**UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM10-Q**

**ý**                                 Quarterlyreport pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934for the quarterly period ended March 31, 2007

** **

**or**

** **

**o**                                 Transitionreport pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

**Commissionfile number:  0-26994**

**ADVENTSOFTWARE, 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) |

 

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

(Address of principalexecutive offices and zip code)

 

**(415) 543-7696**

(Registrant’s telephonenumber, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x  No o

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

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

The number of shares ofthe registrant’s Common Stock outstanding as of April 30, 2007 was 27,177,550.

 

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

 

2

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**PART I. FINANCIALINFORMATION**

**Item 1. FinancialStatements**

**ADVENTSOFTWARE, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(In thousands)(Unaudited)**
| ** **                                       | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|--------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                       | ** ** | **2007**          | ** ** | **2006**             | ** ** |
| **ASSETS**                                       |       |              |       |                 |       |
| Current assets:                                  |       |              |       |                 |       |
| Cash and cash  equivalents                       |       | $                 | 42,961     |                 | $          | 30,187 |   |
| Marketable  securities                           |       | —            |       | 24,881               |       |
| Accounts  receivable, net                        |       | 35,169            |       | 41,336               |       |
| Deferred taxes,  current                         |       | 7,950             |       | 7,950                |       |
| Prepaid expenses  and other                      |       | 13,958            |       | 12,685               |       |
| Total current  assets                            |       | 100,038           |       | 117,039              |       |
| Property and equipment,  net                     |       | 28,007            |       | 27,338               |       |
| Goodwill                                         |       | 98,812            |       | 98,382               |       |
| Other intangibles, net                           |       | 5,465             |       | 6,294                |       |
| Deferred taxes,  long-term                       |       | 75,594            |       | 75,594               |       |
| Other assets, net                                |       | 14,837            |       | 15,000               |       |
|                                             |       |              |       |                 |       |
| Total assets                                     |       | $                 | 322,753    |                 | $          | 339,647 |   |
|                                             |       |              |       |                 |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**   |       |              |       |                 |       |
| Current liabilities:                             |       |              |       |                 |       |
| Accounts payable                                 |       | $                 | 3,398      |                 | $          | 5,083 |   |
| Accrued  liabilities                             |       | 21,060            |       | 22,992               |       |
| Deferred  revenues                               |       | 88,853            |       | 84,260               |       |
| Income taxes  payable                            |       | 4,704             |       | 4,989                |       |
| Total current  liabilities                       |       | 118,015           |       | 117,324              |       |
| Deferred income taxes                            |       | 161               |       | 225                  |       |
| Deferred revenue,  long-term                     |       | 2,273             |       | 1,053                |       |
| Other long-term  liabilities                     |       | 10,845            |       | 11,418               |       |
|                                             |       |              |       |                 |       |
| Total  liabilities                               |       | 131,294           |       | 130,020              |       |
|                                             |       |              |       |                 |       |
| Commitments and  contingencies (See Note 11)     |       |              |       |                 |       |
|                                             |       |              |       |                 |       |
| Stockholders’ equity:                       |       |              |       |                 |       |
| Common stock                                     |       | 270               |       | 272                  |       |
| Additional paid-in  capital                      |       | 311,955           |       | 309,993              |       |
| Accumulated  deficit                             |       | (131,972          | )          | (111,387             | )          |
| Accumulated  other comprehensive income          |       | 11,206            |       | 10,749               |       |
| Total  stockholders’ equity                 |       | 191,459           |       | 209,627              |       |
|                                             |       |              |       |                 |       |
| Total liabilities and  stockholders’ equity |       | $                 | 322,753    |                 | $          | 339,647 |   |

 

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

3

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**ADVENTSOFTWARE, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data)(Unaudited)**
| ** **                                                     | ** ** | **Three Months Ended March 31** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                     | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| **Net  revenues:**                                             |       |                                                |       |   |   |
| Term license,  maintenance and other recurring                 |       | $                                                   | 37,724     |   | $ | 31,171 |   |
| Perpetual  license fees                                        |       | 5,927                                               |       | 8,159 |   |
| Professional  services and other                               |       | 4,328                                               |       | 4,326 |   |
| Total net revenues                                             |       | 47,979                                              |       | 43,656 |   |
|                                                           |       |                                                |       |   |   |
| **Cost of  revenues:**                                         |       |                                                |       |   |   |
| Term license,  maintenance and other recurring                 |       | 9,032                                               |       | 7,917 |   |
| Perpetual  license fees                                        |       | 195                                                 |       | 229 |   |
| Professional  services and other                               |       | 5,873                                               |       | 4,924 |   |
| Amortization of  developed technology                          |       | 364                                                 |       | 394 |   |
|                                                           |       |                                                |       |   |   |
| Total cost of revenues                                         |       | 15,464                                              |       | 13,464 |   |
|                                                           |       |                                                |       |   |   |
| Gross margin                                                   |       | 32,515                                              |       | 30,192 |   |
|                                                           |       |                                                |       |   |   |
| **Operating  expenses:**                                       |       |                                                |       |   |   |
| Sales and  marketing                                           |       | 12,889                                              |       | 12,142 |   |
| Product  development                                           |       | 9,856                                               |       | 7,935 |   |
| General and  administrative                                    |       | 8,784                                               |       | 7,946 |   |
| Amortization of  other intangibles                             |       | 474                                                 |       | 979 |   |
| Restructuring  charges                                         |       | 562                                                 |       | 141 |   |
|                                                           |       |                                                |       |   |   |
| Total operating expenses                                       |       | 32,565                                              |       | 29,143 |   |
|                                                           |       |                                                |       |   |   |
| Income (loss)  from operations                                 |       | (50                                                 | )          | 1,049 |   |
| Interest income  and other expense, net                        |       | 518                                                 |       | 1,346 |   |
|                                                           |       |                                                |       |   |   |
| Income before  income taxes                                    |       | 468                                                 |       | 2,395 |   |
| Provision for  (benefit from) income taxes                     |       | 29                                                  |       | (1,007 | ) |
|                                                           |       |                                                |       |   |   |
| **Net income**                                                 |       | $                                                   | 439        |   | $ | 3,402 |   |
|                                                           |       |                                                |       |   |   |
| Net income per  share:                                         |       |                                                |       |   |   |
| Basic                                                          |       | $                                                   | 0.02       |   | $ | 0.11 |   |
| Diluted                                                        |       | $                                                   | 0.02       |   | $ | 0.11 |   |
|                                                           |       |                                                |       |   |   |
| Weighted average  shares used to compute net income per share: |       |                                                |       |   |   |
| Basic                                                          |       | 27,389                                              |       | 30,764 |   |
| Diluted                                                        |       | 28,756                                              |       | 31,819 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

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**ADVENTSOFTWARE, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)(Unaudited)**
| ** **                                                                         | ** ** | **Three Months Ended March 31** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| **Cash  flows from operating activities:**                                         |       |                                                |       |   |   |
| Net income                                                                         |       | $                                                   | 439        |   | $ | 3,402 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                                |       |   |   |
| Stock-based compensation                                                           |       | 3,246                                               |       | 3,174 |   |
| Depreciation and amortization                                                      |       | 2,790                                               |       | 3,540 |   |
| Loss on dispositions of fixed assets                                               |       | 3                                                   |       | 82 |   |
| Provision for doubtful accounts                                                    |       | 137                                                 |       | 7 |   |
| Reduction of sales returns                                                         |       | (6                                                  | )          | (717 | ) |
| (Gain) loss on investments                                                         |       | (18                                                 | )          | 35 |   |
| Deferred income taxes                                                              |       | (65                                                 | )          | 30 |   |
| Other                                                                              |       | 13                                                  |       | (11 | ) |
| Changes in operating assets and liabilities:                                       |       |                                                |       |   |   |
| Accounts receivable                                                                |       | 6,030                                               |       | 2,960 |   |
| Prepaid and other assets                                                           |       | (1,117                                              | )          | (3,876 | ) |
| Accounts payable                                                                   |       | (685                                                | )          | (1,285 | ) |
| Accrued liabilities                                                                |       | (2,505                                              | )          | (19 | ) |
| Deferred revenues                                                                  |       | 5,819                                               |       | 3,781 |   |
| Income taxes payable                                                               |       | (284                                                | )          | (1,843 | ) |
|                                                                               |       |                                                |       |   |   |
| Net cash  provided by operating activities                                         |       | 13,797                                              |       | 9,260 |   |
|                                                                               |       |                                                |       |   |   |
| **Cash  flows from investing activities:**                                         |       |                                                |       |   |   |
| Net cash used in acquisitions                                                      |       | (1,022                                              | )          | — |   |
| Purchases of property and equipment                                                |       | (2,620                                              | )          | (2,981 | ) |
| Capitalized software development costs                                             |       | —                                              |       | (781 | ) |
| Purchases of marketable securities                                                 |       | —                                              |       | (17,379 | ) |
| Sales and maturities of marketable securities                                      |       | 24,921                                              |       | 12,867 |   |
| Change in restricted cash                                                          |       | —                                              |       | (1,200 | ) |
|                                                                               |       |                                                |       |   |   |
| Net cash  provided by (used in) investing activities                               |       | 21,279                                              |       | (9,474 | ) |
|                                                                               |       |                                                |       |   |   |
| **Cash  flows from financing activities:**                                         |       |                                                |       |   |   |
| Proceeds from issuance of common stock                                             |       | 7,806                                               |       | 2,559 |   |
| Repurchase of common stock                                                         |       | (30,120                                             | )          | (33,712 | ) |
|                                                                               |       |                                                |       |   |   |
| Net cash used in  financing activities                                             |       | (22,314                                             | )          | (31,153 | ) |
|                                                                               |       |                                                |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                      |       | 12                                                  |       | 23 |   |
|                                                                               |       |                                                |       |   |   |
| **Net change  in cash and cash equivalents**                                       |       | 12,774                                              |       | (31,344 | ) |
| **Cash  and cash equivalents at beginning of period**                              |       | 30,187                                              |       | 70,941 |   |
|                                                                               |       |                                                |       |   |   |
| **Cash and cash equivalents at  end of period**                                    |       | $                                                   | 42,961     |   | $ | 39,597 |   |

 

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

5

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**ADVENTSOFTWARE, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**Note 1—Basis of Presentation**

Thecondensed consolidated financial statements include the accounts of AdventSoftware, Inc. (“Advent” or the “Company”) and its wholly ownedsubsidiaries. All inter-company balances and transactions have been eliminated.

Adventhas prepared these condensed consolidated financial statements in accordancewith the rules and regulations of the Securities and Exchange Commission (“SEC”)applicable to interim financial information. Certain information and footnotedisclosures included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen omitted in these interim statements pursuant to such SEC rules andregulations. These interim financial statements should be read in conjunctionwith the audited financial statements and related notes included in Advent’sAnnual Report on Form 10-K/A for the year ended December 31, 2006. Interimresults are not necessarily indicative of the results to be expected for thefull year, and no representation is made thereto.

Thesecondensed consolidated financial statements include all adjustments necessaryto state fairly the financial position and results of operations for eachinterim period shown. All such adjustments occur in the ordinary course ofbusiness and are of a normal, recurring nature.

Certainprior year amounts have been reclassified to conform to the currentpresentation. These reclassifications do not affect total net revenues, netincome or stockholders’ equity. Specifically, as Advent is now more thanhalfway through its transition to a term license model (from a perpetuallicense model), the Company changed its presentation of revenues and associatedcost of revenues during the first quarter of 2007 to more clearly show thegrowth of term license revenues. Historically, the Company has separated termlicense arrangement fees between license and maintenance revenue and allocatedthose revenues on a 55%/45% basis, respectively. As a result of the increasingsignificance of term license revenues for the Company, Advent has discontinuedthis practice during the first quarter of 2007, and now classifies all termlicense revenues, along with perpetual maintenance and other recurringrevenues, in the caption “Term license, maintenance and other recurring”revenues. The Company believes the current presentation more clearly reflectsits business as well as the principal underlying factors impacting long-termgrowth and predictability.

Adventcurrently categorizes its revenues as follows: “Term license, maintenance andother recurring,” “Perpetual license fees” and “Professional services andother.” Prior period amounts have been reclassified to conform to this currentpresentation.

**Note 2—Recent AccountingPronouncements**

No recent accounting pronouncements have been issuedwhich would currently have a material effect on Advent’s condensed consolidatedfinancial position, results of operations, or cash flows.

6

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**Note3—Stock-Based Compensation**

**Equity Award Activity**

Asummary of the status of the Company’s stock option and stock appreciationright (“SAR”) activity for the period presented follows:
| ** **                          | ** ** | ** **              | ** ** | ** **   | ** ** | **Weighted**              | ** ** | ** **              | ** ** |
|-------------------------------------|------------|-------------------------|------------|--------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | ** **              | ** ** | **Weighted** | ** ** | **Average**               | ** ** | **Aggregate**           | ** ** |
| ** **                          | ** ** | **Number of**      | ** ** | **Average**  | ** ** | **Remaining**             | ** ** | **Intrinsic**           | ** ** |
| ** **                          | ** ** | **Shares**              | ** ** | **Exercise** | ** ** | **Contractual Life** | ** ** | **Value**               | ** ** |
| ** **                          | ** ** | **(in thousands)** | ** ** | **Price**    | ** ** | **(in years)**       | ** ** | **(in thousands)** | ** ** |
|                                | ** ** | ** **              | ** ** | ** **   | ** ** | ** **                | ** ** | ** **              | ** ** |
| Outstanding at  December 31, 2006   |       | 5,292                   |       | $            | 20.08      |                      |       |                    |       |   |
| Options &  SAR’s granted   |       | 437                     |       | $            | 36.85      |                      |       |                    |       |   |
| Options &  SAR’s exercised |       | (636                    | )          | $            | 12.27      |                      |       |                    |       |   |
| Options &  SAR’s canceled  |       | (158                    | )          | $            | 23.80      |                      |       |                    |       |   |
| Outstanding at  March 31, 2007      |       | 4,935                   |       | $            | 22.45      |                      | 6.54       |                    | $          | 63,376 |   |
| Exercisable at March  31,2007       |       | 2,584                   |       | $            | 20.06      |                      | 5.02       |                    | $          | 39,409 |   |

 

Theaggregate intrinsic value is calculated as the difference between the exerciseprice of the underlying awards and the Company’s closing stock price of $34.87as of March 31, 2007 for options that were in-the-money as of that date.

The weighted average grant date fair value of optionsand SARs granted during the three months ended March 31, 2007 was $13.83 pershare. The total intrinsic value of options exercised during the threemonths ended March 31, 2007 and 2006 was $14.2 million and $1.6 million,respectively. The total cash received from employees as a result of employeestock option exercises during the three months ended March 31, 2007 and 2006was approximately $7.8 million and $2.6 million, respectively.

TheCompany settles exercised employee stock option and SARs with newly issuedcommon shares.

Asummary of the status of the RSUs for the three months ended March 31, 2007 isas follows:

|                                   | ** ** | ** **              | ** ** | **Weighted**        | ** ** |
|-----------------------------------|------------|-------------------------|------------|---------------------|------------|
| ** **                        | ** ** | **Number of**      | ** ** | **Average**         | ** ** |
| ** **                        | ** ** | **Shares**              | ** ** | **Grant Date** | ** ** |
| ** **                        | ** ** | **(in thousands)** | ** ** | **Fair Value** | ** ** |
| ** **                        | ** ** | ** **              | ** ** | ** **          | ** ** |
| Outstanding at  December 31, 2006 |       | 266                     |       | $                   | 29.81      |   |
|                              |       |                    |       |                |       |
| RSU’s granted                |       | 262                     |       | $                   | 36.94      |   |
|                              |       |                    |       |                |       |
| RSU’s canceled               |       | (8                      | )          | $                   | 30.92      |   |
|                              |       |                    |       |                |       |
| Outstanding at March  31, 2007    |       | 520                     |       | $                   | 33.38      |   |

 

AtMarch 31, 2007, none of the RSUs outstanding were vested.

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. Theaggregate intrinsic value of RSUs outstanding at March 31, 2007 was $18.1million, using the closing price of $34.87 per share as of March 31, 2007.

