**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**
| **x** | **Quarterly report pursuant to Section 13 or 15(d)  of the Securities Exchange Act of 1934** |
|-------|----------------------------------------------------------------------------------------------|

 

**for the quarterly period ended June 30, 2007**

**or**
| **o** | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**Commission file number:  0-26994**

**ADVENT SOFTWARE, INC.**

(Exact name of registrant as specified in its charter)

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

 

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

(Address of principal executive offices and zip code)

**(415) 543-7696**

(Registrant’s telephone number, including area code)

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling 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 “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one):  

Large accelerated filer o     Acceleratedfiler x    Non-accelerated filer   ̈

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

The number of shares of the registrant’s Common Stockoutstanding as of July 31, 2007 was 25,709,174.

 

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**INDEX**
| **PART I. FINANCIAL INFORMATION** | 3                                                                                           |
|-----------------------------------|---------------------------------------------------------------------------------------------|
| Item 1.                           | Financial  Statements                                                                       | 3 |
|                              | Condensed Consolidated Balance Sheets                                                       | 3 |
|                              | Condensed Consolidated Statements of Operations                                             | 4 |
|                              | Condensed Consolidated Statements of Cash Flows                                             | 5 |
|                              | Notes to Condensed Consolidated Financial Statements                                        | 6 |
| Item 2.                           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 16 |
| Item 3.                           | Quantitative  and Qualitative Disclosures About Market Risk                                 | 34 |
| Item 4.                           | Controls and  Procedures                                                                    | 36 |
| **PART  II. OTHER INFORMATION**   | 36                                                                                          |
| Item 1.                           | Legal Proceedings                                                                           | 36 |
| Item  1A.                         | Risk  Factors                                                                               | 36 |
| Item 2.                           | Unregistered Sales of Equity Securities and Use of  Proceeds                                | 45 |
| Item 3.                           | Defaults Upon Senior Securities                                                             | 46 |
| Item 4.                           | Submission of Matters to a Vote of Security Holders                                         | 46 |
| Item  5.                          | Other  Information                                                                          | 46 |
| Item 6.                           | Exhibits                                                                                    | 46 |
| **Signatures**                    | ** **                                                                                  | 47 |

 

2

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**PART I.FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**ADVENT SOFTWARE, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Inthousands)**

**(Unaudited)**
| ** **                                       | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|--------------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                       | ** ** | **2007**         | ** ** | **2006**             | ** ** |
| **ASSETS**                                       |       |             |       |                 |       |
| Current assets:                                  |       |             |       |                 |       |
| Cash and cash  equivalents                       |       | $                | 34,060     |                 | $          | 30,187 |   |
| Marketable  securities                           |       | —           |       | 24,881               |       |
| Accounts  receivable, net                        |       | 38,581           |       | 41,336               |       |
| Deferred taxes,  current                         |       | 7,953            |       | 7,950                |       |
| Prepaid expenses  and other                      |       | 15,520           |       | 12,685               |       |
| Total current  assets                            |       | 96,114           |       | 117,039              |       |
| Property and equipment,  net                     |       | 28,850           |       | 27,338               |       |
| Goodwill                                         |       | 99,373           |       | 98,382               |       |
| Other intangibles, net                           |       | 5,266            |       | 6,294                |       |
| Deferred taxes,  long-term                       |       | 75,592           |       | 75,594               |       |
| Other assets, net                                |       | 7,424            |       | 15,000               |       |
|                                             |       |             |       |                 |       |
| Total assets                                     |       | $                | 312,619    |                 | $          | 339,647 |   |
|                                             |       |             |       |                 |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**   |       |             |       |                 |       |
| Current liabilities:                             |       |             |       |                 |       |
| Accounts payable                                 |       | $                | 4,682      |                 | $          | 5,083 |   |
| Accrued  liabilities                             |       | 21,472           |       | 22,992               |       |
| Deferred  revenues                               |       | 93,494           |       | 84,260               |       |
| Income taxes  payable                            |       | 6,544            |       | 4,989                |       |
| Total current  liabilities                       |       | 126,192          |       | 117,324              |       |
| Deferred income taxes                            |       | 94               |       | 225                  |       |
| Deferred revenues,  long-term                    |       | 2,199            |       | 1,053                |       |
| Long-term debt                                   |       | 25,000           |       | —               |       |
| Other long-term  liabilities                     |       | 12,252           |       | 11,418               |       |
|                                             |       |             |       |                 |       |
| Total  liabilities                               |       | 165,737          |       | 130,020              |       |
|                                             |       |             |       |                 |       |
| Commitments and  contingencies (See Note 12)     |       |             |       |                 |       |
|                                             |       |             |       |                 |       |
| Stockholders’ equity:                       |       |             |       |                 |       |
| Common stock                                     |       | 256              |       | 272                  |       |
| Additional  paid-in capital                      |       | 303,585          |       | 309,993              |       |
| Accumulated  deficit                             |       | (168,782         | )          | (111,387             | )          |
| Accumulated  other comprehensive income          |       | 11,823           |       | 10,749               |       |
| Total  stockholders’ equity                 |       | 146,882          |       | 209,627              |       |
|                                             |       |             |       |                 |       |
| Total  liabilities and stockholders’ equity |       | $                | 312,619    |                 | $          | 339,647 |   |

 

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

3

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**ADVENT SOFTWARE, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

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

**(Unaudited)**
| ** **                                                     | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                     | ** ** | **2007**                                           | ** ** | **2006**                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Net  revenues:**                                             |       |                                               |       |                                             |       |   |   |   |   |
| Term license,  maintenance and other recurring                 |       | $                                                  | 42,012     |                                             | $          | 34,185 |   | $ | 79,736 |   | $ | 65,357 |   |
| Perpetual  license fees                                        |       | 5,689                                              |       | 6,050                                            |       | 11,616 |   | 14,208 |   |
| Professional services  and other                               |       | 4,675                                              |       | 4,125                                            |       | 9,003 |   | 8,451 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Total net revenues                                             |       | 52,376                                             |       | 44,360                                           |       | 100,355 |   | 88,016 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| **Cost of  revenues:**                                         |       |                                               |       |                                             |       |   |   |   |   |
| Term license,  maintenance and other recurring                 |       | 9,048                                              |       | 8,382                                            |       | 18,080 |   | 16,299 |   |
| Perpetual  license fees                                        |       | 219                                                |       | 198                                              |       | 414 |   | 427 |   |
| Professional  services and other                               |       | 6,415                                              |       | 5,150                                            |       | 12,288 |   | 10,074 |   |
| Amortization of  developed technology                          |       | 322                                                |       | 263                                              |       | 686 |   | 657 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Total cost of revenues                                         |       | 16,004                                             |       | 13,993                                           |       | 31,468 |   | 27,457 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Gross margin                                                   |       | 36,372                                             |       | 30,367                                           |       | 68,887 |   | 60,559 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| **Operating  expenses:**                                       |       |                                               |       |                                             |       |   |   |   |   |
| Sales and  marketing                                           |       | 13,985                                             |       | 12,209                                           |       | 26,874 |   | 24,351 |   |
| Product  development                                           |       | 10,816                                             |       | 8,815                                            |       | 20,672 |   | 16,750 |   |
| General and  administrative                                    |       | 7,837                                              |       | 7,702                                            |       | 16,621 |   | 15,648 |   |
| Amortization of  other intangibles                             |       | 466                                                |       | 1,020                                            |       | 940 |   | 1,999 |   |
| Restructuring  charges                                         |       | 227                                                |       | 124                                              |       | 789 |   | 265 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Total operating expenses                                       |       | 33,331                                             |       | 29,870                                           |       | 65,896 |   | 59,013 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Income from  operations                                        |       | 3,041                                              |       | 497                                              |       | 2,991 |   | 1,546 |   |
| Interest income  and other income, net                         |       | 3,868                                              |       | 1,051                                            |       | 4,386 |   | 2,397 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Income before  income taxes                                    |       | 6,909                                              |       | 1,548                                            |       | 7,377 |   | 3,943 |   |
| Provision for  (benefit from) income taxes                     |       | 1,814                                              |       | (55                                              | )          | 1,843 |   | (1,062 | ) |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| **Net income**                                                 |       | $                                                  | 5,095      |                                             | $          | 1,603 |   | $ | 5,534 |   | $ | 5,005 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Net income per  share:                                         |       |                                               |       |                                             |       |   |   |   |   |
| Basic                                                          |       | $                                                  | 0.19       |                                             | $          | 0.05 |   | $ | 0.21 |   | $ | 0.17 |   |
| Diluted                                                        |       | $                                                  | 0.18       |                                             | $          | 0.05 |   | $ | 0.20 |   | $ | 0.16 |   |
|                                                           |       |                                               |       |                                             |       |   |   |   |   |
| Weighted average  shares used to compute net income per share: |       |                                               |       |                                             |       |   |   |   |   |
| Basic                                                          |       | 26,519                                             |       | 29,847                                           |       | 26,950 |   | 30,299 |   |
| Diluted                                                        |       | 27,754                                             |       | 31,332                                           |       | 28,256 |   | 31,589 |   |

 

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

4

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**ADVENT SOFTWARE, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Inthousands)**

