nine months ended September 30, 2006 was $7.7 million. The total cashreceived from employees as a result of employee stock option exercises duringthe nine months ended September 30, 2006 was approximately $9.4 million.

TheCompany settles employee stock option exercises with newly issued commonshares.

Duringthe nine months ended September 30, 2006, the Company granted RSU’s under its2002 Stock Plan. A summary of the status of the RSU’s for the nine months endedSeptember 30, 2006 is as follows:

7

----

 

|                                    | ** ** | ** **              | ** ** | **Weighted**        | ** ** |
|------------------------------------|------------|-------------------------|------------|---------------------|------------|
| ** **                         | ** ** | ** **              | ** ** | **Average**         | ** ** |
| ** **                         | ** ** | **Number of**      | ** ** | **Grant Date** | ** ** |
| ** **                         | ** ** | **Shares**              | ** ** | **Fair Value** | ** ** |
| ** **                         | ** ** | **(in thousands)** | ** ** | ** **          | ** ** |
| Outstanding at  December 31, 2005  |       | —                  |       | $                   | —     |   |
|                               |       |                    |       |                |       |
| RSU’s granted                 |       | 257                     |       | $                   | 29.19      |   |
| RSU’s canceled                |       | (4                      | )          | $                   | 28.04      |   |
|                               |       |                    |       |                |       |
| Outstanding at  September 30, 2006 |       | 253                     |       | $                   | 29.21      |   |

 

Noneof the RSU’s were vested at September 30, 2006.

Theweighted average grant date fair value was determined based on the closingmarket price of the Company’s common stock on the date of the award. Aggregateintrinsic value of RSU’s outstanding at September 30, 2006 was $9.2 million,using the closing price of $36.21 per share as of September 30, 2006.

**Employee Stock Purchase Plan (“ESPP”)**

Allindividuals employed in the United States are eligible to participate in theESPP if Advent employs them for at least 20 hours per week and at least fivemonths per year. The ESPP permits eligible employees to purchase Advent commonstock through payroll deductions at a price equal to 85% of the lower of theclosing sale price for the Company’s common stock reported on the NASDAQNational Market at the beginning or the end of each six-month offering period.In any calendar year, eligible employees can withhold up to 10% of their salaryand certain variable compensation up to Internal Revenue Service limits.

OnMay 18, 2005 Advent’s stockholders approved the 2005 ESPP with 2,000,000 sharesof common stock reserved for issuance. During the nine months ended September30, 2006, the Company issued 56,422 additional shares under the 2005 ESPP. Asof September 30, 2006, 1,871,561 shares were reserved for future issuance underthe 2005 ESPP.

**Stock-Based Compensation Expense**

Effective January 1, 2006, Advent accounts for its ESPPand stock option (including RSU’s and SAR’s) plans under the provisions of theFASB Statement of Financial Accounting Standards No. 123—revised 2004 (“SFAS123R”), “Share-Based Payment” which replaced Statement of Financial AccountingStandards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation” and supersedesAPB Opinion No. 25 (“APB 25”). SFAS 123R requires the recognition of the fairvalue of stock-based compensation in net income. The estimated fairvalue of the Company’s stock-based awards is amortized over the awards’ vestingperiod on a straight-line basis. The Company elected to adopt the modifiedprospective method as provided by SFAS 123R, and consequently, previouslyreported amounts have not been restated. Since the adoption of SFAS 123R,there have been no changes to the Company’s equity plans or modifications tooutstanding stock-based awards.

Asthe stock-based compensation expense recognized on the condensed consolidatedstatements of operations for the three and nine months ended September 30, 2006is based on awards ultimately expected to vest, such amount has been reducedfor estimated forfeitures. SFAS 123R requires forfeitures to be estimated atthe time of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. Forfeitures were estimated based onthe Company’s historical experience over the last ten years. Previously, underSFAS 123, the Company recorded forfeitures as they occurred.

Prior to adoption of SFAS 123R,benefits of tax deductions in excess of recognized compensation costs werereported as operating cash flows. SFAS 123R requires that they be reported as afinancing cash inflow rather than as a reduction of taxes paid.

Theeffect of stock-based compensation expense recognized on Advent’s condensedconsolidated statements of operations for the three and nine months endedSeptember 30, 2006 was as follows (in thousands, except per share data):

8

----

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **September 30, 2006** | ** ** | **September 30, 2006** | ** ** |
| **Statement of operations  classification**          |       |                             | ** ** | ** **                       | ** ** |
| Cost of license and  development fee revenues        |       | $                                | 2          |                             | $          | 7 |   |
| Cost of maintenance and  other recurring revenues    |       | 198                              |       | 722                              |       |
| Cost of professional  services and other revenues    |       | 172                              |       | 593                              |       |
| Total cost of  revenues                              |       | 372                              |       | 1,322                            |       |
|                                                 |       |                             |       |                             |       |
| Sales and marketing                                  |       | 1,291                            |       | 3,676                            |       |
| Product development                                  |       | 692                              |       | 2,217                            |       |
| General and  administrative                          |       | 1,093                            |       | 2,882                            |       |
| Total operating  expenses                            |       | 3,076                            |       | 8,775                            |       |
|                                                 |       |                             |       |                             |       |
| Total stock-based  employee compensation expense     |       | $                                | 3,448      |                             | $          | 10,097 |   |
|                                                 |       |                             |       |                             |       |
| Tax effect on  stock-based employee compensation (1) |       | —                           |       | —                           |       |
|                                                 |       |                             |       |                             |       |
| Net effect on net  income                            |       | $                                | 3,448      |                             | $          | 10,097 |   |
|                                                 |       |                             |       |                             |       |
| Effect on net income  per share:                     |       |                             |       |                             |       |
| Basic                                                |       | $                                | 0.12       |                             | $          | 0.34 |   |
| Diluted                                              |       | $                                | 0.12       |                             | $          | 0.33 |   |

----

(1)   Assumes an effective tax rate of 0% for the three and nine months endedSeptember 30, 2006 due to the full valuation allowance established against theCompany’s deferred tax assets during the fourth quarter of 2003.

Approximately$25,000 and $98,000 and of stock-based compensation was capitalized as softwaredevelopment and internal use software costs, respectively, during the three andnine months ended September 30, 2006. Previously, under SFAS 123, theCompany did not capitalize stock-based compensation as part of its pro formadisclosures.

Asof September 30, 2006, total unrecognized compensation cost related to unvestedawards not yet recognized under all equity compensation plans, adjusted forestimated forfeitures, was $26.1 million and is expected to be recognizedthrough the remaining vesting period of each grant. As of September 30, 2006,the weighted average remaining period was 3.3 years.

**Valuation Assumptions**

Advent uses the Black-Scholes option pricing model todetermine the fair value of stock options and employee stock purchase planshares, consistent with the provisions of SFAS 123R, SEC Staff AccountingBulletin No. 107 (“SAB 107”) and the Company’s prior period pro formadisclosures of net income (loss). The fair value of each option grant isestimated on the date of grant using the Black-Scholes option valuation modeland the straight-line attribution approach with the following assumptions:
| ** **                        | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|-----------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                        | ** ** | **2006**                                                | ** ** | **2005**                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Stock Awards**             |       |                                                    |       |                                                   |       |   |   |   |   |
| Expected volatility               |       | 45.07% - 46.43                                          | %          | 58.1                                                   | %          | 43.5% - 48.5 | % | 61.2 | % |
| Expected life (in  years)         |       | 5                                                       |       | 5                                                      |       | 5 |   | 5 |   |
| Risk-free interest rate           |       | 4.81% - 5.11                                            | %          | 4.0                                                    | %          | 4.3% - 5.11 | % | 3.9 | % |
| Expected dividends                |       | None                                                    |       | None                                                   |       | None |   | None |   |
|                              |       |                                                    |       |                                                   |       |   |   |   |   |
| **Employee  Stock Purchase Plan** |       |                                                    |       |                                                   |       |   |   |   |   |
| Expected volatility               |       | 36.5                                                    | %          | 27.8                                                   | %          | 36.5 | % | 27.8 | % |
| Expected life (in  months)        |       | 6                                                       |       | 6                                                      |       | 6 |   | 6 |   |
| Risk-free interest rate           |       | 4.2                                                     | %          | 2.8                                                    | %          | 4.2 | % | 2.8 | % |
| Expected dividends                |       | None                                                    |       | None                                                   |       | None |   | None |   |

 

The ESPP periods begin every six months in the secondand fourth quarter of each year.

9

----

 

Prior to the adoption ofSFAS 123R, the Company used historical volatility in deriving its expectedvolatility assumption. The expected stock price volatility for the threeand nine months ended September 30, 2006 was determined based on an equallyweighted average of historical and implied volatility of the Company’s commonstock. Advent determined that a blend of implied volatility and historicalvolatility is more reflective of the market conditions and a better indicatorof expected volatility than using purely historical volatility. The expectedlife for the three and nine months ended September 30, 2006 was determinedbased on historical experience of similar awards, giving consideration to thecontractual terms of the stock-based awards, vesting schedules and expectationsof future employee behavior. The risk-free interest rate is based on theU.S. Treasury yield curve in effect at the time of grant for periodscorresponding with the expected life of the option. The dividend yieldassumption is based on the Company’s history of not paying dividends and theresultant future expectation of dividend payouts.

 

**Fiscal Periods Prior to theAdoption of SFAS 123R**

Priorto the adoption of SFAS 123R, Advent used the intrinsic value-based method, as prescribedin APB 25,to account for all stock-based compensation plans, and the Company hadadopted the disclosure-only alternative of SFAS 123, “Accounting forStock-Based Compensation,” as amended by SFAS No. 148, “Accounting forStock-Based Compensation — Transition and Disclosure.” No employee stock-basedcompensation was reflected in net income for the three and nine months endedSeptember 30, 2005, as the related options granted had an exercise price equalto the fair market value of the underlying common stock on the date of grantand the Company had no SAR’s or RSU’s outstanding as of September 30, 2005.

 

The pro forma information for thethree and nine months ended September 30, 2005 was as follows (inthousands, except per share data):
| ** **                                                                                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                 | ** ** | **September 30, 2005** | ** ** | **September 30, 2005** | ** ** |
|                                                                                                                       | ** ** | ** **                       | ** ** | ** **                       | ** ** |
| Net income - as  reported                                                                                                  |       | $                                | 5,846      |                             | $          | 10,521 |   |
|                                                                                                                       |       |                             |       |                             |       |
| Total stock-based  employee compensation expense determined under fair value based method for  all options, net of tax (1) |       | (3,825                           | )          | (12,236                          | )          |
|                                                                                                                       |       |                             |       |                             |       |
| Net income  (loss) - pro forma                                                                                             |       | $                                | 2,021      |                             | $          | (1,715 | ) |
|                                                                                                                       |       |                             |       |                             |       |
| Net income per share -  as reported:                                                                                       |       |                             |       |                             |       |
| Basic                                                                                                                      |       | $                                | 0.19       |                             | $          | 0.34 |   |
| Diluted                                                                                                                    |       | $                                | 0.18       |                             | $          | 0.33 |   |
|                                                                                                                       |       |                             |       |                             |       |
| Net income (loss) per  share - pro forma:                                                                                  |       |                             |       |                             |       |
| Basic                                                                                                                      |       | $                                | 0.07       |                             | $          | (0.06 | ) |
| Diluted                                                                                                                    |       | $                                | 0.06       |                             | $          | (0.06 | ) |

----

(1)   Assumes an effective tax rate of 0% for the three and nine months endedSeptember 30, 2005 due to the full valuation allowance established against theCompany’s deferred tax assets during the fourth quarter of 2003.

**Note 4—Net Income Per Share**

Basicnet income per share is computed by dividing net income by the weighted averagenumber of common shares outstanding during the period. Diluted net income pershare is computed by dividing net income by the sum of the weighted averagenumber of common shares outstanding and the potential number of dilutive commonshares outstanding during the period, excluding the effect of any anti-dilutivesecurities. Potential common shares consist of the shares issuable upon theexercise of stock options, the vesting of restricted stock awards and fromwithholdings associated with the Company’s employee stock purchase plan. Potentialcommon shares are reflected in diluted earnings per share by application of thetreasury stock method, which in 2006 includes consideration of unamortizedstock-based compensation and windfall tax benefits, as a result of theimplementation of SFAS 123R.

Thefollowing table sets forth the computation of basic and diluted net income pershare (in thousands, except per-share data):

10

----

 
| ** **                                                                                                                                | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                                                                | ** ** | **2006**                                                | ** ** | **2005**                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Numerator:**                                                                                                                            |       |                                                    |       |                                                   |       |   |   |   |   |
| Net income                                                                                                                                |       | $                                                       | 952        |                                                   | $          | 5,846 |   | $ | 5,957 |   | $ | 10,521 |   |
| ** **                                                                                                                                |       |                                                    |       |                                                   |       |   |   |   |   |
| **Denominator:**                                                                                                                          |       |                                                    |       |                                                   |       |   |   |   |   |
| Denominator for basic  net income per share-weighted average shares outstanding                                                           |       | 27,937                                                  |       | 30,602                                                 |       | 29,491 |   | 31,047 |   |
|                                                                                                                                      |       |                                                    |       |                                                   |       |   |   |   |   |
| Dilutive common  equivalent shares:                                                                                                       |       |                                                    |       |                                                   |       |   |   |   |   |
| Employee stock  options and other                                                                                                         |       | 1,511                                                   |       | 1,699                                                  |       | 1,391 |   | 1,044 |   |
|                                                                                                                                      |       |                                                    |       |                                                   |       |   |   |   |   |
| Denominator for diluted  net income per share-weighted average shares outstanding, assuming exercise  of potential dilutive common shares |       | 29,448                                                  |       | 32,301                                                 |       | 30,882 |   | 32,091 |   |
| ** **                                                                                                                                |       |                                                    |       |                                                   |       |   |   |   |   |
| **Net income per share:**                                                                                                                 |       |                                                    |       |                                                   |       |   |   |   |   |
| Basic                                                                                                                                     |       | $                                                       | 0.03       |                                                   | $          | 0.19 |   | $ | 0.20 |   | $ | 0.34 |   |
| Diluted                                                                                                                                   |       | $                                                       | 0.03       |                                                   | $          | 0.18 |   | $ | 0.19 |   | $ | 0.33 |   |

 

Weighted averagestock options, SAR’s and withholdings for ESPP of approximately 1.2 million and1.1 million for the three and nine months ended September 30, 2006,respectively, were excluded from the calculation of diluted net income pershare because their inclusion would have been anti-dilutive. Similarly,weighted average stock options and warrants of approximately 0.5 million and1.3 million for the three and nine months ended September 30, 2005,respectively, were excluded from the calculation of diluted net income pershare.

**Note 5—Goodwill**

The changes in the carrying value of goodwill during the nine monthsended September 30, 2006 were as follows (in thousands):

|                                | ** ** | **Goodwill** | ** ** |
|--------------------------------|------------|--------------|------------|
|                           |       |         |       |
| Balance at  December 31, 2005  |       | $            | 94,335     |   |
| Translation  adjustments       |       | 2,449        |       |
|                           |       |         |       |
| Balance at  September 30, 2006 |       | $            | 96,784     |   |

 

In accordance with SFAS No.142, “Goodwill and Other Intangible Assets,” Advent reviews goodwill forimpairment annually during the fourth quarter of the fiscal year and morefrequently if an event or circumstance indicates that an impairment loss hasoccurred. During the fourth quarterof 2005, Advent completed the annual impairment test which indicated that therewas no impairment. There were no events or changes in circumstances during thenine months ended September 30, 2006 which triggered an impairment review. Foreign currency translation adjustmentstotaling $2.4 million reflect the weakening of the U.S. dollar versus Europeancurrencies during the nine months ended September 30, 2006.

**Note 6—Other Intangibles, net**

The following is a summary of other intangibles, net asof September 30, 2006 (in thousands):

11

----

 
| ** **                      | ** ** | **Average**      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|---------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                      | ** ** | **Amortization** | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
| ** **                      | ** ** | **Period**       | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                      | ** ** | **(Years)**      | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
|                            |       |             |       |             |       |             |       |             |       |
| Purchased technologies          |       | 4.9              |       | $                | 12,726     |             | $          | (12,588          | )          | $ | 138 |   |
| Product development  costs      |       | 3.0              |       | 2,409            |       | (632             | )          | 1,777            |       |
| Developed  technology sub-total |       |             |       | 15,135           |       | (13,220          | )          | 1,915            |       |
|                            |       |             |       |             |       |             |       |             |       |
| Customer relationships          |       | 5.6              |       | 21,470           |       | (17,501          | )          | 3,969            |       |
| Other intangibles               |       | 2.5              |       | 307              |       | (262             | )          | 45               |       |
|                            |       |             |       |             |       |             |       |             |       |
| Other  intangibles sub-total    |       |             |       | 21,777           |       | (17,763          | )          | 4,014            |       |
| Balance at September  30, 2006  |       |             |       | $                | 36,912     |             | $          | (30,983          | )          | $ | 5,929 |   |

 

The following is a summary ofother intangibles, net as of December 31, 2005 (in thousands):
| ** **                      | ** ** | **Average**      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|---------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                      | ** ** | **Amortization** | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
| ** **                      | ** ** | **Period**       | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                      | ** ** | **(Years)**      | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
|                            |       |             |       |             |       |             |       |             |       |
| Purchased technologies          |       | 4.9              |       | $                | 12,726     |             | $          | (12,167          | )          | $ | 559 |   |
| Product development  costs      |       | 3.0              |       | 1,511            |       | (136             | )          | 1,375            |       |
| Developed  technology sub-total |       |             |       | 14,237           |       | (12,303          | )          | 1,934            |       |
|                            |       |             |       |             |       |             |       |             |       |
| Customer relationships          |       | 5.6              |       | 20,531           |       | (13,810          | )          | 6,721            |       |
| Other intangibles               |       | 2.5              |       | 307              |       | (204             | )          | 103              |       |
|                            |       |             |       |             |       |             |       |             |       |
| Other  intangibles sub-total    |       |             |       | 20,838           |       | (14,014          | )          | 6,824            |       |
| Balance at December 31,  2005   |       |             |       | $                | 35,075     |             | $          | (26,317          | )          | $ | 8,758 |   |

 

The changes in the carryingvalue of other intangibles during the nine months ended September 30, 2006 wereas follows (in thousands):
| ** **                     | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
|--------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                     | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                     | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
| ** **                     | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Balance at December 31,  2005  |       | $                | 35,075     |             | $          | (26,317          | )          | $ | 8,758 |   |
| Additions                      |       | 800              |       | —           |       | 800              |       |
| Amortization                   |       | —           |       | (3,936           | )          | (3,936           | )          |
| Stock-based  compensation      |       | 98               |       | (8               | )          | 90               |       |
| Translation adjustments        |       | 939              |       | (722             | )          | 217              |       |
|                           |       |             |       |             |       |             |       |
| Balance at September  30, 2006 |       | $                | 36,912     |             | $          | (30,983          | )          | $ | 5,929 |   |

 

Based on the carrying amount of other intangibles as of September 30,2006, the estimated future amortization is as follows (in thousands):

 

12

----

 

|                                    | ** ** | **Three**             | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------|------------|-----------------------|------------|--------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | **Months Ended** | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **December 31**  | ** ** | **Years Ended December 31** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **2006**              | ** ** | **2007**                                   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **Total**  | ** ** |
| Estimated future  amortization of: | ** ** | ** **            | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Developed technology               |       | $                     | 239        |                                       | $          | 769        |       | $          | 599        |       | $          | 308 |   | $ | 1,915 |   |
| Other intangibles                  |       | 834                   |       | 1,812                                      |       | 928        |       | 440        |       | 4,014      |       |
|                               |       |                  |       |                                       |       |       |       |       |       |       |       |
| Total                              |       | $                     | 1,073      |                                       | $          | 2,581      |       | $          | 1,527      |       | $          | 748 |   | $ | 5,929 |   |

 

**Note7—Balance Sheet Detail**

Thefollowing is a summary of other assets (in thousands):
| ** **                                                            | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                                            | ** ** | **2006**              | ** ** | **2005**             | ** ** |
| Long-term investments,  gross                                         |       | $                     | 13,800     |                 | $          | 13,800 |   |
| Accumulated write-downs  due to other-than-temporary decline in value |       | (5,341                | )          | (5,341               | )          |
| Long-term investments,  net                                           |       | 8,459                 |       | 8,459                |       |
| Long-term prepaid  assets                                             |       | 1,555                 |       | 2,377                |       |
| Restricted cash                                                       |       | 1,256                 |       | —               |       |
| Deposits                                                              |       | 1,308                 |       | 1,295                |       |
|                                                                  |       |                  |       |                 |       |
| Total other assets                                                    |       | $                     | 12,578     |                 | $          | 12,131 |   |

 

Long-terminvestments include equity investments in several privately held companies,most of which can still be considered in the start-up or development stages.These equity investments are carried at the lower of cost or fair value atSeptember 30, 2006 and December 31, 2005. As of September 30, 2006, otherassets included restricted cash of $1.3 million to secure a bank line of creditof $1.3 million associated with the Company’s entry into a definitive leaseagreement with Toda Development, Inc. (“Toda”) in January 2006 for its newheadquarters facility located at 600 Townsend Street in San Francisco,California. In the event Advent defaults under the terms of this leaseagreement, Toda may draw upon the letter of credit.