7

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**Stock-Based Compensation Expense**

Theeffect of stock-based employee compensation expense recognized on Advent’scondensed consolidated statement of operations for the first quarter of 2007and 2006 were as follows (in thousands, except per share data):
| ** **                                                      | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                      | ** ** | **March 31, 2007**     | ** ** | **March 31, 2006**     | ** ** |
| **Statement  of operations classification**                     |       |                             |       |                             |       |
| Cost of term  license, maintenance and other recurring revenues |       | $                                | 247        |                             | $          | 258 |   |
| Cost of  professional services and other revenues               |       | 175                              |       | 205                              |       |
| Total cost of revenues                                          |       | 422                              |       | 463                              |       |
|                                                            |       |                             |       |                             |       |
| Sales and  marketing                                            |       | 969                              |       | 1,143                            |       |
| Product  development                                            |       | 737                              |       | 744                              |       |
| General and  administrative                                     |       | 1,118                            |       | 824                              |       |
| Total operating expenses                                        |       | 2,824                            |       | 2,711                            |       |
|                                                            |       |                             |       |                             |       |
| Total  stock-based employee compensation expense                |       | $                                | 3,246      |                             | $          | 3,174 |   |
|                                                            |       |                             |       |                             |       |
| Tax effect on  stock-based employee compensation                |       | (1,053                           | )          | —                           | (1)        |
|                                                            |       |                             |       |                             |       |
| Net effect on net  income                                       |       | $                                | 2,193      |                             | $          | 3,174 |   |

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(1)             Assumesan effective tax rate of 0% for the three months ended March 31, 2006 due tothe full valuation allowance established against the Company’s deferred taxassets during the fourth quarter of 2003. The valuation allowance wassubsequently decreased during the fourth quarter of 2006.

Approximately$3,000 and $98,000 of stock-based compensation was capitalized as internal usesoftware and software development costs, respectively, in the first quarters of2007 and 2006.

Asof March 31, 2007, total unrecognized compensation cost related to unvestedawards not yet recognized under all equity compensation plans, adjusted forestimated forfeitures, was $30.3 million and is expected to be recognizedthrough the remaining vesting period of each grant, with a weighted averageremaining period of 4.3 years.

**Valuation Assumptions**

Thefair value 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 March 31** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------------|------------|
| **Stock Options & SAR’s** | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Expected  volatility                              |       | 35.1%  - 38.4%                                      |       | 46.3%  - 48.5% |   |
| Expected life  (in years)                         |       | 4.58                                                |       | 4.9  - 5.4 |   |
| Risk-free  interest rate                          |       | 4.5%  - 4.8%                                        |       | 4.3%  - 4.7% |   |
| Expected dividends                                |       | None                                                |       | None |   |

 

Theexpected stock price volatility was determined based on an equally weightedaverage of historical and implied volatility of the Company’s commonstock. Advent determined that a blend of implied volatility and historicalvolatility is more reflective of the market conditions and a better indicatorof expected volatility than using purely historical volatility. The expectedlife was determined based on historical experience of similar awards, givingconsideration to the contractual terms of the stock-based awards, vestingschedules and expectations of future employee behavior. The risk-free interestrate is based on the U.S. Treasury yield curve in effect at the time ofgrant 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.

**Note 4—Net Income Per Share**

Basic net income pershare is computed by dividing net income by the weighted average number ofcommon shares outstanding during the period. Diluted net income per share iscomputed by dividing net income by the sum of weighted average number of commonshares outstanding and the potential number of dilutive common sharesoutstanding during the period, excluding the effect of any anti-dilutivesecurities. Potential common shares consist of the shares issuable upon theexercise of stock options and SARs, the vesting of restricted stock awards andfrom withholdings associated with the Company’s employee 

8

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stockpurchase plan. Potential common shares are reflected in diluted earningsper share by application of the treasury stock method, which in the currentperiod includes consideration of unamortized stock-based compensation andwindfall tax benefits, 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):

|                                                                                                                                           | ** ** | **Three Months Ended March 31** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                                | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| **Numerator:**                                                                                                                            |       |                                                |       |   |   |
| Net income                                                                                                                                |       | $                                                   | 439        |   | $ | 3,402 |   |
|                                                                                                                                      |       |                                                |       |   |   |
| **Denominator:**                                                                                                                          |       |                                                |       |   |   |
| Denominator for  basic net income per share-weighted average shares outstanding                                                           |       | 27,389                                              |       | 30,764 |   |
|                                                                                                                                      |       |                                                |       |   |   |
| Dilutive common  equivalent shares:                                                                                                       |       |                                                |       |   |   |
| Employee stock options and other                                                                                                          |       | 1,367                                               |       | 1,055 |   |
|                                                                                                                                      |       |                                                |       |   |   |
| Denominator for  diluted net income per share-weighted average shares outstanding, assuming exercise  of potential dilutive common shares |       | 28,756                                              |       | 31,819 |   |
|                                                                                                                                      |       |                                                |       |   |   |
| Basic net income  per share                                                                                                               |       | $                                                   | 0.02       |   | $ | 0.11 |   |
| Diluted net  income per share                                                                                                             |       | $                                                   | 0.02       |   | $ | 0.11 |   |
|                                                                                                                                      |       |                                                |       |   |   |

 

Forthe quarters ended March 31, 2007 and 2006, weighted average stock options andRSUs of approximately 1.5 million and 1.3 million, respectively, were excludedfrom the calculation of diluted net income per share because their inclusionwould have been anti-dilutive.

**Note 5—Goodwill**

The changes in the carrying value of goodwillfor the three months ended March 31, 2007 were as follows (in thousands):

|                               | ** ** | **Goodwill** | ** ** |
|-------------------------------|------------|--------------|------------|
| ** **                    | ** ** | ** **   | ** ** |
| Balance at  December 31, 2006 |       | $            | 98,382     |   |
| Additions                     |       | 22           |       |
| Translation  adjustments      |       | 408          |       |
|                          |       |         |       |
| Balance at March  31, 2007    |       | $            | 98,812     |   |

 

Foreign currency translation adjustments totaling$408,000 reflect the weakening of the U.S. dollar versus European currenciesduring the first quarter of 2007. Additions to goodwill of $22,000 reflected anadditional payment related to the acquisition of East Circle Solutions, Inc.

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**Note6—Other Intangibles**

Thefollowing is a summary of other intangibles as of March 31, 2007 (inthousands):
| ** **                     | ** ** | **Average**      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                     | ** ** | **Amortization** | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
| ** **                     | ** ** | **Period**       | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                     | ** ** | **(Years)**      | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
| ** **                     | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Purchased  technologies        |       | 4.9              |       | $                | 13,556     |             | $          | (12,776          | )          | $ | 780 |   |
| Product  development costs     |       | 3.0              |       | 3,001            |       | (1,100           | )          | 1,901            |       |
|                           |       |             |       |             |       |             |       |             |       |
| Developed technology sub-total |       |             |       | 16,557           |       | (13,876          | )          | 2,681            |       |
|                           |       |             |       |             |       |             |       |             |       |
| Customer  relationships        |       | 5.6              |       | 22,218           |       | (19,441          | )          | 2,777            |       |
| Other  intangibles             |       | 2.5              |       | 307              |       | (300             | )          | 7                |       |
|                           |       |             |       |             |       |             |       |             |       |
| Other intangibles sub-total    |       |             |       | 22,525           |       | (19,741          | )          | 2,784            |       |
|                           |       |             |       |             |       |             |       |             |       |
| Balance at March  31, 2007     |       |             |       | $                | 39,082     |             | $          | (33,617          | )          | $ | 5,465 |   |

 

Thefollowing is a summary of other intangibles as of December 31, 2006 (inthousands):
| ** **                     | ** ** | **Average**      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                     | ** ** | **Amortization** | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
| ** **                     | ** ** | **Period**       | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                     | ** ** | **(Years)**      | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
|                           |       |             |       |             |       |             |       |             |       |
| Purchased  technologies        |       | 4.9              |       | $                | 13,556     |             | $          | (12,665          | )          | $ | 891 |   |
| Product  development costs     |       | 3.0              |       | 3,001            |       | (847             | )          | 2,154            |       |
|                           |       |             |       |             |       |             |       |             |       |
| Developed technology sub-total |       |             |       | 16,557           |       | (13,512          | )          | 3,045            |       |
|                           |       |             |       |             |       |             |       |             |       |
| Customer  relationships        |       | 5.6              |       | 22,175           |       | (18,952          | )          | 3,223            |       |
| Other  intangibles             |       | 2.5              |       | 307              |       | (281             | )          | 26               |       |
|                           |       |             |       |             |       |             |       |             |       |
| Other intangibles sub-total    |       |             |       | 22,482           |       | (19,233          | )          | 3,249            |       |
|                           |       |             |       |             |       |             |       |             |       |
| Balance at  December 31, 2006  |       |             |       | $                | 39,039     |             | $          | (32,745          | )          | $ | 6,294 |   |

 

The changes in the carrying value of otherintangibles during the three months ended March 31, 2007 were as follows (inthousands):
| ** **                    | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
|-------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                    | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                    | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
|                          |       |             |       |             |       |             |       |
| Balance at  December 31, 2006 |       | $                | 39,039     |             | $          | (32,745          | )          | $ | 6,294 |   |
| Amortization                  |       | —           |       | (838             | )          | (838             | )          |
| Translation  adjustments      |       | 43               |       | (34              | )          | 9                |       |
|                          |       |             |       |             |       |             |       |
| Balance at March  31, 2007    |       | $                | 39,082     |             | $          | (33,617          | )          | $ | 5,465 |   |

 

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Basedon the carrying amount of intangible assets as of March 31, 2007, the estimatedfuture amortization is as follows (in thousands):
| ** **                         | ** ** | **Nine**              | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------|------------|-----------------------|------------|--------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | **Months Ended** | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **December 31**  | ** ** | **Years Ended December 31** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **2007**              | ** ** | **2008**                                   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **Total**  | ** ** |
| Estimated future  amortization of: | ** ** | ** **            | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Developed  technology              |       | $                     | 925        |                                       | $          | 1,072      |       | $          | 494        |       | $          | 190 |   | $ | 2,681 |   |
| Other  intangibles                 |       | 1,380                 |       | 949                                        |       | 448        |       | 7          |       | 2,784      |       |
|                               |       |                  |       |                                       |       |       |       |       |       |       |       |
| Total                              |       | $                     | 2,305      |                                       | $          | 2,021      |       | $          | 942        |       | $          | 197 |   | $ | 5,465 |   |

 

**Note 7—Balance Sheet Detail**

Thefollowing is a summary of prepaid expenses and other (in thousands):
| ** **                        | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|-----------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                        | ** ** | **2007**          | ** ** | **2006**             | ** ** |
| ** **                        | ** ** | ** **        | ** ** | ** **           | ** ** |
| Prepaid  commission               |       | $                 | 3,314      |                 | $          | 3,121 |   |
| Prepaid contract  expense         |       | 3,534             |       | 2,704                |       |
| Prepaid royalty                   |       | 2,489             |       | 2,027                |       |
| Other                             |       | 4,621             |       | 4,833                |       |
| Total prepaid  expenses and other |       | $                 | 13,958     |                 | $          | 12,685 |   |

 

Thefollowing is a summary of other assets, net (in thousands):
| ** **                                                            | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                                            | ** ** | **2007**          | ** ** | **2006**             | ** ** |
|                                                                  |       |              |       |                 |       |
| 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                                             |       | 3,581             |       | 4,098                |       |
| Deposits                                                              |       | 2,797             |       | 2,443                |       |
|                                                                  |       |              |       |                 |       |
| Total other  assets                                                   |       | $                 | 14,837     |                 | $          | 15,000 |   |

 

Long-term investmentsinclude equity investments in several privately held companies. These equityinvestments are carried at the lower of cost or fair value at March 31, 2007and December 31, 2006. Deposits include restricted cash of $1.3 million tosecure a bank letter of credit associated with the Company’s entry into adefinitive lease agreement with Toda Development, Inc. (“Toda”) in January 2006for its headquarters facility.

The following is asummary of accrued liabilities (in thousands):
| ** **                     | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|--------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2007**          | ** ** | **2006**             | ** ** |
|                           |       |              |       |                 |       |
| Salaries and  benefits payable |       | $                 | 8,531      |                 | $          | 13,624 |   |
| Accrued  restructuring         |       | 3,318             |       | 2,650                |       |
| Other                          |       | 9,211             |       | 6,718                |       |
|                           |       |              |       |                 |       |
| Total accrued  liabilities     |       | $                 | 21,060     |                 | $          | 22,992 |   |

 

Accrued restructuringcharges are discussed further in Note 9, “Restructuring Charges.” Other accruedliabilities include accruals for royalties, sales and business taxes,acquisition related costs, and other miscellaneous items.

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Thefollowing is a summary of other long-term liabilities (in thousands):
| ** **                                | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|-------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                | ** ** | **2007**          | ** ** | **2006**             | ** ** |
|                                      |       |              |       |                 |       |
| Deferred rent                             |       | $                 | 6,852      |                 | $          | 6,451 |   |
| Accrued restructuring,  long-term portion |       | 2,926             |       | 3,941                |       |
| Other                                     |       | 1,067             |       | 1,026                |       |
|                                      |       |              |       |                 |       |
| Total other long-term  liabilities        |       | $                 | 10,845     |                 | $          | 11,418 |   |

 

 

**Note 8—Comprehensive Income**

Thecomponents of comprehensive income were as follows for the periods presented(in thousands):
| ** **                                | ** ** | **Three Months Ended March 31** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
|                                      |       |                                                |       |   |   |
| Net income                                |       | $                                                   | 439        |   | $ | 3,402 |   |
| Unrealized gain on  marketable securities |       | 8                                                   |       | 49 |   |
| Foreign currency  translation adjustment  |       | 449                                                 |       | 998 |   |
|                                      |       |                                                |       |   |   |
| Total comprehensive  income               |       | $                                                   | 896        |   | $ | 4,449 |   |

 

The components of accumulated other comprehensiveincome were as follows (in thousands):
| ** **                                                | ** ** | **March 31** | ** ** | **December 31** | ** ** |
|-----------------------------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                                                | ** ** | **2007**          | ** ** | **2006**             | ** ** |
| ** **                                                | ** ** | ** **        | ** ** | ** **           | ** ** |
| Accumulated net  unrealized loss on marketable securities |       | $                 | —     |                 | $          | (8 | ) |
| Accumulated foreign  currency translation adjustments     |       | 11,206            |       | 10,757               |       |
|                                                      |       |              |       |                 |       |
| Total accumulated other  comprehensive income             |       | $                 | 11,206     |                 | $          | 10,749 |   |

 

**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.

##### During the three months ended March 31, 2007,Advent recorded a net restructuring charge of $562,000 due to the update ofcertain sub-lease assumptions for Advent’s prior San Francisco headquartersfacility located at 301 Brannan Street, which the Company exited in October2006. During the three months ended March 31, 2006, Advent recorded a netrestructuring charge of $141,000 primarily to adjust original estimates forfacilities in San Francisco, California and New York, New York.

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The following table sets forth an analysis of thecomponents of the payments and restructuring charges made against the accrualduring the first quarter of 2007 (in thousands):
| ** **                                             | ** ** | **Facility Exit** | ** ** | **Severance &** | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|--------------------------|------------|------------|------------|
| ** **                                             | ** ** | **Costs**              | ** ** | **Benefits**             | ** ** | **Total**  | ** ** |
|                                                   |       |                   |       |                     |       |       |       |
| Balance of  restructuring accrual at December 31, 2006 |       | $                      | 6,587      |                     | $          | 4          |       | $ | 6,591 |   |
| Restructuring  charges                                 |       | 476                    |       | —                   |       | 476        |       |
| Cash payments                                          |       | (909                   | )          | —                   |       | (909       | )          |
| Accretion  adjustment                                  |       | 86                     |       | —                   |       | 86         |       |
|                                                   |       |                   |       |                     |       |       |       |
| Balance of  restructuring accrual at March 31, 2007    |       | $                      | 6,240      |                     | $          | 4          |       | $ | 6,244 |   |

 

Ofthe remaining restructuring accrual of $6.2 million at March 31, 2007, $3.3million and $2.9 million are included in accrued liabilities and otherlong-term liabilities, respectively, on the accompanying condensed consolidatedbalance sheet. The remaining excess facility costs of $6.2 million are statedat estimated fair value, net of estimated sublease income of approximately $7.4million. Advent expects to pay the remaining obligations associated with thevacated facilities no later than over the remaining lease terms, which expireon various dates through 2012.

**Note 10—Common Stock RepurchaseProgram**

Advent’sBoard has approved common stock repurchase programs authorizing management torepurchase shares of the Company’s common stock to enhance shareholder value.The timing and actual number of shares subject to repurchase are at thediscretion of Advent’s management and are contingent on a number of factors andlimitations, including the price of Advent’s stock, corporate and regulatoryrequirements, alternative investment opportunities and other market conditions.The stock repurchase programs specify a maximum number of shares subject torepurchase, do not have an expiration date and may be limited or terminated atany time without prior notice. Repurchased shares are returned to the status ofauthorized and un-issued shares of common stock.

OnFebruary 9, 2007, the Company’s Board authorized the repurchase of up to anadditional 2.25 million shares of outstanding common stock.

