**UNITED STATES****SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

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

 

**Commission file number:  0-26994**

**ADVENT SOFTWARE, INC.**

(Exact name of registrant as specified in its charter)
| **Delaware**                                                    | ** ** | **94-2901952**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization) | ** ** | (IRS  Employer Identification Number) |
|                                                            | ** ** | ** **                            |
| **301 Brannan Street, San Francisco, California 94107**         |
| (Address  of principal executive offices and zip code)          |
| ** **                                                      |       |                                  |
| **(415) 543-7696**                                         |
| (Registrant’s  telephone number, including area code)      |

 

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

Yes x  No o

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

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

The number of shares of the registrant’s Common Stockoutstanding as of July 31, 2006 was 28,140,110.

 

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**INDEX**
| **PART  I. FINANCIAL INFORMATION** | 3                                                                                           |
|------------------------------------|---------------------------------------------------------------------------------------------|
| Item  1.                           | Financial  Statements                                                                       | 3 |
|                               | Condensed Consolidated Balance  Sheets                                                      | 3 |
|                               | Condensed Consolidated Statements of  Operations                                            | 4 |
|                               | Condensed Consolidated Statements of  Cash Flows                                            | 5 |
|                               | Notes to Condensed Consolidated  Financial Statements                                       | 6 |
| Item 2.                            | Management’s Discussion and Analysis  of Financial Condition and Results of Operations | 19 |
| Item  3.                           | Quantitative  and Qualitative Disclosures About Market Risk                                 | 36 |
| Item  4.                           | Controls  and Procedures                                                                    | 36 |
| **PART  II. OTHER INFORMATION**    |                                                                                        |
| Item  1.                           | Legal  Proceedings                                                                          | 37 |
| Item 1A.                           | Risk  Factors                                                                               | 37 |
| Item  2.                           | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 45 |
| Item  3.                           | Defaults  Upon Senior Securities                                                            | 46 |
| Item  4.                           | Submission  of Matters to a Vote of Security Holders                                        | 46 |
| Item  5.                           | Other  Information                                                                          | 47 |
| Item 6.                            | Exhibits                                                                                    | 47 |
| **Signatures**                     | 48                                                                                          |

 

2

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**PART I.FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**ADVENT SOFTWARE, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Inthousands)**

**(Unaudited)**
| ** **                                      | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|-------------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **2006**         | ** ** | **2005**             | ** ** |
| **ASSETS**                                      |       |             |       |                 |       |
| Current assets:                                 |       |             |       |                 |       |
| Cash and cash  equivalents                      |       | $                | 38,959     |                 | $          | 70,941 |   |
| Marketable  securities                          |       | 58,254           |       | 92,491               |       |
| Accounts  receivable, net                       |       | 32,854           |       | 33,507               |       |
| Prepaid expenses  and other                     |       | 17,759           |       | 12,403               |       |
| Total current  assets                           |       | 147,826          |       | 209,342              |       |
| Property and equipment,  net                    |       | 19,611           |       | 16,009               |       |
| Goodwill                                        |       | 96,438           |       | 94,335               |       |
| Other intangibles, net                          |       | 7,183            |       | 8,758                |       |
| Other assets                                    |       | 12,801           |       | 12,131               |       |
|                                            |       |             |       |                 |       |
| Total assets                                    |       | $                | 283,859    |                 | $          | 340,575 |   |
|                                            |       |             |       |                 |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**  |       |             |       |                 |       |
| Current liabilities:                            |       |             |       |                 |       |
| Accounts payable                                |       | $                | 3,751      |                 | $          | 3,945 |   |
| Accrued  liabilities                            |       | 17,079           |       | 20,637               |       |
| Deferred  revenues                              |       | 72,900           |       | 64,839               |       |
| Income taxes  payable                           |       | 1,230            |       | 2,801                |       |
| Total current  liabilities                      |       | 94,960           |       | 92,222               |       |
| Deferred income taxes                           |       | 822              |       | 1,122                |       |
| Other long-term  liabilities                    |       | 9,396            |       | 5,252                |       |
|                                            |       |             |       |                 |       |
| Total liabilities                               |       | 105,178          |       | 98,596               |       |
|                                            |       |             |       |                 |       |
| Commitments and  contingencies (See Note 11)    |       |             |       |                 |       |
|                                            |       |             |       |                 |       |
| Stockholders’ equity:                      |       |             |       |                 |       |
| Common stock                                    |       | 288              |       | 311                  |       |
| Additional  paid-in capital                     |       | 317,005          |       | 331,530              |       |
| Accumulated  deficit                            |       | (147,116         | )          | (95,828              | )          |
| Accumulated  other comprehensive income         |       | 8,504            |       | 5,966                |       |
| Total  stockholders’ equity                |       | 178,681          |       | 241,979              |       |
|                                            |       |             |       |                 |       |
| Total liabilities and stockholders’ equity |       | $                | 283,859    |                 | $          | 340,575 |   |

 

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

3

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**ADVENT SOFTWARE, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

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

**(Unaudited)**
| ** **                                                     | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                           | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| **Net  revenues:**                                             |       |                                               |       |                                             |       |   |   |   |   |
| License and  development fees                                  |       | $                                                  | 8,353      |                                             | $          | 9,634 |   | $ | 17,979 |   | $ | 19,174 |   |
| Maintenance and  other recurring                               |       | 31,882                                             |       | 26,015                                           |       | 61,586 |   | 51,259 |   |
| Professional  services and other                               |       | 4,125                                              |       | 5,278                                            |       | 8,451 |   | 9,883 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Total net revenues                                             |       | 44,360                                             |       | 40,927                                           |       | 88,016 |   | 80,316 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| **Cost of  revenues:**                                         |       |                                               |       |                                             |       |   |   |   |   |
| License and  development fees                                  |       | 338                                                |       | 384                                              |       | 785 |   | 640 |   |
| Maintenance and  other recurring                               |       | 8,242                                              |       | 7,562                                            |       | 15,941 |   | 14,637 |   |
| Professional  services and other                               |       | 5,150                                              |       | 4,392                                            |       | 10,074 |   | 8,480 |   |
| Amortization of  developed technology                          |       | 263                                                |       | 614                                              |       | 657 |   | 1,228 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Total cost of revenues                                         |       | 13,993                                             |       | 12,952                                           |       | 27,457 |   | 24,985 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Gross margin                                                   |       | 30,367                                             |       | 27,975                                           |       | 60,559 |   | 55,331 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| **Operating  expenses:**                                       |       |                                               |       |                                             |       |   |   |   |   |
| Sales and  marketing                                           |       | 12,209                                             |       | 10,474                                           |       | 24,351 |   | 20,537 |   |
| Product  development                                           |       | 8,815                                              |       | 7,811                                            |       | 16,750 |   | 15,767 |   |
| General and  administrative                                    |       | 7,702                                              |       | 7,808                                            |       | 15,648 |   | 16,161 |   |
| Amortization of  other intangibles                             |       | 1,020                                              |       | 1,020                                            |       | 1,999 |   | 2,067 |   |
| Restructuring  charges                                         |       | 124                                                |       | 1,520                                            |       | 265 |   | 1,603 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Total operating expenses                                       |       | 29,870                                             |       | 28,633                                           |       | 59,013 |   | 56,135 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Income (loss)  from operations                                 |       | 497                                                |       | (658                                             | )          | 1,546 |   | (804 | ) |
| Interest income  and other, net                                |       | 1,051                                              |       | 4,712                                            |       | 2,397 |   | 5,609 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Income before  income taxes                                    |       | 1,548                                              |       | 4,054                                            |       | 3,943 |   | 4,805 |   |
| Provision for  (benefit from) income taxes                     |       | (55                                                | )          | 116                                              |       | (1,062 | ) | 130 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| **Net income**                                                 |       | $                                                  | 1,603      |                                             | $          | 3,938 |   | $ | 5,005 |   | $ | 4,675 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Net income per  share:                                         |       |                                               |       |                                             |       |   |   |   |   |
| Basic                                                          |       | $                                                  | 0.05       |                                             | $          | 0.13 |   | $ | 0.17 |   | $ | 0.15 |   |
| Diluted                                                        |       | $                                                  | 0.05       |                                             | $          | 0.13 |   | $ | 0.16 |   | $ | 0.15 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Weighted average  shares used to compute net income per share: |       |                                               |       |                                             |       |   |   |   |   |
| Basic                                                          |       | 29,847                                             |       | 30,522                                           |       | 30,299 |   | 31,267 |   |
| Diluted                                                        |       | 31,332                                             |       | 31,289                                           |       | 31,589 |   | 31,947 |   |

 

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

4

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**ADVENT SOFTWARE, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Inthousands)**

**(Unaudited)**
| ** **                                                                         | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| **Cash  flows from operating activities:**                                         |       |                                             |       |   |   |
| Net income                                                                         |       | $                                                | 5,005      |   | $ | 4,675 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                             |       |   |   |
| Non-cash stock based compensation                                                  |       | 6,649                                            |       | — |   |
| Depreciation and amortization                                                      |       | 6,903                                            |       | 7,970 |   |
| Loss on dispositions of fixed assets                                               |       | 121                                              |       | 68 |   |
| Provision for (reserves for) doubtful accounts                                     |       | 396                                              |       | (140 | ) |
| Provision for (reserves for) sales returns                                         |       | (1,027                                           | )          | 2,224 |   |
| Deferred income taxes                                                              |       | (296                                             | )          | (243 | ) |
| Loss (gain) on investments                                                         |       | 72                                               |       | (3,449 | ) |
| Other                                                                              |       | (28                                              | )          | 172 |   |
| Changes in operating assets and liabilities:                                       |       |                                             |       |   |   |
| Accounts receivable                                                                |       | 258                                              |       | 2,129 |   |
| Prepaid and other assets                                                           |       | (4,581                                           | )          | 1,072 |   |
| Accounts payable                                                                   |       | (194                                             | )          | (221 | ) |
| Accrued liabilities                                                                |       | (4,416                                           | )          | 1,291 |   |
| Deferred rent                                                                      |       | 4,731                                            |       | (1,004 | ) |
| Deferred revenues                                                                  |       | 9,358                                            |       | 626 |   |
| Income taxes payable                                                               |       | (1,572                                           | )          | (1,688 | ) |
|                                                                               |       |                                             |       |   |   |
| Net cash  provided by operating activities                                         |       | 21,379                                           |       | 13,482 |   |
|                                                                               |       |                                             |       |   |   |
| **Cash  flows from investing activities:**                                         |       |                                             |       |   |   |
| Net cash used in acquisitions                                                      |       | —                                           |       | (1,028 | ) |
| Purchases of property and equipment                                                |       | (7,949                                           | )          | (2,435 | ) |
| Capitalized software development costs                                             |       | (796                                             | )          | (461 | ) |
| Purchases of marketable securities                                                 |       | (35,341                                          | )          | (78,929 | ) |
| Sales and maturities of marketable securities                                      |       | 69,446                                           |       | 111,543 |   |
| Proceeds from sale of other investments                                            |       | —                                           |       | 3,791 |   |
| Change in restricted cash                                                          |       | (1,200                                           | )          | — |   |
|                                                                               |       |                                             |       |   |   |
| Net cash  provided by investing activities                                         |       | 24,160                                           |       | 32,481 |   |
|                                                                               |       |                                             |       |   |   |
| **Cash  flows from financing activities:**                                         |       |                                             |       |   |   |
| Proceeds from issuance of common stock                                             |       | 8,906                                            |       | 4,728 |   |
| Repurchase of common stock                                                         |       | (86,491                                          | )          | (48,751 | ) |
|                                                                               |       |                                             |       |   |   |
| Net cash used in  financing activities                                             |       | (77,585                                          | )          | (44,023 | ) |
|                                                                               |       |                                             |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                      |       | 64                                               |       | (97 | ) |
|                                                                               |       |                                             |       |   |   |
| **Net  change in cash and cash equivalents**                                       |       | (31,982                                          | )          | 1,843 |   |
| **Cash  and cash equivalents at beginning of period**                              |       | 70,941                                           |       | 21,177 |   |
|                                                                               |       |                                             |       |   |   |
| **Cash and cash equivalents at  end of period**                                    |       | $                                                | 38,959     |   | $ | 23,020 |   |

 

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

5

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**ADVENT SOFTWARE, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

**Note 1—Basis ofPresentation**

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

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

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

**Note 2—RecentAccounting Pronouncements**

InJune 2006, the Financial Accounting Standards Board (“FASB”) issued FASBInterpretation No. (“FIN”) 48, *Accounting for Uncertaintyin Income Taxes—An Interpretation of FASB Statement No. 109*, whichprescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax provision taken or expected tobe taken in a tax return. FIN 48 will be effective beginning in the firstquarter of 2007. Advent has not yet evaluated the impact of FIN 48 on theCompany’s condensed consolidated financial statements.

**Note3—Stock-Based Compensation**

**Description of Plans**

**Stock Option Plans**

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

**The Plan.**   On May 18, 2005,the Company’s stockholders approved the amendment and restatement of Advent’s2002 Stock Plan, originally approved by the Board of Directors (the “Board”)and stockholders in February and May, respectively, of 2002. Under the Plan,the Company may grant options to purchase common stock to employees,consultants and directors. Options granted may be incentive stock options ornon-statutory stock options and shall be granted at a price not less than fairmarket value on the date of grant. Fair market value (as defined in the Plan)and the vesting of these options shall be determined by the Board of Directors.The options generally vest over 5 years and expire no later than 10 years fromthe date of grant. Non-employee directors were eligible to receive optiongrants under the Director Plan, which terminated in November 2005. EffectiveApril 1, 2005, each non-employee director became eligible to receive awardsunder the 2002 Plan of (i) an initial option grant of 30,000 shares uponjoining the Board, which shall vest over four years with 25% of such sharesvesting after one year of service and in equal monthly installments over theensuing three years, and (ii) an annual grant of 12,000 shares vesting intwelve equal monthly installments. Unvested options on termination ofemployment are canceled and returned to the Plan.

ThePlan permits the award of restricted stock, restricted stock units (“RSU”),stock appreciation rights (“SAR”), performance shares, and performance unitsunder the Plan. During the first half of 2006, Advent granted stock-settled RSU’sand SAR’s. The RSU’s are awards of restricted stock units that generally vestover four years in two equal installments on the second and fourthanniversaries of the date of grant. Upon vesting, the RSU’s will convert intoan equivalent number of shares of common stock. The value of the RSU’s is basedon the closing market price of the Company’s common stock on the date of grantand is amortized on a straight-line basis over the four-year requisite serviceperiod. A SAR is the right to receive the appreciation in fair market value ofcommon stock between the exercise date and the date of grant and generallyvests over 5

6

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years.  Upon exercise, SAR’s willbe settled in shares of Advent common stock. Unvested RSU’s and SAR’s ontermination of employment are canceled and returned to the Plan.

 

**Non-Statutory Plan.**    InNovember 1998, the Board approved the 1998 Non-statutory Stock Option Plan andreserved 300,000 shares of common stock for issuance thereunder. Under theCompany’s 1998 Non-statutory Plan, Advent may grant options to purchase commonstock to employees and consultants, excluding persons who are executiveofficers and directors. Options granted are non-statutory stock options andshall be granted at a price not less than fair market value on the date ofgrant. Fair market value (as defined in the Non-statutory Plan) and the vestingof these options shall be determined by the Board. The options generally vestover 5 years and expire no later than 10 years from the date of grant. Unvestedoptions on termination of employment are canceled and returned to theNon-statutory Plan.

**Director Plan.**    Advent’s Director Plan which expired on November 16, 2005, provided for thegrant of non-statutory stock options to the Company’s non-employee directors (“outsidedirectors”). Under the Director Plan, each outside director was granted anon-qualified option to purchase 30,000 shares on the latter of the date ofeffectiveness of the Director Plan or the date upon which such person firstbecomes a director. The exercise price of each option is equal to the fairmarket value of Advent common stock as of the date of the grant. In subsequentyears, each outside director was automatically granted an option to purchase6,000 shares on December 1st with an exercise price equal to the fair valueof Advent common stock on that date. Initial options granted under the DirectorPlan vest one-fifth of the shares on the first anniversary date of grant andthe remaining shares vest ratably each month over the ensuing four years.Subsequent option grants vest one-twelfth of the shares four years and onemonth after the date of grant and the remaining shares vest ratably each monthover the next 11-month period. In the event of a change in control of theCompany, all unvested options granted under the Director Plan shall becomefully vested and exercisable. All Director Plan options have a ten-year term.As noted above, effective April 1, 2005, option grants to outside directors areissued under the 2002 Stock Plan.

Asummary of the status of the Company’s stock option activity for the six monthsended June 30, 2006 is as follows:
| ** **                        | ** ** | ** **              | ** ** | **Weighted** | ** ** | **Weighted**              | ** ** | ** **              | ** ** |
|-----------------------------------|------------|-------------------------|------------|--------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | ** **              | ** ** | **Average**  | ** ** | **Average**               | ** ** | **Aggregate**           | ** ** |
| ** **                        | ** ** | **Number of**      | ** ** | **Exercise** | ** ** | **Remaining**             | ** ** | **Intrinsic**           | ** ** |
| ** **                        | ** ** | **Shares**              | ** ** | **Price**    | ** ** | **Contractual Life** | ** ** | **Value**               | ** ** |
| ** **                        | ** ** | **(in thousands)** | ** ** | ** **   | ** ** | **(in years)**       | ** ** | **(in thousands)** | ** ** |
| ** **                        | ** ** | ** **              | ** ** | ** **   | ** ** | ** **                | ** ** | ** **              | ** ** |
| Outstanding at  December 31, 2005 |       | 5,489                   |       | $            | 19.26      |                      |       |                    |       |   |
| Options granted                   |       | 781                     |       | $            | 28.48      |                      |       |                    |       |   |
| Options  exercised                |       | (427                    | )          | $            | 17.51      |                      |       |                    |       |   |
| Options canceled                  |       | (330                    | )          | $            | 34.65      |                      |       |                    |       |   |
| Outstanding at  June 30, 2006     |       | 5,513                   |       | $            | 19.78      |                      | 6.60       |                    | $          | 90,833 |   |
| Exercisable at June 30,  2006     |       | 2,847                   |       | $            | 17.70      |                      | 4.76       |                    | $          | 53,229 |   |

 

Theaggregate intrinsic value is calculated as the difference between the exerciseprice of the underlying awards and the Company’s closing stock price of $36.07as of June 30, 2006 for options that were in-the-money as of that date.

