**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-Q/A**

**Amendment No. 1**

 
| **ý** | ** ** | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  for the quarterly period ended June 30, 2005** |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** |
| **or**     |
| ** ** | ** ** | ** **                                                                                                                                 |
| **o**      | ** ** | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**                                              |

 

**Commission file number:  0-26994**

 

**ADVENTSOFTWARE, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

** **

**301 Brannan Street, San Francisco, California94107**

(Address of principal executive offices andzip code)

 

**(415) 543-7696**

(Registrant’s telephone number, includingarea code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 

Yes ý  No o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

 

Yes ý  No o

 

The number of shares of the registrant’s Common Stock outstanding as ofJuly 29, 2005 was 30,569,421.

 

 

----

 

**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 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**                     | ** **                                                                                  |   |
|                                    |                                                                                             |  |  |

 

**EXPLANATORY NOTE**

 

This Amendment No. 1 to Advent Software, Inc.’s (the “Company”)Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, is beingfiled in order to correct its previously issued condensed consolidated balancesheets as of December 31, 2004 and June 30, 2005, condensed consolidatedstatements of operations for the three and six months ended June 30, 2005 and2004, and condensed consolidated statements of cash flows for the six monthsended June 30, 2005 and 2004. As a result, we have also updated the relatedfootnotes to these condensed consolidated financial statements as well as Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations, and Item 4. Controls and Procedures, as appropriate.

 

The corrections are being made to properly account for deferred incometax assets and liabilities and the income tax provision; correct depreciationexpense on certain leasehold improvements; correct our revenue recognition oncertain term license arrangements; and, correct our disclosure for pro formastock-based employee compensation expense.

 

See Note 2 to the Company’s unaudited condensed consolidated financialstatements for additional discussion. This Form 10-Q/A does not reflect eventsoccurring after the filing of the original Form 10-Q, or modify or update thedisclosures therein in any way other than as required to reflect the restatementand revision set forth in Note 2.

 

2

----

 

**PARTI. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**ADVENT SOFTWARE, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                      | ** ** | **(Restated, See Note 2)** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **June 30**                          | ** ** | **December 31** | ** ** |
| ** **                                      | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| **ASSETS**                                      |       |                                      |       |   |   |
| Current assets:                                 |       |                                      |       |   |   |
| Cash and cash equivalents                       |       | $                                         | 23,020     |   | $ | 21,177 |   |
| Marketable securities                           |       | 110,799                                   |       | 144,352 |   |
| Accounts receivable, net                        |       | 30,789                                    |       | 32,778 |   |
| Prepaid expenses and other                      |       | 10,543                                    |       | 10,415 |   |
| Total current assets                            |       | 175,151                                   |       | 208,722 |   |
| Property and equipment, net                     |       | 16,173                                    |       | 18,497 |   |
| Goodwill                                        |       | 95,112                                    |       | 99,393 |   |
| Other intangibles, net                          |       | 11,117                                    |       | 14,668 |   |
| Other assets, net                               |       | 12,669                                    |       | 13,362 |   |
|                                            |       |                                      |       |   |   |
| Total assets                                    |       | $                                         | 310,222    |   | $ | 354,642 |   |
|                                            |       |                                      |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**   |       |                                      |       |   |   |
| Current liabilities:                            |       |                                      |       |   |   |
| Accounts payable                                |       | $                                         | 2,605      |   | $ | 2,825 |   |
| Accrued liabilities                             |       | 17,455                                    |       | 17,570 |   |
| Deferred revenues                               |       | 59,265                                    |       | 56,405 |   |
| Income taxes payable                            |       | 2,348                                     |       | 4,036 |   |
| Total current liabilities                       |       | 81,673                                    |       | 80,836 |   |
| Deferred income taxes                           |       | 2,007                                     |       | 2,250 |   |
| Other long-term liabilities                     |       | 5,178                                     |       | 5,816 |   |
|                                            |       |                                      |       |   |   |
| Total liabilities                               |       | 88,858                                    |       | 88,902 |   |
|                                            |       |                                      |       |   |   |
| Commitments and contingencies (See Note 13)     |       |                                      |       |   |   |
|                                            |       |                                      |       |   |   |
| Stockholders’ equity:                      |       |                                      |       |   |   |
| Common stock                                    |       | 304                                       |       | 327 |   |
| Additional paid-in capital                      |       | 316,898                                   |       | 339,995 |   |
| Accumulated deficit                             |       | (103,083                                  | )          | (86,856 | ) |
| Accumulated other comprehensive income          |       | 7,245                                     |       | 12,274 |   |
| Total stockholders’ equity                 |       | 221,364                                   |       | 265,740 |   |
|                                            |       |                                      |       |   |   |
| Total liabilities and stockholders’ equity |       | $                                         | 310,222    |   | $ | 354,642 |   |

 

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

 

3

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**ADVENT SOFTWARE, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(In thousands, except per share data)**

**(Unaudited)**

 
| ** **                                                            | ** ** | **(Restated, See Note 2)**          | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                            | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
| ** **                                                            | ** ** | **2005**                                           | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                  |       |                                               |       |   |   |   |   |   |   |
| **Net revenues:**                                                     |       |                                               |       |   |   |   |   |   |   |
| License and development fees                                          |       | $                                                  | 9,634      |   | $ | 8,719 |   | $ | 19,174 |   | $ | 16,727 |   |
| Maintenance and other recurring                                       |       | 26,015                                             |       | 23,314 |   | 51,259 |   | 46,200 |   |
| Professional services and other                                       |       | 5,278                                              |       | 3,991 |   | 9,883 |   | 8,819 |   |
|                                                                  |       |                                               |       |   |   |   |   |   |   |
| Total net revenues                                                    |       | 40,927                                             |       | 36,024 |   | 80,316 |   | 71,746 |   |
|                                                                  |       |                                               |       |   |   |   |   |   |   |
| **Cost of revenues:**                                                 |       |                                               |       |   |   |   |   |   |   |
| License and development fees                                          |       | 384                                                |       | 426 |   | 640 |   | 1,020 |   |
| Maintenance and other recurring                                       |       | 7,562                                              |       | 7,320 |   | 14,637 |   | 14,200 |   |
| Professional services and other                                       |       | 4,392                                              |       | 4,107 |   | 8,480 |   | 7,680 |   |
| Amortization of developed technology                                  |       | 614                                                |       | 1,350 |   | 1,228 |   | 2,692 |   |
|                                                                  |       |                                               |       |   |   |   |   |   |   |
| Total cost of revenues                                                |       | 12,952                                             |       | 13,203 |   | 24,985 |   | 25,592 |   |
|                                                                  |       |                                               |       |   |   |   |   |   |   |
| Gross margin                                                          |       | 27,975                                             |       | 22,821 |   | 55,331 |   | 46,154 |   |
|                                                                  |       |                                               |       |   |   |   |   |   |   |
| **Operating expenses:**                                               |       |                                               |       |   |   |   |   |   |   |
| Sales and marketing                                                   |       | 10,474                                             |       | 9,276 |   | 20,537 |   | 18,069 |   |
| Product development                                                   |       | 7,811                                              |       | 8,501 |   | 15,767 |   | 16,353 |   |
| General and administrative                                            |       | 7,808                                              |       | 6,197 |   | 16,161 |   | 12,168 |   |
| Amortization of other intangibles                                     |       | 1,020                                              |       | 2,060 |   | 2,067 |   | 4,084 |   |
| Restructuring charges                                                 |       | 1,520                                              |       | 5,903 |   | 1,603 |   | 5,860 |   |
|                                                                  |       |                                               |       |   |   |   |   |   |   |
| Total operating expenses                                              |       | 28,633                                             |       | 31,937 |   | 56,135 |   | 56,534 |   |
|                                                                  |       |                                               |       |   |   |   |   |   |   |
| Loss from operations                                                  |       | (658                                               | )          | (9,116 | ) | (804 | ) | (10,380 | ) |
| Interest income and other, net                                        |       | 4,712                                              |       | (142 | ) | 5,609 |   | (16 | ) |
|                                                                  |       |                                               |       |   |   |   |   |   |   |
| Income (loss) before income taxes                                     |       | 4,054                                              |       | (9,258 | ) | 4,805 |   | (10,396 | ) |
| Provision for (benefit from) income taxes                             |       | 116                                                |       | (387 | ) | 130 |   | (388 | ) |
|                                                                  |       |                                               |       |   |   |   |   |   |   |
| **Net income (loss)**                                                 |       | $                                                  | 3,938      |   | $ | (8,871 | ) | $ | 4,675 |   | $ | (10,008 | ) |
|                                                                  |       |                                               |       |   |   |   |   |   |   |
| Net income (loss) per share:                                          |       |                                               |       |   |   |   |   |   |   |
| Basic                                                                 |       | $                                                  | 0.13       |   | $ | (0.27 | ) | $ | 0.15 |   | $ | (0.30 | ) |
| Diluted                                                               |       | $                                                  | 0.13       |   | $ | (0.27 | ) | $ | 0.15 |   | $ | (0.30 | ) |
|                                                                  |       |                                               |       |   |   |   |   |   |   |
| Weighted average shares used to compute net  income (loss) per share: |       |                                               |       |   |   |   |   |   |   |
| Basic                                                                 |       | 30,522                                             |       | 33,179 |   | 31,267 |   | 33,122 |   |
| Diluted                                                               |       | 31,289                                             |       | 33,179 |   | 31,947 |   | 33,122 |   |

 

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

 

4

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**ADVENT SOFTWARE, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                                | ** ** | **(Restated, See Note 2)**        | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                | ** ** | **Six Months Ended June 30** | ** ** |
| ** **                                                                                | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
|                                                                                      |       |                                             |       |   |   |
| **Cash flows from operating activities:**                                                 |       |                                             |       |   |   |
| Net income (loss)                                                                         |       | $                                                | 4,675      |   | $ | (10,008 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |       |                                             |       |   |   |
| Non-cash stock based compensation                                                         |       | —                                           |       | 18 |   |
| Depreciation and amortization                                                             |       | 7,970                                            |       | 11,114 |   |
| Non-cash restructuring charges                                                            |       | —                                           |       | 863 |   |
| Loss on dispositions of fixed assets                                                      |       | 68                                               |       | 372 |   |
| Reduction of doubtful accounts                                                            |       | (140                                             | )          | (175 | ) |
| (Gain) loss on investments                                                                |       | (3,449                                           | )          | 717 |   |
| Deferred income taxes                                                                     |       | (243                                             | )          | (100 | ) |
| Other                                                                                     |       | (832                                             | )          | (232 | ) |
| Changes in operating assets and  liabilities:                                             |       |                                             |       |   |   |
| Accounts receivable                                                                       |       | 2,129                                            |       | 6,766 |   |
| Prepaid and other assets                                                                  |       | 1,072                                            |       | 3,499 |   |
| Accounts payable                                                                          |       | (221                                             | )          | 120 |   |
| Accrued liabilities                                                                       |       | 1,291                                            |       | 1,771 |   |
| Deferred revenues                                                                         |       | 2,850                                            |       | (1,488 | ) |
| Income taxes payable                                                                      |       | (1,688                                           | )          | (761 | ) |
|                                                                                      |       |                                             |       |   |   |
| Net cash provided by operating activities                                                 |       | 13,482                                           |       | 12,476 |   |
|                                                                                      |       |                                             |       |   |   |
| **Cash flows from investing activities:**                                                 |       |                                             |       |   |   |
| Net cash used in acquisitions                                                             |       | (1,028                                           | )          | (5,756 | ) |
| Purchases of property and equipment                                                       |       | (2,435                                           | )          | (1,265 | ) |
| Capitalized software development costs                                                    |       | (461                                             | )          | — |   |
| Purchases of marketable securities                                                        |       | (78,929                                          | )          | (73,505 | ) |
| Sales and maturities of marketable  securities                                            |       | 111,543                                          |       | 65,498 |   |
| Proceeds from sale of other investments                                                   |       | 3,791                                            |       | — |   |
|                                                                                      |       |                                             |       |   |   |
| Net cash provided by (used in) investing  activities                                      |       | 32,481                                           |       | (15,028 | ) |
|                                                                                      |       |                                             |       |   |   |
| **Cash flows from financing activities:**                                                 |       |                                             |       |   |   |
| Proceeds from issuance of common stock                                                    |       | 4,728                                            |       | 4,263 |   |
| Repurchase of common stock                                                                |       | (48,751                                          | )          | (858 | ) |
|                                                                                      |       |                                             |       |   |   |
| Net cash provided by (used in) financing  activities                                      |       | (44,023                                          | )          | 3,405 |   |
|                                                                                      |       |                                             |       |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                             |       | (97                                              | )          | (52 | ) |
|                                                                                      |       |                                             |       |   |   |
| **Net change in cash and cash equivalents**                                               |       | 1,843                                            |       | 801 |   |
| **Cash and cash equivalents at beginning of  period**                                     |       | 21,177                                           |       | 34,761 |   |
|                                                                                      |       |                                             |       |   |   |
| **Cash and cash equivalents at end of period**                                            |       | $                                                | 23,020     |   | $ | 35,562 |   |

 

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

 

5

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**ADVENT SOFTWARE, INC.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1—Basis ofPresentation**

 

The condensed consolidated financial statements include the accounts ofAdvent Software, Inc. (“Advent” or the “Company”) and its wholly ownedsubsidiaries. All intercompany balances and transactions have been eliminated.

 

Advent has prepared these condensed consolidated financial statementsin accordance with the rules and regulations of the Securities and ExchangeCommission (“SEC”) applicable to interim financial information. Certaininformation and footnote disclosures included in financial statements preparedin accordance with accounting principles generally accepted in the UnitedStates of America have been omitted in these interim statements pursuant tosuch SEC rules and regulations. These interim financial statements should beread in conjunction with the audited financial statements and related notesincluded in Advent’s Annual Report on Form 10-K/A for the year endedDecember 31, 2004 (see Note 2 below). Interim results are not necessarilyindicative of the results to be expected for the full year, and norepresentation is made thereto.

 

These condensed consolidated financial statements include alladjustments 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(loss) or stockholders’ equity.

 

**Note 2—Restatement of Financial Statementsand Revision of Stock-Based Employee Compensation Expense Disclosures**

 

Restatement of FinancialStatements

 

In connection with itspreparation of the consolidated financial statements for the fiscal year endedDecember 31, 2005, management of the Company determined that its previouslyissued financial statements contained in the Company’s Quarterly Reports onForm 10-Q for the quarters ended March 31, 2004 and 2005, June 30, 2004 and2005, and September 30, 2004 and 2005 should be restated to correct errors inthose financial statements. The decision to restate these financial statementswas made after management’s discovery of the following errors. Specifically,the Company did not (i) include the benefit from the reversal of the deferredtax liability associated with the amortization of intangible assets of itsEuropean subsidiaries, or (ii) properly estimate the reduction in the valuationallowance associated with the deferred tax assets in the United States, in thecalculation of its income tax provision. In addition, the Company did notadjust the amortization periods of certain leasehold improvements upon a changein the lease termination date at one of its facilities and, as a result,overstated depreciation expense for the fiscal quarters of 2004 and 2005.Further, the Company did not defer license, maintenance and professionalservices revenue, together with related expenses in sales and marketing, oncertain term license arrangements in accordance with SOP 97-2 for each of thequarters of fiscal 2005.

 

The following is a summaryof the effect of these corrections on the Company’s condensed consolidatedbalance sheets as of June 30, 2005 and December 31, 2004, condensedconsolidated statement of operations for the three and six months ended June30, 2005 and 2004, and condensed consolidated statements of cash flows for thesix months ended June 30, 2005 and 2004 (in thousands, except per share data):

 

6

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| ** **                                | ** ** | **Consolidated Balance Sheet** | ** ** |
|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                | ** ** | **As Previously**                   | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                                | ** ** | **Reported**                             | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **June 30, 2005**               |       |                                     |       |   |   |   |   |   |   |   |
| Prepaid expenses and other                |       | $                                        | 10,357     |   | $ | 186 |   | $ | 10,543 |   |
| Total current assets                      |       | $                                        | 174,965    |   | $ | 186 |   | $ | 175,151 |   |
| Property and equipment, net               |       | $                                        | 15,988     |   | $ | 185 |   | $ | 16,173 |   |
| Total assets                              |       | $                                        | 309,851    |   | $ | 371 |   | $ | 310,222 |   |
| Deferred revenues                         |       | $                                        | 58,713     |   | $ | 552 |   | $ | 59,265 |   |
| Income taxes payable                      |       | $                                        | 3,202      |   | $ | (854 | ) | $ | 2,348 |   |
| Total current liabilities                 |       | $                                        | 81,975     |   | $ | (302 | ) | $ | 81,673 |   |
| Total liabilities                         |       | $                                        | 89,160     |   | $ | (302 | ) | $ | 88,858 |   |
| Accumulated deficit                       |       | $                                        | (103,763   | ) | $ | 680 |   | $ | (103,083 | ) |
| Accumulated other comprehensive income    |       | $                                        | 7,252      |   | $ | (7 | ) | $ | 7,245 |   |
| Total stockholders equity                 |       | $                                        | 220,691    |   | $ | 673 |   | $ | 221,364 |   |
| Total liabilities and stockholders equity |       | $                                        | 309,851    |   | $ | 371 |   | $ | 310,222 |   |

 
| ** **                                                    | ** ** | **Consolidated Statement of Operations** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                    | ** ** | **As Previously**                                  | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                                                    | ** ** | **Reported**                                            | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **Three months ended June 30, 2005** |       |                                                    |       |   |   |   |   |   |   |   |
| License and development fee revenue                           |       | $                                                       | 9,635      |   | $ | (1 | ) | $ | 9,634 |   |
| Maintenance and other recurring revenue                       |       | $                                                       | 26,016     |   | $ | (1 | ) | $ | 26,015 |   |
| Professional services and other revenue                       |       | $                                                       | 5,581      |   | $ | (303 | ) | $ | 5,278 |   |
| Total net revenues                                            |       | $                                                       | 41,232     |   | $ | (305 | ) | $ | 40,927 |   |
| Cost of professional services and other  revenue              |       | $                                                       | 4,510      |   | $ | (118 | ) | $ | 4,392 |   |
| Total cost of revenues                                        |       | $                                                       | 13,070     |   | $ | (118 | ) | $ | 12,952 |   |
| Gross margin                                                  |       | $                                                       | 28,162     |   | $ | (187 | ) | $ | 27,975 |   |
| General and administrative expense                            |       | $                                                       | 7,868      |   | $ | (60 | ) | $ | 7,808 |   |
| Total operating expenses                                      |       | $                                                       | 28,693     |   | $ | (60 | ) | $ | 28,633 |   |
| Income (loss) from operations                                 |       | $                                                       | (531       | ) | $ | (127 | ) | $ | (658 | ) |
| Income (loss) before income taxes                             |       | $                                                       | 4,181      |   | $ | (127 | ) | $ | 4,054 |   |
| Provision for (benefit from) income taxes                     |       | $                                                       | 906        |   | $ | (790 | ) | $ | 116 |   |
| Net income (loss)                                             |       | $                                                       | 3,275      |   | $ | 663 |   | $ | 3,938 |   |
| Basic net income (loss) per share                             |       | $                                                       | 0.11       |   | $ | 0.02 |   | $ | 0.13 |   |
| Diluted net income (loss) per share                           |       | $                                                       | 0.10       |   | $ | 0.03 |   | $ | 0.13 |   |

 

7

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| ** **                                                  | ** ** | **Consolidated Statement of Operations** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                  | ** ** | **As Previously**                                  | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                                                  | ** ** | **Reported**                                            | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **Six months ended June 30, 2005** | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| License and development fee revenue                         |       | $                                                       | 19,228     |   | $ | (54 | ) | $ | 19,174 |   |
| Maintenance and other recurring revenue                     |       | $                                                       | 51,303     |   | $ | (44 | ) | $ | 51,259 |   |
| Professional services and other revenue                     |       | $                                                       | 10,337     |   | $ | (454 | ) | $ | 9,883 |   |
| Total net revenues                                          |       | $                                                       | 80,868     |   | $ | (552 | ) | $ | 80,316 |   |
| Cost of professional services and other  revenue            |       | $                                                       | 8,657      |   | $ | (177 | ) | $ | 8,480 |   |
| Total cost of revenues                                      |       | $                                                       | 25,162     |   | $ | (177 | ) | $ | 24,985 |   |
| Gross margin                                                |       | $                                                       | 55,706     |   | $ | (375 | ) | $ | 55,331 |   |
| Sales and marketing expense                                 |       | $                                                       | 20,546     |   | $ | (9 | ) | $ | 20,537 |   |
| General and administrative expense                          |       | $                                                       | 16,281     |   | $ | (120 | ) | $ | 16,161 |   |
| Total operating expenses                                    |       | $                                                       | 56,264     |   | $ | (129 | ) | $ | 56,135 |   |
| Income (loss) from operations                               |       | $                                                       | (558       | ) | $ | (246 | ) | $ | (804 | ) |
| Income (loss) before income taxes                           |       | $                                                       | 5,051      |   | $ | (246 | ) | $ | 4,805 |   |
| Provision for (benefit from) income taxes                   |       | $                                                       | 991        |   | $ | (861 | ) | $ | 130 |   |
| Net income (loss)                                           |       | $                                                       | 4,060      |   | $ | 615 |   | $ | 4,675 |   |
| Basic net income (loss) per share                           |       | $                                                       | 0.13       |   | $ | 0.02 |   | $ | 0.15 |   |
| Diluted net income (loss) per share                         |       | $                                                       | 0.13       |   | $ | 0.02 |   | $ | 0.15 |   |
|                                                        |       |                                                    |       |   |   |   |   |
| **Three months ended June 30, 2004**                        |       |                                                    |       |   |   |   |   |
| General and administrative expense                          |       | $                                                       | 6,207      |   | $ | (10 | ) | $ | 6,197 |   |
| Total operating expenses                                    |       | $                                                       | 31,947     |   | $ | (10 | ) | $ | 31,937 |   |
| Income (loss) from operations                               |       | $                                                       | (9,126     | ) | $ | 10 |   | $ | (9,116 | ) |
| Income (loss) before income taxes                           |       | $                                                       | (9,268     | ) | $ | 10 |   | $ | (9,258 | ) |
| Provision for (benefit from) income taxes                   |       | $                                                       | (21        | ) | $ | (366 | ) | $ | (387 | ) |
| Net income (loss)                                           |       | $                                                       | (9,247     | ) | $ | 376 |   | $ | (8,871 | ) |
| Basic net income (loss) per share                           |       | $                                                       | (0.28      | ) | $ | 0.01 |   | $ | (0.27 | ) |
| Diluted net income (loss) per share                         |       | $                                                       | (0.28      | ) | $ | 0.01 |   | $ | (0.27 | ) |
|                                                        |       |                                                    |       |   |   |   |   |
| **Six months ended June 30, 2004**                          |       |                                                    |       |   |   |   |   |
| General and administrative expense                          |       | $                                                       | 12,188     |   | $ | (20 | ) | $ | 12,168 |   |
| Total operating expenses                                    |       | $                                                       | 56,554     |   | $ | (20 | ) | $ | 56,534 |   |
| Income (loss) from operations                               |       | $                                                       | (10,400    | ) | $ | 20 |   | $ | (10,380 | ) |
| Income (loss) before income taxes                           |       | $                                                       | (10,416    | ) | $ | 20 |   | $ | (10,396 | ) |
| Provision for (benefit from) income taxes                   |       | $                                                       | (21        | ) | $ | (367 | ) | $ | (388 | ) |
| Net income (loss)                                           |       | $                                                       | (10,395    | ) | $ | 387 |   | $ | (10,008 | ) |
| Basic net income (loss) per share                           |       | $                                                       | (0.31      | ) | $ | 0.02 |   | $ | (0.29 | ) |
| Diluted net income (loss) per share                         |       | $                                                       | (0.31      | ) | $ | 0.02 |   | $ | (0.29 | ) |

 
| ** **                                                  | ** ** | **Consolidated Statement of Cash Flows** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **As Previously**                                       | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                                                  | ** ** | **Reported**                                                 | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **Six months ended June 30, 2005** | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                                           |       | $                                                            | 4,060      |   | $ | 615 |   | $ | 4,675 |   |
| Depreciation and amortization                               |       | $                                                            | 8,090      |   | $ | (120 | ) | $ | 7,970 |   |
| Other (adjustment to reconcile net loss to  net cash        |       |                                                         |       |   |   |   |   |
| provided by operating activities)                           |       | $                                                            | (825       | ) | $ | (7 | ) | $ | (832 | ) |
| Prepaid and other assets                                    |       | $                                                            | 1,258      |   | $ | (186 | ) | $ | 1,072 |   |
| Deferred revenues                                           |       | $                                                            | 2,298      |   | $ | 552 |   | $ | 2,850 |   |
| Income taxes payable                                        |       | $                                                            | (834       | ) | $ | (854 | ) | $ | (1,688 | ) |
|                                                        |       |                                                         |       |   |   |   |   |
| **Six months ended June 30, 2004**                          |       |                                                         |       |   |   |   |   |
| Net income (loss)                                           |       | $                                                            | (10,395    | ) | $ | 387 |   | $ | (10,008 | ) |
| Depreciation and amortization                               |       | $                                                            | 11,134     |   | $ | (20 | ) | $ | 11,114 |   |
| Income taxes payable                                        |       | $                                                            | (394       | ) | $ | (367 | ) | $ | (761 | ) |

 

8

----

 

Revision of Stock-Based Employee Compensation Expense Disclosures

 

Inaddition, management of the Company also determined that the Company’s proforma disclosure relating to stock based employee compensation expensepresented in Note 4, “Stock-Based Compensation”, to the condensed consolidatedfinancial statements for the quarters ended June 30, 2004 and 2005 wereincorrect. Specifically, the revisions related to the attribution period of proforma stock-based employee compensation from non-routine stock compensationarrangements, including those with non-standard vesting terms or performanceconditions. As a result, the Company has revised the disclosure for stock-basedemployee compensation expense determined under the fair valued based method forthe three months ended June 30, 2005 and 2004 by increasing (decreasing) theexpense by approximately $(13,000) and $104,000, respectively, and for the sixmonths ended June 30, 2005 and 2004 by increasing the expense by $102,000 and $691,000(or $0.02 per basic and diluted share), respectively.