**(Unaudited)**
| ** **                                                                         | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| **Cash  flows from operating activities:**                                         |       |                                             |       |   |   |
| Net income                                                                         |       | $                                                | 5,534      |   | $ | 5,005 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                             |       |   |   |
| Stock-based compensation                                                           |       | 6,828                                            |       | 6,649 |   |
| Depreciation and amortization                                                      |       | 5,426                                            |       | 6,903 |   |
| Loss on dispositions of fixed assets                                               |       | 49                                               |       | 121 |   |
| Provision for doubtful accounts                                                    |       | 51                                               |       | 396 |   |
| Reduction of sales returns                                                         |       | (315                                             | )          | (1,027 | ) |
| (Gain) loss on investments                                                         |       | (4,265                                           | )          | 72 |   |
| Other-than-temporary loss on private equity  investments                           |       | 585                                              |       | — |   |
| Deferred income taxes                                                              |       | (132                                             | )          | (296 | ) |
| Other                                                                              |       | (5                                               | )          | (28 | ) |
| Changes in operating assets and liabilities:                                       |       |                                             |       |   |   |
| Accounts receivable                                                                |       | 2,704                                            |       | 258 |   |
| Prepaid and other assets                                                           |       | (2,833                                           | )          | (4,581 | ) |
| Accounts payable                                                                   |       | 599                                              |       | (194 | ) |
| Accrued liabilities                                                                |       | (718                                             | )          | 315 |   |
| Deferred revenues                                                                  |       | 10,695                                           |       | 9,358 |   |
| Income taxes payable                                                               |       | 1,556                                            |       | (1,572 | ) |
|                                                                               |       |                                             |       |   |   |
| Net cash  provided by operating activities                                         |       | 25,759                                           |       | 21,379 |   |
|                                                                               |       |                                             |       |   |   |
| **Cash  flows from investing activities:**                                         |       |                                             |       |   |   |
| Net cash used in acquisitions                                                      |       | (1,022                                           | )          | — |   |
| Purchases of property and equipment                                                |       | (5,337                                           | )          | (7,949 | ) |
| Capitalized software development costs                                             |       | (514                                             | )          | (796 | ) |
| Proceeds from sale of private equity investments                                   |       | 11,621                                           |       | — |   |
| Purchases of marketable securities                                                 |       | —                                           |       | (35,341 | ) |
| Sales and maturities of marketable securities                                      |       | 24,921                                           |       | 69,446 |   |
| Change in restricted cash                                                          |       | (359                                             | )          | (1,200 | ) |
|                                                                               |       |                                             |       |   |   |
| Net cash  provided by investing activities                                         |       | 29,310                                           |       | 24,160 |   |
|                                                                               |       |                                             |       |   |   |
| **Cash  flows from financing activities:**                                         |       |                                             |       |   |   |
| Proceeds from common stock issued from exercises of  stock options                 |       | 13,074                                           |       | 7,479 |   |
| Proceeds from common stock issued under the employee  stock purchase plan          |       | 1,829                                            |       | 1,427 |   |
| Repurchase of common stock                                                         |       | (91,157                                          | )          | (86,491 | ) |
| Proceeds from long-term borrowing                                                  |       | 25,000                                           |       | — |   |
|                                                                               |       |                                             |       |   |   |
| Net cash used in  financing activities                                             |       | (51,254                                          | )          | (77,585 | ) |
|                                                                               |       |                                             |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                      |       | 58                                               |       | 64 |   |
|                                                                               |       |                                             |       |   |   |
| **Net  change in cash and cash equivalents**                                       |       | 3,873                                            |       | (31,982 | ) |
| **Cash  and cash equivalents at beginning of period**                              |       | 30,187                                           |       | 70,941 |   |
|                                                                               |       |                                             |       |   |   |
| **Cash  and cash equivalents at end of period**                                    |       | $                                                | 34,060     |   | $ | 38,959 |   |

 

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

5

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**ADVENT SOFTWARE, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

**Note 1—Basis ofPresentation**

The condensed consolidated financial statements includethe accounts of Advent Software, Inc. (“Advent” or the “Company”) and itswholly owned subsidiaries. All inter-company balances and transactions havebeen eliminated.

Advent has prepared these condensed consolidatedfinancial statements in accordance with the rules and regulations of theSecurities and Exchange Commission (“SEC”) applicable to interim financialinformation. Certain information and footnote disclosures included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been omitted in these interim statementspursuant to such SEC rules and regulations. These interim financial statementsshould be read in conjunction with the audited financial statements and relatednotes included in Advent’s Annual Report on Form 10-K/A for the year endedDecember 31, 2006. Interim results are not necessarily indicative of theresults to be expected for the full year, and no representation is madethereto.

These condensed consolidated financial statements includeall adjustments necessary to state fairly the financial position and results ofoperations for each interim period shown. All such adjustments occur in theordinary course of business and are of a normal, recurring nature. 

Certain prior year amounts have been reclassified toconform to the current presentation. These reclassifications do not affecttotal net revenues, net income or stockholders’ equity. Specifically,the Company changed its presentation of revenues and associated cost of revenuesduring the first quarter of 2007 to more clearly show the nature and componentsof the Company’s revenues under a term licensing model and the predominance ofrevenue from recurring sources. Historically, the Company separated termlicense arrangement fees between license and maintenance revenues and allocatedthose revenues on a 55%/45% basis, respectively. As a result of the increasingsignificance of term license revenues for the Company, Advent discontinued thispractice during the first quarter of 2007, and now classifies all term licenserevenues, along with perpetual maintenance and other recurring revenues, in thecaption “Term license, maintenance and other recurring” revenues. 

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

**Note 2—RecentAccounting Pronouncements**

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

6

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**Note3—Stock-Based Compensation**

**EquityAward Activity**

Asummary of the status of the Company’s stock option and stock appreciationright (“SAR”) activity for the period presented follows:
| ** **                        | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------|------------|----------------------------|------------|----------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **(in thousands)**    | ** ** | ** **                             | ** ** | **(in years)**                                     | ** ** | **(in thousands)**         | ** ** |
|                              | ** ** | ** **                 | ** ** | ** **                             | ** ** | ** **                                              | ** ** | ** **                      | ** ** |
| Outstanding at  December 31, 2006 |       | 5,292                      |       | $                                      | 20.08      |                                                    |       |                            |       |   |
| Options &  SARs granted       |       | 520                        |       | $                                      | 36.45      |                                                    |       |                            |       |   |
| Options &  SARs exercised     |       | (920                       | )          | $                                      | 14.45      |                                                    |       |                            |       |   |
| Options &  SARs canceled      |       | (291                       | )          | $                                      | 23.91      |                                                    |       |                            |       |   |
| Outstanding at  June 30, 2007     |       | 4,601                      |       | $                                      | 22.81      |                                                    | 6.53       |                            | $          | 48,307 |   |
| Exercisable at June 30,  2007     |       | 2,566                      |       | $                                      | 20.37      |                                                    | 5.17       |                            | $          | 32,687 |   |

 

Theaggregate intrinsic value is calculated as the difference between the exerciseprice of the underlying awards and the Company’s closing stock price of $32.55as of June 29, 2007 for options that were in-the-money as of that date. 

Theweighted average grant date fair value of options and SARs granted during thesix months ended June 30, 2007 was $13.50 per share. The total intrinsicvalue of options exercised during the six months ended June 30, 2007 and 2006was $18.6 million and $5.9 million, respectively. The total cash receivedresulting from stock option exercises during the six months ended June 30, 2007and 2006 was approximately $13.1 million and $7.5 million, respectively.  

TheCompany settles exercised stock options and SARs with newly issued commonshares.

Asummary of the status of the Company’s restricted stock unit (“RSU”) activityfor the six months ended June 30, 2007 is as follows:
|                                   | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|-----------------------------------|------------|----------------------------|------------|---------------------------------------------------------|------------|
| ** **                        | ** ** | **(in thousands)**    | ** ** | ** **                                              | ** ** |
| ** **                        | ** ** | ** **                 | ** ** | ** **                                              | ** ** |
| Outstanding at  December 31, 2006 |       | 266                        |       | $                                                       | 29.81      |   |
| RSUs granted                      |       | 297                        |       | $                                                       | 36.63      |   |
| RSUs vested and  released         |       | (1                         | )          | $                                                       | 33.51      |   |
| RSUs canceled  and returned       |       | (25                        | )          | $                                                       | 31.93      |   |
| Outstanding at June 30,  2007     |       | 537                        |       | $                                                       | 33.48      |   |

 

Theweighted average grant date fair value was determined based on the closingmarket price of the Company’s common stock on the date of the award. Theaggregate intrinsic value of RSUs outstanding at June 30, 2007 was $17.5million, based on the closing price of $32.55 per share as of June 29, 2007.

RSUs are subject to Section 451 of the InternalRevenue Code, under which a RSU holder recognizes income upon vesting of theunderlying stock.  The Company’s 2002 Stock Plan (as amended and restatedMay 18, 2005) and Agreement provide that Advent has the right to satisfy theRSU holder’s tax withholding obligations that arise in connection with thevesting by withholding an equivalent number of common shares from the amountreleased. The equivalent number of common shares withheld for taxes aredetermined based on the closing market price of the Company’s common stock onthe date of vest and are returned to the Company’s 2002 Stock Plan.

**EmployeeStock Purchase Plan (“ESPP”)**

During the sixmonths ended June 30, 2007, the Company issued 59,677 additional shares underthe ESPP. A total of 1,757,374 shares were reserved for future issuance underthe ESPP as of June 30, 2007. 

7

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**Stock-Based Compensation Expense**

Theeffect of stock-based employee compensation expense recognized on Advent’scondensed consolidated statement of operations for the three and six months endedJune 30, 2007 and 2006 were as follows:
| ** **                                                      | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                      | ** ** | **2007**                                           | ** ** | **2006**                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Statement  of operations classification**                     |       |                                               |       |                                             |       |   |   |   |   |
| Cost of term  license, maintenance and other recurring revenues |       | $                                                  | 328        |                                             | $          | 271 |   | $ | 575 |   | $ | 529 |   |
| Cost of  professional services and other revenues               |       | 182                                                |       | 216                                              |       | 357 |   | 421 |   |
| Total cost of revenues                                          |       | 510                                                |       | 487                                              |       | 932 |   | 950 |   |
|                                                            |       |                                               |       |                                             |       |   |   |   |   |
| Sales and  marketing                                            |       | 1,167                                              |       | 1,242                                            |       | 2,136 |   | 2,385 |   |
| Product  development                                            |       | 900                                                |       | 781                                              |       | 1,637 |   | 1,525 |   |
| General and  administrative                                     |       | 1,005                                              |       | 965                                              |       | 2,123 |   | 1,789 |   |
| Total operating expenses                                        |       | 3,072                                              |       | 2,988                                            |       | 5,896 |   | 5,699 |   |
|                                                            |       |                                               |       |                                             |       |   |   |   |   |
| Total  stock-based employee compensation expense                |       | $                                                  | 3,582      |                                             | $          | 3,475 |   | $ | 6,828 |   | $ | 6,649 |   |
|                                                            |       |                                               |       |                                             |       |   |   |   |   |
| Tax effect on stock-based employee compensation (1)             |       | $                                                  | (1,276     | )                                                | $          | — |   | $ | (2,329 | ) | $ | — |   |
|                                                            |       |                                               |       |                                             |       |   |   |   |   |
| Net effect on  net income                                       |       | $                                                  | 2,306      |                                             | $          | 3,475 |   | $ | 4,499 |   | $ | 6,649 |   |

 

----

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

Approximately$106,000 and $98,000 of stock-based compensation was capitalized related tointernal use software, software development, and term license implementationprojects during the six months ended June 30, 2007 and 2006,respectively. 