Theweighted average grant date fair value of options, as determined under SFAS123R, granted during the six months ended June 30, 2006 was $13.73 pershare. The total intrinsic value of options exercised during the sixmonths ended June 30, 2006 was $5.9 million. The total cash received fromemployees as a result of employee stock option exercises during the six monthsended June 30, 2006 was approximately $7.5 million.

TheCompany settles employee stock option exercises with newly issued commonshares.

Duringthe six months ended June 30, 2006, the Company granted RSU’s under its 2002Stock Plan. A summary of the status of Advent’s non-vested share activityrelated to RSU’s for the six months ended June 30, 2006 is as follows:

7

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|                                  | ** ** | ** **              | ** ** | **Weighted**        | ** ** |
|----------------------------------|------------|-------------------------|------------|---------------------|------------|
| ** **                       | ** ** | ** **              | ** ** | **Average**         | ** ** |
| ** **                       | ** ** | **Number of**      | ** ** | **Grant Date** | ** ** |
| ** **                       | ** ** | **Shares**              | ** ** | **Fair Value** | ** ** |
| ** **                       | ** ** | **(in thousands)** | ** ** | ** **          | ** ** |
| ** **                       | ** ** | ** **              | ** ** | ** **          | ** ** |
| Non-vested at  December 31, 2005 |       | —                  |       | $                   | —     |   |
|                             |       |                    |       |                |       |
| RSU’s granted               |       | 164                     |       | $                   | 27.79      |   |
| RSU’s canceled              |       | (3                      | )          | $                   | 27.46      |   |
|                             |       |                    |       |                |       |
| Non-vested at June 30,  2006     |       | 161                     |       | $                   | 27.80      |   |

 

Theweighted average grant date fair value was determined based on the closingmarket price of the Company’s common stock on the date of the award. Aggregateintrinsic value of RSU’s outstanding at June 30, 2006 was $5.8 million, usingthe closing price of $36.07 per share as of June 30, 2006.

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

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

OnMay 18, 2005 Advent’s stockholders approved the 2005 ESPP with 2,000,000 sharesof common stock reserved for issuance. During the six months ended June 30,2006, the Company issued 56,422 additional shares under the ESPP. As of June30, 2006, 1,871,561 shares were reserved for future issuance under the 2005ESPP.

**Stock-Based Compensation Expense**

EffectiveJanuary 1, 2006, Advent accounts for its ESPP and stock option (including RSU’sand SAR’s) plans under the provisions of the FASB Statement of FinancialAccounting Standards No. 123—revised 2004 (“SFAS 123R”), “Share-Based Payment”which replaced Statement of Financial Accounting Standards No. 123 (“SFAS123”), “Accounting for Stock-Based Compensation” and supersedes APB Opinion No.25 (“APB 25”). SFAS 123R requires the recognition of the fair value ofstock-based compensation in net income. The estimated fair value of theCompany’s stock-based awards is amortized over the awards’ vesting period on astraight-line basis. The Company elected to adopt the modified prospectivemethod as provided by SFAS 123R, and consequently, previously reported amountshave not been restated. Since the adoption of SFAS 123R, there have been nochanges to the Company’s equity plans or modifications to outstandingstock-based awards.

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

Priorto adoption of SFAS 123R, benefits of tax deductions in excess of recognizedcompensation costs were reported as operating cash flows. SFAS 123R requiresthat they be reported as a financing cash inflow rather than as a reduction oftaxes paid. For the three and six months ended June 30, 2006, there was noexcess tax benefit generated from option exercises.

Theeffect of stock-based compensation expense recognized on Advent’s condensedconsolidated statements of operations for the three and six months ended June30, 2006 was as follows (in thousands, except per share data):

8

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| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | **June 30, 2006**      | ** ** | **June 30, 2006**    | ** ** |
| **Statement  of operations classification**         | ** ** | ** **                       | ** ** | ** **                     | ** ** |
| Cost of license  and development fee revenues       |       | $                                | 3          |                           | $          | 5 |   |
| Cost of  maintenance and other recurring revenues   |       | 268                              |       | 524                            |       |
| Cost of  professional services and other revenues   |       | 216                              |       | 421                            |       |
| Total cost of revenues                              |       | 487                              |       | 950                            |       |
|                                                |       |                             |       |                           |       |
| Sales and  marketing                                |       | 1,242                            |       | 2,385                          |       |
| Product  development                                |       | 781                              |       | 1,525                          |       |
| General and  administrative                         |       | 965                              |       | 1,789                          |       |
| Total operating expenses                            |       | 2,988                            |       | 5,699                          |       |
|                                                |       |                             |       |                           |       |
| Total  stock-based employee compensation expense    |       | $                                | 3,475      |                           | $          | 6,649 |   |
|                                                |       |                             |       |                           |       |
| Tax effect on stock-based employee compensation (1) |       | —                           |       | —                         |       |
|                                                |       |                             |       |                           |       |
| Net effect on  net income                           |       | $                                | 3,475      |                           | $          | 6,649 |   |
|                                                |       |                             |       |                           |       |
| Effect on net  income per share:                    |       |                             |       |                           |       |
| Basic                                               |       | $                                | 0.12       |                           | $          | 0.22 |   |
| Diluted                                             |       | $                                | 0.11       |                           | $          | 0.21 |   |

 

----

(1)   Assumes an effective tax rate of 0% for thethree and six months ended June 30, 2006 due to the full valuation allowanceestablished against the Company’s deferred tax assets during the fourth quarterof 2003.

Approximately $98,000 of stock-based compensation wascapitalized as software development costs during the six months ended June 30,2006. Previously, under SFAS 123, the Company did not capitalizestock-based compensation as part of its pro forma disclosures.

Asof June 30, 2006, total unrecognized compensation cost related to unvestedawards not yet recognized under all equity compensation plans, adjusted forestimated forfeitures, was $26.6 million and is expected to be recognizedthrough the remaining vesting period of each grant. As of June 30, 2006, theweighted average remaining period was 3.4 years.

**Valuation Assumptions**

Adventuses the Black-Scholes option pricing model to determine the fair value ofstock options and employee stock purchase plan shares, consistent with theprovisions of SFAS 123R, SEC Staff Accounting Bulletin No. 107 (“SAB 107”) andthe Company’s prior period pro forma disclosures of net income (loss). The fairvalue of each option grant is estimated on the date of grant using theBlack-Scholes option valuation model and the straight-line attribution approachwith the following assumptions:
| ** **                       | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|----------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                       | ** ** | **2006**                                           | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Stock Awards**                 |       |                                               |       |                                             |       |   |   |   |   |
| Expected  volatility             |       | 43.5% - 46.7                                       | %          | 58.8                                             | %          | 43.5% - 48.5 | % | 61.3 | % |
| Expected life  (in years)        |       | 5                                                  |       | 5                                                |       | 5 |   | 5 |   |
| Risk-free interest  rate         |       | 5.0% - 5.1                                         | %          | 3.9                                              | %          | 4.3% - 5.1 | % | 3.9 | % |
| Expected  dividends              |       | None                                               |       | None                                             |       | None |   | None |   |
|                             |       |                                               |       |                                             |       |   |   |   |   |
| **Employee Stock Purchase Plan** |       |                                               |       |                                             |       |   |   |   |   |
| Expected  volatility             |       | 36.5                                               | %          | 27.8                                             | %          | 36.5 | % | 27.8 | % |
| Expected life  (in months)       |       | 6                                                  |       | 6                                                |       | 6 |   | 6 |   |
| Risk-free  interest rate         |       | 4.2                                                | %          | 2.8                                              | %          | 4.2 | % | 2.8 | % |
| Expected dividends               |       | None                                               |       | None                                             |       | None |   | None |   |

 

TheESPP periods begin every six months in the second and fourth quarter of eachyear.

Priorto the adoption of SFAS 123R, the Company used historical volatility inderiving its expected volatility assumption. The expected stock pricevolatility for the three and six months ended June 30, 2006 was determinedbased on an equally weighted average of historical and implied volatility ofthe Company’s common stock. Advent determined that a blend

9

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of impliedvolatility and historical volatility is more reflective of the marketconditions and a better indicator of expected volatility than using purelyhistorical volatility. The expected life for the three and six months endedJune 30, 2006 was determined based on historical experience of similar awards,giving consideration to the contractual terms of the stock-based awards,vesting schedules and expectations of future employee behavior. The risk-freeinterest rate is based on the U.S. Treasury yield curve in effect at the timeof grant for periods corresponding with the expected life of the option. Thedividend yield assumption is based on the Company’s history of not payingdividends and the resultant future expectation of dividend payouts.

**FiscalPeriods Prior to the Adoption of SFAS 123R**

Priorto the adoption of SFAS 123R, Advent used the intrinsic value-based method, asprescribed in APB 25, to account for all stock-based compensation plans, andthe Company had adopted the disclosure-only alternative of SFAS 123,“Accounting for Stock-Based Compensation,” as amended by SFAS No. 148,“Accounting for Stock-Based Compensation — Transition and Disclosure.” Noemployee stock-based compensation was reflected in net income for the three andsix months ended June 30, 2005, as the related options granted had an exerciseprice equal to the fair market value of the underlying common stock on the dateof grant and the Company had no SAR’s or RSU’s outstanding as of June 30, 2005.

Thepro forma information for the three and six months ended June 30, 2005 was asfollows (in thousands, except per share data):
| ** **                                                                                                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                 | ** ** | **June 30, 2005**      | ** ** | **June 30, 2005**    | ** ** |
| ** **                                                                                                                 | ** ** | ** **                       | ** ** | ** **                     | ** ** |
| Net income - as  reported                                                                                                  |       | $                                | 3,938      |                           | $          | 4,675 |   |
| Total  stock-based employee compensation expense determined under fair value based  method for all options, net of tax (1) |       | (4,350                           | )          | (8,411                         | )          |
|                                                                                                                       |       |                             |       |                           |       |
| Net loss - pro forma                                                                                                       |       | $                                | (412       | )                              | $          | (3,736 | ) |
|                                                                                                                       |       |                             |       |                           |       |
| Net income  (loss) per share:                                                                                              |       |                             |       |                           |       |
| Basic and  diluted - as reported                                                                                           |       | $                                | 0.13       |                           | $          | 0.15 |   |
| Basic and diluted - pro  forma                                                                                             |       | $                                | (0.01      | )                              | $          | (0.12 | ) |

 

----

(1)   Assumes an effective tax rate of 0% for thethree and six months ended June 30, 2005 due to the full valuation allowanceestablished against the Company’s deferred tax assets during the fourth quarterof 2003.

**Note 4—Net Income Per Share**

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

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

10

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| ** **                                                                                                                                 | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                                 | ** ** | **2006**                                           | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                                                                       |       |                                               |       |                                             |       |   |   |   |   |
| **Numerator:**                                                                                                                             |       |                                               |       |                                             |       |   |   |   |   |
| Net income                                                                                                                                 |       | $                                                  | 1,603      |                                             | $          | 3,938 |   | $ | 5,005 |   | $ | 4,675 |   |
|                                                                                                                                       |       |                                               |       |                                             |       |   |   |   |   |
| **Denominator:**                                                                                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Denominator for  basic net income per share- weighted average shares outstanding                                                           |       | 29,847                                             |       | 30,522                                           |       | 30,299 |   | 31,267 |   |
|                                                                                                                                       |       |                                               |       |                                             |       |   |   |   |   |
| Dilutive common  equivalent shares:                                                                                                        |       |                                               |       |                                             |       |   |   |   |   |
| Employee stock options and other                                                                                                           |       | 1,485                                              |       | 767                                              |       | 1,290 |   | 680 |   |
|                                                                                                                                       |       |                                               |       |                                             |       |   |   |   |   |
| Denominator for  diluted net income per share- weighted average shares outstanding, assuming exercise  of potential dilutive common shares |       | 31,332                                             |       | 31,289                                           |       | 31,589 |   | 31,947 |   |
|                                                                                                                                       |       |                                               |       |                                             |       |   |   |   |   |
| Basic net income  per share                                                                                                                |       | $                                                  | 0.05       |                                             | $          | 0.13 |   | $ | 0.17 |   | $ | 0.15 |   |
| Diluted net income per  share                                                                                                              |       | $                                                  | 0.05       |                                             | $          | 0.13 |   | $ | 0.16 |   | $ | 0.15 |   |

 

Weightedaverage stock options, RSU’s, SAR’s and warrants of approximately 1.2 millionand 1.1 million for the three and six months ended June 30, 2006, respectively,were excluded from the calculation of diluted net income per share becausetheir inclusion would have been anti-dilutive. Similarly, weighted averagestock options and warrants of approximately 1.4 million and 3.0 million for thethree and six months ended June 30, 2005, respectively, were excluded from the calculationof diluted net income per share.

**Note 5—Goodwill**

The changes in the carrying value of goodwill during thesix months ended June 30, 2006 were as follows (in thousands):

|                               | ** ** | **Goodwill** | ** ** |
|-------------------------------|------------|--------------|------------|
| ** **                    | ** ** | ** **   | ** ** |
| Balance at  December 31, 2005 |       | $            | 94,335     |   |
| Translation  adjustments      |       | 2,103        |       |
|                          |       |         |       |
| Balance at June  30, 2006     |       | $            | 96,438     |   |

 

In accordance with SFASNo. 142, “Goodwill and Other Intangible Assets,” Advent reviews goodwill forimpairment annually during the fourth quarter of the fiscal year and morefrequently if an event or circumstance indicates that an impairment loss hasoccurred. During the fourth quarter of 2005, Advent completed the annualimpairment test which indicated that there was no impairment. There were noevents or changes in circumstances during the six months ended June 30, 2006which triggered an impairment review. Foreign currency translation adjustmentstotaling $2.1 million reflect the weakening of the U.S. dollar versus Europeancurrencies during the six months ended June 30, 2006.

 

**Note 6—Other Intangibles, net**

The following is a summary of other intangibles as ofJune 30, 2006 (in thousands):

11

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|                            | ** ** | **Average**      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                 | ** ** | **Amortization** | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
| ** **                 | ** ** | **Period**       | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                 | ** ** | **(Years)**      | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
| ** **                 | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Purchased  technologies    |       | 4.9              |       | $                | 12,726     |             | $          | (12,529          | )          | $ | 197 |   |
| Product  development costs |       | 3.0              |       | 2,405            |       | (440             | )          | 1,965            |       |
| Customer  relationships    |       | 5.6              |       | 21,500           |       | (16,543          | )          | 4,957            |       |
| Other  intangibles         |       | 2.5              |       | 307              |       | (243             | )          | 64               |       |
| Balance at June  30, 2006  |       |             |       | $                | 36,938     |             | $          | (29,755          | )          | $ | 7,183 |   |

 

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

 

The changes in the carryingvalue of other intangibles during the six months ended June 30, 2006 were asfollows (in thousands):
|                               | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
|-------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                    | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                    | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
|                          |       |             |       |             |       |             |       |
| Balance at  December 31, 2005 |       | $                | 35,075     |             | $          | (26,317          | )          | $ | 8,758 |   |
| Additions                     |       | 796              |       | —           |       | 796              |       |
| Amortization                  |       | —           |       | (2,648           | )          | (2,648           | )          |
| Stock-based  compensation     |       | 98               |       | (8               | )          | 90               |       |
| Translation  adjustments      |       | 969              |       | (782             | )          | 187              |       |
| Balance at June  30, 2006     |       | $                | 36,938     |             | $          | (29,755          | )          | $ | 7,183 |   |

 

Amortization of other intangibles, including theamortization of capitalized stock-based compensation, was as follows for theperiods presented (in thousands):
| ** **                  | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|-----------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                           | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                  | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Developed  technology       |       | $                                                  | 263        |                                             | $          | 614 |   | $ | 657 |   | $ | 1,228 |   |
| Other  intangibles          |       | 1,020                                              |       | 1,020                                            |       | 1,999 |   | 2,067 |   |
| Total  amortization expense |       | $                                                  | 1,283      |                                             | $          | 1,634 |   | $ | 2,656 |   | $ | 3,295 |   |

 

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

12

----

 
|                                    | ** ** | **Six**               | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------|------------|-----------------------|------------|--------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | **Months Ended** | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **December 31**  | ** ** | **Years Ended December 31** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **2006**              | ** ** | **2007**                                   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **Total**  | ** ** |
| Estimated future  amortization of: | ** ** | ** **            | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Developed  technology              |       | $                     | 511        |                                       | $          | 846        |       | $          | 679        |       | $          | 126 |   | $ | 2,162 |   |
| Other  intangibles                 |       | 1,180                 |       | 2,302                                      |       | 1,116      |       | 423        |       | 5,021      |       |
| Total                              |       | $                     | 1,691      |                                       | $          | 3,148      |       | $          | 1,795      |       | $          | 549 |   | $ | 7,183 |   |

 

**Note 7—Balance Sheet Detail**

Thefollowing is a summary of other assets (in thousands):
|                                                                       | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|-----------------------------------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                                            | ** ** | **2006**         | ** ** | **2005**             | ** ** |
|                                                                  |       |             |       |                 |       |
| Long-term  investments, gross                                         |       | $                | 13,800     |                 | $          | 13,800 |   |
| Accumulated  write-downs due to other-than-temporary decline in value |       | (5,341           | )          | (5,341               | )          |
| Long-term  investments, net                                           |       | 8,459            |       | 8,459                |       |
| Long-term  prepaid assets                                             |       | 1,803            |       | 2,377                |       |
| Restricted cash                                                       |       | 1,200            |       | —               |       |
| Deposits                                                              |       | 1,339            |       | 1,295                |       |
| Total other  assets                                                   |       | $                | 12,801     |                 | $          | 12,131 |   |

 

Long-terminvestments include equity investments in several privately held companies,most of which can still be considered in the start-up or development stages.These equity investments are carried at the lower of cost or fair value at June30, 2006 and December 31, 2005. As of June 30, 2006, other assets includedrestricted cash of $1.2 million to secure a bank line of credit of $1.2 millionassociated with the Company’s entry into a definitive lease agreement with TodaDevelopment, Inc. (“Toda”) in January 2006 for its future headquarters facilitylocated at 600 Townsend Street in San Francisco, California. In the eventAdvent defaults under the terms of this lease agreement, the letter of creditof $1.2 million may be drawn upon by Toda.