The following is asummary of accrued liabilities (in thousands):
| ** **                     | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|--------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2006**              | ** ** | **2005**             | ** ** |
| Salaries and benefits  payable |       | $                     | 8,620      |                 | $          | 10,368 |   |
| Accrued restructuring          |       | 827                   |       | 1,422                |       |
| Other accrued  liabilities     |       | 8,047                 |       | 8,847                |       |
|                           |       |                  |       |                 |       |
| Total accrued  liabilities     |       | $                     | 17,494     |                 | $          | 20,637 |   |

 

Accruedrestructuring charges are discussed further in Note 9, “Restructuring Charges”.Other accrued liabilities include accruals for royalties, sales and businesstaxes, and other miscellaneous items which are each individually less than 10%of total accrued liabilities.

The following is asummary of other long-term liabilities (in thousands):

13

----

 
| ** **                                | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                | ** ** | **2006**              | ** ** | **2005**             | ** ** |
| Deferred rent                             |       | $                     | 6,125      |                 | $          | 1,456 |   |
| Accrued restructuring,  long-term portion |       | 2,761                 |       | 3,138                |       |
| Other                                     |       | 898                   |       | 658                  |       |
|                                      |       |                  |       |                 |       |
| Total other  long-term liabilities        |       | $                     | 9,784      |                 | $          | 5,252 |   |

 

**Note8—Comprehensive Income**

Thecomponents of comprehensive income were as follows for the periods presented(in thousands):
| ** **                                               | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                                | ** ** | **2005**                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income                                               |       | $                                                       | 952        |                                                   | $          | 5,846 |   | $ | 5,957 |   | $ | 10,521 |   |
| Unrealized gain (loss)  on available-for-sale securities |       | 334                                                     |       | (136                                                   | )          | 524 |   | (226 | ) |
| Foreign currency  translation adjustment                 |       | 332                                                     |       | (155                                                   | )          | 2,680 |   | (5,094 | ) |
| Total comprehensive  income                              |       | $                                                       | 1,618      |                                                   | $          | 5,555 |   | $ | 9,161 |   | $ | 5,201 |   |

 

Thecomponents of accumulated other comprehensive income were as follows (inthousands):
| ** **                                                        | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                                        | ** ** | **2006**              | ** ** | **2005**             | ** ** |
| Accumulated net  unrealized loss on available-for-sale securities |       | $                     | (62        | )                    | $          | (586 | ) |
| Accumulated foreign  currency translation adjustments             |       | 9,232                 |       | 6,552                |       |
| Total accumulated other  comprehensive income                     |       | $                     | 9,170      |                 | $          | 5,966 |   |

 

**Note 9—Restructuring Charges**

Restructuringinitiatives have been implemented in the Company’s Advent Investment Managementand Other operating segments to reduce costs and improve operating efficienciesby better aligning the Company’s resources to its near-term revenueopportunities. These initiatives have resulted in restructuring chargescomprised primarily of costs related to properties abandoned in connection withfacilities consolidation, related write-down of leasehold improvements andseverance and associated employee termination costs related to headcount reductions.Advent’s restructuring charges included accruals for estimated losses onfacility costs based on the Company’s contractual obligations net of estimatedsublease income. Advent reassesses this liability periodically based on marketconditions.

The restructuring charges recorded for the three and nine months endedSeptember 30, 2006 and 2005 were as follows (in thousands):
| ** **                   | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                                | ** ** | **2005**                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Facility exit costs          |       | $                                                       | 57         |                                                   | $          | 116 |   | $ | 323 |   | $ | 1,724 |   |
| Severance and benefits       |       | (3                                                      | )          | —                                                 |       | (3 | ) | (5 | ) |
| Total restructuring  charges |       | $                                                       | 54         |                                                   | $          | 116 |   | $ | 320 |   | $ | 1,719 |   |

 

##### During the three months ended September 30,2006, Advent recorded a restructuring charge of $54,000 which related to thepresent value amortization of facility exit obligations. During the threemonths ended June 30, 2006, we recorded a restructuring charge of $124,000which related to the costs to exit a portion of our facility in New Rochelle,New York, and our entire facility in Summit, New Jersey as well as the fairvalue amortization of prior period obligations. During the threemonths ended March 31, 2006, Advent recorded a net restructuring charge of$141,000 primarily to adjust original estimates for facilities in SanFrancisco, California and New York, New York.

Duringthe nine months ended September 30, 2005, Advent recorded total restructuringcharges of $1.7 million consisting of charges of $83,000, $1.5 million and$116,000 recorded in the first, second and third quarters, respectively, of 

14

----

 

2005. The secondquarter charge of $1.5 million primarily consisted of net facility and exitcosts related to sub-leasing one floor of its Chrysler East office space in NewYork, New York. The net restructuring charges of $83,000 and $116,000 recordedin first and third quarters, respectively, were to adjust original estimatesfor vacated facilities.

Thefollowing table sets forth an analysis of the components of the restructuringcharges and the payments and non-cash charges made against the accrual duringthe nine months ended September 30, 2006 (in thousands):
| ** **                                              | ** ** | **Facility Exit** | ** ** | **Severance and** | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------|------------|
| ** **                                              | ** ** | **Costs**              | ** ** | **Benefits**           | ** ** | **Total**  | ** ** |
| Balance of  restructuring accrual at December 31, 2005  |       | $                      | 4,553      |                   | $          | 7          |       | $ | 4,560 |   |
| Cash payments                                           |       | (1,298                 | )          | —                 |       | (1,298     | )          |
| Reversal of deferred  rent related to facilities exited |       | 6                      |       | —                 |       | 6          |       |
| Restructuring charges                                   |       | 134                    |       | —                 |       | 134        |       |
| Adjustment of prior  restructuring costs                |       | 189                    |       | (3                     | )          | 186        |       |
| Balance of  restructuring accrual at September 30, 2006 |       | $                      | 3,584      |                   | $          | 4          |       | $ | 3,588 |   |

 

Of the remaining restructuring accrual of $3.6 million at September 30,2006, $0.8 million and $2.8 million are included in accrued liabilities andother long-term liabilities, respectively, on the accompanying condensedconsolidated balance sheet. The remaining excess facility costs of $3.6 millionare stated at estimated fair value, net of estimated sublease income ofapproximately $7.5 million. Advent expects to pay the remaining obligationsassociated with the vacated facilities over the remaining lease terms, whichexpire on various dates through 2012. Advent expects to pay the remainingseverance and benefits in 2006.

**Note 10—Common Stock Repurchase Programs**

Advent’s Board has approved common stock repurchase programs authorizingmanagement to repurchase shares of the Company’s common stock. The timing andactual number of shares subject to repurchase are at the discretion of Advent’smanagement and are contingent on a number of factors and limitations, includingthe price of Advent’s stock, corporate and regulatory requirements, alternativeinvestment opportunities and other market conditions. The stockrepurchase programs specify a maximum number of shares subject to repurchase,do not have an expiration date and may be limited or terminated at any timewithout prior notice. Repurchased shares would be returned to the status ofauthorized and un-issued shares of common stock. The purchases are funded from available working capital.

In May 2004, the Board authorized the repurchase of 1.2 million sharesof outstanding common stock. In September 2004, February 2005 and May 2005, theBoard authorized an extension of this stock repurchase program to cover therepurchase of an additional 0.8 million, 1.8 million and 1.0 million shares ofoutstanding common stock, respectively. In March 2006, Advent completed thiscommon stock repurchase program. Since the inception of this program in May2004 through March 2006, Advent repurchased 4.8 million shares for a total costof $98.2 million and at an average price of $20.43 per share.

In April 2006,Advent’s Board approved a common stock repurchase program authorizing therepurchase of up to 2.3 million shares of the Company’s common stock. In May2006, Advent entered into a pre-arranged Rule 10b5-1 trading plan (“TradingPlan”) with a broker to facilitate the repurchase of its shares of commonstock, pursuant to the requirements of and in conformity with the provisions ofRule 10b5-1 under the Securities Exchange Act of 1934, as amended. Under theTrading Plan, Advent may continue to repurchase shares without suspension fortrading blackout periods. The shares to be repurchased under the Trading Planwould be part of the stock repurchase program approved in April 2006. TheTrading Plan commenced on June 1, 2006 and purchases have been made by abroker, based upon the guidelines and parameters of the Trading Plan. Duringthe second quarter of 2006, Advent repurchased an aggregate 1.6 million sharesof common stock under the repurchase program authorized in April 2006 for atotal cash outlay of $52.8 million and at an average price of $33.07 per share.Of the 1.6 million shares repurchased during the second quarter, 1.0 millionwere repurchased under the Trading Plan.

In July2006, Advent’s Board approved an additional common stock repurchase programauthorizing the repurchase of up to 1.5 million shares of the Company’s commonstock. To facilitate the stock repurchase program, stock repurchases may bemade through open market or privately negotiated transactions at times and insuch amounts as management deems appropriate.

During the thirdquarter of 2006, Advent repurchased an aggregate 1.3 million shares of commonstock under the repurchase programs authorized in April and July 2006 for atotal cash outlay of $41.4 million and at an average price of

15

----

 

$31.49 per share. Duringthe nine months ended September 30, 2006, Advent repurchased an aggregate 4.1million shares for a total cash outlay of $127.9 million and at an averageprice of $30.95.

#### **Note 11—Commitments and Contingencies**

*Lease Obligations*

Advent leasesoffice space and equipment under non-cancelable operating lease agreements,which expire at various dates through May 2012. Certain operating leasescontain escalation provisions for adjustments in the consumer price index.Advent is generally responsible for maintenance, insurance, and property taxesfor these facilities.

In January 2006,Advent entered into a definitive lease agreement with Toda whereby the Companyleases approximately 105,000 square feet of office space at 600 Townsend Streetin San Francisco, California. The Company’s cash obligation under thisagreement is approximately $20 million, payable over the ten-year term of thelease. In October 2006, Advent moved its headquarters into the 600 Townsendfacility. Additionally, approximately $11 million of leasehold improvementswere made, of which $4.2 million were funded by Toda and the remainder was paidby Advent.

In October 2006,Advent extended its lease for its facility located at 619 West 54th Street in New York, New York. See Note 14,“Subsequent Event” for further discussion regarding this lease agreement.

Asof September 30, 2006, Advent’s remaining operating lease commitments through2018, including those related to the 600 Townsend Street and 619 West 54th Street facilities, were approximately $50.6million, net of future minimum rental receipts of $8.7 million to be receivedunder non-cancelable sub-leases.

*Indemnifications*

As permitted orrequired under Delaware law and to the maximum extent allowable under that law,Advent has certain obligations to indemnify its current and former officers anddirectors for certain events or occurrences while the officer or director is,or was serving, at Advent’s request in such capacity. These indemnificationobligations are valid as long as the director or officer acted in good faithand in a manner the person reasonably believed to be in or not opposed to thebest interests of the corporation, and, with respect to any criminal action orproceeding, had no reasonable cause to believe his or her conduct was unlawful.The maximum potential amount of future payments Advent could be required tomake under these indemnification obligations is unlimited; however, Advent hasa director and officer insurance policy that mitigates Advent’s exposure andenables Advent to recover a portion of any future amounts paid. The Companybelieves the estimated fair value of these indemnification obligations isminimal.

*Legal Contingencies*

From time to time,Advent is involved in claims and legal proceedings that arise in the ordinarycourse of business. Based on currently available information, management doesnot believe that the ultimate outcome of these unresolved matters, individuallyand in the aggregate, is likely to have a material adverse effect on Advent’sfinancial position or results of operations. However, litigation is subject toinherent uncertainties and Advent’s view of these matters may change in thefuture. Were an unfavorable outcome to occur, there exists the possibility of amaterial adverse impact on Advent’s financial position and results ofoperations for the period in which the unfavorable outcome occurs, andpotentially in future periods.

In September 2003,NetJets Aviation, Inc. (formerly known as Executive Jet Aviation, Inc.) filedsuit against B. Douglas Morriss, Rueben Morriss and Barbara Morriss in theCircuit Court of the County of Saint Louis, Missouri for their alleged failureto pay for their use of private jet aircraft leased and managed by plaintiffs.In April 2005, plaintiffs amended their complaint to join approximately 15additional entities allegedly controlled by B. Morriss as defendants in thesuit, including Kinexus Corporation, which was acquired by Advent after thealleged conduct in plaintiffs’ lawsuit. The complaint alleged breach ofcontract and seeks approximately $1.1 million in damages, as well as interestand attorneys’ fees. At mediation amongst the parties on October 10, 2006,the parties agreed to settle the case and Kinexus agreed to pay $10,000.

On March 8, 2005,certain of the former shareholders of Kinexus and the shareholders’representative filed suit against Advent in the Delaware Chancery Court. Thecomplaint alleges that Advent breached the Agreement and Plan of Merger datedas of December 31, 2001 pursuant to which Advent acquired all of theoutstanding shares of Kinexus due principally to the fact that no amount waspaid by Advent on an earn-out of up to $115 million. The earn-out, which waspayable in cash or stock at the election of Advent, was based upon Kinexusmeeting certain revenue targets in both 2002 and 2003. The complaint seeksunspecified compensatory damages, an accounting and restitution for unjustenrichment. Advent advised the shareholders’ representative in January 2003that the earn-out terms had not been met in 2002 and accordingly no 

16

----

 

earn-out was payable for2002 and would not be payable for 2003. Advent disputes the plaintiffs’ claimsand believes that it has meritorious defenses and intends to vigorously defendthis action. Management believes that any potential loss associated with thislitigation is neither probable nor reasonably estimable at this time andaccordingly has not accrued any amounts for any potential loss.

On July 11, 2006,a former independent consultant filed suit against Advent in the Supreme Courtof the State of New York.  The complaintalleges that Advent failed to pay plaintiff commissions due for his services asa consultant to Advent.  The plaintiff isseeking approximately $101,000 in commissions and $2.0 million in unspecifiedconsequential damages, as well as interest and attorney’s fees.  Advent disputes the plaintiffs’ claims andbelieves that it has meritorious defenses and intends to vigorously defend thisaction.  Management believes that any potentialloss associated with this litigation is neither probable nor reasonablyestimable at this time and accordingly has not accrued any amounts for anypotential loss.

**Note 12—Segment and Geographic Information**

*Description of Segments*

SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” established standardsfor reporting information about operating segments in annual financialstatements and requires disclosure of selected information about operatingsegments in interim reports. It also established standards for relateddisclosures about products and services, major customers and geographic areas.Operating segments are defined as components of an enterprise about whichseparate financial information is available that is evaluated regularly by thechief operating decision maker (“CODM”), or decision making group, in decidinghow to allocate resources and in assessing performance. Advent’s CODM is theChief Executive Officer.

Advent’sorganizational structure is based on a number of factors that the CODM uses toevaluate, view and run its business operations which include, but are notlimited to, customer base, homogeneity of products and technology. Advent’soperating segments are based on this organizational structure and informationreviewed by Advent’s CODM to evaluate the operating segment results. Advent hasdetermined that its operations are organized into two reportable segments:  1) Advent Investment Management; and 2)MicroEdge. Future changes to this organizational structure may result inchanges to the business segments disclosed. A description of the types ofproducts and services provided by each operating segment follows.

Advent InvestmentManagement is the Company’s core business and derives revenues from the development,marketing and sale of software products, data interfaces and relatedmaintenance and services that automate, integrate and support certain missioncritical functions of investment management organizations. MicroEdge derivesrevenues from the sale of software and services for grant management, matchinggifts and volunteer tracking for the grant-making community worldwide.

*Segment Data*

The results of theoperating segments are derived directly from Advent’s internal managementreporting system. The accounting policies used to derive operating segmentresults are substantially the same as those used by the consolidated company.Management measures the performance of each operating segment based on severalmetrics, including income (loss) from operations. These results are used, inpart, to evaluate the performance of, and to assign resources to, each of theoperating segments. Certain operating expenses, including stock-basedcompensation expense, and amortization of developed technology and other intangibles,which Advent manages separately at the corporate level, are not allocated tothe operating segments. Advent does not separately accumulate and review assetinformation by segment.

Segmentinformation for the periods presented is as follows (in thousands):

17

----

 
| ** **                    | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|-------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                                | ** ** | **2005**                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net revenues:                 |       |                                                    |       |                                                   |       |   |   |   |   |
| Advent  Investment Management |       | $                                                       | 40,975     |                                                   | $          | 36,957 |   | $ | 118,573 |   | $ | 106,513 |   |
| MicroEdge                     |       | 5,121                                                   |       | 4,986                                                  |       | 14,822 |   | 14,488 |   |
| Other                         |       | (219                                                    | )          | 833                                                    |       | 498 |   | 2,091 |   |
|                          |       |                                                    |       |                                                   |       |   |   |   |   |
| Total net  revenues           |       | $                                                       | 45,877     |                                                   | $          | 42,776 |   | $ | 133,893 |   | $ | 123,092 |   |

 
| ** **                                           | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                                | ** ** | **2005**                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Income from operations:                              |       |                                                    |       |                                                   |       |   |   |   |   |
| Advent  Investment Management                        |       | $                                                       | 4,210      |                                                   | $          | 5,409 |   | $ | 13,883 |   | $ | 6,864 |   |
| MicroEdge                                            |       | 1,418                                                   |       | 997                                                    |       | 3,541 |   | 1,947 |   |
| Other                                                |       | (573                                                    | )          | 163                                                    |       | (1,518 | ) | 249 |   |
| Unallocated  corporate operating costs and expenses: |       |                                                    |       |                                                   |       |   |   |   |   |
| Stock-based  compensation                            |       | (3,448                                                  | )          | —                                                 |       | (10,097 | ) | — |   |
| Amortization of  developed technology                |       | (251                                                    | )          | (641                                                   | )          | (909 | ) | (1,869 | ) |
| Amortization of  other intangibles                   |       | (1,028                                                  | )          | (997                                                   | )          | (3,027 | ) | (3,064 | ) |
|                                                 |       |                                                    |       |                                                   |       |   |   |   |   |
| Total income from  operations                        |       | $                                                       | 328        |                                                   | $          | 4,931 |   | $ | 1,873 |   | $ | 4,127 |   |

 

*MajorCustomers*

Nosingle customer represented 10% or more of Advent’s total net revenue in anyperiod presented.

**Note 13—Related Party Transactions**

As of September30, 2005, Citigroup, Inc. (“Citigroup”) owned more than 10% of the voting stockof Advent. Effective December 1, 2005, Citigroup sold the Asset Managementdivision of Citigroup Global Markets Inc. to Legg Mason, Inc. (“Legg Mason”).As of December 31, 2005, Citigroup owned less than 5% of the voting stock ofAdvent. Advent recognized approximately $0.5 million and $1.5 million ofrevenue from Citigroup during the three and nine months ended September 30,2005, respectively. The Company’s accounts receivable from Citigroup was$307,000 as of December 31, 2005. As of December 31, 2005 and September 30,2006, Legg Mason owned approximately 15% of the voting stock of Advent. Adventrecognized approximately $0.1 million and $0.3 million of revenue from LeggMason during the three and nine months ended September 30, 2006 respectively.The Company’s accounts receivable from Legg Mason was $40,000 and $100,000 asof September 30, 2006 and December 31, 2005.

Advent acts astrustee for the Company’s short-term disability plan—Advent Software CaliforniaVoluntary Disability Plan (“VDI”). Employee withholdings were $69,000 and$273,000 during the three and nine months ended September 30, 2006,respectively. Disbursements on behalf of the VDI were $91,000 and $230,000during the three and nine months ended September 30, 2006, respectively. Cashheld by Advent related to the VDI was $352,000 and $309,000 as of September 30,2006 and December 31, 2005, respectively, and are included in “other assets” onthe condensed consolidated balance sheets.

**Note 14—Subsequent Event**

On October 25,2006, the Company entered into a definitive lease extension and modificationagreement with 619 Owners Corp. (the “Landlord”) whereby the parties haveagreed to extend the lease relating to the entire tenth floor of the facilitylocated at 619 West 54th Street in New York, New York, which theCompany currently leases. The pre-existing lease was set to expire on December31, 2008, and has been extended for a term of ten years, commencing on January1, 2009, to and including December 31, 2018. Advent’s contractual operatinglease obligation to the Landlord under this agreement is approximately $11million, payable over the ten-year term of the lease.

18

----

 

**Item 2. ****Management’s Discussionand Analysis of Financial Condition and Results of Operations**

**SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS**

You should read the following discussion in conjunction with our consolidatedfinancial statements and related notes. The following discussion containsforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 as amended and Section 21E of the SecuritiesExchange Act of 1934 as amended, including, but not limited to statementsreferencing our expectations relating to future revenues and expenses. Forward-lookingstatements can be identified by the use of terminology such as “may”, “will”, “should”,“expect”, “plan” “anticipate”, “believe”, “estimate”, “predict”, “potential”, “continue”or other similar terms and the negative of such terms regarding beliefs, plans,expectations or intentions regarding the future. Forward-looking statementsinclude, among others: statements regarding growth in the investment managementmarket and opportunities for us related thereto; future expansion, acquisition,divestment of or investment in other businesses; projections of revenues,future cost and expense levels; expected timing and amount of amortizationexpenses related to past acquisitions; the adequacy of resources to meet futurecash requirements; estimates or predictions of actions by customers, suppliers,competitors or regulatory authorities; future client wins; future hiring; and,future product introductions. Such forward-looking statements are based on ourcurrent plans and expectations, and involve known and unknown risks anduncertainties that may cause our actual results or performance to be materiallydifferent from any results or performance expressed or implied by suchforward-looking statements. Such factors include, but are not limited to, thoseset forth in “Item 1A. Risk Factors” in this Form 10-Q, as well as other risksidentified from time to time in other Securities and Exchange Commission (“SEC”)reports. You should not place undue reliance on our forward-looking statements,as they are not guarantees of future results, levels of activity or performanceand represent our expectations only as of the date they are made.