 

**Note 3—Recent AccountingPronouncements**

 

In December 2004, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), which replacesSFAS 123 and supersedes Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” (“APB 25”).SFAS 123R requires all share-based payments to employees, including grantsof employee stock options, to be recognized in the financial statements basedon their fair values, beginning with the first interim or annual period afterJune 15, 2005, with early adoption encouraged. The pro forma disclosurespreviously permitted under SFAS 123 no longer will be an alternative tofinancial statement recognition. In April 2005, the SEC subsequently adopted anew rule delaying compliance with SFAS 123R until the beginning of the Company’snext fiscal year, instead of the next reporting period that begins after June15, 2005. Under the SEC’s recent rule, Advent is required to adoptSFAS 123R in the first quarter of fiscal 2006, beginning January 1,2006. Under SFAS 123R, Advent must determine the appropriate fair value modelto be used for valuing share-based payments, the amortization method forcompensation cost and the transition method to be used at date of adoption. Thetransition method includes prospective and retroactive adoption methods. Underthe retroactive method, prior periods may be restated either as of thebeginning of the year of adoption or for all periods presented. The prospectivemethod requires that compensation expense be recorded for all unvested stockoptions and restricted stock at the beginning of the first quarter of adoptionof SFAS 123R, while the retroactive method would record compensationexpense for all unvested stock options and restricted stock beginning with thefirst period restated. Advent is evaluating the requirements of SFAS 123Rand expects that the adoption of SFAS 123R will have a material impact onits condensed consolidated results of operations and earnings per share. Adventhas not yet determined the method of adoption or the effect of adoptingSFAS 123R, and has not determined whether the adoption will result inamounts that are similar to the current pro forma disclosures underSFAS 123.

 

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB107”) regarding the staff’s interpretation of Share-Based Payments. Thisinterpretation expresses the views of the staff regarding the interactionbetween SFAS 123R and certain SEC rules and regulations and provides the staff’sviews regarding the valuation of share-based payment arrangements for publiclytraded companies. In particular, SAB 107 provides guidance related toshare-based payment transactions with non-employees, the transition fromnonpublic to public entity status, valuation methods, the accounting forcertain redeemable financial instruments issued under share-based paymentarrangements, the classification of compensation expense, non-GAAP financialmeasures, first-time adoption of SFAS 123R in an interim period, capitalizationof compensation cost related to share-based arrangements, the accounting forincome tax effects of share-based payment arrangements upon adoption of SFAS123R, the modification of employee share options prior to adoption of SFAS 123Rand disclosures in Management’s Discussion and Analysis subsequent to adoptionof SFAS 123R. Advent will adopt SAB 107 in connection with its adoption of SFAS123R, which the Company expects to have a material impact on its condensedconsolidated results of operations and earnings per share.

 

In March 2005, the FASB issued Interpretation No. 47, “Accounting forConditional Asset Retirement Obligations – An Interpretation of FASB StatementNo. 143” (“FIN 47”), to clarify the requirement to record liabilities stemmingfrom a legal obligation to clean up and retire fixed assets, such as a plant orfactory, when an asset retirement depends on a future event. The Company plansto adopt FIN 47 in the first quarter of fiscal 2006, and does not expect theapplication of FIN 47 to have a material impact on its condensed consolidatedresults of operations, cash flows or financial position.

 

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes andError Corrections – a replacement of APB Opinion No. 20 and FASB Statement No.3” (“SFAS 154”). This statement applies to all voluntary changes in accountingprinciple and changes required by an accounting pronouncement where no specifictransition provisions are included. SFAS 154 requires retrospective applicationto prior periods’ financial statements of changes in accounting principle,unless it is impracticable to determine either the period-specific effects orthe cumulative effect of the change. Retrospective application is limited tothe direct effects of the change; the indirect effects should be recognized inthe period of the change. This statement carries forward without change theguidance contained in Opinion 20 for reporting the correction of an error inpreviously

 

9

----

 

issued financial statements anda change in accounting estimate. However, SFAS 154 redefines restatement as therevising of previously issued financial statements to reflect the correction ofan error. The provisions of SFAS 154 are effective for accounting changes andcorrections of errors made in fiscal periods that begin after December 15, 2005,although early adoption is permitted. The Company does not anticipate that theimplementation of this standard will have a material impact on its condensedconsolidated results of operations, cash flows or financial position.

 

**Note 4—Stock-Based Compensation**

 

Advent currently uses the intrinsic value-based method as prescribedin APB 25 to account for all stock-based employee compensation plans andhas adopted the disclosure-only alternative of SFAS 123, as amended by SFAS148. Advent is required to disclose the pro forma effects on operating resultsas if Advent had elected to use the fair value approach to account for allstock-based employee compensation plans. Stock-based compensation fornon-employees is based on the fair value of the related stock or options.

 

The fair value of warrants, options or stock exchanged for services isexpensed over the period benefited. The warrants and options are valued usingthe Black-Scholes option pricing model.

 

If compensation had been determined based on the fair value at thegrant date for awards during the three and six months ended June 30, 2005 and2004, consistent with the provisions of SFAS 123, Advent’s net loss and netloss per share would have been as follows (in thousands, except per sharedata):

 
| ** **                                                                                                                 | ** ** | **(Revised, See Note 2)**           | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                                                 | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
| ** **                                                                                                                 | ** ** | **2005**                                           | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                 | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss) - as restated                                                                                            |       | $                                                  | 3,938      |   | $ | (8,871 | ) | $ | 4,675 |   | $ | (10,008 | ) |
| Stock-based employee compensation expense  included in reported net loss, net of tax (1)                                   |       | —                                             |       | 6 |   | — |   | 18 |   |
| Total stock based employee compensation  expense determined under fair value based method for all options, net of tax  (1) |       | (4,350                                             | )          | (4,097 | ) | (8,411 | ) | (9,140 | ) |
|                                                                                                                       |       |                                               |       |   |   |   |   |   |   |
| Net loss - pro forma                                                                                                       |       | $                                                  | (412       | ) | $ | (12,962 | ) | $ | (3,736 | ) | $ | (19,130 | ) |
|                                                                                                                       |       |                                               |       |   |   |   |   |   |   |
| Net income (loss) per share - as reported:                                                                                 |       |                                               |       |   |   |   |   |   |   |
| Basic                                                                                                                      |       | $                                                  | 0.13       |   | $ | (0.27 | ) | $ | 0.15 |   | $ | (0.30 | ) |
| Diluted                                                                                                                    |       | $                                                  | 0.13       |   | $ | (0.27 | ) | $ | 0.15 |   | $ | (0.30 | ) |
|                                                                                                                       |       |                                               |       |   |   |   |   |   |   |
| Net income (loss) per share - pro forma:                                                                                   |       |                                               |       |   |   |   |   |   |   |
| Basic                                                                                                                      |       | $                                                  | (0.01      | ) | $ | (0.39 | ) | $ | (0.12 | ) | $ | (0.58 | ) |
| Diluted                                                                                                                    |       | $                                                  | (0.01      | ) | $ | (0.39 | ) | $ | (0.12 | ) | $ | (0.58 | ) |

 

----

(1)   Assumes an effective tax rate of 0% for thethree and six months ended June 30, 2005 and 2004 due to the full valuationallowance established against the Company’s deferred tax assets during thefourth quarter of 2003.

 

The weighted-average grant-date fair value of options granted were $9.98and $11.01 per option for the three months ended June 30, 2005 and 2004,respectively, and $10.07 and $11.63 per option for the six months ended June30, 2005 and 2004, respectively. The weighted-average fair values of theEmployee Stock Purchase Plan (“ESPP”) rights, measured on the grant date usingBlack-Scholes option pricing model, were $4.62 per share for the three and six monthsended June 30, 2005 and $4.60 per share for the three and six months ended June30, 2004.

 

The fair value of each option grant and ESPP rights were estimated onthe date of grant using the Black-Scholes option pricing model with thefollowing weighted average assumptions:

 

10

----

 
| ** **                        | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|-----------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                        | ** ** | **2005**                                           | ** ** | **2004**                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Stock  Options**                | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Risk-free interest rate           |       | 3.9%                                               |       | 3.7%                                             |       | 3.9% |   | 3.3% |   |
| Volatility                        |       | 58.8%                                              |       | 66.0%                                            |       | 61.3% |   | 66.0% |   |
| Expected life                     |       | 5 years                                            |       | 5 years                                          |       | 5 years |   | 5 years |   |
| Expected dividends                |       | None                                               |       | None                                             |       | None |   | None |   |
|                              |       |                                               |       |                                             |       |   |   |   |   |
| **Employee  Stock Purchase Plan** |       |                                               |       |                                             |       |   |   |   |   |
| Risk-free interest rate           |       | 2.8%                                               |       | 1.4%                                             |       | 2.8% |   | 1.4% |   |
| Volatility                        |       | 27.8%                                              |       | 35.8%                                            |       | 27.8% |   | 35.8% |   |
| Expected life                     |       | 6 months                                           |       | 6 months                                         |       | 6 months |   | 6 months |   |
| Expected dividends                |       | None                                               |       | None                                             |       | None |   | None |   |

 

TheESPP plan periods begin every six months in the second and fourth quarter ofeach year.

 

**Note 5—Net Income(Loss) Per Share**

 

Basicnet income (loss) per share is computed by dividing net income (loss) by theweighted average number of common shares outstanding during the period. Dilutednet income (loss) per share is computed by dividing net income (loss) by thesum of the weighted average number of common shares outstanding and thepotential number of dilutive common shares outstanding during the period,excluding the effect of any anti-dilutive securities. Potential common sharesconsist of the shares issuable upon the exercise of stock options or warrantsand from withholdings associated with the Company’s employee stock purchaseplan.

 

The following table sets forth the computation of basic and diluted netincome (loss) per share for the three and six months ended June 30, 2005 and2004 (in thousands, except per-share data):

 
| ** **                                                                                                                                        | ** ** | **(Restated, See Note 2)**          | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                                                                        | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
| ** **                                                                                                                                        | ** ** | **2005**                                           | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                                                              |       |                                               |       |   |   |   |   |   |   |
| **Numerator:**                                                                                                                                    |       |                                               |       |   |   |   |   |   |   |
| Net income (loss)                                                                                                                                 |       | $                                                  | 3,938      |   | $ | (8,871 | ) | $ | 4,675 |   | $ | (10,008 | ) |
|                                                                                                                                              |       |                                               |       |   |   |   |   |   |   |
| **Denominator:**                                                                                                                                  |       |                                               |       |   |   |   |   |   |   |
| Denominator for basic net income (loss) per  share- weighted average shares outstanding                                                           |       | 30,522                                             |       | 33,179 |   | 31,267 |   | 33,122 |   |
|                                                                                                                                              |       |                                               |       |   |   |   |   |   |   |
| Dilutive common equivalent shares:                                                                                                                |       |                                               |       |   |   |   |   |   |   |
| Employee stock options and other                                                                                                                  |       | 767                                                |       | — |   | 680 |   | — |   |
|                                                                                                                                              |       |                                               |       |   |   |   |   |   |   |
| Denominator for diluted net income (loss)  per share- weighted average shares outstanding, assuming exercise of  potential dilutive common shares |       | 31,289                                             |       | 33,179 |   | 31,947 |   | 33,122 |   |
|                                                                                                                                              |       |                                               |       |   |   |   |   |   |   |
| Basic net income (loss) per share                                                                                                                 |       | $                                                  | 0.13       |   | $ | (0.27 | ) | $ | 0.15 |   | $ | (0.30 | ) |
| Diluted net income (loss) per share                                                                                                               |       | $                                                  | 0.13       |   | $ | (0.27 | ) | $ | 0.15 |   | $ | (0.30 | ) |

 

Weighted average stock options and warrantsof approximately 1.4 million and 3.0 million for the three and six months endedJune 30, 2005, respectively, were excluded from the calculation of diluted netincome (loss) per share because their inclusion would have been anti-dilutive.Similarly, weighted average stock options and warrants of approximately 5.8million for the three and six months ended June 30, 2004, were excluded fromthe calculation of diluted net income (loss) per share.

 

**Note 6—Goodwill**

 

The changes in the carrying value of goodwill during the six monthsended June 30, 2005 were as follows (in thousands):

 

11

----

 
| ** **                   | ** ** | **Goodwill** | ** ** |
|------------------------------|------------|--------------|------------|
| ** **                   | ** ** | ** **   | ** ** |
| Balance at December 31, 2004 |       | $            | 99,393     |   |
| Translation adjustments      |       | (4,281       | )          |
|                         |       |         |       |
| Balance at June 30, 2005     |       | $            | 95,112     |   |

 

In accordance with SFAS No. 142, “Goodwilland Other Intangible Assets,” Advent reviews goodwill for impairment annuallyduring the fourth quarter of the fiscal year and more frequently if an event orcircumstance indicates that an impairment loss has occurred. Duringthe fourth quarter of 2004, Advent completed the annual impairment test whichindicated that there was no impairment. There were no events or changes incircumstances during the six months ended June 30, 2005 which triggered animpairment review. Foreigncurrency translation adjustments totaling $4.3 million reflect thestrengthening of the U.S. dollar versus European currencies during the sixmonths ended June 30, 2005.

 

**Note 7—Other Intangibles**

 

The following is a summary of other intangibles as of June 30, 2005 (inthousands):

 
| ** **                | ** ** | **Average**      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|---------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                | ** ** | **Amortization** | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
| ** **                | ** ** | **Period**       | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                | ** ** | **(Years)**      | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
| ** **                | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Purchased technologies    |       | 4.9              |       | $                | 12,734     |             | $          | (10,963          | )          | $ | 1,771 |   |
| Product development costs |       | 3.0              |       | 461              |       | —           |       | 461              |       |
| Customer relationships    |       | 5.6              |       | 20,847           |       | (12,104          | )          | 8,743            |       |
| Other intangibles         |       | 2.5              |       | 308              |       | (166             | )          | 142              |       |
|                      |       |             |       |             |       |             |       |             |       |
| Balance at June 30, 2005  |       |             |       | $                | 34,350     |             | $          | (23,233          | )          | $ | 11,117 |   |

 

The following is a summary of other intangibles as of December 31, 2004(in thousands):

 
| ** **                   | ** ** | **Average**      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                   | ** ** | **Amortization** | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
| ** **                   | ** ** | **Period**       | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                   | ** ** | **(Years)**      | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
|                         |       |             |       |             |       |             |       |             |       |
| Purchased technologies       |       | 4.9              |       | $                | 12,776     |             | $          | (9,779           | )          | $ | 2,997 |   |
| Customer relationships       |       | 5.5              |       | 22,589           |       | (11,099          | )          | 11,490           |       |
| Other intangibles            |       | 2.5              |       | 307              |       | (126             | )          | 181              |       |
|                         |       |             |       |             |       |             |       |             |       |
| Balance at December 31, 2004 |       |             |       | $                | 35,672     |             | $          | (21,004          | )          | $ | 14,668 |   |

 

The changes in the carrying value of other intangibles during the sixmonths ended June 30, 2005 were as follows (in thousands):

 
| ** **                   | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
|------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                   | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                   | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
|                         |       |             |       |             |       |             |       |
| Balance at December 31, 2004 |       | $                | 35,672     |             | $          | (21,004          | )          | $ | 14,668 |   |
| Additions                    |       | 461              |       | —           |       | 461              |       |
| Amortization                 |       | —           |       | (3,295           | )          | (3,295           | )          |
| Translation adjustments      |       | (1,783           | )          | 1,066            |       | (717             | )          |
|                         |       |             |       |             |       |             |       |
| Balance at June 30, 2005     |       | $                | 34,350     |             | $          | (23,233          | )          | $ | 11,117 |   |

 

Amortization of other intangibles was as follows for the periodspresented (in thousands):

 

12

----

 
| ** **                       | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|----------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                       | ** ** | **2005**                                           | ** ** | **2004**                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| Amortization of:                 |       |                                               |       |                                             |       |   |   |   |   |
| Developed technology intangibles |       | $                                                  | 614        |                                             | $          | 1,350 |   | $ | 1,228 |   | $ | 2,692 |   |
| Non-technology intangibles       |       | 1,020                                              |       | 2,060                                            |       | 2,067 |   | 4,084 |   |
|                             |       |                                               |       |                                             |       |   |   |   |   |
| Total                            |       | $                                                  | 1,634      |                                             | $          | 3,410 |   | $ | 3,295 |   | $ | 6,776 |   |

 

Based on the carrying amount of other intangibles as of June 30, 2005,the estimated future amortization is as follows (in thousands): 

 
| ** **                        | ** ** | **Six**               | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|-----------------------|------------|-------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                        | ** ** | **Months Ended** | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **December 31**  | ** ** | **Year Ended December 31** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **2005**              | ** ** | **2006**                                  | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **Total**  | ** ** |
| Estimated future amortization of: | ** ** | ** **            | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Developed technology intangibles  |       | $                     | 1,280      |                                      | $          | 633        |       | $          | 233        |       | $          | 86         |       | $ | — |   | $ | 2,232 |   |
| Non-technology intangibles        |       | 1,976                 |       | 3,775                                     |       | 1,776      |       | 918        |       | 440        |       | 8,885      |       |
|                              |       |                  |       |                                      |       |       |       |       |       |       |       |       |       |
| Total                             |       | $                     | 3,256      |                                      | $          | 4,408      |       | $          | 2,009      |       | $          | 1,004      |       | $ | 440 |   | $ | 11,117 |   |

 

**Note 8—BalanceSheet Detail**

 

The following is a summary of other assets, net (in thousands):

 
| ** **                                                            | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|-----------------------------------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                                            | ** ** | **2005**         | ** ** | **2004**             | ** ** |
|                                                                  |       |             |       |                 |       |
| Long-term investments, gross                                          |       | $                | 13,800     |                 | $          | 16,300 |   |
| Accumulated write-downs due to  other-than-temporary decline in value |       | (5,341           | )          | (7,658               | )          |
| Long-term investments, net                                            |       | 8,459            |       | 8,642                |       |
| Long-term prepaid assets                                              |       | 2,817            |       | 3,303                |       |
| Deposits                                                              |       | 1,393            |       | 1,417                |       |
|                                                                  |       |             |       |                 |       |
| Total other assets, net                                               |       | $                | 12,669     |                 | $          | 13,362 |   |

 

Long-terminvestments include equity investments in several privately held companies,most of which can still be considered in the start-up or development stages.

 

In 2002,Advent acquired approximately 15% of the outstanding voting stock of LatentZeroLimited (“LatentZero”), a privately-held company located in the United Kingdom,for $7.0 million. Through December 28, 2004, LatentZero was accounted for underthe equity method of accounting as Advent’s Chief Executive Officer was amember of LatentZero’s board of directors and Advent accordingly considereditself to have significant influence over this company. During the three andsix months ended June 30, 2004, Advent recorded a loss of $335,000 and$606,000, respectively, resulting from Advent’s pro rata share of net losses onthis equity method investment which was included in interest income and other,net on Advent’s condensed consolidated statement of operations. EffectiveDecember 28, 2004, Advent’s Chief Executive Officer resigned her seat on theinvestee’s board of directors and as a result, Advent no longer believes it hassignificant influence over LatentZero. Therefore, this investment is carried atthe lower of cost or fair value at December 31, 2004 and June 30, 2005, similarto the Company’s other non-marketable investments.

 

During thethree months ended June 30, 2005, Advent sold its private equity investment inPlusFunds Group Inc. with a carrying value of $183,000 for total proceeds of$3.8 million. The Company recorded the associated gain on sale of thisinvestment of $3.6 million in interest income and other, net on Advent’scondensed consolidated statement of operations.

 

Thefollowing is a summary of accrued liabilities (in thousands):

 

13

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| ** **                    | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|-------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                    | ** ** | **2005**         | ** ** | **2004**             | ** ** |
|                          |       |             |       |                 |       |
| Salaries and benefits payable |       | $                | 7,588      |                 | $          | 8,208 |   |
| Accrued restructuring         |       | 1,644            |       | 1,127                |       |
| Other                         |       | 8,223            |       | 8,235                |       |
|                          |       |             |       |                 |       |
| Total accrued liabilities     |       | $                | 17,455     |                 | $          | 17,570 |   |

 

Accruedrestructuring charges are discussed further in Note 10, “Restructuring Charges”.Other accrued liabilities include accruals for royalties, sales and businesstaxes, acquisition related costs, and other miscellaneous items.