Thefollowing is a summary of accrued liabilities (in thousands):
|                                | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|--------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2006**         | ** ** | **2005**             | ** ** |
|                           |       |             |       |                 |       |
| Salaries and  benefits payable |       | $                | 9,000      |                 | $          | 10,368 |   |
| Accrued  restructuring         |       | 853              |       | 1,422                |       |
| Other accrued  liabilities     |       | 7,226            |       | 8,847                |       |
| Total accrued  liabilities     |       | $                | 17,079     |                 | $          | 20,637 |   |

 

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

Thefollowing is a summary of other long-term liabilities (in thousands):
|                                           | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|-------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                | ** ** | **2006**         | ** ** | **2005**             | ** ** |
|                                      |       |             |       |                 |       |
| Deferred rent                             |       | $                | 5,839      |                 | $          | 1,456 |   |
| Accrued  restructuring, long-term portion |       | 2,896            |       | 3,138                |       |
| Other                                     |       | 661              |       | 658                  |       |
| Total other  long-term liabilities        |       | $                | 9,396      |                 | $          | 5,252 |   |

 

13

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**Note 8—Comprehensive Income (Loss)**

 

The components ofcomprehensive income (loss) were as follows for the periods presented (inthousands):

 
| ** **                                               | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                               | ** ** | **2006**                                           | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                     |       |                                               |       |                                             |       |   |   |   |   |
| Net income                                               |       | $                                                  | 1,603      |                                             | $          | 3,938 |   | $ | 5,005 |   | $ | 4,675 |   |
| Unrealized gain  (loss) on available-for-sale securities |       | 141                                                |       | 230                                              |       | 190 |   | (90 | ) |
| Foreign currency  translation adjustment                 |       | 1,350                                              |       | (2,677                                           | )          | 2,348 |   | (4,939 | ) |
| Total  comprehensive income (loss)                       |       | $                                                  | 3,094      |                                             | $          | 1,491 |   | $ | 7,543 |   | $ | (354 | ) |

 

The components of accumulated other comprehensiveincome were as follows (in thousands):
|                                                                   | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|-------------------------------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                                        | ** ** | **2006**         | ** ** | **2005**             | ** ** |
|                                                              |       |             |       |                 |       |
| Accumulated net  unrealized loss on available-for-sale securities |       | $                | (396       | )                    | $          | (586 | ) |
| Accumulated  foreign currency translation adjustments             |       | 8,900            |       | 6,552                |       |
| Total  accumulated other comprehensive income                     |       | $                | 8,504      |                 | $          | 5,966 |   |

 

**Note 9—Restructuring Charges**

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

Therestructuring charges recorded for the three and six months ended June 30, 2006and 2005 were as follows (in thousands):
| ** **                   | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                           | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|                         |       |                                               |       |                                             |       |   |   |   |   |
| Facility exit  costs         |       | $                                                  | 124        |                                             | $          | 1,525 |   | $ | 265 |   | $ | 1,608 |   |
| Severance and  benefits      |       | —                                             |       | (5                                               | )          | — |   | (5 | ) |
| Total  restructuring charges |       | $                                                  | 124        |                                             | $          | 1,520 |   | $ | 265 |   | $ | 1,603 |   |

 

##### During the three months ended June 30, 2006,Advent recorded a restructuring charge of $124,000 which related to the coststo exit a portion of Advent’s facility in New Rochelle, New York, and Advent’sentire facility in Summit, New Jersey as well as the fair value amortization ofprior period obligations. During the three months ended March 31,2006, Advent recorded a net restructuring charge of $141,000 primarily toadjust the original estimates of facility exit costs for facilities in SanFrancisco, California and New York, New York.

##### During the three months ended June 30, 2005,Advent recorded a restructuring charge of $1.5 million primarily consisting offacility and exit costs related to sub-leasing one floor of its office space inNew York, New York. During the three months ended March 31,2005, Advent recorded a net restructuring charge of $83,000 primarily to adjustits original estimates for vacated facilities in Concord, California.

##### 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, 2006 (inthousands):

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|                                                         | ** ** | **Facility Exit** | ** ** | **Severance and** | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------|------------|
| ** **                                              | ** ** | **Costs**              | ** ** | **Benefits**           | ** ** | **Total**  | ** ** |
|                                                    |       |                   |       |                   |       |       |       |
| Balance of  restructuring accrual at December 31, 2005  |       | $                      | 4,553      |                   | $          | 7          |       | $ | 4,560 |   |
| Cash payments                                           |       | (1,082                 | )          | —                 |       | (1,082     | )          |
| Reversal of  deferred rent related to facilities exited |       | 6                      |       | —                 |       | 6          |       |
| Restructuring  charges                                  |       | 95                     |       | —                 |       | 95         |       |
| Adjustment of  prior restructuring costs                |       | 173                    |       | (3                     | )          | 170        |       |
| Balance of  restructuring accrual at June 30, 2006      |       | $                      | 3,745      |                   | $          | 4          |       | $ | 3,749 |   |

 

Of the remaining restructuring accrual of $3.7 million atJune 30, 2006, $0.8 million and $2.9 million are included in accruedliabilities and other long-term liabilities, respectively, on the accompanyingcondensed consolidated balance sheet. The remaining excess facility costs of$3.7 million are stated at estimated fair value, net of estimated subleaseincome of approximately $7.9 million. Advent expects to pay the remainingobligations associated with the vacated facilities over the remaining leaseterms, which expire on various dates through 2012. Advent expects to pay theremaining severance and benefits in 2006.

**Note10—Common Stock Repurchase Programs**

##### Advent’s Board has approvedcommon stock repurchase programs authorizing management to repurchase shares ofthe Company’s common stock. The timing and actual number of shares subject torepurchase are at the discretion of Advent’s management and are contingent on anumber of factors, including the price of Advent’s stock, corporate andregulatory requirements, alternative investment opportunities and other marketconditions. The stock repurchase programs specify a maximum number of sharessubject to repurchase, do not have an expiration date and may be limited orterminated at any time without prior notice. Repurchased shares would bereturned to the status of authorized and un-issued shares of common stock. Thepurchases are funded from available working capital.

##### In May 2004, the Boardauthorized the repurchase of 1.2 million shares of outstanding common stock. InSeptember 2004, February 2005 and May 2005, the Board authorized an extensionof this stock repurchase program to cover the repurchase of an additional 0.8million, 1.8 million and 1.0 million shares of outstanding common stock,respectively. In March 2006, Advent completed this common stock repurchaseprogram. During the first quarter of 2006, Advent repurchased 1.2 millionshares of common stock under this repurchase program at a total cost of $33.7million and an average price of $27.60 per share. Since the inception of thisprogram in May 2004 through March 2006, Advent repurchased 4.8 million sharesfor a total cost of $98.2 million and an average price of $20.43 per share.

##### On April 25, 2006, Advent’s Board approved acommon stock repurchase program authorizing the repurchase of up to 2.3 millionshares of the Company’s common stock. Advent repurchased approximately 0.6million shares, from April 25, 2006 through May 31, 2006. In May 2006, Advententered into a pre-arranged Rule 10b5-1 trading plan (“Trading Plan”) with abroker to facilitate the repurchase of its shares of common stock, pursuant tothe requirements of and in conformity with the provisions of Rule 10b5-1 underthe Securities Exchange Act of 1934, as amended. Under the Trading Plan, Adventmay continue to repurchase shares without suspension for trading blackoutperiods. The shares to be repurchased under the Trading Plan would be part ofthe stock repurchase program approved in April 2006. The Trading Plan commencedon June 1, 2006 and purchases have been made by a broker, based upon theguidelines and parameters of the Trading Plan. During the second quarter of2006, Advent repurchased an aggregate 1.6 million shares of common stock underthe repurchase program authorized on April 25, 2006 for a total cash outlay of$52.8 million and an average price of $33.07 per share.

##### The common stock repurchase program continuedinto the third quarter of 2006 and all 2.3 million shares approved forrepurchase by the Board in April 2006 have been repurchased before the end ofJuly 2006. Since the inception of this program in April 2006 through July 2006,Advent repurchased 2.3 million shares for a total cost of $75.0 million and anaverage price of $32.60.

##### On July 26, 2006, Advent’s Board authorizedthe repurchase of an additional 1.5 million shares of the Company’s outstandingcommon stock. See Note 14, “Subsequent Event”, for further information.

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

*LeaseObligations*

Adventleases office space and equipment under non-cancelable operating leaseagreements, which expire at various dates through May 2012. Certain operatingleases contain escalation provisions for adjustments in the consumer priceindex. Advent is generally responsible for maintenance, insurance, and propertytaxes for these facilities.

InJanuary 2006, Advent entered into a definitive lease agreement with Todawhereby the Company will lease approximately 105,000 square feet of officespace at 600 Townsend Street in San Francisco, California. The Company’s cashobligation under this agreement is approximately $20 million, payable over theten-year term of the lease. Additionally, Advent currently anticipatesapproximately $11 million of leasehold improvements, of which $4.2 million willbe funded by Toda and the remainder will be paid by Advent. Advent anticipatesrelocating from its current headquarters to the 600 Townsend facility during the fourth quarter of fiscal 2006.

Asof June 30, 2006, Advent’s remaining operating lease commitments through 2016,including those related to the 600 Townsend Street facility, were approximately$40.6 million, net of future minimum rental receipts of $9.3 million to bereceived under non-cancelable sub-leases.

*Indemnifications*

Aspermitted or required under Delaware law and to the maximum extent allowableunder that law, Advent has certain obligations to indemnify its current andformer officers and directors for certain events or occurrences while theofficer or director is, or was serving, at Advent’s request in such capacity.These indemnification obligations are valid as long as the director or officeracted in good faith and in a manner the person reasonably believed to be in ornot opposed to the best interests of the corporation, and, with respect to anycriminal action or proceeding, had no reasonable cause to believe his or herconduct was unlawful. The maximum potential amount of future payments Adventcould be required to make under these indemnification obligations is unlimited;however, Advent has a director and officer insurance policy that mitigates Advent’sexposure and enables Advent to recover a portion of any future amounts paid.The Company believes the estimated fair value of these indemnificationobligations is minimal.

*LegalContingencies*

Fromtime to time, Advent is involved in claims and legal proceedings that arise inthe ordinary course of business. Based on currently available information,management does not believe that the ultimate outcome of these unresolvedmatters, individually and in the aggregate, is likely to have a materialadverse effect on Advent’s financial position or results of operations.However, litigation is subject to inherent uncertainties and Advent’s view ofthese matters may change in the future. Were an unfavorable outcome to occur,there exists the possibility of a material adverse impact on Advent’s financialposition and results of operations for the period in which the unfavorableoutcome occurs, and potentially in future periods.

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

InSeptember 2003, NetJets Aviation, Inc. (formerly known as Executive JetAviation, Inc.) filed suit against B. Douglas Morriss, Rueben Morriss andBarbara Morriss in the Circuit Court of the County of Saint Louis, Missouri fortheir alleged failure to pay for their use of private jet aircraft leased andmanaged by plaintiffs. In April 2005, plaintiffs amended their complaint tojoin approximately 15 additional entities allegedly controlled by B. Morriss asdefendants in the suit, including Kinexus Corporation, which was acquired byAdvent Software, Inc. after the alleged conduct in plaintiffs’ lawsuit. Thecomplaint alleges breach of contract and seeks approximately $1.1 million indamages, as well as interest and attorneys’ fees. Kinexus was not servedwith the complaint and became aware of the lawsuit through co-defendant’scounsel in November 2005. Kinexus entered an appearance at a schedulingconference for the case in April 2006 and filed an answer to the complaint onthe same day, disputing the plaintiff’s claims against Kinexus. Kinexusbelieves that it has meritorious defenses and intends to vigorously defend thissuit. 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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OnJuly 11, 2006, a former independent consultant filed suit against Advent in theSupreme Court of the State of New York. The complaint alleges that Advent failed to pay plaintiff commissionsdue for his services as a consultant to Advent. The plaintiff is seeking approximately $101,000 in commissions and $2.0million in unspecified consequential damages, as well as interest and attorney’sfees.  Advent disputes the plaintiffs’claims and believes that it has meritorious defenses and intends to vigorouslydefend this action.  Management believesthat any potential loss associated with this litigation is neither probable norreasonably estimable at this time and accordingly has not accrued any amountsfor any potential loss.

**Note12—Segment and Geographic Information**

*Descriptionof Segments*

SFASNo. 131, “Disclosures about Segments of an Enterprise and Related Information,”established standards for reporting information about operating segments inannual financial statements and requires disclosure of selected informationabout operating segments in interim reports. It also established standards forrelated disclosures about products and services, major customers and geographicareas. Operating segments are defined as components of an enterprise about whichseparate financial information is available that is evaluated regularly by thechief operating decision maker (“CODM”), or decision making group, in decidinghow to allocate resources and in assessing performance. Advent’s CODM is theChief Executive Officer.

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

AdventInvestment Management is the Company’s core business and derives revenues fromthe development, 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.

*SegmentData*

Theresults of the operating segments are derived directly from Advent’s internalmanagement reporting system. The accounting policies used to derive operatingsegment results are substantially the same as those used by the consolidatedcompany. Management measures the performance of each operating segment based onseveral metrics, including income (loss) from operations. These results areused, in part, to evaluate the performance of, and to assign resources to, eachof the operating segments. Certain operating expenses, including stock-basedcompensation expense, and amortization of developed technology and otherintangibles, which Advent manages separately at the corporate level, are notallocated to the operating segments. Advent does not separately accumulate andreview asset information by segment.

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

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| ** **                   | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                           | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net revenues:                |       |                                               |       |                                             |       |   |   |   |   |
| Advent Investment Management |       | $                                                  | 39,005     |                                             | $          | 35,433 |   | $ | 77,598 |   | $ | 69,556 |   |
| MicroEdge                    |       | 4,849                                              |       | 4,843                                            |       | 9,701 |   | 9,502 |   |
| Other                        |       | 506                                                |       | 651                                              |       | 717 |   | 1,258 |   |
| Total net  revenues          |       | $                                                  | 44,360     |                                             | $          | 40,927 |   | $ | 88,016 |   | $ | 80,316 |   |

 
| ** **                                           | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                           | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Income (loss)  from operations:                      |       |                                               |       |                                             |       |   |   |   |   |
| Advent Investment Management                         |       | $                                                  | 4,560      |                                             | $          | 313 |   | $ | 9,673 |   | $ | 1,455 |   |
| MicroEdge                                            |       | 1,172                                              |       | 577                                              |       | 2,123 |   | 950 |   |
| Other                                                |       | (477                                               | )          | 86                                               |       | (945 | ) | 86 |   |
| Unallocated  corporate operating costs and expenses: |       |                                               |       |                                             |       |   |   |   |   |
| Stock-based compensation                             |       | (3,475                                             | )          | —                                           |       | (6,649 | ) | — |   |
| Amortization of developed technology                 |       | (263                                               | )          | (614                                             | )          | (657 | ) | (1,228 | ) |
| Amortization of other intangibles                    |       | (1,020                                             | )          | (1,020                                           | )          | (1,999 | ) | (2,067 | ) |
| Total income  (loss) from operations                 |       | $                                                  | 497        |                                             | $          | (658 | ) | $ | 1,546 |   | $ | (804 | ) |

 

*MajorCustomers*

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

**Note 13—Related Party Transactions**

Asof June 30, 2005, Citigroup, Inc. (“Citigroup”) owned more than 10% of thevoting stock of Advent. Effective December 1, 2005, Citigroup sold the AssetManagement division of Citigroup Global Markets Inc. to Legg Mason, Inc. (“LeggMason”). As of December 31, 2005, Citigroup owned less than 5% of the votingstock of Advent. Advent recognized approximately $0.5 million and $1.0 millionof revenue from Citigroup during the three and six months ended June 30, 2005,respectively. The Company’s accounts receivable from Citigroup was $307,000 asof December 31, 2005. As of December 31, 2005 and June 30, 2006, Legg Masonowned approximately 15% of the voting stock of Advent. Advent recognizedapproximately $0.1 million and $0.2 million of revenue from Legg Mason duringthe three and six months ended June 30, 2006 respectively. The Company’saccounts receivable from Legg Mason was $81,000 and $100,000 as of June 30,2006 and December 31, 2005.

Adventacts as trustee for the Company’s short-term disability plan—Advent SoftwareCalifornia Voluntary Disability Plan (“VDI”). Employee withholdings were$80,000 and $204,000 during the three and six months ended June 30, 2006,respectively. Disbursements were $71,000 and $139,000 during the three and sixmonths ended June 30, 2006, respectively. Cash held by Advent related to theVDI was $374,000 and $309,000 as of June 30, 2006 and December 31, 2005,respectively, and are included in “other assets” on the condensed consolidatedbalance sheets.

**Note 14—Subsequent Event**

OnJuly 26, 2006, Advent’s Board approved an additional common stock repurchaseprogram authorizing the repurchase of up to 1.5 million shares of the Company’scommon stock. To facilitate the stock repurchase program, stock repurchases maybe made through open market or privately negotiated transactions at times andin such amounts as management deems appropriate. The timing and actual numberof shares repurchased will depend on a variety of factors including price,corporate and regulatory requirements, alternative investment opportunities andother market conditions. The stock repurchase program does not have anexpiration date and may be limited or terminated at any time without priornotice. Repurchased shares would be returned to the status of authorized andun-issued shares of common stock.

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

**SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS**

Youshould read the following discussion in conjunction with our consolidatedfinancial statements and related notes. The following discussion containsforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933 as amended and Section 21E of the Securities Exchange Act of 1934as amended, including, but not limited to statements referencing ourexpectations relating to future revenues and expenses. Forward-lookingstatements can be identified by the use of terminology such as “may”, “will”,“should”, “expect”, “plan” “anticipate”, “believe”, “estimate”, “predict”,“potential”, “continue” or other similar terms and the negative of such termsregarding beliefs, plans, expectations or intentions regarding the future. Forward-lookingstatements include, among others: statements regarding growth in the investmentmanagement market and opportunities for us related thereto; future expansion,acquisition, divestment of or investment in other businesses; projections ofrevenues, future cost and expense levels; expected timing and amount ofamortization expenses related to past acquisitions; the adequacy of resourcesto meet future cash requirements; estimates or predictions of actions bycustomers, suppliers, competitors or regulatory authorities; future clientwins; future hiring; and, future product introductions. Such forward-lookingstatements are based on our current plans and expectations, and involve knownand unknown risks and uncertainties that may cause our actual results orperformance to be materially different from any results or performanceexpressed or implied by such forward-looking statements. Such factors include,but are not limited to, those set forth in “Item 1A. Risk Factors” in this Form10-Q, as well as other risks identified from time to time in other Securitiesand Exchange Commission (“SEC”) reports. You should not place undue reliance onour forward-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.