The following table provides a summary of therepurchase activity during the first quarter of 2007 under the stock repurchaseprograms approved by the Board in July 2006 and February 2007 (in thousands,except per share data):

|            | ** ** | **Total Number**   | ** ** | ** ** | ** ** | ** **              | ** ** |
|------------|------------|--------------------|------------|------------|------------|-------------------------|------------|
| ** ** | ** ** | **of Shares** | ** ** | ** ** | ** ** | **Average Price**       | ** ** |
| ** ** | ** ** | **Purchased**      | ** ** | **Cost**   | ** ** | **Paid Per Share** | ** ** |
|       |       |               |       |       |       |                    |       |
| Q1 2007    |       | 837                |       | $          | 30,120     |                    | $          | 36.00 |   |
|            |            |                    |            |            |            |                         |            |  |  |

 

Asof March 31, 2007, 1.7 million shares were available to be repurchased underthe most recent Board authorized repurchase plan approved in February 2007.

#### Note 11—Commitments and Contingencies

*LeaseObligations*

Adventleases office space and equipment under non-cancelable operating leaseagreements, which expire at various dates through December 2018. Some operatingleases contain escalation provisions for adjustments in the consumer priceindex. Advent is responsible for maintenance, insurance, and property taxes. InMarch 2007, the Company executed an amendment to the lease agreement for its600 Townsend Street headquarters facility whereby the Company will lease anadditional 21,000 square feet. As of March 31, 2007, Advent’s remainingoperating lease commitments through 2018 were approximately $52.2 million, netof future minimum rental receipts of $8.5 million to be received undernon-cancelable sub-leases.

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*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 mitigatesAdvent’s exposure and enables Advent to recover a portion of any future amountspaid. 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.

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 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 aboutwhich separate financial information is available that is evaluated regularlyby the chief operating decision maker (“CODM”), or decision making group, indeciding how to allocate resources and in assessing performance. Advent’s CODMis the Chief 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 

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support certain mission critical functions ofinvestment management organizations. MicroEdge derives revenues from the saleof software and services for grant management, matching gifts and volunteertracking for the grantmaking community.

*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-basedemployee compensation expense, and amortization of developed technology andother intangibles, which Advent manages separately at the corporate level, arenot allocated to the operating segments. Advent does not separately accumulateand review asset information by segment.

Segment information for the periods presented is asfollows (in thousands):

|                                                     | ** ** | **Three Months Ended March 31** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Net revenues:                                       |       |                                                |       |   |   |
| Advent Investment Management                        |       | $                                                   | 42,555     |   | $ | 38,593 |   |
| MicroEdge                                           |       | 5,424                                               |       | 4,852 |   |
| Other                                               |       | —                                              |       | 211 |   |
|                                                |       |                                                |       |   |   |
| Total net revenues                                  |       | $                                                   | 47,979     |   | $ | 43,656 |   |
|                                                |       |                                                |       |   |   |
| Income (loss)  from operations:                     |       |                                                |       |   |   |
| Advent Investment Management                        |       | $                                                   | 2,860      |   | $ | 5,113 |   |
| MicroEdge                                           |       | 1,174                                               |       | 951 |   |
| Other                                               |       | —                                              |       | (468 | ) |
| Unallocated corporate operating costs and expenses: |       |                                                |       |   |   |
| Stock-based employee compensation                   |       | (3,246                                              | )          | (3,174 | ) |
| Amortization of developed technology                |       | (364                                                | )          | (394 | ) |
| Amortization of other intangibles                   |       | (474                                                | )          | (979 | ) |
|                                                |       |                                                |       |   |   |
| Total income  (loss) from operations                |       | $                                                   | (50        | ) | $ | 1,049 |   |

 

*MajorCustomers*

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

**Note13—Related Party Transactions**

Asof December 31, 2006, Legg Mason owned approximately 17% of the voting stock ofAdvent. Advent recognized approximately $107,000 and $118,000 of revenue fromLegg Mason during the first quarter of fiscal 2007 and 2006, respectively. TheCompany’s accounts receivable from Legg Mason were $252,000 and $10,000 as ofMarch 31, 2007 and December 31, 2006, respectively.

Adventacts as trustee for the Company’s short-term disability plan—Advent SoftwareCalifornia Voluntary Disability Plan (“VDI”). Employee withholdings were$95,000 and $123,000 during the three months ended March 31, 2007 and 2006,respectively. Disbursements were $83,000 and $68,000 during the three monthsended March 31, 2007 and 2006, respectively. Cash held by Advent related to theVDI was $317,000 and $305,000 as of March 31, 2007 and December 31, 2006,respectively, and are included in “Other assets, net” on the condensedconsolidated balance sheets.

**Note14—Line of Credit**

On February 14, 2007, Advent and certain of itssubsidiaries entered into a senior secured credit facility agreement (the “Facility”)with Wells Fargo Foothill, Inc. (the “Lender”) for a term of three years. Underthe Facility, the Lender will provide the Company with a revolving line ofcredit up to an aggregate amount of $75 million to fund the repurchase ofoutstanding common stock, working capital, capital expenditures and generalcorporate requirements. The Company has the option of selecting an interestrate for any drawdown under the Facility equal to either: (a) the Base Rate; or(b) the then 

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applicable LIBOR Rate plus 1.50% per annum. The loanis secured by the Company’s property and assets and is subject to a financialcovenant. The financial covenant in the Facility is limited to a maximum ratioof senior debt to adjusted earnings before interest, taxes, depreciation,amortization (EBITDA), and non-cash stock-based employee compensation. Covenanttesting will commence upon either the occurrence of an event of default or whenexcess availability under the Facility plus qualified cash and cash equivalentsis less than $50 million. As of March 31, 2007, the Company has yet to drawdown on the Facility.

**Note 15—Income Taxes**

On January 1, 2007, Advent adopted the provisionsof Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”**(“FIN 48”). As ofJanuary 1, 2007, Advent had $4.9 million of unrecognized taxbenefits. If recognized, the portion of unrecognized tax benefits that woulddecrease the Company’s provision for income taxes and increase net income is$4.1 million. The impact on net income reflects the liabilities forunrecognized tax benefits net of the federal tax benefit of state income taxitems. The adoption resulted in no significant cumulative impact to accumulateddeficit. As of March 31, 2007, Advent’s unrecognized tax benefits totaled$4.1 million and are included in “Income taxes payable” on the condensedconsolidated balance sheet. The total unrecognized tax benefits at thebeginning and the end of the first quarter of 2007 relate primarily to researchand other California tax credits, various state net operating losses, andpotential penalties and interest on amended state and local tax returns.

Advent recognizes interest and penalties accrued onunrecognized tax benefits as well as interest received from favorablesettlements within “Provision for (benefit from) income taxes” on the condensedconsolidated statement of operations. As of March 31, 2007, the Company had$0.2 million of interest and penalties accrued associated with unrecognized taxbenefits.

Advent is subject to taxation in the U.S. and variousstates and foreign jurisdictions. Advent is not under examination in any incometax jurisdiction at the present time.  The material jurisdictions that aresubject to examination by tax authorities include California for tax yearsafter fiscal 2001 and the U.S. and New York for tax years after 2002.

**Note16—Subsequent Event**

OnApril 16, 2007, the Company, together with other LatentZero Limited (“LatentZero”)shareholders, entered into a conditional agreement to sell their ownership inLatentZero to royalblue group plc. The maximum possible consideration to theCompany from the sale of its ownership interest in LatentZero is approximately$17 million, which is comprised of initial consideration of $10 million,payable at completion of the sale transaction and subject to certain closingcontingencies and fees, and up to an aggregate $7 million of deferredcontingent consideration for fiscal years 2007 and 2008. For fiscal 2007 and2008, the payment of the deferred contingent consideration is dependent on theachievement of performance objectives related to revenue and operating profit.Consideration is denominated in Pounds Sterling (GBP) in the conditionalagreement and the actual amounts of consideration in U.S. dollars to bereceived by the Company may differ depending on foreign exchange rates at thetime of payment. On April 30, 2007, the sale transaction was completed and theCompany received the initial consideration of $10 million.

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

**SPECIAL NOTEREGARDING 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 theSecurities Act of 1933 as amended and Section 21E of the SecuritiesExchange Act of 1934 as amended, including, but not limited to statementsreferencing our expectations relating to future revenues and expenses.Forward-looking statements 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 or investment in other businesses; projections of revenues, futurecost and expense levels (including for the second quarter of 2007); expectedtiming and amount of amortization expenses related to past acquisitions; theadequacy of resources to meet future cash requirements; estimates orpredictions of actions by customers, suppliers, competitors or regulatoryauthorities; future client wins; future hiring; and future productintroductions including those planned for 2007. Such forward-looking statementsare based on our current plans and expectations, and involve known and unknownrisks and uncertainties that may cause our actual results or performance to bematerially different from any results or performance expressed or implied bysuch forward-looking statements. Such factors 

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include, but are not limited to, those set forth in “Item1A. Risk Factors” in this Form 10-Q, as well as other risks identified fromtime to time in other Securities and Exchange Commission (“SEC”) reports. Youshould not place undue reliance on our forward-looking statements, as they arenot guarantees of future results, levels of activity or performance andrepresent our expectations only as of the date 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.

Our business is organized into tworeportable segments, Advent Investment Management (“AIM”) and MicroEdge. AdventInvestment Management is our core business and derives revenues from thedevelopment, marketing and sale of software products, data interfaces andrelated maintenance and services that automate, integrate and support certainmission-critical functions of investment management organizations in the UnitedStates, Europe, Middle East and Africa. MicroEdge derives revenues from thesale of software and services for grant management, matching gifts andvolunteer tracking for the grant-making community. For additional informationregarding our reportable segments, see Note 12, “Segment Information,” to ourcondensed consolidated financial statements.

Duringthe first quarter of 2007, we continued to execute on our strategy ofstrengthening and growing our core business.

Weexperienced continued demand for our products evidenced by the signing of 64new customer agreements in the first quarter. We added 15 new customers forAdvent Portfolio Exchange (“APX”), 5 new customers for Geneva, and achieved anew milestone for Moxy, our trade order management system, with 750 totalcustomers now live on Moxy.

Wecontinued to invest in product development during the first quarter of 2007, aswe plan to launch more new products and new releases of existing products in2007 than any other year in Advent’s history. Product development expenses were$9.9 million during the first quarter of 2007, which represented 21% of totalnet revenues, as compared to $7.9 million (or 18% of total net revenues) in thesame quarter of 2006. During the first quarter of 2007, we launched AdventRevenue Center, an automated billing and revenue management solution. AdventRevenue Center automates and improves a client’s operational efficiency bysimplifying the costly and lengthy billing process from managing multiple anddiverse billing structures. This product, which integrates with both APX andAxys, is currently live at several client sites.

Weare currently engaged in validation and beta cycles for major new releases of severalkey products, including APX, Geneva and Moxy. In the latter half of 2007, weplan to release Geneva 7.0, which offers improved workflow, a new userinterface, and a new reporting front-end. The new release of Moxy, which isplanned to be released mid—year, will feature a highly scalable, dot-netarchitecture as well as improved workflow and user interface. Later in 2007, wewill be introducing two new products to the Advent suite of products: 1) atrading compliance solution; and, 2) an analytics solution that will enablemanagers to analyze not only the “how” but also the “why” of portfolioperformance and make better informed investment choices.

Financialhighlights of our first quarter of 2007 include:

·                  Term contractbookings were $9.8 million, an increase of 24% from $7.9 million in the firstquarter of 2006. With an average term of 3.4 years, these first quartercontracts, once implemented, will add approximately $2.9 million in annualrevenue;

·                  Revenues were$48.0 million, which was a 10% increase from $43.7 million in the same quarterof 2006;

·                  Revenuesrecognized from recurring sources represented 79% of total revenues for thefirst quarter of 2007, compared to 71% in the first quarter of 2006; and

·                  Cashprovided by operating activities was $13.8 million, representing a 49% increasefrom $9.3 million in the first quarter of 2006.

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Netrevenues for the first quarter of 2007 grew 10% over the first quarter of 2006while term license, maintenance and other recurring revenues were up 21% yearover year. Despite our transition to a term licensing model, we have been ableto show top-line growth, measured year over year, for two reasons:

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

·                  Wehave a large installed base of customers, who we are not requiring to convertto term licenses for either products they already own, or when they expand theusage of products they already own, such as ordering additional seats.

Weare in the process of converting the Company’s license revenues from aperpetual model to a term model, and during the three months ended March 31,2007, quarterly term license revenues exceeded revenues from perpetual licensesfor the first time. Under a perpetualpricing model, customers purchase a license to use our software indefinitelyand generally we recognize all license revenue at the time of sale; maintenanceis purchased under an annual renewable contract, and recognized ratably overthe contract period. Under a term pricing model, customers purchase a licenseto use our software and receive maintenance for a limited period of time and werecognize all of the revenue ratably over the length of the contract. This hasthe effect of lowering revenues in the early stages of the transition, butincreasing the total potential value of the customer relationship. Moving AIM’snew customer sales from a perpetual to a term licensing model has had theeffect of lowering our reported revenue growth rates over the past two yearsand will, depending on our new term license bookings, continue to have animpact through 2007 and possibly 2008. However, because our products are usedby customers for an average of approximately eight years, we believe thischange to our business model is extremely significant for the long-term growthand value of the business. For example, over an eight- year period, a customermay enter into two or more contracts for the same software product and servicesunder a term license model.

Whena customer purchases a term license together with implementation services we donot recognize any revenue under the contract until the implementation servicesare substantially completed. If the implementation services are still inprogress as of quarter-end, we will defer all of the contract revenues to asubsequent quarter. During the first quarter of 2007, we deferred net revenuesof $3.3 million and deferred directly related expenses of $0.9 million. Theimpact of these deferrals on our operating income was approximately $2.4million. As of March 31, 2007, we have deferred a total of approximately $12.6million in net revenues and $3.8 million of directly related expenses (whichare classified as “Deferred revenues” (short-term and long-term) and “Prepaidexpenses and other,” respectively, on the condensed consolidated balance sheet)as the implementation services associated with the related term licensearrangements were in progress as of March 31, 2007. As of December 31, 2006,$9.4 million and $2.9 million of net revenues and directly related expenses,respectively, were deferred.

Thetransition to a term model also has the effect of decreasing operating cashflows in the early stages of the transition. Under perpetual pricing, theentire license fee is generally billed and collected at the commencement of thearrangement. Under term pricing, a typical contract term is three years. We generallybill and collect license fees over the term of the arrangement in equalinstallments in advance of each annual period. The amount of the annual termbilling is less than the perpetual billing, resulting in lower cash flows inthe initial annual term license period. Annual term billing results in anincrease in deferred revenues and an increase in operating cash flows at thecommencement of each annual billing period.

Duringthe first quarter of 2007, we recognized approximately 79% of total net revenuefrom recurring sources, which we define as revenues from term license,maintenance on perpetual licenses and other recurring. These recurring revenuesources provide us with increased ability to make strategic decisions to investin our business while remaining confident that our operating results will bemore predictable. As we are now more than half-way through our transition to aterm licensing model, we have changed our presentation of revenue andassociated cost of revenues during the first quarter of 2007 to more clearlyshow the nature and components of our revenues under a term licensing model andthe predominance of revenue from recurring revenue sources. We believe thecurrent presentation more clearly reflects our business as well as the principalunderlying factors impacting our long-term growth and predictability. Wecurrently categorize our revenues as follows: “Term license, maintenance andother recurring,” “Perpetual license fees” and “Professional services andother.”

Historically,we have separated term license arrangement fees between license and maintenancerevenue. During the first quarter of 2007, we have discontinued this practice,and now report all term license revenues, along with perpetual maintenance andother recurring revenues, in the “Term license, maintenance and other recurring”revenues caption, which represent revenue from all of our recurring sources.Term license, maintenance and other recurring revenues increased to $37.7million or 79% of total net revenues in the first quarter of 2007, compared to$31.2 million and 71%, respectively, in the same period of 2006.

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The “Perpetuallicense fees” revenue caption principally includes revenue from:

·                  Perpetuallicense sales of Advent products into our existing installed base customers whohave not yet converted to term;

·                  Perpetuallicense sales for MicroEdge products which are sold on a perpetual model; and

·                  Asset-basedfees from fund administrators who licensed our software on a perpetual licensebasis.

Werecorded stock-based compensation expense of $3.2 million, total amortizationexpense of $0.8 million, and restructuring charges of $0.6 million in the firstquarter of 2007; these expenses totaled $4.6 million (or 10% of total netrevenues). We achieved net income of $0.4 million, resulting in dilutedearnings per share of $0.02. In addition, we generated operating cash flow ofapproximately $13.8 million during the first quarter of 2007.

InFebruary 2007, our Board authorized the repurchase of up to an additional 2.25million shares of outstanding common stock. During the first quarter of 2007,we repurchased 837,000 shares under our Board-authorized share repurchase plansfor a total cash outlay of $30.1 million and an average price of $36.00.