 

Thefollowing is a summary of other long-term liabilities (in thousands):

 
| ** **                               | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                               | ** ** | **2005**         | ** ** | **2004**             | ** ** |
|                                     |       |             |       |                 |       |
| Deferred rent                            |       | $                | 1,427      |                 | $          | 2,456 |   |
| Accrued restructuring, long-term portion |       | 3,364            |       | 3,042                |       |
| Other                                    |       | 387              |       | 318                  |       |
|                                     |       |             |       |                 |       |
| Total other long-term liabilities        |       | $                | 5,178      |                 | $          | 5,816 |   |

 

**Deferred Rent.**Certaindeferred rent liabilities have been reclassified from long-term to short-term.Advent has historically classified all amounts accrued for deferred rent as “otherlong-term liabilities” on the condensed consolidated balance sheet. Based uponAdvent’s re-evaluation of these liabilities, the Company has reclassifieddeferred rent liabilities that are to be recognized within a year of thebalance sheet date to “accrued liabilities” on the condensed consolidatedbalance sheets. These reclassifications had no impact on the Company’s resultsof operations or cash flows. The following is a summary of the effect of thesereclassifications on the Company’s condensed consolidated balance sheet as ofDecember 31, 2004 (in thousands):

 
| ** **                      | ** ** | **Condensed Consolidated Balance Sheet** | ** ** |
|---------------------------------|------------|---------------------------------------------------------|------------|
| ** **                      | ** ** | **As Previously**                                  | ** ** | ** ** | ** ** | **As** | ** ** |
| **December 31, 2004** | ** ** | **Reported**                                            | ** ** | **Reclassifications** | ** ** | **Reclassified** | ** ** |
| Accrued liabilities             |       | $                                                       | 16,855     |   | $ | 715 |   | $ | 17,570 |   |
| Total current liabilities       |       | $                                                       | 80,121     |   | $ | 715 |   | $ | 80,836 |   |
| Other long-term liabilities     |       | $                                                       | 6,531      |   | $ | (715 | ) | $ | 5,816 |   |
| Total liabilities               |       | $                                                       | 88,902     |   | $ | — |   | $ | 88,902 |   |

 

**Note 9—Comprehensive Income (Loss)**

 

The componentsof comprehensive income (loss) were as follows for the periods presented (inthousands):

 
| ** **                                                   | ** ** | **(Restated, See Note 2)**          | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                   | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
| ** **                                                   | ** ** | **2005**                                           | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                         |       |                                               |       |   |   |   |   |   |   |
| Net income (loss)                                            |       | $                                                  | 3,938      |   | $ | (8,871 | ) | $ | 4,675 |   | $ | (10,008 | ) |
| Unrealized gain (loss) on marketable  securities, net of tax |       | 230                                                |       | (496 | ) | (90 | ) | (556 | ) |
| Foreign currency translation adjustment                      |       | (2,677                                             | )          | (24 | ) | (4,939 | ) | (1,376 | ) |
| Total comprehensive income (loss)                            |       | $                                                  | 1,491      |   | $ | (9,391 | ) | $ | (354 | ) | $ | (11,940 | ) |

 

Thecomponents of accumulated other comprehensive income were as follows (inthousands):

 

14

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| ** **                                                            | ** ** | **(Restated,**            | ** ** | ** **           | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------|------------|----------------------|------------|
| ** **                                                            | ** ** | **See Note 2)** | ** ** | ** **           | ** ** |
| ** **                                                            | ** ** | **June 30**          | ** ** | **December 31** | ** ** |
| ** **                                                            | ** ** | **2005**                  | ** ** | **2004**             | ** ** |
|                                                                  |       |                      |       |                 |       |
| Accumulated net unrealized loss on  marketable securities, net of tax |       | $                         | (492       | )                    | $          | (402 | ) |
| Accumulated foreign currency translation  adjustments                 |       | 7,737                     |       | 12,676               |       |
| Total accumulated other comprehensive  income                         |       | $                         | 7,245      |                 | $          | 12,274 |   |

 

**Note 10—Restructuring Charges**

 

##### ***In response to the downturn inthe financial services industry, the decline in information technology spendingand duplicative efforts in parts of the business as a result of various acquisitions,Advent implemented several phases of restructuring beginning in 2003. Theseplans were implemented to reduce costs and improve operating efficiencies bybetter aligning Advent’s resources to the Company’s near-term revenueopportunities.***

##### *** ***

The restructuring charges recorded for the three and six months ended June30, 2005 and 2004 were as follows (in thousands):

 
| ** **                       | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|----------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                       | ** ** | **2005**                                           | ** ** | **2004**                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|                             |       |                                               |       |                                             |       |   |   |   |   |
| Facility exit costs              |       | $                                                  | 1,525      |                                             | $          | 5,028 |   | $ | 1,608 |   | $ | 4,865 |   |
| Severance and benefits           |       | (5                                                 | )          | 12                                               |       | (5 | ) | 132 |   |
| Property and equipment abandoned |       | —                                             |       | 863                                              |       | — |   | 863 |   |
| Total restructuring charges      |       | $                                                  | 1,520      |                                             | $          | 5,903 |   | $ | 1,603 |   | $ | 5,860 |   |

 

During the three months ended June 30, 2005, Advent recorded arestructuring charge of $1.5 million primarily consisting of facility and exitcosts related to sub-leasing one floor of its office space in New York, NewYork. During the three months ended March 31, 2005, Advent recorded a netrestructuring charge of $83,000 primarily to adjust original estimates forvacated facilities.

 

During the three months ended June 30, 2004, Advent recorded arestructuring charge of $5.9 million primarily consisting of $4.9 million offacility and exit costs and $0.9 million of property and equipment impairmentcharges related to vacating a facility in San Francisco, California, $72,000related to vacating a portion of a facility in Cambridge, Massachusetts and a$12,000 adjustment to severance for employees terminated in the first quarterof 2004. During the three months ended March 31, 2004, Advent recorded a netrestructuring benefit of $43,000 consisting of a $163,000 adjustment related toentering into a final sub-lease agreement on one of its vacated facilities inNew York and a $16,000 adjustment to non-cash severance. These adjustments werepartially offset by a restructuring charge of $136,000 related to thetermination of nine employees, located primarily in New York.

 

The following table sets forth an analysis of the components of therestructuring charges and the payments and non-cash charges made against theaccrual during the six months ended June 30, 2005 (in thousands):

 
| ** **                                              | ** ** | **Facility Exit** | ** ** | **Severance &** | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|--------------------------|------------|------------|------------|
| ** **                                              | ** ** | **Costs**              | ** ** | **Benefits**             | ** ** | **Total**  | ** ** |
|                                                    |       |                   |       |                     |       |       |       |
| Balance of restructuring accrual at  December 31, 2004  |       | $                      | 4,157      |                     | $          | 12         |       | $ | 4,169 |   |
| Restructuring charges                                   |       | 1,472                  |       | —                   |       | 1,472      |       |
| Reversal of deferred rent related to  facilities exited |       | 704                    |       | —                   |       | 704        |       |
| Cash payments                                           |       | (1,468                 | )          | —                   |       | (1,468     | )          |
| Adjustment of prior restructuring costs                 |       | 136                    |       | (5                       | )          | 131        |       |
| Balance of restructuring accrual at June  30, 2005      |       | $                      | 5,001      |                     | $          | 7          |       | $ | 5,008 |   |

 

Of the remaining restructuring accrual of $5.0 million at June 30,2005, $1.6 million and $3.4 million are included in accrued liabilities andother long-term liabilities, respectively, on the accompanying condensedconsolidated balance sheet. The remaining excess facility costs of $5.0 millionare stated at estimated fair value, net of estimated sublease income ofapproximately $8.8 million. Advent expects to pay the remaining obligationsassociated with the vacated facilities no later than

 

15

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over the remaining lease terms,which expire on various dates through 2012. Advent expects to pay the remainingseverance and benefits in 2005.

 

**Note 11—Common Stock Repurchase Programs**

 

Advent’s Board of Directors (the “Board”) has approved common stockrepurchase programs authorizing management to repurchase shares of the Company’scommon stock in the open market. The timing and actual number of shares subjectto repurchase are at the discretion of Advent’s management and are contingenton a number of factors, including the price of Advent’s stock, general marketconditions and alternative investment opportunities. The purchases are fundedfrom available working capital.

 

During 2001 and 2002, the Board authorized the repurchase of up to 4.0million shares of outstanding common stock. Through May 2004 when this programwas terminated, Advent had repurchased and retired 3.8 million shares of commonstock since inception of this stock repurchase program at a total cost of $78.8million and an average price of $20.82 per share.

 

In May 2004, the Board authorized the repurchase of an additional 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. During the firstquarter of 2005, Advent repurchased 2.1 million shares of common stock underthis repurchase program at a total cost of $38.0 million and an average priceof $17.90 per share. During the second quarter of 2005, Advent repurchased 0.6million shares of common stock at a total cost of $10.7 million and an averageprice of $19.32 per share. Since the inception of this program in May 2004through June 30, 2005, Advent has repurchased 3.4 million shares for a totalcost of $60.7 million and an average price of $17.72 per share. As of June 30,2005, approximately 1.4 million shares were available to be repurchased underthis share repurchase plan.

 

#### **Note 12—Acquisitions**

####  

InMay 2004, Advent acquired the remaining independent distributor businesses fromits independent European distributor, Advent Europe Holding BV (“Advent Europe”),in the United Kingdom and Switzerland, as well as certain assets of AdventEurope. Advent made these acquisitions in order to gain direct control over allof its European operations, which it views as an increasingly important market.The consideration of $6.0 million consisted of $5.7 million in cash, $242,000of assumed liabilities and $83,000 of closing costs. A total of $5.5 million ofthe cash consideration was paid at closing and the remaining $0.2 million waspaid by the Company during the second quarter of 2005. In addition, the Companypaid an earn-out distribution of approximately $1.8 million under a formulabased on revenue bookings, which was recorded as additional goodwill in thesecond quarter of 2004. No further earn-out distributions were earned or paid.

 

Theacquisition has been accounted for using the purchase method of accounting andaccordingly, the purchase price has been allocated to the tangible andidentifiable intangible assets and liabilities acquired on the basis of theirrespective fair values on the acquisition date. The amounts allocated toidentifiable intangibles were determined based upon management’s estimatesusing established valuation techniques. The results of operations of AdventUnited Kingdom and Advent Switzerland are included in the condensedconsolidated statement of operations from the date of acquisition.

 

Theallocation of the purchase price for Advent United Kingdom, Advent Switzerlandand certain assets of Advent Europe at the date of purchase was as follows (inthousands, except estimated remaining useful life):

 

16

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| ** **               | ** ** | **Estimated Remaining** | ** ** | ** **              | ** ** |
|--------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **               | ** ** | **Useful Life**         | ** ** | **Purchase Price** | ** ** |
| ** **               | ** ** | **(Years)**                  | ** ** | **Allocation**          | ** ** |
| ** **               | ** ** | ** **                   | ** ** | ** **              | ** ** |
| Goodwill                 |       |                         |       | $                       | 3,765      |   |
| Customer relationships   |       | 4                            |       | 326                     |       |
| Sub-licensing agreements |       | 4                            |       | 913                     |       |
| Employment agreements    |       | 3                            |       | 232                     |       |
| Developed technology     |       | 3                            |       | 710                     |       |
| Tangible assets          |       |                         |       | 2,754                   |       |
| Current liabilities      |       |                         |       | (2,387                  | )          |
| Deferred tax liabilities |       |                         |       | (337                    | )          |
|                     |       |                         |       |                    |       |
| Total purchase price     |       |                         |       | $                       | 5,976      |   |

####  

Residualgoodwill has been recorded based on the purchase price remaining afterallocating the purchase price to the fair market value of assets purchased lessliabilities assumed and to identifiable intangible assets. Residual goodwillarises as a result of, among other factors, new customers as well as theimplicit value of future cost savings as a result of the combining of entities.Goodwill resulting from this acquisition was assigned to the Advent InvestmentManagement segment and was expected to be non-deductible for tax purposes underInternal Revenue Code 197.

 

Thefollowing unaudited pro forma summary presents the consolidated results ofoperations as if the acquisitions had occurred at the beginning of the periodspresented. This does not purport to be indicative of the results that wouldhave been achieved had the acquisition been made as of those dates nor of theresults which may occur in the future (in thousands, except per share data):

 
| ** **                             | ** ** | **(Restated, See Note 2)** | ** ** |
|----------------------------------------|------------|-------------------------------------------|------------|
| ** **                             | ** ** | **Three Months**                     | ** ** | **Six Months** | ** ** |
| ** **                             | ** ** | **Ended**                                 | ** ** | **Ended** | ** ** |
| ** **                             | ** ** | **June 30, 2004**               | ** ** | **June 30, 2004** | ** ** |
| Net revenues                           |       | $                                         | 36,322     |   | $ | 72,974 |   |
| Net loss                               |       | $                                         | (9,024     | ) | $ | (10,758 | ) |
| Net loss per share - basic and diluted |       | $                                         | (0.27      | ) | $ | (0.32 | ) |

 

#### **Note 13—Commitments andContingencies**

####  

Advent leases office space and equipment under non-cancelable operatinglease agreements, which expire at various dates through May 2012. Certainoperating leases contain escalation provisions for adjustments in the consumerprice index. Advent is responsible for maintenance, insurance, and propertytaxes. As of June 30, 2005, Advent’s remaining operating lease commitmentsthrough 2012 were approximately $25.6 million, net of future minimum rentalincome of $10.3 million to be received under non-cancelable sub-leases.

 

As permitted or required under Delaware law and to the maximum extentallowable under that law, Advent has certain obligations to indemnify itscurrent and former officers and directors for certain events or occurrenceswhile the officer or director is, or was, serving at Advent’s request in suchcapacity. These indemnification obligations are valid as long as the directoror officer acted in good faith and in a manner the person reasonably believedto be in or not opposed to the best interests of the corporation, and, withrespect to any criminal action or proceeding, had no reasonable cause tobelieve his or her conduct was unlawful. The maximum potential amount of futurepayments Advent could be required to make under these indemnificationobligations is unlimited; however, Advent has a director and officer insurancepolicy that mitigates Advent’s exposure and enables Advent to recover a portionof any future amounts paid. The Company believes the estimated fair value ofthese indemnification obligations is minimal.

 

##### ***From time to time, Advent isinvolved in claims and legal proceedings that arise in the ordinary course ofbusiness activities including claims for commercial, employment and othermatters. Based on currently available information, management does not believethat the ultimate outcome of these unresolved matters, individually and in theaggregate, is likely to have a material adverse effect on Advent’s financialposition or results of operations. However, litigation is subject to inherentlimitations and Advent’s view of these matters may change in the future. Werean unfavorable outcome to occur, there***

 

17

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##### ***exists the possibility of a material adverse impact on Advent’sfinancial position and results of operations for the period in which theunfavorable outcome occurs, and potentially in future periods.***

##### *** ***

On March 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.

 

On May 26, 2005, certain of the former members of Advent Outsource DataManagement LLC (“plaintiffs”) filed suit against Advent in San FranciscoSuperior Court. The complaint asserts claims for breach of contract, breach ofthe covenant of good faith and fair dealing, fraud, conversion, declaratoryrelief and accounting relating to alleged breaches of the Agreement and Plan ofMerger dated October 31, 2002 (“Agreement”). Pursuant to the Agreement, inaddition to cash compensation, Advent agreed to pay plaintiffs an “earn-out”payment based on net revenues from the sales of “Relevant Products” as definedby the Agreement with a maximum earn-out payment of $5 million. Advent has madeearn-out payments to plaintiffs totaling approximately $3.9 million. However,plaintiffs claim that the earn-out payment should have been the maximum amountof $5 million. Based on these allegations, plaintiffs seek compensatory damagesof approximately $1.1 million and other special damages including attorneys’fees. Advent disputes the plaintiffs’ claims and believes that it hasmeritorious defenses and intends to vigorously defend this action. Managementbelieves that any potential loss associated with this litigation is neitherprobable nor reasonably estimable at this time and accordingly has not accruedany amounts for any potential loss.

 

**Note14—Segment and Geographic Information**

 

*Description of Segments*

 

SFAS No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation,” established standards for reporting information about operatingsegments in annual financial statements and requires disclosure of selectedinformation about operating segments in interim reports. It also establishedstandards for related disclosures about products and services, major customersand geographic areas. Operating segments are defined as components of anenterprise about which separate financial information is available that isevaluated regularly by the chief operating decision maker (“CODM”), or decisionmaking group, in deciding how to allocate resources and in assessingperformance. Advent’s CODM is the Chief Executive Officer.

 

Advent’s organizational structure is based on a number of factors thatthe CODM uses to evaluate, view and run its business operations which include,but are not limited to, customer base, homogeneity of products and technology.Advent’s operating segments are based on this organizational structure andinformation reviewed by Advent’s CODM to evaluate the operating segmentresults. During fiscal 2004, Advent determined that its operations wereorganized into two reportable segments: 1) Advent Investment Management; and 2) MicroEdge. The segmentinformation for the three and six months ended June 30, 2005 and 2004 belowreflect this organizational change. Future changes to this organizationalstructure may result in changes to the business segments disclosed. Adescription of the types of products and services provided by each operatingsegment follows.

 

Advent Investment Management is the Company’s core business and derivesrevenues from the development, marketing and sale of software products, datainterfaces and related maintenance and services that automate, integrate andsupport certain mission critical functions of investment management organizations.MicroEdge derives revenues from the sale of software and services for grantmanagement, matching gifts and volunteer tracking for the grantmaking communityworldwide.

 

*Segment Data*

 

The results of the operating segments are derived directly from Advent’sinternal management reporting system. The accounting policies used to deriveoperating segment results are substantially the same as those used by theconsolidated company. Management measures the performance of each operatingsegment based on several metrics, including income (loss) from operations.These results are used, in part, to evaluate the performance of, and to assignresources to, each of the

 

18

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operating segments. Certainoperating expenses, including amortization and impairment of developedtechnology and other intangibles, which Advent manages separately at thecorporate level, are not allocated to the operating segments. Advent does notseparately accumulate and review asset information by segment.

 

Segment information for the periods presented is as follows (inthousands):

 
| ** **                   | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                   | ** ** | **2005**                                           | ** ** | **2004**                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                   | ** ** | **(Restated,**                                     | ** ** | ** **                                       | ** ** | **(Restated,** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **See Note 2)**                          | ** ** | ** **                                       | ** ** | **See Note 2)** | ** ** | ** ** | ** ** |
| Net revenues:                |       |                                               |       |                                             |       |   |   |   |   |
| Advent Investment Management |       | $                                                  | 35,433     |                                             | $          | 31,626 |   | $ | 69,556 |   | $ | 62,400 |   |
| MicroEdge                    |       | 4,843                                              |       | 3,836                                            |       | 9,502 |   | 8,003 |   |
| Other                        |       | 651                                                |       | 562                                              |       | 1,258 |   | 1,343 |   |
|                         |       |                                               |       |                                             |       |   |   |   |   |
| Total net revenues           |       | $                                                  | 40,927     |                                             | $          | 36,024 |   | $ | 80,316 |   | $ | 71,746 |   |

 
| ** **                                           | ** ** | **(Restated, See Note 2)**          | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                           | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
| ** **                                           | ** ** | **2005**                                           | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Income (loss) from operations:                       |       |                                               |       |   |   |   |   |   |   |
| Advent Investment Management                         |       | $                                                  | 313        |   | $ | (5,246 | ) | $ | 1,455 |   | $ | (3,797 | ) |
| MicroEdge                                            |       | 577                                                |       | (419 | ) | 950 |   | 112 |   |
| Other                                                |       | 86                                                 |       | (41 | ) | 86 |   | 81 |   |
| Unallocated corporate operating costs and  expenses: |       |                                               |       |   |   |   |   |   |   |
| Amortization of developed technology                 |       | (614                                               | )          | (1,350 | ) | (1,228 | ) | (2,692 | ) |
| Amortization of other intangibles                    |       | (1,020                                             | )          | (2,060 | ) | (2,067 | ) | (4,084 | ) |
|                                                 |       |                                               |       |   |   |   |   |   |   |
| Total loss from operations                           |       | $                                                  | (658       | ) | $ | (9,116 | ) | $ | (804 | ) | $ | (10,380 | ) |

 

*Major Customers*

 

No single customer represented 10% or more of Advent’s total netrevenue in any period presented.

 

**Note 15—Related Party Transactions**

 

As of June 30, 2005, Citigroup, Inc. (“Citigroup”) owned more than 10%of the voting stock of Advent. Advent recognized approximately $0.5 million and$1.0 million of revenue from Citigroup during the three and six months endedJune 30, 2005, respectively. During the three and six months ended June 30,2004, Advent recognized approximately $0.2 million and $0.5 million of revenuefrom Citigroup. The Company’s accounts receivable from Citigroup was $0.4million and $0.7 million as of June 30, 2005 and December 31, 2004,respectively.

 

**Item 2.****Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

**SPECIAL NOTE REGARDING FORWARD-LOOKINGSTATEMENTS**

 

You should read the following discussion in conjunction with ourcondensed consolidated financial statements and related notes. The followingdiscussion contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 as amended and Section 21Eof the Securities Exchange Act of 1934 as amended, including, but not limitedto statements referencing our expectations relating to future revenues andexpenses. Forward-looking statements can be identified by the use ofterminology such as “may”, “will”, “should”, “expect”, “plan” “anticipate”, “believe”,“estimate”, “predict”, “potential”, “continue” or other similar terms and thenegative of such terms and include statements about our products and expectedfinancial performance. Suchforward-looking statements are based on our current plans and expectations andinvolve known and unknown risks and uncertainties which may cause our actualresults or performance to be materially different from any results orperformance expressed or implied by such forward-looking statements. Suchfactors include, but are not limited to the “Risk Factors” set forth below aswell as other risks identified from time to time in other Securities andExchange (“SEC”) reports. You should not place undue reliance on ourforward-looking statements, as they are not guarantees of future results,levels of activity or performance and represent our expectations only as of thedate they are made.

 

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

 

**Overview and Strategy**

 

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 management organizationand is tailored to meet the needs of the particular client, as determined bysize, assets under management and complexity of the investment environment.

 

Duringthe second quarter of 2005, we continued to experience positive results:revenue growth, progress on our term pricing transition, new client wins, achievingpositive earnings per share for the second consecutive quarter, strongoperating cash flow, solid expense management, and successful product launches.

 

Netrevenues for the second quarter of 2005 grew 4% from the previous quarter andover 14% year over year. We continued our transition to term licensing in thesecond quarter, which has the effect of deferring a greater portion of ourlicense revenue into future periods than with a purely perpetual licensingmodel. Over the past four quarters, we have been able to manage a smoothtransition with steady top-line growth measured year over year for two reasons:

 

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

•      We have a large installed base ofcustomers, whom we are not requiring to convert to term licenses for productsthey already own.

 

Thetransition to term licensing is proceeding successfully. We began to acceleratethe conversion to term licensing in the second half of 2004 as part of ourlong-term strategy to build recurring revenue streams and increase the lifetimevalue of our customers. Over the past four quarters, we have cumulatively sold$16.3 million in term contracts, which includes second quarter contractstotaling $4 million with an average term of 2.9 years. Going forward, weanticipate revenues from the term contracts will compound, enhancing the growthand predictability of our top line. In addition, sales activity was brisk inthe second quarter of 2005 as we added 90 new Advent Office clients and fivenew Geneva clients: four hedge funds and a fund administrator.

 

Wegenerated positive earnings per share for the second consecutive quarter.Although we have not yet returned to our historical levels of profitability, wehave made steady progress. We generated positive cash flow from operations forthe seventh consecutive quarter.

 

Wecontinue to aggressively manage our expenses and recorded a restructuringcharge of $1.5 million in the second quarter as a result of sub-leasing onefloor of our New York City office space. Our total headcount as of June 30,2005 was 734, down from 750 as of March 31, 2005, and down from its high of 980as of December 31, 2003.

 

Weare also making good progress with Moxy 5.0, the most recent release of ourtrade order management system. The release of Moxy 5 in September 2004 hasproven to be successful, with over 40 firms purchasing the newest version and over200 firms having upgraded from prior versions since the product’s launch.

 

Inaddition to our signing of new customers, our installed customer base continuesto be an important part of Advent’s organic growth. Roughly two-thirds of ourlicense revenues each quarter comes from existing customers, and the same wastrue for the second quarter of 2005.

 

Ournext generation portfolio accounting product is in its beta testing phase andwe currently have 13 clients representing a diverse set of our InvestmentManagement customers, including institutional, high net worth and brokerageorganizations managing between $400 million and $26 billion in assets who areparticipating in testing the product. We are targeting the production versionfor these beta clients for September 2005.

 

Ourfocus for the remainder of 2005 continues to be on three areas:

 

•      First, improving our financialperformance. We will continue to exercise tight control over headcount andexpenses and are taking steps to further improve our efficiency;

•      Second, growing our customer base across allthe markets we serve; and

 

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•      Third, continuing to launch leading edgeproducts that help our customers grow their businesses.