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

**Overview**

We offer integrated software solutionsfor automating and integrating data and work flows across the investmentmanagement organization, as well as the information flows between theinvestment management organization and external parties. Our products areintended to increase operational efficiency, improve the accuracy of clientinformation and enable better decision-making. Each solution focuses onspecific 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.

Ourrevenues for the second quarter of 2006 were $44.4 million which was an 8%increase from $40.9 million in the same quarter of 2005. During the secondquarter of 2006 we saw solid performance in the following areas:

·                  Expandedcustomer relationships and acceptance of our product offerings. We signed 89customer agreements in the second quarter with 11 new Geneva clients and 18clients choosing Advent Portfolio Exchange (“APX”); and

·                  Increasedterm license bookings.  In the secondquarter, we signed a total of $12.9 million of term licenses with an averageterm of 3.1 years.

DuringJune 2006, we introduced several product upgrades and enhancements:

·                  *APX 1.5—*The Company released version 1.5 of its newestproduct, APX, delivering expanded scalability and enhanced integration ofrelationship and portfolio management features. APX 1.5 enables asset managersand single or multi-family offices the ability to provide enhanced clientservice in a single solution, thus reducing the cost and complexity of managingmultiple systems;

·                  *Geneva 6.0*—We announced several enhancements to the latestedition of Geneva, including a lower total cost of ownership through reducedhardware costs, ease of integration with enhanced third party accelerators, andimproved scalability through technology enhancements; and

·                  *Gifts 6.1*—MicroEdge released Gifts 6.1, a follow-on upgradeon MicroEdge’s GIFTS 6 grant-making software which include the followingfeatures:

·                  giving users theability to automate and schedule the creation and delivery of GIFTS reports;

·                  a wide range ofcompatibility certifications not previously available;

·                  single sign-onsupport for  GIFTS Connections; and

·                  backgroundscheduling of database maintenance.

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We are in the midst ofconverting our license revenues from a perpetual model to a term model for ourAdvent Investment Management segment. Undera perpetual pricing model, customers purchase a license to use our softwareindefinitely and generally we recognize all license revenue at the time ofsale; maintenance is purchased under an annual renewable contract, andrecognized ratably over the contract period. Under a term pricing model,customers purchase a license to use our software and receive maintenance for alimited period of time and we recognize the license revenue ratably over thelength of the contract. The transition to a term model has the effect oflowering license revenues in the early stages of the transition, but increasingthe total potential value of the customer relationship. Moving our corebusiness new customer sales to term will have the effect of lowering ourrevenue growth in 2006 and over the next several years. However, we believe thischange to our business model is extremely significant for the long term growthand value of the business because it leverages the long-term “stickiness” ofAdvent’s applications and improves the predictability and visibility of theCompany’s revenue model. For example, our products are used by our customersfor an average of approximately eight years. Over a typical eight-year period,a customer may enter into two or more contracts for the same software productand services under a term license model. When a customer purchases a term license together with implementationservices we do not recognize any revenue under the contract until theimplementation services are substantially complete. If the implementationservices are still in progress as of a quarter-end, it will cause us to deferall of the contract revenues to a subsequent quarter. During the second quarterof 2006, we deferred $2.7 million in net revenues as the professional serviceprojects associated with the related term license arrangements were in progressas of June 30, 2006.

 

Totalnet revenues for the second quarter of 2006 grew 8% over the second quarter of2005 while our maintenance and recurring revenues were up 23% year over year.Despite our transition to a term licensing model, we have been able to show netrevenue growth measured year-over-year for two reasons:

·                  Our diverse mixof products has allowed us to phase in term licensing by product; and

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

Duringthe second quarter of 2006, we recognized approximately 45% of license revenuefrom term licenses and signed new termlicenses with a total contract value for license and maintenance of $12.9million over the terms of the initial contracts which averaged 3.1 years,as compared to $4.0 million in the second quarter of 2005 with an average termof 2.9 years.

OnJanuary 1, 2006, we adopted SFAS 123R. As a result of this adoption and due tothe issuance of restricted stock units (“RSU’s”) and stock appreciation rights(“SAR’s”) during the first half of 2006, we recorded stock-based compensationexpense of $3.5 million in the second quarter of 2006. We earned net income of$1.6 million, resulting in diluted earnings per share of $0.05 for the secondquarter of 2006. In addition, we generated operating cash flow of approximately$21.4 million during the first half of 2006.

Duringthe second quarter of 2006, our Board of Directors (the “Board”) approved acommon stock repurchase program authorizing the repurchase of up to 2.3 millionshares of our common stock.  Throughoutthe second quarter of 2006, we repurchased 1.6 million shares for a totaloutlay of $52.8 million.  The commonstock repurchase program continued into the third quarter and all 2.3 millionshares have been repurchased before the end of July 2006. On July 26, 2006, ourBoard approved an additional common stock repurchase program authorizing therepurchase of up to 1.5 million shares of our common stock.

Duringthe first quarter of 2006, we began to wind down the soft dollar component ofour SEC-registered broker/dealer subsidiary, Second Street Securities, as it nolonger fit with our corporate strategy. Second Street Securities offers ourcustomers the ability to pay for Advent products and other third party servicesthrough brokerage commissions and other fee-based arrangements. We continued towind down the soft dollar business in the second quarter of 2006 and anticipatethat this will be completed during the third quarter of 2006. Subsequent to thewind down of the soft dollar business, Second Street Securities will continueto maintain its broker/dealer status.

Lookingforward, we continue to focus on improving our long-term profitability as wetransition to a term license model. While recent economic trends have beenpositive and our customers have been more willing to commit to new softwarepurchases, improving our profitability will depend upon our introducing newproducts, licensing software to new and existing customers, selling services tonew and existing customers and renewing license and maintenance contracts atsimilar levels to those we achieved during fiscal 2005 and the first half of2006. The success of our transition to a term license model will also depend onfuture renewal rates, which we will evaluate as our term license contractsexpire. We will continue our focus on aggressively managing costs. We will alsocontinue to invest in areas we deem appropriate.

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**Recent Developments**

 

OnJuly 26, 2006, our Board approved an additional common stock repurchase programauthorizing the repurchase of up to 1.5 million shares of our common stock. Tofacilitate the stock repurchase program, stock repurchases may be made throughopen market or privately negotiated transactions at times and in such amountsas management deems appropriate. The timing and actual number of sharesrepurchased will depend on a variety of factors including price, corporate andregulatory requirements, alternative investment opportunities and other marketconditions. The stock repurchase program does not have an expiration date andmay be limited or terminated at any time without prior notice. Repurchasedshares would be returned to the status of un-issued shares of common stock.

**CriticalAccounting Policies and Estimates**

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

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

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

*Software license and development fees.*We recognize revenue from the licensing of software when persuasive evidence ofan arrangement exists, the product has been delivered, the fee is fixed ordeterminable and collection of the resulting receivable is reasonably assured.We generally use a signed license agreement as evidence of an arrangement.Sales through our distributors are evidenced by a master agreement governingthe relationship together with binding order forms and signed contracts fromthe distributor’s customers. Revenue is recognized once shipment to thedistributor’s customer has taken place and when all other revenue recognitioncriteria have been met. Delivery occurs when product is delivered to a commoncarrier F.O.B shipping point. Some of our arrangements include acceptanceprovisions, and if such acceptance provisions are provided, delivery is deemedto occur upon acceptance. We assess whether the fee is fixed or determinablebased on the payment terms associated with the transaction. We assess whetherthe collectibility of the resulting receivable is reasonably assured based on anumber of factors, including the credit worthiness of the customer determinedthrough review of credit reports, our transaction history with the customer,other available information and pertinent country risk if the customer islocated outside the United States. Our standard payment terms are due at 180days or less unless the transaction was part of a soft dollar arrangementthrough our in-house broker/dealer subsidiary, Second Street Securities, forwhich payment was then required within one year; however, payment terms mayvary based on the country in which the agreement is executed. Software licensesare sold with maintenance and, frequently, professional services.

*Licenses.*  We have continued our transition from sellingmostly perpetual licenses to selling a mix of perpetual and term contracts, andwe expect term license revenue to increase as a proportion of total licenserevenue in the future. We recognized approximately 45% and 23% of licenserevenue from term licenses during the second quarter of 2006 and 2005,

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respectively.Revenue recognition for software licensed under perpetual and term-basedlicense models differs depending on which type of contract a customer signs:

·                  Perpetuallicenses

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

·                  Termlicenses

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

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

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

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

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

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

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Wedo have two situations where we provide a contractual limited right of returnto end-user customers only:  in shrink-wrap license agreements for Adventproducts, and certain MicroEdge products. The shrink-wrap licenseagreement for Advent products provides for a right of return within seven daysof delivery of the software. Certain MicroEdge software license agreementsallow for either a thirty-day money back guarantee or a seven-day right ofreturn. We recognize revenue on delivery since the fee is fixed ordeterminable, the buyer is obligated to pay, the risk of loss passes to thecustomer, and we have the ability to estimate returns. Our ability toestimate returns is based on a long history of experience with relativelyhomogenous transactions and the fact that the return period is short. We haverecorded a sales returns reserve to adjust revenue for these situations based on our historical experience.We have recorded a sales reserve provision (benefit) of $(33,000) and $65,000in the second quarter of 2006 and 2005, respectively.

*Maintenance and other recurring revenues.*We offer annual maintenance programs that provide for technical support andupdates to our software products. Maintenance fees are bundled under perpetuallicenses in the initial licensing year and charged separately for renewals ofannual maintenance in subsequent years. Fair value for maintenance is basedupon renewal rates stated in the contracts or, in limited cases, separate salesof renewals to other customers. Generally, we recognize maintenance revenueratably over the contract term, except in the case of multi-year term licensecontracts which are described in the “term licenses” section above. Werecognized approximately 5% and 3% of maintenance and other recurring revenuefrom term licenses during the second quarter of fiscal 2006 and 2005,respectively.

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

Basedon our historical experience, we have recorded a returns reserve to adjustrevenues for estimated returns for maintenance and other recurring revenues of$(321,000) and $293,000 for the second quarter of fiscal 2006 and 2005,respectively. We have an algorithm for calculating the value of reserves thattakes the last 18 months of experience into account, which resulted in a creditto revenue in the second quarter of 2006.

*Professional services and other revenues.*We offer a variety of professional services that include project management,implementation, data conversion, integration, custom report writing andtraining. Fair value for professional services is based upon separate sales ofthese services by us to other customers. Our professional services aregenerally billed based on hourly rates together with reimbursement for traveland accommodation expenses. Our professional services and other revenue alsoinclude revenue from our annual user conferences. We generally recognizerevenue as these professional services are performed, except in the case ofmulti-year term license contracts which are described in the “term licenses”section above. Certain professional services arrangements involve acceptancecriteria. In these cases, revenue and directly related expenses are deferredand then recognized upon acceptance.

Basedon our historical experience, we have recorded a returns reserve to adjustrevenues for the estimated returns for professional services and other revenuesof $(3,000) and $14,000 for the second quarter of fiscal 2006 and 2005,respectively.

*Directly related expenses. *When we defer servicerevenues, we also defer the direct costs incurred in the delivery of thoseservices.  We recognize those deferredcosts as costs of professional services revenues proportionally and over thesame period that the deferred revenue is recognized as service revenue. When wedefer license revenue, we defer the direct incremental costs incurred (i.e.sales commissions) related to the license revenues.  We recognize those costs as sales and marketingexpense proportionally and over the same period as the license revenues.

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

·      ourhistorical operating results;

·      thelength of time over which the differences will be realized;

·      taxplanning opportunities; and

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·      expectationsfor future earnings.

Inconsidering whether or not we will realize a benefit from net deferred taxassets, recent losses must be given substantially more weight than anyprojections of future profitability. In the fourth quarter of 2003, wedetermined that, under applicable accounting principles and based on ourhistory of successive quarterly losses since the second quarter of 2002, it wasmore likely than not that we would not realize any value for our net deferredtax assets. Accordingly, we established a valuation allowance equal to 100% ofthe amount of these assets. Since the beginning of 2004, we have continued to maintaina full valuation allowance against our deferred tax assets (except for deferredtax assets in the United Kingdom, Switzerland and the Netherlands) due to ourhistory of losses through fiscal 2004. However, if our recent trend ofprofitability continues, we may determine that there is sufficient positiveevidence to support a reversal of, or decrease in, the valuation allowance. Ifwe were to reverse all or some part of our valuation allowance and recognizeall or some part of our deferred tax assets, our financial statements wouldreflect an increase in assets on our balance sheet and a corresponding taxbenefit to our statement of operations in the amount of the reversal.

**Impairment of long-lived assets**.We review our goodwill for impairment annually during the fourth quarter of ourfiscal year (as of November 1) and more frequently if an event or circumstanceindicates that an impairment loss has occurred. We are required to test ourgoodwill for impairment at the reporting unit level. We have determined that wehad five reporting units as of November 1, 2005. The test for goodwillimpairment 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 2005, we completed our annual impairment test which did notindicate impairment. During the second quarter of 2006, there were no events orcircumstances which triggered an impairment review. Therefore, the first stepof the impairment test was not necessary to perform.

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

·      significantunderperformance relative to expected historical or projected future operatingresults;

·      significantchanges in the manner of our use of the acquired assets or the strategy for ouroverall business;

·      significantnegative market or economic trends;

·      significantdecline in our stock price for a sustained period; and

·      ourmarket capitalization relative to net book value.

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

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

Futureadverse changes in market conditions or poor operating results of underlyinginvestments could result in losses or an inability to recover the carrying valueof 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

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variety ofvaluation methodologies. Such methodologies include comparing the privatecompany with publicly traded companies in similar lines of business, applyingrevenue multiples to estimated future operating results for the private companyand estimating discounted cash flows for that company.

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

**Stock-based compensation**. Effective January 1, 2006, we adopted theprovisions of, and account for stock-based compensation in accordance with, theFinancial Accounting Standards Board’s (“FASB”) Statement of FinancialAccounting Standards No. 123—revised 2004 (“SFAS 123R”), “Share-Based Payment”which replaced Statement of Financial Accounting Standards No. 123 (“SFAS 123”),“Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 (“APB25”), “Accounting for Stock Issued to Employees.” Under the fair value recognitionprovisions of this statement, stock-based compensation cost is measured at thegrant date based on the fair value of the award and is recognized as expense ona straight-line basis over the requisite service period, which is the vestingperiod. We elected to implement using the modified-prospective method, underwhich prior periods are not restated for comparative purposes. Under themodified prospective method, the valuation provisions of SFAS 123R apply to newgrants and to grants that were outstanding as of the effective date. Estimatedcompensation expense for grants that were outstanding as of the effective datewill be recognized over the remaining service period using the compensationcost estimated for the SFAS 123 pro forma disclosures. We make quarterlyassessments of the adequacy of our tax credit pool to determine if there areany deficiencies which require recognition in our condensed consolidatedstatements of operations.

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

We estimate the volatility of our common stock basedon an equally weighted average of historical and implied volatility of theCompany’s common stock. We determined that a blend of historical and impliedvolatility is more reflective of the market conditions and a better indicatorof expected volatility than using purely historical volatility. We estimate theexpected life of options granted based on historical experience of similarawards, giving consideration to the contractual terms of the stock-basedawards, vesting schedules and expectations of future employee behavior. We basethe risk-free interest rate on the U.S. Treasury yield curve in effect at thetime of grant for periods corresponding with the expected life of the option.We do not anticipate paying any cash dividends in the foreseeable future andtherefore use an expected dividend yield of zero in the option pricing model.SFAS 123R requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. Forfeitures were estimated based on the Company’s historicalexperience over the last ten years.

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

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

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**Recent Accounting Pronouncements**

 

InJune 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, *Accounting for Uncertainty in Income Taxes—An Interpretation of FASBStatement No. 109*, which prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax provision taken or expected to be taken in a tax return. FIN 48 willbe effective beginning in the first quarter of 2007. We have not yet evaluatedthe impact of FIN 48 on our condensed consolidated financial statements.

**RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006AND 2005**

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

 
|                                            | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                           | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                       |       |                                               |       |                                             |       |   |   |   |   |
| **Net  revenues:**                         |       |                                               |       |                                             |       |   |   |   |   |
| License and  development fees              |       | 19                                                 | %          | 24                                               | %          | 20 | % | 24 | % |
| Maintenance and  other recurring           |       | 72                                                 |       | 64                                               |       | 70 |   | 64 |   |
| Professional  services and other           |       | 9                                                  |       | 13                                               |       | 10 |   | 12 |   |
|                                       |       |                                               |       |                                             |       |   |   |   |   |
| Total net revenues                         |       | 100                                                |       | 100                                              |       | 100 |   | 100 |   |
|                                       |       |                                               |       |                                             |       |   |   |   |   |
| **Cost of  revenues:**                     |       |                                               |       |                                             |       |   |   |   |   |
| License and  development fees              |       | 1                                                  |       | 1                                                |       | 1 |   | 1 |   |
| Maintenance and  other recurring           |       | 19                                                 |       | 18                                               |       | 18 |   | 18 |   |
| Professional  services and other           |       | 12                                                 |       | 11                                               |       | 11 |   | 11 |   |
| Amortization of  developed technology      |       | 1                                                  |       | 2                                                |       | 1 |   | 2 |   |
|                                       |       |                                               |       |                                             |       |   |   |   |   |
| Total cost of revenues                     |       | 32                                                 |       | 32                                               |       | 31 |   | 31 |   |
|                                       |       |                                               |       |                                             |       |   |   |   |   |
| Gross margin                               |       | 68                                                 |       | 68                                               |       | 69 |   | 69 |   |
|                                       |       |                                               |       |                                             |       |   |   |   |   |
| **Operating  expenses:**                   |       |                                               |       |                                             |       |   |   |   |   |
| Sales and  marketing                       |       | 28                                                 |       | 26                                               |       | 28 |   | 26 |   |
| Product  development                       |       | 20                                                 |       | 19                                               |       | 19 |   | 20 |   |
| General and  administrative                |       | 17                                                 |       | 19                                               |       | 18 |   | 20 |   |
| Amortization of  other intangibles         |       | 2                                                  |       | 2                                                |       | 2 |   | 3 |   |
| Restructuring  charges                     |       | 0                                                  |       | 4                                                |       | 0 |   | 2 |   |
|                                       |       |                                               |       |                                             |       |   |   |   |   |
| Total operating expenses                   |       | 67                                                 |       | 70                                               |       | 67 |   | 70 |   |
|                                       |       |                                               |       |                                             |       |   |   |   |   |
| Income (loss)  from operations             |       | 1                                                  |       | (2                                               | )          | 2 |   | (1 | ) |
| Interest income  and other, net            |       | 2                                                  |       | 12                                               |       | 3 |   | 7 |   |
|                                       |       |                                               |       |                                             |       |   |   |   |   |
| Income before  income taxes                |       | 3                                                  |       | 10                                               |       | 4 |   | 6 |   |
| Provision for  (benefit from) income taxes |       | (0                                                 | )          | 0                                                |       | (1 | ) | 0 |   |
|                                       |       |                                               |       |                                             |       |   |   |   |   |
| **Net income**                             |       | 4                                                  | %          | 10                                               | %          | 6 | % | 6 | % |

 

# **NET REVENUES**

| ** **                         | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2006**                                           | ** ** | **2005**   | ** ** | **Change**                                       | ** ** | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
|                               |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Total net revenues (in  thousands) |       | $                                                  | 44,360     |       | $          | 40,927                                           |       | $          | 3,433      |   | $ | 88,016 |   | $ | 80,316 |   | $ | 7,700 |   |
|                                    |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Our net revenues are made up of three components: licenseand development fees; maintenance and other recurring; and professionalservices and other. License revenues are derived from the licensing of softwareproducts, while development

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fees are derived from development contracts that we haveentered into with other companies, including customers and developmentpartners. Maintenance and other recurring revenues are derived from maintenancefees charged in the initial licensing year, renewals of annual maintenanceservices in subsequent years and recurring revenues derived from oursubscription-based and transaction-based services. Professional services andother revenues include fees for consulting, training services, commissionrevenues from “soft dollaring” of third-party products and services and ouruser conferences.

Each of the major revenuecategories has historically varied as a percentage of net revenues and weexpect this variability to continue in future periods. This variability ispartially due to the timing of the introduction of new products, the relativesize and timing of individual perpetual software licenses, as well as the sizeof the implementation, the resulting proportion of the maintenance andprofessional services components of these license transactions and the amountof client use of pricing and related data. We are currently transitioning themajority of our license revenue to term license agreements. Once our transitionto term licensing is completed, we expect less variability between our majorcategories of revenues. We expect total net revenues for the third quarter of2006 to be between $44 million and $46 million.

***Licenseand Development Fees***
| ** **                                   | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                   | ** ** | **2006**                                           | ** ** | **2005**   | ** ** | **Change**                                       | ** ** | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
|                                         |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| License and  development fees (in thousands) |       | $                                                  | 8,353      |       | $          | 9,634                                            |       | $          | (1,281     | ) | $ | 17,979 |   | $ | 19,174 |   | $ | (1,195 | ) |
| Percent of total net  revenues               |       | 19                                                 | %          | 24         | %          |                                             |       | 20         | %          | 24 | % |   |   |
|                                              |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Thedecrease in license revenue and development fees during the three and sixmonths ended June 30, 2006 reflects our focus on transitioning sales of ourcore products to a term basis where license revenue is amortized over the termof the contract, as opposed to being recognized upfront with perpetualcontracts. Term sales have the effectof lowering license revenues in the short term, but increase the totalpotential value of the customer relationship. We continue to sign morecontracts on a term basis as term bookings increased from $4.0 million duringthe second quarter of 2005 to $12.9 million during the second quarter of 2006,which primarily reflects 11 new Geneva customers and 18 new APX customers inthe current quarter. Revenue recognized from term license contracts on our coreproducts increased significantly to $3.8 million or 45% of license revenueduring the second quarter of 2006, as compared to $2.3 million or 23% oflicense revenue during the second quarter of 2005. Revenue recognized from termlicense contracts on our core products was approximately 39% and 22% of licenserevenue during the six months ended June 30, 2006 and 2005, respectively. Thisincrease in term license revenue was offset by a decrease in perpetual licenserevenues of $2.9 million during the second quarter of 2006 versus thecomparable period in 2005.

We expectlicense and development fee revenues to be relatively flat to slightly up inthe third quarter of 2006, as we continue our transition to a term licensemodel.

We typically license ourproducts on a per server, per user basis with the price per customer varyingbased on the selection of the products licensed, the number of siteinstallations and the number of authorized users. We earn development fees whenwe provide product solutions which are not part of our standard productoffering but will be incorporated into our future releases. For the three andsix months ended June 30, 2006 and 2005, revenue from development fees was lessthan 3% of total license and development fees revenue.** **For the threemonths ended June 30, 2006 and 2005, soft dollar revenues generated from Adventrelated licenses paid for through soft dollar transactions were $0.5 millionand $0.2 million, respectively, and represented 6% and 2%, respectively, oftotal license and development revenues. In conjunction with the soft dollar wind-downprocess during the second quarter of 2006, we experienced acceleratedsettlement of our outstanding soft dollar arrangements, resulting in anincrease in soft dollar license transactions and revenue during the threemonths ended June 30, 2006. In the future, we expect soft dollar revenues to benominal.

***Maintenanceand Other Recurring Revenues***
| ** **                                               | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                               | ** ** | **2006**                                           | ** ** | **2005**   | ** ** | **Change**                                       | ** ** | **2006**   | ** ** | **2005** | ** ** | **Change** | ** ** |
| Maintenance and  other recurring revenues (in thousands) |       | $                                                  | 31,882     |       | $          | 26,015                                           |       | $          | 5,867      |   | $ | 61,586 |   | $ | 51,259 |   | $ | 10,327 |   |
| Percent of total net  revenues                           |       | 72                                                 | %          | 64         | %          |                                             |       | 70         | %          | 64 | % |   |   |
|                                                          |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Theincrease in maintenance and other recurring revenues in the three and six monthperiods reflected an increase in new maintenance support contracts as a resultof the increase in the number of new license contracts (term and perpetual),price increases and service level upgrades to our installed customer base, anincrease in demand for our data services and an increase in our recurringrevenue sharing. We disclose our maintenance renewal rate one quarter inarrears in order to include most payments received against maintenanceinvoices. The maintenance renewal rate for the second quarter of 2006 of 88%was within the range of 86% to 90% that we have experienced since the secondquarter of 2005. During the second quarter of 2006, we recognized a net benefitof approximately $0.3 million from reducing our reserve against maintenance andother recurring

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revenues. Also in thesecond quarter of 2006, we recognized $0.4 million of revenue from deferredmaintenance and recurring revenue that should have been previously recognizedbetween the periods of the third quarter of 2001 and the first quarter of 2006.Recurring revenue increased by $1.7 million and $2.5 million during the threeand six months ended June 30, 2006, respectively, as a result of growth inour subscription and data management revenue stream, especially AdventCustodial Data (ACD), as well as our receiving increased revenue share fromtrade routing fees from a partner.

Maintenancerevenue has remained relatively flat as a proportion of total maintenance andrecurring revenues at approximately 68% to 69% in the three and six monthsended June 30, 2006 and 2005. We expect maintenance and recurring revenueswill increase slightly in dollar amount in the third quarter of 2006 reflectingadditions to the customer base and maintenance price increases with existingcustomers, partially offset by attrition within our existing customer base.

***ProfessionalServices and Other Revenues***
| ** **                                | ** ** | **Three Months Ended June 30**                                           | ** ** | ** **                                                                                   | ** ** | **Six Months Ended June 30** | ** ** | ** **                                                                       | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **Change**                                       | ** ** | **      2006      ** | ** ** | **      2005      ** | ** ** | **Change** | ** ** |
| Professional services  and other revenues |       |                                                                                         |       |                                                                                         |       |                                             |       |                                                                             |       |   |   |   |   |
| (in thousands)                            |       | $                                                                                            | 4,125      |                                                                                         | $          | 5,278                                            |       | $                                                                                | (1,153     | ) | $ | 8,451 |   | $ | 9,883 |   | $ | (1,432 | ) |
| Percent of total net revenues             |       | 9                                                                                            | %          | 13                                                                                           | %          |                                             |       | 10                                                                               | %          | 12 | % |   |   |
|                                           |            |                                                                                              |            |                                                                                              |            |                                                  |            |                                                                                  |            |  |  |  |  |  |  |  |  |  |  |

 

Professionalservices and other revenues include consulting, project management, custom integration,custom work, training and soft dollar transactions for products and servicesnot related to Advent product or services. Professional services related toAdvent Office products generally can be completed and accepted in a relativelyshort time period while services related to Geneva and APX products may requirea six to nine month implementation period. Therefore, the revenues associatedwith professional services reflect a mix of services related to current quarterlicense revenue as well as transactions from prior quarters. Generally, ourconsulting revenues lag our license revenues by one or two quarters, but canalso be affected by specific milestone completions.

Professionalservices and other revenues decreased $1.2 million and $1.4 million during thethree and six months ended June 30, 2006, respectively. These decreasesare primarily attributable to the deferral of professional services revenue of$1.9 million and $3.3 million for the three and six months ended June 30,2006, respectively, for services performed on term license implementationswhich were still in progress as of June 30, 2006. In addition, revenuesearned from third party products paid for through soft dollar transactionsdecreased due to fewer transactions as we began to wind down the soft dollarcomponent of Second Street Securities beginning in the first quarter of 2006.In addition, professional services and other revenues for the six months ended June 30,2006 reflect $0.6 million of write-offs and reserves incurred in the firstquarter of 2006 related to these soft dollar transactions. These decreases inprofessional services and other revenues were partially offset by increases inour general consulting, project management and training revenues associatedwith APX and Geneva implementations.

We expect revenuesfrom professional services to be relatively flat in the third quarter of 2006,as the expected $1 million of revenue generated by the annual Advent UserConference held in September 2006 is offset by increased services revenuedeferrals for term license contracts.

***Revenuesby Segment***
| ** **                    | ** ** | **Three Months Ended June 30**                                           | ** ** | ** **                                                                                   | ** ** | **Six Months Ended June 30** | ** ** | ** **                                                                                   | ** ** |
|-------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                    | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **Change**                                       | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **Change** | ** ** |
| ** **                    | ** ** | **(in thousands)**                                                                      | ** ** |
| Advent Investment  Management |       | $                                                                                            | 39,005     |                                                                                         | $          | 35,433                                           |       | $                                                                                            | 3,572      |   | $ | 77,598 |   | $ | 69,556 |   | $ | 8,042 |   |
| MicroEdge                     |       | 4,849                                                                                        |       | 4,843                                                                                        |       | 6                                                |       | 9,701                                                                                        |       | 9,502 |   | 199 |   |
| Other                         |       | 506                                                                                          |       | 651                                                                                          |       | (145                                             | )          | 717                                                                                          |       | 1,258 |   | (541 | ) |
| Total                         |       | $                                                                                            | 44,360     |                                                                                         | $          | 40,927                                           |       | $                                                                                            | 3,433      |   | $ | 88,016 |   | $ | 80,316 |   | $ | 7,700 |   |

 

We have two reportablesegments: Advent Investment Management (“AIM”) and MicroEdge. AIM 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 managementorganizations. MicroEdge derives revenues from the sale of software andservices for grant management, matching gifts and volunteer tracking for thegrant-making community worldwide.

The 10% and 12%increase in AIM’s revenue in the three and six months ended June 30, 2006,respectively, reflected an increase in new maintenance support contracts as aresult of new license contracts and price increases and service level upgradesfrom maintenance contracts for our installed customer base.

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The technologyspending patterns of organizations in MicroEdge’s primary markets (independentfoundations, community foundations and corporations) are directly affected byeconomic fluctuations as foundation budgets are largely driven by endowmentincome which often contains market-exposed components. Foundation spendingtypically decreases in an economic downturn. Community foundations are subjectto similar influences, compounded by the fact that in many cases much of theirongoing funding and endowment comes from active donors who may increase orreduce their giving depending on the economic climate and the related effect ontheir income 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 slightincreases in MicroEdge revenue in the three and six months ended June 30,2006 also reflected the economic conditions and growth in the financial marketswhich resulted in slightly more charitable contributions. This increase incharitable contributions received by the foundations sector in the first halfof 2006 enabled foundations to increase their information technologyexpenditures which resulted in the increase in MicroEdge revenue in the firsthalf of 2006.

### **COST OF REVENUES**

| ** **                             | ** ** | **Three Months Ended June 30**                                           | ** ** | ** **                                                                                   | ** ** | **Six Months Ended June 30** | ** ** | ** **                                                                                   | ** ** |
|----------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **Change**                                       | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **Change** | ** ** |
| Total cost of  revenues (in thousands) |       | $                                                                                            | 13,993     |                                                                                         | $          | 12,952                                           |       | $                                                                                            | 1,041      |   | $ | 27,457 |   | $ | 24,985 |   | $ | 2,472 |   |
| Percent of total net  revenues         |       | 32                                                                                           | %          | 32                                                                                           | %          |                                             |       | 31                                                                                           | %          | 31 | % |   |   |
|                                        |            |                                                                                              |            |                                                                                              |            |                                                  |            |                                                                                              |            |  |  |  |  |  |  |  |  |  |  |

 

Our cost ofrevenues is made up of four components: cost of license and development fees;cost of maintenance and other recurring; cost of professional services andother; and amortization of developed technology.

***Costof License and Development Fees***
| ** **                                            | ** ** | **Three Months Ended June 30**                                           | ** ** | ** **                                                                                   | ** ** | **Six Months Ended June 30** | ** ** | ** **                                                                                   | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **Change**                                       | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **Change** | ** ** |
| Cost of license  and development fees  (in thousands) |       | $                                                                                            | 338        |                                                                                         | $          | 384                                              |       | $                                                                                            | (46        | ) | $ | 785 |   | $ | 640 |   | $ | 145 |   |
| Percent of total  license revenues                    |       | 4                                                                                            | %          | 4                                                                                            | %          |                                             |       | 4                                                                                            | %          | 3 | % |   |   |
|                                                       |            |                                                                                              |            |                                                                                              |            |                                                  |            |                                                                                              |            |  |  |  |  |  |  |  |  |  |  |

 

Cost of licenseand development fees consists primarily of royalties and other fees paid tothird parties, the fixed direct labor involved in producing and distributingour software, labor costs associated with generating development fees and costof product media including duplication, manuals and packaging materials. Thesecosts have remained relatively flat during the three and six months ended June 30,2006. The fluctuations in the three and six months ended June 30, 2006primarily reflect increases in payroll and related expenses of $68,000 and$113,000, respectively, as a result of an increase in headcount. The increasein payroll and related expense for the three months ended June 30, 2006was more than offset by a decrease in royalty expense of $132,000. We expectcost of license and development fees to remain flat in the third quarter of2006 compared to the second quarter of 2006.

***Costof Maintenance and Other Recurring***
| ** **                                               | ** ** | **Three Months Ended June 30**                                           | ** ** | ** **                                                                                   | ** ** | **Six Months Ended June 30** | ** ** | ** **                                                                                   | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **Change**                                       | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **Change** | ** ** |
| Cost of maintenance  and other recurring  (in thousands) |       | $                                                                                            | 8,242      |                                                                                         | $          | 7,562                                            |       | $                                                                                            | 680        |   | $ | 15,941 |   | $ | 14,637 |   | $ | 1,304 |   |
| Percent of total  maintenance revenue                    |       | 26                                                                                           | %          | 29                                                                                           | %          |                                             |       | 26                                                                                           | %          | 29 | % |   |   |
|                                                          |            |                                                                                              |            |                                                                                              |            |                                                  |            |                                                                                              |            |  |  |  |  |  |  |  |  |  |  |

 

Cost ofmaintenance and other recurring revenues is primarily comprised of the directcosts of providing technical support and other services for recurring revenuesand royalties paid to third party subscription-based and transaction-basedvendors. The increase during the three and six months ended June 30, 2006was due primarily to an increase in compensation and related costs of $467,000and $910,000 resulting from an increase in stock-based compensation costs andheadcount. Specifically, stock-based compensation costs, which are included incompensation and related costs, of $268,000 and $523,000 were recognized duringthe three and six months ended June 30, 2006, respectively, as a result ofimplementing SFAS 123R effective January 1, 2006, and from issuing RSU’sand SAR’s during the first half of 2006. Higher utilization of outside servicesalso contributed to $226,000 and $213,000 of the increases during the three andsix months ended June 30, 2006, respectively. We expect cost ofmaintenance and other recurring revenues to be flat in the third quarter of2006 compared to the second quarter of 2006.

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***Costof Professional Services and Other***
| ** **                                               | ** ** | **Three Months Ended June 30**                                                       | ** ** | ** **                                                                                               | ** ** | **Six Months Ended June 30** | ** ** | ** **                                                                                               | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **Change**                                       | ** ** | **        2006        ** | ** ** | **        2005       ** | ** ** | **Change** | ** ** |
| Cost of  professional services and other  (in thousands) |       | $                                                                                                        | 5,150      |                                                                                                     | $          | 4,392                                            |       | $                                                                                                        | 758        |   | $ | 10,074 |   | $ | 8,480 |   | $ | 1,594 |   |
| Percent of total  professional services revenues         |       | 125                                                                                                      | %          | 83                                                                                                       | %          |                                             |       | 119                                                                                                      | %          | 86 | % |   |   |
|                                                          |            |                                                                                                          |            |                                                                                                          |            |                                                  |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |

 

Cost ofprofessional services and other revenue consists primarily of personnel relatedcosts associated with the client services and support organization in providingconsulting, custom report writing and conversions of data from clients’previous systems. Also included are direct costs associated with third-partyconsultants and travel expenses. The increases in the 2006 periods primarilyreflect increases in payroll and related costs, recruiting expenses, and travelcosts. Payroll related expenses increased by $360,000 and $660,000 during thethree and six months ended June 30, 2006 as a result of an increase inheadcount and stock based compensation. Stock-based compensation costs of$216,000 and $421,000, which are included in payroll related expenses, wererecognized during the three and six months ended June 30, 2006,respectively, as a result of implementing SFAS 123R effective January 1,2006, and from issuing RSU’s and SAR’s during the first half of 2006. Theseincreases in payroll related expense were partially offset by decreases insalary expense, as a result of the deferral of professional services costsunder SOP 97-2 of $0.8 million and $1.3 million for the three and sixmonths ended June 30, 2006, respectively, for services performed on termlicense implementations which were in progress at the end of June 30,2006. Consistent with the increase in headcount, recruiting costs increased by$167,000 and $225,000 during the three and six months ended June 30, 2006,respectively. In addition, travel expenses increased by $267,000 and $523,000during the three and six months ended June 30, 2006, respectively, due totravel associated with more professional service projects. Gross margin for thethree and six months ended June 30, 2006 were negatively impacted by ourdeferral of professional services costs under SOP 97-2 as we only deferthe direct costs associated with services performed on term licensearrangements which were in progress at each quarter-end. As a result, indirectcosts such as management and other overhead expenses are recognized and havethe effect of compressing or eliminating margin on these services. In addition,our professional services organization has ramped up during fiscal 2006resulting in additional headcount who are not being fully utilized as they arein their initial training phase. Gross margin for the six months ended June 30,2006 were also impacted by the $0.6 million of write-offs and reserves incurredin the first quarter of 2006 associated with third party products paid throughsoft dollar transactions as noted above.