Unless expresslystated or the context otherwise requires, the terms “we”, “our”, “us”, the “Company”and “Advent” refer to Advent Software, Inc. and its subsidiaries.

**Overview**

We offerintegrated software solutions for automating and integrating data and workflows across the investment management organization, as well as the informationflows between the investment management organization and external parties. Ourproducts are intended to increase operational efficiency, improve the accuracyof client information and enable better decision-making. Each solution focuseson specific mission-critical functions of the investment managementorganization and is tailored to meet the needs of the particular client, asdetermined by size, assets under management and complexity of the investmentenvironment.

Our revenues forthe third quarter of 2006 were $45.9 million which was a 7% increase from $42.8million in the same quarter of 2005. Total expenses, including cost ofrevenues, for the third quarter of 2006 were $45.5 million, compared with $37.8million in the same quarter last year.

During the thirdquarter of 2006, we:

·      increasedheadcount. Total company headcount at September 30, 2006 was 806 whichrepresented an increase of 40 new employees from June 30, 2006.  The majority of these new hires were in oursales and services groups, and to a lesser extent in product development.

·      expandedcustomer relationships and acceptance of our product offerings. We signed 80customer agreements in the third quarter with 8 new Geneva clients and 13clients choosing Advent Portfolio Exchange (“APX”);

·      conductedour Advent Client Conference in Washington, D.C.  This was our 20th and largest annual ClientConference with nearly 1,000 participants attending from 42 states and 15countries; and

·      addedmore term license bookings.  In the thirdquarter, we signed a total of $10.6 million of term licenses with an averageterm of 2.9 years. These results are in addition to term license bookings of$12.9 million in the second quarter with an average term of 3.1 years and $7.9million in the first quarter with an average term of 2.5 years.

We are in themidst of converting our software licensing model from a perpetual model to aterm model for our Advent Investment Management segment. Under a perpetual model, customers purchasea license to use our software indefinitely and generally we recognize alllicense revenue at the time of sale; maintenance is purchased under an annualrenewable contract, and recognized ratably over the contract period. Under aterm model, customers purchase a license to use our software and receivemaintenance for a limited period of time and we recognize the revenue ratablyover the length of the contract.

19

----

 

The transition to a term model has the effect of lowering license revenuesin the early stages of the transition, but increasing the total potential valueof the customer relationship. Moving our core business new customer sales toterm has had the effect of lowering our revenue growth in 2006 and may continueto slow our revenue growth over the next several years when compared to aperpetual license model.

The transition toa term model also has the effect of decreasing our operating cash flows in theearly stages of the transition. Under perpetual pricing, the entire license feeis generally billed and collected at the commencement of the relationship.Under term pricing, a typical contract term is three years. We generally billand collect license fees over the term of the arrangement in equal installmentsin advance of each annual period. The amount of the annual term billing is lessthan the perpetual billing resulting in lower cash flows in the initial termlicense period. Annual term billing results in an increase in deferred revenuesand an increase in operating cash flows at the commencement of each annualbilling period.

When a customer purchases a term license together with implementationservices we do not recognize any revenue under the contract until theimplementation services are complete. If the implementation services are stillin progress as of a quarter-end, we will defer all of the contract revenues toa subsequent quarter. During the third quarter of 2006, we deferred $1.4million in total net revenues and $0.4 million of directly related expenses asthe implementation services associated with the related term licensearrangements were in progress as of September 30, 2006. These deferred amountsreflect both revenues and expenses deferred in the current quarter offset byamounts recognized from previously deferred amounts.

Although the transition to a term model decreases revenues from newcontracts in the early periods, we believe this change to our business model isextremely significant for the long term growth and value of the businessbecause it leverages the long-term “stickiness” of Advent’s products andservices. We believe that once our products are implemented, our clients aremotivated to continue using Advent’s products and services due to improvedworkflow efficiencies and additional controls they gain over their business.

Total net revenuesfor the third quarter of 2006 grew 7% over the third quarter of 2005 while ourmaintenance and recurring revenues were up 17% year over year. Despite ourtransition to a predominantly term licensing model, we have grown net revenueyear-over-year for two reasons:

·      Our diverse mix of products has allowed usto phase in term licensing by product; and

·      Wehave a large installed base of customers that we are not requiring to convertto term licenses when they expand the usage (e.g. order additional seats) ofproducts they already own.

During the thirdquarter of 2006, we recognized approximately 59% of license revenue from termlicenses and signed new term licenseswith a total contract value for license and maintenance of $10.6 million overthe terms of the initial contracts which averaged 2.9 years, as comparedto $4.9 million in the third quarter of 2005 with an average term of 3.3 years.Total recurring revenues, which we define as term license, term and perpetualmaintenance, and other recurring revenues, have increased to 82% of totalrevenues during the third quarter of 2006, as compared to 65% during the thirdquarter of 2004, when we began our transition to a term model.

Duringthe third quarter of 2006, total expenses, including cost of revenues were$45.5 million, compared with $43.9 million in the second quarter of 2006, and$37.8 million in the same quarter last year. Expenses for the third quarterincluded $1.1 million relating to the 2006 Advent Client Conference. Ourexpenses came in higher than we expected largely as a result of higher bonusaccruals based on strong bookings performance, lower capitalization of expensesunder FAS 86 and additional costs resulting from winding down Second StreetSecurities.

During the firstquarter of 2006, we began to wind down the soft dollar business of ourSEC-registered broker/dealer subsidiary, Second Street Securities, as it nolonger fit with our corporate strategy. Second Street Securities offered ourcustomers the ability to pay for Advent products and other third party servicesthrough brokerage commissions and other fee-based arrangements. We continued towind down the soft dollar business in the third quarter of 2006 and anticipatethat this activity will be completed during the fourth quarter of 2006.Subsequent to the wind down of the soft dollar business, Second StreetSecurities will continue to maintain its broker/dealer status.

On January 1,2006, we adopted SFAS 123R. As a result of this adoption and due to theissuance of restricted stock units (“RSU’s”) and stock appreciation rights (“SAR’s”)to employees during the nine months of 2006, we recorded stock-based employeecompensation expense of $3.4 million in the third quarter of 2006. We earnednet income of $952,000, resulting in diluted earnings per share of $0.03 forthe third quarter of 2006. In addition, we generated operating cash flow ofapproximately $10.4 million during the third quarter of 2006.

During the thirdquarter of 2006, we repurchased 1.3 million shares, under the repurchaseprograms authorized in April and July 2006, for a total outlay of $41.4 millionand an average price of $31.49.

20

----

Lookingforward, we continue to focus on improving our long-term profitability as wetransition to a term license model. While recent economic trends have beenpositive and our customers have been more willing to commit to new softwarepurchases, improving our profitability will depend upon our introducing newproducts, licensing software to new and existing customers, selling services tonew and existing customers and renewing license, maintenance and recurringrevenue contracts at similar levels to those we achieved during fiscal 2005 andthe first nine months of 2006. The success of our transition to a term licensemodel will also depend on future renewal rates, which we will evaluate as ourterm license contracts expire. We will continue our focus on aggressivelymanaging costs. We will also continue to invest in areas we deem appropriate.

**RecentDevelopments**

Inthe latter half of October 2006, we moved our San Francisco, Californiaheadquarters facility from 301 Brannan Street to 600 Townsend Street. We expectto have vacated and made the 301 Brannan facility available for sublease beforeNovember 30, 2006. Accordingly, we expect to record a restructuring charge ofapproximately $3 million related to the liability for costs that will continueto be incurred under our 301 Brannan facility for its remaining term withouteconomic benefit.

OnOctober 25, 2006, we entered into a definitive lease extension and modificationagreement with 619 Owners Corp. (the “Landlord”) whereby the parties haveagreed to extend the lease relating to the entire tenth floor of the facilitylocated at 619 West 54th Street in New York, New York, which wecurrently lease. The pre-existing lease was set to expire on December 31, 2008,and has been extended for a term of ten years, commencing on January 1, 2009,to and including December 31, 2018. Our contractual operating lease obligationto the Landlord under this agreement is approximately $11 million, payable overthe ten-year term of the lease.

**CriticalAccounting Policies and Estimates**

Management’sdiscussion and analysis of our financial condition and results of operationsare based upon our condensed consolidated financial statements and relatednotes, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America. We review the accountingpolicies used in reporting our financial results on a regular basis. Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent liabilities. On an ongoingbasis, we evaluate the process we use to develop estimates, including thoserelated to product returns, bad debts, investments, intangible assets, incometaxes, restructuring, contingencies and litigation. We base our estimates onhistorical experience and on various other assumptions that we believe arereasonable for making judgments about the carrying value of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates due to actual outcomes being different fromthose on which we based our assumptions. We believe the following criticalaccounting policies affect our more significant judgments and estimates used inthe preparation of our condensed consolidated financial statements.

**Revenue recognition**. Werecognize revenue from software licenses, development fees, maintenance, otherrecurring revenues, professional services and other revenues. In addition, wehave earned commissions from customers who used our broker/dealer, SecondStreet Securities, to “soft dollar” the purchase of non-Advent products andservices with “soft dollars”. “Soft dollaring” enabled those customers to usethe commissions earned on trades to pay all or part of the fees owed to us fornon-Advent products or services, which are initially paid for by Second StreetSecurities. The commission revenues earned from soft dollar purchases ofnon-Advent products or services are recorded as other revenues in professionalservices and other revenues on our consolidated statements of operations. Asnoted above, we continue to wind down the soft dollar component of SecondStreet Securities, as it no longer fit with our corporate strategy. Weanticipate that we will complete the wind down of soft dollaring Advent orthird party products and services through Second Street Securities during thefourth quarter of 2006.

Weoffer a wide variety of products and services to a large number of financiallysophisticated customers. While many of our lower-priced license transactions,maintenance contracts, subscription-based transactions and professionalservices projects conform to a standard structure, many of our largertransactions are complex and may require significant review and judgment in ourapplication of generally accepted accounting principles.

*Software license and development fees.*We recognize revenue from the licensing of software when persuasive evidence ofan arrangement exists, the product has been delivered, the fee is fixed ordeterminable and collection of the resulting receivable is reasonably assured.We generally use a signed license agreement as evidence of an arrangement.Sales through our distributors are evidenced by a master agreement governingthe relationship together with binding order forms and signed contracts fromthe distributor’s customers. Revenue is recognized once shipment to thedistributor’s customer has taken

21

----

place and when allother revenue recognition criteria have been met. Delivery occurs when productis delivered to a common carrier F.O.B shipping point. Some of our arrangementsinclude acceptance provisions, and if such acceptance provisions are provided,delivery is deemed to occur upon acceptance. We assess whether the fee is fixedor determinable based on the payment terms associated with the transaction. Weassess whether the collectibility of the resulting receivable is reasonablyassured based on a number of factors, including the credit worthiness of thecustomer determined through review of credit reports, our transaction historywith the customer, other available information and pertinent country risk ifthe customer is located outside the United States. Our standard payment termsare due at 180 days or less unless the transaction was part of a soft dollararrangement through our in-house broker/dealer subsidiary, Second StreetSecurities, for which payment was then required within one year; however,payment terms may vary based on the country in which the agreement is executed.Software licenses are sold with maintenance and, frequently, professionalservices.

*Licenses.*  We have continued our transition from sellingmostly perpetual licenses to selling a mix of perpetual and term licenses, andwe expect term license revenue to increase as a proportion of total licenserevenue in the future. We recognized approximately 59% and 27% of licenserevenue from term licenses during the third quarter of 2006 and 2005,respectively. Revenue recognition for software licensed under perpetual andterm license models differs depending on which type of contract a customersigns:

·      Perpetual licenses

We allocate revenue to delivered components, normallythe license component of the arrangement, using the residual method, based onvendor specific objective evidence, or VSOE, of fair value of the undeliveredelements (generally the maintenance and professional services components),which is specific to us. We determine the fair value of the undelivered elementsbased on the historical evidence of the Company’s stand-alone sales of theseelements to third parties. If VSOE of fair value does not exist for anyundelivered elements, then the entire arrangement fee is deferred untildelivery of that element has occurred.

·      Term licenses

Term license contract prices include both the softwarelicense fees and maintenance fees, and, as a result, we typically allocate 55%of the contract price to license revenue and 45% to maintenance and recurringrevenues, based on our assessment of the relative economic value of the twoelements.

To date, we have offered multi-year term licenses bywhich a customer makes a binding commitment to license the software for a fixedmulti-year term — typically three to five years. For multi-year term licenseswe have not established VSOE of fair value for the term license and maintenancecomponents, and, as a result, in situations where we are also performingrelated professional services, we defer all revenue and directly relatedexpenses under the arrangement until the professional services aresubstantially complete. At the point professional services are substantiallycompleted, we recognize a pro rata amount of the term license and maintenancerevenue, professional services fees earned and related expenses, based on theelapsed time from the start of the term license to the substantial completionof professional services. The remaining deferred professional services revenueand related expenses are recognized ratably over the remaining contract length.Term license and maintenance revenue for the remaining contract years isrecognized ratably over the remaining period of the contract. When multi-yearterm licenses are sold and do not include related professional services, werecognize the entire term license and maintenance revenue ratably over theperiod of the contract term from the effective date of the license agreement.

We occasionally offer single-year term licenses.Revenue on delivered components will be allocated and recognized using theresidual method, based on vendor specific objective evidence, or VSOE, of fairvalue of the undelivered elements (license, maintenance and professionalservices components), which is specific to us. While fair value of theundelivered professional services component is based on the historical evidenceof the Company’s stand-alone sales of these components to third parties, VSOEfor the term license and the related maintenance components will be determinedby the stated optional renewal rate. If VSOE of fair value does not exist forany undelivered elements, then the entire arrangement fee is deferred untildelivery of that element has occurred.

Developmentfees are derived from contracts that we have entered into with other companies,including customers and development partners. Agreements for which we receivedevelopment fees normally provide for the development of technologies andproducts that are expected to become part of our general product offerings inthe future. Revenues for license development projects are recognized primarilyusing the percentage-of-completion method of accounting, based on costsincurred to date compared with the estimated cost of completion, or using thecompleted contract method, when the development project is finished.

22

----

If acustomer purchased our software and chose to enter into a soft dollararrangement through our in-house broker/dealer subsidiary, Second StreetSecurities, the soft dollar arrangement did not change or modify the originalfixed or determinable fee in the written contract. The customer is required topay the original fee for our software within one year. If insufficient tradingvolume is generated to pay the entire original fee within one year, thecustomer is still required to render payment within one year. If the customerchooses to use a third-party broker/dealer, the original payment terms apply,regardless of the arrangement with the third-party broker/dealer. The option tosoft dollar a transaction does not alter the underlying revenue recognition forthe transaction; all the revenue recognition criteria listed in the “Softwarelicense” section above must be assessed in determining how the revenue will berecognized.

Ourstandard practice is to enforce our contract terms and not allow our customersto return software. We have, however, allowed customers to return softwareon a limited case-by-case basis and have recorded sales returns reserves asoffsets to revenue in the period the sales return becomes probable, inaccordance with FASB Statement No. 48, “Revenue Recognition when Right ofReturn Exists”. The estimates for returns are adjusted periodically based uponhistorical rates of returns and other related factors.

Wedo have two situations where we provide a contractual limited right of returnto end-user customers only: in shrink-wrap license agreements for Adventproducts, and certain MicroEdge products. The shrink-wrap licenseagreement for Advent products provides for a right of return within seven daysof delivery of the software. Certain MicroEdge software license agreementsallow for either a thirty-day money back guarantee or a seven-day right ofreturn. We recognize revenue on delivery since the fee is fixed ordeterminable, the buyer is obligated to pay, the risk of loss passes to the customer,and we have the ability to estimate returns. Our ability to estimatereturns is based on a long history of experience with relatively homogenoustransactions and the fact that the return period is short. We have recorded asales returns reserve to adjust revenue for these situations based on ourhistorical experience. We have recorded sales reserve benefits of $48,000 and$135,000 in the third quarter of 2006 and 2005, respectively. We have analgorithm for calculating the value of reserves that takes the previous 18months of experience into account which we have applied consistently andresulted in the credits to license revenue during the three months endedSeptember 30, 2006 and 2005.

*Maintenance and other recurring revenues.*We offer annual maintenance programs that provide for technical support andupdates to our software products. Maintenance fees are bundled under perpetuallicenses in the initial licensing year and charged separately for renewals ofannual maintenance in subsequent years. Fair value for maintenance is basedupon renewal rates stated in the contracts or, in limited cases, separate salesof renewals to other customers. Generally, we recognize maintenance revenueratably over the contract term, except in the case of multi-year term licensecontracts which are described in the “term licenses” section above. Werecognized approximately 8% and 3% of maintenance and other recurring revenuefrom term licenses during the third quarter of fiscal 2006 and 2005,respectively.

Weoffer other recurring revenue services that are either subscription-based ortransaction-based, and primarily include the provision of software interfacesto, and the capability to download securities information from, third partydata providers. We recognize revenue from recurring revenue transactions eitherratably over the subscription period or as the transactions occur.

Basedon our historical experience, we have recorded sales reserve benefits to adjustrevenues for estimated returns for maintenance and other recurring revenues of$248,000 and $594,000 for the third quarter of fiscal 2006 and 2005,respectively. We have an algorithm for calculating the value of reserves thattakes the last 18 months of experience into account, which resulted in theabove credits to revenue in the third quarter of 2006 and 2005.

*Professional services and other revenues.*We offer a variety of professional services that include project management,implementation, data conversion, integration, custom report writing andtraining. Fair value for professional services is based upon separate sales ofthese services by us to other customers. Our professional services aregenerally billed based on hourly rates together with reimbursement for traveland accommodation expenses. Our professional services and other revenue alsoinclude revenue from our annual client conferences. We recognize revenue asthese professional services are performed except in the case of multi-year termlicense contracts which are described in the “term licenses” section above.Certain professional services arrangements involve acceptance criteria. Inthese cases, revenue and directly related expenses are deferred and thenrecognized upon acceptance.

Basedon our historical experience, we have recorded sales reserve benefits to adjustrevenues for the estimated returns for professional services and other revenuesof $11,000 and $28,000 for the third quarter of fiscal 2006 and 2005,respectively.

*Directly related expenses. *When we defer servicerevenues, we also defer the direct costs incurred in the delivery of thoseservices to the extent those costs are recoverable through the future revenueson non-cancellable contracts. We recognize

23

----

those deferredcosts as costs of professional services revenues proportionally and over thesame period that the deferred revenue is recognized as service revenue. When wedefer license revenue, we defer the direct incremental costs incurred (i.e.sales commissions earned by the sales force as a part of their overallcompensation) related to the license revenues because those costs would nothave been incurred but for the acquisition of that contract. We recognize thosecosts as sales and marketing expense proportionally and over the same period asthe license revenues.

**Income taxes**. We account forworldwide income taxes under an asset and liability approach that requires theexpected future tax consequences of temporary differences between book and taxbases of assets and liabilities be recognized as deferred tax assets andliabilities. Generally accepted accounting principles require us to evaluatewhether or not we will realize a benefit from net deferred tax assets on anongoing basis. A valuation allowance is recorded to reduce the net deferred taxassets to an amount that will more likely than not be realized. Significantfactors considered by management in assessing the need for a valuationallowance include the following:

·      our historical operating results;

·      the length of time over which thedifferences will be realized;

·      tax planning opportunities; and

·      expectations for future earnings.

Inconsidering whether or not we will realize a benefit from net deferred taxassets, recent losses must be given substantially more weight than anyprojections of future profitability. In the fourth quarter of 2003, wedetermined that based on our history of successive quarterly losses since thesecond quarter of 2002, it was more likely than not that we would not realizeany value for our net deferred tax assets. Accordingly, we established a valuationallowance equal to 100% of the amount of these assets. Since the beginning of2004, we have continued to maintain a full valuation allowance against ourdeferred tax assets (except for deferred tax assets in the United Kingdom,Switzerland and the Netherlands) due to our history of losses through fiscal2004. However, if our recent trend of profitability continues, we may determinethat there is sufficient positive evidence to support a reversal of, ordecrease in, the valuation allowance. If we were to reverse all or some part ofour valuation allowance and recognize all or some part of our deferred taxassets, our financial statements in the period of reversal would reflect anincrease in assets on our balance sheet and a corresponding tax benefit to ourstatement of operations in the amount of the reversal.