 

While worldwide demand for large investment management software systemshas stabilized over the past year, we expect a continued challenging businessenvironment and limited visibility for the remainder of fiscal 2005. We may,from time to time, invest in areas we deem appropriate, such as the recentexpansion of our European operations.

 

**Critical Accounting Policies and Estimates**

 

Our management’s discussion and analysis of our financial condition andresults of operations are based upon our condensed consolidated financialstatements and related notes, which have been prepared in accordance withaccounting principles generally accepted in the United States of America. Wereview the accounting policies used in reporting our financial results on aregular basis. The preparation of these financial statements requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingentliabilities. On an ongoing basis, we evaluate our process used to developestimates, including those related to product returns, accounts receivable,investments, intangible assets, income taxes, restructuring, contingencies andlitigation. We baseour estimates on historical experience and on various other assumptions thatare believed to be reasonable for making judgments about the carrying value ofassets and liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates due to actual outcomes being differentfrom those on which we based our assumptions. These estimates and judgments arereviewed by management on an ongoing basis and by the Audit Committee at theend of each quarter prior to the public release of our financial results. Webelieve the following critical accounting policies affect our more significantjudgments and estimates used in the preparation of our condensed consolidatedfinancial statements.

 

**Revenue recognition.** We recognize revenue from software licenses, development fees,maintenance, other recurring revenues, professional services and otherrevenues. In addition, we earn commissions from customers who use ourbroker/dealer, Second Street Securities, to “soft dollar” the purchase ofnon-Advent products and services. “Soft dollaring” enables the 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 dollaring” non-Adventproducts or services are recorded as other revenues in professional servicesand other revenues on our condensed consolidated statements of operations.

 

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 ofsoftware when persuasive evidence of an arrangement exists, the product hasbeen delivered, the fee is fixed or determinable and collection of theresulting receivable is probable. We generally use a signed license agreementas evidence of an arrangement. Sales through our distributors are evidenced bya master agreement governing the relationship together with binding order formsand signed contracts from the distributor’s customers. Revenue is recognizedupon shipment to the distributor’s customer and when all other revenuerecognition criteria have been met. Delivery occurs when product is deliveredto a common carrier F.O.B shipping point. Some of our arrangements includeacceptance provisions, and if such acceptance provisions are provided, deliveryis deemed to occur upon acceptance. We assess whether the fee is fixed ordeterminable based on the payment terms associated with the transaction. Weassess whether the collectibility of the resulting receivable is probable basedon a number of factors, including the credit worthiness of the customerdetermined through review of credit reports, our transaction history with thecustomer, other available information and pertinent country risk if thecustomer is located outside the United States. Our standard payment terms aredue at 180 days or less unless the transaction is part of a soft dollararrangement through our in-house broker/dealer subsidiary, Second StreetSecurities, for which payment is then required within one year; however, termsmay vary based on the country in which the agreement is executed. Softwarelicenses are sold with maintenance and, frequently, professional services. Weallocate revenue to delivered components, normally the license component of thearrangement, using the residual method, based on vendor specific objectiveevidence, or VSOE, of fair value of the undelivered elements (generally themaintenance and professional services components), which is specific to us. Wedetermine the fair value of the undelivered elements based on the historicalevidence of the Company’s stand-alone sales of these elements to third parties,or also, in the case of maintenance, substantive renewal rates. When VSOE doesnot exist for undelivered elements, then the entire arrangement fee is deferreduntil delivery of the element. We offer term licenses as an alternative toperpetual licenses and generally recognize revenue for term licenses ratablyover the period of the contract term. The term license contract priceincludes both the software license fee and maintenance and support fees, and,as a result, we allocate approximately half of the contract price to licenserevenue and the other half to maintenance and recurring revenues, based on ourassessment of the relative fair value of the two elements. We have begun atransition from selling mostly perpetual licenses to selling a mix of term andperpetual contracts, and we expect term license revenue to increase as aproportion of total license

 

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revenue in the future. Including our entry level product, AdventOffice Essentials, we recognized approximately 23% of license revenue from termlicenses in the second quarter of 2005.

 

Developmentfees are derived from contracts that we have entered into with other companies,including customers and development partners. Agreements for which we receivedevelopment fees generally 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.

 

Ifa customer buys our software and chooses to enter into a “soft dollar”arrangement through our in-house broker/dealer subsidiary, Second StreetSecurities, the “soft dollar” arrangement does not change or modify theoriginal fixed or determinable fee in the written contract. The customer isrequired to pay the original fee for our software within one year. Ifinsufficient trading volume is generated to pay the entire original fee withinone year, the customer is still required to render payment within one year. Ifthe customer chooses to use a third-party broker/dealer, the original paymentterms apply, regardless of the arrangement with the third-party broker/dealer.The option to “soft dollar” a transaction does not alter the underlying revenuerecognition for the transaction; all the revenue recognition criteria listed inthe “Software license” section above must be assessed in determining how therevenue will be recognized.

 

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 three situations where we provide a contractual limited right of returnto end-user customers only:  in shrink-wrap license agreements for Adventproducts, our MicroEdge product and our NPO product. The shrink-wraplicense agreement for Advent products provides for a right of return withinseven days of delivery of the software. The MicroEdge software licenseagreement allows for a thirty-day money back guarantee. The NPO licenseagreement allows for a seven-day right of return. We recognize revenue ondelivery since the fee is fixed or determinable, the buyer is obligated to pay,the risk of loss passes to the customer, and we have the ability to estimatereturns. Our ability to estimate returns is based on a long history ofexperience with relatively homogenous transactions and the fact that the returnperiod is short. We have recorded a sales returns reserve (contra revenueaccount) to account for these situations based on our historical experience of$80,000 and $336,000 for the three and six months ended June 30, 2005,respectively.

 

*Maintenance and other recurring revenues.* We offer annual maintenance programs thatprovide for technical support and updates to our software products. Maintenancefees are bundled in the initial licensing year and charged separately forrenewals of annual maintenance in subsequent years. We offer other recurringrevenue services that are either subscription-based or transaction-based, andprimarily include the provision of software interfaces to, and the capabilityto download securities information from, third party data providers. Fair valuefor maintenance is based upon renewal rates stated in the contracts or, inlimited cases, separate sales of renewals to other customers. We recognizerevenue for maintenance ratably over the contract term. We recognize revenuefrom recurring revenue transactions either ratably over the subscription periodor as the transactions occur. Term license contracts include fees for bothsoftware and maintenance and support. As noted above, we allocate approximatelyhalf of term license fees to maintenance and recurring revenues, based on ourestimate of the relative fair value of the maintenance and support fees as apercentage of the total contract price.

 

Subscription-basedrevenues and any related set-up fees are recognized ratably over the term ofthe agreement.

 

*Professional services and other revenues.* We offer a variety of professional servicesthat include project management, implementation, data conversion, integration,custom report writing and training. Fair value for professional services isbased upon separate sales of these services by us to other customers. Ourprofessional services are generally billed based on hourly rates together withreimbursement for travel and accommodation expenses. Our professional servicesand other revenue also include revenue from our annual user conferences. Wegenerally recognize revenue as these professional services are performed.Certain professional services arrangements involve acceptance criteria. Inthese cases, revenue and related expenses are recognized upon acceptance.

 

EffectiveJanuary 1, 2004, commission revenues received from “soft dollar” transactionsfor products and services not related to Advent products and services arerecorded as other revenues on a net basis as we are not the primary obligor inthese transactions. Revenues for these “soft dollar” transactions arerecognized on a trade-date basis as securities transactions occur.

 

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**Income taxes**.We account for income taxes under an asset and liability approach that requiresthe expected future tax consequences of temporary differences between book andtax bases 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 2003, we determined that, underapplicable accounting principles, based on our history of consecutive lossessince the second quarter of 2002, it was more likely than not that we would notrealize any value for our net deferred tax assets. Accordingly, we establisheda valuation allowance equal to 100% of the amount of these assets. In fiscal2004 and fiscal year-to-date 2005, we continued to maintain a full valuationallowance against our deferred tax assets due to our history of losses. Incometax expense recorded in the future will be reduced to the extent sufficientpositive evidence materializes to support a reversal of, or decrease in, thevaluation allowance.

 

**Impairment of long-lived assets**. We review our goodwill for impairmentannually during the fourth quarter of our fiscal year (as of November 1) andmore frequently if an event or circumstance indicates that an impairment losshas occurred. We are required to test our goodwill for impairment at thereporting unit level. We have determined that we had five reporting units as ofNovember 1, 2004. The test for goodwill impairment is a two-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 2004, we completed our annual impairment test which did notindicate impairment. Therefore, the second step of the impairment test was notnecessary to perform. There were no events or changes in circumstancesduring the six months ended June 30, 2005 which triggered an impairment review.

 

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;

•      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. For example,demand for our Techfi product line was significantly lower than expected andthus we discontinued certain products within our Techfi product line in September2004. As a result, we recorded a non-cash impairment charge of $3.4 million inthe third quarter of 2004 to write-off the carrying value of certainTechfi-related intangible assets.

 

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 condensedconsolidated balance sheets. Through December 28, 2004,

 

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one of these investments had been accountedfor under the equity method of accounting as our Chief Executive Officer was amember of this investee’s board of directors. Effective December 28, 2004, ourChief Executive Officer resigned her seat on this investee’s board of directorsand as a result, we no longer believe we have significant influence over thisinvestee. Therefore, this investment is carried at the lower of cost or fairvalue at December 31, 2004 and June 30, 2005, similar to our other investments.

 

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 andimplemented formalized plans for restructuring our business to better align ourresources to market conditions and recorded significant charges. In connectionwith these plans, we recorded estimated expenses for severance and benefits,lease cancellations, asset write-offs and other restructuring costs. Given thesignificance of, and the timing of the execution of such activities, thisprocess is complex and involves periodic reassessments of estimates made at thetime the original decisions were made, including evaluating real estate marketconditions for expected vacancy periods and sub-lease rents. We continuallyevaluate the adequacy of the remaining liabilities under our restructuringinitiatives. Although we believe that these estimates accurately reflect thecosts of our restructuring plans, actual results may differ, thereby requiringus to record additional provisions or reverse a portion of such provisions.

 

**Recent AccountingPronouncements**

 

In December 2004, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards No. 123R, “Share-BasedPayment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting forStock-Based Compensation” (“SFAS 123”) and supercedes AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees (“APB25”). SFAS 123R requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the financial statementsbased on their fair values, beginning with the first interim or annual periodafter June 15, 2005, with early adoption encouraged. The pro formadisclosures previously permitted under SFAS 123 no longer will be analternative to financial statement recognition. In April 2005, the SECsubsequently adopted a new rule delaying compliance with SFAS 123R until thebeginning of our next fiscal year, instead of the next reporting period, thatbegins after June 15, 2005. Under the SEC’s recent rule, we are required toadopt SFAS 123R in our first quarter of fiscal 2006, beginningJanuary 1, 2006. Under SFAS 123R, we must determine the appropriatefair value model to be used for valuing share-based payments, the amortizationmethod for compensation cost and the transition method to be used at date ofadoption. The transition method includes prospective and retroactive adoptionmethods. Under the retroactive method, prior periods may be restated either asof the beginning of the year of adoption or for all periods presented. Theprospective method requires that compensation expense be recorded for allunvested stock options and restricted stock at the beginning of the firstquarter of adoption of SFAS 123R, while the retroactive method would recordcompensation expense for all unvested stock options and restricted stockbeginning with the first period restated. We are evaluating the requirements ofSFAS 123R and we expect that the adoption of SFAS 123R will have amaterial impact on our consolidated results of operations and earnings pershare. We have not yet determined the method of adoption or the effect ofadopting SFAS 123R, and we have not determined whether the adoption willresult in amounts that are similar to the current pro forma disclosures underSFAS 123.

 

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB107”) regarding the staff’s interpretation of Share-Based Payments. Thisinterpretation expresses the views of the staff regarding the interactionbetween SFAS 123R and certain SEC rules and regulations and provides the staff’sviews regarding the valuation of share-based payment arrangements for publiclytraded companies. In particular, SAB 107 provides guidance related toshare-based payment transactions with non-employees, the transition fromnonpublic to public entity status, valuation methods, the accounting forcertain redeemable financial instruments issued under share-based paymentarrangements, the classification of compensation expense, non-GAAP financial measures,first-time adoption of SFAS 123R in an interim period, capitalization ofcompensation cost related to share-based arrangements, the accounting forincome tax effects of share-based payment arrangements upon adoption of SFAS123R, the modification of employee share options prior to adoption of SFAS 123Rand disclosures in Management’s Discussion and Analysis subsequent to adoptionof SFAS 123R. We will adopt SAB 107 in connection with our adoption of SFAS123R, which is expected to have a material impact on our condensed consolidatedresults of operations and earnings per share.

 

In March 2005, the FASB issued Interpretation No. 47, “Accounting forConditional Asset Retirement Obligations – An Interpretation of FASB StatementNo. 143” (“FIN 47”), to clarify the requirement to record liabilities stemmingfrom a legal obligation to clean up and retire fixed assets, such as a plant orfactory, when an asset retirement depends on a future

 

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event. We plan to adopt FIN 47in the first quarter of fiscal 2006, and do not expect the application of FIN47 to have a material impact on our condensed consolidated results ofoperations, cash flows or financial position.

 

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes andError Corrections – a replacement of APB Opinion No. 20 and FASB Statement No.3 (“SFAS 154”). This statement applies to all voluntary changes in accountingprinciple and changes required by an accounting pronouncement where no specifictransition provisions are included. SFAS 154 requires retrospective applicationto prior periods’ financial statements of changes in accounting principle,unless it is impracticable to determine either the period-specific effects orthe cumulative effect of the change. Retrospective application is limited tothe direct effects of the change; the indirect effects should be recognized inthe period of the change. This statement carries forward without change theguidance contained in Opinion 20 for reporting the correction of an error inpreviously issued financial statements and a change in accounting estimate.However, SFAS 154 redefines restatement as the revising of previously issuedfinancial statements to reflect the correction of an error. The provisions ofSFAS 154 are effective for accounting changes and corrections of errors made infiscal periods that begin after December 15, 2005, although early adoption ispermitted. We do not anticipate that the implementation of this standard willhave a material impact on our condensed consolidated results of operations,cash flows or financial position.

 

**Restatement of Financial Statements andRevision of Stock-Based Employee Compensation Expense Disclosures**

 

Restatement of FinancialStatements

 

In connection with itspreparation of the consolidated financial statements for the fiscal year endedDecember 31, 2005, we determined that the previously issued financialstatements contained in our Quarterly Reports on Form 10-Q for the quartersended March 31, 2004 and 2005, June 30, 2004 and 2005, and September 30, 2004and 2005 should be restated to correct errors in those financial statements.The decision to restate these financial statements was made after management’sdiscovery of the following errors. Specifically, we did not (i) include thebenefit from the reversal of the deferred tax liability associated with theamortization of intangible assets of its European subsidiaries, or (ii)properly estimate the reduction in the valuation allowance associated with thedeferred tax assets in the United States, in the calculation of its income taxprovision. In addition, we did not adjust the amortization periods of certainleasehold improvements upon a change in the lease termination date at one ofits facilities and, as a result, overstated depreciation expense for the fiscalquarters of 2004 and 2005. Further, we did not defer license, maintenance andprofessional services revenue, together with related expenses in sales andmarketing, on certain term license arrangements in accordance with SOP 97-2 foreach of the quarters of fiscal 2005.

 

Thefollowing is a summary of the effect of these corrections on our condensedconsolidated balance sheets as of June 30, 2005 and December 31, 2004,condensed consolidated statement of operations for the three and six monthsended June 30, 2005 and 2004, and condensed consolidated statements of cashflows for the six months ended June 30, 2005 and 2004 (in thousands, except pershare data):

 
| ** **                                | ** ** | **Consolidated Balance Sheet** | ** ** |
|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                | ** ** | **As Previously**                   | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                                | ** ** | **Reported**                             | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **June 30, 2005**                         |       |                                     |       |   |   |   |   |
| Prepaid expenses and other                |       | $                                        | 10,357     |   | $ | 186 |   | $ | 10,543 |   |
| Total current assets                      |       | $                                        | 174,965    |   | $ | 186 |   | $ | 175,151 |   |
| Property and equipment, net               |       | $                                        | 15,988     |   | $ | 185 |   | $ | 16,173 |   |
| Total assets                              |       | $                                        | 309,851    |   | $ | 371 |   | $ | 310,222 |   |
| Deferred revenues                         |       | $                                        | 58,713     |   | $ | 552 |   | $ | 59,265 |   |
| Income taxes payable                      |       | $                                        | 3,202      |   | $ | (854 | ) | $ | 2,348 |   |
| Total current liabilities                 |       | $                                        | 81,975     |   | $ | (302 | ) | $ | 81,673 |   |
| Total liabilities                         |       | $                                        | 89,160     |   | $ | (302 | ) | $ | 88,858 |   |
| Accumulated deficit                       |       | $                                        | (103,763   | ) | $ | 680 |   | $ | (103,083 | ) |
| Accumulated other comprehensive income    |       | $                                        | 7,252      |   | $ | (7 | ) | $ | 7,245 |   |
| Total stockholders equity                 |       | $                                        | 220,691    |   | $ | 673 |   | $ | 221,364 |   |
| Total liabilities and stockholders equity |       | $                                        | 309,851    |   | $ | 371 |   | $ | 310,222 |   |
|                                      |       |                                     |       |   |   |   |   |
| **December 31, 2004**                     |       |                                     |       |   |   |   |   |
| Property and equipment, net               |       | $                                        | 18,432     |   | $ | 65 |   | $ | 18,497 |   |
| Total assets                              |       | $                                        | 354,577    |   | $ | 65 |   | $ | 354,642 |   |
| Accumulated deficit                       |       | $                                        | (86,921    | ) | $ | 65 |   | $ | (86,856 | ) |
| Total stockholders equity                 |       | $                                        | 265,675    |   | $ | 65 |   | $ | 265,740 |   |
| Total liabilities and stockholders equity |       | $                                        | 354,577    |   | $ | 65 |   | $ | 354,642 |   |

 

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| ** **                                                    | ** ** | **Consolidated Statement of Operations** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                    | ** ** | **As Previously**                                  | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                                                    | ** ** | **Reported**                                            | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **Three months ended June 30, 2005** |       |                                                    |       |   |   |   |   |
| License and  development fee revenue                          |       | $                                                       | 9,635      |   | $ | (1 | ) | $ | 9,634 |   |
| Maintenance  and other recurring revenue                      |       | $                                                       | 26,016     |   | $ | (1 | ) | $ | 26,015 |   |
| Professional  services and other revenue                      |       | $                                                       | 5,581      |   | $ | (303 | ) | $ | 5,278 |   |
| Total net  revenues                                           |       | $                                                       | 41,232     |   | $ | (305 | ) | $ | 40,927 |   |
| Cost of  professional services and other revenue              |       | $                                                       | 4,510      |   | $ | (118 | ) | $ | 4,392 |   |
| Total cost  of revenues                                       |       | $                                                       | 13,070     |   | $ | (118 | ) | $ | 12,952 |   |
| Gross margin                                                  |       | $                                                       | 28,162     |   | $ | (187 | ) | $ | 27,975 |   |
| General and  administrative expense                           |       | $                                                       | 7,868      |   | $ | (60 | ) | $ | 7,808 |   |
| Total  operating expenses                                     |       | $                                                       | 28,693     |   | $ | (60 | ) | $ | 28,633 |   |
| Income  (loss) from operations                                |       | $                                                       | (531       | ) | $ | (127 | ) | $ | (658 | ) |
| Income  (loss) before income taxes                            |       | $                                                       | 4,181      |   | $ | (127 | ) | $ | 4,054 |   |
| Provision  for (benefit from) income taxes                    |       | $                                                       | 906        |   | $ | (790 | ) | $ | 116 |   |
| Net income  (loss)                                            |       | $                                                       | 3,275      |   | $ | 663 |   | $ | 3,938 |   |
| Basic net  income (loss) per share                            |       | $                                                       | 0.11       |   | $ | 0.02 |   | $ | 0.13 |   |
| Diluted net  income (loss) per share                          |       | $                                                       | 0.10       |   | $ | 0.03 |   | $ | 0.13 |   |
|                                                          |       |                                                    |       |   |   |   |   |
| **Six  months ended June 30, 2005**                      | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| License and  development fee revenue                          |       | $                                                       | 19,228     |   | $ | (54 | ) | $ | 19,174 |   |
| Maintenance  and other recurring revenue                      |       | $                                                       | 51,303     |   | $ | (44 | ) | $ | 51,259 |   |
| Professional  services and other revenue                      |       | $                                                       | 10,337     |   | $ | (454 | ) | $ | 9,883 |   |
| Total net  revenues                                           |       | $                                                       | 80,868     |   | $ | (552 | ) | $ | 80,316 |   |
| Cost of  professional services and other revenue              |       | $                                                       | 8,657      |   | $ | (177 | ) | $ | 8,480 |   |
| Total cost  of revenues                                       |       | $                                                       | 25,162     |   | $ | (177 | ) | $ | 24,985 |   |
| Gross margin                                                  |       | $                                                       | 55,706     |   | $ | (375 | ) | $ | 55,331 |   |
| Sales and  marketing expense                                  |       | $                                                       | 20,546     |   | $ | (9 | ) | $ | 20,537 |   |
| General and  administrative expense                           |       | $                                                       | 16,281     |   | $ | (120 | ) | $ | 16,161 |   |
| Total  operating expenses                                     |       | $                                                       | 56,264     |   | $ | (129 | ) | $ | 56,135 |   |
| Income  (loss) from operations                                |       | $                                                       | (558       | ) | $ | (246 | ) | $ | (804 | ) |
| Income  (loss) before income taxes                            |       | $                                                       | 5,051      |   | $ | (246 | ) | $ | 4,805 |   |
| Provision  for (benefit from) income taxes                    |       | $                                                       | 991        |   | $ | (861 | ) | $ | 130 |   |
| Net income  (loss)                                            |       | $                                                       | 4,060      |   | $ | 615 |   | $ | 4,675 |   |
| Basic net  income (loss) per share                            |       | $                                                       | 0.13       |   | $ | 0.02 |   | $ | 0.15 |   |
| Diluted net  income (loss) per share                          |       | $                                                       | 0.13       |   | $ | 0.02 |   | $ | 0.15 |   |
|                                                          |       |                                                    |       |   |   |   |   |
| **Three  months ended June 30, 2004**                    |       |                                                    |       |   |   |   |   |
| General and  administrative expense                           |       | $                                                       | 6,207      |   | $ | (10 | ) | $ | 6,197 |   |
| Total  operating expenses                                     |       | $                                                       | 31,947     |   | $ | (10 | ) | $ | 31,937 |   |
| Income  (loss) from operations                                |       | $                                                       | (9,126     | ) | $ | 10 |   | $ | (9,116 | ) |
| Income  (loss) before income taxes                            |       | $                                                       | (9,268     | ) | $ | 10 |   | $ | (9,258 | ) |
| Provision  for (benefit from) income taxes                    |       | $                                                       | (21        | ) | $ | (366 | ) | $ | (387 | ) |
| Net income  (loss)                                            |       | $                                                       | (9,247     | ) | $ | 376 |   | $ | (8,871 | ) |
| Basic net  income (loss) per share                            |       | $                                                       | (0.28      | ) | $ | 0.01 |   | $ | (0.27 | ) |
| Diluted net  income (loss) per share                          |       | $                                                       | (0.28      | ) | $ | 0.01 |   | $ | (0.27 | ) |

 

26

----

 
| ** **                                 | ** ** | **Consolidated Statement of Operations** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                 | ** ** | **As Previously**                                  | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                                 | ** ** | **Reported**                                            | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **Six  months ended June 30, 2004**   |       |                                                    |       |   |   |   |   |
| General and  administrative expense        |       | $                                                       | 12,188     |   | $ | (20 | ) | $ | 12,168 |   |
| Total  operating expenses                  |       | $                                                       | 56,554     |   | $ | (20 | ) | $ | 56,534 |   |
| Income  (loss) from operations             |       | $                                                       | (10,400    | ) | $ | 20 |   | $ | (10,380 | ) |
| Income  (loss) before income taxes         |       | $                                                       | (10,416    | ) | $ | 20 |   | $ | (10,396 | ) |
| Provision  for (benefit from) income taxes |       | $                                                       | (21        | ) | $ | (367 | ) | $ | (388 | ) |
| Net income  (loss)                         |       | $                                                       | (10,395    | ) | $ | 387 |   | $ | (10,008 | ) |
| Basic net  income (loss) per share         |       | $                                                       | (0.31      | ) | $ | 0.02 |   | $ | (0.29 | ) |
| Diluted net  income (loss) per share       |       | $                                                       | (0.31      | ) | $ | 0.02 |   | $ | (0.29 | ) |

 
| ** **                                                                              | ** ** | **Consolidated Statement of Cash Flows** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **As Previously**                                       | ** ** | ** ** | ** ** | **As** | ** ** |
| ** **                                                                              | ** ** | **Reported**                                                 | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **Six  months ended June 30, 2005**                                                | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss)                                                                      |       | $                                                            | 4,060      |   | $ | 615 |   | $ | 4,675 |   |
| Depreciation  and amortization                                                          |       | $                                                            | 8,090      |   | $ | (120 | ) | $ | 7,970 |   |
| Other  (adjustment to reconcile net loss to net cash provided by operating  activities) |       | $                                                            | (825       | ) | $ | (7 | ) | $ | (832 | ) |
| Prepaid and  other assets                                                               |       | $                                                            | 1,258      |   | $ | (186 | ) | $ | 1,072 |   |
| Deferred  revenues                                                                      |       | $                                                            | 2,298      |   | $ | 552 |   | $ | 2,850 |   |
| Income taxes  payable                                                                   |       | $                                                            | (834       | ) | $ | (854 | ) | $ | (1,688 | ) |
| ** **                                                                              |       |                                                         |       |   |   |   |   |
| **Six  months ended June 30, 2004**                                                |       |                                                         |       |   |   |   |   |
| Net income  (loss)                                                                      |       | $                                                            | (10,395    | ) | $ | 387 |   | $ | (10,008 | ) |
| Depreciation  and amortization                                                          |       | $                                                            | 11,134     |   | $ | (20 | ) | $ | 11,114 |   |
| Income taxes  payable                                                                   |       | $                                                            | (394       | ) | $ | (367 | ) | $ | (761 | ) |

 

Revision of Stock-Based Employee CompensationExpense Disclosures

 

In addition, we also determined that the Company’spro forma disclosure relating to stock based employee compensation expensepresented in the condensed consolidated financial statements for the quartersended June 30, 2004 and 2005 were incorrect. Specifically, the revisionsrelated to the attribution period of pro forma stock-based employeecompensation from non-routine stock compensation arrangements, including thosewith non-standard vesting terms or performance conditions. As a result, we haverevised the disclosure for stock-based employee compensation expense determinedunder the fair valued based method for the three months ended June 30,2005 and 2004 by increasing (decreasing) the expense by $(13,000) and $104,000,respectively, and for the six months ended June 30, 2005 and 2004 byincreasing (decreasing) the expense by $102,000 and $691,000, respectively.