Alsoin February 2007, we and certain of our domestic subsidiaries entered into asenior secured credit facility agreement (the “Facility”) with Wells FargoFoothill, Inc. (the “Lender”). Under the Facility, we have a revolving line ofcredit up to an aggregate amount of $75 million, subject to a borrowing baseformula, to provide backup liquidity for a period of three years for generalcorporate purposes, including stock repurchases, or investment opportunities.This Facility provides us with the flexibility to run our business with lowercash balances.

Lookingforward, we continue to focus on improving our long-term profitability as weare now more than half-way through our transition to a term licensing model.While recent economic trends have been positive and our customers have beenmore willing to commit to new software purchases, improving our profitabilitywill depend on our introducing new products, licensing software to new andexisting customers, selling services to new and existing customers, andrenewing license and maintenance contracts at similar levels to those weachieved during fiscal 2006. The success of our transition to a term licensemodel will also depend on future renewal rates, which we will evaluate as ourterm license contracts expire. While we will continue our focus on managingcosts, we will also continue to invest in areas of the business as we deemappropriate as reflected in our recent investments in new products.

**CriticalAccounting Policies and Estimates**

Management’sdiscussion and analysis of our financial condition and results of operationsare based on our condensed consolidated financial statements and related notes,which have been prepared in accordance with accounting principles generallyaccepted in the United States of America. We review the accounting policiesused in reporting our financial results on a regular basis. The preparation ofthese financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent liabilities.

Onan ongoing basis, we evaluate the process we use to develop estimates. We baseour estimates on historical experience and on other information that we believeare reasonable for making judgments at the time they are made. Actual resultsmay differ from these estimates due to actual outcomes being different fromthose on which we based our assumptions.

Webelieve the following accounting policies contain the more significantjudgments and estimates used in the preparation of our condensed consolidatedfinancial statements.

·                  Goodwill;

·                  Revenuerecognition and deferred revenues;

·                  Incometaxes;

·                  Stock-basedcompensation;

·                  Restructuringcharges and related accruals;

·                  Impairmentof long-lived assets;

·                  Legalcontingencies; and

·                  Salesreturns and accounts receivable allowances

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Therehave been no significant changes in our critical accounting policies andestimates during the three months ended March 31, 2007 as compared to thecritical accounting policies and estimates disclosed in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”included in our Annual Report on Form 10-K/A for the year ended December 31,2006, except for “Revenue recognition” and “Income taxes”.

**Revenue recognition**. Werecognize revenue from term license, maintenance and other recurring; perpetuallicense fees, and professional services and other. We offer a wide variety ofproducts and services to a large number of financially sophisticated customers.While many of our lower-priced license transactions, maintenance contracts,subscription-based transactions and professional services projects conform to astandard structure, many of our larger transactions are complex and may requiresignificant review and judgment in our application of generally acceptedaccounting principles.

*Software licenses.* We recognizerevenue from the licensing of software when persuasive evidence of anarrangement 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 a product is delivered to a commoncarrier F.O.B shipping point. Some of our arrangements include acceptanceprovisions, and if such acceptance provisions are present, 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, but payment terms may vary based on the country in which theagreement is executed. Software licenses are sold with maintenance and,frequently, professional services.

*Licenses.*  We typically license our products on a perserver, per user basis with the price per customer varying based on theselection of the products licensed, the number of site installations and thenumber of authorized users. We have continued our transition from sellingmostly perpetual licenses to selling a mix of term and perpetual licenses, andwe expect term license revenue to increase as a proportion of total recurringrevenues (which we define as term license, maintenance and other recurringrevenues) in the future. Term license revenue comprised approximately 19% and8% of term license, maintenance and other recurring revenues during the firstquarter of 2007 and 2006, respectively. Revenue recognition for softwarelicensed under term and perpetual license models differs depending on whichtype of contract a customer signs:

·                  Term licenses

Term license contract prices include fees for both thesoftware license and maintenance. We offer multi-year term licenses by which acustomer makes a binding commitment that typically spans three years. Formulti-year term licenses, we have not established VSOE of fair value for theterm license and maintenance components and, as a result, in situations wherewe are also performing related professional services, we defer all revenue anddirectly related expenses under the arrangement until the professional servicesare substantially complete. At the point professional services aresubstantially completed, we recognize a pro-rata amount of the term license andmaintenance revenue, professional services fees earned and related expenses,based on the elapsed time from the start of the term license to the substantialcompletion of professional services. Term license and maintenance revenue forthe remaining contract years and the remaining deferred professional servicesrevenue and related expenses are recognized ratably over the remaining contractlength. When multi-year term licenses are sold and do not include relatedprofessional services, we recognize the entire term license and maintenancerevenue ratably over the period of the contract term from the effective date ofthe license agreement assuming all other revenue recognition criteria have beenmet. Revenues from term licenses are included in “Term license, maintenance andother recurring” revenues on the condensed consolidated statement ofoperations.

·                  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. Revenues from perpetual licenses areincluded in “Perpetual license fees” revenue on the condensed consolidatedstatement of operations.

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Certainof our perpetual and term license contracts include asset-based fee structuresthat provide additional revenues based on the assets that the client managesusing our software (“Assets Under Administration” or “AUA”).  Contracts containing an AUA fee structurehave a defined measurement period which requires the client to self reportactual AUA in arrears of the specified period. AUA fees above the statedminimum fee for the same period are considered incremental fees. Becauseincremental fees are not determinable until the conclusion of the measurementperiod, they are both earned and recognized in arrears, on a quarterly orannual basis. Incremental fees from perpetual AUA contracts are included in “Perpetuallicense fees” on the condensed consolidated statement of operations.  Incrementalfees from term AUA contracts are included in “Term license, maintenance andother recurring revenue” revenue on the condensed consolidated statement ofoperations.

For certain term AUA contracts signed in 2006, whichwill be entering the second year of the arrangement in 2007, we began accruingthe minimum AUA component of the fees in the applicable period during the firstquarter of 2007 rather than in arrears as was the treatment for earliercontracts. We have gained more experience in working with these types ofarrangements and are able to conclude that the minimum fees are fixed anddeterminable. The change in the first quarter of 2007 to our revenuerecognition practice to start to accrue for minimum fees is based on anaffirmative experience with all existing AUA-based arrangements where ourhistorical experience has shown that we have received the AUA report, invoicedthe client for both the minimum and incremental amounts, and received paymentin all of the cases.  Therefore,beginning in the first quarter of 2007, we will recognize AUA contract minimumfees in the period to which they are applicable, whereas we will continuerecognizing incremental fees in arrears once our clients contractually reportthem to us, because the incremental fees are not determinable until reported.The impact of this change for the first quarter of 2007 was an increase to termlicense revenue of approximately $25,000.

For existing term license arrangements signed prior to2006 which are in their second or third year where we had previously begunbilling in arrears of the measurement period, we will continue to recognizerevenue for the minimum (and incremental) value of the AUA fees upon receipt ofthe customer’s AUA report.

*Maintenance and other recurring revenues.*We offer annual maintenance programs on perpetual licenses that provide fortechnical support and updates to our software products. Maintenance fees arebundled with perpetual license fees in the initial licensing year and chargedseparately for renewals of annual maintenance in subsequent years. Fair valuefor maintenance is based upon renewal rates stated in the perpetual licensecontracts or, in limited cases, separate sales of renewals to customers.Generally, we recognize maintenance revenue ratably over the contract term.

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

Maintenanceand other recurring revenues are included in the caption “Term license,maintenance and other recurring” revenues on the consolidated statement ofoperations.

*Professional services and other revenues.*We offer a variety of professional services that include project management,implementation, data conversion, integration, custom report writing andtraining. We base fair value for professional services upon separate sales ofthese services to customers. Our professional services are generally billedbased on hourly rates together with reimbursement for travel and accommodationexpenses. We recognize revenue as professional services are performed, exceptin the case of multi-year term license contracts which are described in the “termlicenses” section above. Certain professional services arrangements involveacceptance criteria and in these cases, revenue and related expenses arerecognized upon acceptance. Professional services and other revenues alsoinclude revenue from our user conferences.

**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. Significant judgment is required to determine our worldwide incometax provision.  In the ordinary course ofbusiness, there are many transactions and calculations where the ultimate taxoutcome is uncertain. Many of these uncertainties arise as a consequence ofcost reimbursement arrangements among related entities, the process of identifyingitems of revenue and expense that have differing or preferential tax treatmentand segregation of foreign and domestic income and expense to the appropriatetaxing jurisdictions to reasonably allocate earnings. Although we believe thatour judgments and estimates are reasonable, the final outcome could bedifferent from that which is reflected in our income tax provision andaccruals.

Avaluation allowance is recorded to reduce the net deferred tax assets to anamount that will more likely than not be realized. In order for us to realizeour deferred tax assets, we must be able to generate sufficient taxable incomein the 

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jurisdiction where the tax asset is located. Weconsider forecasted earnings, future taxable income and prudent and reasonabletax planning strategies in determining the need for a valuation allowance.

Wecalculate our current and deferred tax provision based on estimates andassumptions that could differ from the actual results reflected in income taxreturns filed during the subsequent year. Adjustments based on filed returns are generally recorded in the periodwhen the return is filed and the tax implication is known.

Werecognize interest and penalties accrued on unrecognized tax benefits as wellas interest received form favorable settlements within “Provision for (benefitfrom) income taxes” on the condensed consolidated statement of operations. Weare subject to audits by state, federal and foreign tax authorities. Ourestimates for the potential outcome of any uncertain tax matter are judgmental.We believe we have adequately provided for any reasonably foreseeable outcomerelated to these matters.  However, ourfuture results may include adjustments to our estimated tax liabilities.

**Recent AccountingPronouncements**

No recent accounting pronouncements have been issuedwhich would currently have a material effect on our condensed consolidatedfinancial position, results of operations, or cash flows.

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**RESULTS OFOPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006**

The following table sets forth, for the periods indicated,certain financial information as a percentage of total net revenues. Thefinancial information and the ensuing discussion should be read in conjunctionwith the accompanying condensed consolidated financial statements and notesthereto:

|                                                | ** ** | **Three Months Ended March 31** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| **Net  revenues:**                             |       |                                                |       |   |   |
| Term license,  maintenance and other recurring |       | 79                                                  | %          | 71 | % |
| Perpetual  license fees                        |       | 12                                                  |       | 19 |   |
| Professional  services and other               |       | 9                                                   |       | 10 |   |
|                                           |       |                                                |       |   |   |
| Total net revenues                             |       | 100                                                 |       | 100 |   |
|                                           |       |                                                |       |   |   |
| **Cost of  revenues:**                         |       |                                                |       |   |   |
| Term license,  maintenance and other recurring |       | 19                                                  |       | 18 |   |
| Perpetual  license fees                        |       | 0                                                   |       | 1 |   |
| Professional  services and other               |       | 12                                                  |       | 11 |   |
| Amortization of  developed technology          |       | 1                                                   |       | 1 |   |
|                                           |       |                                                |       |   |   |
| Total cost of revenues                         |       | 32                                                  |       | 31 |   |
|                                           |       |                                                |       |   |   |
| Gross margin                                   |       | 68                                                  |       | 69 |   |
|                                           |       |                                                |       |   |   |
| **Operating  expenses:**                       |       |                                                |       |   |   |
| Sales and  marketing                           |       | 27                                                  |       | 28 |   |
| Product  development                           |       | 21                                                  |       | 18 |   |
| General and  administrative                    |       | 18                                                  |       | 18 |   |
| Amortization of  other intangibles             |       | 1                                                   |       | 2 |   |
| Restructuring  charges                         |       | 1                                                   |       | 0 |   |
|                                           |       |                                                |       |   |   |
| Total operating expenses                       |       | 68                                                  |       | 67 |   |
|                                           |       |                                                |       |   |   |
| Income (loss)  from operations                 |       | (0                                                  | )          | 2 |   |
| Interest income  and other expense, net        |       | 1                                                   |       | 3 |   |
|                                           |       |                                                |       |   |   |
| Income before  income taxes                    |       | 1                                                   |       | 5 |   |
| Provision from  (benefit from) income taxes    |       | 0                                                   |       | (2 | ) |
|                                           |       |                                                |       |   |   |
| **Net  income**                                |       | 1                                                   | %          | 8 | % |

 

**NET REVENUES**

|                                    | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **Change** | ** ** |
| Total net  revenues (in thousands) |       | $                                                   | 47,979     |       | $          | 43,656 |   | $ | 4,323 |   |
|                                    |            |                                                     |            |            |            |  |  |  |  |  |

 

Our net revenues are made up of three components: termlicense, maintenance and other recurring; perpetual license fees; and,professional services and other.

Historically,our components of revenue varied as a percentage of net revenues dueprincipally to the relative size and timing of individual perpetual softwarelicenses and the timing of new product introductions. In addition, the size ofclient implementations, the resulting proportion of the maintenance andprofessional services components of license transactions and the amount ofclient use of pricing and related data can impact variability. We are now morethan halfway through our transition to a term licensing model, and we expectthat in 2007 and beyond, over 80% of our net revenues will come from ourrecurring revenue sources and that perpetual license fees will decrease as a percentageof net revenues. As we substantially complete our transition to term licensingin fiscal 2009, we expect less variability between our major categories ofrevenues because the variation from large perpetual license deals willdecrease.

Weexpect total net revenues for the second quarter of 2007 to be between $49million and $51 million.

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***TermLicense, Maintenance and Other Recurring Revenues***
| ** **                                                                                  | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| **(in thousands, except percent of total net revenues)** | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **Change** | ** ** |
|                                                                                        |       |                                                |       |       |       |   |   |
| Term license revenues                                                                       |       | $                                                   | 7,012      |       | $          | 2,468 |   | $ | 4,544 |   |
| Maintenance revenues                                                                        |       | 20,504                                              |       | 19,424     |       | 1,080 |   |
| Other recurring  revenues                                                                   |       | 10,208                                              |       | 9,279      |       | 929 |   |
| Total term license,  maintenance and other recurring revenues                               |       | $                                              | 37,724     |       | $     | 31,171 |   | $  | 6,553 |   |
| Percent of total net revenues                                                               |       | 79                                                  | %          | 71         | %          |   |   |

 

Termlicense revenues, which includes software license and maintenance fees,increased $4.5 million or 184% during the first quarter of 2007 compared to thesame quarter in 2006, and represented 19% of total term license, maintenanceand other recurring revenues as compared to 8% in the first quarter of 2006. Aswe sell more products on a term license model, we defer a greater portion oflicense revenue over the term of the contract, instead of recognizing thelicense revenue up front as with perpetual licenses. In addition, in multi-yearterm licenses where we perform professional services, we defer all revenue anddirectly related expenses until the professional services are complete. The neteffect, assuming most customers renew their contracts upon expiration of theinitial term, is to build a long-term recurring revenue stream and also enhancepredictability. We continue to sign more contracts on a term basis as termlicense bookings were $9.8 million in the first quarter of 2007 compared to$7.9 million in the same period of 2006.

Maintenancerevenues increased $1.1 million or 6% during the first quarter of 2007 comparedto the same quarter of 2006, reflecting the impact of price increases on annualperpetual maintenance renewals purchased by our installed customer base and, toa lesser extent, an increase in new perpetual maintenance support contracts,partially offset by maintenance de-activations and downgrades. We disclose ourmaintenance renewal rate one quarter in arrears in order to includesubstantially all payments received against the maintenance invoices for thatquarter. Our maintenance renewal rate has been in the range of 88% to 92% overthe past five quarters and was 92% for the fourth quarter of 2006.

Otherrecurring revenues increased $0.9 million or 10% during the first quarter of2007, as a result of an increase in the amount of revenue we receive fromtransaction charges generated by a partner using our software, as well asgrowth in our subscription and data management revenue streams, especiallyAdvent Custodial Data (ACD).

Weexpect that term license, maintenance and other recurring revenues willincrease in the second quarter of 2007 compared to the first quarter as weanticipate additional term license revenue as we continue to layer revenue intoour term license model, and higher maintenance revenues from a higher volume ofcontracts and expected price increases.

***PerpetualLicense Fees***
| ** **                             | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                             | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **Change** | ** ** |
| Perpetual license fees  (in thousands) |       | $                                                   | 5,927      |       | $          | 8,159 |   | $ | (2,232 | ) |
| Percent of total net revenues          |       | 12                                                  | %          | 19         | %          |   |   |
|                                        |            |                                                     |            |            |            |  |  |  |  |  |

 

Althoughwe believe the overall economic outlook and conditions within the financialservices industry remained positive in the first quarter of 2007, whichresulted in continuing capital expenditures by our customers, the transition ofour core products to a term pricing model has resulted in a decrease inperpetual license fees to $5.9 million in the first quarter of 2007, comparedto $8.2 million in the same quarter of 2006. Incremental AUA fees fromperpetual licenses included in the “Perpetual license fees” caption were $1.8million in the first quarter of 2007 and were flat with the same quarter of2006.

