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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**x****        Quarterlyreport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934 for the quarterly period ended June 30, 2008**

** **

**or**

** **

**o**** ****Transition report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

 

**Commission file number:  0-26994**

 

**ADVENTSOFTWARE, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

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

(Address of principal executive offices andzip code)

 

**(415) 543-7696**

(Registrant’s telephone number, includingarea code)

 

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

Yes x  No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

Largeaccelerated filer o                                                          Acceleratedfiler x

 

Non-acceleratedfiler o                                                      Smallerreporting company  ̈

(Do not check if a smallerreporting company)

 

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

 

The number of shares of the registrant’s Common Stock outstanding as ofJuly 31, 2008 was 26,818,384.

 

 

 

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**INDEX**

 
| **PART I. FINANCIAL INFORMATION** | ** **                                                                                  |
|----------------------------------------|---------------------------------------------------------------------------------------------|
| Item 1.                                | Financial Statements                                                                        | 3 |
|                                   | Condensed Consolidated Balance Sheets                                                       | 3 |
|                                   | Condensed Consolidated Statements of Operations                                             | 4 |
|                                   | Condensed Consolidated Statements of Cash Flows                                             | 5 |
|                                   | Notes to Condensed Consolidated Financial  Statements                                       | 6 |
| Item 2.                                | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 17 |
| Item 3.                                | Quantitative and Qualitative Disclosures  About Market Risk                                 | 32 |
| Item 4.                                | Controls and Procedures                                                                     | 33 |
|                                   |                                                                                        |   |
| **PART II. OTHER INFORMATION**    | ** **                                                                                  |
| ** **                             | ** **                                                                                  |
| Item 1.                                | Legal Proceedings                                                                           | 33 |
| Item 1A.                               | Risk Factors                                                                                | 34 |
| Item 2.                                | Unregistered Sales of Equity Securities and  Use of Proceeds                                | 44 |
| Item 3.                                | Defaults Upon Senior Securities                                                             | 44 |
| Item 4.                                | Submission of Matters to a Vote of Security  Holders                                        | 44 |
| Item 5.                                | Other Information                                                                           | 44 |
| Item  6.                               | Exhibits                                                                                    | 45 |
| **Signatures**                         | 46                                                                                          |

 

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**PART I.FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**ADVENT SOFTWARE, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                      | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|-------------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **2008**         | ** ** | **2007**             | ** ** |
| **ASSETS**                                      |       |             |       |                 |       |
| Current assets:                                 |       |             |       |                 |       |
| Cash and cash equivalents                       |       | $                | 82,443     |                 | $          | 49,589 |   |
| Accounts receivable, net                        |       | 41,401           |       | 47,574               |       |
| Deferred taxes, current                         |       | 10,288           |       | 10,288               |       |
| Prepaid expenses and other                      |       | 19,949           |       | 19,577               |       |
| Total current assets                            |       | 154,081          |       | 127,028              |       |
| Property and equipment, net                     |       | 33,558           |       | 27,779               |       |
| Goodwill                                        |       | 108,600          |       | 106,520              |       |
| Other intangibles, net                          |       | 7,644            |       | 9,376                |       |
| Deferred taxes, long-term                       |       | 70,980           |       | 70,981               |       |
| Other assets, net                               |       | 11,122           |       | 10,645               |       |
|                                            |       |             |       |                 |       |
| Total assets                                    |       | $                | 385,985    |                 | $          | 352,329 |   |
|                                            |       |             |       |                 |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**   |       |             |       |                 |       |
| Current liabilities:                            |       |             |       |                 |       |
| Accounts payable                                |       | $                | 7,417      |                 | $          | 4,382 |   |
| Accrued liabilities                             |       | 23,734           |       | 29,328               |       |
| Deferred revenues                               |       | 124,287          |       | 115,398              |       |
| Income taxes payable                            |       | 3,065            |       | 1,086                |       |
| Total current liabilities                       |       | 158,503          |       | 150,194              |       |
| Deferred income taxes                           |       | 811              |       | 998                  |       |
| Deferred revenue, long-term                     |       | 6,336            |       | 4,939                |       |
| Other long-term liabilities                     |       | 16,195           |       | 16,352               |       |
|                                            |       |             |       |                 |       |
| Total liabilities                               |       | 181,845          |       | 172,483              |       |
|                                            |       |             |       |                 |       |
| Commitments and contingencies (See Note 10)     |       |             |       |                 |       |
|                                            |       |             |       |                 |       |
| Stockholders’ equity:                      |       |             |       |                 |       |
| Common stock                                    |       | 268              |       | 265                  |       |
| Additional paid-in capital                      |       | 338,843          |       | 326,964              |       |
| Accumulated deficit                             |       | (151,695         | )          | (161,685             | )          |
| Accumulated other comprehensive income          |       | 16,724           |       | 14,302               |       |
| Total stockholders’ equity                 |       | 204,140          |       | 179,846              |       |
|                                            |       |             |       |                 |       |
| Total liabilities and stockholders’ equity |       | $                | 385,985    |                 | $          | 352,329 |   |

 

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

 

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**ADVENT SOFTWARE, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
| ** **                                                     | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                     | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Net revenues:**                                              |       |                                               |       |                                             |       |   |   |   |   |
| Term license, maintenance and other  recurring                 |       | $                                                  | 50,838     |                                             | $          | 42,012 |   | $ | 99,977 |   | $ | 79,736 |   |
| Perpetual license fees                                         |       | 5,242                                              |       | 5,689                                            |       | 10,867 |   | 11,616 |   |
| Professional services and other                                |       | 7,947                                              |       | 4,675                                            |       | 14,656 |   | 9,003 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Total net revenues                                             |       | 64,027                                             |       | 52,376                                           |       | 125,500 |   | 100,355 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| **Cost of revenues:**                                          |       |                                               |       |                                             |       |   |   |   |   |
| Term license, maintenance and other  recurring                 |       | 11,379                                             |       | 9,048                                            |       | 22,313 |   | 18,080 |   |
| Perpetual license fees                                         |       | 224                                                |       | 219                                              |       | 541 |   | 414 |   |
| Professional services and other                                |       | 8,519                                              |       | 6,415                                            |       | 16,245 |   | 12,288 |   |
| Amortization of developed technology                           |       | 732                                                |       | 322                                              |       | 1,454 |   | 686 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Total cost of revenues                                         |       | 20,854                                             |       | 16,004                                           |       | 40,553 |   | 31,468 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Gross margin                                                   |       | 43,173                                             |       | 36,372                                           |       | 84,947 |   | 68,887 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| **Operating expenses:**                                        |       |                                               |       |                                             |       |   |   |   |   |
| Sales and marketing                                            |       | 15,626                                             |       | 13,985                                           |       | 31,016 |   | 26,874 |   |
| Product development                                            |       | 13,008                                             |       | 10,816                                           |       | 25,898 |   | 20,672 |   |
| General and administrative                                     |       | 9,232                                              |       | 7,837                                            |       | 18,459 |   | 16,621 |   |
| Amortization of other intangibles                              |       | 242                                                |       | 466                                              |       | 729 |   | 940 |   |
| Restructuring charges (benefit)                                |       | (1                                                 | )          | 227                                              |       | 55 |   | 789 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Total operating expenses                                       |       | 38,107                                             |       | 33,331                                           |       | 76,157 |   | 65,896 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Income from operations                                         |       | 5,066                                              |       | 3,041                                            |       | 8,790 |   | 2,991 |   |
| Interest and other income, net                                 |       | 3,559                                              |       | 3,868                                            |       | 3,786 |   | 4,386 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Income before income taxes                                     |       | 8,625                                              |       | 6,909                                            |       | 12,576 |   | 7,377 |   |
| Provision for income taxes                                     |       | 1,270                                              |       | 1,814                                            |       | 2,586 |   | 1,843 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| **Net income**                                                 |       | $                                                  | 7,355      |                                             | $          | 5,095 |   | $ | 9,990 |   | $ | 5,534 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Net income per share:                                          |       |                                               |       |                                             |       |   |   |   |   |
| Basic                                                          |       | $                                                  | 0.28       |                                             | $          | 0.19 |   | $ | 0.37 |   | $ | 0.21 |   |
| Diluted                                                        |       | $                                                  | 0.26       |                                             | $          | 0.18 |   | $ | 0.36 |   | $ | 0.20 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Weighted average shares used to compute net  income per share: |       |                                               |       |                                             |       |   |   |   |   |
| Basic                                                          |       | 26,712                                             |       | 26,519                                           |       | 26,641 |   | 26,950 |   |
| Diluted                                                        |       | 28,119                                             |       | 27,754                                           |       | 28,046 |   | 28,256 |   |

 

 

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

 

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**ADVENTSOFTWARE, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| **Cash flows from operating activities:**                                          |       |                                             |       |   |   |
| Net income                                                                         |       | $                                                | 9,990      |   | $ | 5,534 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                             |       |   |   |
| Stock-based compensation                                                           |       | 7,252                                            |       | 6,828 |   |
| Depreciation and amortization                                                      |       | 6,220                                            |       | 5,426 |   |
| Loss on dispositions of fixed assets                                               |       | 2                                                |       | 49 |   |
| Provision for doubtful accounts                                                    |       | 485                                              |       | 51 |   |
| Provision for (reduction of) sales returns                                         |       | 4                                                |       | (315 | ) |
| Gain on investments                                                                |       | (3,393                                           | )          | (4,265 | ) |
| Other-than-temporary loss on private equity  investments                           |       | —                                           |       | 585 |   |
| Deferred income taxes                                                              |       | (187                                             | )          | (132 | ) |
| Other                                                                              |       | 3                                                |       | (5 | ) |
| Effect of statement of operations  adjustments                                     |       | 10,386                                           |       | 8,222 |   |
| Changes in operating assets and  liabilities:                                      |       |                                             |       |   |   |
| Accounts receivable                                                                |       | 5,688                                            |       | 2,704 |   |
| Prepaid and other assets                                                           |       | (571                                             | )          | (2,833 | ) |
| Accounts payable                                                                   |       | 3,034                                            |       | 599 |   |
| Accrued liabilities                                                                |       | (5,870                                           | )          | (685 | ) |
| Deferred revenues                                                                  |       | 10,282                                           |       | 10,695 |   |
| Income taxes payable                                                               |       | 2,100                                            |       | 1,556 |   |
| Effect of changes in operating assets and  liabilities                             |       | 14,663                                           |       | 12,036 |   |
|                                                                               |       |                                             |       |   |   |
| Net cash provided by operating activities                                          | ** ** | **35,039**                                       | ** ** | **25,792** | ** ** |
|                                                                               |       |                                             |       |   |   |
| **Cash flows from investing activities:**                                          |       |                                             |       |   |   |
| Net cash used in acquisitions                                                      |       | —                                           |       | (1,022 | ) |
| Purchases of property and equipment                                                |       | (9,777                                           | )          | (5,337 | ) |
| Capitalized software development costs                                             |       | (420                                             | )          | (514 | ) |
| Proceeds from sale of private equity  investments                                  |       | 3,393                                            |       | 11,621 |   |
| Sales and maturities of marketable  securities                                     |       | —                                           |       | 24,921 |   |
| Change in restricted cash                                                          |       | (248                                             | )          | (359 | ) |
|                                                                               |       |                                             |       |   |   |
| Net cash provided by (used in) investing  activities                               | ** ** | **(7,052**                                       | **)**      | **29,310** | ** ** |
|                                                                               |       |                                             |       |   |   |
| **Cash flows from financing activities:**                                          |       |                                             |       |   |   |
| Proceeds from common stock issued from  exercises of stock options                 |       | 3,240                                            |       | 13,074 |   |
| Withholding taxes related to equity award  net share settlement                    |       | (1,271                                           | )          | (33 | ) |
| Proceeds from common stock issued under the  employee stock purchase plan          |       | 2,576                                            |       | 1,829 |   |
| Repurchase of common stock                                                         |       | —                                           |       | (91,157 | ) |
| Proceeds from long-term borrowing                                                  |       | —                                           |       | 25,000 |   |
|                                                                               |       |                                             |       |   |   |
| Net cash provided by (used in) financing  activities                               | ** ** | **4,545**                                        | ** ** | **(51,287** | **)** |
|                                                                               |       |                                             |       |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                      | ** ** | **322**                                          | ** ** | **58** | ** ** |
|                                                                               |       |                                             |       |   |   |
| **Net change in cash and cash equivalents**                                        | ** ** | **32,854**                                       | ** ** | **3,873** | ** ** |
| **Cash and cash equivalents at beginning of  period**                              | ** ** | **49,589**                                       | ** ** | **30,187** | ** ** |
|                                                                               |       |                                             |       |   |   |
| **Cash and cash equivalents at end of period**                                     | ** ** | **$**                                            | **82,443** | ** ** | **$** | **34,060** | ** ** |

 

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

 

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**ADVENT SOFTWARE, INC.**

**NOTES TOCONDENSED 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 for the year ended December 31, 2007.Interim results are not necessarily indicative of the results to be expectedfor the full 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.

 

**Note 2—Recent AccountingPronouncements**

 

Withthe exception of those discussed below, there have been no recent accountingpronouncements or changes in accounting pronouncements during the six monthsended June 30, 2008, as compared to the recent accounting pronouncementsdescribed in Advent’s Annual Report on Form 10-K for the fiscal year endedDecember 31, 2007, that are of significance, or potential significance, tothe Company.

 

InApril 2008, the Financial Accounting Standards Board (“FASB”) issued FASBStaff Position (“FSP”) No. 142-3, “Determination of the Useful Life ofIntangible Assets”. FSP 142-3 amends the factors an entity should consider indeveloping renewal or extension assumptions used in determining the useful lifeor recognized intangible assets under FASB Statement No. 142, “Goodwilland Other Intangible Assets”. This new guidance applies prospectively tointangible assets that are acquired individually or with a group of otherassets in business combinations and asset acquisitions. FSP 142-3 is effectivefor financial statements issued for fiscal years and interim periods beginningafter December 15, 2008. Early adoption is prohibited. The Company iscurrently evaluating the impact, if any, that FSP 142-3 will have on itsconsolidated financial statements.

 

InMay 2008, the FASB issued SFAS No. 162, “The Hierarchy of GenerallyAccepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sourcesof accounting principles and the framework for selecting the principles to beused in the preparation of financial statements that are presented inconformity with generally accepted accounting principles in the United States.This statement is effective 60 days following the SEC’s approval of the PublicCompany Accounting Oversight Board amendments to AU Section 411, “TheMeaning of Present Fairly in Conformity with Generally Accepted AccountingPrinciples.” The Company does not expect SFAS 162 to have a material impact onits consolidated financial statements.

 

**Note3—Stock-Based Compensation**

 

**Equity Award Activity**

 

A summary of the statusof the Company’s stock option and stock appreciation right (“SAR”) activity forthe period presented follows:

 

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| ** **                            | ** ** | ** **              | ** ** | ** **   | ** ** | **Weighted**              | ** ** | ** **              | ** ** |
|---------------------------------------|------------|-------------------------|------------|--------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                            | ** ** | ** **              | ** ** | **Weighted** | ** ** | **Average**               | ** ** | ** **              | ** ** |
| ** **                            | ** ** | ** **              | ** ** | **Average**  | ** ** | **Remaining**             | ** ** | **Aggregate**           | ** ** |
| ** **                            | ** ** | **Number of**      | ** ** | **Exercise** | ** ** | **Contractual Life** | ** ** | **Intrinsic**           | ** ** |
| ** **                            | ** ** | **Shares**              | ** ** | **Price**    | ** ** | **(in years)**       | ** ** | **Value**               | ** ** |
| ** **                            | ** ** | **(in thousands)** | ** ** | ** **   | ** ** | ** **                | ** ** | **(in thousands)** | ** ** |
| ** **                            | ** ** | ** **              | ** ** | ** **   | ** ** | ** **                | ** ** | ** **              | ** ** |
| Outstanding at December 31, 2007 |       | 3,818                   |       | $            | 24.61      |                      |       |                    |       |   |
| Options & SARs granted       |       | 724                     |       | $            | 43.15      |                      |       |                    |       |   |
| Options & SARs exercised     |       | (204                    | )          | $            | 21.12      |                      |       |                    |       |   |
| Options & SARs canceled      |       | (59                     | )          | $            | 31.64      |                      |       |                    |       |   |
| Outstanding at June 30, 2008     |       | 4,279                   |       | $            | 27.82      |                      | 6.66       |                    | $          | 43,224 |   |
| Exercisable at June 30, 2008     |       | 2,262                   |       | $            | 22.16      |                      | 5.11       |                    | $          | 32,354 |   |

 

The aggregate intrinsicvalue is calculated as the difference between the exercise price of theunderlying awards and the Company’s closing stock price of $36.08 as of June 30,2008 for options that were in-the-money as of that date.

 

The weighted averagegrant date fair value of options and SARs granted during the six months ended June 30,2008 was $18.41 per share. The total intrinsic value of options exercisedduring the six months ended June 30, 2008 and 2007 was $5.1 million and$18.6 million, respectively. The total cash received from employees as a resultof employee stock option exercises net of taxes paid for SARs exercised andrestricted stock units (“RSU”) vested during the six months ended June 30,2008 and 2007 was approximately $2.0 million and $13.0 million, respectively.

 

The Company settlesexercised stock options and SARs with newly issued common shares.

 

A summary of the statusof the Company’s RSU activity for the six months ended June 30, 2008 is asfollows:

 
| ** **                                         | ** ** | ** **              | ** ** | **Weighted**        | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|---------------------|------------|
| ** **                                         | ** ** | ** **              | ** ** | **Average**         | ** ** |
| ** **                                         | ** ** | **Number of**      | ** ** | **Grant Date** | ** ** |
| ** **                                         | ** ** | **Shares**              | ** ** | **Fair Value** | ** ** |
| ** **                                         | ** ** | **(in thousands)** | ** ** | ** **          | ** ** |
| ** **                                         | ** ** | ** **              | ** ** | ** **          | ** ** |
| Outstanding and unvested at December 31, 2007 |       | 571                     |       | $                   | 34.62      |   |
|                                               |       |                    |       |                |       |
| RSUs granted                                       |       | 248                     |       | $                   | 42.02      |   |
|                                               |       |                    |       |                |       |
| RSUs vested                                        |       | (72                     | )          | $                   | 28.02      |   |
|                                               |       |                    |       |                |       |
| RSUs canceled                                      |       | (19                     | )          | $                   | 36.86      |   |
|                                               |       |                    |       |                |       |
| Outstanding and unvested at June 30, 2008     |       | 728                     |       | $                   | 37.72      |   |

 

The weighted averagegrant date fair value was determined based on the closing market price of theCompany’s common stock on the date of the award. The aggregate intrinsic valueof RSUs outstanding at June 30, 2008 was $26.3 million, using the closingprice of $36.08 per share as of June 30, 2008.