Asof June 30, 2007, total unrecognized compensation cost related to unvestedawards under all equity compensation plans, adjusted for estimated forfeitures,was $29.1 million and is expected to be recognized through the remainingvesting period of each grant, with a weighted average remaining period of4.0 years. 

**Valuation Assumptions**

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option valuation model and the straight-line attribution approachwith the following assumptions:
| ** **                       | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|----------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                       | ** ** | **2007**                                           | ** ** | **2006**                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Stock Options & SARs**     |       |                                               |       |                                             |       |   |   |   |   |
| Expected  volatility             |       | 32.9%  - 34.5%                                     |       | 43.5%  - 46.7%                                   |       | 32.9%  - 38.4% |   | 43.5%  - 48.5% |   |
| Expected life  (in years)        |       | 4.58                                               |       | 5                                                |       | 4.58 |   | 5 |   |
| Risk-free  interest rate         |       | 4.6%  - 5.2%                                       |       | 5.0%  - 5.1%                                     |       | 4.5%  - 5.2% |   | 4.3%  - 5.1% |   |
| Expected  dividends              |       | None                                               |       | None                                             |       | None |   | None |   |
|                             |       |                                               |       |                                             |       |   |   |   |   |
| **Employee Stock Purchase Plan** |       |                                               |       |                                             |       |   |   |   |   |
| Expected  volatility             |       | 35.5%  - 36.5%                                     |       | 36.5%                                            |       | 35.5%  - 36.5% |   | 36.5% |   |
| Expected life  (in months)       |       | 6                                                  |       | 6                                                |       | 6 |   | 6 |   |
| Risk-free  interest rate         |       | 4.2%  - 5.0%                                       |       | 4.2%                                             |       | 4.2%  - 5.0% |   | 4.2% |   |
| Expected dividends               |       | None                                               |       | None                                             |       | None |   | None |   |

 

The expected stock price volatility was determinedbased on an equally weighted average of historical and implied volatility ofthe Company’s common stock. Advent determined that a blend of impliedvolatility and historical volatility is more reflective of the marketconditions and a better indicator of expected volatility than using purelyhistorical volatility. The expected life 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.

8

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**Note 4—Net Income Per Share**

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

Thefollowing table sets forth the computation of basic and diluted net income pershare (in thousands, except per-share data):
| ** **                                                                          | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                          | ** ** | **2007**                                           | ** ** | **2006**                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Numerator:**                                                                      |       |                                               |       |                                             |       |   |   |   |   |
| Net income                                                                          |       | $                                                  | 5,095      |                                             | $          | 1,603 |   | $ | 5,534 |   | $ | 5,005 |   |
|                                                                                |       |                                               |       |                                             |       |   |   |   |   |
| **Denominator:**                                                                    |       |                                               |       |                                             |       |   |   |   |   |
| Denominator for  basic net income per share- weighted average shares outstanding    |       | 26,519                                             |       | 29,847                                           |       | 26,950 |   | 30,299 |   |
|                                                                                |       |                                               |       |                                             |       |   |   |   |   |
| Dilutive common  equivalent shares: Employee stock options, unvested RSUs and other |       | 1,235                                              |       | 1,485                                            |       | 1,306 |   | 1,290 |   |
|                                                                                |       |                                               |       |                                             |       |   |   |   |   |
| Denominator for  diluted net income per share- weighted average shares outstanding  |       | 27,754                                             |       | 31,332                                           |       | 28,256 |   | 31,589 |   |
|                                                                                |       |                                               |       |                                             |       |   |   |   |   |
| Basic net income  per share                                                         |       | $                                                  | 0.19       |                                             | $          | 0.05 |   | $ | 0.21 |   | $ | 0.17 |   |
| Diluted net income per  share                                                       |       | $                                                  | 0.18       |                                             | $          | 0.05 |   | $ | 0.20 |   | $ | 0.16 |   |

 

Weightedaverage stock options and RSUs of approximately 1.6 million and 1.5 million forthe three and six months ended June 30, 2007, respectively, were excluded fromthe calculation of diluted net income per share because their inclusion wouldhave been anti-dilutive. Similarly, weighted average stock options, RSUs andwarrants of approximately 1.2 million and 1.1 million for the three and sixmonths ended June 30, 2006, respectively, were excluded from the calculation ofdiluted net income per share. 

**Note 5—Goodwill**

The changes in the carryingvalue of goodwill for the six months ended June 30, 2007 were as follows (inthousands):
|                               | ** ** | **Goodwill** | ** ** |
|-------------------------------|------------|--------------|------------|
|                          |       |         |       |
| Balance at  December 31, 2006 |       | $            | 98,382     |   |
| Additions                     |       | 22           |       |
| Translation  adjustments      |       | 969          |       |
|                          |       |         |       |
| Balance at June  30, 2007     |       | $            | 99,373     |   |

 

Foreign currency translation adjustments totaling$969,000 reflect the weakening of the U.S. dollar versus European currenciesduring the six months ended June 30, 2007. Additions to goodwill of $22,000reflected an additional payment related to the acquisition of East CircleSolutions, Inc.

9

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**Note 6—Other Intangibles**

The following is a summary of other intangibles as ofJune 30, 2007 (in thousands):
| ** **                     | ** ** | **Average**      | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
|--------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                     | ** ** | **Amortization** | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                     | ** ** | **Period**       | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
| ** **                     | ** ** | **(Years)**      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                     | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Purchased  technologies        |       | 4.9              |       | $                | 13,556     |             | $          | (12,847          | )          | $ | 709 |   |
| Product  development costs     |       | 3.0              |       | 3,582            |       | (1,350           | )          | 2,232            |       |
|                           |       |             |       |             |       |             |       |             |       |
| Developed technology sub-total |       |             |       | 17,138           |       | (14,197          | )          | 2,941            |       |
|                           |       |             |       |             |       |             |       |             |       |
| Customer  relationships        |       | 5.6              |       | 22,255           |       | (19,930          | )          | 2,325            |       |
| Other  intangibles             |       | 2.5              |       | 307              |       | (307             | )          | —           |       |
|                           |       |             |       |             |       |             |       |             |       |
| Other intangibles sub-total    |       |             |       | 22,562           |       | (20,237          | )          | 2,325            |       |
|                           |       |             |       |             |       |             |       |             |       |
| Balance at June  30, 2007      |       |             |       | $                | 39,700     |             | $          | (34,434          | )          | $ | 5,266 |   |

 

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

 

The changes in the carryingvalue of other intangibles during the six months ended June 30, 2007 were asfollows (in thousands):
|                               | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
|-------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                    | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                    | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
|                          |       |             |       |             |       |             |       |
| Balance at  December 31, 2006 |       | $                | 39,039     |             | $          | (32,745          | )          | $ | 6,294 |   |
| Additions                     |       | 514              |       | —           |       | 514              |       |
| Stock-based  compensation     |       | 67               |       | —           |       | 67               |       |
| Amortization                  |       | —           |       | (1,626           | )          | (1,626           | )          |
| Translation  adjustments      |       | 80               |       | (63              | )          | 17               |       |
|                          |       |             |       |             |       |             |       |
| Balance at June  30, 2007     |       | $                | 39,700     |             | $          | (34,434          | )          | $ | 5,266 |   |

 

10

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Based on the carrying amount of intangible assets as ofJune 30, 2007, the estimated future amortization is as follows (in thousands):
|                                    | ** ** | **Six**               | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------|------------|-----------------------|------------|--------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | **Months Ended** | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **December 31**  | ** ** | **Years Ended December 31** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **2007**              | ** ** | **2008**                                   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **Total**  | ** ** |
| Estimated future  amortization of: | ** ** | ** **            | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Developed  technology              |       | $                     | 701        |                                       | $          | 1,265      |       | $          | 687        |       | $          | 288 |   | $ | 2,941 |   |
| Other  intangibles                 |       | 917                   |       | 953                                        |       | 448        |       | 7          |       | 2,325      |       |
|                               |       |                  |       |                                       |       |       |       |       |       |       |       |
| Total                              |       | $                     | 1,618      |                                       | $          | 2,218      |       | $          | 1,135      |       | $          | 295 |   | $ | 5,266 |   |

 

**Note 7—Balance Sheet Detail**

Thefollowing is a summary of prepaid expenses and other (in thousands):
|                                   | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|-----------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                        | ** ** | **2007**         | ** ** | **2006**             | ** ** |
|                              |       |             |       |                 |       |
| Prepaid  commission               |       | $                | 3,390      |                 | $          | 3,121 |   |
| Prepaid contract  expense         |       | 4,507            |       | 2,704                |       |
| Prepaid royalty                   |       | 2,442            |       | 2,027                |       |
| Other                             |       | 5,181            |       | 4,833                |       |
|                              |       |             |       |                 |       |
| Total prepaid  expenses and other |       | $                | 15,520     |                 | $          | 12,685 |   |

 

Thefollowing is a summary of other assets, net (in thousands):
|                                                                       | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|-----------------------------------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                                            | ** ** | **2007**         | ** ** | **2006**             | ** ** |
|                                                                  |       |             |       |                 |       |
| Long-term  investments, gross                                         |       | $                | 6,160      |                 | $          | 13,800 |   |
| Accumulated  write-downs due to other-than-temporary decline in value |       | (5,660           | )          | (5,341               | )          |
| Long-term  investments, net                                           |       | 500              |       | 8,459                |       |
| Long-term  prepaid assets                                             |       | 3,780            |       | 4,098                |       |
| Deposits                                                              |       | 3,144            |       | 2,443                |       |
|                                                                  |       |             |       |                 |       |
| Total other  assets                                                   |       | $                | 7,424      |                 | $          | 15,000 |   |

 

Long-terminvestments include equity investments in several privately held companies.These equity investments are carried at the lower of cost or fair value at June30, 2007 and December 31, 2006. 

OnApril 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 iscomprised of initial consideration of $10 million, paid at completion of thesale transaction and up to an aggregate $7 million of deferred contingentconsideration for fiscal years 2007 and 2008. For fiscal 2007 and 2008, thepayment of the deferred contingent consideration is dependent on LatentZeroachieving certain performance objectives related to revenue and operatingprofit. Consideration is denominated in Pounds Sterling (GBP) and the actualamounts of consideration in U.S. dollars to be received by the Company maydiffer depending on foreign exchange rates at the time of payment. At the timeof sale, the carrying value of Advent’s investment in LatentZero was $6.6million resulting in a gain on sale of $3.4 million during the second quarterof 2007. 