**Impairment of long-lived assets**.We review our goodwill for impairment annually during the fourth quarter of ourfiscal year (as of November 1) and more frequently if an event or circumstance indicatesthat an impairment loss has occurred. We are required to test our goodwill forimpairment at the reporting unit level. We have determined that we had fivereporting units as of November 1, 2005. The test for goodwill impairment is atwo-step process:

Thefirst step compares the fair value of each reporting unit with its respectivecarrying amount, including goodwill. If the fair value of the reporting unitexceeds its carrying amount, goodwill of our reporting unit is considered notimpaired, thus the second step of the impairment test is unnecessary.

Thesecond step, used to measure the amount of impairment loss, compares theimplied fair value of each reporting unit’s goodwill with the respectivecarrying amount of that goodwill. If the carrying amount of the reporting unitgoodwill exceeds the implied fair value of that goodwill, an impairment lossshall be recognized in an amount equal to that excess.

Theprocess for evaluating the potential impairment of goodwill is subjective andrequires judgment at many points during the test including future revenueforecasts, discount rates and various reporting unit allocations. During thefourth quarter of 2005, we completed our annual impairment test which did notindicate impairment. During the third quarter of 2006, there were no events orcircumstances which triggered an impairment review. Therefore, the first stepof the impairment test was not necessary to perform.

Wereview our other long-lived assets including property and equipment and otherintangibles for impairment whenever events or changes in circumstances indicatethat the carrying amount of these assets may not be recoverable. Factors weconsider important which could trigger an impairment review include thefollowing:

·      significant underperformance relative toexpected historical or projected future operating results;

·      significant changes in the manner of ouruse of the acquired assets or the strategy for our overall business;

24

----

·      significant negative market or economictrends;

·      significant decline in our stock price fora sustained period; and

·      our market capitalization relative to netbook value.

Recoverabilityis measured by a comparison of the assets’ carrying amount to their expectedfuture undiscounted net cash flows. If such assets are considered to beimpaired, the impairment to be recognized is measured based on the amount bywhich the carrying amount of the asset exceeds its fair value.

Wehold minority interests in several privately held companies having operationsor technology in areas within our strategic focus. Most of these investmentscan be considered as early stage investment opportunities and are classified asother assets and valued at the lower of cost or fair value on our consolidatedbalance sheets.

Futureadverse changes in market conditions or poor operating results of underlyinginvestments could result in losses or an inability to recover the carryingvalue of the investments that may not be reflected in an investment’s currentcarrying value, thereby possibly requiring an impairment charge in the future.We estimate an investment’s carrying value using a variety of valuationmethodologies. Such methodologies include comparing the private company withpublicly traded companies in similar lines of business, applying revenuemultiples to estimated future operating results for the private company andestimating discounted cash flows for that company.

**Restructuring charges and related accruals**.Since 2003, we have developed and implemented formalized plans forrestructuring our business to better align our resources to market conditionsand recorded significant charges. In connection with these plans, we recordedestimated expenses for severance and benefits, lease cancellations, assetwrite-offs and other restructuring costs. Given the significance of, and thetiming of the execution of such activities, this process is complex andinvolves periodic reassessments of estimates made at the time the originaldecisions were made, including evaluating real estate market conditions forexpected vacancy periods and sub-lease rents. We continually evaluate theadequacy of the remaining liabilities under our restructuring initiatives.Although we believe that these estimates accurately reflect the costs of our restructuringplans, actual results may differ, thereby requiring us to record additionalprovisions or reverse a portion of such provisions.

**Stock-based compensation**. Effective January 1, 2006, we adopted theprovisions of, and account for stock-based compensation in accordance with, theFinancial Accounting Standards Board’s (“FASB”) Statement of FinancialAccounting Standards No. 123—revised 2004 (“SFAS 123R”), “Share-Based Payment”which replaced Statement of Financial Accounting Standards No. 123 (“SFAS 123”),“Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 (“APB25”), “Accounting for Stock Issued to Employees.” Under the fair valuerecognition provisions of this statement, stock-based compensation cost ismeasured at the grant date based on the fair value of the award and isrecognized as expense on a straight-line basis over the requisite serviceperiod, which is the vesting period. We elected to implement this statementusing the modified-prospective method, under which prior periods are notrestated for comparative purposes. Under the modified prospective method, thevaluation provisions of SFAS 123R apply to new grants and to grants that wereoutstanding as of the effective date. Estimated compensation expense for grantsthat were outstanding as of the effective date will be recognized over theremaining service period using the compensation cost estimated for the SFAS 123pro forma disclosures. We make quarterly assessments of the adequacy of our taxcredit pool to determine if there are any deficiencies which requirerecognition in our condensed consolidated statements of operations.

We currently use the Black-Scholes option pricingmodel to determine the fair value of stock options and employee stock purchaseplan shares. The fair value of our restricted stock units is calculated basedon the fair market value of our stock on the date of grant. The determinationof the fair value of stock-based payment awards on the date of grant using anoption-pricing model is affected by our stock price as well as assumptionsregarding a number of complex and subjective variables. These variables includeour expected stock price volatility over the term of the awards, actual andprojected employee stock option exercise behaviors, risk-free interest rate andexpected dividends.

We estimate the volatility of our common stock basedon an equally weighted average of historical and implied volatility of theCompany’s common stock. We determined that a blend of historical and impliedvolatility is more reflective of the market conditions and a better indicatorof expected volatility than using purely historical volatility. We estimate theexpected life of options granted based on historical experience of similarawards, giving consideration to the contractual terms of the stock-basedawards, vesting schedules and expectations of future employee behavior. We basethe risk-free interest rate on the U.S. Treasury yield curve in effect at thetime of grant for periods corresponding with the expected life of the option.

25

----

We do not anticipate paying any cash dividends in the foreseeable futureand therefore use an expected dividend yield of zero in the option pricingmodel. SFAS 123R requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. Forfeitures were estimated based on the Company’s historicalexperience over the last ten years.

The guidance in SFAS 123R and SAB 107 is relativelynew. The application of these principles may be subject to furtherinterpretation and refinement over time. There are significant differencesamong valuation models, and there is a possibility that we will adopt differentvaluation models in the future. This may result in a lack of consistency infuture periods and could materially affect the fair value estimate ofstock-based payments. It may also result in a lack of comparability with othercompanies that use different models, methods and assumptions.

The adoption of SFAS 123R had a material impact onour condensed consolidated financial position and results of operations. SeeNote 3, “Stock Based Compensation”, for further information regarding ourstock-based compensation assumptions and expense, including pro forma disclosuresfor prior periods as if we had recorded stock-based compensation expense.

**Recent Accounting Pronouncements**

InSeptember 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, Accountingfor Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109,which prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax provision taken orexpected to be taken in a tax return. FIN 48 will be effective beginning in thefirst quarter of 2007. We are currently evaluating the impact of FIN 48 on ourcondensed consolidated financial statements.

InSeptember 2006, the FASB issued Statement of Financial Accounting Standards No.157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value,establishes a framework for measuring fair value in accordance with generallyaccepted accounting principles, and expands disclosures about fair valuemeasurements. The provisions of SFAS 157 will be effective in the first quarterof 2008. We are currently evaluating the impact of the provisions of SFAS 157.

InSeptember 2006, the U.S. Securities and Exchange Commission issued StaffAccounting Bulletin (SAB) No. 108, “Considering the Effects of Prior YearMisstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 doesnot change the staff’s previous guidance in SAB 99 on evaluating themateriality of misstatements. SAB 108 requires companies to evaluate themateriality of identified unadjusted errors on each financial statement andrelated financial statement disclosure using both the “rollover” approach andthe “iron curtain” approach. The rollover approach quantifies misstatementsbased on the amount of the error in the current year financial statementwhereas the iron curtain approach quantifies misstatements based on the effectsof correcting the misstatement in the balance sheet at the end of the currentyear, irrespective of the misstatement’s year(s) of origin. Financialstatements would require adjustment when either approach results in quantifyinga misstatement that is material. Correcting prior year financial statements forimmaterial errors would not require previously filed reports to be amended. SAB108 is effective for interim periods of the first fiscal year ending afterNovember 15, 2006. The provisions of SAB 108 currently have no impact on ourcondensed consolidated financial statements.

**RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,2006 AND 2005**

Thefollowing table sets forth, for the periods indicated, certain financialinformation as a percentage of total net revenues. The financial informationand the ensuing discussion should be read in conjunction with the accompanyingcondensed consolidated financial statements and notes thereto:

26

----

 
| ** **                                 | ** ** | **Three Months Ended September 30**                                                              | ** ** | **Nine Months Ended September 30**                                                               | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **         2006         ** | ** ** | **         2005         ** | ** ** | **         2006         ** | ** ** | **         2005         ** | ** ** |
|                                       |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |
| **Net  revenues:**                         | ** ** | ** **                                                                                                           | ** ** | ** **                                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| License and  development fees              |       | 19                                                                                                                   | %          | 21                                                                                                                   | %          | 20 | % | 23 | % |
| Maintenance and  other recurring           |       | 71                                                                                                                   |       | 65                                                                                                                   |       | 70 |   | 64 |   |
| Professional  services and other           |       | 10                                                                                                                   |       | 14                                                                                                                   |       | 10 |   | 13 |   |
|                                       |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |
| Total net revenues                         |       | 100                                                                                                                  |       | 100                                                                                                                  |       | 100 |   | 100 |   |
|                                       |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |
| **Cost of  revenues:**                     | ** ** | ** **                                                                                                           | ** ** | ** **                                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| License and  development fees              |       | 1                                                                                                                    |       | 1                                                                                                                    |       | 1 |   | 1 |   |
| Maintenance and  other recurring           |       | 17                                                                                                                   |       | 17                                                                                                                   |       | 18 |   | 18 |   |
| Professional  services and other           |       | 15                                                                                                                   |       | 10                                                                                                                   |       | 13 |   | 10 |   |
| Amortization of  developed technology      |       | 1                                                                                                                    |       | 1                                                                                                                    |       | 1 |   | 1 |   |
|                                       |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |
| Total cost of revenues                     |       | 33                                                                                                                   |       | 29                                                                                                                   |       | 32 |   | 30 |   |
|                                       |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |
| Gross margin                               |       | 67                                                                                                                   |       | 71                                                                                                                   |       | 68 |   | 70 |   |
|                                       |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |
| **Operating  expenses:**                   | ** ** | ** **                                                                                                           | ** ** | ** **                                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales and  marketing                       |       | 26                                                                                                                   |       | 22                                                                                                                   |       | 27 |   | 25 |   |
| Product  development                       |       | 19                                                                                                                   |       | 16                                                                                                                   |       | 19 |   | 18 |   |
| General and  administrative                |       | 18                                                                                                                   |       | 19                                                                                                                   |       | 18 |   | 20 |   |
| Amortization of  other intangibles         |       | 2                                                                                                                    |       | 2                                                                                                                    |       | 2 |   | 3 |   |
| Restructuring  charges                     |       | —                                                                                                               |       | —                                                                                                               |       | 0 |   | 1 |   |
|                                       |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |
| Total operating expenses                   |       | 66                                                                                                                   |       | 59                                                                                                                   |       | 67 |   | 67 |   |
|                                       |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |
| Income from  operations                    |       | 1                                                                                                                    |       | 12                                                                                                                   |       | 1 |   | 3 |   |
| Interest income  and other, net            |       | 1                                                                                                                    |       | 2                                                                                                                    |       | 2 |   | 6 |   |
|                                       |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |
| Income before  income taxes                |       | 2                                                                                                                    |       | 14                                                                                                                   |       | 4 |   | 9 |   |
| Provision for  (benefit from) income taxes |       | —                                                                                                               |       | —                                                                                                               |       | (1 | ) | — |   |
|                                       |       |                                                                                                                 |       |                                                                                                                 |       |   |   |   |   |
| **Net income**                             |       | 2                                                                                                                    | %          | 14                                                                                                                   | %          | 4 | % | 9 | % |

 

**NET REVENUES**
| ** **                         | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2006**                                                | ** ** | **2005**   | ** ** | **Change**                                             | ** ** | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
|                               |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Total net revenues (in  thousands) |       | $                                                       | 45,877     |       | $          | 42,776                                                 |       | $          | 3,101      |   | $ | 133,893 |   | $ | 123,092 |   | $ | 10,801 |   |
|                                    |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Our net revenues are made up of three components: licenseand development fees; maintenance and other recurring; and professionalservices and other. License revenues are derived from the licensing of softwareproducts, while development fees are derived from development contracts that wehave entered into with other companies, including customers and developmentpartners. Maintenance and other recurring revenues are derived from maintenancefees charged in the initial licensing year, renewals of annual maintenanceservices in subsequent years and recurring revenues derived from oursubscription-based and transaction-based services.Term license contract prices include both the software license fees andmaintenance fees, and, as a result, we typically allocate 55% of the contractprice to license revenue and 45% to maintenance and recurring revenues, basedon our assessment of the relative economic value of the two elements. Professional services and otherrevenues include fees for consulting, training services, commission revenuesfrom “soft dollaring” of third-party products and services and our clientconferences.

Eachof the major revenue categories has historically varied as a percentage of netrevenues and we expect this variability to continue in future periods. This variabilityis partially due to the timing of the introduction of new products, the 

27

----

relative size andtiming of individual perpetual software licenses, as well as the size of theimplementation, the resulting proportion of the maintenance and professional servicescomponents of these license transactions and the amount of client use ofpricing and related data. We are currently transitioning the majority of ourlicense revenue to term license agreements. Once our transition to termlicensing is complete, we expect less variability between our major categoriesof revenues because the variation from large perpetual license deals willdecrease.

Duringthe third quarter of 2006, we recorded a catch-up adjustment of approximately$529,000 to net revenues related to three term license invoices which were notsent to customers in a timely manner. The revenue associated with theseinvoices should have been recorded in three roughly equal quarterly amountsbetween the fourth quarter of 2005 and the second quarter of 2006. The amountof this adjustment was allocated 55% to license revenue and 45% to maintenancerevenue.

Weexpect total net revenues for the fourth quarter of 2006 to be between $48million and $50 million, an increase over the third quarter due to seasonalityas further noted below.

***Licenseand Development Fees***
| ** **                                   | ** ** | **Three Months Ended September 30**                                                              | ** ** | ** **                                                                                                           | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                   | ** ** | **         2006         ** | ** ** | **         2005         ** | ** ** | **Change**                                             | ** ** | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
|                                         |       |                                                                                                                 |       |                                                                                                                 |       |                                                   |       |       |       |   |   |   |   |
| License and  development fees (in thousands) |       | $                                                                                                                    | 8,610      |                                                                                                                 | $          | 9,169                                                  |       | $          | (559       | ) | $ | 26,589 |   | $ | 28,343 |   | $ | (1,754 | ) |
| Percent of total net  revenues               |       | 19                                                                                                                   | %          | 21                                                                                                                   | %          |                                                   |       | 20         | %          | 23 | % |   |   |
|                                              |            |                                                                                                                      |            |                                                                                                                      |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Wetypically license our products on a per user basis with the price for eachcustomer varying based on the selection of the products licensed, the number ofauthorized users and the size of the customer, typically measured by assetsunder management. We earn development fees when we provide product solutionswhich are not part of our standard product offering but will be incorporatedinto our future releases. The decrease in license revenue and development feesduring the three and nine months ended September 30, 2006 reflects our focus ontransitioning sales of our core products to a term model where license revenueis amortized over the term of the contract, as opposed to being recognized upfront with perpetual contracts. As a result, perpetual license revenuedecreased $3.7 million during the third quarter of 2006 versus the comparableperiod in 2005. Revenue recognized from term license contracts increased $3.1million to $5.1 million, or 59% of license revenue, during the third quarter of2006, as compared to $2.5 million, or 27% of license revenue, during the thirdquarter of 2005. Revenue recognized from term license contracts wasapproximately 46% and 24% of license revenue during the nine months endedSeptember 30, 2006 and 2005, respectively.

Termsales have the effect of loweringlicense revenues in the short term, but increase the total potential value ofthe customer relationship. We continue to sign more contracts on a termbasis as term bookings increased from $4.9 million during the third quarter of2005 to $10.6 million during the third quarter of 2006, which primarilyreflects 8 new Geneva customers and 13 new APX customers.

Dueto the winding down of our soft dollar business during fiscal 2006, forthe three months ended September 30, 2006 and 2005, soft dollar revenuesgenerated by Second Street Securities from Advent-related licenses paid forthrough soft dollar transactions were zero and $0.2 million, respectively, andrepresented 0% and 2% of total license and development revenues.

Weexpect license and development fee revenues to increase in the fourth quarterof 2006, due to certain Assets Under Administration (AUA) clients whom weassess and bill on an annual basis.

***Maintenanceand Other Recurring Revenues***
| ** **                                                     | ** ** | **Three Months Ended September 30**                                                              | ** ** | ** **                                                                                                           | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                                     | ** ** | **         2006         ** | ** ** | **         2005         ** | ** ** | **Change**                                             | ** ** | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
|                                                           |       |                                                                                                                 |       |                                                                                                                 |       |                                                   |       |       |       |   |   |   |   |
| Maintenance  revenues (in thousands)                           |       | $                                                                                                                    | 22,896     |                                                                                                                 | $          | 19,091                                                 |       | $          | 3,805      |   | $ | 65,385 |   | $ | 53,779 |   | $ | 11,606 |   |
| Other recurring  revenues (in thousands)                       |       | 9,639                                                                                                                |       | 8,680                                                                                                                |       | 959                                                    |       | 28,736     |       | 25,251 |   | 3,485 |   |
| Total  maintenance and other recurring revenues (in thousands) |       | $                                                                                                                    | 32,535     |                                                                                                                 | $          | 27,771                                                 |       | $          | 4,764      |   | $ | 94,121 |   | $ | 79,030 |   | $ | 15,091 |   |
| Percent of total net  revenues                                 |       | 71                                                                                                                   | %          | 65                                                                                                                   | %          |                                                   |       | 70         | %          | 64 | % |   |   |

 

Theincrease in maintenance and other recurring revenues in the three and ninemonth periods reflected an increase in new maintenance contracts as a result ofthe increase in the number of new license contracts (both term and perpetual),price increases and service level upgrades to our installed customer base, anincrease in demand for our data services and an increase in our recurringrevenue sharing. We disclose our maintenance renewal rate one quarter inarrears. The maintenance renewal rate for the second quarter of 2006 of 89% andwas within the range of 86% to 90% that we have experienced since the secondquarter of 2005. Maintenance revenues increased $3.8 million and $11.6 millionduring the three and nine months ended

28

----

September 30,2006, respectively, reflecting an increase in new maintenance support contractsas a result of new license contracts, price increases and service level upgradesfrom maintenance contracts for our installed customer base. Recurring revenueincreased by $1.0 million and $3.5 million during the three and nine monthsended September 30, 2006, respectively, primarily as a result of increases inrevenue sharing from a partner program that began in 2004, as well as increasesin volume and prices in our subscription and data management revenue streams,especially Advent Custodial Data (ACD).

Maintenancerevenue has remained relatively flat as a proportion of total maintenance andrecurring revenues at approximately 68% to 70% in the three and nine monthsended September 30, 2006 and 2005. We expect maintenance and recurring revenueswill increase slightly in the fourth quarter of 2006 compared to the thirdquarter, reflecting additions to the customer base and maintenance priceincreases with existing customers, partially offset by attrition within ourexisting customer base.

***ProfessionalServices and Other Revenues***
| ** **                                               | ** ** | **Three Months Ended September 30**                                                              | ** ** | ** **                                                                                                           | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                               | ** ** | **         2006         ** | ** ** | **         2005         ** | ** ** | **Change**                                             | ** ** | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
| Professional  services and other revenues (in thousands) |       | $                                                                                                                    | 4,732      |                                                                                                                 | $          | 5,836                                                  |       | $          | (1,104     | ) | $ | 13,183 |   | $ | 15,719 |   | $ | (2,536 | ) |
| Percent of total net  revenues                           |       | 10                                                                                                                   | %          | 14                                                                                                                   | %          |                                                   |       | 10         | %          | 13 | % |   |   |
|                                                          |            |                                                                                                                      |            |                                                                                                                      |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Professionalservices and other revenues include consulting, project management, customintegration, custom work, training and soft dollar transactions for productsand services not related to Advent product or services. Professional servicesrelated to Advent Office products generally can be completed in a relativelyshort time period while services related to Geneva and APX products may requirea six- to nine-month implementation period. Therefore, the revenues associatedwith professional services reflect a mix of services related to current quarterlicense revenue as well as transactions from prior quarters. Generally, ourconsulting revenues lag our license revenues by one or two quarters, but canalso be affected by specific milestone completions.

Professionalservices and other revenues decreased $1.1 million and $2.5 million during thethree and nine months ended September 30, 2006, respectively. These decreasesare primarily attributable to the net deferral of professional services revenuefor the three and nine months ended September 30, 2006, respectively, forservices performed on term license implementations which were still in progressas of September 30, 2006. We have experienced an increase of implementationservices with the launch of our APX product and sales traction for our Genevaproduct, which are generally sold under the term license model. As there weremore term license implementation projects in progress as of September 30, 2006compared to the prior year, we have experienced an increase in the deferral ofprofessional services revenue. We deferred net professional services revenuesof approximately $0.9 million during the third quarter of 2006 as compared to$0.2 million during the third quarter of 2005. During the nine months endedSeptember 30, 2006, we deferred net professional services revenues ofapproximately $4.2 million as compared to only $0.7 million during thecorresponding period of 2005. In addition, revenues earned from third partyproducts paid for through soft dollar transactions decreased due to fewertransactions as we continued our winding down the soft dollar business ofSecond Street Securities beginning in the first quarter of 2006. Thesedecreases in professional services and other revenues were offset by $0.9million in revenue generated during the third quarter of 2006 from our AnnualClient Conference held in September 2006 previously held in the fourth quarterof 2005.