 

**Reclassifications**

 

Certain prior period amounts have been reclassifiedto conform to the current period presentation to better reflect our viewof the current business. These reclassifications do not affect total netrevenues, net income (loss), cash flows, or stockholders’ equity.

 

**Deferred Rent.**Certaindeferred rent liabilities have been reclassified from long-term to short-term.We have historically classified all amounts accrued for deferred rent as “otherlong-term liabilities” on the condensed consolidated balance sheets. Based uponour re-evaluation of these liabilities, we have reclassified deferred rentliabilities that are to be recognized within a year of the balance sheet dateto “accrued liabilities” on the condensed consolidated balance sheets. Thesereclassifications had no impact on our results of operations or cash flows. Thefollowing is a summary of the effect of these reclassifications on ourcondensed consolidated balance sheet as of December 31, 2004 (inthousands):

 

27

----

 
| ** **                      | ** ** | **Condensed Consolidated Balance Sheet** | ** ** |
|---------------------------------|------------|---------------------------------------------------------|------------|
| ** **                      | ** ** | **As Previously**                                  | ** ** | ** ** | ** ** | **As** | ** ** |
| **December 31, 2004** | ** ** | **Reported**                                            | ** ** | **Reclassifications** | ** ** | **Reclassified** | ** ** |
| Accrued  liabilities            |       | $                                                       | 16,855     |   | $ | 715 |   | $ | 17,570 |   |
| Total  current liabilities      |       | $                                                       | 80,121     |   | $ | 715 |   | $ | 80,836 |   |
| Other  long-term liabilities    |       | $                                                       | 6,531      |   | $ | (715 | ) | $ | 5,816 |   |
| Total  liabilities              |       | $                                                       | 88,902     |   | $ | — |   | $ | 88,902 |   |

 

**RESULTS OF OPERATIONS FOR THE THREE AND SIXMONTHS ENDED JUNE 30, 2005 AND 2004**

 

The following table sets forth, for the periodsindicated, certain financial information as a percentage of total net revenues.The financial information and the ensuing discussion should be read inconjunction with the accompanying condensed consolidated financial statementsand notes thereto:

 
| ** **                                 | ** ** | **(Restated, See Note 2)**          | ** ** |
|--------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                 | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
| ** **                                 | ** ** | **2005**                                           | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                       |       |                                               |       |   |   |   |   |   |   |
| **Net  revenues:**                         |       |                                               |       |   |   |   |   |   |   |
| License and  development fees              |       | 23                                                 | %          | 24 | % | 24 | % | 23 | % |
| Maintenance  and other recurring           |       | 64                                                 |       | 65 |   | 64 |   | 65 |   |
| Professional  services and other           |       | 13                                                 |       | 11 |   | 12 |   | 12 |   |
|                                       |       |                                               |       |   |   |   |   |   |   |
| Total net  revenues                        |       | 100                                                |       | 100 |   | 100 |   | 100 |   |
|                                       |       |                                               |       |   |   |   |   |   |   |
| **Cost of  revenues:**                     |       |                                               |       |   |   |   |   |   |   |
| License and  development fees              |       | 1                                                  |       | 1 |   | 1 |   | 1 |   |
| Maintenance  and other recurring           |       | 18                                                 |       | 20 |   | 18 |   | 20 |   |
| Professional  services and other           |       | 11                                                 |       | 12 |   | 11 |   | 11 |   |
| Amortization  of developed technology      |       | 2                                                  |       | 4 |   | 1 |   | 4 |   |
|                                       |       |                                               |       |   |   |   |   |   |   |
| Total cost  of revenues                    |       | 32                                                 |       | 37 |   | 31 |   | 36 |   |
|                                       |       |                                               |       |   |   |   |   |   |   |
| Gross margin                               |       | 68                                                 |       | 63 |   | 69 |   | 64 |   |
|                                       |       |                                               |       |   |   |   |   |   |   |
| **Operating  expenses:**                   |       |                                               |       |   |   |   |   |   |   |
| Sales and  marketing                       |       | 26                                                 |       | 26 |   | 26 |   | 25 |   |
| Product  development                       |       | 19                                                 |       | 23 |   | 20 |   | 23 |   |
| General and  administrative                |       | 19                                                 |       | 17 |   | 20 |   | 17 |   |
| Amortization  of other intangibles         |       | 2                                                  |       | 6 |   | 2 |   | 6 |   |
| Restructuring  charges                     |       | 4                                                  |       | 16 |   | 2 |   | 8 |   |
|                                       |       |                                               |       |   |   |   |   |   |   |
| Total  operating expenses                  |       | 70                                                 |       | 88 |   | 70 |   | 79 |   |
|                                       |       |                                               |       |   |   |   |   |   |   |
| Loss from  operations                      |       | (2                                                 | )          | (25 | ) | (1 | ) | (15 | ) |
| Interest  income and other, net            |       | 12                                                 |       | (1 | ) | 7 |   | (0 | ) |
|                                       |       |                                               |       |   |   |   |   |   |   |
| Income  (loss) before income taxes         |       | 10                                                 |       | (26 | ) | 6 |   | (15 | ) |
| Provision  for (benefit from) income taxes |       | 0                                                  |       | (1 | ) | 0 |   | (1 | ) |
|                                       |       |                                               |       |   |   |   |   |   |   |
| **Net  income (loss)**                     |       | 10                                                 | %          | (25 | )% | 6 | % | (14 | )% |

 

28

----

 

# **NET REVENUES**

#  

| ** **                         | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** **                | ** ** |
|------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|---------------------------|------------|
| ** **                         | ** ** | **2005**                                           | ** ** | **2004**   | ** ** | **Change**                                       | ** ** | **2005**                  | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                         | ** ** | **(Restated,**                                     | ** ** | ** ** | ** ** | ** **                                       | ** ** | **(Restated,**            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **See Note 2)**                          | ** ** | ** ** | ** ** | ** **                                       | ** ** | **See Note 2)** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                               |       |                                               |       |       |       |                                             |       |                      |       |   |   |   |   |
| Total net  revenues (in thousands) |       | $                                                  | 40,927     |       | $          | 36,024                                           |       | $                         | 4,903      |   | $ | 80,316 |   | $ | 71,746 |   | $ | 8,570 |   |
|                                    |            |                                                    |            |            |            |                                                  |            |                           |            |  |  |  |  |  |  |  |  |  |  |

 

Our net revenues are made up ofthree components: license and development fees; maintenance and other recurring;and professional services and other. License revenues are derived from thelicensing of software products, while development fees are derived fromdevelopment contracts that we have entered into with other companies, includingcustomers and development partners. Maintenance and other recurring revenuesare derived from maintenance fees charged in the initial licensing year,renewals of annual maintenance services in subsequent years and recurringrevenues derived from our subscription-based and transaction-based services.Professional services and other revenues include fees for consulting, trainingservices, commission revenues from “soft dollaring” of third-party products andservices and our user conferences.

 

Each of the major revenue categories hashistorically varied as a percentage of net revenues and we expect thisvariability to continue in future periods. This variability is partially due tothe timing of the introduction of new products, the relative size and timing ofindividual perpetual software licenses, as well as the size of theimplementation, the resulting proportion of the maintenance and professionalservices components of these license transactions and the amount of client useof pricing and related data. We expect total net revenues for the third quarterof 2005 to be between $40 million and $42 million.

 

***License and Development Fees***

 
| ** **                                   | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** **                | ** ** |
|----------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|---------------------------|------------|
| ** **                                   | ** ** | **2005**                                           | ** ** | **2004**   | ** ** | **Change**                                       | ** ** | **2005**                  | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                                   | ** ** | **(Restated,**                                     | ** ** | ** ** | ** ** | ** **                                       | ** ** | **(Restated,**            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | **See Note 2)**                          | ** ** | ** ** | ** ** | ** **                                       | ** ** | **See Note 2)** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                         |       |                                               |       |       |       |                                             |       |                      |       |   |   |   |   |
| License and  development fees (in thousands) |       | $                                                  | 9,634      |       | $          | 8,719                                            |       | $                         | 915        |   | $ | 19,174 |   | $ | 16,727 |   | $ | 2,447 |   |
| Percent of  total net revenues               |       | 24                                                 | %          | 24         | %          |                                             |       | 24                        | %          | 23 | % |   |   |
|                                              |            |                                                    |            |            |            |                                                  |            |                           |            |  |  |  |  |  |  |  |  |  |  |

 

The increase in license revenue and developmentfees reflected an improved overall economic outlook and improved conditionswithin the financial services industry, which contributed to increases incapital expenditures by our customers. License and development fee revenue inthe three and six months periods reflected an increase of Geneva-relatedrevenues and the transition to a term license model. Our Geneva-relatedrevenues increased significantly from the same periods in 2004, as a result ofthe growth in assets under administration for our fund administration clients,where certain Geneva contracts provide for quarterly fees based on assets,resulting in significant recurring quarterly revenue. Geneva contracts aregenerally complex transactions and may include acceptance criteria whichcan result in deferral of revenue. While perpetual license revenue wasrelatively flat, we continue to sign more deals on a term basis, and revenuerecognized on our core products from term license deals increased significantlyin the three and six month periods. In addition, we had significant growth inrevenue from our GIFTS product line from our MicroEdge subsidiary. We expectlicense and development fee revenues to remain relatively flat in the thirdquarter of 2005, as we continue our transition to a term license model.

 

We typicallylicense our products on a per server, per user basis with the price percustomer varying based on the selection of the products licensed, the number ofsite installations and the number of authorized users. We earn development feeswhen we provide product solutions which are not part of our standardproduct offering but will be incorporated into our future releases. Forthe three and six months ended June 30, 2005 and 2004, revenue fromdevelopment fees was less than 5% of total license and development fees revenue.** **Forthe three and six months ended June 30, 2005 and 2004, soft dollarrevenues generated from Advent related licenses paid for through soft dollartransactions represented less than 3% of total license and development revenues.

 

***Maintenance and Other Recurring Revenues***

 
| ** **                                               | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** **                | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|---------------------------|------------|
| ** **                                               | ** ** | **2005**                                           | ** ** | **2004**   | ** ** | **Change**                                       | ** ** | **2005**                  | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                                               | ** ** | **(Restated,**                                     | ** ** | ** ** | ** ** | ** **                                       | ** ** | **(Restated,**            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                               | ** ** | **See Note 2)**                          | ** ** | ** ** | ** ** | ** **                                       | ** ** | **See Note 2)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Maintenance  and other recurring revenues (in thousands) |       | $                                                  | 26,015     |       | $          | 23,314                                           |       | $                         | 2,701      |   | $ | 51,259 |   | $ | 46,200 |   | $ | 5,059 |   |
| Percent of  total net revenues                           |       | 64                                                 | %          | 65         | %          |                                             |       | 64                        | %          | 65 | % |   |   |
|                                                          |            |                                                    |            |            |            |                                                  |            |                           |            |  |  |  |  |  |  |  |  |  |  |

 

The increase in maintenance and otherrecurring revenues in the three and six month periods reflected an increase innew maintenance support contracts as a result of the increase in the number ofnew license deals, price increases to our 

 

29

----

 

installed customer base, an increase in demand for our data services andan increase in our recurring revenue sharing stream. We disclose ourmaintenance renewal rate one quarter in arrears in order to include allpayments received against maintenance invoices. The maintenance renewal rate forthe second quarter of 2005 of 87% was within the range of 80% to 90% that wehave experienced since the second quarter of 2004. Recurring revenue increasedsignificantly as a result of growth in our subscription and data managementrevenue streams, as well as our receiving a revenue share from transactioncharges generated by a partner program that began in early 2004.

 

Maintenance revenue has remained relatively flat asa proportion of total maintenance and recurring revenues at approximately 68% to69% in the three and six months ended June 30, 2005 and 2004. Weexpect maintenance and recurring revenues will increase slightly in the thirdquarter of 2005 reflecting additions to the customer base and maintenance priceincreases with existing customers, partially offset by attrition within ourexisting customer base.

 

***Professional Services and Other Revenues***

 
| ** **                                               | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** **                | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|---------------------------|------------|
| ** **                                               | ** ** | **2005**                                           | ** ** | **2004**   | ** ** | **Change**                                       | ** ** | **2005**                  | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                                               | ** ** | **(Restated,**                                     | ** ** | ** ** | ** ** | ** **                                       | ** ** | **(Restated,**            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                               | ** ** | **See Note 2)**                          | ** ** | ** ** | ** ** | ** **                                       | ** ** | **See Note 2)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Professional  services and other revenues (in thousands) |       | $                                                  | 5,278      |       | $          | 3,991                                            |       | $                         | 1,287      |   | $ | 9,883 |   | $ | 8,819 |   | $ | 1,064 |   |
| Percent of  total net revenues                           |       | 13                                                 | %          | 11         | %          |                                             |       | 12                        | %          | 12 | % |   |   |
|                                                          |            |                                                    |            |            |            |                                                  |            |                           |            |  |  |  |  |  |  |  |  |  |  |

 

Professional services and other revenuesinclude consulting, project management, custom integration, custom work,training and soft dollar transactions for products and services not related toAdvent product or services. Professional services related to Advent Officeproducts generally can be completed and accepted in a relatively short time periodwhile services related to Geneva products may require a six to nine monthimplementation period. Therefore, the revenues associated with professionalservices reflect a mix of services related to current quarter license revenueas well as transactions from prior quarters. Generally, our consulting revenueslag our license revenues by one or two quarters, but can also be affected byspecific milestone completions.

 

For the three months ended June 30, 2005,professional services and other revenues grew 32% with the majority of thegrowth from consulting revenue. The growth for the six months ended June 30,2005 is due to a general increase in the consulting business combined with somelarge consulting amounts recognized from deferred revenue which were pendingcustomer acceptance as of December 31, 2004. We expect revenues fromprofessional services to remain relatively flat in the third quarter of 2005.

 

***Revenues by Segment***

 
| ** **                    | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** **                | ** ** |
|-------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|---------------------------|------------|
| ** **                    | ** ** | **2005**                                           | ** ** | **2004**   | ** ** | **Change**                                       | ** ** | **2005**                  | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                    | ** ** | **(Restated,**                                     | ** ** | ** ** | ** ** | ** **                                       | ** ** | **(Restated,**            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **See Note 2)**                          | ** ** | ** ** | ** ** | ** **                                       | ** ** | **See Note 2)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **(in thousands)**                            | ** ** |
| Advent  Investment Management |       | $                                                  | 35,433     |       | $          | 31,626                                           |       | $                         | 3,807      |   | $ | 69,556 |   | $ | 62,400 |   | $ | 7,156 |   |
| MicroEdge                     |       | 4,843                                              |       | 3,836      |       | 1,007                                            |       | 9,502                     |       | 8,003 |   | 1,499 |   |
| Other                         |       | 651                                                |       | 562        |       | 89                                               |       | 1,258                     |       | 1,343 |   | (85 | ) |
|                          |       |                                               |       |       |       |                                             |       |                      |       |   |   |   |   |
| Total                         |       | $                                                  | 40,927     |       | $          | 36,024                                           |       | $                         | 4,903      |   | $ | 80,316 |   | $ | 71,746 |   | $ | 8,570 |   |

 

We have two reportable segments: AdventInvestment Management (“AIM”) and MicroEdge. AIM derives revenues from thedevelopment, marketing and sale of software products, data interfaces andrelated maintenance and services that automate, integrate and support certainmission critical functions of investment management organizations. MicroEdgederives revenues from the sale of software and services for grant management,matching gifts and volunteer tracking for the grant-making community worldwide.

 

The 12% and 11% increase in AIM’s revenue inthe three and six months ended June 30, 2005, respectively reflected theimproved economic conditions and growth in the financial markets, as well asthe continued focus on selling our Advent Office and Geneva products. Ourassets under administration revenues increased significantly from the sameperiods in 2004, as a result of the growth in assets under administration forour fund administration clients, where certain Geneva contracts provide forquarterly fees based on assets, resulting in significant recurring quarterlyrevenue. AIM’s revenue increase during the first half of 2005 also reflected anincrease in new maintenance support contracts as a result of new license dealsand price increases for maintenance contracts from our customer installed base,partially offset by attrition from within our existing customer base. We alsohad growth in international sales, partly attributable to our acquisitions inthe UK and Switzerland in May 2004.

 

30

----

 

The technology spending patterns oforganizations in MicroEdge’s primary markets (independent foundations,community foundations and corporations) are directly affected by economicfluctuations as foundation budgets are largely driven by endowment income whichoften contains market-exposed components. Foundation spending typicallydecreases in an economic downturn. Community foundations are subject to similarinfluences, compounded by the fact that in many cases much of their ongoingfunding and endowment comes from active donors who may increase or reducetheir giving depending on the economic climate and the related effect on theirincome and wealth. Corporations typically fund charitable activities fromoperating budgets, and the allocation to charitable donations and supportingcompany charitable operations is often closely tied to a company’s performance.Thus, corporate philanthropy and spending on related technology are correlatedwith company and overall economic performance.

 

The 26% and 19% increase in MicroEdge revenuein the three and six months ended June 30, 2005 also reflected theimproved economic conditions and growth in the financial markets which resultedin increased charitable contributions. This increase in charitablecontributions received by the foundations sector in the first half of 2005enabled foundations to increase their information technology expenditures whichresulted in the increase in MicroEdge revenue in the first and second quarters of2005.

 

### **COST OF REVENUES**

###  

| ** **                             | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** **                | ** ** |
|----------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|---------------------------|------------|
| ** **                             | ** ** | **2005**                                           | ** ** | **2004**   | ** ** | **Change**                                       | ** ** | **2005**                  | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                             | ** ** | **(Restated,**                                     | ** ** | ** ** | ** ** | ** **                                       | ** ** | **(Restated,**            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **See Note 2)**                          | ** ** | ** ** | ** ** | ** **                                       | ** ** | **See Note 2)** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                   |       |                                               |       |       |       |                                             |       |                      |       |   |   |   |   |
| Total cost  of revenues (in thousands) |       | $                                                  | 12,952     |       | $          | 13,203                                           |       | $                         | (251       | ) | $ | 24,985 |   | $ | 25,592 |   | $ | (607 | ) |
| Percent of  total net revenues         |       | 32                                                 | %          | 37         | %          |                                             |       | 31                        | %          | 36 | % |   |   |
|                                        |            |                                                    |            |            |            |                                                  |            |                           |            |  |  |  |  |  |  |  |  |  |  |

 

Our cost of revenues is made up of fourcomponents: cost of license and development fees; cost of maintenance and otherrecurring; cost of professional services and other; and amortization ofdeveloped technology.

 

***Cost of License and Development Fees***

 
| ** **                                           | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                           | ** ** | **2005**                                           | ** ** | **2004**   | ** ** | **Change**                                       | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                                 |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Cost of  license and development fees (in thousands) |       | $                                                  | 384        |       | $          | 426                                              |       | $          | (42        | ) | $ | 640 |   | $ | 1,020 |   | $ | (380 | ) |
| Percent of  total license revenues                   |       | 4                                                  | %          | 5          | %          |                                             |       | 3          | %          | 6 | % |   |   |
|                                                      |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Cost of license and development fees consistsprimarily of royalties and other fees paid to third parties, the fixed directlabor involved in producing and distributing our software, labor costsassociated with generating development fees and cost of product media includingduplication, manuals and packaging materials. The decrease in the three and sixmonths ended June 30, 2005 primarily reflected a reduction in headcount of40% and decreased shipping and related product costs. The decrease waspartially offset by an increase in royalties paid to a third party vendorrelated to products sold, which included their technology. We expect cost oflicense and development fees to increase slightly in the third quarter of 2005to support the new product releases of Partner and Geneva.

 

***Cost of Maintenance and Other Recurring***

 
| ** **                                              | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                              | ** ** | **2005**                                           | ** ** | **2004**   | ** ** | **Change**                                       | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                                    |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Cost of  maintenance and other recurring (in thousands) |       | $                                                  | 7,562      |       | $          | 7,320                                            |       | $          | 242        |   | $ | 14,637 |   | $ | 14,200 |   | $ | 437 |   |
| Percent of  total maintenance revenue                   |       | 29                                                 | %          | 31         | %          |                                             |       | 29         | %          | 31 | % |   |   |
|                                                         |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Cost of maintenance and other recurringrevenues is primarily comprised of the direct costs of providing technicalsupport and other services for recurring revenues and royalties paid to thirdparty subscription-based and transaction-based vendors. The increase in thethree and six months ended June 30, 2005 was due primarily to an increasein employee bonus programs. The increase was partially offset by decreases inoutside services. We expect cost of maintenance and other recurring revenues tobe relatively flat in the third quarter of 2005.