Anotherprivately held company, Investment Scorecard Inc. (“Scorecard”), was soldduring the second quarter of 2007. Advent received proceeds of $1.6 millionfrom the sale of its interest in Scorecard, resulting in a gain of $0.9million. Additionally, Advent determined that the carrying value of itsinvestment in another private held company was fully impaired, resulting in animpairment loss of $585,000 during the second quarter of 2007. The Company’sreview of this investee’s operations during the second quarter of 2007 indicateda decline in value that is other-than-temporary.

11

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AtDecember 31, 2006, deposits included restricted cash of $1.3 million to securea bank letter of credit associated with the Company’s lease agreement with TodaDevelopment, Inc. (“Toda”) for its headquarters facility. The Companyexecuted amendments to the lease agreement whereby the Company will lease anadditional facility space of 28,000 square feet. Due to these amendments, therestricted cash required for the lease increased to $1.6 million at June 30,2007.

Thefollowing is a summary of accrued liabilities (in thousands):
|                                | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|--------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2007**         | ** ** | **2006**             | ** ** |
|                           |       |             |       |                 |       |
| Salaries and  benefits payable |       | $                | 11,218     |                 | $          | 13,624 |   |
| Accrued  restructuring         |       | 2,854            |       | 2,650                |       |
| Other                          |       | 7,400            |       | 6,718                |       |
|                           |       |             |       |                 |       |
| Total accrued  liabilities     |       | $                | 21,472     |                 | $          | 22,992 |   |

 

Accruedrestructuring charges are discussed further in Note 9, “Restructuring Charges.”Other accrued liabilities include accruals for royalties, sales and businesstaxes, acquisition related costs, and other miscellaneous items.

Thefollowing is a summary of other long-term liabilities (in thousands):
|                                           | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|-------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                | ** ** | **2007**         | ** ** | **2006**             | ** ** |
|                                      |       |             |       |                 |       |
| Deferred rent                             |       | $                | 8,191      |                 | $          | 6,451 |   |
| Accrued  restructuring, long-term portion |       | 2,992            |       | 3,941                |       |
| Other                                     |       | 1,069            |       | 1,026                |       |
|                                      |       |             |       |                 |       |
| Total other  long-term liabilities        |       | $                | 12,252     |                 | $          | 11,418 |   |

 

**Note 8—Comprehensive Income**

The components of comprehensive income were asfollows for the periods presented (in thousands):
|                                           | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                           | ** ** | **2006**                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                      |       |                                               |       |                                             |       |   |   |   |   |
| Net income                                |       | $                                                  | 5,095      |                                             | $          | 1,603 |   | $ | 5,534 |   | $ | 5,005 |   |
| Unrealized gain  on marketable securities |       | —                                             |       | 141                                              |       | 8 |   | 190 |   |
| Foreign currency  translation adjustment  |       | 617                                                |       | 1,350                                            |       | 1,066 |   | 2,348 |   |
|                                      |       |                                               |       |                                             |       |   |   |   |   |
| Total  comprehensive income               |       | $                                                  | 5,712      |                                             | $          | 3,094 |   | $ | 6,608 |   | $ | 7,543 |   |

 

The components of accumulated other comprehensiveincome were as follows (in thousands):
|                                                           | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|-----------------------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                                | ** ** | **2007**         | ** ** | **2006**             | ** ** |
|                                                      |       |             |       |                 |       |
| Accumulated  foreign currency translation adjustments     |       | $                | 11,823     |                 | $          | 10,757 |   |
| Accumulated net  unrealized loss on marketable securities |       | —           |       | (8                   | )          |
|                                                      |       |             |       |                 |       |
| Total  accumulated other comprehensive income             |       | $                | 11,823     |                 | $          | 10,749 |   |

 

**Note 9—Restructuring Charges**

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

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Duringthe six months ended June 30, 2007, Advent recorded a net restructuring chargeof $789,000 due to the update of certain sub-lease assumptions for Advent’sprior San Francisco headquarters facility located at 301 Brannan Street, whichthe Company exited in October 2006, and interest accretion. During the sixmonths ended June 30, 2006, Advent recorded a net restructuring charge of$265,000 primarily to adjust original estimates for facilities in SanFrancisco, California and New York, New York and interest accretion. 

Thefollowing table sets forth an analysis of the components of the payments andrestructuring charges made against the accrual during the six months ended June30, 2007 (in thousands):
| ** **                                             | ** ** | **Facility Exit** | ** ** | **Severance &** | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|--------------------------|------------|------------|------------|
| ** **                                             | ** ** | **Costs**              | ** ** | **Benefits**             | ** ** | **Total**  | ** ** |
|                                                   |       |                   |       |                     |       |       |       |
| Balance of  restructuring accrual at December 31, 2006 |       | $                      | 6,587      |                     | $          | 4          |       | $ | 6,591 |   |
| Restructuring  charges                                 |       | 635                    |       | —                   |       | 635        |       |
| Cash payments                                          |       | (1,530                 | )          | (4                       | )          | (1,534     | )          |
| Accretion  adjustment                                  |       | 154                    |       | —                   |       | 154        |       |
|                                                   |       |                   |       |                     |       |       |       |
| Balance of  restructuring accrual at June 30, 2007     |       | $                      | 5,846      |                     | $          | —     |       | $ | 5,846 |   |

 

The remaining excess facility exit costs of $5.8 millionare stated at estimated fair value, net of estimated sublease income ofapproximately $7.0 million. Advent expects to pay the remaining obligations associatedwith the vacated facilities over their remaining lease terms, which expire onvarious dates through 2012. 

**Note10—Common Stock Repurchase Program**

Advent’s Board has approved common stock repurchaseprograms authorizing management to repurchase shares of the Company’s commonstock to enhance shareholder value. The timing and actual number of sharessubject to repurchase are at the discretion of Advent’s management and arecontingent on a number of factors and limitations, including the price of Advent’sstock, corporate and regulatory requirements, alternative investmentopportunities and other market conditions. The stock repurchase programsspecify a maximum number of shares subject to repurchase, do not have anexpiration date and may be limited or terminated at any time without priornotice. Repurchased shares are returned to the status of authorized andun-issued shares of common stock. 

OnFebruary 9, 2007, the Company’s Board authorized the repurchase of up to anadditional 2.25 million shares of outstanding common stock.  During the second quarter of 2007, Adventcompleted the repurchase of shares under this authorization.

The following table provides a summary of the quarterlyrepurchase activity during the six months ended June 30, 2007 under the stockrepurchase programs approved by the Board in July 2006 and February 2007 (inthousands, except per share data):
|            | ** ** | **Total**     | ** ** | ** ** | ** ** | **Average**   | ** ** |
|------------|------------|---------------|------------|------------|------------|---------------|------------|
| ** ** | ** ** | **Number**    | ** ** | ** ** | ** ** | **Price**     | ** ** |
| ** ** | ** ** | **of Shares** | ** ** | ** ** | ** ** | **Paid**      | ** ** |
| ** ** | ** ** | **Purchased** | ** ** | **Cost**   | ** ** | **Per Share** | ** ** |
|       |       |          |       |       |       |          |       |
| Q1 2007    |       | 837           |       | $          | 30,120     |          | $          | 36.00 |   |
| Q2 2007    |       | 1,743         |       | $          | 61,037     |          | $          | 35.01 |   |
|       |       |          |       |       |       |          |       |
| Total      |       | 2,580         |       | $          | 91,157     |          | $          | 35.33 |   |

 

**Note11—Line of Credit**

On February 14, 2007, Advent and certain of itssubsidiaries entered into a senior secured credit facility agreement (the “Facility”)with Wells Fargo Foothill, Inc. (the “Lender”) for a term of three years. Underthe Facility, the Lender will provide the Company with a revolving line ofcredit up to an aggregate amount of $75.0 million to fund the repurchase ofoutstanding common stock, working capital, capital expenditures and generalcorporate requirements. The Company has the option of selecting an interestrate for any drawdown under the Facility equal to either: (a) the Base Rate(Wells Fargo prime 

13

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rate);or (b) the then applicable LIBOR Rate plus 1.50% per annum. The loan is securedby the Company’s property and assets and is subject to a financial covenant.The financial covenant in the Facility is limited to a maximum ratio of seniordebt to earnings before interest, taxes, depreciation, and amortization(EBITDA), adjusted for cost capitalizations, extraordinary gains (losses) andnon-cash stock-based employee compensation. Covenant testing will commence uponeither the occurrence of an event of default or when excess availability,defined as the Facility line of $75.0 million less amounts drawn, plusqualified cash and cash equivalents is less than $50.0 million. 

InJune 2007, the Company drew down $25.0 million against this Facility which bears interest at an aggregate rate of6.86%, consisting of a three month LIBOR contract rate of 5.36% and anapplicable margin of 1.5%. In September 2007, the LIBOR rate contract willexpire and Advent will have the option to either re-enter into another LIBORrate contract, choose the Base Rate, or pay off the existing loan balance. Asof June 30, 2007, Advent was in compliance with all associated covenants.

#### **Note 12—Commitments and Contingencies**

*LeaseObligations*

Adventleases office space and equipment under non-cancelable operating leaseagreements, which expire at various dates through December 2018. Some operatingleases contain escalation provisions for adjustments in the consumer priceindex. Under some leases, Advent is responsible for maintenance, insurance, andproperty taxes. In March and May 2007, the Company executed amendments to thelease agreement for its 600 Townsend Street headquarters facility whereby theCompany will lease additional facility space of 28,000 square feet. As of June30, 2007, Advent’s remaining operating lease commitments through 2018 wereapproximately $52.6 million, net of future minimum rental receipts of $7.8million to be received under non-cancelable sub-leases. 

*Indemnifications*

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

*LegalContingencies*

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

OnMarch 8, 2005, certain of the former shareholders of Kinexus and theshareholders’ representative filed suit against Advent in the Delaware ChanceryCourt. The complaint alleges that Advent breached the Agreement and Plan ofMerger dated as of December 31, 2001 pursuant to which Advent acquired all ofthe outstanding shares of Kinexus due principally to the fact that no amountwas paid by Advent on an earn-out of up to $115 million. The earn-out, whichwas payable in cash or stock at the election of Advent, was based upon Kinexusmeeting certain revenue targets in both 2002 and 2003. The complaint seeksunspecified compensatory damages, an accounting and restitution for unjustenrichment. Advent advised the shareholders’ representative in January 2003that the earn-out terms had not been met in 2002 and accordingly no earn-outwas payable for 2002 and would not be payable for 2003. ****Some discovery wasconducted by plaintiffs in 2005, but no further discovery has been conductedsince December 2005 and Advent has received no further communication fromplaintiffs since that time.****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. 