 

**Stock-Based Compensation Expense**

 

The effect of stock-basedemployee compensation expense recognized on Advent’s condensed consolidatedstatement of operations for the three and six months ended June 30, 2008and 2007 was as follows (in thousands, except per share data):

 

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| ** **                                                     | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                     | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Statement of operations classification**                     |       |                                               |       |                                             |       |   |   |   |   |
| Cost of term license, maintenance and other recurring revenues |       | $                                                  | 323        |                                             | $          | 328 |   | $ | 613 |   | $ | 575 |   |
| Cost of professional services and other revenues               |       | 258                                                |       | 182                                              |       | 495 |   | 357 |   |
| Total cost of revenues                                         |       | 581                                                |       | 510                                              |       | 1,108 |   | 932 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Sales and marketing                                            |       | 1,099                                              |       | 1,167                                            |       | 2,137 |   | 2,136 |   |
| Product development                                            |       | 1,009                                              |       | 900                                              |       | 1,880 |   | 1,637 |   |
| General and administrative                                     |       | 1,172                                              |       | 1,005                                            |       | 2,127 |   | 2,123 |   |
| Total operating expenses                                       |       | 3,280                                              |       | 3,072                                            |       | 6,144 |   | 5,896 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Total stock-based employee compensation expense                |       | $                                                  | 3,861      |                                             | $          | 3,582 |   | $ | 7,252 |   | $ | 6,828 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Tax effect on stock-based employee compensation                |       | (1,351                                             | )          | (1,276                                           | )          | $ | (2,651 | ) | $ | (2,329 | ) |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Net effect on net income                                       |       | $                                                  | 2,510      |                                             | $          | 2,306 |   | $ | 4,601 |   | $ | 4,499 |   |

 

Advent capitalizedstock-based employee compensation expense of $85,000 and $106,000 during thesix months ended June 30, 2008 and 2007, respectively, associated with theCompany’s software development, internal-use software and professional servicesimplementation projects.

 

As of June 30, 2008,total unrecognized compensation cost related to unvested awards not yetrecognized under all equity compensation plans, adjusted for estimatedforfeitures, was $36.2 million and is expected to be recognized through theremaining vesting period of each grant, with a weighted average remainingperiod of 3.2 years.

 

**ValuationAssumptions**

 

The fair value of eachoption grant is estimated on the date of grant using the Black-Scholes optionvaluation model and the straight-line attribution approach with the followingassumptions:

 
| ** **                                  | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                  | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Stock Options & SARs** |       |                                               |       |                                             |       |   |   |   |   |
| Expected volatility                         |       | 42.8%  - 43.5%                                     |       | 32.4%  - 34.5%                                   |       | 41.8%  - 43.5% |   | 32.4%  - 38.4% |   |
| Expected life (in years)                    |       | 3.82  - 5.27                                       |       | 3.75  - 4.58                                     |       | 3.82  - 5.27 |   | 3.75  - 4.58 |   |
| Risk-free interest rate                     |       | 2.8%  - 3.9%                                       |       | 4.6%  - 5.2%                                     |       | 2.6%  - 3.9% |   | 4.5%  - 5.2% |   |
| Expected dividends                          |       | None                                               |       | None                                             |       | None |   | None |   |
|                                        |       |                                               |       |                                             |       |   |   |   |   |
| **Employee Stock Purchase Plan**            |       |                                               |       |                                             |       |   |   |   |   |
| Expected volatility                         |       | 43.8%  - 46.0%                                     |       | 35.5%  - 36.5%                                   |       | 43.8%  - 46.0% |   | 35.5%  - 36.5% |   |
| Expected life (in months)                   |       | 6                                                  |       | 6                                                |       | 6 |   | 6 |   |
| Risk-free interest rate                     |       | 2.0%  - 3.4%                                       |       | 4.2%  - 5.0%                                     |       | 2.0%  - 3.4% |   | 4.2%  - 5.0% |   |
| Expected dividends                          |       | None                                               |       | None                                             |       | None |   | None |   |

 

The expected stock pricevolatility was determined based on an equally weighted average of historicaland implied volatility of the Company’s common stock. Adventdetermined that a blend of implied volatility and historical volatility is morereflective of the market conditions and a better indicator of expectedvolatility than using purely historical volatility. The expected life was determined based on historicalexperience of similar awards, giving consideration to the contractual terms ofthe stock-based awards, vesting schedules and expectations of future employeebehavior. The risk-free interest rate is based on the U.S. Treasury yieldcurve in effect at the time of grant for periods corresponding with theexpected life of the option. The dividend yield assumption is based on theCompany’s history of not paying dividends and the resultant future expectationof 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

 

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stock purchase plan. Potential common shares are reflected indiluted earnings per share by application of the treasury stock method, whichin the current period includes consideration of unamortized stock-basedcompensation and windfall tax benefits, as a result of the implementation ofSFAS 123R.

 

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

 
| ** **                                                                                                                               | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                               | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Numerator:**                                                                                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Net income                                                                                                                               |       | $                                                  | 7,355      |                                             | $          | 5,095 |   | $ | 9,990 |   | $ | 5,534 |   |
|                                                                                                                                     |       |                                               |       |                                             |       |   |   |   |   |
| **Denominator:**                                                                                                                         |       |                                               |       |                                             |       |   |   |   |   |
| Denominator for basic net income per share-weighted average shares  outstanding                                                          |       | 26,712                                             |       | 26,519                                           |       | 26,641 |   | 26,950 |   |
|                                                                                                                                     |       |                                               |       |                                             |       |   |   |   |   |
| Dilutive common equivalent shares:                                                                                                       |       |                                               |       |                                             |       |   |   |   |   |
| Employee stock options and other                                                                                                         |       | 1,407                                              |       | 1,235                                            |       | 1,405 |   | 1,306 |   |
|                                                                                                                                     |       |                                               |       |                                             |       |   |   |   |   |
| Denominator for diluted net income per share-weighted average shares  outstanding, assuming exercise of potential dilutive common shares |       | 28,119                                             |       | 27,754                                           |       | 28,046 |   | 28,256 |   |
|                                                                                                                                     |       |                                               |       |                                             |       |   |   |   |   |
| Basic net income per share                                                                                                               |       | $                                                  | 0.28       |                                             | $          | 0.19 |   | $ | 0.37 |   | $ | 0.21 |   |
| Diluted net income per share                                                                                                             |       | $                                                  | 0.26       |                                             | $          | 0.18 |   | $ | 0.36 |   | $ | 0.20 |   |

 

Weighted average stockoptions, SARs and RSUs of approximately 1.4 million and 1.0 million for thethree and six months ended June 30, 2008, respectively, were excluded fromthe calculation of diluted net income per share because their inclusion wouldhave been anti-dilutive. Similarly, weighted average stock options, SARs andRSUs of approximately 1.6 million and 1.5 million for the three and six monthsended June 30, 2007, respectively, were excluded from the calculation ofdiluted net income per share.

 

**Note5—Goodwill**

 

Thechanges in the carrying value of goodwill for the six months ended June 30,2008 were as follows (in thousands):

 
| ** **                        | ** ** | **Goodwill** | ** ** |
|-----------------------------------|------------|--------------|------------|
| ** **                        | ** ** | ** **   | ** ** |
| Balance at December 31, 2007 |       | $            | 106,520    |   |
| Translation adjustments           |       | 2,080        |       |
|                              |       |         |       |
| Balance at June 30, 2008     |       | $            | 108,600    |   |

 

Foreigncurrency translation adjustments totaling $2.1 million reflect the weakening ofthe U.S. dollar versus European currencies during the six months ended June 30,2008.

 

**Note 6—Other Intangibles**

 

Thefollowing is a summary of other intangibles as of June 30, 2008 (inthousands):

 

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| ** **                     | ** ** | **Average**      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                     | ** ** | **Amortization** | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
| ** **                     | ** ** | **Period**       | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                     | ** ** | **(Years)**      | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
| ** **                     | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Purchased technologies         |       | 4.9              |       | $                | 16,526     |             | $          | (13,401          | )          | $ | 3,125 |   |
| Product development costs      |       | 3.0              |       | 6,738            |       | (3,137           | )          | 3,601            |       |
|                           |       |             |       |             |       |             |       |             |       |
| Developed technology sub-total |       |             |       | 23,264           |       | (16,538          | )          | 6,726            |       |
|                           |       |             |       |             |       |             |       |             |       |
| Customer relationships         |       | 5.5              |       | 22,954           |       | (22,125          | )          | 829              |       |
| Other intangibles              |       | 3.6              |       | 404              |       | (315             | )          | 89               |       |
|                           |       |             |       |             |       |             |       |             |       |
| Other intangibles sub-total    |       |             |       | 23,358           |       | (22,440          | )          | 918              |       |
|                           |       |             |       |             |       |             |       |             |       |
| Balance at June 30, 2008  |       |             |       | $                | 46,622     |             | $          | (38,978          | )          | $ | 7,644 |   |

 

Thefollowing is a summary of other intangibles as of December 31, 2007 (inthousands):

 
| ** **                        | ** ** | **Average**      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                        | ** ** | **Amortization** | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
| ** **                        | ** ** | **Period**       | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                        | ** ** | **(Years)**      | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
|                              |       |             |       |             |       |             |       |             |       |
| Purchased technologies            |       | 4.9              |       | $                | 16,529     |             | $          | (13,001          | )          | $ | 3,528 |   |
| Product development costs         |       | 3.0              |       | 6,290            |       | (2,081           | )          | 4,209            |       |
|                              |       |             |       |             |       |             |       |             |       |
| Developed technology sub-total    |       |             |       | 22,819           |       | (15,082          | )          | 7,737            |       |
|                              |       |             |       |             |       |             |       |             |       |
| Customer relationships            |       | 5.5              |       | 22,673           |       | (21,130          | )          | 1,543            |       |
| Other intangibles                 |       | 3.6              |       | 404              |       | (308             | )          | 96               |       |
|                              |       |             |       |             |       |             |       |             |       |
| Other intangibles sub-total       |       |             |       | 23,077           |       | (21,438          | )          | 1,639            |       |
|                              |       |             |       |             |       |             |       |             |       |
| Balance at December 31, 2007 |       |             |       | $                | 45,896     |             | $          | (36,520          | )          | $ | 9,376 |   |

 

Thechanges in the carrying value of other intangibles during the six months ended June 30,2008 were as follows (in thousands):

 
| ** **                         | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
|------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                         | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                         | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
|                               |       |             |       |             |       |             |       |
| Balance at December 31, 2007  |       | $                | 45,896     |             | $          | (36,520          | )          | $ | 9,376 |   |
| Additions                          |       | 420              |       | —           |       | 420              |       |
| Stock-based compensation additions |       | 28               |       | —           |       | 28               |       |
| Amortization                       |       | —           |       | (2,183           | )          | (2,183           | )          |
| Translation adjustments            |       | 278              |       | (275             | )          | 3                |       |
|                               |       |             |       |             |       |             |       |
| Balance at June 30, 2008      |       | $                | 46,622     |             | $          | (38,978          | )          | $ | 7,644 |   |

 

Basedon the carrying amount of intangible assets as of June 30, 2008, theestimated future amortization is as follows (in thousands):

 

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| ** **                        | ** ** | **Six**               | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
|-----------------------------------|------------|-----------------------|------------|--------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                        | ** ** | **Months Ended** | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **December 31**  | ** ** | **Years Ended December 31** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **2008**              | ** ** | **2009**                                   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** |
| Estimated future amortization of: | ** ** |                  | ** ** |                                       | ** ** |       | ** ** |       | ** ** |       | ** ** |           | ** ** |       | ** ** |
| Developed technology              |       | $                     | 1,356      |                                       | $          | 2,270      |       | $          | 1,736      |       | $          | 790            |       | $          | 574        |   | $ | — |   | $ | 6,726 |   |
| Other intangibles                 |       | 283                   |       | 478                                        |       | 37         |       | 30         |       | 30         |       | 60             |       | 918        |       |
|                              |       |                  |       |                                       |       |       |       |       |       |       |       |           |       |       |       |
| Total                             |       | $                     | 1,639      |                                       | $          | 2,748      |       | $          | 1,773      |       | $          | 820            |       | $          | 604        |   | $ | 60 |   | $ | 7,644 |   |

 

**Note 7—Balance Sheet Detail**

 

Thefollowing is a summary of prepaid expenses and other (in thousands):

 
| ** **                       | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|----------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                       | ** ** | **2008**         | ** ** | **2007**             | ** ** |
| ** **                       | ** ** | ** **       | ** ** | ** **           | ** ** |
| Prepaid commission               |       | $                | 5,530      |                 | $          | 5,364 |   |
| Prepaid contract expense         |       | 6,207            |       | 5,353                |       |
| Prepaid royalty                  |       | 2,644            |       | 2,624                |       |
| Other                            |       | 5,568            |       | 6,236                |       |
|                             |       |             |       |                 |       |
| Total prepaid expenses and other |       | $                | 19,949     |                 | $          | 19,577 |   |

 

 

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

 
| ** **                          | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|-------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                          | ** ** | **2008**         | ** ** | **2007**             | ** ** |
|                                |       |             |       |                 |       |
| Long-term investments, net          |       | $                | 500        |                 | $          | 500 |   |
| Long-term prepaid commissions       |       | 4,793            |       | 5,368                |       |
| Deposits                            |       | 2,929            |       | 2,628                |       |
| Prepaid contract expense, long-term |       | 2,848            |       | 1,838                |       |
| Other                               |       | 52               |       | 311                  |       |
|                                |       |             |       |                 |       |
| Total other assets, net             |       | $                | 11,122     |                 | $          | 10,645 |   |

 

Long-term investmentsinclude an equity investment in a privately held company. This equityinvestment is carried at the lower of cost or fair value at June 30, 2008and December 31, 2007.

 

On April 30, 2007,the Company, together with other LatentZero Limited (“LatentZero”)shareholders, sold their ownership in LatentZero to royalblue group plc. Themaximum possible consideration due to the Company from the sale of itsownership interest in LatentZero is approximately $17 million, which is comprisedof initial consideration of $10 million, paid at completion of the saletransaction and up to an aggregate $7 million of deferred contingentconsideration for fiscal years 2007 and 2008. Consideration is denominated inPounds Sterling (GBP) and the actual amounts of consideration in U.S. dollarsto be received by the Company may differ depending on foreign exchange rates atthe time of payment. During the second quarter of 2008, the Company receivedthe first deferred contingent payment of $3.4 million for fiscal 2007 andrecorded this gain in “interest and other income, net” on its condensedconsolidated statement of operations for the three and six months ended June 30,2008.

 

On June 30, 2008,the Company, together with other LatentZero shareholders, executed a Deed ofAmendment to fix the deferred contingent consideration for fiscal 2008 at approximately$3 million payable March 2009. The Company will record this contingentgain when realized.

 

Deposits includerestricted cash of $1.9 million to secure a bank letter of credit associatedwith the Company’s definitive lease agreement, as amended, with TodaDevelopment, Inc. (“Toda”) for its San Francisco headquarters facility.

 

The following is asummary of accrued liabilities (in thousands):

 

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| ** **                             | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|----------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                             | ** ** | **2008**         | ** ** | **2007**             | ** ** |
|                                   |       |             |       |                 |       |
| Salaries and benefits payable          |       | $                | 14,065     |                 | $          | 18,696 |   |
| Accrued restructuring, current portion |       | 1,414            |       | 2,531                |       |
| Other                                  |       | 8,255            |       | 8,101                |       |
|                                   |       |             |       |                 |       |
| Total accrued liabilities              |       | $                | 23,734     |                 | $          | 29,328 |   |

 

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.

 

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

 
| ** **                               | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                               | ** ** | **2008**         | ** ** | **2007**             | ** ** |
|                                     |       |             |       |                 |       |
| Deferred rent                            |       | $                | 8,828      |                 | $          | 8,902 |   |
| Accrued restructuring, long-term portion |       | 1,468            |       | 1,734                |       |
| Reserve for uncertain tax positions      |       | 4,867            |       | 4,746                |       |
| Other                                    |       | 1,032            |       | 970                  |       |
|                                     |       |             |       |                 |       |
| Total other long-term liabilities        |       | $                | 16,195     |                 | $          | 16,352 |   |

 

**Note 8—Comprehensive Income**

 

The components ofcomprehensive income were as follows for the periods presented (in thousands):

 
| ** **                               | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                     |       |                                               |       |                                             |       |   |   |   |   |
| Net income                               |       | $                                                  | 7,355      |                                             | $          | 5,095 |   | $ | 9,990 |   | $ | 5,534 |   |
| Unrealized gain on marketable securities |       | —                                             |       | —                                           |       | — |   | 8 |   |
| Foreign currency translation adjustment  |       | 5                                                  |       | 617                                              |       | 2,422 |   | 1,066 |   |
|                                     |       |                                               |       |                                             |       |   |   |   |   |
| Total comprehensive income               |       | $                                                  | 7,360      |                                             | $          | 5,712 |   | $ | 12,412 |   | $ | 6,608 |   |

 

**Note9—Restructuring Charges**

 

Restructuring initiativeshave been implemented in the Company’s Advent Investment Management and Otheroperating segments to reduce costs and improve operating efficiencies by betteraligning the Company’s resources to its near-term revenue opportunities. Theseinitiatives have resulted in restructuring charges comprised primarily of costsrelated to properties abandoned in connection with facilities consolidation,related write-down of leasehold improvements and severance and associatedemployee termination costs related to headcount reductions. Advent’srestructuring charges included accruals for estimated losses on facility costsbased on the Company’s contractual obligations net of estimated subleaseincome. Advent periodically reassesses this liability based on marketconditions.

 

##### ***During the sixmonths ended June 30, 2008, Advent recorded a restructuring charge of$55,000 which related to the present value amortization of facility exitobligations partially offset by adjustments to facility exit assumptions.***During the six months ended June 30, 2007, Adventrecorded a net restructuring charge of $789,000 due to the update of certainsub-lease assumptions for Advent’s prior San Francisco headquarters facilitylocated at 301 Brannan Street, which the Company exited in October 2006,and interest accretion.

##### *** ***

Thefollowing table sets forth an analysis of the components of the cash paymentsand restructuring charges made against the accrual during the six months ended June 30,2008 (in thousands):

 

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| ** **                                                  | ** ** | **Facility Exit** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                  | ** ** | **Costs**              | ** ** |
| ** **                                                  | ** ** | ** **             | ** ** |
| Balance of restructuring accrual at  December 31, 2007 |       | $                      | 4,265      |   |
| Cash payments                                               |       | (1,438                 | )          |
| Restructuring charges                                       |       | 55                     |       |
|                                                        |       |                   |       |
| Balance of restructuring accrual at  June 30, 2008     |       | $                      | 2,882      |   |

 

The remaining excess facility costs of $2.9 million are stated atestimated fair value, net of estimated sublease income of approximately $4.7million. 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.

 

#### **Note10—Commitments and Contingencies**

 

*Lease Obligations*

 

Advent leases office space and equipment under non-cancelable operatinglease agreements, which expire at various dates through December 2018.Some operating leases contain escalation provisions for adjustments in theconsumer price index. Advent is responsible for maintenance, insurance, andproperty taxes. As of June 30, 2008, Advent’s remaining operating leasecommitments through 2018 were approximately $50.1 million, net of futureminimum rental receipts of $5.6 million to be received under non-cancelablesub-leases.