 

31

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***Cost of Professional Services and Other***

 
| ** **                                              | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** **                | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|---------------------------|------------|
| ** **                                              | ** ** | **2005**                                           | ** ** | **2004**   | ** ** | **Change**                                       | ** ** | **2005**                  | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                                              | ** ** | **(Restated,**                                     | ** ** | ** ** | ** ** | ** **                                       | ** ** | **(Restated,**            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | **See Note 2)**                          | ** ** | ** ** | ** ** | ** **                                       | ** ** | **See Note 2)** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                    |       |                                               |       |       |       |                                             |       |                      |       |   |   |   |   |
| Cost of  professional services and other (in thousands) |       | $                                                  | 4,392      |       | $          | 4,107                                            |       | $                         | 285        |   | $ | 8,480 |   | $ | 7,680 |   | $ | 800 |   |
| Percent of  total professional services revenues        |       | 83                                                 | %          | 103        | %          |                                             |       | 86                        | %          | 87 | % |   |   |
|                                                         |            |                                                    |            |            |            |                                                  |            |                           |            |  |  |  |  |  |  |  |  |  |  |

 

Cost of professional services and otherrevenue consists primarily of personnel related costs associated with theclient services and support organization in providing consulting, custom reportwriting and conversions of data from clients’ previous systems. Also includedare direct costs associated with third-party consultants and travel expenses. Theincrease in the three and six months ended June 30, 2005 was primarily dueto an increase in headcount of 6% and employee bonus programs. The increase waspartially offset by decreases in outside services. We expect cost ofprofessional services and other revenues to remain relatively flat in the thirdquarter of 2005.

 

***Amortization of Developed Technology***

 
| ** **                                           | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                           | ** ** | **2005**                                           | ** ** | **2004**   | ** ** | **Change**                                       | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                                 |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Amortization  of developed technology (in thousands) |       | $                                                  | 614        |       | $          | 1,350                                            |       | $          | (736       | ) | $ | 1,228 |   | $ | 2,692 |   | $ | (1,464 | ) |
| Percent of  total net revenues                       |       | 2                                                  | %          | 4          | %          |                                             |       | 1          | %          | 4 | % |   |   |
|                                                      |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Amortization of developed technologyrepresents amortization of acquisition-related intangible assets. The decreasein amortization of developed technology reflected technology related intangibleassets from prior acquisitions becoming fully amortized, partially offset byamortization of technology related intangible assets associated with ouracquisitions in the United Kingdom and Switzerland. We expect amortization ofdeveloped technology to be approximately $600,000 in the third quarter of 2005.

 

### **OPERATING EXPENSES**

###  

***Sales and Marketing***

 
| ** **                          | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** **                | ** ** |
|-------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|---------------------------|------------|
| ** **                          | ** ** | **2005**                                           | ** ** | **2004**   | ** ** | **Change**                                       | ** ** | **2005**                  | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** **                                       | ** ** | **(Restated,**            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** **                                       | ** ** | **See Note 2)** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                |       |                                               |       |       |       |                                             |       |                      |       |   |   |   |   |
| Sales and  marketing (in thousands) |       | $                                                  | 10,474     |       | $          | 9,276                                            |       | $                         | 1,198      |   | $ | 20,537 |   | $ | 18,069 |   | $ | 2,468 |   |
| Percent of  total net revenues      |       | 26                                                 | %          | 26         | %          |                                             |       | 26                        | %          | 25 | % |   |   |
|                                     |            |                                                    |            |            |            |                                                  |            |                           |            |  |  |  |  |  |  |  |  |  |  |

 

Sales and marketing expenses consistprimarily of the costs of personnel involved in the sales and marketingprocess, sales commissions, advertising and promotional materials, salesfacilities expense, trade shows, and seminars. The increase in expensefor the three and six months ended June 30, 2005 was primarily due toincreased salary expense, severance related to a reduction in headcount andincreased employee bonus programs. The increase was offset by a decrease inoutside services and conference expenses. We expect sales and marketingexpenses to remain relatively flat in the third quarter of 2005.

 

***Product Development***

 
| ** **                          | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2005**                                           | ** ** | **2004**   | ** ** | **Change**                                       | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Product development  (in thousands) |       | $                                                  | 7,811      |       | $          | 8,501                                            |       | $          | (690       | ) | $ | 15,767 |   | $ | 16,353 |   | $ | (586 | ) |
| Percent of  total net revenues      |       | 19                                                 | %          | 23         | %          |                                             |       | 20         | %          | 23 | % |   |   |
|                                     |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Product development expenses consistprimarily of salary and benefits for our development staff as well as contractors’fees and other costs associated with the enhancements of existing products andservices and development of new products and services. The decrease inexpenses for the three and six months ended June 30, 2005 was primarilydue to the capitalization of software development costs incurred in the secondquarter of 2005 of $461,000. The capitalized costs will be amortized overapproximately three years. We expect product development expenses to berelatively flat in the third quarter of 2005 as we continue progress on newproduct introductions.

 

32

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***General and Administrative***

 
| ** **                                 | ** ** | **(Restated, See Note 2)**          | ** ** | ** ** | ** ** | **(Restated, See Note 2)**        | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **2005**                                           | ** ** | **2004**   | ** ** | **Change**                                       | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                       |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| General and  administrative (in thousands) |       | $                                                  | 7,808      |       | $          | 6,197                                            |       | $          | 1,611      |   | $ | 16,161 |   | $ | 12,168 |   | $ | 3,993 |   |
| Percent of  total net revenues             |       | 19                                                 | %          | 17         | %          |                                             |       | 20         | %          | 17 | % |   |   |
|                                            |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

General and administrative expenses consist primarilyof personnel costs for finance, administration, operations and generalmanagement, as well as legal and accounting expenses. The increase in thethree and six months ended June 30, 2005 was primarily due to increases inpersonnel and related costs, professional fees, and outside services. Theincrease in personnel and related costs was primarily due to additionalheadcount associated with the acquisition of our remaining independentdistributor business in the United Kingdom and Switzerland in May 2004 aswell as severance costs. Theincrease in professional fees was the result of higher legal fees incurred forvarious inquiries and disputes and costs associated with complying with the Sarbanes-OxleyAct of 2002. The increase in outside services was primarily due to costsassociated with increased utilization of outside contractors. We expectgeneral and administrative expenses to decrease slightly in the third quarterof 2005.

 

***Amortization of Other Intangibles***

 
| ** **                                        | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                        | ** ** | **2005**                                           | ** ** | **2004**   | ** ** | **Change**                                       | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                              |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Amortization  of other intangibles (in thousands) |       | $                                                  | 1,020      |       | $          | 2,060                                            |       | $          | (1,040     | ) | $ | 2,067 |   | $ | 4,084 |   | $ | (2,017 | ) |
| Percent of  total net revenues                    |       | 2                                                  | %          | 6          | %          |                                             |       | 2          | %          | 6 | % |   |   |
|                                                   |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Amortization of other intangibles representsamortization of non-technology related intangible assets. The decrease isprimarily due to the write-off of other intangibles related to our Techfi,Advent Wealth Services and Advent Hellas subsidiaries during the second half of2004. The decrease was partially offset by additional amortization of otherintangibles associated with our acquisitions in the United Kingdom andSwitzerland in May 2004. We expect amortization of other intangibles to beapproximately $1.1 million in the third quarter of 2005.

 

***Restructuring Charges***

 
| ** **                            | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2005**                                           | ** ** | **2004**   | ** ** | **Change**                                       | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                  |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Restructuring  charges (in thousands) |       | $                                                  | 1,520      |       | $          | 5,903                                            |       | $          | (4,383     | ) | $ | 1,603 |   | $ | 5,860 |   | $ | (4,257 | ) |
| Percent of  total net revenues        |       | 4                                                  | %          | 16         | %          |                                             |       | 2          | %          | 8 | % |   |   |
|                                       |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

##### ***In response to the downturn in the financial services industry, thedecline in information technology spending and duplicative efforts in parts ofour business as a result of our acquisitions, we implemented several phases ofrestructuring beginning in 2003. These plans were implemented to reduce costsand improve operating efficiencies by better aligning our resources to our nearterm revenue opportunities.***

#####  

During the three months ended June 30,2005, we recorded a restructuring charge of $1.5 million primarily consistingof facility and exit costs related to sub-leasing one floor of our office spacein New York, New York. During the three months ended March 31, 2005, we recordeda net restructuring charge of $83,000 primarily to adjust original estimatesfor vacated facilities.

 

##### ***For the three months ended June 30, 2004, we recorded a netrestructuring expense of $5.9 million***primarilyconsisting of $4.9 million of facility exit costs and $0.9 million of propertyand equipment impairment charges related to vacating a facility in SanFrancisco, California, $72,000 related to vacating a portion of a facility inCambridge, Massachusetts and a $12,000 adjustment to severance for employees terminatedin the first quarter of 2004. During the three months ended March 31,2004, we recorded a net restructuring benefit of $43,000 consisting of a$163,000 adjustment related to entering into a final sub-lease agreement on oneof the vacated facilities in New York, New York and a $16,000 adjustment tonon-cash severance. These adjustments were partially offset by a restructuringcharge of $136,000 related to the termination of nine employees, located primarilyin New York.

#####  

The following table sets forth an analysis ofthe components of the restructuring charges and the payments and non-cashcharges made against the accrual during the six months ended June 30, 2005(in thousands):

 

33

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| ** **                                                  | ** ** | **Facility Exit** | ** ** | **Severance &** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|--------------------------|------------|------------|------------|
| ** **                                                  | ** ** | **Costs**              | ** ** | **Benefits**             | ** ** | **Total**  | ** ** |
|                                                        |       |                   |       |                     |       |       |       |
| Balance of  restructuring accrual at December 31, 2004 |       | $                      | 4,157      |                     | $          | 12         |       | $ | 4,169 |   |
| Restructuring  charges                                      |       | 1,472                  |       | —                   |       | 1,472      |       |
| Reversal of  deferred rent related to facilities exited     |       | 704                    |       | —                   |       | 704        |       |
| Cash  payments                                              |       | (1,468                 | )          | —                   |       | (1,468     | )          |
| Adjustment  of prior restructuring costs                    |       | 136                    |       | (5                       | )          | 131        |       |
| Balance of  restructuring accrual at June 30, 2005     |       | $                      | 5,001      |                     | $          | 7          |       | $ | 5,008 |   |

 

Of the remaining restructuring accrual of $5.0million at June 30, 2005, $1.6 million and $3.4 million are included inaccrued liabilities and other long-term liabilities, respectively, on theaccompanying condensed consolidated balance sheet. As of June 30, 2005,the remaining excess facility costs of $5.0 million are stated at estimatedfair value, net of estimated sublease income of approximately $8.8 million. Weexpect to pay remaining obligations in connection with vacated facilities nolater than over the remaining lease terms, which expire on various datesthrough 2012. We expect to pay the remaining severance and benefits in 2005. Asthe result of our restructuring activities implemented to date, we have reducedour total expenses by approximately $15 million on an annual basis.

 

### ***OperatingIncome (Loss) by Segment***

###  

| ** **                                          | ** ** | **(Restated, See Note 2)**          | ** ** | ** ** | ** ** | **(Restated, See Note 2)**        | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                          | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **2005**                                           | ** ** | **2004**   | ** ** | **Change**                                       | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                            | ** ** |
| Advent  Investment Management                       |       | $                                                  | 313        |       | $          | (5,246                                           | )          | $          | 5,559      |   | $ | 1,455 |   | $ | (3,797 | ) | $ | 5,252 |   |
| MicroEdge                                           |       | 577                                                |       | (419       | )          | 996                                              |       | 950        |       | 112 |   | 838 |   |
| Other                                               |       | 86                                                 |       | (41        | )          | 127                                              |       | 86         |       | 81 |   | 5 |   |
| Unallocated  corporate operating costs and expenses |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Amortization  of developed technology               |       | (614                                               | )          | (1,350     | )          | 736                                              |       | (1,228     | )          | (2,692 | ) | 1,464 |   |
| Amortization  of other intangibles                  |       | (1,020                                             | )          | (2,060     | )          | 1,040                                            |       | (2,067     | )          | (4,084 | ) | 2,017 |   |
|                                                |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Total  operating loss                               |       | $                                                  | (658       | )          | $          | (9,116                                           | )          | $          | 8,458      |   | $ | (804 | ) | $ | (10,380 | ) | $ | 9,576 |   |

 

Operating income for the AIM segment was $313,000and $1.5 million for the three and six months ended June 30, 2005,respectively. Operating loss for the AIM segment was $5.3 million and $3.8million for the three and six months ended June 30, 2004, respectively. Thefluctuations from the comparable periods in 2004 were the result of AIM’srevenue growth of $3.8 million and $7.2 million during the three and six monthsended June 30, 2005, respectively. In addition, AIM’s restructuringcharges decreased by $4.4 million and $4.3 million during the three and sixmonths ended June 30, 2005, respectively, relative to the comparableperiods in 2004. These were offset by increases in certain operating expensesincluding personnel and related costs, severance, retention bonuses, legalfees, compliance costs for Sarbanes Oxley, and accelerated depreciation onassets we intend to abandon in our New York office space that we havesub-leased. The increase in personnel and related costs was due to additionalheadcount associated with the acquisition of our remaining independent distributorbusinesses in the United Kingdom and Switzerland in May 2004.

 

MicroEdge’s operating income during the threeand six months ended June 30, 2005 increased by $996,000 and $838,000,respectively, from the comparable periods of 2004 primarily due to increases inrevenue of $1.0 million and $1.5 million. The increase in MicroEdge’s revenueduring the six months ended June 30, 2005 was partially offset byincreases in operating activity resulting in higher compensation, marketing andoutsourcing costs.

 

### ***InterestIncome and Other, Net***

###  

| ** **                                     | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                     | ** ** | **2005**                                           | ** ** | **2004**   | ** ** | **Change**                                       | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                           |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Interest  income and other, net (in thousands) |       | $                                                  | 4,712      |       | $          | (142                                             | )          | $          | 4,854      |   | $ | 5,609 |   | $ | (16 | ) | $ | 5,625 |   |
| Percent of  total net revenues                 |       | 11                                                 | %          | -1         | %          |                                             |       | 7          | %          | 0 | % |   |   |
|                                                |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Interest income and other, net consists ofinterest income, realized gains and losses on short-term investments, our prorata share of net income or loss on our equity method investment and foreigncurrency gains and losses. The increases in interest income and other, net forthe three and six months ended June 30, 2005 primarily reflected a gain onsale of a private equity investment of $3.6 million during the second quarterof 2005. The increases also reflected higher interest income of approximately $478,000and $922,000 for the three and six months ended June 30, 2005,respectively, as a result of higher average interest rates. Interest income andother, net for the three and six months ended June 30, 2004 also reflectedlosses on 

 

34

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retirement of fixed assets of $125,000 and $372,000, respectively, andour pro rata share of net losses on our equity method investment of $335,000and $606,000, respectively. Effective December 28, 2004, our Chief Executive Officer resignedher seat on LatentZero’s board of directors. As a result, we no longer believewe have significant influence over LatentZero and therefore are not required toadjust the carrying amount of this investment to recognize our share ofLatentZero’s earnings or losses. This investment is carried at the lower ofcost or fair value at December 31, 2004 and June 30, 2005, similar tothe Company’s other non-marketable investments. The remaining components ofinterest income and other, net fluctuate primarily due to foreign currencygains and losses and realized gains and losses from sales of short-terminvestments.

 

### **Provision For(Benefit From) Income Taxes**

###  

| ** **                                 | ** ** | **(Restated, See Note 2)**          | ** ** | ** ** | ** ** | **(Restated, See Note 2)**        | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **2005**                                           | ** ** | **2004**   | ** ** | **Change**                                       | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| Provision  for (benefit from) income taxes |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| (in  thousands)                            |       | $                                                  | 116        |       | $          | (387                                             | )          | $          | 503        |   | $ | 130 |   | $ | (388 | ) | $ | 518 |   |
| Percent of  total net revenues             |       | 0                                                  | %          | -1         | %          |                                             |       | 0          | %          | -1 | % |   |   |
|                                            |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

For the three and six months ended June 30,2005, we recorded a provision for income taxes of $116,000 and $130,000,respectively, compared to a benefit of $387,000 and $388,000 in the three and sixmonths ended June 30, 2004, respectively. We account for income taxesunder an asset and liability approach that requires the expected future taxconsequences of temporary differences between book and tax bases of assets andliabilities to be recognized as deferred tax assets and liabilities. During thefourth quarter of 2003, we established a full valuation allowance against ourdeferred tax assets in the United States because we determined it is morelikely than not that these deferred tax assets will not be realized in theforeseeable future. The increases in the provision for income taxes for thethree and six months ended June 30, 2005 reflect foreign, state and federalalternative minimum tax charges.

 

### **LIQUIDITY ANDCAPITAL RESOURCES**

###  

Our aggregate cash, cash equivalents andmarketable securities were $133.8 million at June 30, 2005, compared with$165.5 million at December 31, 2004. Cash equivalents are comprised ofhighly liquid investments purchased with an original or remaining maturity of90 days or less at the date of purchase.

 

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

 

| ** **                                           | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                         | ** ** | **2004** | ** ** |
|                                                 |       |                                             |       |   |   |
| Net cash  provided by operating activities           |       | $                                                | 13,482     |   | $ | 12,476 |   |
| Net cash  provided by (used in) investing activities |       | $                                                | 32,481     |   | $ | (15,028 | ) |
| Net cash  provided by (used in) financing activities |       | $                                                | (44,023    | ) | $ | 3,405 |   |

 

***Cash Flows from Operating Activities***

 

Our cash flows from operating activitiesrepresent the most significant source of funding for our operations. Our cashprovided by operating activities generally follows the trend in our netrevenues and operating results. Our cash provided by operating activities of $13.5million was primarily the result of our net income and non-cash chargesincluding depreciation and amortization, partially offset by a non-operatinggain from the sale of an equity investment. Other sources of cash during thefirst six months of 2005 included decreases in accounts receivable, prepaid andother assets and increases in accrued liabilities and deferred revenue. Thedecrease in accounts receivable primarily reflected strong collections duringthe first half of 2005. Days’ sales outstanding decreased to 68 days from 73days during this period. The decrease in prepaid and other assets primarilyreflected prepaid expense amortization. The increase in accrued liabilities wasprimarily due to restructuring charges for facility exit costs during the secondquarter of 2005. The increase in deferred revenue primarily reflected anincrease in deferred maintenance. Uses of our operating cash included areduction in income taxes payable as a result of the payment of a taxsettlement of $1.2 million. Other major uses of cash include funding payroll(salaries, bonuses and benefits), general operating expenses (marketing, traveland office rent) and cost of revenues.

 

Sources of cash during the first six monthsof 2004 included decreases in accounts receivable and prepaid and other assets,and an increase in accrued liabilities. The decrease in accounts receivablereflected strong collections. The decrease in prepaid and other assetsreflected prepaid expense amortization and collection of a receivable for alitigation settlement recorded in the fourth quarter of 2003. The increase in accruedliabilities was primarily due to additional accrued restructuring charges. 

 

35

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Uses of cash during the six months ended June 30, 2004 included adecrease in deferred revenues, as a result of recognition of revenue fromlicense contracts signed during 2003.

 

We expect that cash provided by operatingactivities may fluctuate in future periods as a result of a number offactors including fluctuations in our net revenues and operating results,amount of revenue deferred, collection of accounts receivable, and timing ofpayments.

 

***Cash Flows from Investing Activities***

 

Net cash provided by investing activities of$32.5 million for the six months ended June 30, 2005, consisted primarilyof net sales and maturities of marketable securities of $32.6 million andproceeds from the sale of a private equity investment of $3.8 million offset bycapital expenditures of $2.4 million and cash used in acquisitions of $1.0million related to the final earn-out payment made to the shareholders ofAdvent Outsource Data Management and the final payment made to Advent Europe relatingto the acquisition of Advent United Kingdom and Switzerland in May 2004.

 

Net cash used in investing activities of $15.0million for the six months ended June 30, 2004 consisted of net purchases ofmarketable securities of $8.0 million, capital expenditures of $1.3 million andcash used in acquisitions, including payments of assumed liabilities, of $5.8million.

 

***Cash Flows from Financing Activities***

 

Net cash used in financing activities for thesix months ended June 30, 2005 of $44.0 million reflected the repurchaseof 2.7 million shares of our common stock for $48.8 million, partially offsetby proceeds received from the issuance of common stock of $4.7 million. Netcash provided by financing activities for the six months ended June 30,2004 of $3.4 million reflected proceeds from the issuance of common stock of$4.3 million partially offset by proceeds used in the repurchase of 48,000shares of our common stock for $0.9 million.

 

Our liquidity and capital resources in anyperiod could be affected by the exercise of outstanding stock options andissuance of common stock under our employee stock purchase plan. The resultingincrease in the number of outstanding shares could also affect our per shareresults of operations. However, we cannot predict the timing or amount ofproceeds from the exercise of these securities, or whether they will beexercised at all. Furthermore, we may continue our stock repurchaseactivity under the share repurchase program approved by the Board of Directorsand publicly announced in May 2004. As of June 30, 2005,approximately 1.4 million shares were available to be repurchased under ourcurrent share repurchase plan.

 

At June 30, 2005, we had $93.0 millionin working capital. We currently have no significant capital commitments otherthan commitments under our operating leases, which declined from $31.5 millionat December 31, 2004 to $25.6 million at June 30, 2005.

 

The following table summarizes ourcontractual cash obligations as of June 30, 2005 (in thousands):

 
| ** **                    | ** ** | **Six Months Ended** | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
|-------------------------------|------------|--------------------------------|------------|-------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                    | ** ** | **December 31**           | ** ** | **Year Ended December 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **2005**                       | ** ** | **2006**                                  | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** |
| Operating  lease obligations, |       |                           |       |                                      |       |       |       |       |       |       |       |           |       |       |       |
| net of  sub-lease income      |       | $                              | 4,085      |                                      | $          | 6,920      |       | $          | 5,171      |       | $          | 4,868          |       | $          | 1,941      |   | $ | 2,583 |   | $ | 25,568 |   |
|                               |            |                                |            |                                           |            |            |            |            |            |            |            |                |            |            |            |  |  |  |  |  |  |  |

 

At June 30, 2005 and December 31,2004, we did not have any relationships with unconsolidated entities or financialpartnerships, such as entities often referred to as structured finance orspecial purpose entities, which would have been established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow orlimited purposes. As such, we are not materially exposed to any financing,liquidity, market or credit risk that could arise if we had engaged in suchrelationships.

 

We have taken numerous actions over the lasttwo years to strengthen our cash position and balance sheet and to improve ourability to generate positive cash flow from operating activities. Many of theseactions were taken in the last half of 2003 in order to offset the negativeimpacts of the economic downturn and decreased information technology spendingwhich negatively impacted our net revenues.

 

We expect that for the foreseeable future,our operating expenses will continue to constitute a significant use of cashflow. 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 

 

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sufficient to satisfy our working capital needs, capital expenditures,investment requirements, stock repurchases and financing activities for atleast the next twelve months.

 

**Off-Balance Sheet Arrangements and ContractualObligations**

 

Our off-balance sheet arrangements as of June 30,2005 consist of obligations under operating leases. See Note 13, “Commitmentsand Contingencies” to the condensed consolidated financial statements and the “Liquidityand Capital Resources” section above for further discussion and a tabularpresentation of our contractual obligations.