Weexpect revenues from professional services to remain relatively flat in the fourthquarter of 2006 compared to the third quarter. Our third quarter of 2006results include $0.9 million of revenue from the annual Advent ClientConference, which will not recur in the fourth quarter of 2006. However, in thefourth quarter we expect this decrease in revenue will be offset byapproximately $0.5 million of revenue generated by the MicroEdge ClientConference, which was held in October 2006.

***Revenuesby Segment***
| ** **                    | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                    | ** ** | **2006**                                                | ** ** | **2005**   | ** ** | **Change**                                             | ** ** | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                    | ** ** | **(in thousands)**                                 | ** ** |
| Advent  Investment Management |       | $                                                       | 40,975     |       | $          | 36,957                                                 |       | $          | 4,018      |   | $ | 118,573 |   | $ | 106,513 |   | $ | 12,060 |   |
| MicroEdge                     |       | 5,121                                                   |       | 4,986      |       | 135                                                    |       | 14,822     |       | 14,488 |   | 334 |   |
| Other                         |       | (219                                                    | )          | 833        |       | (1,052                                                 | )          | 498        |       | 2,091 |   | (1,593 | ) |
|                          |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Total                         |       | $                                                       | 45,877     |       | $          | 42,776                                                 |       | $          | 3,101      |   | $ | 133,893 |   | $ | 123,092 |   | $ | 10,801 |   |

 

We have two reportable segments: Advent InvestmentManagement (“AIM”) and MicroEdge. AIM derives revenues from the development,marketing and sale of software products, data interfaces and relatedmaintenance and services that automate, integrate and support certain missioncritical functions of investment management organizations. MicroEdge derives

29

----

revenues from the sale of software and services for grant management,matching gifts and volunteer tracking for the grant-making community worldwide.

The 11% increase in AIM’s revenue in both the three and nine monthsended September 30, 2006 reflected an increase in new maintenance supportcontracts as a result of new license contracts, price increases and servicelevel upgrades from maintenance contracts for our installed customer base.

The slight increases in MicroEdge revenues in the three and nine monthsended September 30, 2006 primarily reflected increase in maintenance revenuesdue to price increases and continued strong customer retention.

The revenue decreases in our Other segment primarily resulted from thewinding down of the soft dollar business of our broker/dealer subsidiary.During this transition, we determined that we needed to write-off certainbroker receivable balances. Due to our requirement to report revenue net ofexpenses for this segment, the write-off resulted in negative revenues duringthe three months ended September 30, 2006 since we have no significant revenueto offset the write-off in the period.

**COST OF REVENUES**
| ** **                             | ** ** | **Three Months Ended September 30**                                                              | ** ** | ** **                                                                                                           | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                             | ** ** | **         2006         ** | ** ** | **         2005         ** | ** ** | **Change**                                             | ** ** | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
|                                   |       |                                                                                                                 |       |                                                                                                                 |       |                                                   |       |       |       |   |   |   |   |
| Total cost of  revenues (in thousands) |       | $                                                                                                                    | 15,241     |                                                                                                                 | $          | 12,532                                                 |       | $          | 2,709      |   | $ | 42,697 |   | $ | 37,517 |   | $ | 5,180 |   |
| Percent of total net  revenues         |       | 33                                                                                                                   | %          | 29                                                                                                                   | %          |                                                   |       | 32         | %          | 30 | % |   |   |
|                                        |            |                                                                                                                      |            |                                                                                                                      |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Ourcost of revenues is made up of four components: cost of license and developmentfees; cost of maintenance and other recurring; cost of professional servicesand other; and amortization of developed technology.

***Costof License and Development Fees***
| ** **                                           | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                           | ** ** | **2006**                                                | ** ** | **2005**   | ** ** | **Change**                                             | ** ** | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
|                                                 |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Cost of license  and development fees (in thousands) |       | $                                                       | 356        |       | $          | 328                                                    |       | $          | 28         |   | $ | 1,141 |   | $ | 968 |   | $ | 173 |   |
| Percent of total  license revenues                   |       | 4                                                       | %          | 4          | %          |                                                   |       | 4          | %          | 3 | % |   |   |
|                                                      |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Costof license and development fees consists primarily of royalties and other feespaid to third parties, the fixed direct labor involved in producing anddistributing our software, labor costs associated with generating developmentfees and cost of product media including duplication, manuals and packagingmaterials. These costs have remained relatively flat during the three monthsended September 30, 2006 compared to the prior year period. The increase incosts for the nine months ended September 30, 2006 primarily reflect increasesin payroll and related expenses, higher utilization of outside contractors androyalties. Payroll related expenses increased by $76,000 due to an additionalemployee in the department during fiscal 2006 as compared to fiscal 2005.Higher utilization of outside services also contributed to $48,000 of theincrease during the nine months ended September 30, 2006. We expect cost oflicense and development fees to remain flat in the fourth quarter of 2006compared to the third quarter of 2006.

***Costof Maintenance and Other Recurring***
| ** **                                              | ** ** | **Three Months Ended September 30**                                                              | ** ** | ** **                                                                                                           | ** ** | **Nine Months Ended September 30** | ** ** | ** **                                                                                                           | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **         2006         ** | ** ** | **         2005         ** | ** ** | **Change**                                             | ** ** | **         2006         ** | ** ** | **         2005         ** | ** ** | **Change** | ** ** |
|                                                    |       |                                                                                                                 |       |                                                                                                                 |       |                                                   |       |                                                                                                                 |       |   |   |   |   |
| Cost of  maintenance and other recurring (in thousands) |       | $                                                                                                                    | 7,740      |                                                                                                                 | $          | 7,314                                                  |       | $                                                                                                                    | 426        |   | $ | 23,680 |   | $ | 21,951 |   | $ | 1,729 |   |
| Percent of total  maintenance revenue                   |       | 24                                                                                                                   | %          | 26                                                                                                                   | %          |                                                   |       | 25                                                                                                                   | %          | 28 | % |   |   |
|                                                         |            |                                                                                                                      |            |                                                                                                                      |            |                                                        |            |                                                                                                                      |            |  |  |  |  |  |  |  |  |  |  |

 

Costof maintenance and other recurring revenues is primarily comprised of thedirect costs of providing technical support and other services for recurringrevenues and royalties paid to third party subscription-based andtransaction-based vendors. The increase during the three and nine months endedSeptember 30, 2006 was due primarily to an increase in compensation and relatedcosts of $744,000 and $1.7 million, respectively, resulting from an increase instock-based compensation costs and headcount. Specifically, stock-basedcompensation costs, which are included in compensation and related costs, of$198,000 and $722,000 were recognized during the three and nine months endedSeptember 30, 2006, respectively, as a result of implementing SFAS 123Reffective January 1, 2006, and from issuing RSU’s and SAR’s to employees during2006. Payroll related expenses increased by $513,000 and $946,000 during thethree and nine months ended September 30, 2006 as a result of an increase inheadcount. This increase was offset by a decrease in royalty expense of$316,000 and $276,000 for the three and nine months ended September 30, 2006.We expect cost of maintenance and other recurring revenues to increaseconsistent with the associated revenue increase in the fourth quarter of 2006compared to the third quarter of 2006.

30

----

 

***Costof Professional Services and Other***
|                                                         | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                              | ** ** | **2006**                                                | ** ** | **2005**   | ** ** | **Change**                                             | ** ** | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
|                                                    |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Cost of professional  services and other (in thousands) |       | $                                                       | 6,894      |       | $          | 4,249                                                  |       | $          | 2,645      |   | $ | 16,967 |   | $ | 12,729 |   | $ | 4,238 |   |
| Percent of total professional services revenues         |       | 146                                                     | %          | 73         | %          |                                                   |       | 129        | %          | 81 | % |   |   |
|                                                         |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Costof professional services and other revenue consists primarily of personnelrelated costs associated with the client services and support organization inproviding consulting, custom report writing and conversions of data fromclients’ previous systems. Also included are direct costs associated withthird-party consultants and travel expenses.

Theincreases in the 2006 periods primarily reflect the cost of Advent’s AnnualClient Conference, increases in payroll and related costs, recruiting expenses,and travel costs. Our annual Advent client conference was held in Septemberthis year and we recorded approximately $1.1 million of costs during the thirdquarter of 2006. In the prior year, our client conference was held in thefourth quarter and therefore we recorded no client conference costs in thethird quarter of 2005. Payroll related expenses increased by $1.3 million and $1.9million during the three and nine months ended September 30, 2006 as a resultof an increase in headcount and stock based compensation. To keep pace with thestrong demand for our products in 2006, we have increased headcount in ourprofessional services group. Headcount increased to 117 at September 30, 2006from 93 at September 30, 2005, primarily reflecting increases in our clientservices and consulting groups. Stock-based compensation costs of $172,000 and$593,000, which are included in payroll related expenses, were recognizedduring the three and nine months ended September 30, 2006, respectively, as aresult of implementing SFAS 123R effective January 1, 2006, and from issuingRSU’s and SAR’s to employees during 2006. Consistent with the increase inheadcount, recruiting costs increased by $90,000 and $315,000 during the threeand nine months ended September 30, 2006, respectively. In addition, travelexpenses increased by $143,000 and $666,000 during the three and nine monthsended September 30, 2006, respectively, due to travel associated with moreprofessional service projects. Costs for the nine months ended September 30,2006 also reflect $0.6 million of write-offs and reserves incurred in the firstquarter of 2006 associated with third party products paid through soft dollartransactions.

 These increases in costs were partially offsetby larger net deferrals of professional services costs under SOP 97-2 relatedto services performed on term license implementations which were in progress atperiod end. We have experienced an increase of implementation services with thelaunch of our APX product and sales traction for our Geneva product, which areprincipally sold under the term license model. As there were more term licenseimplementation projects in progress as of September 30, 2006 compared to theprior year, we have experienced an increase in the deferral of professionalservice costs. We deferred net professional services costs of $0.9 millionduring the third quarter of 2006 compared to only $0.2 million during the thirdquarter of 2005. We deferred net professional services costs of $4.2 millionduring the nine months ended September 30, 2006 compared to only $0.7 millionin the corresponding period of 2005.

Grossmargins for the three and nine months ended September 30, 2006 were negativelyimpacted by our deferral of professional services costs under SOP 97-2 as wedefer only the direct costs associated with services performed on term licensearrangements which were in progress at each quarter-end. As a result, indirectcosts such as management and other overhead expenses are recognized in theperiod in which they arise, with no revenue to offset them. In addition, wehave added headcount in both our client services and consulting groups. Sincethese new employees undergo a training period to become fully functional orbillable, their associated costs have a near-term negative impact on margins.Gross margin for the nine months ended September 30, 2006 was also impacted bythe $0.6 million of write-offs and reserves incurred in the first quarter of2006 associated with third party products paid through soft dollartransactions. Excluding the effects of our deferrals and the headcountincreases, we forecast a 5-10% gross margin on our professional services.However, we presently expect our deferrals and headcount increases tonegatively affect our professional services gross margins for the foreseeablefuture.

Weexpect cost of professional services and other revenues to decrease in the fourthquarter of 2006 compared to the third quarter. Of the expected decrease, $1.1million is attributed to Advent’s Annual Client Conference held in September2006 which will not recur in the fourth quarter, partially offset by $0.5million of MicroEdge client conference related expenses.

***Amortizationof Developed Technology***
| ** **                                           | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                           | ** ** | **2006**                                                | ** ** | **2005**   | ** ** | **Change**                                             | ** ** | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                                           | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Amortization of  developed technology (in thousands) |       | $                                                       | 251        |       | $          | 641                                                    |       | $          | (390       | ) | $ | 909 |   | $ | 1,869 |   | $ | (960 | ) |
| Percent of total net revenues                        |       | 1                                                       | %          | 1          | %          |                                                   |       | 1          | %          | 2 | % |   |   |
|                                                      |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

31

----

 

Amortizationof developed technology represents amortization of acquisition-relatedintangible assets and internal product development costs.  The decrease in amortization of developedtechnology reflected technology related intangible assets from prioracquisitions becoming fully amortized during fiscal 2005 and the first ninemonths of 2006. We expect amortization of developed technology to be approximately$0.3 million in the fourth quarter of 2006.

### **OPERATING EXPENSES**

***Salesand Marketing***
| ** **                          | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2006**                                                | ** ** | **2005**   | ** ** | **Change**                                             | ** ** | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                          | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales and marketing (in  thousands) |       | $                                                       | 12,115     |       | $          | 9,453                                                  |       | $          | 2,662      |   | $ | 36,466 |   | $ | 29,990 |   | $ | 6,476 |   |
| Percent of total net revenues       |       | 26                                                      | %          | 22         | %          |                                                   |       | 27         | %          | 25 | % |   |   |
|                                     |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Salesand marketing expenses consist primarily of the costs of personnel involved inthe sales and marketing process, sales commissions, advertising and promotionalmaterials, sales facilities expense, trade shows, and seminars. The increase inexpense for the three and nine months ended September 30, 2006 was primarilydue to stock-based compensation expense of $1.3 million and $3.7 million, respectively,as a result of implementing SFAS 123(R), effective January 1, 2006, and fromissuing RSU’s and SAR’s to employees during 2006. We incurred approximately$0.2 million and $0.5 million of bad debt expense during the three and ninemonths ended September 2006, respectively, associated with the winding down ofour soft dollar business. Travel expenses increased by $370,000 and $554,000for the three and nine months ended September 30, 2006, respectively. Payrollrelated expenses increased by $724,000 during the three months ended September30, 2006 as a result of higher bonuses resulting from strong bookingsperformance and an increase in headcount. Payroll related expenses increased byonly $549,000 during the nine months ended September 30, 2006 as our averageheadcount in our sales and marketing group during the first half of 2006 wasless than the comparable period in 2005. This resulted in a decrease in payrollrelated expenses during the first half of 2006 but an overall increase of$549,000 increase during the nine months ended September 30, 2006. We allocatedpayroll and related costs of certain IT personnel from general andadministrative expense to sales and marketing expense as these IT employeeswere working on specific projects relating to the sales and marketing function.We expect sales and marketing expenses to be up in the fourth quarter of 2006compared to the third quarter of 2006, due primarily to corporate marketingprograms and year-end compensation accelerators.

***ProductDevelopment***
| ** **                          | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2006**                                                | ** ** | **2005**   | ** ** | **Change**                                             | ** ** | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                          | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product development  (in thousands) |       | $                                                       | 8,849      |       | $          | 6,800                                                  |       | $          | 2,049      |   | $ | 25,599 |   | $ | 22,567 |   | $ | 3,032 |   |
| Percent of total net revenues       |       | 19                                                      | %          | 16         | %          |                                                   |       | 19         | %          | 18 | % |   |   |
|                                     |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Productdevelopment expenses consist primarily of salary and benefits for ourdevelopment staff as well as contractors’ fees and other costs associated withthe enhancements of existing products and services and development of new productsand services. We account for product development costs in accordance with SFAS2, “Accounting for Research and Development Costs”, and SFAS 86, “Accountingfor Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”,which specifies that costs incurred to develop computer software productsshould be charged to expense as incurred until technological feasibility isreached for the products. Once technological feasibility is reached, allsoftware costs should be capitalized until the product is made available forgeneral release to customers. The capitalized costs will be amortized using thegreater of the ratio of the products current gross revenues to the total ofcurrent expected gross revenues or on a straight-line basis over the software’sestimated economic life of approximately three years.

Theincrease in product development expense during the three and nine months endedSeptember 30, 2006 was primarily due to stock-based compensation expense of$0.7 million and $2.2 million, respectively, as a result of implementing SFAS123(R), effective January 1, 2006, and from issuing RSU’s and SAR’s toemployees during 2006. In addition, payroll and other related costs increasedby $1.6 million and 1.2 million during the three and nine months endedSeptember 30, 2006 as a result of an increase in headcount and lesscapitalization of product development costs under SFAS 86. During the three andnine months ended September 30, 2006, we capitalized $4,000 and $898,000 ofsoftware development costs, whereas we capitalized $819,000 and $1.3 millionduring the comparable periods of 2005. We expect product development expensesto be flat to slightly down in the fourth quarter of 2006 compared to the thirdquarter as we expect more products to enter their beta phase and will thereforecapitalize more costs under SFAS 86 compared to the third quarter of 2006. Theeffect of the expected SFAS 86 capitalization will be partially offset byexpected headcount growth.

32

----

***Generaland Administrative***
| ** **                                 | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **2006**                                                | ** ** | **2005**   | ** ** | **Change**                                             | ** ** | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
|                                       |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| General and  administrative (in thousands) |       | $                                                       | 8,262      |       | $          | 7,947                                                  |       | $          | 315        |   | $ | 23,911 |   | $ | 24,108 |   | $ | (197 | ) |
| Percent of total net revenues              |       | 18                                                      | %          | 19         | %          |                                                   |       | 18         | %          | 20 | % |   |   |
|                                            |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Generaland administrative expenses consist primarily of personnel costs for finance,administration, operations and general management, as well as legal andaccounting expenses. During the three and nine months ended September 30, 2006,we allocated payroll and related costs for certain IT personnel to sales andmarketing expense and cost of professional services as these IT employees wereworking on specific projects relating to these functions. The overallfluctuations were also attributable to lower legal fees of $0.3 million and$1.1 million during the three and nine months ended September 30, 2006 as thecomparative 2005 periods included costs for various legal disputes. Decreasesin depreciation expense of $0.3 million and $0.9 million for the three and ninemonths ended September 30, 2006, respectively, also contributed to the overalldecrease in general and administrative expense which primarily resulted fromassets being fully depreciated subsequent to September 30, 2005 and also from theexit of one floor of our office space in New York, New York in the secondquarter of 2005. Outside service costs decreased by $636,000 and $650,000 forthe three and nine months ended September 30, 2006 as fewer externalconsultants were used during that period. These decreases were offset byincreases in stock-based compensation expense of $1.1 million and $2.9 millionduring the three and nine months ended September 30, 2006, respectively, as aresult of adopting SFAS 123R in the first quarter of 2006, and from issuing RSU’sand SAR’s to employees during 2006 and an increase in rent expense ofapproximately $251,000 and $869,000 during the three and nine months endedSeptember 30, 2006, respectively. We entered into a definitive lease agreement in January 2006 for our new headquartersfacility located at 600 Townsend Street in San Francisco, California and sincethen we have incurred rent expense at both 600 Townsend and our priorheadquarter facility located at 301 Brannan Street resulting in higher rentexpense for 2006.Also, accountingfees increased $0.3 million and $0.4 million during the three and nine monthsended September 30, 2006, respectively, due to higher external Sarbanes-Oxleycompliance costs. We expect general and administrative expenses to bedown slightly in the fourth quarter of 2006 compared to the third quarter as weexpect a decrease in rent expense resulting from the exit of our 301 Brannanfacility in San Francisco, California.

***Amortizationof Other Intangibles***
| ** **                                         | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                         | ** ** | **2006**                                                | ** ** | **2005**   | ** ** | **Change**                                             | ** ** | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                                         | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Amortization of other  intangibles  (in thousands) |       | $                                                       | 1,028      |       | $          | 997                                                    |       | $          | 31         |   | $ | 3,027 |   | $ | 3,064 |   | $ | (37 | ) |
| Percent of total net revenues                      |       | 2                                                       | %          | 2          | %          |                                                   |       | 2          | %          | 3 | % |   |   |
|                                                    |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Amortizationof other intangibles represents amortization of non-technology relatedintangible assets. Amortization of other intangibles has remained flat duringthe three and nine months ended September 30, 2006 as we continue to amortizeour non-technology intangibles through their estimated useful lives. We expectamortization of other intangibles to be approximately $1.0 million in thefourth quarter of 2006.

***RestructuringCharges***
| ** **                            | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2006**                                                | ** ** | **2005**   | ** ** | **Change**                                             | ** ** | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
|                                  |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Restructuring charges  (in thousands) |       | $                                                       | 54         |       | $          | 116                                                    |       | $          | (62        | ) | $ | 320 |   | $ | 1,719 |   | $ | (1,399 | ) |
| Percent of total net revenues         |       | 0                                                       | %          | 0          | %          |                                                   |       | 0          | %          | 1 | % |   |   |
|                                       |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Restructuringinitiatives have been implemented in our AIM and Other operating segments toreduce costs and improve operating efficiencies by better aligning ourresources to near-term revenue opportunities. These initiatives have resultedin restructuring charges comprised primarily of costs related to propertiesabandoned in connection with facilities consolidation, related write-down ofleasehold improvements and severance and associated employee termination costsrelated to headcount reductions. Our restructuring charges included accrualsfor estimated losses on facility costs based on our contractual obligations netof estimated sublease income. We reassess this liability periodically based onmarket conditions.