 

*Indemnifications*

 

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

 

*LegalContingencies*

 

On March 8, 2005, certain of the former shareholders of Kinexusand the shareholders’ representative filed suit against Advent in the DelawareChancery Court. The complaint alleges that Advent breached the Agreement andPlan of Merger dated as of December 31, 2001 pursuant to which Adventacquired all of the outstanding shares of Kinexus due principally to the factthat no amount was paid by Advent on an earn-out of up to $115 million. Theearn-out, which was payable in cash or stock at the election of Advent, wasbased upon Kinexus meeting certain revenue targets in both 2002 and 2003. Thecomplaint seeks unspecified compensatory damages, an accounting and restitutionfor unjust enrichment. 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. Discovery iscontinuing between the parties. Advent disputes the plaintiffs’ claimsand believes that it has meritorious defenses and intends to vigorously defendthis action. Management believes that any potential loss associated with thislitigation is neither probable nor reasonably estimable at this time andaccordingly has not accrued any amounts for any potential loss.

 

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 the Company’s financial position or results of operations.However, litigation is subject to inherent uncertainties and our view of thesematters may change in the future. Were an unfavorable outcome to occur, thereexists the possibility of a material adverse impact on our financial positionand results of operations for the period in which the unfavorable outcomeoccurs, and potentially in future periods.

 

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**Note11—Segment Information**

 

*Description of Segments*

 

Advent’s organizational structure is based on a number of factors thatthe chief operating decision maker (“CODM”) uses to evaluate, view and run itsbusiness operations which include, but are not limited to, customer base,homogeneity of products and technology. Advent’s operating segments are basedon this organizational structure and information reviewed by Advent’s CODM toevaluate the operating segment results. Advent has determined that itsoperations are organized into two reportable segments: Advent InvestmentManagement and MicroEdge. Future changes to this organizational structure mayresult in changes to the business segments disclosed. A description of thetypes of products and services provided by each operating segment follows.

 

Advent Investment Management is the Company’s core business and derivesrevenues from the development, marketing and sale of software products, data,data interfaces and related maintenance and services that automate, integrateand support certain mission critical functions of investment managementorganizations. MicroEdge derives revenues from the sale of software andservices for grant management, matching gifts and volunteer tracking for thegrantmaking community.

 

*Segment Data*

 

The results of the operating segments are derived directly from Advent’sinternal management reporting system. The accounting policies used to deriveoperating segment results are substantially the same as those used by theconsolidated company. Management measures the performance of each operatingsegment based on several metrics, including income (loss) from operations.These results are used, in part, to evaluate the performance of, and to assignresources to, each of the operating segments. Certain operating expenses,including stock-based employee compensation expense, and amortization ofdeveloped technology and other intangibles, which Advent manages separately atthe corporate level, are not allocated to the operating segments. Advent doesnot separately accumulate and review asset information by segment.

 

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

 
| ** **                                           | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net revenues:                                        | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Advent Investment Management                         |       | $                                                  | 57,979     |                                             | $          | 46,545 |   | $ | 113,243 |   | $ | 89,100 |   |
| MicroEdge                                            |       | 6,048                                              |       | 5,831                                            |       | 12,257 |   | 11,255 |   |
|                                                 |       |                                               |       |                                             |       |   |   |   |   |
| Total net revenues                                   |       | $                                                  | 64,027     |                                             | $          | 52,376 |   | $ | 125,500 |   | $ | 100,355 |   |
| ** **                                           | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income from operations:                              | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Advent Investment Management                         |       | $                                                  | 9,290      |                                             | $          | 5,647 |   | $ | 17,226 |   | $ | 8,507 |   |
| MicroEdge                                            |       | 611                                                |       | 1,764                                            |       | 999 |   | 2,938 |   |
| Unallocated corporate operating costs and  expenses: |       |                                               |       |                                             |       |   |   |   |   |
| Stock-based employee compensation                    |       | (3,861                                             | )          | (3,582                                           | )          | (7,252 | ) | (6,828 | ) |
| Amortization of developed technology                 |       | (732                                               | )          | (322                                             | )          | (1,454 | ) | (686 | ) |
| Amortization of other intangibles                    |       | (242                                               | )          | (466                                             | )          | (729 | ) | (940 | ) |
|                                                 |       |                                               |       |                                             |       |   |   |   |   |
| Total income from operations                         |       | $                                                  | 5,066      |                                             | $          | 3,041 |   | $ | 8,790 |   | $ | 2,991 |   |

 

*Major Customers*

 

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

 

**Note 12—Related Party Transactions**

 

Asof December 31, 2007 and June 30, 2008, Clearbridge Advisors LLC (“Clearbridge”),a Legg Mason company, owned approximately 14% of the voting stock of Advent. Norevenue was recorded from sales to Clearbridge during the second quarter of2008 or 2007 as Clearbridge is not a customer of Advent.  However, Advent recognized approximately $170,000and $310,000 of revenue from all Legg Mason entities during the three and sixmonths ended June 30, 2008, respectively. The Company’s accountsreceivable from all Legg Mason entities were $0.2 million and zero as of June 30,2008 and December 31, 2007, respectively.

 

Adventacts as trustee for the Company’s short-term disability plan—Advent SoftwareCalifornia Voluntary Disability Plan (“VDI”). Employee withholdings were$115,000 and $265,000 during the three and six months ended June 30, 2008,respectively. Disbursements were $124,000 and $174,000 during the three and sixmonths ended June 30, 2008, respectively. Cash held by Advent related tothe VDI was $0.3 million and $0.2 million as of June 30, 2008 and December 31,2007, respectively, and are included in “Other assets, net” on the condensedconsolidated balance sheets.

 

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**Note 13—Line of Credit**

 

On February 14, 2007, Advent and certain of its subsidiariesentered into a senior secured credit facility agreement (the “Credit Facility”)with Wells Fargo Foothill, Inc. (the “Lender”) for a term of three years.Under the Credit Facility, the Lender will provide the Company with a revolvingline of credit up to an aggregate amount of $75.0 million to fund therepurchase of outstanding common stock, capital expenditures and generalcorporate requirements. The Company has the option of selecting an interestrate for any drawdown under the Credit Facility equal to either: (a) theBase Rate (Wells Fargo prime rate); or (b) the then applicable LIBOR Rateplus 1.50% per annum. The loan is secured by the Company’s property and assetsand is subject to a financial covenant. The financial covenant in the CreditFacility is limited to a maximum ratio of senior debt to earnings beforeinterest, taxes, depreciation, and amortization (EBITDA), adjusted for costcapitalizations, extraordinary gains (losses) and non-cash stock-based employeecompensation. Covenant testing will commence upon either the occurrence of anevent of default or when excess availability, defined as the Credit Facilityline of $75.0 million less amounts drawn, plus qualified cash and cashequivalents is less than $50.0 million.

 

As of June 30, 2008 and December 31, 2007, the Companymaintained a zero debt balance and was in compliance with all associatedcovenants.

 

**Note 14—Income Taxes**

 

Thefollowing table summarizes the activity relating to the Company’s unrecognizedtax benefits during the six months ended June 30, 2008 (in thousands):

 
| ** **                                                | ** ** | **Total**  | ** ** |
|-----------------------------------------------------------|------------|------------|------------|
| ** **                                                | ** ** | ** ** | ** ** |
| Balance at December 31, 2007                         |       | $          | 5,899      |   |
|                                                      |       |       |       |
| Gross decreases related to tax positions in  prior period |       | (197       | )          |
| Gross increases related to current period  tax positions  |       | 187        |       |
| Balance at June 30, 2008                             |       | $          | 5,889      |   |

 

AtJune 30, 2008 and December 31, 2007, Advent had $5.9 million ofgross unrecognized tax benefits. During the first six months of 2008, Adventrecognized a tax benefit of $0.2 million relating to accrued interest andpenalties as a result of a lapse of a statute of limitations while increasingthe amount of unrecognized tax benefits by $0.2 million relating to Californiaresearch credits. If recognized, the portion of unrecognized tax benefits at June 30,2008 that would decrease Advent’s tax position and increase net income is $4.9million. The impact on net income reflects the liabilities for unrecognized taxbenefits net of the federal tax benefit of state income tax items. The Company’sliabilities for unrecognized tax benefits are included in “Other long-termliabilities” on the condensed consolidated balance sheet and relate to federalresearch credits, California research and enterprise zone tax credits andvarious state net operating losses that have been recorded as deferred taxassets but have yet to be utilized.

 

Advent is subject to taxation in the U.S. and various states andforeign jurisdictions. Advent is not under examination in any income taxjurisdiction at the present time.  The material jurisdictions that aresubject to examination by tax authorities include California for tax yearsafter fiscal 2002 and the U.S. and New York for tax years after 2003.

 

**Note15—Fair Value Measurements**

 

EffectiveJanuary 1, 2008, Advent implemented SFAS No. 157, “Fair ValueMeasurement”, for the Company’s financial assets and liabilities that aremeasured and reported at fair value at each reporting period, and non-financialassets and liabilities that are re-measured and reported at fair value at leastannually. In accordance with the provisions of FSP No. FAS 157-2, “EffectiveDate of FASB Statement No. 157”, the Company has elected to deferimplementation of FAS 157 as it relates to non-financial assets andnon-financial liabilities that are recognized and disclosed at fair value inthe financial statements on a nonrecurring basis until January 1, 2009.Advent is evaluating the impact, if any, this will have on the Company’snon-financial assets and liabilities.

 

Theadoption of SFAS 157 to Advent’s financial assets and liabilities andnon-financial assets and liabilities that are measured and reported at fairvalue at least annually did not have an impact on the Company’s financialresults.

 

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SFASNo. 157 clarifies that fair value is an exit price, representing theamount that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants. As such, fair value is amarket-based measurement that should be determined based on assumptions thatmarket participants would use in pricing an asset or liability. As a basis forconsidering such assumptions, SFAS No. 157 establishes a three-tier valuehierarchy, which prioritizes the inputs used in measuring fair value asfollows:

 
| **Level Input** | ** ** | **Input Definition**                                                                                                                                                  |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                  |
| Level  I        |       | Inputs  are unadjusted, quoted prices for identical assets or liabilities in active  markets at the measurement date.                                                 |
|            |       |                                                                                                                                                                  |
| Level  II       |       | Inputs  other than quoted prices included in Level I that are observable for the  asset or liability through corroboration with market data at the measurement  date. |
|            |       |                                                                                                                                                                  |
| Level  III      |       | Unobservable  inputs that reflect management’s best estimate of what market participants  would use in pricing the asset or liability at the measurement date.   |

 

Thishierarchy requires the Company to use observable market data, when available,and to minimize the use of unobservable inputs when determining inputs anddetermining fair value.  The Companymeasures certain financial assets and liabilities at fair value on a recurringbasis, including available-for-sale securities and our equity investment. Thefair value of these certain financial assets was determined using the followinginputs as of June 30, 2008 (in thousands):

 
|                                                 | ** ** | **Fair Value Measurements at Reporting Date Using** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | ** **                                                                        | ** ** | ** ** | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | ** **                                                                        | ** ** | **Quoted Prices in** | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **                                      | ** ** | ** **                                                                        | ** ** | **Active Markets for** | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                                      | ** ** | ** **                                                                        | ** ** | **Identical Assets** | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| ** **                                      | ** ** | **Total**                                                                         | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| Assets                                          | ** ** | ** **                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fixed income available-for-sale securities  (1) |       | $                                                                                 | 72,279     |   | $ | 72,279 |   | $ | — |   | $ | — |   |
|                                                 |            |                                                                                   |            |  |  |  |  |  |  |  |  |  |  |

 

----

(1)       Included in cash and cash equivalents on our condensed consoldiatedbalance sheet

 

Fixedincome available-for-sale securities consist of cash equivalents with remainingmaturities of three months or less at the date of purchase and are composedprimarily of US Government and Treasury Obligation money market mutual funds.The fair value of these securities is determined through market, observable andcorroborated sources.

 

 Non-marketable investments which totaled $0.5million at June 30, 2008, represent the Company’s investment in aprivately held company. Non-marketable investments are priced at the lower ofcost or fair value due to an absence of market activity and market data, andare not reported in the above table of assets measured at fair value as of June 30,2008.

 

**Note 16**—Common Stock Repurchase Program

 

Advent’s Board has approved common stockrepurchase programs authorizing management to repurchase shares of the Company’scommon stock as a means to enhance shareholder value. The timing and actualnumber of shares subject to repurchase are at the discretion of Advent’smanagement and are contingent on a number of factors, including the price ofAdvent’s stock, Advent’s cash balances and working capital needs, generalbusiness and market conditions, regulatory requirements, and alternative investmentopportunities. Repurchased shares are returned to the status of authorized andun-issued shares of common stock.

 

OnMay 7, 2008, Advent’s Board authorized the repurchase of up to 1.0 millionshares of the Company’s common stock. Consistent with prior repurchaseprograms, there is no expiration date and repurchases may be limited orterminated at any time at the discretion of management. As of June 30,2008, no shares have been repurchased under this authorization.

 

**Note 17—Subsequent Event**

** **

OnJuly 29, 2008, the Company announced that Craig B. Collins, the Company’sExecutive Vice President and Chief Financial Officer, would leave the Companyeffective July 31, 2008.

 

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

 

**SPECIAL NOTE REGARDING FORWARD-LOOKINGSTATEMENTS**

 

You should read the following discussion in conjunction with ourconsolidated financial statements and related notes. The following discussioncontains forward-looking statements within the meaning of Section 27A ofthe Securities 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, expenses andoperating margins. Forward-looking statements can be identified by the use ofterminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,”“estimate,” “predict,” “potential,” “continue” or other similar terms and thenegative of such terms regarding beliefs, plans, expectations or intentionsregarding the future. Forward-looking statements include, among others,statements regarding growth in the investment management market andopportunities for us related thereto, future expansion, acquisition, divestmentof or investment in other businesses, projections of revenues, future cost andexpense levels, expected timing and amount of amortization expenses related topast acquisitions, the adequacy of resources to meet future cash requirements,estimates or predictions of actions by customers, suppliers, competitors orregulatory authorities, future client wins, future hiring and future productintroductions. Such forward-looking statements are based on our current plansand expectations and involve known and unknown risks and uncertainties whichmay cause our actual results or performance to be materially different from anyresults or performance expressed or implied by such forward-looking statements.Such factors include, but are not limited to the “Risk Factors” set forth in “Part II,Item 1A. Risk Factors” in this Form 10-Q, as well as other risks identifiedfrom time to time in other Securities and Exchange Commission (“SEC”) reports.You should not place undue reliance on our forward-looking statements, as theyare not guarantees of future results, levels of activity or performance andrepresent our expectations only as of the date they are made.

 

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

 

**Overview**

 

We offerintegrated software, products and services for automating and integrating dataand work flows across the investment management organization, as well asbetween the investment management organization and external parties. Ourproducts are intended to increase operational efficiency, improve the accuracyof client information and reporting, and enable better decision-making. Eachsolution focuses on specific mission-critical functions of the front, middleand back offices of investment management organizations and is designed to meetthe needs of the particular client, as determined by size, assets undermanagement and complexity of the investment environment.

 

Thesoftware solutions offered through our MicroEdge segment support the grantmanagement, matching gifts and volunteer tracking processes for thegrant-making community.

 

*Operating Overview*

 

Highlightsof our second quarter of 2008 include:

 

·      Selectedby TIAA-CREF to build a service to address new regulatory challenges faced by403(b) retirement plan administrators. The service will use Advent’scustodial data (ACD) infrastructure to aggregate data from multiple vendors tohelp prevent non-compliant transactions before they occur and enable planproviders to verify compliance. Launch of the service is subject to milestonesand acceptance, so we do not expect revenue to be recognized until the fourthquarter of 2009 or early 2010, and we expect this contract to substantiallyincrease our “other recurring revenues” beginning in 2010. Since we will billand collect fees as milestones are achieved, we expect deferred revenues andoperating cash flows related to this contract to grow starting in the thirdquarter of 2008 until we begin to recognize revenues.

 

·      Expandedcustomer relationships and acceptance of our product offerings. We experiencedcontinued demand for both our newest and largest portfolio management andaccounting platforms: Advent Portfolio Exchange (“APX”) and Geneva. We signed25 APX contracts, bringing the total number of licenses sold globally to 237,and we added 12 new Geneva clients which brings the total number of Genevalicenses sold to 176 as of June 30, 2008.

 

·      Continuedgrowth in term license contract value (TCV). Total TCV, including APXmigrations, was $21.2 million, an increase of 15% from $18.5 million in thesecond quarter of 2007. With an average term of 3.1

 

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years, these contracts will add approximately $6.9 million in annualrevenue (“annual contract value”) once they are fully implemented, up 9% overthe same period last year.

 

TheTIAA-CREF contract, noted above, is for data services rather than a termlicense, and as such is not included in TCV for the second quarter of 2008.However, after meeting certain milestones and acceptance, we expect the totalvalue of this five-year agreement with TIAA-CREF to significantly exceed theTCV reported for the second quarter of 2008. The annual revenue from thiscontract, when combined with the hosted services contract previously announcedwith Fidelity Investments, are expected to contribute at least an additional $8million to $10 million per year in recurring revenue by the year 2010.

 

·      Increasedheadcount. Total Company headcount at June 30, 2008 was 997 whichincreased from headcount of 982 and 946 from March 31, 2008 and December 31,2007, respectively. The majority of these new hires were in our sales andclient services groups to support our recent term license contracts.

 

*FinancialOverview*

 

Werecognized revenue of $64.0 million during the second quarter of 2008, ascompared to $52.4 million in the second quarter 2007. This year-over-yearincrease of 22% in 2008 reflects significant period to period growth in revenuefrom term licenses and from international sales. Term license revenue increased49% to $15.1 million in the second quarter of 2008, from $10.1 million in thesecond quarter of 2007. Maintenance revenue was up $1.6 million, or 8%year-over-year, while other recurring revenue was also up $2.3 million or 21%and professional services posted an increase of 70% to $7.9 million in thesecond quarter of 2008. We have grown net revenue year-over-year for severalreasons, including the following:

 

·      Ourproduct innovation helped drive acquisition of new customers and created newrevenue opportunities with existing clients, resulting in incremental TCV andprofessional services billings.

 

·      Ourcompletion of term license implementations resulted in incremental term licenseand professional services revenues.

 

·      We have alarge installed base of customers who have continued to upgrade and expandtheir usage of our products and services, such as subscription data managementand outsourcing, resulting in higher maintenance and other recurring revenues.

 

·      Ourexisting term licenses, maintenance and other recurring revenues provide aconsistent, recurring revenue stream during the term of those agreements.

 

Totalrecurring revenues, which we define as term license, perpetual maintenance, andother recurring revenues, remained essentially level at 79% of total netrevenues during the second quarter of 2008, as compared to 80% during the sameperiod of 2007.  In addition,international revenue increased to $9.2 million or 14% of total revenue duringthe second quarter of 2008, compared to $6.0 million or 11% of total revenue inthe second quarter of 2007.

 

Total expenses, including cost ofrevenues, were $59.0 million in the second quarter of 2008, compared with $49.3million in the second quarter of 2007. Our expenses increased in 2008 over 2007largely as a result of increased payroll, variable compensation and benefitexpenses resulting from increases in headcount.

 

Ourincome from operations in the second quarter of 2008 was $5.1 million or 8% ofrevenue, compared to $3.0 million or 6% of revenue in the second quarter of2007.

 

Duringthe second quarter of 2008, we recognized a non-operating gain of $3.4 millionrelated to our private equity investments, compared to a net gain of $3.7million in the second quarter of 2007.