Weexpect perpetual license fees in the second quarter to be approximately flatcompared to the first quarter.

***Professional Services and Other Revenues***
| ** **                                               | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                               | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **Change** | ** ** |
| Professional  services and other revenues (in thousands) |       | $                                              | 4,328      |       | $     | 4,326 |   | $  | 2 |   |
| Percent of total net  revenues                           |       | 9                                                   | %          | 10         | %          |   |   |
|                                                          |            |                                                     |            |            |            |  |  |  |  |  |

 

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Professionalservices and other revenues primarily include consulting, project management,custom integration, custom work, and training. Professional services projectsrelated to Axys, Moxy and Partner products generally can be completed in a two-to six-month time period, while services related to Geneva and APX products mayrequire a four- to nine-month implementation period.

Inthe first quarter of 2007, increases in our general consulting and projectmanagement revenues associated with Advent Office and Geneva implementationswere offset by the net deferral of professional services revenue for servicesperformed on term license implementations. When services are performed withterm license implementations, service revenue is deferred until theimplementation is complete. Then service revenues are recognized over theremaining license term. We have experienced an increase in implementationservices after the launch of our APX product and the sales success of ourGeneva product, which are sold under a term license model. There were more termlicense implementation projects in progress at March 31, 2007 compared withMarch 31, 2006, and as a result there was a significant increase in thedeferral of professional services revenue. We deferred net professionalservices revenue of approximately $2.1 million in the first quarter of 2007 ascompared to $1.4 million in the same period of 2006. We expect that revenuesfrom professional services and other will be flat to slightly up in the secondquarter of 2007 relative to the first quarter as we expect to recognize revenuefrom  service implementation projects forterm licenses that commenced in 2006 deals which we will complete during thesecond quarter of 2007.

***Revenues by Segment***
| ** **                    | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|-------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| **(in thousands)**       | ** ** | ** **                                          | **2007**   | ** ** | **2006**   | ** ** | **Change** | ** ** |
| ** **                    | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Advent  Investment Management |       | $                                                   | 42,555     |       | $          | 38,593 |   | $ | 3,962 |   |
| MicroEdge                     |       | 5,424                                               |       | 4,852      |       | 572 |   |
| Other                         |       | —                                              |       | 211        |       | (211 | ) |
|                          |       |                                                |       |       |       |   |   |
| Total net  revenues           |       | $                                                   | 47,979     |       | $          | 43,656 |   | $ | 4,323 |   |
|                               |            |                                                     |            |            |            |  |  |  |  |  |  |

 

Wehave two reportable segments: Advent Investment Management (“AIM”) and MicroEdge.AIM derives revenues from the development, marketing and sale of softwareproducts, data interfaces and related maintenance and services that automate,integrate and support certain mission critical functions of investmentmanagement organizations. MicroEdge derives revenues from the sale of softwareand services for grant management, matching gifts and volunteer tracking forthe grant-making community.

The10% increase in AIM’s revenue in the three months ended March 31, 2007primarily reflects generally healthy economic conditions and growth infinancial markets, as well as the continued focus on selling our Axys, APX,Moxy, Partner and Geneva products. AIM’s revenue increase during the firstquarter of 2007 also reflected an increase in new maintenance support contractsas a result of new license deals and price increases for maintenance contractsfrom our installed customer base, partially offset by attrition from within ourexisting installed customer base.

Thetechnology spending patterns of organizations in MicroEdge’s primary markets(independent foundations, community foundations and corporations) are directlyaffected by economic fluctuations as foundation budgets are largely driven byendowment income which often contains market-exposed components. Foundationspending typically decreases in an economic downturn. Community foundations aresubject to similar influences, compounded by the fact that in many cases muchof their ongoing funding and endowment comes from active donors who may increaseor reduce their giving depending on the economic climate and the related effecton their income and wealth. Corporations typically fund charitable activitiesfrom operating budgets, and the allocation to charitable donations andsupporting company charitable operations is often closely tied to a company’sperformance. Thus, corporate philanthropy and spending on related technologyare correlated with company and overall economic performance.

The12% increase in MicroEdge revenue in the first quarter of 2007 reflects thegenerally healthy economic conditions and general trend of increased charitablecontributions that has persisted for the past few years. This increase incharitable contributions received by the foundations sector has enabledfoundations to increase their information technology expenditures whichresulted in the increase in MicroEdge revenue in the first quarter of 2007.

Therevenue decrease in our “Other” segment resulted from the winding down of thesoft dollar component of our broker/dealer subsidiary in fiscal 2006.

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**COST OF REVENUES**
| ** **                             | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                             | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **Change** | ** ** |
| Total cost of  revenues (in thousands) |       | $                                                   | 15,464     |       | $          | 13,464 |   | $ | 2,000 |   |
| Percent of total net  revenues         |       | 32                                                  | %          | 31         | %          |   |   |
|                                        |            |                                                     |            |            |            |  |  |  |  |  |

 

Ourcost of revenues is made up of four components: cost of term license,maintenance and other recurring; cost of perpetual license fees; cost ofprofessional services and other; and amortization of developed technology.

***Costof Term License, Maintenance and Other Recurring***
| ** **                                                            | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                                            | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **Change** | ** ** |
| Cost of term  license, maintenance and other recurring (in thousands) |       | $                                              | 9,032      |       | $     | 7,917 |   | $  | 1,115 |   |
| Percent of total term  license, maintenance and recurring revenue     |       | 24                                                  | %          | 25         | %          |   |   |
|                                                                       |            |                                                     |            |            |            |  |  |  |  |  |

 

Costof term license fees consists primarily of royalties and other fees paid tothird parties, the fixed direct labor involved in producing and distributingour software, and cost of product media including duplication, manuals andpackaging materials. Cost of maintenance and other recurring revenues isprimarily comprised of the direct costs of providing technical support andother services for recurring revenues and royalties paid to third partysubscription-based and transaction-based vendors. The increase in dollar amountin the first quarter of 2007 was primarily due to an increase in compensationand related costs including bonuses and fringe benefits of $1.2 million as aresult of an increase in headcount. This increase in headcount enables us toimprove the services we provide to our clients in their day-to-day use of oursoftware.

Weexpect cost of term license, maintenance and other recurring revenue in thesecond quarter of 2007 to increase slightly in dollar amount as compared to thefirst quarter due to higher payroll expenses from annual merit increases andthe continued hiring of personnel to provide technical support to our growinginstalled base of customers.

***Costof Perpetual License Fees***
| ** **                                     | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                     | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **Change** | ** ** |
|                                           |       |                                                |       |       |       |   |   |
| Cost of  perpetual license fees (in thousands) |       | $                                                   | 195        |       | $          | 229 |   | $ | (34 | ) |
| Percent of total  perpetual license revenues   |       | 3                                                   | %          | 3          | %          |   |   |
|                                                |            |                                                     |            |            |            |  |  |  |  |  |

 

Costof perpetual license fees consists primarily of royalties and other fees paidto third parties, the fixed direct labor involved in producing and distributingour software, and cost of product media including duplication, manuals andpackaging materials. The cost of perpetual license fees has remained consistentwith the same period in the prior fiscal year. We expect cost of perpetuallicense fees to be flat in the second quarter of 2007.

***Costof Professional Services and Other***
| ** **                                                 | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                                 | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **Change** | ** ** |
| Cost of  professional services and other (in thousands)    |       | $                                              | 5,873      |       | $     | 4,924 |   | $  | 949 |   |
| Percent of total  professional services and other revenues |       | 136                                                 | %          | 114        | %          |   |   |
|                                                            |            |                                                     |            |            |            |  |  |  |  |  |

 

Costof professional services and other revenue consists primarily of personnelrelated costs associated with the client services 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 increase in the first quarter of 2007reflects increases in payroll related expenses of $0.6 million as a result ofthe increase in headcount to address the general increase in demand forconsulting and training services demanded as a result of higher license sales.Consistent with the increase in headcount, recruiting costs increased by$264,000 during the first quarter of 2007. In addition, travel expensesincreased by $130,000 during the three months ended March 31, 2007 due totravel associated with more service projects.

26

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Thesecost increases were partially offset by larger net deferrals of professionalservices costs under SOP 97-2 related to services performed on term licenseimplementations. We have experienced an increase in implementation serviceswith the launch of our APX product and sales of our Geneva product, which areprincipally sold under the term license model. As there were more term licenseimplementation projects in progress as of March 31, 2007 compared to March 31,2006, we have experienced an increase in the deferral of professional servicecosts. We deferred net professional service costs of $0.8 million during thethree months ended March 31, 2007, compared to $0.5 million in the same periodof 2006.

Grossmargins for the first quarter of 2007 were reduced by the larger deferral ofprofessional services revenues and costs under SOP 97-2, as we defer only thedirect costs associated with services performed on term license arrangements.As a result, indirect costs such as management and other overhead expenses arerecognized in the period in which they are incurred, with no revenue to offsetthem. In addition, we have added headcount in our consulting group. Since thesenew employees undergo a training period typically of six months before becomingfully billable, their associated costs have a near-term negative impact ongross margins.

Weexpect cost of professional services and other in the second quarter of 2007 toincrease as compared to the first quarter due to higher payroll expenses fromannual merit increases and the continued hiring of consultants to supportproduct implementations.

***Amortizationof Developed Technology***
| ** **                                          | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                          | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **Change** | ** ** |
| Amortization of  developed techology (in thousands) |       | $                                              | 364        |       | $     | 394 |   | $  | (30 | ) |
| Percent of total net  revenues                      |       | 1                                                   | %          | 1          | %          |   |   |
|                                                     |            |                                                     |            |            |            |  |  |  |  |  |

 

Amortizationof developed technology represents amortization of acquisition-relatedintangible assets and internal product development costs.  The decrease in amortization of developedtechnology reflected technology related intangible assets from prioracquisitions becoming fully amortized during fiscal 2006. We expectamortization of developed technology to be slightly lower in the second quarterof 2007 as compared to the first quarter.

**OPERATING EXPENSES**

***Salesand Marketing***
| ** **                          | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **Change** | ** ** |
| Sales and  marketing (in thousands) |       | $                                                   | 12,889     |       | $          | 12,142 |   | $ | 747 |   |
| Percent of total net  revenues      |       | 27                                                  | %          | 28         | %          |   |   |
|                                     |            |                                                     |            |            |            |  |  |  |  |  |

 

Salesand marketing expenses consist primarily of the costs of personnel involved inthe sales and marketing process, sales commissions, advertising and promotionalmaterials, sales facilities expense, trade shows, and seminars. The increase inexpenses in the first quarter of 2007 was primarily due to increases in payrolland other related costs of $917,000 as a result of an increase in headcount to169 at March 31, 2007 from 148 at March 31, 2006. This was partially offset bya decrease in broker fees of approximately $384,000 during the first quarter of2007, associated with the winding down of our soft dollar business in fiscal2006. We expect sales and marketing expenses to be up slightly in the secondquarter of 2007 relative to the first quarter due to increased marketingspending, and payroll costs from additional headcount and annual meritincreases.

***ProductDevelopment***
| ** **                          | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **Change** | ** ** |
|                                |       |                                                |       |       |       |   |   |
| Product  development (in thousands) |       | $                                                   | 9,856      |       | $          | 7,935 |   | $ | 1,921 |   |
| Percent of total net  revenues      |       | 21                                                  | %          | 18         | %          |   |   |
|                                     |            |                                                     |            |            |            |  |  |  |  |  |

 

Productdevelopment expenses consist primarily of salary and benefits for ourdevelopment staff as well as contractors’ fees and other costs associated withthe enhancements of existing products and services and development of 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 

27

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capitalized until the product is made available forgeneral release to customers. The capitalized costs will be amortized using thegreater of the ratio of the product’s current gross revenues to the total ofcurrent expected gross revenues or on a straight-line basis over the software’sestimated economic life of approximately three years.

Theincrease in product development expense during the first quarter of 2007 wasprimarily due to increases in payroll and other related costs of $2.0 million,as a result of an increase in headcount to help us meet our expanded newproduct delivery schedules for fiscal 2007 and less capitalization of productdevelopment costs in the first quarter of 2007. We capitalized zero costsrelated to product development during the first quarter of 2007 as we had noproducts in their final beta stage, compared to $0.9 million in the firstquarter of 2006. We expect product development expenses to be down slightly inthe second quarter of 2007 as compared to the first quarter due to increasedamounts capitalized under SFAS 86, partially offset by higher payroll expensesfrom annual merit increases.

***Generaland Administrative***
| ** **                                 | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **Change** | ** ** |
| General and  administrative (in thousands) |       | $                                                   | 8,784      |       | $          | 7,946 |   | $ | 838 |   |
| Percent of total net  revenues             |       | 18                                                  | %          | 18         | %          |   |   |
|                                            |            |                                                     |            |            |            |  |  |  |  |  |

 

Generaland administrative expenses consist primarily of personnel costs for finance,administration, operations and general management, as well as legal andaccounting expenses. The increase in expenses in the first quarter of 2007 isprimarily due to the increase in payroll and other related costs of $1.3million as a result of an increase in headcount, as well as increased businesstaxes of $0.4 million. This increase was offset by a decrease in rent andbuilding related expense of $0.8 million for the three months ending March 31,2007 as we are no longer incurring rent and facility expenses related to ourprior San Francisco headquarters facility located at 301 Brannan Street, whichwe exited in October 2006. We entered into a definitive lease agreement inJanuary 2006 for our new headquarters facility located at 600 Townsend Streetin San Francisco, California resulting in rent expense at both 600 Townsend andour prior headquarters facility causing higher rent expense for the firstquarter of 2006. We expect general and administrative expenses to be downslightly in the second quarter of 2007 due to lower audit fees and business andpayroll taxes as compared to the first quarter, partially offset by higherpayroll expenses from annual merit increases.

***Amortizationof Other Intangibles***
| ** **                                        | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                        | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **Change** | ** ** |
| Amortization of  other intangibles (in thousands) |       | $                                              | 474        |       | $     | 979 |   | $  | (505 | ) |
| Percent of total net  revenues                    |       | 1                                                   | %          | 2          | %          |   |   |
|                                                   |            |                                                     |            |            |            |  |  |  |  |  |

 

Amortizationof other intangibles represents amortization of non-technology relatedintangible assets. The decrease in amortization of other intangibles in thefirst quarter of 2007 was attributed to assets becoming fully amortized duringfiscal 2006. We expect amortization of other intangibles to be slightly lowerin the second quarter of 2007 as compared to the first quarter.

***RestructuringCharges***
| ** **                            | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **Change** | ** ** |
|                                  |       |                                                |       |       |       |   |   |
| Restructuring  charges (in thousands) |       | $                                                   | 562        |       | $          | 141 |   | $ | 421 |   |
| Percent of total net  revenues        |       | 1                                                   | %          | 0          | %          |   |   |
|                                       |            |                                                     |            |            |            |  |  |  |  |  |

 

Restructuringinitiatives have been implemented in our AIM operating segment to reduce costsand improve operating efficiencies by better aligning our resources tonear-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 first quarter of 2007, we recordeda restructuring charge of $562,000 due to the update of certain sub-lease assumptionsfor our prior San Francisco headquarters facility located at 301 BrannanStreet, which the Company exited in 

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October 2006. During the first quarter of 2006, werecorded a net restructuring charge of $141,000 primarily to adjust originalestimates for facilities in San Francisco, California and New York, New York.

Thefollowing table sets forth an analysis of the components of the payments andrestructuring charges made against the accrual during the first quarter of 2007(in thousands):
| ** **                                             | ** ** | **Facility Exit** | ** ** | **Severance &** | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|--------------------------|------------|------------|------------|
| ** **                                             | ** ** | **Costs**              | ** ** | **Benefits**             | ** ** | **Total**  | ** ** |
|                                                   |       |                   |       |                     |       |       |       |
| Balance of  restructuring accrual at December 31, 2006 |       | $                      | 6,587      |                     | $          | 4          |       | $ | 6,591 |   |
| Restructuring  charges                                 |       | 476                    |       | —                   |       | 476        |       |
| Cash payments                                          |       | (909                   | )          | —                   |       | (909       | )          |
| Accretion  adjustment                                  |       | 86                     |       | —                   |       | 86         |       |
|                                                   |       |                   |       |                     |       |       |       |
| Balance of  restructuring accrual at March 31, 2007    |       | $                      | 6,240      |                     | $          | 4          |       | $ | 6,244 |   |

 

***OperatingIncome (Loss) by Segment***
| ** **                                          | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| **(in thousands)**                             | ** ** | ** **                                          | **2007**   | ** ** | **2006**   | ** ** | **Change** | ** ** |
| ** **                                          | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Advent  Investment Management                       |       | $                                                   | 2,860      |       | $          | 5,113 |   | $ | (2,253 | ) |
| MicroEdge                                           |       | 1,174                                               |       | 951        |       | 223 |   |
| Other                                               |       | —                                              |       | (468       | )          | 468 |   |
| Unallocated  corporate operating costs and expenses |       |                                                |       |       |       |   |   |
| Stock-based employee compensation                   |       | (3,246                                              | )          | (3,174     | )          | (72 | ) |
| Amortization of developed technology                |       | (364                                                | )          | (394       | )          | 30 |   |
| Amortization of other intangibles                   |       | (474                                                | )          | (979       | )          | 505 |   |
|                                                |       |                                                |       |       |       |   |   |
| Total operating  income (loss)                      |       | $                                                   | (50        | )          | $          | 1,049 |   | $ | (1,099 | ) |
|                                                     |            |                                                     |            |            |            |  |  |  |  |  |  |

 

Operatingincome for the AIM segment decreased by approximately $2.3 million in the firstquarter of 2007 compared with the first quarter of 2006 primarily as a result ofan increase in total expenses of $6.2 million during the first quarter of 2007.The increase is primarily due to payroll and other related costs from higherheadcount of 753 employees at March 31, 2007 from 660 at March 31, 2006, as theAIM segment has added personnel primarily in the client support, productdevelopment, professional services and sales and marketing groups. Thisincrease in AIM’s expenses was partially offset by AIM’s revenue growth of $4.0million during the first quarter of 2007.