##### During the three months ended September 30,2006, we recorded a restructuring charge of $54,000 which related to thepresent value amortization of facility exit obligations. During the threemonths ended June 30, 2006, we recorded a restructuring charge of $124,000which related to the costs to exit a portion of our facility in New Rochelle,New York, and our entire facility in Summit, New Jersey as well as the fairvalue amortization of prior period obligations. During the threemonths ended March 31, 2006, Advent recorded a net restructuring charge of$141,000 primarily to adjust original estimates for facilities in SanFrancisco, California and New York, New York.

Duringthe nine months ended September 30, 2005, we recorded total restructuringcharges of $1.7 million consisting of charges of $83,000, $1.5 million and$116,000 recorded in the first, second and third quarters, respectively, of2005. The

33

----

 

second quartercharge of $1.5 million primarily consisted of net facility and exit costsrelated to sub-leasing one floor of our Chrysler East office space in New York,New York. The net restructuring charges of $83,000 and $116,000 recorded infirst and third quarters, respectively, were to adjust original estimates forvacated facilities.

The followingtable sets forth an analysis of the components of the restructuring charges andthe payments and non-cash charges made against the accrual during the ninemonths ended September 30, 2006 (in thousands):
| ** **                                              | ** ** | **Facility Exit** | ** ** | **Severance and** | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------|------------|
| ** **                                              | ** ** | **Costs**              | ** ** | **Benefits**           | ** ** | **Total**  | ** ** |
|                                                    |       |                   |       |                   |       |       |       |
| Balance of  restructuring accrual at December 31, 2005  |       | $                      | 4,553      |                   | $          | 7          |       | $ | 4,560 |   |
| Cash payments                                           |       | (1,298                 | )          | —                 |       | (1,298     | )          |
| Reversal of deferred  rent related to facilities exited |       | 6                      |       | —                 |       | 6          |       |
| Restructuring charges                                   |       | 134                    |       | —                 |       | 134        |       |
| Adjustment of prior  restructuring costs                |       | 189                    |       | (3                     | )          | 186        |       |
| Balance of  restructuring accrual at September 30, 2006 |       | $                      | 3,584      |                   | $          | 4          |       | $ | 3,588 |   |

 

Of the remaining restructuring accrual of $3.6 million atSeptember 30, 2006, $0.8 million and $2.8 million are included in accruedliabilities and other long-term liabilities, respectively, on the accompanyingcondensed consolidated balance sheet. As of September 30, 2006, the remainingexcess facility costs of $3.6 million are stated at estimated fair value, netof estimated sublease income of approximately $7.5 million. We expect to payremaining obligations in connection with vacated facilities no later than overthe remaining lease terms, which expire on various dates through 2012. Weexpect to pay the remaining severance and benefits in 2006. As a result of ourrestructuring activities implemented to date, we have reduced our totalexpenses by approximately $15 million on an annual basis. We anticipateincurring a restructuring charge of approximately $3 million in relation to ourcorporate headquarters facility move in the fourth quarter of 2006.

### ***Operating Income by Segment***

| ** **                                          | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                          | ** ** | **2006**                                                | ** ** | **2005**   | ** ** | **Change**                                             | ** ** | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                                 | ** ** |
| Advent Investment  Management                       |       | $                                                       | 4,210      |       | $          | 5,409                                                  |       | $          | (1,199     | ) | $ | 13,883 |   | $ | 6,864 |   | $ | 7,019 |   |
| MicroEdge                                           |       | 1,418                                                   |       | 997        |       | 421                                                    |       | 3,541      |       | 1,947 |   | 1,594 |   |
| Other                                               |       | (573                                                    | )          | 163        |       | (736                                                   | )          | (1,518     | )          | 249 |   | (1,767 | ) |
| Unallocated corporate  operating costs and expenses |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Stock-based  compensation                           |       | (3,448                                                  | )          | —     |       | (3,448                                                 | )          | (10,097    | )          | — |   | (10,097 | ) |
| Amortization of  developed technology               |       | (251                                                    | )          | (641       | )          | 390                                                    |       | (909       | )          | (1,869 | ) | 960 |   |
| Amortization of  other intangibles                  |       | (1,028                                                  | )          | (997       | )          | (31                                                    | )          | (3,027     | )          | (3,064 | ) | 37 |   |
|                                                |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Total operating income                              |       | $                                                       | 328        |       | $          | 4,931                                                  |       | $          | (4,603     | ) | $ | 1,873 |   | $ | 4,127 |   | $ | (2,254 | ) |

 

Operating income for the AIM segment decreased by $1.2million and increased $7.0 million during the three and nine months endedSeptember 30, 2006, respectively. As noted in the “net revenues” sectionabove, we recorded a catch-up adjustment of approximately $529,000 related tothree term license invoices which were not sent to customers in a timely mannerduring the third quarter of 2006. The effect of this adjustment positivelyeffected AIM’s net revenues and operating income for the three and nine monthsended September 30, 2006. The decrease of$1.2 million in AIM’s operating income for the third quarter of 2006 reflectedhigher costs of $1.1 million from our Annual Advent Client Conference held inSeptember 2006 (previously held in the fourth quarter of 2005), payroll relatedcosts associated with the AIM’s increase in headcount, lower SFAS 86capitalization of software development costs, and higher bonuses accruals basedon strong bookings performance. These decreases were partially offset by AIM’srevenue growth of $4.0 million during the three months ended September 30,2006. The increase in AIM’s operating income for the nine months endedSeptember 30, 2006 generally reflected the increase in AIM’s revenue of $12.1million partially offset by higher payroll related expenses associated with theincrease in headcount and less SFAS 86 capitalization.

MicroEdge’s operating income increased by $0.4 millionand $1.6 million during the three and nine months ended September 30, 2006primarily due to decreased marketing costs and outside services cost associatedwith lower utilization of outside contractors.

Operating losses for our Other segment increased by $0.7million and $1.8 million during the three and nine months ended September 30,2006, due to decreases in revenue and incurring costs resulting primarily from thewinding down of our soft dollar business in 2006.

34

----

 

***Interest Income and Other, Net***
| ** **                                     | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                     | ** ** | **2006**                                                | ** ** | **2005**   | ** ** | **Change**                                             | ** ** | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
|                                           |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Interest income and  other, net (in thousands) |       | $                                                       | 656        |       | $          | 977                                                    |       | $          | (321       | ) | $ | 3,054 |   | $ | 6,586 |   | $ | (3,532 | ) |
| Percent of total net revenues                  |       | 1                                                       | %          | 2          | %          |                                                   |       | 2          | %          | 5 | % |   |   |
|                                                |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Interest income and other, net consists of interestincome, realized gains and losses on investments and foreign currency gains andlosses. The decrease in interest income during the three months endedSeptember 30, 2006 was a result of our lower cash balance, as we liquidatedpart of our portfolio to fund the significant stock repurchases in fiscal 2006.Interest income and other, net during thenine months ended September 30, 2005 included a gain on sale of aprivate equity investment of $3.6 million during the second quarter of 2005,accounting for the majority of the decrease of $3.5 million during the ninemonths ended September 30, 2006.

**Provision For(Benefit From) Income Taxes**
| ** **                                                | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                                | ** ** | **2006**                                                | ** ** | **2005**   | ** ** | **Change**                                             | ** ** | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
|                                                      |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Provision for (benefit  from) income taxes (in thousands) |       | $                                                       | 32         |       | $          | 62                                                     |       | $          | (30        | ) | $ | (1,030 | ) | $ | 192 |   | $ | (1,222 | ) |
| Percent of total net revenues                             |       | 0                                                       | %          | 0          | %          |                                                   |       | -1         | %          | 0 | % |   |   |
|                                                           |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

For the three and nine months ended September 30,2006, we recorded a provision for income taxes of $32,000 and a benefit fromincome taxes of $1.0 million respectively, compared to provisions of $62,000and $192,000 in the three and nine months ended September 30, 2005,respectively. We account for income taxes under an asset and liability approachthat requires the expected future tax consequences of temporary differencesbetween book and tax bases of assets and liabilities to be recognized asdeferred tax assets and liabilities. During the fourth quarter of 2003, weestablished a full valuation allowance against our deferred tax assets in theUnited States because we determined that it was more likely than not that thesedeferred tax assets would not be realized in the foreseeable future. The smallprovision for income taxes for the three months ended September 30, 2006 isprimarily due to statutory income tax expense being fully offset by a decreasein the valuation allowance and the recognition of some foreign deferred taxbenefits. The benefit from income taxes of $1.0 million for the nine monthsended September 30, 2006 is primarily due to the receipt of a state income taxrefund of $0.5 million and a reduction in other projected tax liabilitiesassociated with the expiration of a federal income tax return contingency ofapproximately $0.6 million.

If our recent trend of profitability continues, we maydetermine that there is sufficient positive evidence to support a reversal of,or decrease in, the valuation allowance. We continue to monitor and evaluatethe facts pertaining to the possible recoverability of our deferred tax assets.One of the key indicators we are monitoring is the rolling twelve-quartercumulative pre-tax net income or loss position at the end of eachquarter.  At the end of the third quarter, this indicator still showed acumulative loss suggesting that we have not yet fully recovered from the periodof quarterly losses in 2003 and 2004. If we were to reverse all or somepart of our valuation allowance and recognize all or some part of our deferredtax assets, our condensed consolidated financial statements would reflect anincrease in assets on our balance sheet and a corresponding tax benefit to ourstatement of operations in the amount of the reversal. Once we have removed ourvaluation allowance, we will resume providing for income taxes at the statutoryrate. Despite this potential increase in our effective tax rate, our cashpayments for income taxes will continue to be nominal in the near term as wehave significant net operating losses, capital losses and credit carryforwardsto utilize against current income taxes.

**LIQUIDITY ANDCAPITAL RESOURCES**

Our aggregate cash, cash equivalents and marketablesecurities were $60.9 million at September 30, 2006, compared with $163.4million at December 31, 2005, primarily as a result of the repurchase of ourcommon stock. Cash equivalents are comprised of highly liquid investmentspurchased with an original or remaining maturity of 90 days or less at the dateof purchase.

The table below, for the periods indicated, providesselected cash flow information (in thousands):

35

----

 

|                                            | ** ** | **Nine Months Ended September 30** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
|                                       |       |                                                   |       |   |   |
| Net cash  provided by operating activities |       | $                                                      | 31,752     |   | $ | 24,451 |   |
| Net cash  provided by investing activities |       | $                                                      | 46,938     |   | $ | 49,087 |   |
| Net cash used in  financing activities     |       | $                                                      | (117,088   | ) | $ | (39,080 | ) |

 

***Cash Flows from Operating Activities***

Our cash flows from operating activities represent themost significant source of funding for our operations. Our cash provided byoperating activities generally follows the trend in our net revenues andoperating results. Our cash provided by operating activities during the ninemonths ended September 30, 2006 of $31.8 million was primarily the result ofour net income adjusted for non-cash charges including stock-basedcompensation, depreciation and amortization. Other sources of cash during thenine months ended September 30, 2006 included increases in deferred rent anddeferred revenue. The increase in deferred rent resulted from the entry into amaterial definitive lease agreement on January 2006 for our new headquartersfacility located at 600 Townsend Street in San Francisco. The increase indeferred revenue primarily reflected our continued transition to a term licensemodel. Under the term model, we generally bill and collect for a termarrangement in equal installments in advance of each annual period. Theseamounts are deferred at billing and recognized over the annual term period.This has the effect of increasing deferred revenue when compared with aperpetual license model where no license revenue is deferred. See furtherdiscussion of the effects of our transition to a term model in the “Overview”section. Uses of our operating cash includeda reduction of our sales reserves, an increase in our prepaid and other assetsand decreases in accrued liabilities and income taxes payable. The increase inprepaid and other assets primarily reflected a receivable established for thetenant improvement allowance associated with our 600 Townsend lease agreement,which was partially offset by cash payments by the lessor during the ninemonths ended September 30, 2006. The decreases in accrued liabilities reflectedcash payments for December 31, 2005 liabilities including year-end payables andbonuses, commissions, payroll taxes, settlement of claims of certain formermembers and employees of Advent Outsource Data Management, and legal costsassociated with the discovery phase of the Kinexus earnout litigation. Thedecrease in income taxes payable during the nine months ended September 30,2006 reflected cash payments related to state income taxes and reductionsin other projected tax liabilities.

Our cash provided by operating activities of $24.5million during the nine months ended September 30, 2005 was primarily theresult of our net income adjusted for non-cash charges including depreciationand amortization, partially offset by a non-operating gain from the sale of anequity investment. Other sources of cash during the first nine months of 2005included a decrease in accounts receivable, and increases in accruedliabilities and deferred revenue. The decrease in accounts receivable primarilyreflected strong collections during the first nine months of 2005. Days’ salesoutstanding decreased from 73 days to 60 days during this period. The increasein accrued liabilities was primarily due to restructuring charges for facilityexit costs during the second quarter of 2005. The increase in deferred revenuesprimarily reflected an increase in deferred maintenance. Uses of our operatingcash included a reduction in income taxes payable as a result of the payment ofa tax settlement of $1.2 million. Other major uses of cash include fundingpayroll (salaries, bonuses and benefits), general operating expenses(marketing, travel and office rent) and cost of revenues.

We expect that cash provided by operating activities mayfluctuate in future periods as a result of a number of factors includingfluctuations in our net revenues and operating results, amount of revenuedeferred, collection of accounts receivable, and timing of payments.

***Cash Flows from Investing Activities***

Net cash provided by investing activities of $46.9million for the nine months ended September 30, 2006, consisted primarily ofnet sales and maturities of marketable securities of $64.5 million. During thenine months ended September 30, 2006, we liquidated investments to provide thecash required to repurchase our common stock. These cash proceeds were offsetby capital expenditures of $15.5 million, a change in restricted cash of $1.3million to secure a bank line of credit associated with the lease of our newheadquarter facilities, and capitalized software development costs of $0.8million.

Net cash provided by investing activities of $49.1million for the nine months ended September 30, 2005, consisted primarily ofnet sales and maturities of marketable securities of $52.1 million and proceedsfrom the sale of a private equity investment of $3.8 million offset by capitalexpenditures of $4.5 million and cash used in acquisitions of $1.0 millionrelated to the final earn-out payment made to the shareholders of AdventOutsource Data Management and the final payment made to Advent Europe relatingto the acquisition of Advent United Kingdom and Switzerland in May 2004.

36

----

 

***CashFlows from Financing Activities***

Net cash used in financing activities for the nine monthsended September 30, 2006 of $117.1 million reflected the repurchase of 4.1million shares of our common stock for $127.9 million, partially offset byproceeds received from the issuance of common stock of $10.8 million.

Net cash used in financing activities for the nine monthsended September 30, 2005 of $39.1 million reflected the repurchase of 2.8million shares of our common stock for $52.6 million, partially offset byproceeds received from the issuance of common stock related to employee stockoptions and our employee stock purchase plan of $13.5 million.

Our liquidity and capitalresources in any period could be affected by the exercise of outstanding stockoptions and issuance of common stock under our employee stock purchase plan.The resulting increase in the number of outstanding shares could also affectour per share results of operations. However, we cannot predict the timing oramount of proceeds from the exercise of these securities, or whether they willbe exercised at all. Furthermore, we may continue our stock repurchase activityunder the share repurchase programs approved by our Board. As of September 30,2006, approximately 0.9 million shares were available to be repurchased underthe share repurchase plan that was approved by the Board and publicly announcedin July 2006.

At September 30, 2006, we had $14.1 million in workingcapital. We currently have no significant capital commitments other thancommitments under our operating leases, which increased from $21.9 million atDecember 31, 2005 to $50.6 million at September 30, 2006, primarily as a resultof our entry into lease agreements in January and October 2006 for ourfacilities located at 600 Townsend Street in San Francisco, California and 619West 54th Street inNew York, New York, respectively.

The following table summarizesour contractual cash obligations, including those related to the 619 West 54th Streetfacility, as of September 30, 2006 (in thousands):
| ** **                                            | ** ** | **Three Months Ended** | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|-------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                                            | ** ** | **December 31**             | ** ** | **Year Ended December 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **2006**                         | ** ** | **2007**                                  | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** |
| Operating lease  obligations, net of sub-lease income |       | $                                | 1,701      |                                      | $          | 5,944      |       | $          | 7,156      |       | $          | 5,090          |       | $          | 4,779      |   | $ | 25,887 |   | $ | 50,557 |   |
|                                                       |            |                                  |            |                                           |            |            |            |            |            |            |            |                |            |            |            |  |  |  |  |  |  |  |

 

At September 30, 2006 and December 31, 2005, we did nothave any relationships with unconsolidated entities or financial partnerships,such as entities often referred to as structured finance or special purposeentities, which would have been established for the purpose of facilitatingoff-balance sheet arrangements or other contractually narrow or limitedpurposes. As such, we are not materially exposed to any financing, liquidity,market or credit risk that could arise if we had engaged in such relationships.

We expect that for the foreseeable future, our operatingexpenses and stock repurchases will continue to constitute a significant use ofcash flow. In addition, we may use cash to fund acquisitions or invest in otherbusinesses. Based upon our past performance and current expectations, webelieve that our cash and cash equivalents, marketable securities, and cashgenerated from operations will be sufficient to satisfy our working capitalneeds, capital expenditures, and investment requirements for at least the nexttwelve months. If we continue to repurchase our stock in amounts in excess ofour operating cash flows, we may be required to restrict our investingactivities or obtain additional liquidity through debt or other financingactivities. There can be no assurance that debt or other financing activitieswill be available to us at that time.

**Off-Balance Sheet Arrangements and Contractual Obligations**

Ouroff-balance sheet arrangements as of September 30, 2006 consist primarily ofobligations under operating leases. See Note 11, “Commitments andContingencies” to the condensed consolidated financial statements and the“Liquidity and Capital Resources” section above for further discussion and atabular presentation of our contractual obligations.

**Item 3.  Quantitative and QualitativeDisclosures About Market Risk**

We areexposed to financial market risks, including changes in foreign currencyexchange rates and interest rates. Historically, much of our revenues andcapital spending was transacted in U.S. dollars. However, since theacquisitions of Advent Denmark, Advent Norway, Advent Sweden, AdventNetherlands, and Advent Europe’s remaining distributors in the United Kingdomand Switzerland, whose revenues, with the exception of Geneva transactions andcapital spending, are transacted in local country currencies, we have greaterexposure to foreign currency fluctuations. We do not believe that a

37

----

 

hypothetical 10%change in foreign currency exchange rates would have a material adverse effecton our consolidated financial position, results of operations or cash flows.

Our interest rate risk relates primarily to ourinvestment portfolio, which consisted of $27.0 million in cash equivalentsand $28.2 million in marketable securities as of September 30, 2006. Animmediate sharp increase in interest rates could have a material adverse affecton the fair value of our investment portfolio. Conversely, immediate sharpdeclines in interest rates could seriously harm interest earnings of ourinvestment portfolio. We do not currently use derivative financial instrumentsin our investment portfolio, nor hedge for these interest rate exposures.

By policy, we limit our exposure to longer-terminvestments, and a majority of our investment portfolio at September 30, 2006and December 31, 2005 had maturities of less than one year. As a result of therelatively short duration of our portfolio, an immediate hypothetical parallelshift to the yield curve of plus 25 basis points (BPS), 50 BPS and 100 BPSwould result in a reduction of 0.12% ($67,000), 0.24% ($135,000) and 0.49%($270,000), respectively, in the market value of our investment portfolio as ofSeptember 30, 2006.

We have also invested in several privately-heldcompanies, most of which can still be considered in the start-up or developmentstages. These non-marketable investments are classified as other assets on ourbalance sheet. Our investments in privately-held companies could be affected byan adverse movement in the financial markets for publicly-traded equitysecurities, although the impact cannot be directly quantified. These investmentsare inherently risky as the market for the technologies or products theseprivately-held companies have under development are typically in the earlystages and may never materialize. The value of these investments is alsoinfluenced by factors including the operating effectiveness of these companies,the overall health of the companies’ industries and the strength of the privateequity markets. We could lose our entire investment in these companies. AtSeptember 30, 2006 our net investments in privately-held companies totaled $8.5million.

**Item 4.  Controls and Procedures**

**Evaluationof disclosure controls and procedures**

TheCompany’s management evaluated, with the participation of the Chief ExecutiveOfficer and Chief Financial Officer, the effectiveness of the Company’sdisclosure controls and procedures, as such term is defined under Rule13a-15(f) of the Securities and Exchange Act of 1934, as of the end of theperiod covered by this Quarterly Report on Form 10-Q. Based on this evaluation,the Chief Executive Officer and Chief Financial Officer have concluded thatbecause the material weaknesses in internal control over financial reportingwhich were previously identified in “Management’s Report on Internal Controlover Financial Reporting” included in Item 8 of our Annual Report on Form 10-Kfor the year ended December 31, 2005 (“2005 10-K”) have not yet both beenremediated, our disclosure controls and procedures were ineffective as ofSeptember 30, 2006 to ensure that information we are required to disclose inreports that we file or submit under the Securities Exchange Act of 1934 (i) isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms and (ii) is accumulated andcommunicated to Advent’s management, including our Chief Executive Officer andour Chief Financial Officer, as appropriate to allow timely decisions regardingrequired disclosure.