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**Note13—Segment Information**

*Descriptionof Segments*

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

Advent’sorganizational structure is based on a number of factors that the ChiefExecutive Officer (CEO) uses to evaluate, view and run its business operationswhich include, but are not limited to, customer base, homogeneity of productsand technology. Advent’s operating segments are based on this organizationalstructure and information reviewed by Advent’s CEO to evaluate the operatingsegment results. Advent has determined that its operations are organized intotwo reportable segments:  1) AdventInvestment Management; and 2) MicroEdge. Future changes to this organizationalstructure may result in changes to the business segments disclosed. A descriptionof the types of products and services provided by each operating segmentfollows. 

AdventInvestment Management is the Company’s core business and derives revenues fromthe development, marketing and sale of software products, data interfaces andrelated maintenance and services that automate, integrate and support certainmission critical functions of investment management organizations. MicroEdgederives revenues from the sale of software and services for grant management,matching gifts and volunteer tracking for the grantmaking community.

*SegmentData*

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

Segmentinformation for the periods presented is as follows (in thousands):
| ** **                                          | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                           | ** ** | **2006**                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net revenues:                                       |       |                                               |       |                                             |       |   |   |   |   |
| Advent Investment Management                        |       | $                                                  | 46,545     |                                             | $          | 39,005 |   | $ | 89,100 |   | $ | 77,598 |   |
| MicroEdge                                           |       | 5,831                                              |       | 4,849                                            |       | 11,255 |   | 9,701 |   |
| Other                                               |       | —                                             |       | 506                                              |       | — |   | 717 |   |
|                                                |       |                                               |       |                                             |       |   |   |   |   |
| Total net revenues                                  |       | $                                                  | 52,376     |                                             | $          | 44,360 |   | $ | 100,355 |   | $ | 88,016 |   |
|                                                |       |                                               |       |                                             |       |   |   |   |   |
| Income from  operations:                            |       |                                               |       |                                             |       |   |   |   |   |
| Advent Investment Management                        |       | $                                                  | 5,647      |                                             | $          | 4,560 |   | $ | 8,507 |   | $ | 9,673 |   |
| MicroEdge                                           |       | 1,764                                              |       | 1,172                                            |       | 2,938 |   | 2,123 |   |
| Other                                               |       | —                                             |       | (477                                             | )          | — |   | (945 | ) |
| Unallocated corporate operating costs and expenses: |       |                                               |       |                                             |       |   |   |   |   |
| Stock-based employee compensation                   |       | (3,582                                             | )          | (3,475                                           | )          | (6,828 | ) | (6,649 | ) |
| Amortization of developed technology                |       | (322                                               | )          | (263                                             | )          | (686 | ) | (657 | ) |
| Amortization of other intangibles                   |       | (466                                               | )          | (1,020                                           | )          | (940 | ) | (1,999 | ) |
|                                                |       |                                               |       |                                             |       |   |   |   |   |
| Total income  from operations                       |       | $                                                  | 3,041      |                                             | $          | 497 |   | $ | 2,991 |   | $ | 1,546 |   |

 

*MajorCustomers*

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

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**Note 14—Related Party Transactions**

Asof December 31, 2006, Legg Mason owned approximately 17% of the voting stock ofAdvent. Advent recognized approximately $90,000 and $198,000 of revenue fromLegg Mason during the three and six months ended June, 30 2007, respectively.The Company’s accounts receivable from Legg Mason were $110,000 and $10,000 asof June 30, 2007 and December 31, 2006, respectively.

Adventacts as trustee for the Company’s short-term disability plan—Advent SoftwareCalifornia Voluntary Disability Plan (“VDI”). Employee withholdings were$72,000 and $167,000 during the three and six months ended June 30, 2007,respectively. Disbursements were $95,000 and $178,000 during the three and sixmonths ended June 30, 2007, respectively. Cash held by Advent related to theVDI was $293,000 and $305,000 as of June 30, 2007 and December 31, 2006,respectively, and are included in “Other assets, net” on the condensedconsolidated balance sheets.

**Note 15—Income Taxes**

On January 1, 2007, Advent adopted the provisionsof Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”**(“FIN 48”). As ofJanuary 1, 2007, Advent accrued $4.9 million of unrecognized taxbenefits. If recognized, the portion of unrecognized tax benefits that woulddecrease the Company’s provision for income taxes and increase net income is$4.1 million. The impact on net income reflects the liabilities forunrecognized tax benefits net of the federal tax benefit of state income taxitems. The adoption resulted in no significant cumulative impact to accumulateddeficit. As of June 30, 2007, Advent’s unrecognized tax benefits totaled$5.2 million and are included in “Income taxes payable” on the condensedconsolidated balance sheet. The total unrecognized tax benefits at June 30,2007 and December 31, 2006 relate primarily to federal research and Californiaresearch and enterprise zone tax credits, various state net operating losses,and potential penalties and interest on amended state and local tax returns.

Advent recognizes interest and penalties accrued onunrecognized tax benefits as well as interest received from favorablesettlements within “Provision for (benefit from) income taxes” on the condensedconsolidated statement of operations. As of June 30, 2007, the Company had $0.2million of interest and penalties accrued associated with unrecognized taxbenefits.

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

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

**SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS**

You should read the following discussion in conjunctionwith our condensed consolidated financial statements and related notes. Thefollowing discussion contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 as amended and Section 21Eof the Securities Exchange Act of 1934 as amended, including, but not limitedto statements referencing our expectations relating to future revenues andexpenses. Forward-looking statements can be identified by the use ofterminology such as “may”, “will”, “should”, “expect”, “plan” “anticipate”, “believe”,“estimate”, “predict”, “potential”, “continue” or other similar terms and thenegative of such terms 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 orinvestment in other businesses; projections of revenues, future cost andexpense levels (including for the third quarter of 2007); expected timing andamount of amortization expenses related to past acquisitions; the adequacy ofresources to meet future cash requirements; estimates or predictions of actionsby customers, suppliers, competitors or regulatory authorities; future clientwins; future hiring; and future product introductions. Such forward-lookingstatements are based on our current plans and expectations, and involve knownand unknown risks and uncertainties that may cause our actual results orperformance to be materially different from any results or performanceexpressed or implied by such forward-looking statements. Such factors include,but are not limited to, those set forth in “Item 1A. Risk Factors” in this Form10-Q, as well as other risks identified from time to time in other Securitiesand Exchange Commission (“SEC”) reports. You should not place undue reliance onour forward-looking statements, as they are not guarantees of future results,levels of activity or performance and represent our expectations only as of thedate they are made.

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

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**Overview**

Our business is organized into tworeportable segments, Advent Investment Management (“AIM”) and MicroEdge. AdventInvestment Management is our core business and derives revenues from thedevelopment, marketing and sale of software products, data interfaces andrelated maintenance and services that automate, integrate and support certainmission-critical functions of investment management organizations principallyin the United States and the Europe, Middle East and Africa (EMEA) region.MicroEdge derives revenues from the sale of software and services for grantmanagement, matching gifts and volunteer tracking for the grant-makingcommunity. For additional information regarding our reportable segments, seeNote 13, “Segment Information,” to our condensed consolidated financialstatements.

We offer integrated software solutionsfor automating and integrating data and work flows across the investmentmanagement organization, as well as the information flows between theinvestment management organization and external parties. Each solution focuseson specific mission-critical functions of the investment managementorganization and is tailored to meet the needs of the particular client, asdetermined by size, assets under management and complexity of the investmentenvironment. Our products are intended to increase operational efficiency,improve the accuracy of client information and enable better decision-making.

*OperatingOverview*

Duringthe second quarter of 2007, we continued to execute on our strategy ofstrengthening and growing our core business of delivering mission-criticalsoftware and services to the investment management community by winning newcustomers, expanding our product footprint with existing customers, andinvesting in innovation to increase the reach of our product suite.

Wegrew our core business by signing 87 new customer agreements, including 15 newcustomers for Geneva and 21 new customers for Advent Portfolio Exchange (“APX”).Term contract bookings were $17.0 million, representing growth of 32% from thesecond quarter of 2006.

Inthe second quarter, we released Moxy 6.0, the latest version of our trade ordermanagement system, which features a more scalable dot-net architecture, as wellas improved workflow and a new user interface. We also continued to see healthydemand for Advent Revenue Center, the product we launched in the first quarterof 2007.

Wecontinued to invest in innovation to increase the reach of our product suiteduring the second quarter of 2007. Product development expenses were $10.8 million during the secondquarter of 2007, which represented 21% of total net revenues, as compared to$8.8 million, or 20% of total net revenues, in the same quarter of 2006.  We are planning the third quarter launch of ournew solution for pre- and post-trade compliance that is currently in betatesting at several client sites. We also expect to release Geneva 7.0, whichoffers enhanced reporting functionality, improved workflow and a new userinterface in the latter half of 2007. We continue to develop and test ourperformance analytics capabilities, which will be tightly integrated with APX2.0. Rather than release as a standalone product, we will include the analyticsfunctionality in the planned release of APX 2.0 in the latter half of 2007,giving managers a single source for accurate performance data and the abilityto analyze and communicate not only the “how” but also the “why” of portfolioperformance.

*FinancialOverview*

Financialoverview of our second quarter of 2007 includes:

·                  Revenues were$52.4 million, representing growth of 18% from $44.4 million in the secondquarter of 2006;

·                  Revenuesrecognized from recurring sources represented 80% of total revenues for thesecond quarter of 2007, compared to 77% in the second quarter of 2006;

·                  Operatingexpenses, including the cost of revenues, were $49.3 million, which was a 12%increase from $43.9 million in the second quarter of 2006;

·                  The secondquarter included a non-operating net gain of $3.7 million related to ourprivate equity investments;

·                  Net income was$5.1 million, or  $0.18 earnings perdiluted share;

·                  Cash provided byoperating activities was $12.0 million, essentially flat with the $12.1 millionin the second quarter of 2006;

·                  Commonstock  repurchases of 1.7 million sharesfor $61.0 million at an average price of $35.01; and

·                  Borrowingsof $25.0 million from our $75.0 million credit facility.

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*TermLicense and Term License Deferral*

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

When a customer purchases a term license together withimplementation services, we do not recognize any revenue under the contractuntil the implementation services are complete. If the implementation servicesare still in progress as of quarter-end, we will defer all of the contractrevenues to a subsequent quarter. At the point professional services aresubstantially completed, we recognize a pro-rata amount of the term licenserevenue, professional services fees earned and related expenses, based on theelapsed time from the start of the term license to the substantial completionof professional services. Term license revenue for the remaining contract yearsand the remaining deferred professional services revenue and related expensesare recognized ratably over the remaining contract length.