 

###### ***RISK FACTORS***

######  

*Investors should carefully consider the risksdescribed below before making an investment decision. These risks are not theonly ones we face. Additional risks we are not presently aware of or that wecurrently believe are immaterial may also impair our business operations.Our business could be harmed by any of these risks. The trading price of ourcommon stock could decline due to any of these risks. In assessing these risks,investors should also refer to the other information contained or incorporatedby reference in this Quarterly Report on Form 10-Q/A filed with the SEC,including our condensed consolidated financial statements and related notesthereto.*

 

**Our Operating Results May FluctuateSignificantly.**

 

Although we are transitioning to a termlicense model, perpetual licenses still constitute over two-thirds of ourquarterly software license revenues. Individual perpetual software licensesvary significantly in value, and the value and timing of these transactions cantherefore cause our quarterly license revenues to fluctuate, and we have oftenrecognized a substantial portion of each quarter’s license revenues in the lastmonth, weeks or even days of the quarter. As a result, the magnitude ofquarterly fluctuations in license revenue may not be evident until late inor after the close of a particular quarter and a disruption late in the quartermay have a disproportionately large negative impact on revenue. Inaddition, some of our large professional services contracts contain performancemilestones or acceptance clauses, which affect the timing of revenue recognizedunder such contracts. As a result of these and other factors, historically ourquarterly net revenues have fluctuated significantly. Our expense levels arebased in significant part on our expectations of future revenues andtherefore are relatively fixed in the short term. Due to the fixed nature ofthese expenses, combined with the relatively high gross margin historicallyachieved on our products, an unanticipated decline in net revenues in anyparticular quarter may adversely affect our operating results. Thesefactors have impacted and may continue to impact our results.

 

We are in a transition from selling predominantlyperpetual licenses to selling a mix of perpetual and multi-year term licenses,and we expect term license revenue to increase as a proportion of total licenserevenue in the future. We recognize revenue for term licenses ratably over theperiod of the contract term, which is typically three to five years. Includingour entry level product, Advent Office Essentials, we recognized approximately23% of license revenue from term licenses in the second quarter of 2005. If weare successful in our strategy to increase the proportion of our businesssigned on term license contracts, it will result in a greater portion oflicense revenue being deferred and could therefore impact the level and timingof our profitability. However, over the long-term the increases in deferredlicense revenue and backlog, which we define as the value of multi-year termlicense contracts not included in deferred revenue, will lower the quarterlyvariability of license revenues.

 

In addition, we experience seasonality in ourlicense revenue. The fourth quarter of the year typically has the highestlicense revenue, 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, the impact of this seasonality will likely decrease.

 

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 LimitedAbility to Forecast the Timing and Amount of Specific Sales.**

 

The purchase of our software products oftenrequires prospective customers to provide significant executive-levelsponsorship and to make major systems architecture decisions. As a result, wemust generally engage in a relatively lengthy sales and contracting efforts.Sales transactions may therefore be delayed during the customer decisionprocess because we must provide a significant level of education to prospectivecustomers regarding the use and benefit of our products. This has beenexacerbated by the adverse and uncertain economic conditions that have causedexisting and potential clients to reduce or cancel expenditures and delaydecisions related to acquisition of software and related services. While wehave seen somewhat improved economic conditions recently, customers are stillvery cautious about capital and information technology expenditures. As aresult, the sales cycle associated with the purchase of our solutions istypically between two and twelve months depending upon the size 

 

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of the client, and is subject to a number of significant risks overwhich we have little or no control, including customers’ budgeting constraints,internal selection procedures, and changes in customer personnel, among others.As a result of a lengthy and unpredictable sales cycle, we have limited abilityto forecast the timing and amount of specific license sales. The timing oflarge individual license sales is especially difficult to forecast, and we may notbe successful in closing large license transactions on a timely basis or atall. In addition, customers may postpone their purchases of our existingproducts or product enhancements in advance of the anticipated introduction ofnew products or product enhancements by us or our competitors. 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 Product, Axys®.**

 

Historically, we have derived a significantportion of our net revenues from the licensing of Axys, and related ancillaryproducts and services. In addition, many of our other applications, such asPartner, Moxy, Qube and various data interfaces were designed to operate withAxys to provide an integrated solution. As a result, we believe that for theforeseeable future a majority of our net revenues will depend upon continuedmarket acceptance of Axys, enhancements or upgrades to Axys and relatedproducts and services. As our clients include a range of organizations,including asset managers, investment advisors, brokerage firms, banks, familyoffices, hedge funds and others, the degree of continued market acceptance alsowill depend on the number of firms within each type of organization and the degreeto which Axys previously penetrated those firms.

 

**We Depend upon Financial Markets.**

 

The target clients for our products include arange of financial services organizations that manage investment portfolios,including asset managers, investment advisors, brokerage firms, banks, familyoffices, hedge funds and others. In addition, we target corporations, publicfunds, universities and non-profit organizations, which also manage investmentportfolios and have many of the same needs. The success of many of our clientsis intrinsically linked to the health of the financial markets. We believe thatdemand for our solutions has been, and could continue to be, disproportionatelyaffected by fluctuations, disruptions, instability or downturns in the financialservices industry which may cause clients and potential clients to exitthe industry or delay, cancel or reduce any planned expenditures for investmentmanagement systems and software products. Also, recent investigative effortsinto various mutual fund and other financial industry practices could impactour business if the industry experiences a decline in business. In addition, aslowdown in the formation of new investment firms or a decline in the growth ofassets under management would cause a decline in demand for our solutions. Webelieve that the downturn in the financial services industry and the decline ininformation technology spending continued to negatively impact the demand forour products in the past two years, and that continuing uncertainty aboutfinancial markets and the financial services sector could have a materialadverse effect on our business and results of operations.

 

**Uncertain Economic Conditions May Continueto Affect Our Revenues.**

 

We believe that the market for largeinvestment management software systems may be negatively impacted by anumber of factors, including reductions in capital expenditures by largecustomers, poor performance of major financial markets, and increasingcompetition. Those factors may, in turn, give rise to a number of market trendswhich we have experienced in the past two years that have slowed revenue growthacross the financial services industry, including longer sales and contractingcycles, deferral or delay of information technology projects and generallyreduced expenditures for software and related services. If the downturn in thefinancial services industry and information technology spending continues, thepresence of these factors in the market for large investment managementsolutions will likely materially adversely affect our business and results ofoperations.

 

**We Face Intense Competition.**

 

The market for investment management softwareis intensely competitive and highly fragmented, is subject to rapid change andis sensitive to new product introductions and marketing efforts by industryparticipants. Our largest single source of competition is from proprietarysystems used by existing and potential clients, many of whom develop their ownsoftware for their particular needs and therefore may be reluctant tolicense software products offered by independent vendors like Advent. Othercompetitors include providers of software and related services as well asproviders of outsourced services, and include some of the following vendors:Beauchamp, Charles River Development, CheckFree Corporation, the Eaglesubsidiary of Mellon Financial Corporation, Eze Castle Software, FTIntegretorsia, IBSI, IDS, Indata, Linedata, Macgregor Financial Technologies,Schwab Performance Technologies, Simcorp A/S, SS&C Technologies, Inc.,SunGard, the Portia Division of Thomson Financial and others.

 

Our competitors vary in size, scope ofservices offered and platforms supported. Many of our competitors have longeroperating histories and greater financial, technical, sales and marketingresources than we do. During 2005, two competitors have announced plans to bebought out by private equity firms, with the possibility of forming even largercompanies through 

 

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additional acquisitions of companies and technologies using fundsprovided as part of the buyout transactions. 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 our business.

 

**We Must Continue to Introduce New Productsand Product Enhancements.**

 

The market for our products is characterizedby rapid technological change, changes in customer demands and evolvingindustry standards. New products based on new technologies or new industrystandards can render existing products obsolete and unmarketable. As a result,our future success will continue to depend upon our ability to develop newproducts or product enhancements that address the future needs of our targetmarkets and to respond to these changing standards and practices, such as ournext generation portfolio accounting product. We may not be successful indeveloping, introducing and marketing our next generation portfolio accountingproduct or other new products or product enhancements on a timely and costeffective basis, or at all, and our new products and product enhancements may notadequately meet the requirements of the marketplace or achieve marketacceptance. Delays in the commencement of commercial shipments of new productsor enhancements may result in client dissatisfaction and delay or loss ofproduct revenues. In addition, clients may delay purchases in anticipationof new products or product enhancements. If we are unable, for technological orother reasons, to develop and introduce new products or enhancements ofexisting products in a timely manner in response to changing market conditionsor client requirements, or if new products or new versions of existing productsdo not achieve market acceptance, our business would be seriously harmed. Inaddition, our ability to develop new products and product enhancements isdependent upon the products of other software vendors, including certain systemsoftware vendors, such as Microsoft Corporation, Sun Microsystems, databasevendors and development tool vendors. If the products of such vendors havedesign defects or flaws, are unexpectedly delayed in their introduction, or areunavailable on acceptable terms, our business could be seriously harmed. Oursoftware products are complex and may contain undetected defects or errorswhen first introduced or as new versions are released. Although we have notexperienced adverse effects resulting from any software errors, we cannot besure that, despite testing by us and our clients, defects or errors will not befound in new products after commencement of commercial shipments, resulting inloss of or delay in market acceptance, which could seriously harm our business.

 

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

 

We believe that our futuresuccess is dependent on the continued employment of our senior managementand our ability to identify, attract, motivate and retain qualifiedtechnical, sales and other personnel. We need technical resources such asour product development engineers to develop new products and enhance existingproducts and we rely upon sales personnel to sell our products and services andmaintain healthy business relationships. We therefore needto identify, attract, motivate and retain such employees with therequisite education, backgrounds and industry experience. If we are unableto do so, our business could be harmed. In addition, we must attract andretain financial and accounting personnel to comply with the requirements of Section 404of the Sarbanes-Oxley Act of 2002.

 

We have relied on our ability to grant equitycompensation as one mechanism for recruiting and retaining such high skilledpersonnel. Recently enacted accounting regulations requiring the expensing ofequity compensation may impair our ability to provide these incentiveswithout incurring significant compensation costs. If we are unable to continueto successfully attract and retain key personnel, our business may beharmed.

 

We may also choose to create additionalperformance and retention incentives in order to retain our employees,including the granting of additional stock options to employees at currentprices or issuing incentive cash bonuses. Such incentives may eitherdilute our existing stockholder base or result in unforeseen operatingexpenses, which may cause our stock price to fall.

 

**We Face Challenges in Expanding OurInternational Operations.**

 

We market and sell our products in the UnitedStates and, to a lesser extent, internationally. In 1999, we entered into adistributor relationship with Advent Europe, an independent distributor of ourproducts in selected European markets. In November 2001, we acquired theNorwegian, Swedish, and Danish companies of this independent distributor. In September 2002,we purchased their Greek subsidiary; in May 2003, we purchased their Dutchsubsidiary; and in May 2004, we purchased their remaining subsidiaries inthe United Kingdom and Switzerland and certain assets of Advent Europe. Tofurther expand our international operations, we would need to establishadditional locations, acquire other businesses or enter into additionaldistribution relationships in other parts of the world. Any further expansionof our existing international operations and entry into new internationalmarkets could require significant management attention and financial resources.We cannot be certain that establishing businesses in other countries willproduce the desired levels of revenues. We currently have limited experience in

 

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developing localized versions of our products and marketing anddistributing our products internationally. In addition, internationaloperations are subject to other inherent risks, including:

 

•                  the impact ofrecessions in economies outside the United States;

•                  greaterdifficulty in accounts receivable collection and longer collection periods;

•                  unexpectedchanges in regulatory requirements;

•                  difficulties insuccessfully adapting our products to the language, regulatory and technologystandards of other countries;

•                  difficulties andcosts of staffing and managing foreign operations;

•                  reducedprotection for intellectual property rights in some countries;

•                  potentiallyadverse tax consequences; and

•                  political andeconomic instability.

 

The revenues, expenses, assets andliabilities of our international subsidiaries are primarily denominated inlocal currencies. We have not historically undertaken foreign exchange hedgingtransactions to cover potential foreign currency exposure. Future fluctuationsin currency exchange rates may adversely affect revenues and accountsreceivable from international sales and the U.S. dollar value of our foreignsubsidiaries’ revenues, expenses, assets and liabilities. Our internationalrevenues from our European subsidiaries are generally denominated in localforeign currencies, with the exception of our Geneva license transactions.

 

**Difficulties in Integrating Our Acquisitionsand Expanding Into New Business Areas Have Impacted and Could Continue toAdversely Impact Our Business and We Face Risks Associated with PotentialAcquisitions, Investments, Divestitures and Expansion.**

 

From 2001 through the middle of 2003, ourstrategy focused 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 ouracquisitions has required and will continue to require significant resources,particularly in light of our relative inexperience in integrating acquisitions.Integrating these acquisitions has been and will continue to be time-consuming,expensive and disruptive to our business. This integration process has strainedand could continue to strain our managerial resources, resulting in thediversion of these resources from our core business objectives. Failure toachieve the anticipated benefits of these acquisitions or to successfullyintegrate the operations of these entities has harmed and could continue to harmour business, results of operations and cash flows. For example, in the firstquarter of 2003, we closed our Australian subsidiary because it failed to perform ata satisfactory profit level. 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 forsuch offerings, and revenue growth for these newer business areas has sufferedand may continue to suffer. For example, demand for our Techfi productline was significantly lower than expected and thus we discontinued certain productswithin our Techfi product line in September 2004. As a result, we recordeda non-cash impairment charge of $3.4 million in the third quarter of 2004 towrite-off the carrying value of certain Techfi-related intangible assets.

 

We may not realize the anticipatedbenefits from our acquisitions because of the following significant challenges:

 

•                  expected synergybenefits from these acquisitions, such as lower costs or increased revenues, may notbe realized or may be realized more slowly than anticipated, particularlywith regard to costs associated with reductions in headcount and facilities;

•                  potentiallyincompatible cultural differences between the companies;

•                  incorporatingthese companies’ technologies and products into our current and future productlines;

•                  geographicdispersion of operations and the complexities of international operations;

•                  integrating thetechnical teams of these companies with our engineering organizations;

•                  generatingmarket demand for an expanded product line;

•                  integrating theproducts of these companies with our business, because we do not havedistribution, manufacturing, marketing or support experience for theseproducts;

•                  the difficultyof leveraging our combined technologies and capabilities across all productlines and customer bases; and

•                  our inability toretain significant customers or key employees of these entities.

 

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We have incurred and expect to continue toincur significant costs and commit significant management time in integratingthe operations, technology, development programs, products, administrative andinformation systems, customers and personnel of these acquisitions. These costshave been and will likely continue to be substantial and include costs for:

 

•                  integrating andreorganizing operations, including combining teams, facilities and processes invarious functional areas;

•                  identifyingduplicative or redundant resources and facilities, developing plans forresource consolidation and implementing those plans;

•                  fees andexpenses of professionals and consultants involved in completing theintegration process;

•                  settlingexisting liabilities of these companies;

•                  uncoveringthrough our audit process new issues reflected on the companies’ financial statements;

•                  vacating,sub-leasing and closing facilities;

•                  employeerelocation, redeployment or severance costs;

•                  discontinuingcertain products and services;

•                  integratingtechnology and products; and

•                  othertransaction costs associated with the acquisition, including financial advisor,attorney, accountant and exchange agent fees.

 

We may make additional acquisitions ofcomplementary companies, products or technologies in the future. In addition,we periodically evaluate the performance of all our products and services and may sellor discontinue current products and services. Failure to achieve theanticipated benefits of any future acquisition or divestiture could also harmour business, results of operations and cash flows. Furthermore, we may haveto incur debt, write-off investments, infrastructure costs or other assets,incur severance liabilities, write-off impaired goodwill or other intangibleassets or issue equity securities to pay for any future acquisitions. Theissuance of equity securities could dilute our existing stockholders’ownership. Finally, we may not identify suitable businesses to acquire ornegotiate acceptable terms for acquisitions.

 

**Difficulties We May Encounter ManagingChanges in the Size of Our Business Could Adversely Affect Our OperatingResults.**

 

Our business has experienced years of rapidgrowth in 2000 and 2001 through both internal expansion and acquisitions,followed by reduced revenues in 2002 and 2003, and significant downsizingduring 2003 and 2004. These changes have caused and may continue to causea significant strain on our infrastructure, internal systems and managerialresources. Beginning in 2003, we took steps to better align our resources withour operating requirements in order to increase our efficiency. Through thesesteps, we reduced our headcount, closed selected offices and incurred chargesfor employee severance and excess facilities capacity. While we believe thatthese steps help us achieve greater operating efficiency, we have limitedhistory with such measures and the results of these measures are less thanpredictable. Additional restructuring efforts may be required. To manageour business effectively, we must continue to streamline our infrastructure,including operating and administrative systems and controls; and continuemanaging headcount, capital and processes in an efficient manner. We believeworkforce reductions, management changes and facility consolidation createanxiety and uncertainty and may adversely affect employee morale. These measurescould adversely affect our employees that we wish to retain and may alsoadversely affect our ability to hire new personnel. In addition, our revenues may notgrow in alignment with our headcount.

 

**Writing Off Investments Could Harm OurResults of Operations.**

 

We have made investments in privately heldcompanies, which we classify as other assets on our condensed consolidatedbalance sheets. The value of these investments is influenced by many factors,including the operating effectiveness of these companies, the overall health ofthese companies’ industries, the strength of the private equity markets andgeneral market conditions. Due to these and other factors, we have previouslydetermined, and may in the future determine, that the value of these investmentsis impaired, which has caused and would cause us to write down the carryingvalue of these investments, such as the write-downs of our investments of $2.0million and $13.5 million in fiscal 2003 and 2002, respectively. Furthermore,we cannot be sure that future investment, license, fixed asset or other assetwrite-downs will not happen, particularly if the downturn in the financialservices industry and the decline in information technology spending continues.If future write-downs do occur, they could harm our business and results ofoperations.

 

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**Information We Provide to Investors IsAccurate Only as of the Date We Disseminate It.**

 

From time to time, we may publiclydisseminate forward-looking information or guidance in compliance withRegulation FD. This information or guidance represents our outlook only as ofthe date we disseminate it, and we do not undertake to update such informationor guidance.

 

**Our Stock Price Has Fluctuated Significantly.**

 

Like many companies in the technology andemerging growth sector, our stock price may be subject to widefluctuations, particularly during times of high market volatility. If netrevenues or earnings in any quarter fail to meet the investment community’sexpectations, our stock price is likely to decline. In addition, our stockprice is affected by trends in the financial services sector and by broadermarket trends unrelated to our performance. For instance, in the event ofincreased hostilities abroad or additional terrorist attacks, there could beincreased market volatility, which could negatively impact our stock price.

 

**If Our Relationship with FinancialTimes/Interactive Data Is Terminated, Our Business May Be Harmed.**

 

Many of our clients use our proprietaryinterface to electronically retrieve pricing and other data from FinancialTimes/Interactive Data (FTID). FTID pays us a commission based on theirrevenues from providing this data to our clients. Our software products havebeen customized to be compatible with their system and this software would needto be redesigned if their services were unavailable for any reason. Terminationof our agreement with FTID would require at least two years notice by either usor them, or 90 days in the case of material breach. Our revenue could beadversely impacted if our relationship with FTID was terminated or theirservices were unavailable to our clients for any reason.

 

**Potential Changes in Securities Laws andRegulation Governing the Investment Industry’s Use of Soft Dollars May ReduceOur Revenues.**

 

Approximately 600 of our clients utilize softdollars to pay for software products and services, both through ourbroker/dealer subsidiary, Second Street Securities, and through otherindependent broker/dealers. In 2004, the total value of Advent products andservices paid with soft dollars was approximately 9% of our total revenues. In May of2004, the SEC and the National Association of Securities Dealers (the “NASD”)set up a task force to consider soft dollar arrangements in the industry, andto provide the SEC with guidance on improving the transparency of fundtransaction costs and distribution arrangements. Phase I of the task forcefocused on soft dollars and concluded with “The Report of the Mutual Fund TaskForce on Soft Dollars and Portfolio Transaction Costs”, delivered to the SEC inNovember 2004 and recommending the SEC to:

 

****•********                 ********Narrow the definition of “research” to items thatprincipally benefit 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 managedadvisory accounts.****

 

****Phase II of the taskforce focused on distribution arrangements, including 12b-1 fees and revenuesharing, and its recommendations are detailed in “Report of the Mutual FundTask Force – Mutual Fund Distribution”.****

 

****Additionally, in March 2005,the UK Financial Services Agency (the “FSA”) published a consultation paper toaddress lack of transparency and management of conflicts of interest regardingsoft commissions and bundled brokerage arrangements. The FSA focused onlimiting commissions to the purchase of execution and narrowing the definitionof research services along with enhancing disclosures regarding costs ofexecution and research.****

 

****The SEC has yet toissue rules, or even a proposed rule, on soft or bundled commissions as itappears to be taking into consideration a wide range of issues relating tomutual fund regulation. If additional rules are issued that narrow thedefinition of research, which results in our clients being unable to use softdollar arrangements to pay for Advent product and services, our revenues coulddecrease.****

 

**If We Are Unable to Protect Our IntellectualProperty We May Be Subject to Increased Competition that Could SeriouslyHarm Our Business.**

 

Our success depends significantly upon ourproprietary technology. We currently rely on a combination of copyright andtrademark laws, trade secrets, confidentiality procedures and contractualprovisions to protect our proprietary rights. We have registered trademarks formany of our products and services and will continue to evaluate theregistration of additional trademarks as appropriate. We generally enter intoconfidentiality agreements with our employees and with our resellers andcustomers. We seek to protect our software, documentation and other writtenmaterials under trade secret and copyright laws, which afford only limitedprotection. Despite these efforts, it may be possible for unauthorizedthird parties to copy certain portions of our products 

 

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or to reverse engineer or otherwise obtain and use our proprietaryinformation. We do not have any patents, and existing copyright and tradesecret laws afford only limited protection. In addition, we cannot be certainthat 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 proprietarytechnology which may be time-consuming and expensive. Despite our effortsto protect our proprietary rights, unauthorized parties may attempt tocopy aspects of our products or to obtain and use information that we regard asproprietary. In addition, the laws of some foreign countries do not protectproprietary rights to as great an extent as do the laws of the United States.We cannot be sure that our means of protecting our proprietary rights will beadequate or that our competitors will not independently develop similartechnology, duplicate our products or design around any patent that may beissued to us or other intellectual property rights of ours.

 

**If We Infringe the Intellectual PropertyRights of Others, We May Incur Additional Costs or Be Prevented fromSelling Our Products and Services.**

 

We cannot be certain that our products orservices do not infringe the intellectual property rights of others. As aresult, we may be subject to litigation and claims, including claims ofinfringement of patents, copyrights and other intellectual property rights ofthird parties that would be time-consuming and costly to resolve. If wediscovered that our products or services violated the intellectual propertyrights of third parties, we would have to make substantial changes to ourproducts or services or obtain licenses from such third parties. We might notbe able to obtain such licenses on favorable terms or at all, and we may beunable to change our products successfully or in a timely manner. Failure toresolve an infringement matter successfully or in a timely manner, would forceus to incur significant costs, including damages, redevelopment costs,diversion of management’s attention and satisfaction of indemnificationobligations that we have with our clients, as well as prevent us from sellingcertain products or services.

 

**Business Disruptions Could Adversely AffectOur Business.**

 

Our operations are exposed to potentialdisruption by fire, earthquake, power loss, telecommunications failure, andother events beyond our control. Additionally, we are vulnerable tointerruption caused by political and terrorist incidents. For example, ourfacilities in New York were temporarily closed due to the September 11,2001 terrorist attacks. Immediately after the terrorist attacks, our clientswho were located in the World Trade Center area were concentrating on disasterrecovery rather than licensing additional software components, while thegrounding of transportation impeded our ability to deliver professionalservices at client sites. Additionally, during the temporary closure of theU.S. stock markets, our clients did not use our market data services. Ourcorporate headquarters are located in the San Francisco Bay Area, which is aregion with significant seismic activity. Earthquakes such as that experiencedin 1989 could disrupt our business. Such disruptions could affect our abilityto sell and deliver products and services and other critical functions of ourbusiness and could seriously harm us. Further, such attacks could causeinstability in the financial markets upon which we depend.