MicroEdge’soperating income increased by $223,000 from the first quarter of 2006 primarilydue to an increase in revenues of $572,000, partially offset by an increase intotal costs of $348,000. Operating loss for our “Other” segment was $468,000for the first quarter of 2006 compared to zero in the first quarter of 2007, aswe completed the wind down of the soft dollar component of our broker/dealer in2006.

***Interest Income and Other Expense, Net***
| ** **                                             | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                             | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **Change** | ** ** |
| Interest income  and other expense, net (in thousands) |       | $                                              | 518        |       | $     | 1,346 |   | $  | (828 | ) |
| Percent of total net  revenues                         |       | 1                                                   | %          | 3          | %          |   |   |
|                                                        |            |                                                     |            |            |            |  |  |  |  |  |

 

Interestincome and other, net consists of interest income, realized gains and losses oninvestments and foreign currency gains and losses. Interest income was $0.5million during the three months ended March 31, 2007 compared to $1.4 millionin the same quarter of 2006. This decrease was a result of our lower cashbalance during the first quarter of 2007, as we liquidated part of ourportfolio to fund our significant stock repurchases in fiscal 2006 and thefirst quarter of 2007.

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***Provision for (Benefit from) Income Taxes***
| ** **                                                | ** ** | **Three Months Ended March 31** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                                | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **Change** | ** ** |
| Provision for  (benefit from) income taxes (in thousands) |       | $                                              | 29         |       | $     | (1,007 | ) | $  | 1,036 |   |
| Effective tax rate                                        |       | 6                                                   | %          | -42        | %          |   |   |
|                                                           |            |                                                     |            |            |            |  |  |  |  |  |

 

Duringthe three months ended March 31, 2007, we recorded a provision of $29,000. Thisprovision reflects a projected fiscal 2007 effective tax rate of 45.5%, lessthe discrete tax benefit generated in the first quarter of 2007 fordisqualifying dispositions of incentive stock options and employee stockpurchase plan shares whose associated stock-based employee compensation expenseunder FAS 123R has been expensed. The fiscal 2007 effective tax rateexceeds the statutory rate primarily as a result of non-deductible stock-basedemployee compensation relating to incentive stock options and the Company’semployee stock purchase plan, partially offset by the benefit from federal andCalifornia research credits.  During the three months ended March 31,2006, we continued to carry a full valuation allowance against our deferred taxassets which resulted in a tax provision (benefit) primarily based on currentincome tax expense. The benefit from income taxes of $1.0 million for the threemonths ended March 31, 2006 primarily reflects the receipt of a state incometax refund of $0.5 million and a reduction in other projected tax liabilitiesassociated with the expiration of federal income tax return contingency ofapproximately $0.6 million slightly offset by federal alternative minimum taxand various state obligations.

**LIQUIDITY ANDCAPITAL RESOURCES**

Ouraggregate cash, cash equivalents and marketable securities were $43.0 millionat March 31, 2007, compared with $55.1 million at December 31, 2006. Cashequivalents are comprised of highly liquid investments purchased with anoriginal or remaining maturity of 90 days or less at the date of purchase.

The table below, for the periods indicated, providesselected cash flow information (in thousands):
| ** **                                           | ** ** | **Three Months Ended March 31** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
|                                                 |       |                                                |       |   |   |
| Net cash  provided by operating activities           |       | $                                                   | 13,797     |   | $ | 9,260 |   |
| Net cash  provided by (used in) investing activities |       | $                                                   | 21,279     |   | $ | (9,474 | ) |
| Net cash used in  financing activities               |       | $                                                   | (22,314    | ) | $ | (31,153 | ) |

 

***CashFlows from Operating Activities***

Ourcash flows from operating activities represent the most significant source offunding for our operations. The major uses of our operating cash includefunding payroll (salaries, commissions, bonuses and benefits), generaloperating expenses (marketing, travel, computer and telecommunications, legaland professional expenses, and office rent) and cost of revenues. Our cashprovided by operating activities generally follows the trend in our netrevenues, operating results and the increase in deferred revenues resultingfrom term license bookings.

 Our cash provided by operating activities of$13.8 million during the three months ended March 31, 2007 was primarily theresult of our net income and non-cash charges including stock-basedcompensation and depreciation and amortization during the quarter. Cash flowsresulting from changes in assets and liabilities included decreases in accountsreceivable and increases in deferred revenue. The decrease in accountsreceivable primarily reflected improved collections during the quarter. Days’sales outstanding decreased to 67 days during the first quarter of 2007 from 75days in the fourth quarter of 2006. The increase in deferred revenue primarilyreflected our continued transition to the term license model. Under the termmodel, we generally bill and collect for a term agreement in equal installmentsin advance of each annual period. These amounts are deferred at billing and recognizedover the annual term period. This has the effect of increasing deferred revenuewhen compared to a perpetual license model where no license revenue isdeferred. See further discussion of the effects of our transition to a termmodel in the “Overview” section. Other changes in assets and liabilitiesincluded an increase in our prepaid and other assets and decreases in accountspayable and accrued liabilities. The decreases in accounts payable and accruedliabilities reflected cash payments of fiscal 2006 liabilities includingyear-end payables and bonuses, commissions and payroll taxes.

Ourcash provided by operating activities of $9.3 million during the three monthsended March 31, 2006 was primarily the result of our net income and non-cashcharges including stock-based compensation and depreciation and amortizationduring the quarter. Other sources of cash during the first quarter of 2006included decreases in accounts receivable and increases in deferred rent anddeferred revenue. The decrease in accounts receivable primarily reflectedimproved collections during the 

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quarter. Days’sales outstanding decreased to 64 days for the first quarter of 2006 from 68days in the fourth quarter of 2005. The increase in deferred rent resulted fromthe entry into a definitive lease agreement on January 6, 2006 for our futureheadquarters facilities located at 600 Townsend Street in San Francisco,California. The increase in deferred revenue primarily reflected our continuedtransition to the term license model. Uses of our operating cash included anincrease in our prepaid and other assets and decreases in accounts payable,accrued liabilities and income taxes payable. The increase in prepaid and otherassets primarily reflected a receivable established for the tenant improvementallowance associated with our 600 Townsend lease agreement, which was slightlyreduced by cash payments by the lessor during the quarter. The decreases inaccounts payable and accrued liabilities reflected cash payments of fiscal 2005liabilities including year-end payables and bonuses, commissions, payrolltaxes, settlement of claims of certain former members and employees of AdventOutsource Data Management, and legal costs associated with the discovery phaseof the Kinexus earnout litigation. The decrease in income taxes payable duringthe first quarter of 2006 reflected cash payments related to state income taxesand reductions in other projected tax liabilities.

Weexpect that cash provided by operating activities may fluctuate in futureperiods as a result of a number of factors including fluctuations in our netrevenues and operating results, amount of revenue deferred, collection ofaccounts receivable, and timing of payments.

***CashFlows from Investing Activities***

Netcash provided by investing activities of $21.3 million for the first quarter of2007 is primarily from the sale of short term investments of $24.9 million,partially offset by capital expenditures of $2.6 million and an installmentpayment totaling $1.0 million related to the acquisition of East CircleSolutions, Inc.

Netcash used in investing activities of $9.5 million for the first quarter of 2006consisted primarily of net purchases of marketable securities of $4.5 million,capital expenditures of $3.0 million, increase in restricted cash of $1.2million to secure a bank line of credit for our corporate headquartersfacility, and capitalized software development costs of $0.8 million.

***CashFlows from Financing Activities***

Netcash used in financing activities for the first quarter of 2007 of $22.3million reflected the repurchase of 0.8 million shares of our common stock for$30.1 million, partially offset by proceeds received from the exercise of stockoptions of $7.8 million. Net cash used in financing activities for the firstquarter of 2006 of $31.2 million reflected the repurchase of 1.2 million sharesof our common stock for $33.7 million, partially offset by proceeds receivedfrom the exercise of stock options of $2.6 million.

Ourliquidity and capital resources in any period could be affected by the exerciseof outstanding stock options and issuance of common stock under our employeestock purchase plan. The resulting increase in the number of outstanding sharesfrom this and from the issuance of common stock from our other outstandingequity awards (RSUs and SARs) could also affect our per share results ofoperations. However, we cannot predict the timing or amount of proceeds fromthe exercise of stock options or SARs, or whether they will be exercised atall. Furthermore, we may continue our stock repurchase activity under the sharerepurchase programs approved by our Board. As of March 31, 2007, approximately1.7 million shares were available to be repurchased under the share repurchaseplan that was approved by the Board and publicly announced in February 2007.

AtMarch 31, 2007, we had negative working capital of $18.0 million, compared tonegative working capital of $0.3 million at December 31, 2006. Our negativeworking capital is primarily due to our common stock repurchases, totaling$148.6 million during fiscal 2006 and $30.1 million during the first quarter of2007, and to a lesser extent deferred revenue growth.

Wecurrently have no significant capital commitments other than commitments underour operating leases, which increased from $49.0 million at December 31, 2006to $52.2 million at March 31, 2007 primarily as a result from expanding therentable square footage at our corporate headquarters facility located at 600Townsend Street in San Francisco, California during the first quarter of 2007.

The following table summarizes our contractual cashobligations as of March 31, 2007 (in thousands):
| ** **                                             | ** ** | **Nine**              | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|--------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                                             | ** ** | **Months Ended** | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | **December 31**  | ** ** | **Years Ended December 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | **2007**              | ** ** | **2008**                                   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** |
| Operating lease  obligations, net of sub-lease  income | ** ** | $                | 4,750      | ** **                                 | $     | 7,518      | ** ** | $     | 5,752      | ** ** | $     | 5,261          | ** ** | $     | 4,755      | ** ** | $  | 24,169 | ** ** | $  | 52,205 | ** ** |
|                                                        |            |                       |            |                                            |            |            |            |            |            |            |            |                |            |            |            |  |  |  |  |  |  |  |

 

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AtMarch 31, 2007 and December 31, 2006, we did not have any relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities, which would havebeen established for the purpose of facilitating off-balance sheet arrangementsor other contractually narrow or limited purposes. As such, we are notmaterially exposed to any financing, liquidity, market or credit risk thatcould arise if we had engaged in such relationships.

InFebruary 2007, we and certain of our domestic subsidiaries entered into asenior secured credit facility agreement (the “Facility”) with Wells FargoFoothill, Inc. (the “Lender”). Under the Facility, the Lender will provide theCompany with a revolving line of credit up to an aggregate amount of $75million, subject to a borrowing base formula, to provide backup liquidity forgeneral corporate purposes, including stock repurchases, or investmentopportunities for a period of three years.

Weexpect that for the next year, our operating expenses and common stockrepurchases will continue to constitute a significant use of cash flow. Inaddition, we may use cash to fund acquisitions or invest in other businesses,when opportunities arise. Based upon our past performance and currentexpectations, we believe that our cash and cash equivalents, marketablesecurities, cash generated from operations and availability under our Facilitywill be sufficient to satisfy our working capital needs, capital expenditures, investmentrequirements, stock repurchases and financing activities for the next year.

**Off-BalanceSheet Arrangements and Contractual Obligations**

Ouroff-balance sheet arrangements as of March 31, 2007 consist 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.Quantitative and Qualitative Disclosures About Market Risk**

Weare exposed to financial market risks, including changes in foreign currencyexchange rates and interest rates. Historically, much of our revenues andcapital spending was transacted in U.S. dollars. However, since theacquisitions of Advent Denmark, Advent Norway, Advent Sweden, AdventNetherlands, and Advent Europe’s remaining distributors in the United Kingdomand Switzerland, whose service and certain license revenues and capitalspending, are transacted in local country currencies, we have greater exposureto foreign currency fluctuations. Additionally as of March 31, 2007, $39.6million of goodwill and $0.9 million of other intangibles from the acquisitionof these entities is denominated in foreign currency. Therefore a hypotheticalweakening (strengthening) of the U.S. dollar of 10% relative to certainEuropean currencies could increase (decrease) our assets and equity byapproximately $4 million. We do not believe that a hypothetical 10% change inforeign currency exchange rates would have a material adverse effect on ourcondensed consolidated results of operations or cash flows.

Historically,our interest rate risk related primarily to our investment portfolio, whichconsisted of $20.2 million in cash equivalents and $24.9 million in marketablesecurities as of December 31, 2006 and $35.3 million in cash equivalents andzero in marketable securities as of March 31, 2007. An immediate sharp increasein interest rates could have a material adverse effect on the fair value of ourinvestment portfolio. Conversely, immediate sharp declines in interest ratescould seriously harm interest earnings of our investment portfolio. We do notcurrently use derivative financial instruments in our investment portfolio, norhedge for these interest rate exposures.

Bypolicy, we limit our exposure to longer-term investments, and the majority ofour investment portfolio at December 31, 2006 had interest rate maturities ofless than one year. As a result of the relatively short duration of ourportfolio, an immediate hypothetical parallel shift to the yield curve of plus25 basis points (“BPS”), 50 BPS and 100 BPS would result in a reduction of0.11% ($51,000), 0.23% ($103,000) and 0.46% ($205,000), respectively, in themarket value of our investment portfolio as of December 31, 2006. During thefirst quarter of 2007, we liquidated our investment portfolio to fund our stockrepurchase program resulting in a zero balance as of March 31, 2007.

EffectiveFebruary 2007, we also have interest rate risk relating to debt under our lineof credit facility which is indexed to LIBOR or a Wells Fargo prime rate.However, as of March 31, 2007, we essentially have no exposure for market riskfor changes in interest rates associated with our Facility, as we have yet tomake any draw-downs.

Wehave also invested in several privately-held companies. These non-marketableinvestments are classified as other assets on our consolidated balance sheets.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. It is our policy to review investments in 

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privately heldcompanies on a regular basis to evaluate the carrying amount and economicviability of these companies. This policy includes, but is not limited to,reviewing each of the companies cash position, financing needs,earnings/revenue outlook, operational performance, management/ownership changesand competition. The evaluation process is based on information that we requestfrom these privately held companies. This information is not subject to thesame disclosure regulations as U.S. publicly traded companies, and as such, thebasis for these evaluations is subject to timing and the accuracy of the datareceived from these companies.

Ourinvestments in privately held companies are assessed for impairment when areview of the investee’s operations indicates that a decline in value of theinvestment is other than temporary. Such indicators include, but are notlimited to, limited capital resources, limited prospects of receivingadditional financing, and prospects for liquidity of the related securities.Impaired investments in privately held companies are written down to estimatedfair value. We estimate fair value using a variety of valuation methodologies.Such methodologies include comparing the private company with publicly tradedcompanies in similar lines of business, applying revenue multiples to estimatedfuture operating results for the private company and estimating discounted cashflows for that company. We could lose our entire investment in these companies.At March 31, 2007, our net investments in privately-held companies totaled $8.5million, which was principally comprised of our investment in LatentZeroLimited (“LatentZero”). In April 2007, we sold our investment in LatentZero.See Note 16, “Subsequent Event”, to our condensed consolidated financialstatements for further discussion.

**Item 4. Controlsand Procedures**

**Evaluation of disclosurecontrols and procedures.**

TheCompany’s management evaluated, with the participation of the Chief ExecutiveOfficer and Chief Financial Officer, the effectiveness of the Company’sdisclosure controls and procedures, as such term is defined under Rule13a-15(f) of the Securities and Exchange Act of 1934, as of the end of theperiod covered by this Quarterly Report on Form 10-Q. Based on this evaluation,the Chief Executive Officer and Chief Financial Officer have concluded ourdisclosure controls and procedures were effective as of March 31, 2007 toensure that information we are required to disclose in reports that we file orsubmit under 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 and communicated toAdvent’s management, including our Chief Executive Officer and our ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure.