We expect cost ofprofessional services and other revenues to increase in the third quarter of2006, by approximately $1 million. The increase is attributed to Advent’sannual User Conference which will be held in September. The balance of theincrease is due to headcount additions ramping to support APX implementations.

***Amortizationof Developed Technology***
| ** **                                            | ** ** | **Three Months Ended June 30**                                           | ** ** | ** **                                                                                   | ** ** | **Six Months Ended June 30** | ** ** | ** **                                                                                   | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **Change**                                       | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **Change** | ** ** |
| Amortization of  developed technology  (in thousands) |       | $                                                                                            | 263        |                                                                                         | $          | 614                                              |       | $                                                                                            | (351       | ) | $ | 657 |   | $ | 1,228 |   | $ | (571 | ) |
| Percent of total net  revenues                        |       | 1                                                                                            | %          | 2                                                                                            | %          |                                             |       | 1                                                                                            | %          | 2 | % |   |   |
|                                                       |            |                                                                                              |            |                                                                                              |            |                                                  |            |                                                                                              |            |  |  |  |  |  |  |  |  |  |  |

 

Amortization ofdeveloped technology represents amortization of acquisition-related intangibleassets and internal product development costs. The decrease in amortization ofdeveloped technology reflected technology related intangible assets from prioracquisitions becoming fully amortized during fiscal 2005 and the first sixmonths of 2006. We expect amortization of developed technology to beapproximately $0.3 million in the third quarter of 2006.

### **OPERATING EXPENSES**

***Salesand Marketing***
| ** **                          | ** ** | **Three Months Ended June 30**                                           | ** ** | ** **                                                                                   | ** ** | **Six Months Ended June 30** | ** ** | ** **                                                                                   | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **Change**                                       | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **Change** | ** ** |
| Sales and  marketing (in thousands) |       | $                                                                                            | 12,209     |                                                                                         | $          | 10,474                                           |       | $                                                                                            | 1,735      |   | $ | 24,351 |   | $ | 20,537 |   | $ | 3,814 |   |
| Percent of total net  revenues      |       | 28                                                                                           | %          | 26                                                                                           | %          |                                             |       | 28                                                                                           | %          | 26 | % |   |   |
|                                     |            |                                                                                              |            |                                                                                              |            |                                                  |            |                                                                                              |            |  |  |  |  |  |  |  |  |  |  |

 

Sales andmarketing expenses consist primarily of the costs of personnel involved in thesales and marketing process, sales commissions, advertising and promotionalmaterials, sales facilities expense, trade shows, and seminars. The increase inexpense for the three and six months ended June 30, 2006 was primarily dueto stock-based compensation expense of $1.2 million and $2.4 million,respectively, as a result of implementing SFAS 123(R), effective January 1,2006, and from issuing RSU’s and SAR’s during the first half of 2006. We alsoincurred approximately $0.3 million of bad debt expense during the secondquarter of 2006 associated with the winding down of our soft dollar business.Increases in travel expenses, marketing costs and higher information technologycosts contributed to the increases during the fiscal 2006 periods. We allocatedpayroll and related costs of certain IT personnel from general andadministrative expense to sales and marketing expense as these employees wereworking on specific projects relating to the sales and marketing function. Weexpect sales and marketing

30

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expenses to be downslightly in the third quarter of 2006 compared to the second quarter of 2006,due primarily to non-recurring expenses related to the closure of our softdollar business in the second quarter of 2006.

***ProductDevelopment***
| ** **                          | ** ** | **Three Months Ended June 30**                                                       | ** ** | ** **                                                                                               | ** ** | **Six Months Ended June 30** | ** ** | ** **                                                                                               | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **Change**                                       | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **Change** | ** ** |
| Product  development (in thousands) |       | $                                                                                                        | 8,815      |                                                                                                     | $          | 7,811                                            |       | $                                                                                                        | 1,004      |   | $ | 16,750 |   | $ | 15,767 |   | $ | 983 |   |
| Percent of total net  revenues      |       | 20                                                                                                       | %          | 19                                                                                                       | %          |                                             |       | 19                                                                                                       | %          | 20 | % |   |   |
|                                     |            |                                                                                                          |            |                                                                                                          |            |                                                  |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |

 

Productdevelopment expenses consist primarily of salary and benefits for ourdevelopment staff as well as contractors’ fees and other costs associated withthe enhancements of existing products and services and development of newproducts and services. We account for product development costs in accordancewith SFAS 2, “Accounting for Research and Development Costs”, and SFAS 86, “Accountingfor Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”,which specifies that costs incurred to develop computer software productsshould be charged to expense as incurred until technological feasibility isreached for the products. Once technological feasibility is reached, allsoftware costs should be capitalized until the product is made available forgeneral release to customers. The capitalized costs will be amortized using thegreater of the ratio of the products current gross revenues to the total ofcurrent expected gross revenues or on a straight-line basis over the software’sestimated economic life of approximately three years.

The increase inproduct development expense of $1.0 million during the three and six monthsended June 30, 2006 was primarily due to stock-based compensation expenseof $0.8 million and $1.5 million, respectively, as a result of implementingSFAS 123(R), effective January 1, 2006, and from issuing RSU’s and SAR’sduring the first half of 2006. The increase in expense during the six monthsended June 30, 2006 was partially offset by the capitalization of softwaredevelopment costs (related to the beta phase of APX 1.5) of $0.9 million,whereas only $0.5 million was capitalized during the comparable period of 2005.We expect product development expenses to decrease slightly in the thirdquarter of 2006 as we capitalize more payroll and related expense under SFAS 86compared to the second quarter of 2006.

***Generaland Administrative***
| ** **                                 | ** ** | **Three Months Ended June 30**                                                       | ** ** | ** **                                                                                               | ** ** | **Six Months Ended June 30** | ** ** | ** **                                                                                               | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **Change**                                       | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **Change** | ** ** |
| General and  administrative (in thousands) |       | $                                                                                                        | 7,702      |                                                                                                     | $          | 7,808                                            |       | $                                                                                                        | (106       | ) | $ | 15,648 |   | $ | 16,161 |   | $ | (513 | ) |
| Percent of total net  revenues             |       | 17                                                                                                       | %          | 19                                                                                                       | %          |                                             |       | 18                                                                                                       | %          | 20 | % |   |   |
|                                            |            |                                                                                                          |            |                                                                                                          |            |                                                  |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |

 

General andadministrative expenses consist primarily of personnel costs for finance,administration, operations and general management, as well as legal andaccounting expenses. The decrease in the three and six months ended June 30,2006 reflects lower personnel costs (excluding stock-based compensationexpense) of approximately $0.8 million and $1.3 million as a result of lowerheadcount and allocation of information technology (IT) personnel costs toother departments. During the three and six months ended June 30, 2006, weallocated payroll and related costs for certain IT personnel to sales andmarketing expense and cost of professional services as these IT employees wereworking on specific projects relating to these functions. Consistent with thedecrease in headcount, our recruiting fees decreased by $0.1 million and $0.2million during the three and six months ended June 30, 2006. The overalldecrease was also attributable to lower legal fees of $0.4 million and $0.8million during the three and six months ended June 30, 2006 as thecomparative 2005 periods included costs for various legal disputes in the prioryear. Decreases in depreciation expense of $0.4 million and $0.5 million forthe three and six months ended June 30, 2006, respectively, alsocontributed to the overall decrease in general and administrative expense whichprimarily resulted from assets being fully depreciated subsequent to June 30,2005 and also from the exit of one floor of our office space in New York, NewYork in the third quarter of 2005. Outside service costs also decreased in 2006as we utilized fewer external consultants during the three and six months endedJune 30, 2006. These decreases were offset by increases in stock-basedcompensation expense of $1.0 million and $1.8 million during the three and sixmonths ended June 30, 2006, respectively, as a result of adopting SFAS123R in the first quarter of 2006, and from issuing RSU’s and SAR’s during thefirst half of 2006 and an increase in rent expense of approximately $0.3million and $0.6 million during the three and six months ended June 30,2006, respectively, primarily resulting fromhigher rent expense due to our entry into a definitive lease agreement in January 2006for our future headquarters facility located at 600 Townsend Street in SanFrancisco, California. We expect general and administrative expenses tobe down slightly in the third quarter of 2006.

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***Amortizationof Other Intangibles***
| ** **                                         | ** ** | **Three Months Ended June 30**                                                       | ** ** | ** **                                                                                               | ** ** | **Six Months Ended June 30** | ** ** | ** **                                                                                               | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **Change**                                       | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **Change** | ** ** |
| Amortization of  other intangibles  (in thousands) |       | $                                                                                                        | 1,020      |                                                                                                     | $          | 1,020                                            |       | $                                                                                                        | —     |   | $ | 1,999 |   | $ | 2,067 |   | $ | (68 | ) |
| Percent of total net  revenues                     |       | 2                                                                                                        | %          | 2                                                                                                        | %          |                                             |       | 2                                                                                                        | %          | 3 | % |   |   |
|                                                    |            |                                                                                                          |            |                                                                                                          |            |                                                  |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |

 

Amortization ofother intangibles represents amortization of non-technology related intangibleassets. Amortization of other intangibles has remained flat during the threeand six months ended June 30, 2006 as we continue to amortize ournon-technology intangibles through their estimated useful lives. We expectamortization of other intangibles to be approximately $1 million in the thirdquarter of 2006.

***RestructuringCharges***
| ** **                            | ** ** | **Three Months Ended June 30**                                                       | ** ** | ** **                                                                                               | ** ** | **Six Months Ended June 30** | ** ** | ** **                                                                                               | ** ** |
|---------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **Change**                                       | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **Change** | ** ** |
| Restructuring  charges (in thousands) |       | $                                                                                                        | 124        |                                                                                                     | $          | 1,520                                            |       | $                                                                                                        | (1,396     | ) | $ | 265 |   | $ | 1,603 |   | $ | (1,338 | ) |
| Percent of total net  revenues        |       | 0                                                                                                        | %          | 4                                                                                                        | %          |                                             |       | 0                                                                                                        | %          | 2 | % |   |   |
|                                       |            |                                                                                                          |            |                                                                                                          |            |                                                  |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |

 

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

##### During the three months ended June 30,2006, we recorded a restructuring charge of $124,000 which related to the coststo exit a portion of our facility in New Rochelle, New York, and our entirefacility in Summit, New Jersey as well as the fair value amortization of priorperiod obligations. During the three months ended March 31,2006, Advent recorded a net restructuring charge of $141,000 primarily toadjust original estimates for facilities in San Francisco, California and NewYork, New York.

During the threemonths ended June 30, 2005, Advent recorded a restructuring charge of $1.5million primarily consisting of facility and exit costs related to sub-leasingone floor of its office space in New York, New York. During the three months ended March 31,2005, Advent recorded a net restructuring charge of $83,000 primarily to adjustits original estimates for vacated facilities in Concord, California.

The followingtable sets forth an analysis of the components of the restructuring charges andthe payments and non-cash charges made against the accrual during the sixmonths ended June 30, 2006 (in thousands):
| ** **                                                  | ** ** | **Facility Exit** | ** ** | **Severance and** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------|------------|
| ** **                                                  | ** ** | **Costs**              | ** ** | **Benefits**           | ** ** | **Total**  | ** ** |
| Balance of  restructuring accrual at December 31, 2005 |       | $                      | 4,553      |                   | $          | 7          |       | $ | 4,560 |   |
| Cash payments                                               |       | (1,082                 | )          | —                 |       | (1,082     | )          |
| Reversal of  deferred rent related to facilities exited     |       | 6                      |       | —                 |       | 6          |       |
| Restructuring  charges                                      |       | 95                     |       | —                 |       | 95         |       |
| Adjustment of  prior restructuring costs                    |       | 173                    |       | (3                     | )          | 170        |       |
| Balance of  restructuring accrual at June 30, 2006     |       | $                      | 3,745      |                   | $          | 4          |       | $ | 3,749 |   |

 

Of the remaining restructuring accrual of $3.7 million at June 30,2006, $0.8 million and $2.9 million are included in accrued liabilities andother long-term liabilities, respectively, on the accompanying condensedconsolidated balance sheet. As of June 30, 2006, the remaining excessfacility costs of $3.7 million are stated at estimated fair value, net ofestimated sublease income of approximately $7.9 million. We expect to payremaining obligations in connection with vacated facilities no later than overthe remaining lease terms, which expire on various dates through 2012. Weexpect to pay the remaining severance and benefits in 2006. As a result of ourrestructuring activities implemented to date, we have reduced our totalexpenses by approximately $15 million on an annual basis. We anticipateincurring a restructuring charge of approximately $3.0 million in relation toour corporate facility move in the fourth quarter of 2006.

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### ***Operating Income (Loss) by Segment***

| ** **                                          | ** ** | **Three Months Ended June 30**                                           | ** ** | ** **                                                                                   | ** ** | **Six Months Ended June 30** | ** ** | ** **                                                                                   | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **Change**                                       | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **Change** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                                                                      | ** ** |
| Advent  Investment Management                       |       | $                                                                                            | 4,560      |                                                                                         | $          | 313                                              |       | $                                                                                            | 4,247      |   | $ | 9,673 |   | $ | 1,455 |   | $ | 8,218 |   |
| MicroEdge                                           |       | 1,172                                                                                        |       | 577                                                                                          |       | 595                                              |       | 2,123                                                                                        |       | 950 |   | 1,173 |   |
| Other                                               |       | (477                                                                                         | )          | 86                                                                                           |       | (563                                             | )          | (945                                                                                         | )          | 86 |   | (1,031 | ) |
| Unallocated  corporate operating costs and expenses |       |                                                                                         |       |                                                                                         |       |                                             |       |                                                                                         |       |   |   |   |   |
| Stock-based compensation                            |       | (3,475                                                                                       | )          | —                                                                                       |       | (3,475                                           | )          | (6,649                                                                                       | )          | — |   | (6,649 | ) |
| Amortization of developed technology                |       | (263                                                                                         | )          | (614                                                                                         | )          | 351                                              |       | (657                                                                                         | )          | (1,228 | ) | 571 |   |
| Amortization of other intangibles                   |       | (1,020                                                                                       | )          | (1,020                                                                                       | )          | —                                           |       | (1,999                                                                                       | )          | (2,067 | ) | 68 |   |
| Total operating  income (loss)                      |       | $                                                                                            | 497        |                                                                                         | $          | (658                                             | )          | $                                                                                            | 1,155      |   | $ | 1,546 |   | $ | (804 | ) | $ | 2,350 |   |

 

Operating income for the AIM segment increased by approximately $4.2million and $8.2 million during the three and six months ended June 30,2006, respectively which generally reflects increases in AIM revenues of $3.6million and $8.0 million during these respective periods. MicroEdge’s operatingincome increased by $0.6 million and $1.2 million during the three and sixmonths ended June 30, 2006 primarily due to decreased marketing costs andoutside services cost associated with lower utilization of outside contractors.Operating losses for our “Other” segment increased by $0.6 million and $1.0million during the three and six months ended June 30, 2006, resultingprimarily from our decision during the first quarter of 2006 to wind down thesoft dollar component of our business as it no longer fits with our corporatestrategy. We anticipate winding down soft dollaring of Advent or third partyproducts and services through this subsidiary during the third quarter of 2006.

### ***Interest Income and Other, Net***

| ** **                                     | ** ** | **Three Months Ended June 30**                                           | ** ** | ** **                                                                                   | ** ** | **Six Months Ended June 30** | ** ** | ** **                                                                                   | ** ** |
|------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **Change**                                       | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **Change** | ** ** |
| Interest income  and other, net (in thousands) |       | $                                                                                            | 1,051      |                                                                                         | $          | 4,712                                            |       | $                                                                                            | (3,661     | ) | $ | 2,397 |   | $ | 5,609 |   | $ | (3,212 | ) |
| Percent of total net  revenues                 |       | 2                                                                                            | %          | 12                                                                                           | %          |                                             |       | 3                                                                                            | %          | 7 | % |   |   |
|                                                |            |                                                                                              |            |                                                                                              |            |                                                  |            |                                                                                              |            |  |  |  |  |  |  |  |  |  |  |

 

Interest income and other, net consists of interest income, realizedgains and losses on investments and foreign currency gains and losses. Interestincome and other, net during the three and six months ended June 30, 2005included a gain on sale of a private equity investment of $3.6 millionduring the second quarter of 2005, accounting for the majority of the decreaseof $3.7 million and $3.2 million in interest income and other, net during thethree and six months ended June 30, 2006, respectively. These decreaseswere offset by an increase in interest income of $0.2 million and $0.6 millionduring the three and six months ended June 30, 2006 as a result of higheraverage interest rates. The remaining components of interest incomeand other expense, net fluctuate primarily due to foreign currency gains andlosses and realized gains and losses from sales of investments.