During the second quarter of 2007, we deferred netrevenues of $1.4 million and deferred directly-related expenses of $0.9million. The impact of these deferrals on our operating income wasapproximately $0.5 million. The $1.4 million net deferral of revenue iscomposed of an additional deferral of $2.1 million of professional servicesrevenue offset by recognition of $773,000 of term license revenue. The secondquarter of 2007 was the first quarter since our transition to term licensingthat more revenue was recognized from previously deferred term license revenuethan new term license revenue was deferred. This occurred because an unusuallyhigh number of implementation projects reached substantial completion in thesecond quarter. We expect that the term license component of the deferredrevenue balance will increase or decrease in the future based on the number ofimplementations that reach substantial completion in a particular quarter.Professional services revenue deferrals continued to increase as the deferralfor current projects exceeded the amount recognized from completed pastprojects. We currently expect that the professional services component of thedeferred revenue balance will continue to increase through at least 2008.

As of June 30, 2007, we have deferred a total of approximately$14.0 million in net revenues and $4.7 million of directly-related expenses,which are classified as “Deferred revenues” (short-term and long-term), and “Prepaidexpenses and other,” and “Other assets, net,” respectively, on the condensedconsolidated balance sheet. As of December 31, 2006, we deferred a total of$9.4 million and $2.9 million of net revenues and directly-related expenses,respectively.

The transition to a term model also has the effect ofdecreasing operating cash flows in the early stages of the transition. Underperpetual pricing, the entire license fee is generally billed and collected atthe commencement of the arrangement. Under term pricing, a typical contractterm is three years. We generally bill and collect license fees over the termof the arrangement in installments in advance of each annual period. The amountof the annual term billing is less than the perpetual billing, resulting inlower cash flows in the initial annual term license period. Annual term billingresults in an increase in deferred revenues and an increase in operating cashflows at the commencement of each annual billing period.

*RecurringRevenue Model and Revenue Presentation*

Duringthe second quarter of 2007, we recognized approximately 80% of total net revenuefrom recurring sources, which we define as revenues from term license,maintenance on perpetual licenses and other recurring. This high proportion ofrecurring revenues allows us to take a long-term view and invest in ourbusiness while remaining confident that our operating results will bereasonably predictable.

 During the first quarter of 2007, we changedour presentation of revenue and associated cost of revenues to more clearlyshow the nature and components of our revenues under a term licensing model andthe predominance of revenue from recurring sources. We believe the currentpresentation more clearly reflects our business as well as the principalunderlying factors impacting our long-term growth and predictability. Wecurrently categorize our revenues as follows: “Term license, maintenance andother recurring,” “Perpetual license fees” and “Professional services andother.” Please refer to Note 1, “Basis of Presentation,” to our condensedconsolidated financial statements for a complete description of the changes.

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*Non-CashOperating Expenses*

Werecorded stock-based compensation expense of $3.6 million, total amortizationexpense of $0.8 million, and restructuring charges of $0.2 million in thesecond quarter of 2007; these expenses totaled $4.6 million or 9% of revenues.

*CapitalStructure*

InFebruary 2007, our Board authorized the repurchase of up to an additional 2.25million shares of outstanding common stock. During the second quarter of 2007,we repurchased 1.7 million shares under our Board-authorized share repurchaseplans for a total cash outlay of $61.0 million and an average price of $35.01.This completes the repurchase of shares under the February 2007 authorization.

Alsoin February 2007, we and certain of our domestic subsidiaries entered into asenior secured credit facility agreement (the “Facility”) with Wells FargoFoothill, Inc. (the “Lender”). Under the Facility, we have a revolving line ofcredit up to an aggregate amount of $75.0 million, subject to a borrowing baseformula, to provide backup liquidity for a period of three years for generalcorporate purposes, including stock repurchases, or investment opportunities.This Facility provides us with the flexibility to run our business with lowercash balances. During the second quarter of 2007, we drew down $25.0 million onthis facility at a three-month borrowing rate of 6.86% to help fund therepurchase of shares. See Note 11, “Line of Credit” for further description ofour credit facility.

**CriticalAccounting Policies and Estimates**

Management’sdiscussion and analysis of our financial condition and results of operationsare based on our condensed consolidated financial statements and related notes,which have been prepared in accordance with accounting principles generally acceptedin the United States of America. We review the accounting policies used inreporting 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.

·                  Goodwill;

·                  Revenuerecognition and deferred revenues;

·                  Incometaxes;

·                  Stock-basedcompensation;

·                  Restructuringcharges and related accruals;

·                  Impairmentof long-lived assets;

·                  Legalcontingencies; and

·                  Salesreturns and accounts receivable allowances

Therehave been no significant changes in our critical accounting policies andestimates during the six months ended June 30, 2007 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/A for the year ended December 31, 2006, except for “Revenuerecognition,” “Sales returns and accounts receivables allowances,” and “Incometaxes.”

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

*Software licenses.* We recognizerevenue from the licensing of software when persuasive evidence of anarrangement exists, the product has been delivered, the fee is fixed ordeterminable and collection of the resulting receivable is reasonably assured.We generally use a signed license agreement as evidence of an arrangement.Sales through our distributors are evidenced by a master agreement governingthe relationship together with binding order forms and signed contracts fromthe distributor’s customers. Revenue is recognized once shipment to thedistributor’s customer has taken place and when all other revenue recognitioncriteria have been met. Delivery occurs when a product is delivered to a commoncarrier F.O.B shipping point. Some of our arrangements include acceptanceprovisions, and if such acceptance provisions are present, delivery is deemedto occur upon acceptance. We assess whether the fee is fixed or determinablebased on the payment terms associated with the transaction. We assess whetherthe collectibility of the resulting receivable is reasonably assured based on anumber of factors, including the credit worthiness of the customer determinedthrough review of credit reports, our transaction history with the customer,other available information and pertinent country risk if the customer islocated outside the United States. Our standard payment terms are due at 180days or less, but payment terms may vary based on the country in which theagreement is executed. Software licenses are sold with maintenance and,frequently, professional services.

*Licenses.*  We typically license our products on a perserver, per user basis with the price per customer varying based on theselection of the products licensed, the number of site installations and thenumber of authorized users. We have continued our transition from selling mostlyperpetual licenses to selling a mix of term and perpetual licenses, and weexpect term license revenue to increase as a proportion of total recurringrevenues (which we define as term license, maintenance and other recurringrevenues) in the future. Term license revenue comprised approximately 21% and10% of term license, maintenance and other recurring revenues during the firstsix months of 2007 and 2006, respectively. Revenue recognition for softwarelicensed under term and perpetual license models differs depending on whichtype of contract a customer signs:

·                  Term licenses

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

·                  Perpetuallicenses

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

Certainof our perpetual and term license contracts include asset-based fee structuresthat provide additional revenues based on the assets that the client managesusing our software (“Assets Under Administration” or “AUA”).  Contracts containing an AUA fee structurehave a defined measurement period which requires the client to self-reportactual AUA in arrears of the specified period. AUA fees above the statedminimum fee for the same period are considered incremental

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fees. Becauseincremental fees are not determinable until the conclusion of the measurementperiod, they are both earned and recognized in arrears, on a quarterly orannual basis. Incremental fees from perpetual AUA contracts are included in “Perpetuallicense fees” on the condensed consolidated statement of operations.  Incrementalfees from term AUA contracts are included in “Term license, maintenance andother recurring revenue” revenue on the condensed consolidated statement ofoperations.

For certain term AUA contracts signed in 2006, whichwill be entering the second year of the arrangement in 2007, we began accruingthe minimum AUA component of the fees in the applicable period during the firstquarter of 2007 rather than in arrears as was the treatment for earliercontracts. We have gained more experience in working with these types ofarrangements and are able to conclude that the minimum fees are fixed anddeterminable. The change in the first quarter of 2007 to our revenuerecognition practice to start to accrue for minimum fees is based on an overallaffirmative experience with our existing AUA-based arrangements where ourhistorical experience has shown that we have received the AUA report, invoicedthe client for both the minimum and incremental amounts, and received payment.Therefore, beginning in the first quarter of 2007, we are recognizing AUAcontract minimum fees in the period to which they are applicable, whereas wecontinue to recognize incremental fees in arrears once our clientscontractually report them to us, because the incremental fees are notdeterminable until reported. The impact of this change for the first half of2007 was an increase to term license revenue of approximately $241,000.

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

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

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

Maintenanceand other recurring revenues are included in the caption “Term license,maintenance and other recurring” revenues on the condensed consolidatedstatement of operations.

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

**Sales returns and accounts receivable**a**llowances.**Our standard practice is toenforce our contract terms and not allow our customers to returnsoftware. We have, however, allowed customers to return software on alimited case-by-case basis and have recorded sales returns provisions asoffsets to revenue in the period the sales return becomes probable. We use ourjudgment in estimating our sales returns. We analyze customer demand, acceptance of products and historical returnswhen evaluating the adequacy of the allowance for sales returns, which are notgenerally provided to customers. Beginning in 2004, we used an algorithm tosupplement our judgment for calculating the value of reserves that consideredthe last 18 months of experience into account. Beginning in the second quarterof 2007, we changed our algorithm to include the last 12 months of experience.The change to a review period of 12 months of experience reflects the evolutionof our term license model, as evidenced by quarterly term license revenue exceedingperpetual license revenues for the first time during the first quarter of 2007.Under our term arrangements, we generally bill and collect in advance of eachannual period and therefore, our revenue risk rarely exceeds 12 months.

Ourability to estimate returns is based on our long history of experience withrelatively homogenous transactions and the fact that the return period isshort.  The estimates for returns areadjusted periodically based upon changes in historical rates of returns andother related factors.

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Weuse our judgment in estimating our allowance for doubtful accounts. In order toestimate our allowance for doubtful accounts, we analyze specific accountsreceivables, historical bad debts, customer concentrations, customercredit-worthiness, current economic trends and changes in customer paymentterms.

**Income taxes.** We account forworldwide income taxes under an asset and liability approach that requires theexpected future tax consequences of temporary differences between book and taxbases of assets and liabilities be recognized as deferred tax assets andliabilities. Significant judgment is required to determine our worldwide incometax provision.  In the ordinary course ofbusiness, there are many transactions and calculations where the ultimate taxoutcome is uncertain. Many of these uncertainties arise as a consequence ofcost reimbursement arrangements among related entities, the process ofidentifying items of revenue and expense that have differing or preferentialtax treatment and segregation of foreign and domestic income and expense to theappropriate taxing jurisdictions to reasonably allocate earnings. Although webelieve that our judgments and estimates are reasonable, the final outcomecould be different from that which is reflected in our income tax provision andaccruals.