 

Duringthe second quarter of 2008, we recognized $1.3 million of income tax expense,compared to $1.8 million in the second quarter of 2007.

 

Weearned net income of $7.4 million, resulting in diluted earnings per share of$0.26 for the second quarter of 2008, compared to $5.1 million or $0.18,respectively, in the second quarter of 2007.

 

Wegenerated $25.8 million in cash from operations in the second quarter of 2008,which compares to $12.0 million in the second quarter of 2007. The significantincrease in operating cash flows was primarily due to increased profitability,more 

 

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collectionsof accounts receivable and increases in our deferred revenues. Theincrease in deferred revenues primarily reflected our continued transition tothe term license model. Under the term model, we generally bill and collect fora term agreement in equal installments in advance of each annual period. Theseamounts are deferred at billing and recognized over the annual term period,which has the effect of increasing deferred revenue when compared to aperpetual license model where no license revenue is deferred.

 

*TermLicense and Term License Deferral*

 

Weare continuing the process of converting the Company’s license revenues from aperpetual model to a predominantly term model. Under a perpetual pricing model, customers purchase a license to useour software indefinitely and generally we recognize all license revenue at thetime of sale; maintenance is purchased under an annual renewable contract, andrecognized ratably over the contract period. Under a term pricing model,customers purchase a license to use our software and receive maintenance for alimited period of time and we recognize all of the revenue ratably over thelength of the contract. This has the effect of lowering revenues in the earlystages of the transition, but increasing the total potential value of thecustomer relationship. Moving new customer sales in the Advent InvestmentManagement (AIM) segment from a perpetual to a term licensing model has had theeffect of lowering our reported revenue growth rates over the past four fiscalyears and may, depending on our new term license bookings, continue to have animpact through 2008. Because our products are used by customers for an averageof approximately ten years, we believe this change to our business model issignificant for the long-term growth and value of the business as we expecttotal revenues from a customer to increase over time, as reflected in the 25%increase in total net revenues in the first half of 2008 from the first half of2007. For example, over a ten-year period, a customer may enter into two ormore contracts for the same software product and services under a term licensemodel.

 

When a customer purchases a term license together with implementationservices, we do not recognize any revenue under the contract until theimplementation services are complete and the remaining services aresubstantially complete. If the implementation services are still in progress asof quarter-end, we will defer all of the contract revenues to a subsequentquarter. At the point professional services are substantially completed,we recognize a pro-rata amount of the term license revenue, professionalservices fees earned and related expenses, based on the elapsed time from thestart of the term license to the substantial completion of professionalservices. Term license revenue for the remaining contract years and theremaining deferred professional services revenue and related expenses arerecognized ratably over the remaining contract length.

 

During the second quarter of 2008, we deferred net revenue of $3.2million and directly-related expenses of $1.0 million associated with our termlicensing model. The impact of these deferrals on our operating income wasapproximately $2.2 million. The $3.2 million net deferral of revenue wasprimarily composed of a net deferral of $2.2 million of professional servicesrevenue and $1.0 million of term license revenue. We continue to deferprofessional services as the deferral for current projects exceeded the amountrecognized from completed past projects. We expect that the term licensecomponent of the deferred revenue balance will increase or decrease in thefuture depending on the amount of new term license bookings relative to thenumber of implementations that reach substantial completion in a particularquarter. We currently expect that the professional services component of thedeferred revenue balance will continue to increase through at least 2008.

 

Amounts of revenue and directly-related expenses deferred as of June 30,2008 and December 31, 2007 associated with our term licensing deferralwere as follows (in millions):

 
| ** **                | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|---------------------------|------------|------------------|------------|----------------------|------------|
| ** **                | ** ** | **2008**         | ** ** | **2007**             | ** ** |
| Deferred revenues         | ** ** | ** **       | ** ** | ** **           | ** ** |
| Short-term                |       | $                | 21.0       |                 | $          | 17.9 |   |
| Long-term                 |       | 5.3              |       | 3.3                  |       |
|                      |       |             |       |                 |       |
| Total                     |       | $                | 26.3       |                 | $          | 21.2 |   |
|                      |       |             |       |                 |       |
| Directly-related expenses |       |             |       |                 |       |
| Short-term                |       | $                | 6.7        |                 | $          | 5.7 |   |
| Long-term                 |       | 2.2              |       | 1.3                  |       |
|                      |       |             |       |                 |       |
| Total                     |       | $                | 8.9        |                 | $          | 7.0 |   |

 

Deferred net revenue and directly-related expenses are classified as “Deferredrevenues” (short-term and long-term), and “Prepaid expenses and other,” and “Otherassets, net,” respectively, on the condensed consolidated balance sheets.

 

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The transition to a term model also has had the effect of decreasingoperating cash flows in the early stages of the transition. Under perpetualpricing, the entire license fee and the first year of maintenance is generallybilled and collected at the commencement of the arrangement. Under termpricing, a typical contract term is three years. We generally bill and collectterm license fee installments in advance of each annual period. The amount ofthe annual term billing is less than the perpetual billing, resulting in lowercash flows in the initial annual term license period. Annual term billingresults in an increase in deferred revenue and an increase in operating cashflows at the commencement of each annual billing period.

 

**Critical Accounting 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 of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses, and relateddisclosure 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.

 

·                  Revenue recognition and deferred revenues;

 

·                  Income taxes;

 

·                  Stock-based compensation;

 

·                  Restructuring charges and related accruals;

 

·                  Business combinations;

 

·                  Goodwill;

 

·                  Impairment of long-lived assets;

 

·                  Legal contingencies; and

 

·                  Sales returns and accounts receivable allowances

 

Therehave been no significant changes in our critical accounting policies andestimates during the first six months of 2008 as compared to the criticalaccounting policies and estimates disclosed in “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” included in ourAnnual Report on Form 10-K for the year ended December 31, 2007.

 

**RecentAccounting Pronouncements**

 

With the exception of those discussed below, there have been no recentaccounting pronouncements or changes in accounting pronouncements during thesix months ended June 30, 2008, as compared to the recent accountingpronouncements described in our Annual Report on Form 10-K for the fiscalyear ended December 31, 2007, that are of significance, or potentialsignificance, to the Company.

 

In April 2008, the Financial Accounting Standards Board (“FASB”)issued FASB Staff Position (“FSP”) No. 142-3, “Determination of the UsefulLife of Intangible Assets”. FSP 142-3 amends the factors an entity shouldconsider in developing renewal or extension assumptions used in determining theuseful life or recognized intangible assets under FASB Statement No. 142,“Goodwill and Other Intangible Assets”. This new guidance applies prospectivelyto intangible assets that are acquired individually or with a group of otherassets in business combinations and asset acquisitions. FSP 142-3 is effectivefor financial statements issued for fiscal years and interim periods beginningafter December 15, 2008. Early adoption is prohibited. We are currentlyevaluating the impact, if any, that FSP 142-3 will have on our consolidatedfinancial statements.

 

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In May 2008, the FASB issued SFAS No. 162, “The Hierarchy ofGenerally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies thesources of accounting principles and the framework for selecting the principlesto be used in the preparation of financial statements that are presented inconformity with generally accepted accounting principles in the United States.This statement is effective 60 days following the SEC’s approval of the PublicCompany Accounting Oversight Board amendments to AU Section 411, “TheMeaning of Present Fairly in Conformity with Generally Accepted AccountingPrinciples.” We do not expect SFAS 162 to have a material impact on ourconsolidated financial statements.

 

**RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008AND 2007**

 

The following table sets forth, for theperiods indicated, certain financial information as a percentage of total netrevenues. The financial information and the ensuing discussion should be readin conjunction with the accompanying condensed consolidated financialstatements and notes thereto:

 
| ** **                                     | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                     | ** ** | **2008**                                           | ** ** | **2007**                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Net revenues:**                              |       |                                               |       |                                             |       |   |   |   |   |
| Term license, maintenance and other  recurring |       | 79                                                 | %          | 80                                               | %          | 80 | % | 79 | % |
| Perpetual license fees                         |       | 8                                                  |       | 11                                               |       | 9 |   | 12 |   |
| Professional services and other                |       | 12                                                 |       | 9                                                |       | 12 |   | 9 |   |
|                                           |       |                                               |       |                                             |       |   |   |   |   |
| Total net revenues                             |       | 100                                                |       | 100                                              |       | 100 |   | 100 |   |
|                                           |       |                                               |       |                                             |       |   |   |   |   |
| **Cost of revenues:**                          |       |                                               |       |                                             |       |   |   |   |   |
| Term license, maintenance and other  recurring |       | 18                                                 |       | 17                                               |       | 18 |   | 18 |   |
| Perpetual license fees                         |       | 0                                                  |       | 0                                                |       | 0 |   | 0 |   |
| Professional services and other                |       | 13                                                 |       | 12                                               |       | 13 |   | 12 |   |
| Amortization of developed technology           |       | 1                                                  |       | 1                                                |       | 1 |   | 1 |   |
|                                           |       |                                               |       |                                             |       |   |   |   |   |
| Total cost of revenues                         |       | 33                                                 |       | 31                                               |       | 32 |   | 31 |   |
|                                           |       |                                               |       |                                             |       |   |   |   |   |
| Gross margin                                   |       | 67                                                 |       | 69                                               |       | 68 |   | 69 |   |
|                                           |       |                                               |       |                                             |       |   |   |   |   |
| **Operating expenses:**                        |       |                                               |       |                                             |       |   |   |   |   |
| Sales and marketing                            |       | 24                                                 |       | 27                                               |       | 25 |   | 27 |   |
| Product development                            |       | 20                                                 |       | 21                                               |       | 21 |   | 21 |   |
| General and administrative                     |       | 14                                                 |       | 15                                               |       | 15 |   | 17 |   |
| Amortization of other intangibles              |       | 0                                                  |       | 1                                                |       | 1 |   | 1 |   |
| Restructuring charges (benefit)                |       | (0                                                 | )          | 0                                                |       | 0 |   | 1 |   |
|                                           |       |                                               |       |                                             |       |   |   |   |   |
| Total operating expenses                       |       | 60                                                 |       | 64                                               |       | 61 |   | 66 |   |
|                                           |       |                                               |       |                                             |       |   |   |   |   |
| Income from operations                         |       | 8                                                  |       | 6                                                |       | 7 |   | 3 |   |
| Interest and other income, net                 |       | 6                                                  |       | 7                                                |       | 3 |   | 4 |   |
|                                           |       |                                               |       |                                             |       |   |   |   |   |
| Income before income taxes                     |       | 13                                                 |       | 13                                               |       | 10 |   | 7 |   |
| Provision for income taxes                     |       | 2                                                  |       | 3                                                |       | 2 |   | 2 |   |
|                                           |       |                                               |       |                                             |       |   |   |   |   |
| **Net income**                                 |       | 11                                                 | %          | 10                                               | %          | 8 | % | 6 | % |

 

# **NET REVENUES**

 
| ** **                        | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                        | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change**                                       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
| ** **                        | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total net revenues (in thousands) |       | $                                                  | 64,027     |       | $          | 52,376                                           |       | $          | 11,651     |   | $ | 125,500 |   | $ | 100,355 |   | $ | 25,145 |   |
|                                   |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

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Our netrevenues are made up of three components: term license, maintenance and otherrecurring revenue; perpetual license fees; and professional services and otherrevenue. Term license fees include both the software license fees and maintenancefees recorded under a time based contract. Maintenancerevenues are derived from maintenance fees charged for perpetual licensearrangements and recurring revenues are derived from our subscription-based ortransaction-based services.Perpetuallicense revenues are derived from the licensing of software products under aperpetual arrangement. Professionalservices and other revenues include fees for consulting, training services, andservices and our client conferences. Sales returns, which we generally donot provide to customers, are accounted for as deductions to these threerevenue categories based on our historical experience.

 

Each of the major revenue categories has historically varied as apercentage of net revenues, and we expect this variability to continue to alesser extent in the near term. This variability is primarily due to theintroduction of new products and subscription services, the relative size andtiming of individual perpetual software license sales, as well as the size andtiming of completion of term license implementations. As we continue totransition the substantial majority of our license agreements to term, grow oursubscription, data management and outsourced services revenues, and ourcustomers renew their perpetual maintenance, we expect our revenue fromrecurring sources to continue to increase as a percentage of net revenues. Whenthe transition to term is substantially complete, we expect less variabilitybetween our major categories of revenues because the variation from largeperpetual license deals will decrease.

 

Netrevenues increased in the first half of 2008 due to growing informationtechnology spending by our customers, as well as a general increase in customeradoption for many of our products and services, which principally includes increasesin sales of our APX and Geneva products. The year-over-year growth in total netrevenues for the three and six months ended June 30, 2008 was dueprincipally to substantially higher term license, maintenance and otherrecurring revenues, which reflected 49% and 72% growth, respectively, in termlicense revenues over the three and six month comparative periods, as well as a53% increase in revenue from international sales in the second quarter of 2008.

 

Internationalsales, which are based on the location to which the product is shipped,contributed to our growth in 2008 and were $9.2 million and $6.0 million in thesecond quarter of 2008 and 2007, respectively. We plan to continue expandingour international sales efforts, both in our current markets and elsewhere. Therevenues from customers in any single international country did not exceed 10%of total net revenues.

 

We expect total net revenues for the third quarter of 2008 to bebetween $64 million and $66 million.

 

***Term License, Maintenance and Other RecurringRevenues***

 
| **(in thousands, except percent of**      | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| **total net revenues)**                             | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change**                                       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                                          |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Term license revenues                                         |       | $                                                  | 15,078     |       | $          | 10,121                                           |       | $          | 4,957      |   | $ | 29,449 |   | $ | 17,133 |   | $ | 12,316 |   |
| Maintenance revenues                                          |       | 22,892                                             |       | 21,274     |       | 1,618                                            |       | 45,391     |       | 41,778 |   | 3,613 |   |
| Other recurring revenues                                      |       | 12,868                                             |       | 10,617     |       | 2,251                                            |       | 25,137     |       | 20,825 |   | 4,312 |   |
| Total term license, maintenance and other recurring  revenues |       | $                                                  | 50,838     |       | $          | 42,012                                           |       | $          | 8,826      |   | $ | 99,977 |   | $ | 79,736 |   | $ | 20,241 |   |
| Percent of total net revenues                                 |       | 79                                                 | %          | 80         | %          |                                             |       | 80         | %          | 79 | % |   |   |

 

Term license revenues, which include software license and maintenancefees for term licenses, grew $5.0 million or 49% during the second quarter of2008 compared to the same quarter in 2007, and represented 30% of total termlicense, maintenance and other recurring revenues as compared to 24% in thesecond quarter of 2007. We began our transition to a term licensing model in2004 and have experienced growth in our term license bookings since that time.The growth of term license revenues in the second quarter of 2008 has primarilyresulted from term licenses which have been implemented since the secondquarter of 2007.  For example, we signedterm contracts, including APX product migrations, worth $91.1 million during2007. With an average weighted term of 3.3 years, the contracts signed in 2007will add approximately $27.6 million in annual revenue once they are fullyimplemented.  The increase in termlicense revenue reflects the continued market acceptance of our Geneva, APX,Partner and Moxy products.

 

Maintenance revenues increased $1.6 million and $3.6 million during thethree and six months ended June 30, 2008, respectively compared to thesame periods of 2007. This increase was attributable to the impact of priceincreases on annual perpetual maintenance renewals purchased by our installedcustomer base, up-selling to higher value maintenance plans and, to a lesserextent, an increase in new perpetual maintenance support contracts, partiallyoffset by attrition from within our existing installed customer base.Effective with the third quarterof 2007, we disclose a blended renewal rate that includes both perpetualmaintenance and term contracts but excludes the Axys clients that are migratingto APX from the calculation. We disclose our renewal rate one quarter inarrears in order to include substantially all payments received against theinvoices for 

 

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thatquarter. Our renewal rate was 92% for the first quarter of 2008, and has beenin the range of 90% to 94% over the past seven quarters.

 

Other recurring revenues increased $2.3 million and $4.3 million duringthe three and six months ended June 30, 2008, respectively, compared tothe same periods of 2007. This was primarily due to revenue increasesassociated with growth in our subscription, data management and outsourcedservices of $1.6 million and $2.9 million during the three and six months endedJune 30, 2008, respectively, and higher transaction charges generated byour partners of $0.7 million and $1.4 million.

 

We expect that term license, maintenance and other recurring revenueswill increase in the third quarter of 2008 compared to the second quarter, dueprincipally to term license revenue from term contracts sold in prior periodsbecoming fully implemented.

 

***Perpetual License Fees***

 
| ** **                            | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change**                                       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
| ** **                            | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Perpetual license fees (in thousands) |       | $                                                  | 5,242      |       | $          | 5,689                                            |       | $          | (447       | ) | $ | 10,867 |   | $ | 11,616 |   | $ | (749 | ) |
| Percent of total net revenues         |       | 8                                                  | %          | 11         | %          |                                             |       | 9          | %          | 12 | % |   |   |
|                                       |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Perpetual license fees decreased 8% and 6% during the three and sixmonths ended June 30, 2008, respectively. As a percentage of total netrevenues, perpetual license fees decreased to 8% in the second quarter of 2008from 11% in the same period of 2007. Consistent with our transition to termlicensing, perpetual license fees continue to account for a smaller percentageof total net revenues. Incremental AUA fees from perpetual licenses included inthe “Perpetual license fees” caption were $1.4 million and $3.4 million for thethree and six months ended June 30, 2008, respectively, and were flat ascompared to the same periods in 2007.

 

***Professional Services and Other Revenues***

 
| ** **                                               | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                               | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change**                                       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
| Professional services and other revenues (in  thousands) |       | $                                                  | 7,947      |       | $          | 4,675                                            |       | $          | 3,272      |   | $ | 14,656 |   | $ | 9,003 |   | $ | 5,653 |   |
| Percent of total net revenues                            |       | 12                                                 | %          | 9          | %          |                                             |       | 12         | %          | 9 | % |   |   |
|                                                          |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Professional services and other revenues primarily include consultingservices (which generally also includes project management, custom integration,data conversion and training services) and reimbursable travel. Professionalservices projects related to Axys, Moxy and Partner products generally can becompleted in a two- to six-month time period, while services related to Genevaand APX products may require a four- to nine-month implementation period.

 

Professional services and other revenues increased in the comparativeperiods due to the following (in thousands):

 
| ** **                            | ** ** | **Change From**       | ** ** | **Change From**       | ** ** |
|---------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                            | ** ** | **2007 to 2008** | ** ** | **2007 to 2008** | ** ** |
| ** **                            | ** ** | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                  |       |                       |       |                       |       |
| Increased consulting services         |       | $                          | 2,804      |                       | $          | 4,977 |   |
| Increased reimbursable travel revenue |       | 392                        |       | 674                        |       |
| Various other items                   |       | 76                         |       | 2                          |       |
|                                  |       |                       |       |                       |       |
| Total change                          |       | $                          | 3,272      |                       | $          | 5,653 |   |

 

Professional services increased 70% and 63% during the three and sixmonths ended June 30, 2008, respectively, as compared to the comparableperiods of 2007, primarily reflecting growth in our consulting revenues fromincreased revenue generating professional services headcount and third partyservice providers.