**Changesin internal control over financial reporting**

Managementhas implemented the following changes in our internal control over financialreporting during the third quarter ended September 30, 2006 that havematerially affected, or are reasonably likely to materially affect, Advent’sinternal control over financial reporting.

Managementhas implemented the following remedial actions during 2006 to address thematerial weakness relating to the accounting and disclosure of stock-basedemployee compensation expense identified in our 2005 10-K:

·      Established a communication process foridentifying stock compensation agreements with non-standard vesting terms orperformance vesting conditions between the Compensation Committee of the Boardof Directors, human resources, and finance departments.

·      Upgraded and enhanced our Equity Edgestock administration software.

·      Improved the skills, knowledge andexperience available to the Company through attendance of stock administrationtraining and conferences.

·      Utilized external consultants to validateour process for the calculation of stock-based compensation expense.Specifically, the Company used these additional resources to ensure that thecalculation of stock-based compensation

38

----

 

expense is adequatelyprepared. In addition, the Company has made available external consultants toprovide equity compensation guidance to the Company’s management, whennecessary.

·      Improved the level of expertise in thecalculation and review of: i) option grant agreements, including stockcompensation agreements with non-standard vesting terms or performance vestingconditions, and ii) preparation of our stock-based employee compensationexpense recognized in the Company’s financial statements effective with theadoption of SFAS 123R in the first quarter of 2006 through the hiring of astock administration manager and allocation of additional finance personnel tothese areas.

·      Improved the documentation of thecalculation and accounting procedures for equity compensation.

Basedupon the remedial actions taken to date, management believes the above changeswill result in remediation of the material weakness relating to the accountingand disclosure of stock-based employee compensation expense. However, to date,management has not completed its testing of the internal controls over theaccounting and disclosure of stock-based employee compensation. Additionally,our independent registered public accounting firm has not yet performed theirevaluation of management’s assessment and their own audit of the Company’sinternal control over financial reporting.

Managementcontinues to work on and believes that it has made progress towards remediatingthe material weakness in accounting for income taxes identified in our 200510-K.  We have implemented quarterly controls to include the benefit fromthe reversal of the deferred tax liability associated with the amortization ofintangible assets of our European subsidiaries. However, a significant amountof accounting for income taxes occurs during the fourth quarter of each yearand therefore the remediation cannot be considered tested or complete until theend of the fiscal year. Advent intends to complete the remediation of thismaterial weakness during the fourth quarter of 2006.

**PART II.  OTHER INFORMATION**

**Item 1.    LegalProceedings**

OnMarch 8, 2005, certain of the former shareholders of Kinexus and theshareholders’ representative filed suit against Advent in the Delaware ChanceryCourt. The complaint alleges that Advent breached the Agreement and Plan ofMerger dated as of December 31, 2001 pursuant to which Advent acquired all ofthe outstanding shares of Kinexus due principally to the fact that no amountwas paid by Advent on an earn-out of up to $115 million. The earn-out, whichwas payable in cash or stock at the election of Advent, was based upon Kinexusmeeting certain revenue targets in both 2002 and 2003. The complaint seeksunspecified compensatory damages, an accounting and restitution for unjustenrichment. Advent advised the shareholders’ representative in January 2003that the earn-out terms had not been met in 2002 and accordingly no earn-outwas payable for 2002 and would not be payable for 2003. Advent disputes theplaintiffs’ claims and believes that it has meritorious defenses and intends tovigorously defend this action. Management believes that any potential lossassociated with this litigation is neither probable nor reasonably estimable atthis time and accordingly has not accrued any amounts for any potential loss.

InSeptember 2003, NetJets Aviation, Inc. (formerly known as Executive JetAviation, Inc.) filed suit against B. Douglas Morriss, Rueben Morriss andBarbara Morriss in the Circuit Court of the County of Saint Louis, Missouri fortheir alleged failure to pay for their use of private jet aircraft leased andmanaged by plaintiffs. In April 2005, plaintiffs amended their complaint tojoin approximately 15 additional entities allegedly controlled by B. Morriss asdefendants in the suit, including Kinexus Corporation, which was acquired byAdvent after the alleged conduct in plaintiffs’ lawsuit. The complaint allegesbreach of contract and seeks approximately $1.1 million in damages, as well asinterest and attorneys’ fees. At mediation amongst the parties on October 10,2006, the parties agreed to settle the case and Kinexus agreed to pay $10,000.

OnJuly 11, 2006, a former independent consultant filed suit against the Companyin the Supreme Court of the State of New York. The complaint alleges that Advent failed to pay plaintiff commissionsdue for his services as a consultant to Advent. The plaintiff is seeking approximately $101,000 in commissions and $2.0million in unspecified consequential damages, as well as interest andattorney’s fees.  We dispute theplaintiffs’ claims and believe that we have meritorious defenses and intend tovigorously defend this action. Management believes that any potential loss associated with thislitigation is neither probably nor reasonably estimable at this time andaccordingly has not accrued any amounts for any potential loss.

Fromtime to time, we are involved in claims and legal proceedings that arise in theordinary course of business. Based on currently available information,management does not believe that the ultimate outcome of these unresolvedmatters,

39

----

 

individually andin the aggregate, is likely to have a material adverse effect on the Company’sfinancial position or results of operations. However, litigation is subject toinherent uncertainties and our view of these matters may change in the future.Were an unfavorable outcome to occur, there exists the possibility of amaterial adverse impact on our financial position and results of operations forthe period in which the unfavorable outcome occurs, and potentially in futureperiods.

**Item 1A. Risk Factors**

*Investors should carefullyconsider the risks described below before making an investment decision. Thetrading price of our common stock could decline due to any of, but are notlimited to, these risks. In assessing these risks, investors should also referto the other information contained or incorporated by reference in thisQuarterly Report on Form 10-Q filed with the SEC, including our consolidatedfinancial statements and related notes thereto.*

**Our Operating Results May Fluctuate Significantly.**

Although we are transitioning to a predominantly termlicense model, perpetual licenses still constituted approximately 41% of ourthird quarter of 2006 software license revenues, while declining significantlyfrom the third quarter of 2005. Until we substantially complete our transitionto a term license model, our license revenues will be negatively impacted bythe continued reduction in perpetual license revenue and by the relativelyslower revenue recognition associated with the term license model, which is typically three to five years.During the nine months ended September 30, 2006, we recognized 46% oflicense revenue from term licenses as compared to approximately 24% of licenserevenue from term licenses in fiscal 2005, 11% in 2004 and 4% in 2003. Term license contracts are comprised of bothsoftware licenses and maintenance services and we typically allocate 55% of theterm revenue to license and 45% of the term revenue to maintenance, based onthe relative economic value of these two elements. Individual perpetualsoftware licenses vary significantly in value, and the value and timing ofthese transactions can therefore cause our quarterly license revenues tofluctuate. We have often recognized a substantial portion of each quarter’sperpetual license revenues in the last month, weeks or even days of thequarter. As a result, the magnitude of quarterly fluctuations in licenserevenue may not be evident until late in or after the close of a particularquarter and a disruption late in the quarter may have a disproportionatelylarge negative impact on revenue. In addition, some of our large professionalservices contracts contain performance milestones or acceptance clauses, whichaffect the timing of revenue recognized under such contracts. As a result ofthese and other factors, our quarterly net revenues may fluctuatesignificantly. Our expense levels are based in significant part on ourtransition to term license revenue recognition and expectations of futurerevenues and therefore are relatively fixed in the short-term. Due to the fixednature of these expenses, combined with the relatively high gross marginhistorically achieved on our products, an unanticipated decline in net revenuesin any particular quarter may adversely affect our operating results. Thesefactors have impacted and may continue to impact our operating results. However,over the long-term, we expect that increases in deferred license revenueassociated with the term license model will lower the quarterly variability oflicense revenues

In addition, we experience seasonality in our licenserevenue. The fourth quarter of the year typically has the highest licenserevenue, followed by lower license revenue in the first quarter of thesucceeding year. We believe that this seasonality results primarily fromcustomer budgeting cycles and expect this seasonality to continue in thefuture, although if we are successful in moving more of our licenses to a termmodel, we believe the impact of this seasonality will likely decrease in thelong term.

Because of the above factors, we believe thatperiod-to-period comparisons of our operating results are not necessarilymeaningful and that these comparisons cannot be relied upon as indicators offuture performance.

**Our Sales Cycle is Long and We Have Limited Ability to Forecast theTiming and Amount of Specific Sales and the Timing of Specific Implementations.**

The purchase of our software products often requiresprospective customers to provide significant executive-level sponsorship and tomake major systems architecture decisions. As a result, we must generallyengage in relatively lengthy sales and contracting efforts. Sales transactionsmay therefore be delayed during the customer decision process because we mustprovide a significant level of education to prospective customers regarding theuse and benefit of our products. This was exacerbated by the adverse and uncertaineconomic conditions in 2002 and 2003 that caused existing and potential clientsto reduce or cancel expenditures and delay decisions related to acquisition ofsoftware and related services. While we have seen somewhat improved economicconditions since then, customers are still cautious about capital andinformation technology expenditures. As a result, the sales cycle associatedwith the purchase of our solutions is typically between two and twelve monthsdepending upon the size of the client, and is subject to a number ofsignificant risks over which we have little or no control, including customers’budgeting constraints, internal selection procedures, and changes in customerpersonnel, among others.

40

----

As a result of a lengthy and unpredictable sales cycle,we have limited ability to forecast the timing and amount of specific licensesales. The timing of large individual license sales is especially difficult toforecast, and we may not be successful in closing large license transactions ona timely basis or at all. Customers may postpone their purchases of ourexisting products or product enhancements in advance of the anticipatedintroduction of new products or product enhancements by us or our competitors.When a customer purchases a term license together with implementation serviceswe do not recognize any revenue under the contract until the implementationservices are substantially complete. If we are not able to complete animplementation project for a term license in a quarter, it will cause us todefer all of the contract revenues to a subsequent quarter. Because ourexpenses are relatively fixed in the near term, any shortfall from anticipatedrevenues could result in a significant variation in our operating results fromquarter to quarter.

**We Depend Heavily on Our Products, Axys® and APX.**

Historically, we have derived a significant portion ofour net revenues from the licensing of Axys, and related ancillary products andservices. In addition, many of our other applications, such as Partner, Moxy,Qube and various data interfaces were designed to operate with Axys to providean integrated solution. As a result, we believe that for the next several yearsa majority of our net revenues will depend upon continued market acceptance ofAxys, as well as initial acceptance of APX and upgrades to those products andrelated products and services. As our clients include a range of financialservices organizations, including asset managers, investment advisors,brokerage firms, banks, family offices, hedge funds and others, continuedmarket acceptance also will depend on:

·      thenumber of firms within each type of organization and the degree to which Axyshas previously penetrated those firms;

·      ourability to upgrade those firms to our new product, APX; and

·      our ability to introduce APX to newcustomers.

**Uncertain Economic and Financial Market Conditions May Continue toAffect Our Revenues.**

We believe that the market for large investmentmanagement software systems may be negatively impacted by a number of factors,including reductions in capital expenditures by large customers and poorperformance of major financial markets. The target clients for our productsinclude a range of financial services organizations that manage investmentportfolios, including asset managers, investment advisors, brokerage firms,banks, family offices, hedge funds and others. In addition, we targetcorporations, public funds, universities and non-profit organizations, whichalso manage investment portfolios and have many of the same needs. The successof many of our clients is intrinsically linked to the health of the financialmarkets. We believe that demand for our solutions has been, and could continueto be, disproportionately affected by fluctuations, disruptions, instability ordownturns in the economy and financial services industry which may causeclients and potential clients to exit the industry or delay, cancel or reduceany planned expenditures for investment management systems and softwareproducts. In addition, a slowdown in the formation of new investment firms,especially hedge funds, or a decline in the growth of assets under managementwould cause a decline in demand for our solutions. We believe that the downturnin the financial services industry and the decline in information technologyspending gave rise to a number of market trends which we experienced in fiscal2002 and 2003 that have slowed revenue growth across the financial servicesindustry, including longer sales and contracting cycles, deferral or delay ofinformation technology projects and generally reduced expenditures for softwareand related services, and that future uncertainty about financial markets andthe financial services sector could have a material adverse effect on ourrevenues.

**We Face Intense Competition.**

The market for investment management software is intenselycompetitive and highly fragmented, is subject to rapid change and is sensitiveto new product introductions and marketing efforts by industry participants.Our largest single source of competition is from proprietary systems used byexisting and potential clients, many of whom develop their own software fortheir particular needs and therefore may be reluctant to license softwareproducts offered by independent vendors like Advent. Other competitors includeproviders of software and related services as well as providers of outsourcedservices, and include the following vendors: the APL subsidiary ofCheckFree Corporation, Blackbaud, BNY ConvergEx Group (formerly “Eze CastleSoftware”), Charles River Development, DST International, the Eagle subsidiaryof Mellon Financial Corporation, FT Interactive Data, IBSI, Indata, Kintera,LatentZero, Linedata, the Macgregor subsidiary of Investment Technology Group,Schwab Performance Technologies, Simcorp A/S, SS&C Technologies (“SS&C”),SunGard Data Systems, Inc. (“SunGard”), and the Portia Division of ThomsonFinancial.

Our competitors vary in size, scope of services offeredand platforms supported. Many of our competitors have longer operatinghistories and greater financial, technical, sales and marketing resources thanwe do. In addition, consolidation has occurred among some of the competitors inour markets. In 2005, three of Advent’s competitors were acquired with thepossibility 

41

----

of forming even larger companies through additional acquisitions ofcompanies and technologies. In April 2005, Financial Models Company, Inc. wasacquired by SS&C. Sunshine Acquisition Corporation, a private equity firmaffiliated with the Carlyle Group, later acquired SS&C in November 2005.SunGard was taken private after being acquired by a consortium of privateequity investment firms in August 2005 and merged into Solar CapitalCorporation. Any further consolidations among our competitors may result instronger competitors in our markets and may therefore either result in a lossof market share or harm our results of operations. In addition, we also facecompetition from potential new entrants into our market that may developinnovative technologies or business models. We cannot guarantee that we will beable to compete successfully against current and future competitors or thatcompetitive pressure will not result in price reductions, reduced operatingmargins or loss of market share, any one of which could seriously harm ourbusiness.

**We Must Continue to Introduce New Products and Product Enhancements.**

The market for our products is characterized by rapidtechnological change, changes in customer demands and evolving industrystandards. New products based on new technologies or new industry standards canrender existing products obsolete and unmarketable. As a result, our futuresuccess will continue to depend upon our ability to develop new products, suchas our APX product, or product enhancements, that address the future needs ofour target markets and to respond to their changing standards and practices. Wemay not be successful in developing, introducing, marketing and licensing ournew products or product enhancements on a timely and cost effective basis, orat all, and our new products and product enhancements may not adequately meetthe requirements of the marketplace or achieve market acceptance. Delays in thecommencement of commercial shipments of new products or enhancements may resultin client dissatisfaction and delay or loss of product revenues. In addition,clients may delay purchases in anticipation of new products or productenhancements. In addition, our ability to develop new products and productenhancements is dependent upon the products of other software vendors,including certain system software vendors, such as Microsoft Corporation, SunMicrosystems, database vendors and development tool vendors. If the products ofsuch vendors have design defects or flaws, are unexpectedly delayed in theirintroduction, or are unavailable on acceptable terms, our business could beseriously harmed.

**We Must Retain and Recruit Key Employees.**

We believe that our future success is dependenton the continued employment of our senior management and our ability toidentify, attract, motivate and retain qualified technical, sales and otherpersonnel. We need technical resources such as our product developmentengineers to develop new products and enhance existing products and we relyupon sales personnel to sell our products and services and maintain healthybusiness relationships. We therefore need to identify, attract,motivate and retain such employees with the requisite education,backgrounds and industry experience. In addition, we must attract andretain financial and accounting personnel to comply with the requirements of Section404 of the Sarbanes-Oxley Act of 2002.

We have relied on our ability to grant equitycompensation as one mechanism for recruiting and retaining such highly skilledpersonnel. Recently enacted accounting regulations requiring the expensing ofequity compensation may impair our ability to provide these incentives withoutreporting significant compensation costs.

We may also choose to create additional performance andretention incentives in order to retain our employees, including the grantingof additional stock options, restricted stock, restricted stock units, stockappreciation rights, performance shares or performance units to employees orissuing incentive cash bonuses. Such incentives may either dilute our existingstockholder base or result in unforeseen operating expenses, which may causeour stock price to fall.

**We Face Challenges in Expanding Our International Operations.**

We market and sell our products in the United States and,to a lesser extent, internationally. In 1999, we entered into a distributorrelationship with Advent Europe GmbH, an independent distributor of ourproducts in selected European markets. In November 2001, we acquired theNorwegian, Swedish, and Danish subsidiaries of this independent distributor. InSeptember 2002, we purchased their Greek subsidiary (“Advent Hellas”),which we subsequently sold in the fourth quarter of 2005; in May 2003, wepurchased their Dutch subsidiary; and in May 2004, we purchased their remainingsubsidiaries in the United Kingdom and Switzerland and certain assets of AdventEurope. To further expand our international operations, we would need toestablish additional locations, acquire other businesses or enter intoadditional distribution relationships in other parts of the world. Any furtherexpansion of our existing international operations and entry into newinternational markets could require significant management attention andfinancial resources. We cannot be certain that establishing businesses in othercountries will produce the desired levels of revenues such as in the case ofAdvent Hellas. We currently have limited experience in developing localizedversions of our products and marketing and distributing our productsinternationally. In addition, international operations are subject to otherinherent risks, including:

·      the impact of recessions in economiesoutside the United States;

42

----

·      greater difficulty inaccounts receivable collection and longer collection periods;

·      unexpected changes inregulatory requirements;

·      difficulties in successfullyadapting our products to the language, regulatory and technology standards ofother countries;

·      difficulties in and costs ofstaffing and managing foreign operations;

·      reduced protection forintellectual property rights in some countries;

·      potentially adverse taxconsequences; and

·      political and economic instability.

The revenues, expenses, assets and liabilities of ourinternational subsidiaries are primarily denominated in local currencies. Wehave not historically undertaken foreign exchange hedging transactions to coverpotential foreign currency exposure. Future fluctuations in currency exchangerates may adversely affect revenues and accounts receivable from internationalsales and the U.S. dollar value of our foreign subsidiaries’ revenues,expenses, assets and liabilities. Our international revenues from our Europeansubsidiaries are generally denominated in local foreign currencies, with theexception of our Geneva license transactions.

**Difficulties in Integrating Our Acquisitions and Expanding Into NewBusiness Areas Have Impacted and Could Continue to Adversely Impact OurBusiness and We Face Risks Associated with Potential Acquisitions, Investments,Divestitures and Expansion.**

From 2001 through the middle of 2003, our strategyfocused on growth through the acquisition of additional complementarybusinesses. During those years, we made five major acquisitions includingKinexus Corporation, Techfi Corporation and Advent Outsource Data ManagementLLC, and also acquired all of the common stock of five of our Europeandistributor’s subsidiaries. In addition, we purchased our European distributor’sremaining two subsidiaries in the United Kingdom and Switzerland in May 2004.

The complex process of integrating our acquisitions hasrequired and will continue to require significant resources, particularly inlight of our relative inexperience in integrating acquisitions. Integratingthese acquisitions has been and will continue to be time-consuming, expensiveand disruptive to our business. This integration process has strained and couldcontinue to strain our managerial resources, resulting in the diversion ofthese resources from our core business objectives. Failure to achieve theanticipated benefits of these acquisitions or to successfully integrate theoperations of these entities has harmed and could continue to harm ourbusiness, results of operations and cash flows. For example, in the firstquarter of 2003, we closed our Australian subsidiary because it failed toperform at a satisfactory profit level and similarly in the fourth quarter of2005, we disposed of our Advent Hellas subsidiary because of less thansatisfactory profitability. In addition, as we have expanded into new businessareas and offerings through strategic alliances and internal development, aswell as acquisitions, some of this expansion has required significantmanagement time and resources without generating significant revenues. We havehad difficulty and may continue to have difficulty creating demand for suchofferings, and revenue growth for these newer business areas has suffered andmay continue to suffer. For example, demand for our Techfi product line wassignificantly lower than expected and thus we discontinued certain productswithin our Techfi product line in September 2004. As a result, werecorded a non-cash impairment charge of $3.4 million in the third quarter of2004 to write-off the carrying value of certain Techfi-related intangibleassets.

We may not realize the anticipated benefits from ouracquisitions because of the following significant challenges. We have incurredsignificant costs and commit significant management time in integrating theoperations, technology, development programs, products, administrative andinformation systems, customers and personnel of these acquisitions.Furthermore, we may face other unanticipated costs with our acquisitions, suchas the disputes involving earnout and incentive compensation amounts we haveexperienced with our Kinexus and Advent Outsource acquisitions.

We may make additional acquisitions of complementarycompanies, products or technologies in the future. In addition, we periodicallyevaluate the performance of all our products and services and may sell ordiscontinue current products and services. Failure to achieve the anticipatedbenefits of any future acquisition or divestiture could harm our business,results of operations and cash flows. Furthermore, we may have to incur debt,write-off investments, infrastructure costs or other assets, incur severance liabilities,write-off impaired goodwill or other intangible assets or issue equitysecurities to pay for any future acquisitions. The issuance of equitysecurities could dilute our existing stockholders’ ownership. Finally, we maynot identify suitable businesses to acquire or negotiate acceptable terms forfuture acquisitions.