Avaluation allowance is recorded to reduce the net deferred tax assets to anamount that will more likely than not be realized. In order for us to realizeour deferred tax assets, we must be able to generate sufficient taxable incomein the jurisdiction where the tax asset is located. We consider forecastedearnings, future taxable income and prudent and reasonable tax planningstrategies in determining the need for a valuation allowance.

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

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

**Recent Accounting Pronouncements**

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

** RESULTS OF OPERATIONS FORTHE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006**

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

22

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**ADVENT SOFTWARE, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(Unaudited)**
| ** **                                     | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                           | ** ** | **2006**                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Net  revenues:**                             | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Term license,  maintenance and other recurring |       | 80                                                 | %          | 77                                               | %          | 79 | % | 74 | % |
| Perpetual  license fees                        |       | 11                                                 |       | 14                                               |       | 12 |   | 16 |   |
| Professional  services and other               |       | 9                                                  |       | 9                                                |       | 9 |   | 10 |   |
|                                           |       |                                               |       |                                             |       |   |   |   |   |
| Total net revenues                             |       | 100                                                |       | 100                                              |       | 100 |   | 100 |   |
|                                           |       |                                               |       |                                             |       |   |   |   |   |
| **Cost of  revenues:**                         | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Term license,  maintenance and other recurring |       | 17                                                 |       | 19                                               |       | 18 |   | 19 |   |
| Perpetual  license fees                        |       | 0                                                  |       | 0                                                |       | 0 |   | 0 |   |
| Professional  services and other               |       | 12                                                 |       | 12                                               |       | 12 |   | 11 |   |
| Amortization of  developed technology          |       | 1                                                  |       | 1                                                |       | 1 |   | 1 |   |
|                                           |       |                                               |       |                                             |       |   |   |   |   |
| Total cost of revenues                         |       | 31                                                 |       | 32                                               |       | 31 |   | 31 |   |
|                                           |       |                                               |       |                                             |       |   |   |   |   |
| Gross margin                                   |       | 69                                                 |       | 68                                               |       | 69 |   | 69 |   |
|                                           |       |                                               |       |                                             |       |   |   |   |   |
| **Operating  expenses:**                       | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales and  marketing                           |       | 27                                                 |       | 28                                               |       | 27 |   | 28 |   |
| Product  development                           |       | 21                                                 |       | 20                                               |       | 21 |   | 19 |   |
| General and  administrative                    |       | 15                                                 |       | 17                                               |       | 17 |   | 18 |   |
| Amortization of  other intangibles             |       | 1                                                  |       | 2                                                |       | 1 |   | 2 |   |
| Restructuring  charges                         |       | 0                                                  |       | 0                                                |       | 1 |   | 0 |   |
|                                           |       |                                               |       |                                             |       |   |   |   |   |
| Total operating expenses                       |       | 64                                                 |       | 67                                               |       | 66 |   | 67 |   |
|                                           |       |                                               |       |                                             |       |   |   |   |   |
| Income from  operations                        |       | 6                                                  |       | 1                                                |       | 3 |   | 2 |   |
| Interest income  and other income, net         |       | 7                                                  |       | 2                                                |       | 4 |   | 3 |   |
|                                           |       |                                               |       |                                             |       |   |   |   |   |
| Income before  income taxes                    |       | 13                                                 |       | 3                                                |       | 7 |   | 4 |   |
| Provision from  (benefit from) income taxes    |       | 3                                                  |       | (0                                               | )          | 2 |   | (1 | ) |
|                                           |       |                                               |       |                                             |       |   |   |   |   |
| **Net  income**                                |       | 10                                                 | %          | 4                                                | %          | 6 | % | 6 | % |

 

**NET REVENUES**
| ** **                         | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2007**                                           | ** ** | **2006**   | ** ** | **Change**                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
|                               |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Total net revenues (in  thousands) |       | $                                                  | 52,376     |       | $          | 44,360                                           |       | $          | 8,016      |   | $ | 100,355 |   | $ | 88,016 |   | $ | 12,339 |   |
|                                    |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

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

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

Weexpect total net revenues for the third quarter of 2007 to be between $52million and $54 million.

23

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***TermLicense, Maintenance and Other Recurring Revenues***
| **(in thousands, except percent of**      | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| **total net revenues)**                             | ** ** | **2007**                                           | ** ** | **2006**   | ** ** | **Change**                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
|                                                          |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Term license  revenues                                        |       | $                                                  | 10,121     |       | $          | 3,904                                            |       | $          | 6,217      |   | $ | 17,133 |   | $ | 6,374 |   | $ | 10,759 |   |
| Maintenance  revenues                                         |       | 21,274                                             |       | 20,223     |       | 1,051                                            |       | 41,778     |       | 39,886 |   | 1,892 |   |
| Other recurring  revenues                                     |       | 10,617                                             |       | 10,058     |       | 559                                              |       | 20,825     |       | 19,097 |   | 1,728 |   |
| Total term  license, maintenance and other recurring revenues |       | $                                                  | 42,012     |       | $          | 34,185                                           |       | $          | 7,827      |   | $ | 79,736 |   | $ | 65,357 |   | $ | 14,379 |   |
| Percent of total net  revenues                                |       | 80                                                 | %          | 77         | %          |                                             |       | 79         | %          | 74 | % |   |   |

 

Termlicense revenues, which include software license and maintenance fees for termlicenses, represented 24% of total term license, maintenance and otherrecurring revenues in the second quarter of 2007, up from 11% in the secondquarter of 2006. Term license revenues continue to grow as we sign morecontracts on a term basis. Term license bookings were $17.0 million in thesecond quarter of 2007, an increase of 32% from $12.9 million in the sameperiod of 2006. Additionally, we recorded a net benefit of $0.8 million to termlicense revenue during the second quarter of 2007, as we completed asignificant number of term license implementation services thus allowing therecognition of the associated term license revenues under SOP 97-2.

Maintenancerevenues increased $1.1 million and $1.9 million during the three and sixmonths ended June 30, 2007, respectively compared to the same periods of 2006.These increases are attributable to the impact of price increases on annualperpetual maintenance renewals purchased by our installed customer base and, toa lesser extent, an increase in new perpetual maintenance support contracts,partially offset by maintenance de-activations and downgrades. We disclose ourmaintenance renewal rate one quarter in arrears in order to includesubstantially all payments received against the maintenance invoices for thatquarter. Our maintenance renewal rate has been in the range of 88% to 92% overthe past five quarters and was 90% for the first quarter of 2007.

Other recurring revenues increased $559,000 and $1.7million during the three and six months ended June 30, 2007, respectively,mainly as a result of growth in our subscription and data management revenuestreams.

Weexpect that term license, maintenance and other recurring revenues willincrease slightly in the third quarter of 2007 compared to the second quarter.

***PerpetualLicense Fees***
| ** **                             | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                             | ** ** | **2007**                                           | ** ** | **2006**   | ** ** | **Change**                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
|                                   |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Perpetual  license fees (in thousands) |       | $                                                  | 5,689      |       | $          | 6,050                                            |       | $          | (361       | ) | $ | 11,616 |   | $ | 14,208 |   | $ | (2,592 | ) |
| Percent of total net  revenues         |       | 11                                                 | %          | 14         | %          |                                             |       | 12         | %          | 16 | % |   |   |
|                                        |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Thetransition of our core products to a term pricing model has resulted indecreases in perpetual license fees to $5.7 million and $11.6 million duringthe three and six months ended June 30, 2007, compared to $6.1 million and$14.2 million during the comparable periods of 2006. Incremental AUA fees fromperpetual licenses included in the “Perpetual license fees” caption were $1.5million and $3.3 million for the three and six months ended June 30, 2007,respectively, and were flat as compared to the same periods in 2006.

Weexpect perpetual license fees in the third quarter to be approximately flat withthe second quarter.

***ProfessionalServices and Other Revenues***
| ** **                                               | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                               | ** ** | **2007**                                           | ** ** | **2006**   | ** ** | **Change**                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Professional  services and other revenues (in thousands) |       | $                                                  | 4,675      |       | $          | 4,125                                            |       | $          | 550        |   | $ | 9,003 |   | $ | 8,451 |   | $ | 552 |   |
| Percent of total net  revenues                           |       | 9                                                  | %          | 9          | %          |                                             |       | 9          | %          | 10 | % |   |   |
|                                                          |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

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

Duringthe three and six months ended June 30, 2007, professional services revenueincreased as we experienced growth in our project management, data conversionand custom reporting revenues associated with implementations of our recentlyreleased APX and Moxy products. Additionally, our sales reserve benefit forprofessional services increased during the second quarter of 2007 due toimproved experience of professional service fee adjustments.

24

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Theseincreases were partially offset by lower services revenues associated with Axysimplementations and an increase in the net deferral of professional servicesrevenue for services performed on term license implementations. When servicesare performed with term license implementations, service revenue is deferreduntil the implementation is complete. Then service revenues are recognized overthe remaining license term. We have experienced an increase in implementationservices after the launch of our APX product and the sales success of ourGeneva product, which are sold under a term license model. Due to more term licenseimplementation projects in progress at June 30, 2007 as compared with June 30,2006, we deferred professional services revenue of $2.1 million in the secondquarter of 2007, which represented a $0.2 million increase from the revenuedeferral of $1.9 million in the comparable period of 2006.

Weexpect that revenues from professional services and other will be upsignificantly in the third quarter of 2007 relative to the second quarter,primarily due to our annual client conference in September 2007.

***Revenuesby Segment***
| ** **                    | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|-------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| **(in thousands)**       | ** ** | **2007**                                           | ** ** | **2006**   | ** ** | **Change**                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
|                          |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Advent  Investment Management |       | $                                                  | 46,545     |       | $          | 39,005                                           |       | $          | 7,540      |   | $ | 89,100 |   | $ | 77,598 |   | $ | 11,502 |   |
| MicroEdge                     |       | 5,831                                              |       | 4,849      |       | 982                                              |       | 11,255     |       | 9,701 |   | 1,554 |   |
| Other                         |       | —                                             |       | 506        |       | (506                                             | )          | —     |       | 717 |   | (717 | ) |
|                          |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Total net  revenues           |       | $                                                  | 52,376     |       | $          | 44,360                                           |       | $          | 8,016      |   | $ | 100,355 |   | $ | 88,016 |   | $ | 12,339 |   |

 

Wehave two reportable segments: Advent Investment Management (“AIM”) andMicroEdge. 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.