 

When services are performed with term license implementations, servicerevenue is deferred until the implementation services are substantially complete.Upon completion, service revenues are recognized over the remaining licenseterm. We have experienced an increase in implementation services after thelaunch of our APX product and the sales success of our Geneva product.

 

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***Revenues by Segment***

 
| ** **                   | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| **(in thousands)**      | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change**                                       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                         |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Advent Investment Management |       | $                                                  | 57,979     |       | $          | 46,545                                           |       | $          | 11,434     |   | $ | 113,243 |   | $ | 89,100 |   | $ | 24,143 |   |
| MicroEdge                    |       | 6,048                                              |       | 5,831      |       | 217                                              |       | 12,257     |       | 11,255 |   | 1,002 |   |
|                         |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Total net revenues           |       | $                                                  | 64,027     |       | $          | 52,376                                           |       | $          | 11,651     |   | $ | 125,500 |   | $ | 100,355 |   | $ | 25,145 |   |

 

We have two reportable segments: Advent Investment Management (“AIM”)and MicroEdge. AIM derives revenues from the development, marketing and sale ofsoftware products, data interfaces and related maintenance and services thatautomate, integrate and 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 grant-making community.

 

The 25% and 27% increase in AIM’s revenue in the three and six monthsended June 30, 2008 was due principally to increased term license,maintenance and other recurring revenues, reflecting the continued marketacceptance of Axys, APX, Moxy, Partner and Geneva products as well as increasedinternational sales. AIM’s revenue increases during the first half of2008 also reflected an increase in new perpetual maintenance support contractsas a result of price increases for maintenance contracts from our installedcustomer base, up-selling existing customers to higher value maintenance plansand new perpetual license deals, partially offset by attrition from within ourexisting installed customer base. International sales were $9.2 million or 14%of total revenues in the second quarter of 2008, representing an increase of$3.2 million or 53%, from $6.0 million or 11% of total revenues in the secondquarter of 2007.

 

The4% and 9% increase in MicroEdge revenue during the three and six months endedJune 30, 2008 primarily reflected an increase in perpetual license salesin MicroEdge’s core product Gifts and to a lesser extent maintenance revenuesdue to price increases and continued strong customer retention. The technologyspending patterns of organizations in MicroEdge’s primary markets (independentfoundations, community foundations and corporations) are directly affected byeconomic fluctuations as foundation budgets are largely driven by endowmentincome. Given that endowments often contain market-exposed components, they aresignificantly affected by the economy and foundation spending typicallydecreases in an economic downturn. Community foundations are subject to similarinfluences, compounded by the fact that in many cases much of their ongoingfunding and endowment comes from active donors who may increase or reduce theirgiving depending on the economic climate and the related effect on their incomeand wealth. Corporations typically fund charitable activities from operatingbudgets, and the allocation to charitable donations and supporting companycharitable operations is often closely tied to a company’s performance. Thus,corporate philanthropy and spending on related technology are correlated withcompany and overall economic performance.

 

### **COST OFREVENUES**

###  

| ** **                            | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change**                                       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
| ** **                            | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total cost of revenues (in thousands) |       | $                                                  | 20,854     |       | $          | 16,004                                           |       | $          | 4,850      |   | $ | 40,553 |   | $ | 31,468 |   | $ | 9,085 |   |
| Percent of total net revenues         |       | 33                                                 | %          | 31         | %          |                                             |       | 32         | %          | 31 | % |   |   |
|                                       |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Our cost of revenues is made up of four components: cost of termlicense, maintenance and other recurring; cost of perpetual license fees; costof professional services and other; and amortization of developed technology.The increase in total cost of revenues in absolute dollars was due principallyto new hires in our client support and services groups to support ourincreased new term license bookings and associated increase in clientimplementation projects. The decrease in gross margin percentage during thethree and six months ended June 30, 2008 resulted principally from ourshift in revenue mix. Professional services and other revenue comprised agreater percentage of total revenues during the three and six months endedJune 30, 2008 due to growth of 70% and 63%, respectively.  We are currently experiencing negative grossmargins on professional services revenues.

 

***Cost of Term License, Maintenance and OtherRecurring***

 
| ** **                                                              | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                                              | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change**                                       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
| Cost of term license, maintenance and other  recurring (in thousands)   |       | $                                                  | 11,379     |       | $          | 9,048                                            |       | $          | 2,331      |   | $ | 22,313 |   | $ | 18,080 |   | $ | 4,233 |   |
| Percent of total term license, maintenance and  other recurring revenue |       | 22                                                 | %          | 22         | %          |                                             |       | 22         | %          | 23 | % |   |   |
|                                                                         |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Cost of term license fees consists primarily of royalties and otherfees paid to third parties, the fixed direct labor involved in producing anddistributing our software, and cost of product media including duplication,manuals and packaging 

 

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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.

 

Cost of term license, maintenance and other recurring fluctuated due tothe following (in thousands):

 
| ** **                          | ** ** | **Change From**       | ** ** | **Change From**       | ** ** |
|-------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **2007 to 2008** | ** ** | **2007 to 2008** | ** ** |
| ** **                          | ** ** | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                |       |                       |       |                       |       |
| Increased payroll and related costs |       | $                          | 1,464      |                       | $          | 2,630 |   |
| Increased royalty                   |       | 333                        |       | 413                        |       |
| Increased outside services          |       | 147                        |       | 273                        |       |
| Various other items                 |       | 387                        |       | 917                        |       |
|                                |       |                       |       |                       |       |
| Total change                        |       | $                          | 2,331      |                       | $          | 4,233 |   |

 

The increases for the three and six months ended June 30, 2008were due primarily to an increase in compensation and related costs resultingfrom increases in salary costs and headcount which enables us to deliver theservices we provide to our growing number of clients in their day-to-day use ofour software.

 

We expect cost of term license, maintenance and other recurring revenuein the third quarter of 2008 to increase slightly in dollar amount as comparedto the second quarter due to continued hiring of personnel to provide technicalsupport to our growing installed base of customers.

 

***Cost of Perpetual License Fees***

 
| ** **                                     | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                     | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change**                                       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                           |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Cost of perpetual license fees (in  thousands) |       | $                                                  | 224        |       | $          | 219                                              |       | $          | 5          |   | $ | 541 |   | $ | 414 |   | $ | 127 |   |
| Percent of total perpetual license revenues    |       | 4                                                  | %          | 4          | %          |                                             |       | 5          | %          | 4 | % |   |   |
|                                                |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Cost of perpetual license fees consists primarily of royalties andother fees paid to third parties, the fixed direct labor involved in producingand distributing our software, and cost of product media including duplication,manuals and packaging materials. The cost of perpetual license fees for the sixmonths ended June 30, 2008 has increased by $0.1 million compared with thesame period in 2007 primarily due to additional product and demo costs.

 

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

 
| ** **                                                 | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                                 | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change**                                       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
| Cost of professional services and other (in  thousands)    |       | $                                                  | 8,519      |       | $          | 6,415                                            |       | $          | 2,104      |   | $ | 16,245 |   | $ | 12,288 |   | $ | 3,957 |   |
| Percent of total professional services and other  revenues |       | 107                                                | %          | 137        | %          |                                             |       | 111        | %          | 136 | % |   |   |
|                                                            |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

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

 

Cost of professional services and other increased in dollar amount dueto the following (in thousands):

 
| ** **                          | ** ** | **Change From**       | ** ** | **Change From**       | ** ** |
|-------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **2007 to 2008** | ** ** | **2007 to 2008** | ** ** |
| ** **                          | ** ** | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                |       |                       |       |                       |       |
| Increased payroll and related costs |       | $                          | 1,120      |                       | $          | 2,841 |   |
| Increased travel and entertainment  |       | 390                        |       | 538                        |       |
| Increased outside services          |       | 359                        |       | 556                        |       |
| Various other items                 |       | 235                        |       | 22                         |       |
|                                |       |                       |       |                       |       |
| Total change                        |       | $                          | 2,104      |                       | $          | 3,957 |   |

 

The increase during the three and six months ended June 30, 2008reflects increases in payroll related expenses, and to a lesser extent outsideservices and travel expenses, to address the general increase in demand forconsulting and training services as a result of higher license sales. As aresult of the increase in our license transactions and customer base, we haveincreased headcount in our consulting groups to 145 at June 30, 2008 from121 at June 30, 2007.

 

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We have experienced an increase in implementation services with thelaunch of our APX product and sales of our Geneva product, which are both soldunder the term license model. As there were similar levels of term licenseimplementation projects, primarily Geneva-related, in progress as ofJune 30, 2008 compared to June 30, 2007, our deferral of professionalservice costs has been consistent in 2008. We deferred net professional servicecosts of $940,000 and $1.8 million during the three and six months endedJune 30, 2008, compared to $951,000 and $1.7 million in the comparableperiods of 2007.

 

Professional services’ gross margins for the 2008 periods improved but continueto be negative as a result of the significant deferral of professional servicesrevenues and costs associated with our term license implementation. We deferonly the direct costs associated with services performed on these arrangements.Indirect costs such as management and other overhead expenses are recognized inthe period in which they are incurred, with no revenue to offset them. As thedeferred professional services revenue and expense associated with our termlicenses continue to flow back into our operating results, we believe themargin will continue to improve over time. In addition, we have added headcountin our consulting group. Since these new employees undergo a training period,typically of six months, before becoming fully billable, their associated costshave a near-term negative impact on gross margins.

 

***Amortization of Developed Technology***

 
| ** **                                          | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                          | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change**                                       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
| Amortization of developed techology (in  thousands) |       | $                                                  | 732        |       | $          | 322                                              |       | $          | 410        |   | $ | 1,454 |   | $ | 686 |   | $ | 768 |   |
| Percent of total net revenues                       |       | 1                                                  | %          | 1          | %          |                                             |       | 1          | %          | 1 | % |   |   |
|                                                     |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Amortization of developed technology represents amortization ofacquisition-related intangible assets and capitalized software developmentcosts. The increase in amortization of developed technology reflected increasedamortization from software development costs previously capitalized under SFAS86 and amortization from technology-related intangible assets associated withVivid Orange Limited which our MicroEdge segment acquired inNovember 2007.

 

### **OPERATINGEXPENSES**

### ** **

***Sales and Marketing***

 
| ** **                         | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change**                                       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
| ** **                         | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales and marketing (in thousands) |       | $                                                  | 15,626     |       | $          | 13,985                                           |       | $          | 1,641      |   | $ | 31,016 |   | $ | 26,874 |   | $ | 4,142 |   |
| Percent of total net revenues      |       | 24                                                 | %          | 27         | %          |                                             |       | 25         | %          | 27 | % |   |   |
|                                    |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Sales and marketing expenses consist primarily of the costs ofpersonnel involved in the sales and marketing process, sales commissions,advertising and promotional materials, sales facilities expense, trade shows,and seminars.

 

Sales and marketing expenses increased in dollar amount due to thefollowing (in thousands):

 
| ** **                          | ** ** | **Change From**       | ** ** | **Change From**       | ** ** |
|-------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **2007 to 2008** | ** ** | **2007 to 2008** | ** ** |
| ** **                          | ** ** | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                |       |                       |       |                       |       |
| Increased payroll and related costs |       | $                          | 1,106      |                       | $          | 2,456 |   |
| Increased bad debt                  |       | 315                        |       | 431                        |       |
| Increased travel and entertainment  |       | 276                        |       | 854                        |       |
| Various other items                 |       | (56                        | )          | 401                        |       |
|                                |       |                       |       |                       |       |
| Total change                        |       | $                          | 1,641      |                       | $          | 4,142 |   |
|                                     |            |                            |            |                            |            |  |  |  |  |

 

The increase in expense in absolute dollars for the three and sixmonths ended June 30, 2008 reflected the growth of our business, while thedecrease of expense as a percentage of revenue during 2008 reflected ourachievement of efficiencies of scale associated with increased revenue growth.The increase in payroll and related expense was due to an increase in headcountto 189 at June 30, 2008 from 168 at June 30, 2007. During the firsthalf of 2008, we referred more accounts to collections which resulted in our increasedprovision for bad debt in the 2008 periods compared to 2007. The increase intravel and entertainment costs resulted from increased travel volume, priceincreases in travel and additional costs from our sales group’s offsitemeetings and annual sales recognition event in the first half of 2008.

 

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We expect sales and marketing expenses to be up in the third quarter of2008 relative to the second quarter due to increased marketing spending topublicize our annual Advent client conference, travel, and payroll costs fromadditional headcount.

 

***Product Development***

 
| ** **                         | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change**                                       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                               |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Product development (in thousands) |       | $                                                  | 13,008     |       | $          | 10,816                                           |       | $          | 2,192      |   | $ | 25,898 |   | $ | 20,672 |   | $ | 5,226 |   |
| Percent of total net revenues      |       | 20                                                 | %          | 21         | %          |                                             |       | 21         | %          | 21 | % |   |   |
|                                    |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Product development expenses consist primarily of salary and benefitsfor our development staff as well as contractors’ fees and other costsassociated with the enhancements of existing products and services anddevelopment of new products and services. We account for productdevelopment costs in accordance with SFAS 2, “Accounting for Research andDevelopment Costs”, and SFAS 86, “Accounting for Costs of Computer Software tobe Sold, Leased, or Otherwise Marketed”, which specifies that costs incurred todevelop computer software products should be charged to expense as incurreduntil technological feasibility is reached for the products. Once technologicalfeasibility is reached, all software costs should be capitalized until theproduct is made available for general release to customers. The capitalizedcosts will be amortized using the greater of the ratio of the product’s currentgross revenues to the total of current expected gross revenues or on astraight-line basis over the software’s estimated economic life of approximatelythree years.

 

Product development expenses increased in dollars due to the following(in thousands):

 
| ** **                          | ** ** | **Change From**       | ** ** | **Change From**       | ** ** |
|-------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **2007 to 2008** | ** ** | **2007 to 2008** | ** ** |
| ** **                          | ** ** | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                |       |                       |       |                       |       |
| Increased payroll and related costs |       | $                          | 1,993      |                       | $          | 3,801 |   |
| Increased outside services          |       | 288                        |       | 1,224                      |       |
| Various other items                 |       | (89                        | )          | 201                        |       |
|                                |       |                       |       |                       |       |
| Total change                        |       | $                          | 2,192      |                       | $          | 5,226 |   |
|                                     |            |                            |            |                            |            |  |  |  |  |

 

Theincrease in product development expense during the three and six months endedJune 30, 2008 was primarily due to increases in payroll related costs asa result of an increase in headcount and utilization of outside services tohelp us continue to enhance our existing product suite including new versionsof Geneva, APX, Moxy, Advent Partner and Advent Revenue Center. We invested 21%of our revenues in product development during the first half of 2008.

 

***General and Administrative***

 
| ** **                                | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change**                                       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
| ** **                                | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and administrative (in thousands) |       | $                                                  | 9,232      |       | $          | 7,837                                            |       | $          | 1,395      |   | $ | 18,459 |   | $ | 16,621 |   | $ | 1,838 |   |
| Percent of total net revenues             |       | 14                                                 | %          | 15         | %          |                                             |       | 15         | %          | 17 | % |   |   |
|                                           |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

General and administrative expenses consist primarily of personnelcosts for information technology, finance, administration, operations andgeneral management, as well as legal and accounting expenses.

 

General and administrative expenses increased in dollars due to thefollowing (in thousands):

 
| ** **                          | ** ** | **Change From**       | ** ** | **Change From**       | ** ** |
|-------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **2007 to 2008** | ** ** | **2007 to 2008** | ** ** |
| ** **                          | ** ** | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                |       |                       |       |                       |       |
| Increased payroll and related costs |       | $                          | 940        |                       | $          | 1,476 |   |
| Increased legal and professional    |       | 688                        |       | 534                        |       |
| Decreased recruiting                |       | (230                       | )          | (199                       | )          |
| Various other items                 |       | (3                         | )          | 27                         |       |
|                                |       |                       |       |                       |       |
| Total change                        |       | $                          | 1,395      |                       | $          | 1,838 |   |

 

The increase in expenses during the three and six months endedJune 30, 2008 is primarily due to the increases in payroll andother related costs as a result of an increase in headcount. Additionally, legal and professionalfees were higher due to San Francisco business taxes and increased servicesprovided by Sarbanes-Oxley compliance consultants, and external legal

 

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and accounting firms. These costs increases were partiallyoffset by lower recruiting fees from a lower volume of externalrecruiting activities.  As a percentageof revenue, the decreases in general and administrative expense during thethree and six months ended June 30, 2008 from the comparable periods of2007 reflects our achievement of efficiencies of scale associated with revenuegrowth.

 

We expect general and administrative expenses to be up slightly in thethird quarter of 2008, while remaining flat as a percentage of revenue, due tohigher facilities and depreciation costs compared to the second quarter.

 

***Amortization of Other Intangibles***

 
| ** **                                        | ** ** | **Three Months Ended June 30** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|------------|------------|--------------------------------------------------|------------|------------|
| ** **                                        | ** ** | **2008**                                           | ** ** | **2007**   | ** **                                       | **Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **Change** | ** ** |
| Amortization of other intangibles (in  thousands) |       | $                                                  | 242        |       | $                                                | 466        |       | $ | (224 | ) | $ | 729 |   | $ | 940 |   | $ | (211 | ) |
| Percent of total net revenues                     |       | 0                                                  | %          | 1          | %                                                |       |       | 1 | % | 1 | % |   |   |
|                                                   |            |                                                    |            |            |                                                  |            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Amortization of other intangibles represents amortization ofnon-technology related intangible assets. The decrease during 2008 reflected assetsfrom prior acquisitions becoming fully amortized during 2007 and first half of2008, partially offset by additional amortization from non-technology relatedintangible assets associated with Vivid Orange Limited which our MicroEdgesegment acquired in November 2007.

 

***Restructuring Charges (Benefit)***

 
| ** **                                      | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                      | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change**                                       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                            |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Restructuring charges (benefit) (in  thousands) |       | $                                                  | (1         | )          | $          | 227                                              |       | $          | (228       | ) | $ | 55 |   | $ | 789 |   | $ | (734 | ) |
| Percent of total net revenues                   |       | 0                                                  | %          | 0          | %          |                                             |       | 0          | %          | 1 | % |   |   |
|                                                 |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

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 on marketconditions.

 

##### ***During the second quarter of 2008, we recorded a restructuring benefitof $1,000 which related to adjustments to our facility exit assumptionspartially offset by the present value amortization of facility exitobligations. During the first quarter of 2008, we recorded a restructuringcharge of $56,000 which related to the present value amortization of facilityexit obligations.***

##### *** ***

##### ***During the second quarter of 2007, we recorded a restructuring chargeof $227,000 due to the update of certain sub-lease assumptions for our priorSan Francisco headquarters facility located at 301 Brannan Street, which theCompany exited in October 2006. During the first quarter of 2007, werecorded a restructuring charge of $562,000 due to the update of certainsub-lease assumptions for our prior San Francisco headquarters facility locatedat 301 Brannan Street, which the Company exited in October 2006.***

##### *** ***

For additional analysis of the components of the payments and chargesmade against the restructuring accrual during the first half of 2008, see Note9, “Restructuring Charges” to our condensed consolidated financial statements.