 

**Undetected Software Errors or Failures Foundin New Products May Result in Loss of or Delay in Market Acceptance of OurProducts that Could Seriously Harm Our Business.**

 

Our products may contain undetectedsoftware errors or failures or scalability limitations at any point in the lifeof the product, but particularly when first introduced or as new versions arereleased. Despite testing by us and by current and potential customers, errors may notbe found in new products until after commencement of commercial shipments,resulting in loss of or a delay in market acceptance, damage to our reputation,customer dissatisfaction and reductions in revenues and margins, any of whichcould seriously harm our business. Additionally, our agreements with customersthat attempt to limit our exposure to liability claims may not beenforceable in jurisdictions where we operate.

 

**Recently Enacted and Proposed Changes inSecurities Laws and Regulations Will Increase Our Costs.**

 

The Sarbanes-Oxley Act (“the Act”) of 2002,which became law in July 2002, required changes in some of our corporategovernance and securities disclosure and/or compliance practices. As part ofthe Act’s requirements, the SEC has enacted new rules on a variety of subjects,and the NASDAQ Stock Market has enacted new corporate governance listingrequirements. These developments have increased our accounting and legalcompliance costs and could also expose us to additional liability if we fail tocomply with these new rules and reporting requirements. In fiscal 2004, weincurred approximately $2.1 million in Sarbanes-Oxley related expenses. Inaddition, such developments may make retention and recruitment ofqualified persons to serve on our board of directors or executive managementmore difficult. We continue to evaluate and monitor regulatory and legislativedevelopments and cannot reliably estimate the timing or magnitude of all costswe may incur as a result of the Act or other related legislation orregulation.

 

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**Our Financial Results Will be Affected byChanges in the Accounting Rules Governing the Recognition of Stock-basedCompensation Expense.**

 

We measure compensation expense for ouremployee stock compensation plans under the intrinsic value method ofaccounting prescribed by APB Opinion No. 25, “Accounting for Stock Issuedto Employees” (“APB 25”). In December 2004, the FASB issued SFAS No. 123R,which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”)and supercedes APB 25. SFAS 123R requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thefinancial statements based on their fair values, beginning with the firstinterim or annual period after June 15, 2005, with early adoptionencouraged. The pro forma disclosures previously permitted under SFAS 123 nolonger will be an alternative to financial statement recognition. In April 2005,the SEC subsequently adopted a new rule delaying compliance with SFAS 123Runtil the beginning of the Company’s next fiscal year, instead of the nextreporting period, that begins after June 15, 2005. Under the SEC’s recentrule, we are required to adopt SFAS 123R in our first quarter of fiscal2006, beginning January 1, 2006. Under SFAS 123R, we must determinethe appropriate fair value model to be used for valuing share-based payments,the amortization method for compensation cost and the transition method to beused at date of adoption. The transition method includes prospective andretroactive adoption methods. Under the retroactive method, prior periods may berestated either as of the beginning of the year of adoption or for all periodspresented. The prospective method requires that compensation expense berecorded for all unvested stock options and restricted stock at the beginningof the first quarter of adoption of SFAS 123R, while the retroactivemethod would record compensation expense for all unvested stock options andrestricted stock beginning with the first period restated. We are evaluatingthe requirements of SFAS 123R and we expect that the adoption ofSFAS 123R will have a material impact on our consolidated results ofoperations and earnings per share. We have not yet determined the method ofadoption or the effect of adopting SFAS 123R, and we have not determinedwhether the adoption will result in amounts that are similar to the current proforma disclosures under SFAS 123.

 

**Security Risks May Harm Our Business.**

 

The secure transmission of confidentialinformation over public networks is essential to commerce and communications,particularly in the market in which Advent operates. Advances in computercapabilities, new discoveries in the field of cryptography or other events ordevelopments could result in compromises or breaches of our security systems.Anyone who circumvents our security measures could misappropriate proprietaryinformation or cause interruptions in our services or operations. In addition,computer viruses 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, which could harmour business, exposing us to a risk of loss, litigation and other possibleliabilities, as well as possibly requiring us to expend significant capital andother resources to protect against the threat of security breaches or toalleviate problems caused by such breaches.

 

**If We Fail to Maintain an Effective System ofInternal Control, We May Not be Able to Accurately Report Our FinancialResults. As a Result, Current and Potential Stockholders Could Lose Confidencein Our Financial Reporting, Which Would Harm Our Business and the Trading Priceof Our Stock.**

 

Effective internal control is necessary for us toprovide reliable financial reports. If we can not provide reliable financialreports, our business and operating results could be harmed. We have in thepast discovered, and may in the future discover, areas of our internalcontrol that need improvement including control deficiencies that may constitutematerial weaknesses. For example, as of December 31, 2004, the Company didnot maintain effective controls over the valuation of its property andequipment accounts, including the related restructuring provision.Specifically, the Company’s impairment analysis of its property and equipmentaccounts related to our decision to vacate a facility failed to identify andinclude all applicable assets. This control deficiency resulted in arestatement of the Company’s financial statements for the quarters ended June 30,2004 and September 30, 2004 and an adjustment to the fourth quarter 2004financial statements.

 

TheCompany also did not maintain effective controls over the accounting for incometaxes, including the determination of income taxes payable, deferred income taxassets and liabilities and the related income tax provision as of December 31,2004. Specifically, the Company did not have controls to identify that deferredincome tax assets and related deferred income tax valuation allowances had beeninappropriately recorded. Further, the Company did not have controls in place toinclude all state income tax liabilities in its income taxes payable account.These control deficiencies resulted in a restatement of the Company’s financialstatements for the year ended December 31, 2003, the quarters ended March 31,2004, June 30, 2004 and September 30, 2004, and an adjustment to thefourth quarter 2004 financial statements.

 

Managementhas determined that these control deficiencies constituted material weaknessesas of December 31, 2004. Consequently, management concluded that the Company’sinternal control over financial reporting was not effective as of December 31,2004 based on criteria set forth by the Committee of Sponsoring Organizationsof the Treadway Commission in 

 

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*Internal Control-IntegratedFramework*. TheCompany has begun executing on a remediation plan, as discussed in “Management’sReport on Internal Control over Financial Reporting” included in Item 8 of ourAnnual Report on Form 10-K for the year ended December 31, 2004 (“200410-K”), and expects to have implemented the new control procedures and to havehired additional tax accounting resources by the end of the third quarter of2005.

 

TheCompany also did not maintain effective controls over its disclosure for stock-basedemployee compensation expense under SFAS 123, as amended by SFAS 148, includingthe calculation of the effect of a stock option exchange program that tookplace on December 4, 2002, and the overall determination of the taxtreatment of the pro forma option expense. This control deficiency will resultin a restatement of the disclosure for stock-based employee compensationexpense for fiscal 2002, 2003 and 2004 included in Note 1 to the previouslyissued financial statements contained in our 2004 10-K together with theassociated disclosure for the first three quarters of fiscal 2003 and 2004.Management has determined that this control deficiency also constituted amaterial weakness as of December 31, 2004, March 31, 2005 and June 30,2005. The Company has added an additional item to its remediation plan toimprove controls over its disclosure of stock-based employee compensationexpense based on this deficiency and expects to have implemented these controlprocedures by the end of fiscal 2005.

 

Anyfailure to implement or maintain the improvements in our internal control overfinancial reporting, or difficulties encountered in the implementation of theseimprovements in our controls, could cause us to fail to meet our reportingobligations. Any failure to improve our internal control to address theseidentified weaknesses could also cause investors to lose confidence in ourreported financial information, which could have a negative impact on thetrading price of our stock.

 

**Item 3. Quantitativeand Qualitative Disclosures About Market Risk**

 

We are exposed to financial market risks,including changes in foreign currency exchange rates and interest rates.Historically, much of our revenues and capital spending was transacted in U.S.dollars. However, since the acquisitions of Advent Denmark, Advent Norway,Advent Sweden, Advent Hellas, Advent Netherlands, and the recent acquisitionsof Advent Europe’s remaining distributors in the United Kingdom andSwitzerland, whose revenues, with the exception of Geneva transactions andcapital spending, are transacted in local country currencies, we have greaterexposure to foreign currency fluctuations. Because the results of operationsfrom these territories are not material to our operating results, ahypothetical 10% change foreign currency exchange rates would not have amaterially adverse effect on our consolidated financial position, results ofoperations or cash flows.

 

Our interest rate risk relates primarily toour investment portfolio, which consisted of $18.0 million in cashequivalents and $110.8 million in marketable securities as of June 30,2005. An immediate sharp increase in interest rates could have a materialadverse affect on the fair value of our investment portfolio. Conversely,immediate sharp declines in interest rates could seriously harm interestearnings of our investment portfolio. We do not currently use derivativefinancial instruments in our investment portfolio, nor hedge for these interestrate exposures.

 

By policy, we limit our exposure tolonger-term investments, and a majority of our investment portfolio at June 30,2005 and December 31, 2004 had maturities of less than one year. As aresult of the relatively short duration of our portfolio, an immediatehypothetical parallel shift to the yield curve of plus 25 basis points (BPS),50 BPS and 100 BPS would result in a reduction of 0.15% ($197,000), 0.31% ($394,000)and 0.61% ($789,000), respectively, in the market value of our investmentportfolio as of June 30, 2005.

 

We have also invested in severalprivately-held companies, most of which can still be considered in the start-upor development stages. These non-marketable investments are classified as otherassets on our balance sheet. Our investments in privately-held companies couldbe affected by an adverse movement in the financial markets for publicly-tradedequity securities, although the impact cannot be directly quantified. Theseinvestments are inherently risky as the market for the technologies or productsthese privately-held companies have under development are typically in theearly stages and may never materialize. The value of these investments isalso influenced by factors including the operating effectiveness of thesecompanies, the overall health of the companies’ industries and the strength ofthe private equity markets. We could lose our entire investment in thesecompanies. At June 30, 2005 our net investments in privately-heldcompanies totaled $8.5 million.

 

**Item 4. Controls andProcedures**

 

**Evaluation of disclosure controls and procedures**

 

We maintain disclosure controls and procedures thatare designed to ensure that information relating to Advent Software, Inc.required to be disclosed in our periodic filings under Securities Exchange Actof 1934, as amended (the “Exchange Act”), is recorded, processed, summarizedand reported within the time periods specified by the SEC and that such 

 

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informationis accumulated and communicated to management, including our Chief ExecutiveOfficer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allowfor timely decisions regarding required disclosure.

 

Subsequent to the period covered by this report, inconnection with our preparation of our consolidated financial statements forthe fiscal year ended December 31, 2005, management of the Companydetermined that the previously issued financial statements contained in theCompany’s Annual Report on Form 10-K/A for the year ended December 31,2004 and Quarterly Reports on Form 10-Q for the quarters ended March 31,2004 and 2005, June 30, 2004 and 2005, and September 30, 2004 and2005, should be restated to correct errors in those financial statements. Thisrestatement is further discussed in Note 2 to the condensed consolidatedfinancial statements included in this Quarterly Report on Form 10-Q/A.

 

OurCEO and CFO had previously concluded that our disclosure controls andprocedures were ineffective as of June 30, 2005. Subsequently, inconnection with the restatement as described above, our management, includingthe CEO and CFO, conducted an evaluation of the effectiveness of our disclosurecontrols and procedures. Based on this evaluation, our CEO and CFO concludedthat our disclosure controls and procedures were ineffective as of June 30,2005 because, in part, of the additional material weaknesses in the Company’sinternal control over financial reporting described below.

 

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. The following material weaknessesin the Company’s internal control over financial reporting have been identifiedsubsequent to the original filing of the Quarterly Report on Form 10-Q forthe quarter ended June 30, 2005:

 

1.               The Company did not maintain effectivecontrols over the accounting for income taxes, including the completeness andaccuracy of its deferred income tax liabilities and related income taxprovision. Specifically, the Company did not maintain effective controls to (i) includethe benefit from the reversal of the deferred tax liability associated with theamortization of intangible assets of its European subsidiaries, or (ii) properlyestimate the reduction in the valuation allowance associated with the deferredtax assets in the United States, in the calculation of its income taxprovision. This control deficiency resulted in the restatement of the Company’sfinancial statements for each of the first three quarters of the 2004 and 2005financial statements, and adjustments to the fourth quarter of 2004 and 2005financial statements. Additionally, this control deficiency could result in amisstatement to the deferred income tax liabilities and income tax provisionaccounts that would result in a material misstatement to annual or interimfinancial statements that would not be prevented or detected. Accordingly,management has determined that this control deficiency constitutes a materialweakness.

 

2.               The Company did not maintain effectivecontrols over the completeness and accuracy of its pro forma stock-basedemployee compensation expense. Specifically, the Company did not maintaineffective controls to ensure that pro forma stock-based employee compensationexpense from certain stock compensation arrangements, including those withnon-standard vesting terms or performance vesting conditions, were expensedover the proper attribution period in conformity with generally acceptedaccounting principles. This control deficiency resulted in the revision of theCompany’s financial statements footnote disclosure for pro forma stock-basedemployee compensation expense for 2003 and 2004 and each of the first three quartersof 2004 and 2005. Additionally, this control deficiency could result in amisstatement of stock-based employee compensation expense that would result ina material misstatement to the annual or interim financial statements thatwould not be prevented or detected. Accordingly, management has determined thatthis control deficiency constitutes a material weakness.

 

Management has identified several steps necessary toaddress the material weaknesses in our internal control over financialreporting described above. Our remediation plan includes:

 

•                  Tocontinue to improve the skills, knowledge and experience available to theCompany for the preparation and review of our tax provision calculations,through potentially hiring additional tax accounting personnel and by utilizingoutside tax consultants. The Company will continue to use experienced qualifiedconsultants to assist management in interpreting and applying income taxaccounting literature and preparing the Company’s annual income tax provision,and will continue to use such consultants in the future to obtain access to asmuch income tax accounting expertise as it needs;

 

•                  Tocontinue to improve the skills, knowledge and experience available to theCompany for the preparation of our stock-based employee compensation expense tobe recognized in the Company’s financial statements upon adoption of SFAS No. 123R,“Share-Based Payment” (“SFAS 123R”) in the first quarter of fiscal 2006 byallocating additional resources or expertise to this process. The Company willallocate additional resources or perform training for 

 

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personnel in areas associated with the stock optiongranting process to increase competency levels of the personnel involved toensure that the calculation of stock-based employee compensation expense fromcertain stock compensation arrangements, including those with non-standardvesting terms or performance vesting conditions, are properly expensed over theproper attribution period; and

 

•                  Toincrease the level of review of i) option grant agreements, including stockcompensation arrangements with non-standard vesting terms or performancevesting conditions, and ii) preparation of our stock-based employeecompensation expense to be recognized in the Company’s financial statementsupon adoption of SFAS 123R in the first quarter of fiscal 2006; throughpotentially hiring additional personnel or utilizing external consultants.Specifically, the Company will potentially use additional resources to ensurethat the calculation of stock-based employee compensation expense is adequatelyprepared and reviewed.

 

**Changes in internal controlover financial reporting**

 

Management has implemented the following changes inour internal control over financial reporting during the second quarter ended June 30,2005 that has materially affected, or is reasonably likely to materiallyaffect, Advent’s internal control over financial reporting. As part of theCompany’s remediation plan to address the material weaknesses related to thevaluation of its property and equipment accounts, including the relatedrestructuring provision, management of the Company has documented the standardsestablished by our principal financial and accounting officer and other senioraccounting personnel for the review, analysis, verification and finaldetermination of the proper accounting treatment for all charges associatedwith the termination or abandonment of building leases, including establishinga checklist of items to be reviewed in connection with such transactions. TheCompany used this process, including the checklist, for reviewing, analyzingand determining the accounting treatment for the restructuring charge recordedin the second quarter of 2005, and, as a result, management considers thismaterial weakness remediated as of June 30, 2005.

 

In addition, management continues to work on itsremediation plan to address the material weaknesses relating to the accountingfor income taxes and pro forma stock-based employee compensation expensedisclosures. During the second quarter of 2005, we established a detailedreview process for our quarterly income tax provision calculation by theprincipal financial and accounting officer and other senior accountingpersonnel. We utilized outside tax consultants in preparing and reviewing,through the new review process, the second quarter income tax provision.Additional tax personnel have been hired and commenced work at the Company in July 2005.

 

**PART II.OTHER INFORMATION**

 

**Item 1.****           Legal Proceedings**

 

On March 8, 2005, certain of the formershareholders of Kinexus and the shareholders’ representative filed suit againstAdvent in the Delaware Chancery Court. The complaint alleges that Adventbreached the Agreement and Plan of Merger dated as of December 31, 2001pursuant to which Advent acquired all of the outstanding shares of Kinexus dueprincipally to the fact that no amount was paid by Advent on an earn-out of upto $115 million. The earn-out, which was payable in cash or stock at the electionof Advent, was based upon Kinexus meeting certain revenue targets in both 2002and 2003. The complaint seeks unspecified compensatory damages, an accountingand restitution for unjust enrichment. Advent advised the shareholders’representative in January 2003 that the earn-out terms had not been met in2002 and accordingly no earn-out was payable for 2002 and would not be payablefor 2003. Advent disputes the plaintiffs’ claims and believes that it hasmeritorious defenses and intends to vigorously defend this action. Managementbelieves that any potential loss associated with this litigation is neitherprobable nor reasonably estimable at this time and accordingly has not accruedany amounts for any potential loss.

 

On May 26, 2005, certain of the formermembers of Advent Outsource Data Management LLC (“plaintiffs”) filed suitagainst Advent in San Francisco Superior Court. The complaint asserts claimsfor breach of contract, breach of the covenant of good faith and fair dealing,fraud, conversion, declaratory relief and accounting relating to allegedbreaches of the Agreement and Plan of Merger dated October 31, 2002 (“Agreement”).Pursuant to the Agreement, in addition to cash compensation, Advent agreed topay plaintiffs an “earn-out” payment based on net revenues from the sales of “RelevantProducts” as defined by the Agreement with a maximum earn-out payment of $5million. Advent has made earn-out payments to plaintiffs totaling approximately$3.9 million. However, plaintiffs claim that the earn-out payment should havebeen the maximum amount of $5 million. Based on these allegations, plaintiffsseek compensatory damages of approximately $1.1 million and other specialdamages including attorneys’ fees. Advent disputes the plaintiffs’ claims andbelieves that it has meritorious defenses and intends to vigorously defend thisaction. 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.

 

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From time to time, we are involved in claims andlegal proceedings that arise in the ordinary course of business activitiesincluding commercial, employment and other matters. Based on currentlyavailable information, management does not believe that the ultimate outcome ofthese unresolved matters, individually and in the aggregate, is likely to havea material adverse effect on the Company’s financial position or results ofoperations. However, litigation is subject to inherent uncertainties and ourview of these matters may change in the future. Were an unfavorableoutcome to occur, there exists the possibility of a material adverse impact onour financial position and results of operations for the period in which theunfavorable outcome occurs, and potentially in future periods.

 

**Item 2.****           Unregistered Sales ofEquity Securities and Use of Proceeds**

 

**IssuerPurchases of Equity Securities**

 

In May 2004, the Board of Directors approveda plan to repurchase up to an additional 1.2 million shares of Advent’s commonstock in the open market. In September 2004, February 2005 and May 2005,the Board authorized extensions 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.

 

The following table provides a month-to-monthsummary of the repurchase activity under the current stock repurchase programduring the three months ended June 30, 2005:

 
| ** **      | ** ** | ** **                          | ** ** | ** **         | ** ** | **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)** | ** ** |
|            |       |                                |       |               |       |                                     |       |
| April 2005 |       | —                              |       | $                  | —     |                                     | 932        |   |
| May 2005   |       | 472                                 |       | 19.21              |       | 1,460                                    |       |
| June 2005  |       | 83                                  |       | 19.99              |       | 1,377                                    |       |
|            |       |                                |       |               |       |                                     |       |
| Total           |       | 555                                 |       | $                  | 19.32      |                                     | 1,377      |   |

 

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(1)          Allshares were repurchased as part of publicly announced plans.

 

**Item 3.****           Defaults Upon SeniorSecurities**

 

None.

 

**Item 4.****           Submission of Mattersto a Vote of Security Holders**

 

The Annual Meeting of Stockholders (the “AnnualMeeting”) of Advent Software, Inc. was held at the principal office of theCompany at 301 Brannan Street, San Francisco, California 94107 on May 18,2005. Stockholders of record at the close of business on March 23, 2005(the “Record Date”) were entitled to notice of and to vote at the meeting. Asof the Record Date, 30,669,985 shares of the Company’s common stock were issuedand outstanding, and a quorum of 29,189,584 shares of common stock was representedin person or by proxy at the Annual Meeting.

 

At the Annual Meeting, four items were votedupon:

 

1.              To elect sixdirectors to serve for the ensuing year and until their successors are dulyelected and qualified.

 

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| ** **            | ** ** | **Number of Shares** | ** ** |
|-----------------------|------------|--------------------------------|------------|
| ** **            | ** ** | **Voted For**             | ** ** | **Withheld** | ** ** |
|                  |       |                           |       |   |   |
| John H.  Scully       |       | 27,883,614                     |       | 1,305,970 |   |
| Stephanie G.  DiMarco |       | 28,609,052                     |       | 580,532 |   |
| Terry H.  Carlitz     |       | 27,651,245                     |       | 1,538,339 |   |
| James P.  Roemer      |       | 27,884,369                     |       | 1,350,215 |   |
| Wendell G.  Van Auken |       | 28,608,012                     |       | 581,572 |   |
| William F.  Zuendt    |       | 28,376,688                     |       | 812,896 |   |

 

2.              To approve the 2005Employee Stock Purchase Plan and reserve 2,000,000 shares of Company commonstock for issuance thereunder.

 
| ** **                         | ** ** | **Number of Shares** | ** ** |
|------------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Broker** | ** ** |
| ** **                         | ** ** | **For**                        | ** ** | **Against** | ** ** | **Abstained** | ** ** | **Non-Votes** | ** ** |
| ** **                         | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| 2005  Employee Stock Purchase Plan |       | 15,624,841                     |       | 10,776,512 |   | 8,972 |   | 2,779,259 |   |

 

3.              To approve the Amendedand Restated 2002 Stock Plan and reserve 1,500,000 shares of Company commonstock for issuance thereunder.

 
| ** **                            | ** ** | **Number of Shares** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **Broker**                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **For**                        | ** ** | **Against** | ** ** | **Abstained** | ** ** | **Non-Votes** | ** ** |
| ** **                            | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Amended and  Restated 2002 Stock Plan |       | 21,562,647                     |       | 4,738,397 |   | 109,281 |   | 2,779,259 |   |

 

4.              To ratify theappointment of PricewaterhouseCoopers LLP as the independent registered publicaccounting firm of the Company for the year ending December 31, 2005.

 
| ** **                                                                                                   | ** ** | **Number of Shares** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                   | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Broker** | ** ** |
| ** **                                                                                                   | ** ** | **For**                        | ** ** | **Against** | ** ** | **Abstained** | ** ** | **Non-Votes** | ** ** |
| Ratification  of appointment of PricewaterhouseCoopers LLP as independent registered public  accounting firm |       | 28,728,178                     |       | 447,885 |   | 13,521 |   | - |   |

 

**Item 5.****           Other Information**

 

None.

 

**Item 6.****           Exhibits**

 

31.1               Certification ofChief Executive Officer under Section 302 of the Sarbanes-Oxley Act of2002

 

31.2               Certification ofChief Financial Officer under Section 302 of the Sarbanes-Oxley Act of2002

 

32.1               Certification ofChief Executive Officer under Section 906 of the Sarbanes-Oxley Act of2002

 

32.2               Certification ofChief Financial Officer under Section 906 of the Sarbanes-Oxley Act of2002

 

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**SIGNATURES**

 

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

 

 
|   |               | ADVENT SOFTWARE, INC. |
|--------|--------------------|----------------------------|
|   |               |                       |   |
|   | Dated: May 1, 2006 | By:                        | /s/ Graham V. Smith |
|   |               |                       | Graham V. Smith |
|   |               |                       | *Executive Vice President, Chief Financial  Officer  and Secretary (Principal Financial and Accounting  Officer)* |

 

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