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

| ** **                                                | ** ** | **Three Months Ended June 30**                                           | ** ** | ** **                                                                                   | ** ** | **Six Months Ended June 30** | ** ** | ** **                                                                                   | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **Change**                                       | ** ** | **       2006       ** | ** ** | **       2005       ** | ** ** | **Change** | ** ** |
| Provision for  (benefit from) income taxes (in thousands) |       | $                                                                                            | (55        | )                                                                                            | $          | 116                                              |       | $                                                                                            | (171       | ) | $ | (1,062 | ) | $ | 130 |   | $ | (1,192 | ) |
| Percent of total net  revenues                            |       | 0                                                                                            | %          | 0                                                                                            | %          |                                             |       | -1%                                                                                          |       | 0 | % |   |   |
|                                                           |            |                                                                                              |            |                                                                                              |            |                                                  |            |                                                                                              |            |  |  |  |  |  |  |  |  |  |  |

 

For the three andsix months ended June 30, 2006, we recorded a benefit from income taxes of$55,000 and $1.1 million respectively, compared to provisions of $116,000 and$130,000 in the three and six months ended June 30, 2005, respectively. Weaccount 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 to be recognized as deferred tax assets andliabilities. During the fourth quarter of 2003, we established a full valuationallowance against our deferred tax assets in the United States because wedetermined that it was more likely than not that these deferred tax assetswould not be realized in the foreseeable future. For the fiscal 2005 and 2006periods, we recorded a nominal provision for income taxes because the statutoryincome tax expense was fully offset by a decrease in the valuation allowance.The small benefit from income taxes for the three months ended June 30,2006 is primarily due to the recognition of some foreign deferred tax benefits.The benefit from income taxes of $1.1 million for the six months ended June 30,2006 is primarily due to the receipt of a state income tax refund of $0.5million and a reduction in other projected tax liabilities associated with theexpiration of federal income tax return contingency of approximately $0.6million.

If our recenttrend of profitability continues, we may determine that there is sufficientpositive evidence to support a reversal of, or decrease in, the valuationallowance. If we were to reverse all or some part of our valuation allowanceand recognize all or some part of our deferred tax assets, our condensedconsolidated financial statements would reflect an increase in assets on ourbalance sheet and a corresponding tax benefit to our statement of operations inthe amount of the reversal. Once we have removed our valuation allowance, wewill resume providing for income taxes at the statutory rate. Despite this

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potential increase in oureffective tax rate, our cash payments for income taxes will continue to benominal in the near term as we have significant net operating losses, capitallosses and credit carryforwards to utilize against current income taxes.

### **LIQUIDITY AND CAPITAL RESOURCES**

Our aggregatecash, cash equivalents and marketable securities were $97.2 million at June 30,2006, compared with $163.4 million at December 31, 2005. Cash equivalentsare comprised of highly liquid investments purchased with an original orremaining maturity of 90 days or less at the date of purchase.

The table below,for the periods indicated, provides selected cash flow information (inthousands):
|                                            | ** ** | **Six Months Ended June 30** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Net cash provided  by operating activities |       | $                                                | 21,379     |   | $ | 13,482 |   |
| Net cash  provided by investing activities |       | $                                                | 24,160     |   | $ | 32,481 |   |
| Net cash used in  financing activities     |       | $                                                | (77,585    | ) | $ | (44,023 | ) |

 

***Cash Flows from Operating Activities***

Our cash flows from operating activities represent the most significantsource of funding for our operations. Our cash provided by operating activitiesgenerally follows the trend in our net revenues and operating results. Our cashprovided by operating activities during the six months ended June 30, 2006of $21.4 million was primarily the result of our net income and non-cashcharges including stock-based compensation, depreciation and amortization.Other sources of cash during the six months ended June 30, 2006 includedincreases in deferred rent and deferred revenue. The increase in deferred rentresulted from the entry into a material definitive lease agreement on January 2006for our future headquarters facility located at 600 Townsend Street in SanFrancisco. The increase in deferred revenue primarily reflected our continuedtransition to the term license model. Uses of our operating cash included areduction of our sales reserves, an increase in our prepaid and other assetsand decreases in accrued liabilities and income taxes payable. The increase inprepaid and other assets primarily reflected a receivable established for thetenant improvement allowance associated with our 600 Townsend lease agreement,which was partially offset by cash payments by the lessor during the six monthsended June 30, 2006. The decreases in accounts payable and accruedliabilities reflected cash payments of December 31, 2005 liabilitiesincluding year-end payables and bonuses, commissions, payroll taxes, settlementof claims of certain former members and employees of Advent Outsource DataManagement, and legal costs associated with the discovery phase of the Kinexusearnout litigation. The decrease in income taxes payable during the six monthsended June 30, 2006 reflected cash payments related to state income taxesand reductions in other projected tax liabilities.

Our cash provided by operating activities of $13.5 million during thefirst six months of 2005 was primarily the result of our net income andnon-cash charges including depreciation and amortization, partially offset by anon-operating gain from the sale of an equity investment. Other sources of cashduring the first six months of 2005 included decreases in accounts receivable,prepaid and other assets and increases in accrued liabilities and deferredrevenue. The decrease in accounts receivable primarily reflected strongcollections during the first half of 2005. Days’ sales outstanding decreased to68 days from 73 days during this period. The decrease in prepaid and otherassets primarily reflected prepaid expense amortization. The increase inaccrued liabilities was primarily due to restructuring charges for facilityexit costs during the second quarter of 2005. The increase in deferred revenueprimarily reflected an increase in deferred maintenance. Uses of our operatingcash included a reduction in income taxes payable as a result of the payment ofa tax settlement of $1.2 million. Other major uses of cash include fundingpayroll (salaries, bonuses and benefits), general operating expenses (marketing,travel and office rent) and cost of revenues.

We expect that cash provided by operating activities may fluctuate infuture periods as a result of a number of factors including fluctuations in ournet revenues and operating results, amount of revenue deferred, collection ofaccounts receivable, and timing of payments.

***Cash Flows from Investing Activities***

Net cash provided by investing activities of $24.2 million for the sixmonths ended June 30, 2006, consisted primarily of net sales andmaturities of marketable securities of $34.1 million. During the six monthsended June 30, 2006, we liquidated investments to provide the cashrequired to repurchase our common stock. These cash proceeds were offset bycapital expenditures of $7.9 million, a change in restricted cash of $1.2million to secure a bank line of credit, and capitalized software

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developmentcosts of $0.8 million. During the first six months of 2006, restricted cash increased $1.2million as we secured a bank line of credit of $1.2 million associated with theCompany’s entry into a definitive lease agreement with Toda Development, Inc.(“Toda”) on January 2006 for our future headquarters facility located 600Townsend Street in San Francisco, California. In the event that we defaultunder the terms of this lease agreement, the letter of credit may be drawn uponby Toda.

Net cash provided by investing activities of $32.5 million for the sixmonths ended June 30, 2005, consisted primarily of net sales andmaturities of marketable securities of $32.6 million and proceeds from the saleof a private equity investment of $3.8 million offset by capital expendituresof $2.4 million and cash used in acquisitions of $1.0 million related to thefinal earn-out payment made to the shareholders of Advent Outsource DataManagement and the final payment made to Advent Europe relating to theacquisition of Advent United Kingdom and Switzerland in May 2004.

***CashFlows from Financing Activities***

Net cash used in financing activities for the six months ended June 30,2006 of $77.6 million reflected the repurchase of 2.8 million shares of ourcommon stock for $86.5 million, partially offset by proceeds received from theissuance of common stock of $8.9 million.

Net cash used in financing activities for the six months ended June 30,2005 of $44.0 million reflected the repurchase of 2.7 million shares of ourcommon stock for $48.8 million, partially offset by proceeds received from theissuance of common stock of $4.7 million.

Our liquidity and capital resources in any period couldbe affected by the exercise of outstanding stock options and issuance of commonstock under our employee stock purchase plan. The resulting increase in thenumber of outstanding shares could also affect our per share results ofoperations. However, we cannot predict the timing or amount of proceeds fromthe exercise of these securities, or whether they will be exercised at all.Furthermore, we may continue our stock repurchase activity under the sharerepurchase programs approved by our Board. As of June 30, 2006,approximately 0.7 million shares were available to be repurchased under theshare repurchase plan that was approved by the Board and publicly announced in April 2006.As of the issuance of this 10-Q, all of these shares under this programhave been repurchased. As noted in the “Recent Developments” section above, inJuly 2006, our Board approved an additional common stock repurchaseprogram authorizing the repurchase of up to 1.5 million shares of the Company’scommon stock.

At June 30, 2006, we had $52.9 million in working capital. Wecurrently have no significant capital commitments other than commitments underour operating leases, which increased from $21.9 million at December 31,2005 to $40.6 million at June 30, 2006, primarily as a result of our entryinto a material definitive lease agreement in January 2006 for our futureheadquarters facility located at 600 Townsend Street in San Francisco,California.

The following table summarizes our contractual cash obligations as of June 30,2006 (in thousands):
| ** **                                            | ** ** | **Six Months Ended** | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|--------------------------------|------------|-------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                                            | ** ** | **December 31**           | ** ** | **Year Ended December 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **2006**                       | ** ** | **2007**                                  | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** |
| Operating lease  obligations, net of sub-lease income |       | $                              | 3,411      |                                      | $          | 5,866      |       | $          | 7,078      |       | $          | 4,073          |       | $          | 3,777      |   | $ | 16,362 |   | $ | 40,567 |   |
|                                                       |            |                                |            |                                           |            |            |            |            |            |            |            |                |            |            |            |  |  |  |  |  |  |  |

 

At June 30, 2006 and December 31, 2005, we did not have anyrelationships with unconsolidated entities or financial partnerships, such asentities often referred to as structured finance or special purpose entities, whichwould have been established for the purpose of facilitating off-balance sheetarrangements or other contractually narrow or limited purposes. As such, we arenot materially exposed to any financing, liquidity, market or credit risk thatcould arise if we had engaged in such relationships.

We expect that for the foreseeable future, our operating expenses andstock repurchases will continue to constitute a significant use of cash flow.In addition, we may use cash to fund acquisitions or invest in otherbusinesses. Based upon our past performance and current expectations, webelieve that our cash and cash equivalents, marketable securities and cashgenerated from operations will be sufficient to satisfy our working capitalneeds, capital expenditures, investment requirements and financing activitiesfor at least the next twelve months.

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**Off-BalanceSheet Arrangements and Contractual Obligations**

Our off-balancesheet arrangements as of June 30, 2006 consist primarily of obligationsunder operating leases. See Note 11, “Commitments and Contingencies” to thecondensed consolidated financial statements and the “Liquidity and CapitalResources” section above for further discussion and a tabular presentation ofour contractual obligations.

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

We are exposed tofinancial market risks, including changes in foreign currency exchange ratesand interest rates. Historically, much of our revenues and capital spending wastransacted in U.S. dollars. However, since the acquisitions of Advent Denmark,Advent Norway, Advent Sweden, Advent Netherlands, and Advent Europe’s remainingdistributors in the United Kingdom and Switzerland, whose revenues, with theexception of Geneva transactions and capital spending, are transacted in localcountry currencies, we have greater exposure to foreign currency fluctuations.We do not believe that a hypothetical 10% change in foreign currency exchangerates would have a material adverse effect on our consolidated financial position,results of operations or cash flows.

Our interest rate risk relates primarily to our investment portfolio,which consisted of $30.6 million in cash equivalents and$58.3 million in marketable securities as of June 30, 2006. Animmediate sharp increase in interest rates could have a material adverse affecton the fair value of our investment portfolio. Conversely, immediate sharpdeclines in interest rates could seriously harm interest earnings of ourinvestment portfolio. We do not currently use derivative financial instrumentsin our investment portfolio, nor hedge for these interest rate exposures.

By policy, we limit our exposure to longer-term investments, and amajority of our investment portfolio at June 30, 2006 and December 31,2005 had maturities of less than one year. As a result of the relatively shortduration of our portfolio, an immediate hypothetical parallel shift to theyield curve of plus 25 basis points (BPS), 50 BPS and 100 BPS would result in areduction of 0.13% ($113,000), 0.26% ($227,000) and 0.51% ($454,000),respectively, in the market value of our investment portfolio as of June 30,2006.

We have also invested in several privately-held companies, most of whichcan still be considered in the start-up or development stages. Thesenon-marketable investments are classified as other assets on our balance sheet.Our investments in privately-held companies could be affected by an adversemovement in the financial markets for publicly-traded equity securities,although the impact cannot be directly quantified. These investments areinherently risky as the market for the technologies or products theseprivately-held companies have under development are typically in the earlystages and may never materialize. The value of these investments is alsoinfluenced by factors including the operating effectiveness of these companies,the overall health of the companies’ industries and the strength of the privateequity markets. We could lose our entire investment in these companies. At June 30,2006 our net investments in privately-held companies totaled $8.5 million.

**Item 4. Controls and Procedures**

**Evaluation of disclosure controlsand procedures**

The Company’s managementevaluated, with the participation of the Chief Executive Officer and Chief FinancialOfficer, the effectiveness of the Company’s disclosure controls and procedures,as such term is defined under Rule 13a-15(f) of the Securitiesand Exchange Act of 1934, as of the end of the period covered by this QuarterlyReport on Form 10-Q. Based on this evaluation, the Chief ExecutiveOfficer and Chief Financial Officer have concluded that because the materialweaknesses in internal control over financial reporting which were previouslyidentified in “Management’s Report on Internal Control over Financial Reporting”included in Item 8 of our Annual Report on Form 10-K for the yearended December 31, 2005 have not yet been remediated, our disclosurecontrols and procedures were ineffective as of June 30, 2006 to ensurethat information we are required to disclose in reports that we file or submitunder the Securities Exchange Act of 1934 (i) is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms and (ii) is accumulated andcommunicated to Advent’s management, including our Chief Executive Officer andour Chief Financial Officer, as appropriate to allow timely decisions regardingrequired disclosure.

**Changes in internal controlover financial reporting**

There were no changesin our internal control over financial reporting which were identified inconnection with the evaluation required by Rule 13a-15(e) ofthe Exchange Act that occurred during the second quarter ended June 30,2006 that has materially affected, or is reasonably likely to affect, Advent’sinternal control over financial reporting.

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** **

**PART II. OTHERINFORMATION**

**Item 1.    LegalProceedings**

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

In September 2003,NetJets Aviation, Inc. (formerly known as Executive Jet Aviation, Inc.)filed suit against B. Douglas Morriss, Rueben Morriss and Barbara Morriss inthe Circuit Court of the County of Saint Louis, Missouri for their allegedfailure to pay for their use of private jet aircraft leased and managed byplaintiffs. In April 2005, plaintiffs amended their complaint to joinapproximately 15 additional entities allegedly controlled by B. Morriss asdefendants in the suit, including Kinexus Corporation, which was acquired byAdvent Software, Inc. after the alleged conduct in plaintiffs’ lawsuit.The complaint alleges breach of contract and seeks approximately $1.1 millionin damages, as well as interest and attorneys’ fees. Kinexus was notserved with the complaint and became aware of the lawsuit through co-defendant’scounsel in November 2005. Kinexus entered an appearance at a schedulingconference for the case in April 2006 and filed an answer to the complainton the same day, disputing the plaintiff’s claims against Kinexus. Kinexusbelieves that it has meritorious defenses and intends to vigorously defend thissuit. Management believes that any potential loss associated with thislitigation is neither probable nor reasonably estimable at this time andaccordingly has not accrued any amounts for any potential loss.

On July 11,2006, a former independent consultant filed suit against the Company in theSupreme Court of the State of New York. The complaint alleges that Adventfailed to pay plaintiff commissions due for his services as a consultant toAdvent. The plaintiff is seeking approximately $101,000 in commissions and $2.0million in unspecified consequential damages, as well as interest and attorney’sfees. We dispute the plaintiffs’ claims and believe that we have meritoriousdefenses and intend to vigorously defend this action. Management believes thatany potential loss associated with this litigation is neither probably norreasonably estimable at this time and accordingly has not accrued any amountsfor any potential loss.

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

**Item 1A. Risk Factors**

*Investors should carefully consider the risks described below beforemaking an investment decision. The trading price of our common stock coulddecline due to any of, but are not limited to, these risks. In assessing theserisks, investors should also refer to the other information contained orincorporated by reference in this Quarterly Report on Form 10-Qfiled with the SEC, including our consolidated financial statements and relatednotes thereto.*

**Our Operating Results May Fluctuate Significantly.**

Although we are transitioning to a predominantly term license model,perpetual licenses still constituted approximately 55% of our second quarter of2006 software license revenues, while declining significantly from the secondquarter of 2005. Until we have substantially completed our transition to a termlicense model, our license revenues will be negatively impacted by thecontinued reduction in perpetual license revenue and increased term licenserevenue. Term license contracts are comprised of both software licenses andmaintenance services, and we typically allocate 55% of the term revenue tolicense and 45% of the term revenue to maintenance, based on the relativeeconomic value of these two elements. Individual perpetual software licensesvary significantly in value, and the value and timing of these transactions cantherefore cause our quarterly license revenues to fluctuate. We have oftenrecognized a substantial portion of each quarter’s perpetual license revenuesin the last month, weeks or even days of the quarter. As a result, themagnitude of quarterly fluctuations in license revenue may not be evident untillate in or after the close of a particular quarter and a disruption late in thequarter may have a disproportionately large negative impact on revenue. Inaddition, some of our large professional services contracts contain performancemilestones or acceptance clauses,

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whichaffect the timing of revenue recognized under such contracts. As a result ofthese and other factors, our quarterly net revenues may fluctuatesignificantly. Our expense levels are based in significant part on ourtransition to term license revenue recognition and expectations of futurerevenues and therefore are relatively fixed in the short term. Due to the fixednature of these expenses, combined with the relatively high gross marginhistorically achieved on our products, an unanticipated decline in net revenuesin any particular quarter may adversely affect our operating results. Thesefactors have impacted and may continue to impact our operating results.

We are in a transition from selling predominantly perpetual licenses toselling a mix of perpetual and multi-year term licenses, and we expect termlicense revenue to increase as a proportion of total license revenue in thefuture. We generally recognize revenue for term licenses ratably over theperiod of the contract term, which is typically one to five years. Werecognized approximately 24% of license revenue from term licenses in fiscal2005, as compared to 11% in 2004 and 4% in 2003; this increased toapproximately 34% and 45% of license revenue in the first and second quartersof 2006. We recognized approximately 3% of maintenance and other recurringrevenues from term licenses in fiscal 2005, as compared with 1% in 2004 and 1%in 2003. If we are successful in our strategy to increase the proportion of ourbusiness signed on term license contracts, it will result in a greater portionof license revenue being deferred and as a result, our license revenue andprofitability could be reduced in the short term. However, over the long-term,we expect that increases in deferred license revenue will lower the quarterlyvariability of license revenues.