 

***Income from Operations by Segment***

 
| ** **                                                                              | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| **(in thousands)**                                                                 | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change**                                       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                                                                    |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Advent Investment Management                                                            |       | $                                                  | 9,290      |       | $          | 5,647                                            |       | $          | 3,643      |   | $ | 17,226 |   | $ | 8,507 |   | $ | 8,719 |   |
| MicroEdge                                                                               |       | 611                                                |       | 1,764      |       | (1,153                                           | )          | 999        |       | 2,938 |   | (1,939 | ) |
| Unallocated corporate operating costs and  expenses:  Stock-based employee compensation |       | (3,861                                             | )          | (3,582     | )          | (279                                             | )          | (7,252     | )          | (6,828 | ) | (424 | ) |
| Amortization of developed technology                                                    |       | (732                                               | )          | (322       | )          | (410                                             | )          | (1,454     | )          | (686 | ) | (768 | ) |
| Amortization of other intangibles                                                       |       | (242                                               | )          | (466       | )          | 224                                              |       | (729       | )          | (940 | ) | 211 |   |
|                                                                                    |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Total income from operations                                                            |       | $                                                  | 5,066      |       | $          | 3,041                                            |       | $          | 2,025      |   | $ | 8,790 |   | $ | 2,991 |   | $ | 5,799 |   |

 

Income from operations for the AIM segment increased by approximately$3.6 million in the second quarter of 2008 compared with the second quarter of2007 primarily as a result of an increase in AIM revenue of $11.4 million or25%, reflecting

 

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increased efficiencies of scale as our total expenses increased by $7.8million or 19% primarily due to payroll and other related costs fromhigher headcount of 885 employees at June 30, 2008 from 771 atJune 30, 2007, as the AIM segment has added personnel primarily in theclient support, product development, professional services and sales andmarketing groups.

 

MicroEdge’s income from operations decreased by $1.2 million and $1.9million during the three and six months ended June 30, 2008, as comparedto comparable periods of 2007, primarily due to an increase in total costs of$1.4 million and $2.9 million. This increase primarily resulted from theinvestment in our MicroEdge segment reflected by higher payroll and relatedcosts as MicroEdge added more headcount from the acquisition of Vivid OrangeLimited in December 2007 and used contractors to support its developmentof its SmartChange product. The increase in MicroEdge’s costs was partiallyoffset by revenue growth of $0.2 million and $1.0 million during the three andsix months ended June 30, 2008.

 

### ***Interestand Other Income, Net***

 
| ** **                                     | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                     | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change**                                       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
| Interest and other income, net (in  thousands) |       | $                                                  | 3,559      |       | $          | 3,868                                            |       | $          | (309       | ) | $ | 3,786 |   | $ | 4,386 |   | $ | (600 | ) |
| Percent of total net revenues                  |       | 6                                                  | %          | 7          | %          |                                             |       | 3          | %          | 4 | % |   |   |
|                                                |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Interest and other income, net consists of interest expense and income,realized gains and losses on investments and foreign currency gains and losses.

 

Interest and other income, net decreased in dollars due to thefollowing (in thousands):

 
| ** **                                              | ** ** | **Change From**       | ** ** | **Change From**       | ** ** |
|---------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                              | ** ** | **2007 to 2008** | ** ** | **2007 to 2008** | ** ** |
| ** **                                              | ** ** | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                                    |       |                       |       |                       |       |
| Decreased gain on sale of private equity  investments   |       | $                          | (854       | )                          | $          | (854 | ) |
| Decreased impairment loss of private equity  investment |       | 585                        |       | 585                        |       |
| Decreased interest income                               |       | (179                       | )          | (376                       | )          |
| Decreased interest expense                              |       | 121                        |       | 55                         |       |
| Various other items                                     |       | 18                         |       | (10                        | )          |
|                                                    |       |                       |       |                       |       |
| Total change                                            |       | $                          | (309       | )                          | $          | (600 | ) |

 

InApril 2008, we received the initial deferred contingent payment of $3.4million as a result of the Company’s sale of its ownership in LatentZeroLimited (“LatentZero”) to royalblue group plc. in April 2007.

 

During the second quarter of 2007, interest income and other incomeincluded an aggregate gain of $4.2 million from the sale of two private equityinvestments, including our investment in LatentZero. Also, in the secondquarter of 2007, we recognized an impairment loss of $585,000 associated withone of our other private equity investment.

 

Despite our higher average cash and cash equivalent balance during 2008compared to 2007, the decreases in interest income for the three and six monthsended June 30, 2008 were attributable to declining market interest ratesduring 2008.

 

Interest expense decreased during the three and six months endedJune 30, 2008 as we had a no debt outstanding during the first half of2008 whereas we had drawn down $25.0 million on our credit facility inJune 2007 resulting in higher interest expense during the comparableperiods of 2007.

 

### ***Provision for Income Taxes***

 
| ** **                                | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **Change**                                       | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
| Provision for income taxes (in thousands) |       | $                                                  | 1,270      |       | $          | 1,814                                            |       | $          | (544       | ) | $ | 2,586 |   | $ | 1,843 |   | $ | 743 |   |
| Effective tax rate                        |       | 15                                                 | %          | 26         | %          |                                             |       | 21         | %          | 25 | % |   |   |
|                                           |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Duringthe three months ended June 30, 2008, we recorded a provision of $1.3million resulting in a 15% effective tax rate for the second quarter of2008.  During the second quarter of 2007, we recorded a provision of $1.8million reflecting a 26% effective tax rate. The decrease in effective tax rateover the prior year period primarily reflects the recognition of a significantamount of California enterprise zone credits finalized during the secondquarter of 2008.

 

Duringthe six months ended June 30, 2008, we recorded a provision of $2.6million resulting in a year-to-date effective tax rate of 21%. The increase inincome tax expense resulted from an increase in profit before income taxesoffset by

 

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thedecrease in the effective tax rate over the prior year period. The decrease ineffective income tax rate over the prior year period is primarily attributed tothe recognition of a significant amount of California enterprise zone creditsfinalized during the period.

 

Wecurrently expect an annual effective tax rate for 2008 between 30% and 35%. Ourexpectation is based on a projected fiscal 2008 effective tax rate of 44%,adjusted for discrete tax benefits for tax deductions due to disqualifyingdispositions of incentive stock options and employee stock purchase planshares, the release of valuation allowance relating to capital loss carryforwardsdue to the realization of capital gains and the recognition of Californiaenterprise zone credits.

 

### **LIQUIDITY AND CAPITAL RESOURCES**

 

Our aggregate cash and cash equivalents were $82.4 million atJune 30, 2008, compared with $49.6 million at December 31, 2007. 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, provides selected cash flowinformation (in thousands):

 
| ** **                                           | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                                                 |       |                                             |       |   |   |
| Net cash provided by operating activities            |       | $                                                | 35,039     |   | $ | 25,792 |   |
| Net cash provided by (used in) investing  activities |       | $                                                | (7,052     | ) | $ | 29,310 |   |
| Net cash provided by (used in) financing  activities |       | $                                                | 4,545      |   | $ | (51,287 | ) |

 

***Cash Flows from Operating Activities***

 

Our cash flows from operating activities represent the most significantsource of funding for our operations. The major uses of our operating cashinclude funding 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 $35.0 million during thesix months ended June 30, 2008 was primarily the result of our net income andnon-cash charges including stock-based compensation and depreciation andamortization, partially offset by a gain from our equity investment activityduring the six months. Cash flows resulting from changes in assets andliabilities included decreases in accounts receivable and increases in deferredrevenue and accounts payable. The decrease in accounts receivable primarilyreflected collections during the first half of 2008. Days’ sales outstandingbased on billings were 63 and 52 days during the first and second quarters of2008, respectively, compared to 59 and 62 days in the first and second quartersof 2007. The increase in deferred revenue primarily reflected our continuedtransition to the term license model. Under the term model, we generally billand collect for a term agreement in equal installments in advance of eachannual period. These amounts are deferred at billing and recognized over theannual term period. This has the effect of increasing deferred revenue whencompared to a perpetual license model where no license revenue is deferred. Seefurther discussion of the effects of our transition to a term model in the“Overview” section. Other changes in assets and liabilities included anincrease in our prepaid and other assets and decreases in accrued liabilities.The decrease in accrued liabilities reflected cash payments of fiscal 2007liabilities including year-end payables and bonuses, commissions and payrolltaxes.

 

Ourcash provided by operating activities of $25.8 million during the six monthsended June 30, 2007 was primarily the result of our net income andnon-cash charges including stock-based compensation and depreciation andamortization during the six months ended June 30, 2007, partially offsetby a net gain from equity investment activity. Cash flows resulting fromchanges in assets and liabilities included decreases in accounts receivable andincreases in deferred revenue. The decrease in accounts receivable primarilyreflected improved collections during the first half of 2007. Days’ salesoutstanding decreased to 67 days during the first half of 2007 from 75 days inthe fourth quarter of 2006. The increase in deferred revenue primarilyreflected our continued transition to the term license model. Other changes inassets and liabilities included an increase in our income taxes payables andprepaid and other assets and decreases in accounts payable and accruedliabilities. The decreases in accounts payable and accrued liabilitiesreflected cash payments of fiscal 2006 liabilities including year-end payablesand bonuses, commissions and payroll taxes.

 

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We expect that cash provided by operating activities may fluctuate infuture periods as a result of a number of factors including fluctuations in ournet revenues and operating results, the amount of revenue deferred resultingfrom our shift to a term license model, collection of accounts receivable, andtiming of payments to vendors and employees.

 

***Cash Flows from Investing Activities***

 

Net cash used in investing activities of $7.1 million for the sixmonths ended June 30, 2008 reflects capital expenditures of $9.8 millionprimarily related to the build-out of additional space at our San Franciscoheadquarters facility, capitalized software development costs of $0.4 millionand change in restricted cash of $0.2 million, partially offset by the receiptof $3.4 million for the initial deferred contingent consideration of our saleof our ownership in LatentZero.

 

Netcash provided by investing activities of $29.3 million for the six months endedJune 30, 2007 is primarily from the proceeds of $24.9 million from thesale of short term investments and from the proceeds of $11.6 million from thesale of two private equity investments, including our stake in LatentZeroLimited. This was partially offset by capital expenditures of $5.3 million,capitalized software development costs of $0.5 million and an installmentpayment totaling $1.0 million related to the acquisition of East CircleSolutions, Inc. In addition, restricted cash increased by $0.4 millionassociated with amendments to the lease agreement with TodaDevelopment, Inc. (“Toda”) to increase our rentable square footage at ourheadquarter facility located at 600 Townsend Street in San Francisco,California. In the event that we default under the terms of this leaseagreement, the letter of credit may be drawn upon by Toda.

 

***Cash Flows from Financing Activities***

 

Net cash provided by financing activities of $4.5 million for the sixmonths ended June 30, 2008 reflected proceeds of $2.6 million from theissuance of common stock under the employee stock purchase plan and $2.0million received from the exercise of employee stock options, net of taxes paidassociated with the exercise of stock-settled stock appreciation rights andvesting of restricted stock units. Net cash used in financing activitiesfor the six months ended June 30, 2007 of $51.3 million reflected therepurchase of 2.6 million shares of our common stock for $91.2 million. Thiswas partially offset by a draw-down of $25.0 million against our creditfacility and proceeds received from the issuance of common stock of $14.9million.

 

Our liquidity and capital resources in any period could be affected bythe exercise of outstanding stock options and issuance of common stock underour employee stock purchase plan. The resulting increase in the numberof outstanding shares from this and from the issuance of common stock from ourother outstanding equity awards (RSUs and SARs) could also affect our per shareresults of operations. However, we cannot predict the timing or amount ofproceeds from the exercise of stock options or SARs, or whether they will beexercised at all.

 

At June 30, 2008, we had negative working capital of $(4.4)million, compared to negative working capital of $(23.2) million atDecember 31, 2007. Our negative working capital is primarily due to ourcommon stock repurchases, totaling $91.2 million and $148.6 million duringfiscal 2007 and 2006, respectively, and to a lesser extent deferred revenuegrowth as we continue to transition the substantial majority of our licenseagreements to term. Excluding deferred revenues and deferred taxes, we hadworking capital of $109.6 million at June 30, 2008, compared to $81.9million at December 31, 2007.

 

InFebruary 2007, Advent Software, Inc. and certain of our domesticsubsidiaries entered into a senior secured credit facility agreement (the“Credit Facility”) with Wells Fargo Foothill, Inc. (the “Lender”). Underthe Credit Facility, the Lender will provide the Company with a revolving lineof credit up to an aggregate amount of $75 million, subject to a borrowing baseformula, to provide backup liquidity for general corporate purposes, includingstock repurchases, or investment opportunities for a period of three years. Asof June 30, 2008 and December 31, 2007, the Company maintained a zerodebt balance and was in compliance with all associated covenants.

 

OnMay 7, 2008, our Board authorized the repurchase of up to 1.0 millionshares of the Company’s common stock. The purchases will be funded fromavailable working capital or available liquidity under our Credit Facility, andrepurchased shares will be returned to the status of authorized but un-issuedshares of common stock. To date, no shares have been repurchased under thisprogram.

 

Weexpect that for the next year, our operating expenses will continue toconstitute a significant use of cash flow. In addition, we may use cash to fundacquisitions, repurchase common stock, or invest in other businesses, whenopportunities arise. Based upon the predominance of our revenues from recurringsources, term license bookings performance and current expectations, we believethat our cash and cash equivalents, cash generated from operations andavailability under our Credit Facility will be sufficient to satisfy ourworking capital needs, capital expenditures, investment requirements, stock repurchasesand financing activities for the next year. However, if we identifyopportunities that exceed our current expectation, we may choose to seekadditional capital resources.

 

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**Off-BalanceSheet Arrangements and Contractual Obligations**

 

Wecurrently have no significant capital commitments other than commitments underour operating leases, which decreased from $52.7 million at December 31,2007 to $50.1 million at June 30, 2008.

 

Thefollowing table summarizes our contractual cash obligations as of June 30,2008 (in thousands):

 
| ** **                                            | ** ** | **Six**               | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|--------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                                            | ** ** | **Months Ended** | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **December 31**  | ** ** | **Years Ended December 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **2008**              | ** ** | **2009**                                   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** |
| Operating lease obligations, net  of sub-lease income |       | $                     | 4,008      |                                       | $          | 6,525      |       | $          | 6,163      |       | $          | 5,711          |       | $          | 5,055      |   | $ | 22,601 |   | $ | 50,063 |   |
|                                                       |            |                       |            |                                            |            |            |            |            |            |            |            |                |            |            |            |  |  |  |  |  |  |  |

 

At June 30, 2008 andDecember 31, 2007, we had a gross liability of $5.9 million for uncertaintax positions associated with the adoption of FIN 48. If recognized, theportion of unrecognized tax benefits at June 30, 2008 that would decreaseour tax position and increase net income is $4.9 million. The impact on netincome reflects the liabilities for unrecognized tax benefits net of thefederal tax benefit of state income tax items. Since almost all of thisliability relates to reserves against deferred tax assets that we do not expectto utilize in the short term, we cannot estimate the timing of potential futurecash settlements and have not included any estimates in the table ofcontractual cash obligations above. Additionally, our cash payments for incometaxes will continue to be nominal until at least 2010 as we have significantnet operating losses, capital losses and tax credit carryforwards to utilize.

 

At June 30, 2008 andDecember 31, 2007, we did not have any relationships with unconsolidatedentities or financial partnerships, such as entities often referred to asstructured finance or special purpose entities, which would have beenestablished for the purpose of facilitating off-balance sheet arrangements orother contractually narrow or limited purposes. As such, we are not materiallyexposed to any financing, liquidity, market or credit risk that could arise ifwe had engaged in such relationships.

 

**Item 3.Quantitative and Qualitative Disclosures About Market Risk**

 

We are exposed tofinancial market risks, including changes in foreign currency exchange ratesand interest rates. Historically, much of our revenues and capital spending wastransacted in U.S. dollars. However, since the acquisitions of Advent Denmark,Advent Norway, Advent Sweden, Advent Netherlands, Vivid Orange Ltd. and AdventEurope’s remaining distributors in the United Kingdom and Switzerland, whoseservice and certain license revenues and capital spending are transacted inlocal country currencies, we have greater exposure to foreign currencyfluctuations. Additionally as of June 30, 2008, $49.4 million of goodwilland $2.8 million of other intangibles from the acquisition of these entitiesare denominated in foreign currency. Therefore a hypothetical change of 10%could increase or decrease our assets and equity by approximately $5 million.We do not believe that a hypothetical 10% change in foreign currency exchangerates would have a material adverse effect on our condensed consolidatedresults of operations or cash flows.

 

Our interest rate riskrelated primarily to our investment portfolio which consisted of $37.3 millionin cash equivalents as of December 31, 2007 and $72.3 million in cashequivalents as of June 30, 2008. These cash equivalent securities werecomprised of US government debt securities which would not be materiallyaffected by an immediate sharp increase or decrease in interest rates. As ofJune 30, 2008 and December 31, 2007, Advent did not hold any auctionrate securities and does not plan to hold them in the near future.

 

We also have interestrate risk relating to debt under our line of credit facility which is indexedto LIBOR or a Wells Fargo prime rate. However, as of June 30, 2008, weessentially have no exposure for market risk for changes in interest ratesassociated with our credit facility, as we have a zero balance of debt.

 

We have also invested inseveral privately-held companies. These non-marketable investments areclassified as other assets on our consolidated balance sheets. Our investmentsin privately-held companies could be affected by an adverse movement in thefinancial markets for publicly-traded equity securities, although the impactcannot be directly quantified. These investments are inherently risky as themarket for the technologies or products these privately-held companies haveunder development are typically in the early stages and may never materialize.It is our policy to review investments in privately held companies on a regularbasis to evaluate the carrying amount and economic viability of these companies.This policy includes, but is not limited to, reviewing each of the companies’cash position, financing needs, earnings/revenue

 

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outlook, operationalperformance, management/ownership changes and competition. The evaluationprocess is based on information that we request from these privately heldcompanies. This information is not subject to the same disclosure regulationsas US publicly traded companies, and as such, the basis for these evaluationsis subject to timing and the accuracy of the data received from thesecompanies.

 

Our investments inprivately held companies are assessed for impairment when a review of theinvestee’s operations indicates that a decline in value of the investment isother than temporary. Such indicators include, but are not limited to, limitedcapital resources, limited prospects of receiving additional financing, andprospects for liquidity of the related securities. Impaired investments inprivately held companies are written down to estimated fair value. We estimatefair value using a variety of valuation methodologies. Such methodologiesinclude comparing the private company with publicly traded companies in similarlines of business, applying revenue and price/earnings 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 June 30, 2008 and December 31, 2007, our net investments inprivately-held companies totaled $0.5 million.

 

**Item 4. Controls and Procedures**

 

**Evaluation of disclosure controls and procedures.**

 

TheCompany’s management evaluated, with the participation of the PrincipalExecutive and Financial Officer, the effectiveness of the Company’s disclosurecontrols and procedures, as such term is defined underRule 13a-15(f) of the Securities and Exchange Act of 1934, as of theend of the period covered by this Quarterly Report on Form 10-Q. Based onthis evaluation, the Principal Executive and Financial Officer has concludedour disclosure controls and procedures were effective as of June 30, 2008to ensure that information we are required to disclose in reports that we fileor submit under the Securities Exchange Act of 1934 (i) is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms and (ii) is accumulatedand communicated to Advent’s management, including our Principal Executive andFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure.