**Changesin internal control over financial reporting.**

Therewere no changes in our internal control over financial reporting which wereidentified in connection with the evaluation required by Rule 13a-15(e) ofthe Exchange Act that occurred during the first quarter ended March 31, 2007that has materially affected, or is reasonably likely to materially affect,Advent’s internal control over financial reporting.

**PART II. OTHERINFORMATION**

**Item 1.  Legal Proceedings**

Fromtime to time, we are involved in claims and legal proceedings that arise in theordinary course of business. Based on currently available information,management does not believe that the ultimate outcome of these unresolvedmatters, individually and in the aggregate, is likely to have a material adverseeffect on the Company’s financial position or results of operations. However,litigation is subject to inherent uncertainties and our view of these mattersmay change in the future. Were an unfavorable outcome to occur, there existsthe possibility of a material adverse impact on our financial position andresults of operations for the period in which the unfavorable outcome 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 

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with this litigation is neither probable norreasonably estimable at this time and accordingly has not accrued any amountsfor any potential loss.

OnJuly 11, 2006, a former independent consultant filed suit against the Companyin the Supreme Court of the State of New York. The complaint alleges thatAdvent failed to pay plaintiff commissions due for his services as a consultantto Advent. The plaintiff is seeking approximately $101,000 in commissions and$2.0 million in unspecified consequential damages, as well as interest andattorney’s fees. We dispute the plaintiffs’ claims and believe that we havemeritorious defenses and intend to vigorously defend this action. Managementbelieves that any potential loss associated with this litigation is neitherprobably nor reasonably estimable at this time and accordingly has not accruedany amounts for any potential loss.

**Item 1A. RiskFactors**

*Investors should carefully consider the risksdescribed below before making an investment decision. The trading price of ourcommon stock could decline due to any of, but are not limited to, these risks.In assessing these risks, investors should also refer to the other informationcontained or incorporated by reference in this Quarterly Report on Form 10-Qfiled with the SEC, including our consolidated financial statements and relatednotes thereto.*

**Our SalesCycle is Long and We Have Limited Ability to Forecast the Timing and Amount ofSpecific Sales and the Timing of Specific Implementations**

Thepurchase of our software products often requires prospective customers toprovide significant executive-level sponsorship and to make major systemsarchitecture decisions. As a result, we must generally engage in relativelylengthy sales and contracting efforts. Sales transactions may therefore bedelayed during the customer decision process because we must provide asignificant level of education to prospective customers regarding the use andbenefit of our products. For example in 2002 and 2003, existing and potentialclients reduced or canceled expenditures and delayed decisions related toacquisition of software and related services. While we have seen improvedeconomic conditions in recent years, customers are still cautious about capitaland information technology expenditures. As a result, the sales cycleassociated with the purchase of our solutions is typically between two andtwelve months depending upon the size of the client, and is subject to a numberof significant risks over which we have little or no control, includingcustomers’ budgeting constraints, internal selection procedures, and changes incustomer personnel, among others.

As aresult of a lengthy and unpredictable sales cycle, we have limited ability toforecast the timing and amount of specific license sales. The timing of largeindividual license sales is especially difficult to forecast, and we may not besuccessful in closing large license transactions on a timely basis or at all.Customers may postpone their purchases of our existing products or productenhancements in advance of the anticipated introduction of new products orproduct enhancements by us or our competitors. When a customer purchases a termlicense together with implementation services we do not recognize any revenueunder 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 near term,any shortfall from anticipated revenues could result in a significant variationin our operating results from quarter to quarter.

**We DependHeavily on Our Axys®, Geneva and APX Products**

Wederive a significant portion of our net revenues from the licensing of Axys andGeneva products. In addition, many of our other applications, such as Moxy,Partner and various data services have been designed with either of these twoproducts to provide an integrated solution. As a result, we believe that forthe next several years a majority of our net revenues will depend uponcontinued market acceptance of Axys and Geneva, and upgrades to those products.In addition, APX, our newest portfolio accounting and reporting product, is ofcritical importance in providing an upgrade path for many of our Axyscustomers. Our long-term growth could be harmed if we are unable to establishAPX as a leading product in the market. As a result, we may not be able tosuccessfully upgrade existing Axys clients to APX, or to attract new customersto buy APX.

**UncertainEconomic and Financial Market Conditions May Continue to Affect Our Revenues**

Webelieve that the market for large investment management software systems may beaffected by a number of factors, including reductions in capital expendituresby large customers and poor performance of major financial markets. The targetclients for our products include a range of financial services organizationsthat manage investment portfolios. In addition in our MicroEdge businesssegment, we target corporations, public funds, universities and non-profitorganizations, which also manage investment portfolios and have many of thesame needs. The success of many of our clients is intrinsically linked to thehealth of the financial markets. We believe that demand for our solutions hasbeen, and could continue to be, disproportionately affected by 

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fluctuations, disruptions, instability or downturns inthe economy and financial services industry which may cause clients andpotential clients to exit the industry or delay, cancel or reduce any plannedexpenditures for investment management systems and software products. Inaddition, a slowdown in the formation of new investment firms, especially hedgefunds, or a decline in the growth of assets under management would cause adecline in demand for our solutions. We have, in the past, experienced a numberof market downturns in the financial services industry and resulting declinesin information technology spending, which has caused longer sales and contractingcycles, deferral or delay of information technology projects and generallyreduced expenditures for software and related services, and we believe thatfuture uncertainty about financial markets and the financial services sectorcould have a material adverse effect on our revenues.

**We FaceCompetition**

Themarket for investment management software is competitive and highly fragmented,is subject to rapid change and is sensitive to new product introductions andmarketing efforts by industry participants. Our largest single source ofcompetition is from proprietary systems used by existing and potential clients,many of whom develop their own software for their particular needs andtherefore may be reluctant to license software products offered by independentvendors such as Advent. Other competitors include providers of software andrelated services as well as providers of outsourced services. Many of ourcompetitors have longer operating histories and greater financial, technical,sales and marketing resources than we do. In addition, consolidation hasoccurred among some of the competitors in our markets. Competitors vary insize, scope of services offered and platforms supported. In 2005 and 2006,seven of our competitors were acquired with the possibility of forming evenlarger companies through additional acquisitions of companies and technologies.Any further consolidation among our competitors may result in strongercompetitors in our markets and may therefore either result in a loss of market shareor harm our results of operations. In addition, we also face competition frompotential new entrants into our market that may develop innovative technologiesor business models. We cannot guarantee that we will be able to competesuccessfully against current and future competitors or that competitivepressure will not result in price reductions, reduced operating margins or lossof market share, any one of which could seriously harm our business.

**We MustContinue to Introduce New Products and Product Enhancements**

Themarket for our products is characterized by rapid technological change, changesin customer demands, evolving industry standards and new regulatoryrequirements. New products based on new technologies or new industry standardscan render existing products obsolete and unmarketable. As a result, our futuresuccess will continue to depend upon our ability to develop new products orproduct enhancements that address the future needs of our target markets and torespond to their changing standards and practices. For example, we arecurrently engaged in validation and beta cycles for major new releases ofseveral key products, including APX, Geneva and Moxy. Additionally in 2007, weplan to introduce two new products to our suite: 1) a trading compliancesolution; and, 2) an analytics solution.

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. Our ability to develop new products and product enhancements isalso dependent upon the products of other software vendors, including certainsystem software vendors, such as Microsoft Corporation, Sun Microsystems,database vendors and development tool vendors. If the products of such vendorshave design defects or flaws, are unexpectedly delayed in their introduction,or are unavailable on acceptable terms, our business could be seriously harmed.

**OurOperating Results May Fluctuate Significantly**

Weare more than halfway through our transition to a predominantly term licensemodel. Until we substantially complete our transition to a term license model,our net revenues will be affected by the continued reduction in perpetuallicense revenue and by the relatively slower revenue recognition associatedwith the term license model,which is typically over a three-year period. Under a perpetual model, customerspurchase licenses to use our software indefinitely and generally we recognizeall license revenue at the time of sale; maintenance is purchased under anannual renewable contract, and recognized ratably over the contract period.Under a term model, customers purchase a license to use our software andreceive maintenance for a limited period of time and we recognize the revenueratably over the length of the contract.

During the first quarter of 2007, term licenserevenues comprised approximately 19% of term license, maintenance andother recurring revenues as compared to approximately 8% in the first quarterof 2006. Term license contracts are comprised of both software licenses andmaintenance services. Individual perpetual software licenses vary significantlyin value, and the value and timing of these transactions can therefore causeour quarterly perpetual license revenues to fluctuate.

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Whena customer purchases a term license together with implementation services we donot recognize any revenue under the contract until the implementation servicesare substantially completed. If the implementation services are still inprogress as of quarter-end, we will defer all of the contract revenues to asubsequent quarter. As a result of these and other factors, our quarterly netrevenues may fluctuate significantly. Our expense levels are relatively fixedin the short-term. Due to the fixed nature of these expenses, combined with therelatively high gross margin historically achieved on our products, anunanticipated decline in net revenues in any particular quarter may adverselyaffect our operating results. For example, during the first quarter of 2007, wedeferred net revenues of $3.3 million and deferred directly related expenses of$0.9 million. The impact of these deferrals on our operating income wasapproximately $2.4 million.

Inaddition, we experience seasonality in our perpetual license revenue. Thefourth quarter of the year typically has the highest perpetual license feerevenue, followed by lower perpetual license revenue in the first quarter ofthe following year. We believe that this seasonality results primarily fromcustomer budgeting cycles and the annual nature of some AUA contracts, andexpect this seasonality to continue in the future.

Becauseof the above factors, we believe that quarter-to-quarter comparisons of ouroperating results are not necessarily meaningful and that these comparisonscannot be relied upon as indicators of future performance.

**We MustRetain and Recruit Key Employees**

Webelieve that our future success is dependent on the continuedemployment of our senior management and our ability to identify, attract,motivate and retain qualified technical, sales and otherpersonnel. Members of our executive management team have acquired specializedknowledge and skills with respect to Advent. We need technical resources suchas our product development engineers to develop new products and enhanceexisting products; we rely upon sales personnel to sell our products andservices and maintain healthy business relationships; we must recruitprofessional service consultants to support the anticipated increase in productimplementations; we must hire client services personnel to provide technicalsupport to our growing installed base of customers; and we must attract andretain financial and accounting personnel to comply with the requirements ofSection 404 of the Sarbanes-Oxley Act of 2002. Therefore, we needto identify, attract, motivate and retain such employees with therequisite education, backgrounds and industry experience.  However,experienced personnel in the information technology industry are in high demandand competition for their talents is intense, especially in the San FranciscoBay Area where the majority of our employees are located. For example, inFebruary 2007, one of our executives resigned from the Company to become theChief Executive Officer of an internet company.

Wehave relied on our ability to grant equity compensation as one mechanism forrecruiting and retaining such highly skilled personnel. Recently enactedaccounting regulations requiring the expensing of equity compensation impairour ability to provide these incentives without reporting significantcompensation costs.

Wemay also choose to create additional performance and retention incentives inorder to retain our employees, including the granting of additional stockoptions, restricted stock, restricted stock units, stock appreciation rights,performance shares or performance units to employees or issuing incentive cashbonuses. Such incentives may either dilute our existing stockholder base orresult in unforeseen operating expenses which may have a material adverseeffect on our operating results, which may result in our stock price falling;or may not be valued as highly by our employees which may create retentionissues.

**We FaceChallenges in Expanding Our International Operations**

Wemarket and sell our products in the United States and, to a lesser extent,internationally. 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 new internationalmarkets could require significant management attention and financial resources.We cannot be certain that establishing businesses in other countries willproduce the desired levels of revenues, such as in the case of Advent Hellaswhich produced less than satisfactory revenues and profitability before itssale in 2005. We currently have limited experience in developing localizedversions of our products and marketing and distributing our productsinternationally. In addition, international operations are subject to otherinherent risks, including:

·                  the impact ofrecessions in economies outside the United States;

·                  greaterdifficulty in accounts receivable collection and longer collection periods;

·                  unexpectedchanges in regulatory requirements;

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

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·                  difficulties inand costs of staffing and managing foreign operations;

·                  reducedprotection for intellectual property rights in some countries;

·                  potentiallyadverse tax consequences; and

·                  politicaland economic instability.

Therevenues, expenses, assets and liabilities of our international subsidiariesare primarily denominated in local currencies. We have not historicallyundertaken foreign exchange hedging transactions to cover potential foreigncurrency exposure. Future fluctuations in currency exchange rates may adverselyaffect revenues and accounts receivable from international sales and the U.S.dollar value of our foreign subsidiaries’ revenues, expenses, assets andliabilities. Our international service revenues and certain license revenuesfrom our European subsidiaries are generally denominated in local foreigncurrencies.

**Difficultiesin Integrating Our Acquisitions and Expanding Into New Business Areas HaveImpacted and Could Continue to Adversely Impact Our Business and We Face RisksAssociated with Potential Acquisitions, Investments, Divestitures and Expansion**

From2001 through the middle of 2003, our strategy focused on growth through theacquisition of additional complementary businesses. During those years, we madefive major acquisitions including Kinexus Corporation, Techfi Corporation andAdvent Outsource Data Management LLC, and also acquired all of the common stockof five of our European distributor’s subsidiaries. In addition, we purchasedour European distributor’s remaining two subsidiaries in the United Kingdom andSwitzerland in May 2004. More recently, in December 2006, we acquired EastCircle Solutions, Inc., a developer of investment billing solutions tointegrate their product into our software offerings.

Thecomplex process of integrating our acquisitions has required and will continueto require significant resources, particularly in light of our relative inexperiencein integrating acquisitions. Integrating these acquisitions in the past hasbeen time-consuming, expensive and disruptive to our business. This integrationprocess has strained our managerial resources, resulting in the diversion ofthese resources from our core business objectives and may do so in the future.Failure to achieve the anticipated benefits of these acquisitions or tosuccessfully integrate the operations of these entities has harmed and couldpotentially harm our business, results of operations and cash flows in futureperiods. For example, in the first quarter of 2003, we closed our Australiansubsidiary because it failed to perform at a satisfactory profit level andsimilarly in the fourth quarter of 2005, we disposed of our Advent Hellassubsidiary because of less than satisfactory profitability. In addition, as wehave expanded into new business areas and built new offerings through strategicalliances and internal development, as well as acquisitions, some of thisexpansion has required significant management time and resources withoutgenerating required revenues. We have had difficulty and may continue to havedifficulty creating demand for such offerings. For example, demand for ourTechfi product line was significantly lower than expected and thus wediscontinued certain products within our Techfi product line in September 2004.As a result, we recorded a non-cash impairment charge of $3.4 million in thethird quarter of 2004 to write-off the carrying value of certain Techfi-relatedintangible assets. Furthermore, we may face other unanticipated costs from ouracquisitions, such as the disputes involving earn-out and incentivecompensation amounts, similar to those we have experienced with our Kinexus andAdvent Outsource acquisitions.

Wemay make additional acquisitions of complementary companies, products ortechnologies in the future. In addition, we periodically evaluate theperformance of all our products and services and may sell or discontinuecurrent products and services. Failure to achieve the anticipated benefits ofany future acquisition or divestiture could harm our business, results ofoperations and cash flows. Furthermore, we may have to incur debt, write-offinvestments, infrastructure costs or other assets, incur severance liabilities,write-off impaired goodwill or other intangible assets or issue equitysecurities to pay for any future acquisitions. The issuance of equitysecurities could dilute our existing stockholders’ ownership. Finally, we maynot identify suitable businesses to acquire or negotiate acceptable terms forfuture acquisitions.

**Impairmentof Investments Could Harm Our Results of Operations**

Wehave made and may make future investments in privately held companies, many ofwhich are considered in the start-up or development stages. These investments,which we classify as other assets on our consolidated balance sheets, areinherently risky, as the market for the technologies or products thesecompanies have under development is typically in the early stages and may nevermaterialize. The value of the investment in these companies is influenced bymany factors, including the operating effectiveness of these companies, theoverall health of these companies’ industries, the strength of the private equitymarkets and general market conditions. Due to these and other factors, we havepreviously determined, and may in the future determine, that the value of theseinvestments is impaired, which has caused and would cause us to write down thecarrying value of these investments, such as the write-down of our investmentsof $2.0 million in fiscal 2003. Furthermore, we cannot be sure that futureinvestment, license, fixed asset or other asset write-downs will not occur. Iffuture write-downs do occur, they could harm our business and results ofoperations.

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**InformationWe Provide to Investors Is Accurate Only as of the Date We Disseminate It**

Fromtime to time, we may publicly disseminate forward-looking information orguidance in compliance with Regulation FD. This information or guidancerepresents our outlook only as of the date we disseminate it, and we do notundertake to update such information or guidance.