**Impairment of Investments Could Harm Our Results of Operations.**

We have made and may make future investments in privatelyheld companies, many of which are considered in the start-up or developmentstages. These investments, which we classify as other assets on ourconsolidated balance sheets, are inherently 

43

----

risky, as the market for the technologies or products these companieshave under development is typically in the early stages and may nevermaterialize. The value of the investment in these companies is influenced bymany factors, including the operating effectiveness of these companies, theoverall health of these companies’ industries, the strength of the privateequity markets and general market conditions. Due to these and other factors,we have previously determined, and may in the future determine, that the valueof these investments is impaired, which has caused and would cause us to writedown the carrying value of these investments, such as the write-down of ourinvestments of $2.0 million in fiscal 2003. Furthermore, we cannot be sure thatfuture investment, license, fixed asset or other asset write-downs will notoccur. If future write-downs do occur, they could harm our business and resultsof operations.

**Information We Provide to Investors Is Accurate Only as of the Date WeDisseminate It.**

From time to time, we may publicly disseminateforward-looking information or guidance in compliance with Regulation FD. Thisinformation or guidance represents our outlook only as of the date wedisseminate it, and we do not undertake to update such information or guidance.

**Our Stock Price May Fluctuate Significantly.**

Like many companies in the technology and emerging growthsector, our stock price may be subject to wide fluctuations, particularlyduring times of high market volatility. If net revenues or earnings in anyquarter fail to meet the investment community’s expectations, our stock priceis likely to decline. In addition, our stock price is affected by trends in thefinancial services sector and by broader market trends unrelated to ourperformance. For instance, in the event of increased hostilities abroad oradditional terrorist attacks, there could be increased market volatility, whichcould negatively impact our stock price.

**If Our Relationship with Financial Times/Interactive Data IsTerminated, Our Business May Be Harmed.**

Many of our clients use our proprietary interface toelectronically retrieve pricing and other data from Financial Times/InteractiveData (“FTID”). FTID pays us a commission based on their revenues from providingthis data to our clients. Our software products have been customized to becompatible with their system and this software would need to be redesigned iftheir services were unavailable for any reason. Termination of our agreementwith FTID would require at least two years notice by either us or them, or90 days in the case of material breach. Our revenue could be adverselyimpacted if our relationship with FTID was terminated or their services wereunavailable to our clients for any reason.

**Potential Changes in Securities Laws and Regulation Governing theInvestment Industry’s Use of Soft Dollars May Reduce Our Revenues.**

Approximately 600 of our clients utilize tradingcommissions (“soft dollar arrangements”) to pay for software products andservices, both through our broker/dealer subsidiary, Second Street Securities,and through other independent broker/dealers. During fiscal 2005, the totalvalue of Advent products and services paid with soft dollars was approximately6% of our total billings. In May of 2004, the SEC and the National Associationof Securities Dealers (the “NASD”) set up a task force to consider soft dollararrangements in the industry, and to provide the SEC with guidance on improvingthe transparency of fund transaction costs and distribution arrangements. PhaseI of the task force focused on soft dollars and concluded with “The Report ofthe Mutual Fund Task Force on Soft Dollars and Portfolio Transaction Costs”,delivered to the SEC in November 2004 and recommending the SEC to:

****·********      Narrow the definition of “research” to items that principallybenefit the fund’s clients rather than the manager;****

****·********      Enhance disclosure of expenses, soft dollar policies, andbroker allocations to fund boards as well as clients and prospects; and****

****·********      Consider soft-dollar issues raised by other managed advisoryaccounts.****

****Phase II of the task force focused on distributionarrangements, including 12b-1 fees and revenue sharing, and its recommendationsare detailed in “Report of the Mutual Fund Task Force – Mutual FundDistribution”.****

****In October 2005, the SEC invited comments from interestedparties on its proposed interpretation of the regulations relating to softdollars and bundled commissions in response to the findings of the task force,and on July 18, 2006, the SEC issued its interpretative release, which mayaffect our clients ability to use soft dollar arrangements to pay for Adventproducts and services, in which case our revenues could decrease. The Companyis in the process of continuing to evaluate the impact, if any, of thisrelease.****

44

----

Duringthe third quarter of 2006, we continued the wind down of the “soft dollar”component of our SEC-registered broker/dealer subsidiary, Second StreetSecurities, as it no longer fits with our corporate strategy. Second StreetSecurities offered our customers the ability to pay for Advent products andother third party products and services through brokerage commissions and otherfee-based arrangements.

**If We Are Unable to Protect Our Intellectual Property We May Be Subjectto Increased Competition that Could Seriously Harm Our Business.**

Our success depends significantly upon our proprietarytechnology. We currently rely on a combination of copyright and trademark laws,trade secrets, confidentiality procedures and contractual provisions to protectour proprietary rights. We have registered trademarks for many of our productsand services and will continue to evaluate the registration of additionaltrademarks as appropriate. We generally enter into confidentiality agreementswith our employees and with our resellers and customers. We seek to protect oursoftware, documentation and other written materials under trade secret andcopyright laws, which afford only limited protection and we do not have anypatents. Despite these efforts, it may be possible for unauthorized thirdparties to copy certain portions of our products or to reverse engineer orotherwise obtain and use our proprietary information. In addition, we cannot becertain that others will not develop substantially equivalent or supersedingproprietary technology, or that equivalent products will not be marketed incompetition with our products, thereby substantially reducing the value of ourproprietary rights. We cannot be sure that we will develop proprietary productsor technologies that are patentable, that any patent, if issued, would provideus with any competitive advantages or would not be challenged by third parties,or that the patents of others will not adversely affect our ability to dobusiness. Litigation may be necessary to protect our proprietary technologywhich may be time-consuming and expensive. Despite our efforts to protect ourproprietary rights, unauthorized parties may attempt to copy aspects of ourproducts or to obtain and use information that we regard as proprietary. Inaddition, the laws of some foreign countries do not protect proprietary rightsto as great an extent as do the laws of the United States. We cannot be surethat our means of protecting our proprietary rights will be adequate or thatour competitors will not independently develop similar technology, duplicateour products or design around any patent that may be issued to us or otherintellectual property rights of ours.

**If We Infringe the Intellectual Property Rights of Others, We May IncurAdditional Costs or Be Prevented from Selling Our Products and Services.**

We cannot be certain that our products or services do notinfringe the intellectual property rights of others. As a result, we may besubject to litigation and claims, including claims of infringement of patents,copyrights and other intellectual property rights of third parties that wouldbe time-consuming and costly to resolve. If we discovered that our products orservices violated the intellectual property rights of third parties, we wouldhave to make substantial changes to our products or services or obtain licensesfrom such third parties. We might not be able to obtain such licenses onfavorable terms or at all, and we may be unable to change our products successfullyor in a timely manner. Failure to resolve an infringement matter successfullyor in a timely manner, would force us to incur significant costs, includingdamages, redevelopment costs, diversion of management’s attention andsatisfaction of indemnification obligations that we have with our clients, aswell as prevent us from selling certain products or services.

**Business Disruptions and Uncertain Political Conditions Could AdverselyAffect Our Business.**

Our operations are exposed to potential disruption byfire, earthquake, power loss, telecommunications failure, and other eventsbeyond our control. Additionally, we are vulnerable to interruption caused bypolitical and terrorist incidents. For example, our facilities in New York weretemporarily closed due to the September 11, 2001 terrorist attacks.Immediately after the terrorist attacks, our clients who were located in theWorld Trade Center area were concentrating on disaster recovery rather thanlicensing additional software components, while the grounding of transportationimpeded our ability to deliver professional services at client sites.Additionally, during the temporary closure of the U.S. stock markets, ourclients did not use our market data services. Our corporate headquarters arelocated in the San Francisco Bay Area, which is a region with significantseismic activity. Earthquakes such as that experienced in 1989 could disruptour business. Such disruptions could affect our ability to sell and deliverproducts and services and other critical functions of our business. Further,such disruptions could cause instability in the financial markets upon which wedepend.

Further, terrorist acts, conflicts or wars may causedamage or disruption to our customers. The potential for future attacks, thenational and international responses to attacks or perceived threats tonational security and other actual or potential conflicts or wars, includingthe ongoing crisis in the Middle East, have created many economic and politicaluncertainties. Although it is impossible to predict the occurrences orconsequences of any such events, they could unsettle the financial markets orresult in a decline in information technology spending, which could have amaterial adverse effect on our revenues.

45

----

**Undetected Software Errors or Failures Found in New Products May Resultin Loss of or Delay in Market Acceptance of Our Products that Could SeriouslyHarm Our Business.**

Our products may contain undetected software errors orfailures or scalability limitations at any point in the life of the product,but particularly when first introduced, such as our APX product, or as newversions are released. Despite testing by us and by current and potentialcustomers, errors may not be found in new products until after commencement ofcommercial shipments, resulting in a loss of or a delay in market acceptance,damage to our reputation, customer dissatisfaction and reductions in revenuesand margins, any of which could seriously harm our business. Additionally, ouragreements with customers that attempt to limit our exposure to liabilityclaims may not be enforceable in jurisdictions where we operate.

**Changes in Securities Laws and Regulations May Increase Our Costs.**

The Sarbanes-Oxley Act (“the Act”) of 2002 requiredchanges in some of our corporate governance and securities disclosure and/orcompliance practices. As part of the Act’s requirements, the SEC has enactednew rules on a variety of subjects, and the NASDAQ Stock Market has enacted newcorporate governance listing requirements. These developments have increasedand may in the future increase our accounting and legal compliance costs andcould also expose us to additional liability if we fail to comply with thesenew rules and reporting requirements. In fiscal 2004 and 2005, we incurredapproximately $2.1 million and $1.8 million, respectively, in Sarbanes-Oxleyrelated expenses consisting of external consulting costs and auditor fees, andthe Company anticipates spending a similar amount for its 2006 complianceactivities. In addition, such developments may make retention and recruitmentof qualified persons to serve on our board of directors, or as executiveofficers more difficult. We continue to evaluate and monitor regulatory andlegislative developments and cannot reliably estimate the timing or magnitudeof all costs we may incur as a result of the Act or other related legislationor regulation.

**Changes in, or Interpretations of, Accounting Principles Could Resultin Unfavorable Accounting Charges**

We prepare our condensedconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America. These principles aresubject to interpretation by us, the SEC and various bodies formed to interpretand create accounting principles. A change in these principles or a change inthe interpretations of these principles, can have a significant effect on ourreported results and may even retroactively affect previously reportedtransactions. Our accounting principles that recently have been or may beaffected include:

·      Softwarerevenue recognition

·      Accountingfor stock-based compensation

·      Accountingfor income taxes

·      Accounting for businesscombinations and related goodwill

In particular, the FASB recentlyissued SFAS 123R which requires the measurement of all stock-based compensationto employees, including grants of employee stock options, using afair-value-based method and the recording of such expense in our condensedconsolidated statements of income. We were required to adopt SFAS 123R in thefirst quarter of fiscal 2006. The adoption of SFAS 123R had a significantadverse effect on our reported financial results. It will continue tosignificantly adversely affect our reported financial results and may impactthe way in which we conduct our business.

If factors change and we employ different assumptionsfor estimating stock-based compensation expense in future periods or if wedecide to use a different valuation model, the future periods may differsignificantly from what we have recorded in the current period and couldmaterially affect our operating income, net income and net income per share.

We currently use the Black-Scholes option pricingmodel to determine the fair value of stock options and employee stock purchaseplan shares. The Black-Scholes option pricing model was developed for use inestimating the fair value of traded options that have no vesting restrictionsand are fully transferable, characteristics not present in our option grantsand employee stock purchase plan shares. Existing valuation models, includingthe Black-Scholes and lattice binomial models, may not provide reliablemeasures of the fair values of our stock-based compensation. Consequently,there is a risk that our estimates of the fair values of our stock-basedcompensation awards on the grant dates may bear little resemblance to theactual values realized upon the exercise, expiration, early termination orforfeiture of those stock-based payments in the future. Certain stock-basedpayments, such as employee stock options, may expire worthless or otherwiseresult in zero intrinsic value as compared to the fair values originallyestimated on the grant date and reported in our financial statements.Alternatively, value may be realized from these instruments that aresignificantly higher than the fair values originally estimated on the grantdate and reported in our financial statements. There currently is nomarket-based mechanism or other practical application to verify the reliabilityand accuracy of the estimates stemming from these valuation models, nor isthere a means to compare and adjust the estimates to actual values.

Refer to Note 3, “Stock-BasedCompensation”, for further information regarding the adoption of SFAS 123R.

46

----

**Security Risks May Harm Our Business.**

The secure transmission of confidential information overpublic networks is essential to commerce and communications, particularly inthe market in which Advent operates. Advances in computer capabilities, newdiscoveries in the field of cryptography or other events or developments couldresult in compromises or breaches of our security systems. Anyone whocircumvents our security measures could misappropriate proprietary informationor cause interruptions in our services or operations. In addition, computerviruses or software programs that disable or impair computers could beintroduced into our systems or those of our customers or other third parties,which could disrupt or make our systems inaccessible to customers. Our securitymeasures may be inadequate to prevent security breaches, exposing us to a riskof loss, litigation and other possible liabilities, as well as possiblyrequiring us to expend significant capital and other resources to protectagainst the threat of security breaches or to alleviate problems caused by suchbreaches.

**If WeFail to Maintain an Effective System of Internal Control, We May Not be Able toAccurately Report Our Financial Results. As a Result, Current and PotentialStockholders Could Lose Confidence in Our Financial Reporting, Which Would HarmOur Business and the Trading Price of Our Stock.**

Effectiveinternal control is necessary for us to provide reliable financial reports. Ifwe cannot provide reliable financial reports, our business and operatingresults could be harmed. We have in the past discovered, and may in the futurediscover, areas of our internal control that need improvement including controldeficiencies that may constitute material weaknesses. For example, as ofDecember 31, 2005, the Company did not maintain effective controls overthe accounting for income taxes, including the determination of deferred incometax liabilities and the related income tax provision. Specifically, the Companydid not have adequate controls to (i) include the benefit from the reversal ofthe deferred tax liability associated with the amortization of intangibleassets of its European subsidiaries, or (ii) properly estimate the reduction inthe valuation allowance associated with the deferred tax assets in the UnitedStates, in the calculation of its income tax provision for the quarters endingMarch 31, 2004 and 2005, September 30, 2004 and 2005 and September 30, 2004 and2005. This control deficiency resulted in adjustments to the fourth quarter of2004 and 2005 financial statements and a restatement of the Company’s financialstatements for each of the first three quarters of fiscal 2004 and 2005.Additionally, this control deficiency could result in a misstatement to thedeferred income tax liabilities and income tax provision accounts that wouldresult in a material misstatement to annual or interim financial statementsthat would not be prevented or detected.

The Company also did notmaintain effective controls over the accuracy, presentation and disclosure ofthe pro forma stock-based compensation expense in conformity with generallyaccepted accounting principles as of December 31, 2005. Specifically, theCompany did not maintain effective controls to ensure that pro formastock-based compensation expense from non-routine stock compensation arrangements,including those with non-standard vesting terms or performance vestingprovisions, were expensed over the proper attribution period. As a result ofthis control deficiency, the Company’s disclosure of stock-based compensationexpense for fiscal 2003 and 2004 and first three quarters of 2004 and 2005 havebeen revised. Additionally, this control deficiency could result in amisstatement of stock-based compensation expense that would result in amaterial misstatement to the annual or interim financial statements that wouldnot be prevented or detected.

Management has determined that these controldeficiencies constituted material weaknesses as of December 31, 2005.Consequently, management concluded that the Company’s internal control overfinancial reporting was not effective as of December 31, 2005 basedon criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission in *InternalControl-Integrated Framework*.

Any failure to implementor maintain the improvements in our internal control over financial reporting,or difficulties encountered in the implementation of these improvements in ourcontrols, could cause us to fail to meet our reporting obligations. Any failureto improve our internal control to address these identified weaknesses couldalso cause investors to lose confidence in our reported financial information,which could have a negative impact on the trading price of our stock.

**OurAbility to Conclude that a Control Deficiency is Not a Material Weakness orthat an Accounting Error Does Not Require a Restatement is Limited, in Part, byOur Level of  Pre-Tax Income (Loss).**

Underthe Sarbanes-Oxley Act of 2002, our management is required to assess the impactof control deficiencies based upon both quantitative and qualitative factors,and depending upon that analysis we classify such identified deficiencies aseither a control deficiency, significant deficiency or a material weakness.

Ourcurrent expectation is that our fiscal 2006 pre-tax income will range frombreakeven to a modest amount, due primarily to the impact of expensing forstock options under SFAS 123R, which we implemented on January 1, 2006. Oneelement of our quantitative analysis of any control deficiency is its actual orpotential financial impact, and any impact that is 

47

----

greater than 5% ofour pre-tax income (loss) in any quarter may be more likely to result in thatdeficiency being determined to be a significant deficiency or a materialweakness. Accordingly, our projection of fiscal 2006 pre-tax income at abreakeven level to a modest profit will make it statistically less likely forus and our independent registered public accounting firm to determine that acontrol deficiency is not a material weakness.

Inaddition, if management or our independent registered public accountantsidentify errors in our interim or annual financial statements during 2006, itis statistically more likely that such errors may meet the quantitativethreshold established under Staff Accounting Bulletin No. 99, “Materiality”,that could, depending upon the complete qualitative and quantitative analysis,result in our having to restate previously issued financial statements.

**Item 2.    UnregisteredSales of Equity Securities and Use of Proceeds**

**Issuer Purchases of Equity Securities**

In May 2004, the Board authorized the repurchase of 1.2million shares of outstanding common stock. In September 2004, February 2005and May 2005, the Board authorized an extension of this stock repurchaseprogram to cover the repurchase of an additional 0.8 million, 1.8 million and1.0 million shares of outstanding common stock, respectively. In March 2006,Advent completed this common stock repurchase program. During the first quarterof 2006, Advent repurchased 1.2 million shares of common stock under thisrepurchase program at a total cost of $33.7 million and an average price of$27.60 per share. Since the inception of this program in May 2004 through March2006, Advent repurchased 4.8 million shares for a total cost of $98.2 millionand an average price of $20.43 per share.

InApril and July 2006, Advent’s Board authorized the repurchase of an additional2.3 million and 1.5 million shares, respectively, of the Company’s outstandingcommon stock. See Note 10, “Common Stock Repurchase Programs”, to the condensedconsolidated financial statements for further information. During the third quarter of 2006, Adventrepurchased 1.3 million shares of common stock under this repurchase program ata total cash outlay of $41.4 million and an average price of $31.49 per share.

The following table provides amonth-to-month summary of the repurchase activity during the three months endedSeptember 30, 2006 under the stock repurchase programs approved bythe Board in April and July 2006:

|                | ** ** | ** **                          | ** ** | ** **         | ** ** | **Maximum**                              | ** ** |
|----------------|------------|-------------------------------------|------------|--------------------|------------|------------------------------------------|------------|
| ** **     | ** ** | **Total**                           | ** ** | **Average**        | ** ** | **Number of Shares That** | ** ** |
| ** **     | ** ** | **Number**                          | ** ** | **Price**          | ** ** | **May Yet Be Purchased**  | ** ** |
| ** **     | ** ** | **of Shares**                  | ** ** | **Paid**           | ** ** | **Under Our Share**            | ** ** |
| ** **     | ** ** | **Purchased** (1)              | ** ** | **Per Share** | ** ** | **Repurchase Programs**             | ** ** |
| ** **     | ** ** | **(shares in thousands)** | ** ** |
| ** **     | ** ** | ** **                          | ** ** |
| July 2006      |       | 705                                 |       | $                  | 31.53      |                                     | 1,500      |   |
| August 2006    |       | 612                                 |       | $                  | 31.44      |                                     | 888        |   |
| September 2006 |       | —                              |       | $                  | —     |                                     | 888        |   |
|           |       |                                |       |               |       |                                     |       |
| Total          |       | 1,317                               |       | $                  | 31.49      |                                     | 888        |   |

 

----

(1)  All shares were repurchased as part ofpublicly announced plans.

**Item 3.    DefaultsUpon Senior Securities**

None.

**Item 4.    Submissionof Matters to a Vote of Security Holders**

None.

**Item 5.    OtherInformation**

None.

48

----

**Item 6.    Exhibits**

31.1     Certificationof Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002

31.2    Certification of Chief Financial Officer under Section 302 of theSarbanes-Oxley Act of 2002

32.1     Certificationof Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002

32.2     Certificationof Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

49

----

**SIGNATURES**

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.
|                          |   | ADVENT SOFTWARE, INC. |
|--------------------------|--------|-----------------------|
|                     |   |                  |   |
| Dated: November  9, 2006 |   | By:                   | /s/ Graham V. Smith |
|                     |   |                  | Graham V. Smith |
|                     |   | * *              | *Executive Vice President, Chief Financial Officer    and Secretary (Principal Financial and Accounting   Officer)* |

 

50

----