 

**Changes in internal control overfinancial reporting.**

 

There were no changes inour internal control over financial reporting which were identified inconnection with the evaluation required by Rule 13a-15(e) of theExchange Act that occurred during the second quarter ended June 30, 2008that has materially affected, or is reasonably likely to materially affect,Advent’s internal control over financial reporting.

 

**PART II.OTHER INFORMATION**

 

**Item 1.    LegalProceedings**

 

OnMarch 8, 2005, certain of the former shareholders of Kinexus and theshareholders’ representative filed suit against Advent in the Delaware ChanceryCourt. The complaint alleges that Advent breached the Agreement and Plan ofMerger dated as of December 31, 2001 pursuant to which Advent acquired allof the 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 inJanuary 2003 that the earn-out terms had not been met in 2002 andaccordingly no earn-out was payable for 2002 and would not be payable for 2003.Discovery iscontinuing between the parties. 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.

 

From time to time, we areinvolved in claims and legal proceedings that arise in the ordinary course ofbusiness. Based on currently available information, management does not believethat the ultimate outcome of these unresolved matters, individually and in theaggregate, is likely to have a material adverse effect on the Company’sfinancial position or results of operations. However, litigation is subject toinherent uncertainties and our view of these matters may change in the future.Were an unfavorable outcome to occur, there exists the possibility of amaterial adverse impact on our financial position and results of operations forthe period in which the unfavorable outcome occurs, and potentially in futureperiods.

 

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**Item 1A. Risk Factors**

 

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

 

**Our Sales Cycle is Long and We Have Limited Ability to Forecast theTiming and Amount of Specific 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. Our business and prospects are subject touncertainties in the financial markets and customers remain cautious aboutcapital and information technology expenditures. The sales cycle associated withthe purchase of our solutions is typically between two and twelve monthsdepending upon the size of the client, and is subject to a number ofsignificant risks over which we have little or no control, including broaderfinancial market volatility, customers’ budgeting constraints, internalselection procedures, and changes in customer personnel, among others.

 

Asa result of a lengthy and unpredictable sales cycle, we have limited ability toforecast the timing and amount of specific perpetual license sales, or termlicense sales which we report quarterly as term license contract value (TCV).The timing of large individual license sales is especially difficult toforecast, and we may not be successful in closing large license transactions ona timely basis or at all. Customers may postpone their purchases of ourexisting products or product enhancements in advance of the anticipatedintroduction of new products or product enhancements by us or our competitors.Accordingly, our perpetual license revenue or our level of TCV in anyparticular period is subject to significant fluctuation.

 

Whena customer purchases a term license together with implementation services we donot recognize any revenue under the contract until the implementation servicesare substantially complete. In addition, the timing of large implementations isdifficult to forecast. Customers may delay or postpone the timing of theirparticular projects due to the availability of resources or other customerspecific priorities. If we are not able to complete an implementation projectfor a term license in a quarter, it will cause us to defer all of theproportionate contract revenues to a subsequent quarter. Because our expensesare relatively fixed in the near term, any shortfall from anticipated revenuescould result in a significant variation in our operating results from quarterto quarter.

 

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

 

Wederive over half of our net revenues from the license and maintenance revenuesfrom our Axys, Geneva, APX and Moxy products. In addition, Moxy and many of ourapplications, such as Partner and various data services have been designed toprovide an integrated solution with Axys, Geneva and APX. As a result, webelieve that for the next several years a majority of our net revenues willdepend upon continued market acceptance of Axys, Geneva, APX, and Moxy, andupgrades to those products. In addition, APX, our newest portfolio accountingand reporting product, is of critical importance in providing a migration pathfor many of our Axys customers. Our long-term growth would be harmed if we areunable to establish APX as a leading product in the market. As a result, we maynot be able to successfully migrate existing Axys clients to APX, or to attractnew customers to buy APX.

 

**Our Current Operating Results May Not Be Reflective of Our FutureFinancial Performance**

 

During fiscal 2007 and the first six months of 2008,we recognized 77% and 80%, respectively, of total net revenues from recurringsources, which we define as revenues from term license, maintenance onperpetual licenses and other recurring revenue. We generally recognize revenuefrom these sources ratably over the terms of these agreements, which typicallyrange from one to three years. As a result, almost all of our revenues in anyquarter are generated from contracts entered into during previous periods.

 

Consequently, a significant decline in new businessgenerated in any quarter may not materially affect our results of operations inthat quarter but will have an impact on our revenue growth rate in futurequarters. Additionally, a decline in renewals of term agreements, maintenanceor data contracts during a quarter will not be fully reflected in our financialperformance in that quarter. For example, because we recognize revenue ratably,the non-renewal of term agreements or maintenance contracts late in a quartermay have very little impact on revenue for that quarter, but will reducerevenue in future quarters. In addition, we may be unable to adjust our costsin response to reduced revenue.

 

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Further, because of the large percentage of revenuefrom recurring sources, our historical operating results on a generallyaccepted accounting principles (GAAP) basis will not necessarily be the sole ormost relevant factor in predicting our future operating results. Accordingly,we report non-GAAP information, such as our quarterly term license bookingsmetrics (expressed as term license contract value, “TCV”, or annual contractvalue, “ACV”) and maintenance renewal rates, that is intended to provideinvestors with certain of the information that management uses as a basis forplanning and forecasting of future periods. However, placing undue relianceupon non-GAAP or operating information is not appropriate because thisinformation is neither standardized across companies nor subjected to the samecontrol activities and audit procedures that produce our GAAP financialresults.

 

**Uncertain Economic and Financial Market Conditions Have in the Past andCould in the Future Adversely Affect Our Business**

 

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 in the past, and could be in the future, disproportionately affected byfluctuations, disruptions, instability or downturns in the economy andfinancial services industry which may cause clients and potential clients toexit the industry or delay, cancel or reduce any planned expenditures forinvestment management systems and software products. For example, beginning inthe second half of 2007, difficulties in the mortgage and broader creditmarkets in the United States and elsewhere resulted in a relatively sudden andsubstantial decrease in the availability of credit and a corresponding increasein funding costs. The current volatility and uncertainty in the financialmarkets generally has also caused large losses and layoffs announced byfinancial institutions and could result in reduced expenditures for softwareand related services. Additionally, an economic downturn would also cause adecline in our clients’ assets under management which would in turn cause ourrevenues to decrease since pricing is based on assets under management.Furthermore, competitors may respond to market conditions by lowering pricesand attempting to lure away our customers and prospects to lower costsolutions.  In addition, a slowdown inthe formation of new investment firms, especially hedge funds, or a decline inthe growth of assets under management would cause a decline in demand for oursolutions. Also, consolidation of financial services firms can result inreduced technology expenditures or acquired customers using the acquirer’s ownproprietary software and services solutions or the solutions of another vendor.  In some circumstances where both acquisitionparties are customers of Advent, the combined entity may require fewer Adventproducts and services than each individually licensed, thus reducing ourrevenue.

 

The technology spendingpatterns of organizations in MicroEdge’s primary markets (independentfoundations, community foundations and corporations) are directly affected byeconomic fluctuations as foundation budgets are largely driven by endowmentincome. Given that endowments often contain market-exposed components, they aresignificantly affected by the economy and foundation spending typicallydecreases in an economic downturn. Community foundations are subject to similarinfluences, compounded by the fact that in many cases much of their ongoingfunding and endowment comes from active donors who may increase or reduce theirgiving depending on the economic climate and the related effect on their incomeand wealth. Corporations typically fund charitable activities from operatingbudgets, and the allocation to charitable donations and supporting companycharitable operations is often closely tied to a company’s performance. Thus,corporate philanthropy and spending on related technology are correlated withcompany and overall economic performance.

 

Wehave, in the past, experienced a number of market downturns in the financialservices industry and resulting declines in information technology spending,which has caused longer sales and contracting cycles, deferral or delay ofinformation technology projects and generally reduced expenditures for softwareand related services. Although these factors have not adversely impacted ouroperating results for the first six months of 2008, we believe that acontinuation or worsening of current volatility and uncertainty in thefinancial markets and the financial services sector could have a materialadverse effect on our revenues and results of operations in the longer term.

 

**If Our Existing Customers Do Not Renew Their Term License, PerpetualMaintenance or Other Recurring Contracts, Our Business Will Suffer**

 

Revenues recognized from recurring contractsrepresented 77% and 80% of total net revenues in fiscal 2007 and the first sixmonths of 2008, respectively. We expect to continue to derive a significantportion of our revenue from our clients’ renewal of term license, perpetualmaintenance and other recurring contracts and such renewals are critical to ourfuture success. Some factors that may affect the renewal rate of our contractsinclude:

 

·                  The price, performance andfunctionality of our solutions;

 

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·                  The availability, price,performance and functionality of competing products and services;

·                  The effectiveness of ourmaintenance and support services; and

·                  Our ability to developcomplementary products and services.

 

Most of our perpetuallicense customers renew their annual maintenance although our customers have noobligation to renew such maintenance after the first year of their licenseagreements. In addition, our customers may select maintenance levels lessadvantageous to us upon renewal, which may reduce recurring revenue from thesecustomers.

 

We only have limitedexperience with renewals of our term license contracts. During the thirdquarter of 2007, we commenced renewing term license contracts signed in thethird quarter of 2004.  These were thefirst three-year term license contracts to be renewed by Advent since ourtransition to a term pricing model began. Our customers have no obligation torenew their term license contracts and given the small number of contractssubject to renewal that were renewed in the second half of 2007 and first halfof 2008, we cannot yet conclude whether customers will renew in a mannerconsistent with our perpetual maintenance customers.  Additionally, we cannot predict whether therenewals will be less advantageous to us than the original term contract. Forexample, the renewal periods for our term license contracts are typicallyshorter than our original term license contract and customers may request areduction in the number of users or products licensed, resulting in a lowerannual term license fee.  Further,customers may elect to not renew their term license contracts at all.Additionally, we may incur significantly more costs in securing our termlicense contract renewals than we incur for our perpetual maintenance renewals.If our term license contract customers renew under terms less favorable to us orchoose not to renew their contracts, or if it costs significantly more tosecure a renewal for us, our operating results may be harmed.

 

**We Operate in a Highly Competitive Industry**

 

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 third partyvendors such as Advent. We also face significant competition from otherproviders of software and related services as well as providers of outsourcedservices. Many of our competitors have longer operating histories and greaterfinancial, technical, sales and marketing resources than we do. In addition,consolidation has occurred among some of the competitors in our markets. Competitors vary in size, scope ofservices offered and platforms supported. In recent years, many of ourcompetitors have merged with each other or with other larger third parties, andit is possible that even larger companies will emerge through additionalacquisitions of companies and technologies. Any further consolidation among ourcompetitors may result in stronger competitors in our markets and may thereforeeither result in a loss of market share or harm our results of operations. Inaddition, we also face competition from potential new entrants into our marketthat may develop innovative technologies or business models. We cannotguarantee that we will be able to compete successfully against current andfuture competitors or that competitive pressure will not result in pricereductions, reduced operating margins or loss of market share, any one of whichcould seriously harm our business.

 

**We Must Continue 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 andrespond to their changing standards and practices. For example, in 2007, wereleased more new products and product upgrades than any other year in ourhistory, but it is too early to know whether these products will meetanticipated sales or that they will be broadly accepted in the market or thatwe will continue to introduce more products. Additionally, in 2008, we plan torelease product upgrades for Geneva, APX, Moxy, Advent Partner and AdventRevenue Center.

 

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 or delaysin client implementations or migrations may result in client dissatisfactionand delay or loss of product revenues. Additionally, existing clients may bereluctant to go through the sometimes complex and time consuming process ofmigrating from our Axys to APX product, which may slow the migration of ourcustomer base to APX. In addition, clients may delay purchases in anticipationof new products or product enhancements. Our ability to develop new productsand product enhancements is also dependent upon the products of other softwarevendors, including certain system software vendors, such as MicrosoftCorporation, Sun Microsystems, database vendors and development tool vendors.If the 

 

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productsof such vendors have design defects or flaws, are unexpectedly delayed in theirintroduction, or are unavailable on acceptable terms, our business could beseriously harmed.

 

**Our Operating Results May Fluctuate Significantly**

 

Weare well over 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 relatively slower revenue recognitionassociated with the term license model, which is typically over athree-year period, and by the reduction in perpetual license revenue. Under aperpetual model, customers purchase licenses 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 model, customers purchase a license to useour software and receive maintenance for a limited period of time and werecognize the revenue ratably over the length of the contract.

 

Duringthe first six months of 2008, term license revenues comprised approximately 29% of termlicense, maintenance and other recurring revenues as compared to approximately22% and 14% in fiscal 2007 and 2006, respectively. Term license contracts arecomprised of both software licenses and maintenance services. Individualperpetual software licenses vary significantly in value, and the value andtiming of these transactions can therefore cause our quarterly perpetuallicense revenues to fluctuate.

 

Whena customer purchases a term license together with implementation services we donot recognize any revenue under the contract until the implementation servicesare substantially completed and then we recognize revenue ratably over theremaining length of the contract. If the implementation services are still inprogress as of quarter-end, we will defer all of the contract revenues to a subsequentquarter. As a result of these and other factors, our quarterly net revenues mayfluctuate significantly. Our expense levels are relatively fixed in theshort-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 2007, we deferred netrevenues of $11.8 million and deferred directly related expenses of $4.1million. The impact of these deferrals on our operating income for 2007 wasapproximately $7.7 million.

 

Inaddition, we experience seasonality in our licensing. We believe that thisseasonality results primarily from customer budgeting cycles and the annualnature of some AUA contracts, and expect this seasonality to continue in thefuture.  The fourth quarter of the yeartypically has more licensing activity. That can result in term license bookings and perpetual license feerevenue being the highest in the fourth quarter, followed by lower term licensebookings and perpetual license revenue in the first quarter of the followingyear. Also, term licenses entered into during a quarter may not result inrecognition of associated revenue until later quarters, as we begin recognizingrevenue for such licenses when the related implementation services aresubstantially complete. In addition, we may see commission and bonus expensesin the period in which we enter into a license, but not recognize theassociated revenue until later periods.

 

Becauseof the above factors, we believe that quarter-to-quarter comparisons of ouroperating results are not necessarily reliable indicators of futureperformance.

 

**If Our Relationship with Financial Times/Interactive Data Is Terminatedor Other Large Subscription-based Relationships are 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 current agreement with FTID would require atleast one year’s notice by either us or them, or 90 days in the case ofmaterial breach. Our operating results would be adversely impacted if ourrelationship with FTID was terminated or their services were unavailable to ourclients for any reason. In recent years, Advent has entered into contractsrelating to our subscription, data management revenue streams and outsourcedservices with contract values that are substantially larger than we havecustomarily entered into in the past, including most recently our agreementwith TIAA-CREF.  It is too early to knowwhether we will be able to continue to sign large recurring revenue contractsof this nature, and our operating results could be adversely impacted if thoseagreements are not fully implemented, terminated or not renewed.  Some of these agreements are subject tomilestones, acceptance and penalties and there is no assurance that theseagreements will be fully implemented, renewed, or that Advent will be able toenter similar or larger sized contracts in the future.

 

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**We Must Retain 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 acquiredspecialized knowledge and skills with respect to Advent. We need technicalresources such as our product development engineers to develop new products andenhance existing products; we rely upon sales personnel to sell our productsand services 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. For example, our ChiefFinancial Officer left the Company effective as of July 31, 2008 and wehave not yet named a new individual to fill that position. If we are unable tosecure a replacement in a timely manner for our chief financial officerposition, our results of operations may be harmed and our ability to report ourfinancial results may be impaired. We need to identify, attract, motivateand retain such employees with the requisite education, backgrounds andindustry experience.  However, experienced personnel in the informationtechnology industry are in high demand and competition for their talents isintense, especially in the San Francisco Bay Area where the majority of ouremployees are located.

 

Wehave relied on our ability to grant equity compensation as one mechanism forrecruiting and retaining such highly skilled personnel. Accounting regulationsrequiring the expensing of equity compensation impair our ability to providethese incentives without reporting significant compensation 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 Face Challenges in Expanding Our International Operations**

 

Wemarket and sell our products in the United States and, to a lesser extent,internationally. From 2001 through 2005, we acquired the subsidiaries of ourindependent distributor. In addition, we have begun to expand our sales inrelatively new jurisdictions for Advent, such as the Middle East, EasternEurope, and continue to explore other market regions, such as Asia. In 2006 weopened a branch office of Advent Europe Ltd. in the United Arab Emirates, aswell as a subsidiary of Advent Software, Inc. in Hong Kong in 2008.  To further expand our internationaloperations, we would need to establish additional locations, continue tolocalize our software and acquire other businesses or enter into additionaldistribution relationships in other parts of the world. Internationaloperations, including further expansion and entry into new internationalmarkets, would require significant management attention and financialresources. We cannot be certain that establishing businesses in other countrieswill produce the desired levels of revenues, such as in the case of our Greeksubsidiary, Advent Hellas, which produced less than satisfactory revenues andprofitability before its sale by Advent in 2005. We currently have limitedexperience in developing localized versions of our products and marketing anddistributing our products internationally. In addition, internationaloperations are subject to other inherent risks, including:

 

·                  The impact of recessions in economies outsidethe United States;

·                  Adverse changes in foreign currency exchangerates;

·                  Greater difficulty in accounts receivablecollection and longer collection periods;

·                  Difficulty of enforcement of contractualprovisions in local jurisdictions;

·                  Unexpected changes in foreign laws andregulatory requirements;

·                  US and foreign trade-protection measures andexport and import requirements;

·                  Difficulties in successfully adapting ourproducts to the language, regulatory and technology standards of othercountries;

·                  Resistance of local cultures to foreign-basedcompanies and difficulties establishing local partnerships or engaging localresources;

·                  Difficulties in and costs of staffing andmanaging foreign operations;

·                  Reduced protection for intellectual propertyrights in some countries;

·                  Foreign tax structures and potentiallyadverse tax consequences; and

·                  Political and economic instability.

 

Therevenues, expenses, assets and liabilities of our international subsidiariesare primarily denominated in local foreign 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 

 

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salesand the US dollar value of our foreign subsidiaries’ revenues, expenses, assetsand liabilities. Our international service revenues and certain licenserevenues from our European subsidiaries are generally denominated in localforeign currencies.

 

**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**

 

Periodicallywe seek to grow through the acquisition of additional complementary businesses.From 2001 through the middle of 2003, we made five major acquisitions,including Kinexus Corporation, Techfi Corporation and Advent Outsource DataManagement LLC, and also acquired all of the common stock of five of our Europeandistributor’s subsidiaries. In addition, we purchased our Europeandistributor’s remaining two subsidiaries in the United Kingdom and Switzerlandin May 2004. More recently, in December 2006, we acquired East CircleSolutions, Inc., a developer of investment management billing solutions tointegrate their product into our software offerings; and in November 2007,our MicroEdge subsidiary acquired Vivid Orange Limited, a United Kingdomcompany providing corporate community involvement and employee charitablegiving technology.