In addition, we experience seasonality in our license revenue. Thefourth quarter of the year typically has the highest license revenue, followedby lower license revenue in the first quarter of the succeeding year. Webelieve that this seasonality results primarily from customer budgeting cyclesand expect this seasonality to continue in the future, although if we aresuccessful in moving more of our licenses to a term model, we believe theimpact of this seasonality will likely decrease in the long term.

Because of the above factors, we believe that period-to-periodcomparisons of our operating results are not necessarily meaningful and thatthese comparisons cannot be relied upon as indicators of future performance.

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

The purchase of our software products often requires prospectivecustomers to provide significant executive-level sponsorship and to make majorsystems architecture decisions. As a result, we must generally engage inrelatively lengthy sales and contracting efforts. Sales transactions maytherefore be delayed during the customer decision process because we mustprovide a significant level of education to prospective customers regarding theuse and benefit of our products. This was exacerbated by the adverse anduncertain economic conditions in 2002 and 2003 that caused existing andpotential clients to reduce or cancel expenditures and delay decisions relatedto acquisition of software and related services. While we have seen somewhatimproved economic conditions in 2004 and 2005, customers are still cautiousabout capital and information technology expenditures. As a result, the salescycle associated with the purchase of our solutions is typically between twoand twelve months depending upon the size of the client, and is subject to anumber of significant risks over which we have little or no control, includingcustomers’ budgeting constraints, internal selection procedures, and changes incustomer personnel, among others.

As a result of a lengthy and unpredictable sales cycle, we have limitedability to forecast the timing and amount of specific license sales. The timingof large individual license sales is especially difficult to forecast, and wemay not be successful in closing large license transactions on a timely basisor at all. Customers may postpone their purchases of our existing products orproduct enhancements in advance of the anticipated introduction of new productsor product enhancements by us or our competitors. When a customer purchases aterm license together with implementation services we do not recognize anyrevenue under the contract until the implementation services are substantiallycomplete. If we are not able to complete an implementation project for a termlicense in a quarter, it will cause us to defer all of the contract revenues toa subsequent quarter. Because our expenses are relatively fixed in the nearterm, any shortfall from anticipated revenues could result in a significantvariation in our operating results from quarter to quarter.

**We Depend Heavily on Our Product, Axys®.**

Historically, we have derived a significant portion of our net revenuesfrom the licensing of Axys, and related ancillary products and services. Inaddition, many of our other applications, such as Partner, Moxy, Qube andvarious data interfaces were designed to operate with Axys to provide anintegrated solution. As a result, we believe that for the next several years amajority of our net revenues will depend upon continued market acceptance ofAxys, as well as enhancements or upgrades to those products and relatedproducts and services. As our clients include a range of financial servicesorganizations, including asset managers, investment advisors, brokerage firms,banks, family offices, hedge funds and others, continued market acceptance alsowill depend

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on the number of firms within each type of organization and the degreeto which Axys has previously penetrated those firms and our ability tointroduce new and upgraded products, such as APX, to those firms as well as newcustomers.

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

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

**We Face Intense Competition.**

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

Our competitors vary in size, scope of services offeredand platforms supported. Many of our competitors have longer operatinghistories and greater financial, technical, sales and marketing resources thanwe do. In addition, consolidation has occurred among some of the competitors inour markets. In 2005, three of Advent’s competitors were acquired with thepossibility of forming even larger companies through additional acquisitions ofcompanies and technologies. In April 2005, Financial Models Company, Inc.was acquired by SS&C. Sunshine Acquisition Corporation, a private equityfirm affiliated with the Carlyle Group, later acquired SS&C in November 2005.SunGard was taken private after being acquired by a consortium of privateequity investment firms in August 2005 and merged into Solar CapitalCorporation. Any further consolidations among our competitors may result instronger competitors in our markets and may therefore either result in a lossof market share or harm our results of operations. In addition, we also facecompetition from potential new entrants into our market that may developinnovative technologies or business models. We cannot guarantee that we will beable to compete successfully against current and future competitors or thatcompetitive pressure will not result in price reductions, reduced operatingmargins or loss of market share, any one of which could seriously harm ourbusiness.

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

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

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vendors have design defects or flaws, areunexpectedly delayed in their introduction, or are unavailable on acceptableterms, our business could be seriously harmed.

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

We believe that our future success is dependenton the continued employment of our senior management and our ability toidentify, attract, motivate and retain qualified technical, sales and otherpersonnel. We need technical resources such as our product developmentengineers to develop new products and enhance existing products and we relyupon sales personnel to sell our products and services and maintain healthybusiness relationships. We therefore need to identify, attract,motivate and retain such employees with the requisite education,backgrounds and industry experience. In addition, we must attract andretain financial and accounting personnel to comply with the requirements of 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 highly skilledpersonnel. Recently enacted accounting regulations requiring the expensing ofequity compensation may impair our ability to provide these incentives withoutreporting significant compensation costs.

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

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

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

·      the impact of recessions in economies outside the United States;

·      greater difficulty in accounts receivable collection and longercollection periods;

·      unexpected changes in regulatory requirements;

·      difficulties in successfully adapting our products to the language,regulatory and technology standards of other countries;

·      difficulties in and costs of staffing and managing foreign operations;

·      reduced protection for intellectual property rights in some countries;

·      potentially adverse tax consequences; and

·      political and economic instability.

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

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

From 2001 through the middle of 2003, our strategyfocused on growth through the acquisition of additional complementarybusinesses. During those years, we made five major acquisitions includingKinexus Corporation, Techfi

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Corporation and Advent Outsource Data ManagementLLC, and also acquired all of the common stock of five of our Europeandistributor’s subsidiaries. In addition, we purchased our European distributor’sremaining two subsidiaries in the United Kingdom and Switzerland in May 2004.

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

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

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

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

We have made and may make future investments in privatelyheld companies, many of which are considered in the start-up or developmentstages. These investments, which we classify as other assets on ourconsolidated balance sheets, are inherently risky, as the market for thetechnologies or products these companies have under development is typically inthe early stages and may never materialize. The value of the investment inthese companies is influenced by many factors, including the operatingeffectiveness of these companies, the overall health of these companies’industries, the strength of the private equity markets and general marketconditions. Due to these and other factors, we have previously determined, andmay in the future determine, that the value of these investments is impaired,which has caused and would cause us to write down the carrying value of theseinvestments, such as the write-down of our investments of $2.0 million infiscal 2003. Furthermore, we cannot be sure that future investment, license,fixed asset or other asset write-downs will not occur. If future write-downs dooccur, they could harm our business and results of operations.

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

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

**Our Stock Price May Fluctuate Significantly.**

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

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**If Our Relationship withFinancial Times/Interactive Data Is Terminated, Our Business May BeHarmed.**

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

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

Approximately 600 of our clients utilize tradingcommissions (“soft dollar arrangements”) to pay for software products andservices, both through our broker/dealer subsidiary, Second Street Securities,and through other independent broker/dealers. During fiscal 2005, the totalvalue of Advent products and services paid with soft dollars was approximately6% of our total billings. In May of 2004, the SEC and the NationalAssociation of Securities Dealers (the “NASD”) set up a task force to considersoft dollar arrangements in the industry, and to provide the SEC with guidanceon improving the transparency of fund transaction costs and distributionarrangements. Phase I of the task force focused on soft dollars and concludedwith “The Report of the Mutual Fund Task Force on Soft Dollars and PortfolioTransaction Costs”, delivered to the SEC in November 2004 and recommendingthe SEC to:

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

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

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

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

****In October 2005, the SECinvited comments from interested parties on its proposed interpretation of theregulations relating to soft dollars and bundled commissions in response to thefindings of the task force, and on July 18, 2006, the SEC issued itsinterpretative release, which may affect our clients ability to use soft dollararrangements to pay for Advent products and services, in which case ourrevenues could decrease. The Company is in the process of evaluating theimpact, if any, of this release.****

Duringthe third quarter of 2006, we anticipate that we will complete the wind down ofthe “soft dollar” component of our SEC-registered broker/dealer subsidiary,Second Street Securities, as it no longer fits with our corporate strategy.Second Street Securities offered our customers the ability to pay for Adventproducts and other third party services through brokerage commissions and otherfee-based arrangements.

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

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

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protecting our proprietary rights will be adequateor that our competitors will not independently develop similar technology,duplicate our products or design around any patent that may be issued to us orother intellectual property rights of ours.

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

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

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

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

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

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

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

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

The Sarbanes-Oxley Act (“the Act”) of 2002 requiredchanges in some of our corporate governance and securities disclosure and/orcompliance practices. As part of the Act’s requirements, the SEC has enactednew rules on a variety of subjects, and the NASDAQ Stock Market hasenacted new corporate governance listing requirements. These developments haveincreased and may in the future increase our accounting and legal compliancecosts and could also expose us to additional liability if we fail to complywith these new rules and reporting requirements. In fiscal 2004 and 2005,we incurred approximately $2.1 million and $1.8 million, respectively, inSarbanes-Oxley related expenses consisting of external consulting costs andauditor fees. In addition, such developments may make retention and recruitmentof qualified persons to serve in executive management positions more difficult.We continue to evaluate and monitor regulatory and legislative developments andcannot reliably estimate the timing or magnitude of all costs we may incur as aresult of the Act or other related legislation or regulation.

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**Changes in, or Interpretationsof, Accounting Principles Could Result in Unfavorable Accounting Charges**

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

·      Software revenue recognition

·      Accounting for stock-based compensation

·      Accounting for income taxes

·      Accounting for business combinations and related goodwill

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

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

We currently use the Black-Scholes option pricingmodel to determine the fair value of stock options and employee stock purchaseplan shares. The Black-Scholes option pricing model was developed for use inestimating the fair value of traded options that have no vesting restrictionsand are fully transferable, characteristics not present in our option grantsand employee stock purchase plan shares. Existing valuation models, includingthe Black-Scholes and lattice binomial models, may not provide reliablemeasures of the fair values of our stock-based compensation. Consequently,there is a risk that our estimates of the fair values of our stock-based compensationawards on the grant dates may bear little resemblance to the actual valuesrealized upon the exercise, expiration, early termination or forfeiture ofthose stock-based payments in the future. Certain stock-based payments, such asemployee stock options, may expire worthless or otherwise result in zerointrinsic value as compared to the fair values originally estimated on thegrant date and reported in our financial statements. Alternatively, value maybe realized from these instruments that are significantly higher than the fairvalues originally estimated on the grant date and reported in our financialstatements. There currently is no market-based mechanism or other practicalapplication to verify the reliability and accuracy of the estimates stemmingfrom these valuation models, nor is there a means to compare and adjust theestimates to actual values.

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

**Security Risks May Harm Our Business.**

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

**If WeFail to Maintain an Effective System of Internal Control, We May Not beAble to Accurately Report Our Financial Results. As a Result, Current andPotential Stockholders Could Lose Confidence in Our Financial Reporting, WhichWould Harm Our Business and the Trading Price of Our Stock.**

Effectiveinternal control is necessary for us to provide reliable financial reports. Ifwe can not provide reliable financial reports, our business and operatingresults could be harmed. We have in the past discovered, and may in the futurediscover, areas of our internal control that need improvement including controldeficiencies that may constitute material weaknesses. For example, as of December 31,2005, the Company did not maintain effective controls over the accounting forincome taxes, including the determination of deferred income tax liabilitiesand the related income tax provision. Specifically, the Company did not haveadequate controls to (i) include the benefit from the reversal of thedeferred tax liability associated

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with the amortization of intangible assets of its Europeansubsidiaries, 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 for the quarters ending March 31,2004 and 2005, June 30, 2004 and 2005 and September 30, 2004 and2005. This control deficiency resulted in adjustments to the fourth quarter of2004 and 2005 financial statements and a restatement of the Company’s financialstatements for each of the first three quarters of fiscal 2004 and 2005.Additionally, this control deficiency could result in a misstatement to thedeferred income tax liabilities and income tax provision accounts that wouldresult in a material misstatement to annual or interim financial statementsthat would not be prevented or detected.

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

Management has determinedthat these control deficiencies constituted material weaknesses as of December 31,2005 and June 30, 2006. Consequently, management concluded that theCompany’s internal control over financial reporting was not effective as of December 31,2005 and June 30, 2006 based on criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission in *InternalControl-Integrated Framework*.

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

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

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

Ourcurrent expectation is that our fiscal 2006 pre-tax income will range frombreakeven to a modest amount, due primarily to the impact of expensing forstock options under SFAS 123R, which we implemented on January 1, 2006.One element of our quantitative analysis of any control deficiency is itsactual or potential financial impact, and any impact that is greater than 5% ofour pre-tax income (loss) in any quarter may be more likely to result in thatdeficiency being determined to be a significant deficiency or a materialweakness. Accordingly, our projection of fiscal 2006 pre-tax income at abreakeven level to a modest profit will make it statistically less likely forus and our independent registered public accounting firm to determine that acontrol deficiency is not a material weakness.

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

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

**Issuer Purchases of Equity Securities**

In May 2004, the Board authorized the repurchase of1.2 million shares of outstanding common stock. In September 2004, February 2005and May 2005, the Board authorized an extension of this stock repurchaseprogram to cover the repurchase of an additional 0.8 million, 1.8 million and1.0 million shares of outstanding common stock, respectively. In March 2006,Advent completed this common stock repurchase program. During the first quarterof 2006, Advent repurchased 1.2 million shares of common stock under thisrepurchase program at a total cost of $33.7 million and an average price of$27.60 per share. Since the inception of this program in May 2004 through March 2006,Advent repurchased 4.8 million shares for a total cost of $98.2 million and anaverage price of $20.43 per share.

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In April 2006,Advent’s Board authorized the repurchase of an additional 2.3 million shares ofthe Company’s outstanding common stock. See Note 10, “Common Stock RepurchasePrograms”, to the condensed consolidated financial statements for furtherinformation. During the second quarter of2006, Advent repurchased 1.6 million shares of common stock under thisrepurchase program at a total cash outlay of $52.8 million and an average priceof $33.07 per share.

The following table provides a month-to-month summary ofthe repurchase activity during the three months ended June 30, 2006 underthe stock repurchase program approved by the Board in April 2006:

 
|            | ** ** | ** **                          | ** ** | ** **         | ** ** | **Maximum**                              | ** ** |
|------------|------------|-------------------------------------|------------|--------------------|------------|------------------------------------------|------------|
| ** ** | ** ** | **Total**                           | ** ** | **Average**        | ** ** | **Number of Shares That** | ** ** |
| ** ** | ** ** | **Number**                          | ** ** | **Price**          | ** ** | **May Yet Be Purchased**  | ** ** |
| ** ** | ** ** | **of Shares**                  | ** ** | **Paid**           | ** ** | **Under Our Share**            | ** ** |
| ** ** | ** ** | **Purchased (1)**              | ** ** | **Per Share** | ** ** | **Repurchase Programs**             | ** ** |
| ** ** | ** ** | **(shares in thousands)** | ** ** |
| April 2006 |       | —                              |       | $                  | —     |                                     | 2,300      |   |
| May 2006   |       | 601                                 |       | 34.66              |       | 1,699                                    |       |
| June 2006  |       | 994                                 |       | 32.11              |       | 705                                      |       |
|       |       |                                |       |               |       |                                     |       |
| Total      |       | 1,595                               |       | $                  | 33.07      |                                     | 705        |   |

 

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(1)  All shares wererepurchased as part of publicly announced plans.

On July 26,2006, Advent’s Board authorized the repurchase of an additional 1.5 millionshares of the Company’s outstanding common stock. See Note 14, “SubsequentEvent”, to the condensed consolidated financial statements for furtherinformation.

**Item 3.****    Defaults Upon Senior Securities**

None.

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

The Annual Meeting of Stockholders (the “Annual Meeting”)of Advent Software, Inc. was held at the principal office of the Companyat 301 Brannan Street, San Francisco, California 94107 on May 17, 2006.Stockholders of record at the close of business on March 24, 2006 (the “RecordDate”) were entitled to notice of and to vote at the meeting. As of the RecordDate, 30,068,248 shares of the Company’s common stock were issued andoutstanding, and a quorum of 28,843,553 shares of common stock was representedin person or by proxy at the Annual Meeting.

Atthe Annual Meeting, two items were voted upon:

1.     Toelect eight directors to serve for the ensuing year and until their successorsare duly elected and qualified.
|                       | ** ** | **Number of Shares** | ** ** |
|-----------------------|------------|--------------------------------|------------|
| ** **            | ** ** | **Voted For**             | ** ** | **Withheld** | ** ** |
| John H. Scully        |       | 27,583,265                     |       | 1,260,288 |   |
| Stephanie G.  DiMarco |       | 28,780,630                     |       | 62,923 |   |
| A. George Battle      |       | 28,430,223                     |       | 413,330 |   |
| Terry H. Carlitz      |       | 26,867,145                     |       | 1,976,408 |   |
| James D. Kirsner      |       | 28,435,982                     |       | 407,571 |   |
| James P. Roemer       |       | 28,692,047                     |       | 151,506 |   |
| Wendell G. Van  Auken |       | 26,529,316                     |       | 2,314,237 |   |
| William F. Zuendt     |       | 26,857,076                     |       | 1,986,477 |   |

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2.     Toratify the appointment of PricewaterhouseCoopers LLP as the independentregistered public accounting firm of the Company for the year ending December 31,2006.
| ** **                                 | ** ** | **Number of Shares** | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Broker** | ** ** |
| ** **                                 | ** ** | **For**                        | ** ** | **Against** | ** ** | **Abstained** | ** ** | **Non-Votes** | ** ** |
| Ratification of  appointment of            |       |                           |       |   |   |   |   |   |   |
| PricewaterhouseCoopers  LLP as independent |       |                           |       |   |   |   |   |   |   |
| registered public  accounting firm         |       | 27,987,861                     |       | 847,868 |   | 7,824 |   | — |   |

 

**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      Certificationof Chief 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 the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.
|        |                  |   |   | ADVENT SOFTWARE, INC. |
|--------|-----------------------|--------|--------|-----------------------|
|   |                  |   |   |                  |
|   | Dated: August 8, 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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