**Our StockPrice May Fluctuate Significantly**

Likemany companies in the technology and emerging growth sector, our stock pricemay be subject to wide fluctuations, particularly during times of high marketvolatility. If net revenues or earnings in any quarter or our financialguidance for future periods fail to meet the investment community’sexpectations, our stock price is likely to decline. In addition, our stockprice is affected by trends in the financial services sector and by broadermarket trends unrelated to our performance. For instance, in the event ofincreased hostilities abroad or terrorist attacks on U.S. soil, there could beincreased market volatility, which could negatively impact our stock price.

**If OurRelationship with Financial Times/Interactive Data Is Terminated, Our BusinessMay Be Harmed**

Manyof our clients use our proprietary interface to electronically retrieve pricingand other data from Financial Times/Interactive Data (“FTID”). FTID pays us acommission based on their revenues from providing this data to our clients. Oursoftware products have been customized to be compatible with their system andthis software would need to be redesigned if their services were unavailablefor any reason. Termination of our agreement with FTID would require at leasttwo years notice by either us or them, or 90 days in the case of materialbreach. Our revenue would be adversely impacted if our relationship with FTIDwas terminated or their services were unavailable to our clients for anyreason.

**If We AreUnable to Protect Our Intellectual Property We May Be Subject to IncreasedCompetition that Could Seriously Harm Our Business**

Oursuccess depends significantly upon our proprietary technology. We currentlyrely on a combination of copyright and trademark laws, trade secrets,confidentiality procedures and contractual provisions to protect our proprietaryrights. We have registered trademarks for many of our products and services andwill continue to evaluate the registration of additional trademarks asappropriate. We generally enter into confidentiality agreements with ouremployees 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. In addition,the laws of some foreign countries do not protect proprietary rights to asgreat an extent as do the laws of the United States. We cannot be sure that ourmeans of protecting our proprietary rights will be adequate or that ourcompetitors will not independently develop similar technology, duplicate ourproducts or design around any patent that may be issued to us or otherintellectual property rights of ours.

**If WeInfringe the Intellectual Property Rights of Others, We May Incur AdditionalCosts or Be Prevented from Selling Our Products and Services**

Wecannot be certain that our products or services do not infringe theintellectual property rights of others. As a result, we may be subject tolitigation and claims, including claims of infringement of patents, copyrightsand other intellectual property rights of third parties that would betime-consuming and costly to resolve. If we discovered that our products orservices violated the intellectual property rights of third parties, we mayhave 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.

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**CatastrophicEvents Could Adversely Affect Our Business**

Ouroperations are exposed to potential disruption by fire, earthquake, power loss,telecommunications failure, and other events beyond our control. Additionally,we are vulnerable to interruption caused by terrorist incidents. For example,our facilities in New York were temporarily closed due to theSeptember 11, 2001 terrorist attacks. Immediately after the terroristattacks, our clients who were located in the World Trade Center area wereconcentrating on disaster recovery rather than licensing additional softwarecomponents, while the grounding of transportation impeded our professionalservices employees’ ability to travel to client sites. Additionally, during thetemporary closure of the U.S. stock markets, our clients did not use our marketdata services. Our corporate headquarters are located in the San Francisco BayArea, which is a region with significant seismic activity. Earthquakes such asthat experienced in 1989 could disrupt our business. Such disruptions couldaffect our ability to sell and deliver products and services and other criticalfunctions of our business. Further, such disruptions could cause instability inthe financial markets upon which we depend.

Further,terrorist acts, conflicts or wars may cause damage or disruption to ourcustomers. The potential for future attacks, the national and internationalresponses to attacks or perceived threats to national security and other actualor potential conflicts or wars, including the ongoing crisis in the MiddleEast, have created many economic and political uncertainties. Although it isimpossible to predict the occurrences or consequences of any such events, theycould unsettle the financial markets or result in a decline in informationtechnology spending, which could have a material adverse effect on ourrevenues.

**UndetectedSoftware Errors or Failures Found in New Products May Result in Loss of orDelay in Market Acceptance of Our Products that Could Seriously Harm OurBusiness**

Ourproducts may contain undetected software errors or scalability limitations atany point in their lives, but particularly when first introduced, such as ourAPX product, or as new versions are released. Despite testing by us and bycurrent and potential customers, errors may not be found in new products untilafter commencement of commercial shipments, resulting in a loss of or a delayin market acceptance, damage to our reputation, customer dissatisfaction andreductions in revenues and margins, any of which could seriously harm ourbusiness. Additionally, our agreements with customers that attempt to limit ourexposure to liability claims may not be enforceable in jurisdictions where weoperate.

**Changesin Securities Laws and Regulations May Increase Our Costs**

TheSarbanes-Oxley Act (“the Act”) of 2002 required changes in some of ourcorporate governance and securities disclosure and/or compliance practices. Aspart of the Act’s requirements, the SEC has enacted new rules on a variety ofsubjects, and the Nasdaq Stock Market has enacted new corporate governancelisting requirements. These developments have increased and may in the futureincrease our accounting and legal compliance costs and could also expose us toadditional liability if we fail to comply with these new rules and reportingrequirements. In fiscal 2006 and 2005, we incurred approximately $1.3 millionand $1.8 million, respectively, in Sarbanes-Oxley related expenses consistingof external consulting costs and auditor fees, and the Company anticipatessimilarly spending a significant amount for its 2007 compliance activities. Inaddition, such developments may make retention and recruitment of qualifiedpersons to serve on our board of directors, or as executive officers, moredifficult. We continue to evaluate and monitor regulatory and legislativedevelopments and cannot reliably estimate the timing or magnitude of all costswe may incur as a result of the Act or other related legislation or regulation.

**Changesin, or Interpretations of, Accounting Principles Could Result in UnfavorableAccounting Charges**

We prepare our condensed consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America. These principles are subject to interpretation by us,the SEC and various bodies formed to interpret and create accountingprinciples. A change in these principles or a change in the interpretations ofthese principles can have a significant effect on our reported results and mayeven retroactively affect previously reported transactions. Our accountingprinciples that recently have been or may be affected include:

·                  Software revenuerecognition

·                  Accounting forstock-based compensation

·                  Accounting forincome taxes

·                  Accounting forbusiness combinations and related goodwill

In particular, in the first quarter of 2006, weadopted SFAS 123R which requires the measurement of all stock-basedcompensation to employees, including grants of employee stock options,restricted stock units and stock appreciation rights, using a fair-value-basedmethod and the recording of such expense in our condensed consolidatedstatements of operations. The adoption of SFAS 123R had a significant adverseeffect on our results of operations. It will continue to significantlyadversely affect our results of operations and may impact the way in which weconduct our business.

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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-based compensation awards andemployee stock purchase plan shares. The Black-Scholes option pricing model wasdeveloped for use in estimating the fair value of traded options that have novesting restrictions and are fully transferable, characteristics not present inour option grants and employee stock purchase plan shares. Existing valuationmodels, including the Black-Scholes and lattice binomial models, may notprovide reliable measures of the fair values of our stock-based compensation.Consequently, there is a risk that our estimates of the fair values of ourstock-based compensation awards on the grant dates may bear little resemblanceto the actual values realized upon the exercise, expiration, early terminationor forfeiture of those stock-based payments in the future. Certain stock-basedpayments, such as employee stock options, restricted stock units and stockappreciation rights, may expire worthless or otherwise result in zero intrinsicvalue as compared to the fair values originally estimated on the grant date andreported in our condensed consolidated financial statements. Alternatively,value may be realized from these instruments that are significantly higher thanthe fair values originally estimated on the grant date and reported in ourfinancial statements. There currently is no market-based mechanism or otherpractical application to verify the reliability and accuracy of the estimatesstemming from these valuation models, nor is there a means to compare andadjust the estimates to actual values.

**PotentialChanges in Securities Laws and Regulation Governing the Investment Industry’sUse of Soft Dollars May Reduce Our Revenues**

Asof December 31, 2006, approximately 400 of our clients utilize tradingcommissions (“soft dollar arrangements”) to pay for software products andservices. During fiscal 2006 and 2005, the total value of Advent products andservices paid with soft dollars was approximately 5% and 6% of our totalbillings. Such soft dollar arrangements could be impacted by changes in theregulations governing those arrangements.

Duringthe fourth quarter of 2006, we completed the wind down of the “soft dollar”business of our SEC-registered broker/dealer subsidiary, Second StreetSecurities, as it no longer fits with our corporate strategy. Second StreetSecurities offered our customers the ability to pay for Advent products andother third party products and services through brokerage commissions and otherfee-based arrangements. We will continue to allow clients to utilize softdollar arrangements to pay for Advent software products and services throughother independent broker/dealers.

InJuly 2006, the SEC published an Interpretive Release that provides guidance onmoney managers’ use of client commissions to pay for brokerage and researchservices under the “soft dollars” safe harbor, which is set forth in Section28(e) of the Securities Exchange Act of 1934. The Interpretive Releaseclarifies that money managers may use client commissions to pay only foreligible brokerage and research services. Among other matters, the InterpretiveRelease states that eligible brokerage includes those products and servicesthat relate to the execution of the trade from the point at which the moneymanager communicates with the broker-dealer for the purpose of transmitting anorder for execution, through the point at which funds or securities aredelivered or credited to the advised account. In addition, for “mixed-use” items (such as trade order managementsystems) that are partly eligible and partly ineligible, the InterpretiveRelease states that money managers must make a reasonable allocation of clientcommissions in accordance with the eligible and ineligible uses of the items.Based on this new guidance, our customers may change their method of paying forcertain Advent products or services from soft to hard dollars, and as a resultseek to reduce their usage of these products or services in order to avoidincreasing expenses, which could cause our revenues to decrease.

**Covenantsin Our Credit Facility Agreement Could Adversely Affect our Financial Condition**

In February 2007, we entered into a senior securedfacility agreement which provides us with a revolving line of credit up to anaggregate amount of $75 million. Our continued ability to borrow under ourcredit facility is subject to compliance with certain financial andnon-financial covenants. The financial covenant is limited to a maximum ratioof senior debt to adjusted earnings before interest, taxes, depreciation,amortization (EBITDA) and non-cash stock compensation. Our failure to complywith such covenants could cause default under the agreement, and we may then berequired to repay such debt with capital from other sources. Under thosecircumstances, other sources of capital may not be available to us, or beavailable only on unfavorable terms.

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**SecurityRisks May Harm Our Business**

Thesecure transmission of confidential information over public networks isessential to commerce and communications, particularly in the market in whichAdvent operates. Advances in computer capabilities, new discoveries in thefield of cryptography or other events or developments could result incompromises or breaches of our security systems. Anyone who circumvents oursecurity measures could misappropriate proprietary information or causeinterruptions in our services or operations. In addition, computer viruses orsoftware programs that disable or impair computers could be introduced into oursystems or those of our customers or other third parties, which could disruptor make our systems inaccessible to customers. Our security measures may beinadequate to prevent security breaches, exposing us to a risk of loss,litigation and other possible liabilities, as well as possibly requiring us toexpend significant capital and other resources to protect against the threat ofsecurity breaches or to alleviate problems caused by such breaches.

**If WeFail to Maintain an Effective System of Internal Control, We May Not be Able toAccurately Report Our Financial Results or Our Filings May Not be Timely. As aResult, Current and Potential Stockholders Could Lose Confidence in OurFinancial Reporting, Which Would Harm Our Business and the Trading Price of OurStock**

Effectiveinternal control is necessary for us to provide reliable financial reports. Ifwe cannot provide reliable financial reports, our business and operatingresults could be harmed. We have in the past discovered, and may in the futurediscover, areas of our internal control that need improvement including controldeficiencies that may constitute material weaknesses. For example, as ofDecember 31, 2005, the Company did not maintain effective controls overthe accounting for income taxes, including the determination of deferred incometax liabilities and the related income tax provision. This control deficiencyresulted in adjustments to the fourth quarter of 2004 and 2005 financialstatements and a restatement of the Company’s financial statements for each ofthe first three quarters of fiscal 2004 and 2005.

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. As a result of thiscontrol deficiency, the Company’s disclosure of stock-based compensationexpense for fiscal 2003 and 2004 and first three quarters of 2004 and 2005 wererevised.

During 2006, weimplemented controls and procedures to improve our internal control overfinancial reporting and address the material weaknesses identified in fiscal2004 and 2005. As a result, management concluded that the Company’s internalcontrol over financial reporting was effective as of December 31, 2006 andMarch 31, 2007.

We do not expect that ourinternal control over financial reporting will prevent all errors or fraud. Acontrol system, no matter how well designed and operated, can provide onlyreasonable, not absolute, assurance that the control system’s objectives willbe met. Further, the design of a control system must reflect the fact thatthere are resource constraints, and the benefits of controls must be consideredrelative to their costs. Controls can be circumvented by individual acts ofsome persons, by collusion of two or more people, or by management override ofthe controls. Over time, controls may become inadequate because changes inconditions or deterioration in the degree of compliance with policies orprocedures may occur. Because of the inherent limitations in a cost-effectivecontrol system, misstatements due to error or fraud may occur and not bedetected.

Any failure to implementor maintain improvements in our internal control over financial reporting, ordifficulties encountered in the implementation of these improvements in ourcontrols, could cause significant deficiencies or material weaknesses in ourinternal controls and consequently cause us to fail to meet our reportingobligations. Any failure to implement or maintain required new or improvedinternal controls could also cause investors to lose confidence in our reportedfinancial information, which could have a negative impact on the trading priceof 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 2007 pre-tax income will range frombreakeven to a modest amount, due primarily to the impact of expensing forstock-based compensation, the short-term negative impact on net revenues fromour transition to a term license model, and the investment in the developmentand growth of our business. One element of our quantitative analysis of anycontrol deficiency is its actual or potential financial impact, and any impactthat is greater than 5% of our pre-tax income (loss) in any quarter may be morelikely to result in that deficiency being determined to be a significantdeficiency or a material weakness. Accordingly, our projection of fiscal 2007pre-tax income at a breakeven level to a modest 

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profit will make it statistically less likely for usand 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 2007, itis statistically more likely that such errors may meet the quantitativethreshold established under Staff Accounting Bulletin No. 99, “Materiality”,that could, depending upon the complete qualitative and quantitative analysis,result in our having to restate previously issued financial statements.

**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds**

**IssuerPurchases of Equity Securities**

OurBoard of Directors (the “Board”) has approved common stock repurchase programsauthorizing management to repurchase shares of the Company’s common stock inthe open market to enhance shareholder value. The timing and actual number ofshares subject to repurchase are at the discretion of management and arecontingent on a number of factors, including the price of our stock, generalmarket conditions and alternative investment opportunities. The purchases arefunded from available working capital or debt.

OnFebruary 9, 2007, the Company’s Board authorized the repurchase of up to anadditional 2.25 million shares of outstanding common stock. During the firstquarter of 2007, Advent repurchased an aggregate 0.8 million shares of commonstock under the repurchase programs authorized in July 2006 and February 2007for a total cash outlay of $30.1 million and at an average price of $36.00 pershare. The following table provides a month-to-month summary of the repurchaseactivity under the stock repurchase programs approved by the Board in July 2006and February 2007 during the three months ended March 31, 2007:
| ** **    | ** ** | ** **                          | ** ** | ** **                   | ** ** | **Maximum**                              | ** ** |
|---------------|------------|-------------------------------------|------------|------------------------------|------------|------------------------------------------|------------|
| ** **    | ** ** | ** **                          | ** ** | ** **                   | ** ** | **Number of Shares That** | ** ** |
| ** **    | ** ** | **Total Number**               | ** ** | ** **                   | ** ** | **May Yet Be Purchased**  | ** ** |
| ** **    | ** ** | **of Shares**                  | ** ** | **Average Price**       | ** ** | **Under Our Share**            | ** ** |
| ** **    | ** ** | **Purchased (1)**              | ** ** | **Paid Per Share** | ** ** | **Repurchase Programs**             | ** ** |
| ** **    | ** ** | **(shares in thousands)** | ** ** |
| ** **    | ** ** | ** **                          | ** ** | ** **                   | ** ** | ** **                               | ** ** |
| January 2007  |       | —                              |       | $                            | —     |                                     | 330        |   |
| February 2007 |       | 361                                 |       | $                            | 36.80      |                                     | 2,219      |   |
| March 2007    |       | 476                                 |       | $                            | 35.39      |                                     | 1,743      |   |
|          |       |                                |       |                         |       |                                     |       |
| Total         |       | 837                                 |       | $                            | 36.00      |                                     | 1,743      |   |

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

**Item 3.  Defaults Upon Senior Securities**

None.

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

None.

**Item 5.  Other Information**

None.

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**Item 6.  Exhibits**

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

31.2               Certificationof Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002

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

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

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|        |                | ADVENT SOFTWARE, INC. |
|--------|---------------------|-----------------------|
|   |                |                  |   |
|   | Dated: May 10, 2007 | 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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