 

Theprocess of integrating our acquisitions has required and will continue torequire significant resources, particularly in light of our relativeinexperience in integrating acquisitions, potential regulatory requirements andoperational demands. Integrating these acquisitions in the past has beentime-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. Furthermore, we may face otherunanticipated costs from our acquisitions, such as disputes involving earn-outand incentive compensation amounts, similar to those we have experienced withour Kinexus and Advent 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 acquisition or divestiture could harm our business, results of operationsand cash flows. Furthermore, we may have to incur debt, write-off investments,infrastructure costs or other assets, incur severance liabilities, write-offimpaired goodwill or other intangible assets or issue equity securities to payfor any future acquisitions. The issuance of equity securities could dilute ourexisting stockholders’ ownership. Finally, we may not identify suitablebusinesses to acquire or negotiate acceptable terms for future acquisitions.

 

**Impairment of 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 privateequity markets and general market conditions. Due to these and other factors,we have previously determined, and may in the future determine, that the valueof these investments is impaired, which has caused and would cause us to writedown the carrying value of these investments, such as the $0.6 millionwrite-down of one of our investments during the second quarter of 2007. Furthermore,we cannot be sure that future investment, license, fixed asset or other assetwrite-downs will not occur. If future write-downs do occur, they could harm ourbusiness and results of operations.

 

**Our Stock Price 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. Unfavorable or uncertain economicand market conditions, which can be caused by: outbreaks of hostilities orother geopolitical instability; declines in economic growth, business activityor investor or business confidence; limitation on the availability or increasesin the cost of credit or capital; increases in inflation, interest rates,exchange rate volatility, default rates or the price of basic commodities;corporate, political or other scandals that reduce investor confidence incapital markets; natural disasters or pandemics; or a combination of these orother factors, have adversely affected, and may in the future adversely affect,our business, profitability and stock price.

 

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**If WeAre Unable to Protect Our Intellectual Property We May Be Subject toIncreased Competition that Could Seriously Harm Our Business**

 

Oursuccess depends significantly upon our proprietary technology. We currentlyrely on a combination of copyright, trademark, patent and trade secret law, aswell as confidentiality procedures and contractual provisions to protect ourproprietary rights. We have registered trademarks and copyrights for many ofour products and services and will continue to evaluate the registration ofadditional trademarks and copyrights as appropriate. We generally enter intoconfidentiality agreements with our employees, customers, resellers, vendorsand others. We seek to protect our software, documentation and other writtenmaterials under trade secret and copyright laws. We also have one registeredpatent. While we do not believe we are dependent on any one of our intellectualproperty rights, we do rely on the combination of intellectual property rightsand other measures to protect our proprietary rights and despite our efforts,existing intellectual property laws may afford only limited protection. Inaddition, it may be possible for unauthorized third parties to copy certainportions of our products or to reverse engineer or otherwise obtain and use ourproprietary information. In addition, we cannot be certain that others will notdevelop or acquire substantially equivalent or superseding proprietarytechnology, equivalent or better products will not be marketed in competitionwith our products, or others may not design around any patent that may beissued to us or other intellectual property rights of ours, therebysubstantially reducing the value of our proprietary rights. We cannot be surethat we will develop proprietary products or technologies that are patentable,that any patent, if issued, would provide us with any competitive advantages orwould not be challenged by third parties, or that the patents of others willnot adversely affect our ability to do business. Despite our efforts to protectour proprietary rights, unauthorized parties may attempt to copy aspects of ourproducts or to obtain and use information that we regard as proprietary. Inaddition, the laws of some foreign countries do not protect proprietary rightsto as great an extent as do the laws of the United States. Litigation may benecessary to protect our proprietary technology which may be time-consuming andexpensive, with no assurance of success. As a result, we cannot be sure that our means of protecting ourproprietary rights will be adequate.

 

**If WeInfringe the Intellectual Property Rights of Others, We May IncurAdditional Costs 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 misappropriation of trade secrets orinfringement of patents, copyrights and other intellectual property rights ofthird parties that would be time-consuming and costly to resolve and may leadto unfavorable judgments or settlements. If we discovered that our products orservices violated the intellectual property rights of third parties, we may haveto make substantial changes to our products or services or obtain licenses fromsuch third parties. We might not be able to obtain such licenses on favorableterms or at all, and we may be unable to change our products successfully or ina timely or cost-effective manner. Failure to resolve an infringement mattersuccessfully or in a timely manner would damage our reputation and force us toincur significant costs, including payment of damages, redevelopment costs,diversion of management’s attention and satisfaction of indemnificationobligations that we have with our clients, as well as prevent us from sellingcertain products or services.

 

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

 

**Catastrophic Events Could Adversely Affect Our Business**

 

Ouroperations are exposed to potential disruption by fire, earthquake, flood,power loss, telecommunications failure, security breaches, criminal acts,terrorist incidents and other events. Our corporate headquarters are located inthe San Francisco Bay Area, which is a region with significant seismicactivity. Earthquakes such as that experienced in 1989 could disrupt ourbusiness. Such disruptions could affect our ability to sell and deliverproducts and services and other critical functions of our business. Further,such disruptions could cause instability in the financial markets or thespending of our clients and prospects upon which we depend.

 

Further,abrupt political change, terrorist acts, conflicts or wars may cause damage ordisruption to the economy, financial markets and our customers. The potentialfor future attacks, the national and international responses to attacks orperceived threats to national security and other actual or potential conflictsor wars, including the ongoing crisis in the Middle East, have created manyeconomic and political uncertainties. Although it is impossible to predict theoccurrences or consequences

 

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ofany such events, they could unsettle the financial markets or result in adecline in information technology spending, which could have a material adverseeffect on our revenues.

 

**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 or as newversions are released. Despite testing by us and by current and potentialcustomers, errors may not be found in new products until after commencement ofcommercial shipments, resulting in a loss of or a delay in market acceptance,damage to our reputation, customer dissatisfaction and reductions in revenuesand margins, any of which could seriously harm our business. Additionally, ouragreements with customers that attempt to limit our exposure to liabilityclaims may not be enforceable in jurisdictions where we operate.

 

**Two of Our Principal Stockholders Have an InfluenceOver our Business Affairs and May Make Business Decisions with Which YouDisagree and Which May Adversely Affect the Value of Your Investment**

 

Our Chief ExecutiveOfficer and the Chairman of our board of directors own or control, indirectlyor directly, a substantial number of shares of our common stock (approximately36% as of July 31, 2008). As a result, if these people act together, theywill have the ability to exert significant influence on matters submitted toour stockholders for approval, such as the election or removal of directors,amendments to our certificate of incorporation or the approval of a businesscombination. These actions may be taken even if they are opposed by otherstockholders or it may be difficult to approve these actions without theirconsent. This concentration of ownership may also have the effect of delayingor preventing a change of control of our company or discouraging others frommaking tender offers for our shares, which could prevent our stockholders fromreceiving a premium for their shares.

 

**Changes in 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 varietyof subjects, 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 2007, 2006 and 2005, we incurred approximately $0.9million, $1.3 million and $1.8 million, respectively, in Sarbanes-Oxley relatedexpenses consisting of external consulting costs and auditor fees, and theCompany anticipates similarly spending a significant amount for its 2008compliance activities. In addition, such developments may make retention andrecruitment of qualified persons to serve on our board of directors, or asexecutive officers, more difficult. We continue to evaluate and monitorregulatory and legislative developments and cannot reliably estimate the timingor magnitude of all costs we may incur as a result of the Act or other relatedlegislation or regulation.

 

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

 

                We prepare our consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America. These principles are subject tointerpretation by us, the SEC and various bodies formed to interpret and createaccounting principles. A change in these principles or a change in theinterpretations of these principles can have a significant effect on ourreported results and may even retroactively affect previously reportedtransactions. Some of our accounting principles that recently have been or maybe affected include:

 

·                  Software revenue recognition

·                  Accounting for stock-basedcompensation

·                  Accounting for income taxes

·                  Accounting for businesscombinations 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 consolidated statements ofoperations. The adoption of SFAS 123R had a significant adverse effect on ourresults of operations. It will continue to significantly adversely affect ourresults of operations and has resulted in changes to our compensationpractices, such as an increased reliance on using equity vehicles such asstock-settled stock appreciation rights (SAR) and restricted stock units (RSU).

 

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Iffactors change and we employ different assumptions for estimating stock-basedcompensation expense in future periods or if we decide to use a differentvaluation model, the future periods may differ significantly from what we haverecorded in the current period and could materially affect our operatingincome, net income and net income per share.

 

Wecurrently use the Black-Scholes option pricing model to determine the fairvalue of stock-based compensation awards and employee stock purchase planshares. The Black-Scholes option pricing model was developed for use inestimating the fair value of traded options that have no vesting restrictionsand are fully transferable, characteristics not present in our option grantsand employee stock purchase plan shares. Existing valuation models, includingthe Black-Scholes and lattice binomial models, may not provide reliablemeasures of the fair values of our stock-based compensation. Consequently,there is a risk that our estimates of the fair values of our stock-basedcompensation awards on the grant dates may bear little resemblance to theactual values realized upon the exercise, expiration, early termination orforfeiture of those stock-based payments in the future. Certain stock-basedpayments, such as employee stock options, 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 consolidated financial statements. Alternatively, value may berealized from these instruments that are significantly higher than the fairvalues originally estimated on the grant date and reported in our financialstatements. There currently is no market-based mechanism or other practicalapplication to verify the reliability and accuracy of the estimates stemmingfrom these valuation models, nor is there a means to compare and adjust the estimatesto actual values.

 

Additionally, in December 2007, the FASB issued SFAS No. 141(revised 2007) (“SFAS 141R”), “Business Combinations”. SFAS 141R establishesprinciples and requirements for how the acquirer of a business recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, and any non-controlling interest in the acquiree. SFAS141R is effective for financial statements issued for fiscal years beginningafter December 15, 2008. Accordingly, any business combinations we engagein will be recorded and disclosed following existing generally acceptedaccounting principles (GAAP) until January 1, 2009. The Company expectsSFAS 141R will have an impact on its consolidated financial statements wheneffective, but the nature and magnitude of the specific effects will dependupon the nature, terms and size of the acquisitions the Company consummatesafter the effective date.

 

**Security Risks May Harm Our Business**

 

Maintaining the security of computers, computer networks, hostedsolutions and the transmission of confidential information over public networksis essential to commerce and communications, particularly in the market inwhich Advent operates. Efforts of others to seek unauthorized access to Advent’sor its clients’ computers and networks or introduce viruses, worms and othermalicious software programs that disable or impair computers into our systemsor those of our customers or other third parties, could disrupt or make oursystems inaccessible or allow access to proprietary information and data ofAdvent or its clients.  Advances incomputer capabilities, new discoveries in the field of cryptography or otherevents or developments, also could result in compromises or breaches of oursecurity systems. Our security measures may be inadequate to prevent securitybreaches, exposing us to a risk of data loss, financial loss, harm toreputation, business interruption, litigation and other possible liabilities,as well as possibly requiring us to expend significant capital and otherresources to protect against the threat of security breaches or to alleviateproblems caused by such breaches.

 

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

 

As of December 31, 2007, approximately 360 or 8% of our clientsutilized trading commissions (“soft dollar arrangements”) to pay for softwareproducts and services. During fiscal 2007 and 2006, the total value of Adventproducts and services paid with soft dollars was approximately 4% and 5% of ourtotal billings. Such soft dollar arrangements could be impacted by changes inthe regulations 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’ soft dollar business offered our customers the ability to pay forAdvent products and other third party products and services through brokeragecommissions and other fee-based arrangements. We will continue to allow clientsto utilize soft dollar arrangements to pay for Advent software products andservices through other independent broker/dealers.

 

InJuly 2006, the SEC published an Interpretive Release that providesguidance on money managers’ use of client commissions to pay for brokerage andresearch services under the safe harbor set forth in Section 28(e) ofthe Securities Exchange Act of 1934. The Interpretive Release clarifies thatmoney managers may use client commissions (“soft dollars”) 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 money

 

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managercommunicates with the broker-dealer for the purpose of transmitting an orderfor execution, through the point at which funds or securities are delivered orcredited to the advised account.  Inaddition, for potentially “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 allor a portion of certain Advent products or services from soft to hard dollars,and as a result reduce their usage of these products or services in order toavoid increasing expenses, which could cause our revenues to decrease.

 

**Covenants in Our Credit Facility AgreementCould Adversely Affect our Financial Condition**

 

In February 2007, we entered into a seniorsecured facility agreement which provides us with a revolving line of credit upto an aggregate amount of $75.0 million. Our continued ability to borrow underour credit facility is subject to compliance with certain financial andnon-financial covenants. The financial covenant is limited to a maximum ratioof senior debt to earnings before interest, taxes, depreciation, andamortization (EBITDA), adjusted for cost capitalizations, extraordinary gains(losses) and non-cash stock compensation. Our failure to comply with suchcovenants could cause default under the agreement, and we may then be requiredto repay such debt with capital from other sources. Under those circumstances,other sources of capital may not be available to us, or be available only onunfavorable terms. In the event of default which is not remedied within the prescribedtimeframe, the assets of the Company (subject to the amount borrowed) may beattached or seized by the lender. As of June 30, 2008 and December 31,2007, we had no outstanding borrowings under this credit facility and were incompliance with all covenants.

 

**If We Fail to Maintain an Effective System of Internal Control, We May Notbe Able to Accurately Report Our Financial Results or Our Filings May Notbe Timely. As a Result, Current and Potential Stockholders Could LoseConfidence in Our Financial Reporting, Which Would Harm Our Business and theTrading Price of Our Stock**

 

Effectiveinternal control is necessary for us to provide reliable financial reports. Ifwe cannot provide reliable financial reports, our business and operatingresults could be harmed. We have in the past discovered, and may in the futurediscover, areas of our internal control that need improvement including controldeficiencies that may constitute material weaknesses. For example, as of December 31,2005, the Company did not maintain effective controls over the accounting forincome taxes, including the determination of deferred income tax liabilitiesand the related income tax provision. This control deficiency resulted inadjustments to the fourth quarter of 2004 and 2005 financial statements and arestatement of the Company’s financial statements for each of the first threequarters 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 ofthis control deficiency, the Company’s disclosures of stock-based compensationexpense for fiscal 2003 and 2004 and the first three quarters of 2004 and 2005were revised.

 

During 2006, we implementedcontrols and procedures to improve our internal control over financialreporting and address the material weaknesses identified in fiscal 2004 and2005. Management has concluded that the Company’s internal control overfinancial reporting was effective as of December 31, 2006 and 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 implement ormaintain 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 Can be Affected By aNumber of Factors Including Our Level of Pre-Tax Income**

 

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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.

 

Oneelement of our quantitative analysis of any control deficiency is its actual orpotential financial impact, and any impact that is greater than 5% of ourpre-tax income in any quarter may be more likely to result in that deficiencybeing determined to be a significant deficiency or a material weakness. Forexample, our assessment of a control deficiency as a significant deficiency ormaterial weakness remains dependent in part on our level of profitabilityduring a particular quarter. If our quarterly or fiscal year pre-tax incomewere to decrease, this will make it statistically less likely for us and ourindependent registered public accounting firm to determine that a controldeficiency is not a material weakness.

 

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

 

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

 

**Issuer Purchases of Equity Securities**

 

Our Board of Directors (the “Board”) has approved common stockrepurchase programs authorizing management to repurchase shares of the Company’scommon stock in the open market. The timing and actual number of shares subjectto repurchase are at the discretion of management and are contingent on anumber of factors, including the price of our stock, general market conditionsand alternative investment opportunities. The purchases are funded fromavailable working capital or debt.

 

On May 7, 2008, Advent’s Board authorized therepurchase of up to 1.0 million shares of the Company’s outstanding commonstock. As of June 30, 2008, no shares have been repurchased under thisrepurchase authorization. The following table provides a month-to-month summaryof the repurchase activity under the stock repurchase programs approved by theBoard in May 2008 during the three months ended June 30, 2008:

 
| ** **      | ** ** | ** **                | ** ** | ** **         | ** ** | **Maximum**                              | ** ** |
|-----------------|------------|---------------------------|------------|--------------------|------------|------------------------------------------|------------|
| ** **      | ** ** | **Total**                 | ** ** | **Average**        | ** ** | **Number of Shares That** | ** ** |
| ** **      | ** ** | **Number**                | ** ** | **Price**          | ** ** | **May Yet Be Purchased**  | ** ** |
| ** **      | ** ** | **of Shares**        | ** ** | **Paid**           | ** ** | **Under Our Share**            | ** ** |
| ** **      | ** ** | **Purchased**             | ** ** | **Per Share** | ** ** | **Repurchase Programs**             | ** ** |
| ** **      | ** ** | **(shares in thousands)** | ** ** |
|            |       |                      |       |               |       |                                     |       |
| April 2008 |       | —                    |       | $                  | —     |                                     | —     |   |
| May 2008   |       | —                    |       | $                  | —     |                                     | 1,000      |   |
| June 2008  |       | —                    |       | $                  | —     |                                     | 1,000      |   |
|            |       |                      |       |               |       |                                     |       |
| Total           |       | —                    |       | $                  | —     |                                     | 1,000      |   |

 

**Item 3.  Defaults Upon SeniorSecurities**

 

None.

 

**Item 4.  Submission of Matters to aVote of Security Holders**

 

At the annual meeting of stockholders on May 7, 2008, the Company’sstockholders re-elected directors, ratified the appointment of our independentregistered public accounting firm and approved an amendment to our 2002 StockPlan, and the voting results of the meeting were reported in Item 4 of ourQuarterly Report on Form 10-Q for the period ended March 31, 2008which is incorporated herein by this reference.

 

**Item 5.  Other Information**

 

None.

 

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| **Item 6.** | **Exhibits**                                                              |
|-------------|---------------------------------------------------------------------------|
|        |                                                                      |   |
|        | 10.1                                                                      | Agreement between Advent and Interactive Data Corporation dated  January 1, 1995 * |
|        |                                                                      |   |
|        | 10.2                                                                      | Separation Agreement between Advent and Craig B. Collins dated  July 28, 2008 ** |
|        |                                                                      |   |
|        | 31.1                                                                      | Certification of Principal Executive and Financial Officer under  Section 302 of the Sarbanes-Oxley Act of 2002 |
|        |                                                                      |   |
|        | 32.1                                                                      | Certification of Principal Executive and Financial Officer under  Section 906 of the Sarbanes-Oxley Act of 2002 |
|        |                                                                      |   |
|             |
| *           | Confidential treatment requested as to certain portions of this  exhibit. |
|        |                                                                      |   |
| **          | Denotes management contract or compensatory plan or arrangement.          |

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|        |                       | ADVENT SOFTWARE, INC. |
|--------|----------------------------|-----------------------|
|   |                       |                  |   |
|   | Dated: August 7, 2008 | By:                   | /s/ Stephanie G. DiMarco |
|   |                       |                  | Stephanie G. DiMarco |
|   |                       |                  | *Executive President,* |
|   |                       |                  | *Chief Executive Officer and President  (Principal Executive and Financial Officer)* |
|   |                       |                  |   |
|   |                       |                  |   |
|   | Dated: August 7, 2008 | By:                   | /s/ James S. Cox |
|   |                       |                  | James S. Cox |
|   |                       |                  | *Vice President and Corporate Controller  (Principal Accounting Officer)* |

 

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