The19% and 15% increase in AIM’s revenue in the three and six months ended June30, 2007 primarily reflects generally healthy economic conditions and growth infinancial markets, as well as the continued focus on selling our Axys, APX,Moxy, Partner and Geneva products. AIM’s revenue increase in the first half of2007 also reflected an increase in new maintenance support contracts as aresult of new license deals and price increases for maintenance contracts fromour installed customer base, partially offset by attrition from within ourexisting installed customer base.

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

The20% and 16% increase in MicroEdge’s revenue during the three and six monthsended June 30, 2007 reflects the generally healthy economic conditions andgeneral trend of increased charitable contributions that has persisted for thepast few years. This increase in charitable contributions received by thefoundations sector has enabled foundations to increase their informationtechnology expenditures which resulted in the increase in MicroEdge revenue inthe first half of 2007.

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

### **COST OF REVENUES**

| ** **                             | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                             | ** ** | **2007**                                           | ** ** | **2006**   | ** ** | **Change**                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
|                                   |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Total cost of  revenues (in thousands) |       | $                                                  | 16,004     |       | $          | 13,993                                           |       | $          | 2,011      |   | $ | 31,468 |   | $ | 27,457 |   | $ | 4,011 |   |
| Percent of total net  revenues         |       | 31                                                 | %          | 32         | %          |                                             |       | 31         | %          | 31 | % |   |   |
|                                        |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

25

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

***Costof Term License, Maintenance and Other Recurring***
| ** **                                                            | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                                            | ** ** | **2007**                                           | ** ** | **2006**   | ** ** | **Change**                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Cost of term  license, maintenance and other recurring (in thousands) |       | $                                                  | 9,048      |       | $          | 8,382                                            |       | $          | 666        |   | $ | 18,080 |   | $ | 16,299 |   | $ | 1,781 |   |
| Percent of total term  license, maintenance and recurring revenue     |       | 22                                                 | %          | 25         | %          |                                             |       | 23         | %          | 25 | % |   |   |
|                                                                       |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Costof term license fees consists primarily of royalties and other fees paid tothird parties, the fixed direct labor involved in producing and distributingour software, and cost of product media including duplication, manuals andpackaging materials. Cost of maintenance and other recurring revenues isprimarily comprised of the direct costs of providing technical support andother services for recurring revenues and royalties paid to third partysubscription-based and transaction-based vendors.

Costof term license, maintenance and other recurring fluctuated due to the following(in thousands):
|                                | ** ** | **Change From**       | ** ** | **Change From**       | ** ** |
|--------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **2006 to 2007** | ** ** | **2006 to 2007** | ** ** |
| ** **                     | ** ** | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                           |       |                       |       |                       |       |
| Increased  payroll and related |       | $                          | 994        |                       | $          | 2,242 |   |
| Decreased  royalty             |       | (292                       | )          | (410                       | )          |
| Various other  items           |       | (36                        | )          | (51                        | )          |
|                           |       |                       |       |                       |       |
| Total change                   |       | $                          | 666        |                       | $          | 1,781 |   |

 

Theincrease in dollar amount for the three and six months ended June 30, 2007 wasdue primarily to an increase in compensation and related costs resulting fromincreases in salary costs and headcount which enables us to deliver the serviceswe provide to our growing number of clients in their day-to-day use of oursoftware.

Weexpect cost of term license, maintenance and other recurring revenue in thethird quarter of 2007 to increase as compared to the second quarter due to thecontinued hiring of personnel.

***Costof Perpetual License Fees***
| ** **                                     | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                     | ** ** | **2007**                                           | ** ** | **2006**   | ** ** | **Change**                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
|                                           |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Cost of  perpetual license fees (in thousands) |       | $                                                  | 219        |       | $          | 198                                              |       | $          | 21         |   | $ | 414 |   | $ | 427 |   | $ | (13 | ) |
| Percent of total  perpetual license revenues   |       | 4                                                  | %          | 3          | %          |                                             |       | 4          | %          | 3 | % |   |   |
|                                                |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

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

Weexpect cost of perpetual license fees to be flat in the third quarter of 2007.

***Costof Professional Services and Other***
| ** **                                                 | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                                 | ** ** | **2007**                                           | ** ** | **2006**   | ** ** | **Change**                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Cost of  professional services and other (in thousands)    |       | $                                                  | 6,415      |       | $          | 5,150                                            |       | $          | 1,265      |   | $ | 12,288 |   | $ | 10,074 |   | $ | 2,214 |   |
| Percent of total  professional services and other revenues |       | 137                                                | %          | 125        | %          |                                             |       | 136        | %          | 119 | % |   |   |
|                                                            |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Costof professional services and other revenue consists primarily of personnelrelated costs associated with the client services organization in providingconsulting, custom report writing and conversions of data from clients’previous systems. Also included are direct costs associated with third-partyconsultants and travel expenses. Additionally, under SOP 97-2, we defer ourprofessional services costs until we have substantially completed the termlicense implementation services.

26

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Costof professional services and other fluctuated due to the following (inthousands):
|                                                          | ** ** | **Change From**       | ** ** | **Change From**       | ** ** |
|----------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                               | ** ** | **2006 to 2007** | ** ** | **2006 to 2007** | ** ** |
| ** **                                               | ** ** | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                                     |       |                       |       |                       |       |
| Increased  payroll and related                           |       | $                          | 851        |                       | $          | 1,776 |   |
| Increased  outside services                              |       | 195                        |       | 8                          |       |
| Increased  recruiting                                    |       | 28                         |       | 292                        |       |
| Increased travel                                         |       | 139                        |       | 269                        |       |
| Increased  implementation service cost deferral for term |       | (85                        | )          | (374                       | )          |
| Various other  items                                     |       | 137                        |       | 243                        |       |
|                                                     |       |                       |       |                       |       |
| Total change                                             |       | $                          | 1,265      |                       | $          | 2,214 |   |

 

Theincrease during  the three and six monthsended June 30, 2007 was due primarily to an increase in payroll and relatedexpenses resulting from the increase in headcount to address the generalincrease in demand for consulting and training services demanded as a result ofhigher license sales. Consistent with the increase in headcount, recruitingcosts increased by $292,000 during the six months ended June 30, 2007. Higherutilization of third party implementation consultants during the second quarterof 2007 also contributed to the increase during the three months ended June 30,2007. In addition, travel expenses increased due to travel associated with moreservice projects and rising cost of air travel and accommodations.

Wehave experienced an increase in implementation services with the launch of ourAPX product and sales of our Geneva product, which are principally sold underthe term license model. As there were more term license implementation projectsin progress as of June 30, 2007 compared to June 30, 2006, we have experiencedan increase in the deferral of professional service costs. We deferred netprofessional service costs of $0.9 million and $1.7 million during the threeand six months ended June 30, 2007, compared to $0.8 million and $1.3 millionin the comparable periods of 2006. We experienced only a slight increase in thedeferral of term license implementation service costs during the second quarterof 2007 as we were able to complete an unusually high number of implementationsduring this period as compared to the prior year period.

Grossmargins for the 2007 periods continue to be negative as a result of thesignificant deferral of professional services revenues and costs under SOP97-2. We defer only the direct costs associated with services performed on termlicense arrangements. As a result, indirect costs such as management and otheroverhead expenses are recognized in the period in which they are incurred, withno revenue to offset them. In addition, we have added headcount in ourconsulting 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.

Weexpect cost of professional services and other in the third quarter of 2007 toincrease significantly as compared to the second quarter due to our annualclient conference in September 2007 and higher payroll expenses from thecontinued hiring of consultants to support product implementations.

***Amortizationof Developed Technology***
| ** **                                          | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                          | ** ** | **2007**                                           | ** ** | **2006**   | ** ** | **Change**                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Amortization of  developed techology (in thousands) |       | $                                                  | 322        |       | $          | 263                                              |       | $          | 59         |   | $ | 686 |   | $ | 657 |   | $ | 29 |   |
| Percent of total net  revenues                      |       | 1                                                  | %          | 1          | %          |                                             |       | 1          | %          | 1 | % |   |   |
|                                                     |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Amortizationof developed technology represents amortization of acquisition-relatedintangible assets and internal product development costs.  The increase in amortization of developedtechnology reflected additional expense from the capitalization of internallydeveloped software costs relating to product upgrades since June 30, 2006.

Weexpect amortization of developed technology to be flat in the third quarter of2007 as compared to the second quarter.

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### **OPERATING EXPENSES**

***Salesand Marketing***
| ** **                          | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2007**                                           | ** ** | **2006**   | ** ** | **Change**                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
|                                |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Sales and  marketing (in thousands) |       | $                                                  | 13,985     |       | $          | 12,209                                           |       | $          | 1,776      |   | $ | 26,874 |   | $ | 24,351 |   | $ | 2,523 |   |
| Percent of total net  revenues      |       | 27                                                 | %          | 28         | %          |                                             |       | 27         | %          | 28 | % |   |   |
|                                     |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Salesand marketing expenses consist primarily of the costs of personnel involved inthe sales and marketing process, sales commissions, advertising and promotionalmaterials, sales facilities expense, trade shows, and seminars.

Salesand marketing expenses fluctuated due to the following (in thousands):
|                                     | ** ** | **Change From**       | ** ** | **Change From**       | ** ** |
|-------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **2006 to 2007** | ** ** | **2006 to 2007** | ** ** |
| ** **                          | ** ** | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                |       |                       |       |                       |       |
| Increased  payroll and related      |       | $                          | 1,229      |                       | $          | 2,146 |   |
| Increased travel  and entertainment |       | 310                        |       | 349                        |       |
| Increased  outside services         |       | 216                        |       | 252                        |       |
| Increased  marketing                |       | 428                        |       | 418                        |       |
| Decreased bad  debt and broker fees |       | (640                       | )          | (898                       | )          |
| Various other  items                |       | 233                        |       | 256                        |       |
|                                |       |                       |       |                       |       |
| Total change                        |       | $                          | 1,776      |                       | $          | 2,523 |   |

 

Theincrease in expenses for the three and six months ended June 30, 2007 wasprimarily due to increases in payroll and other related costs as a result of anincrease in headcount to 168 at June 30, 2007 from 145 at June 30, 2006. Webelieve this investment in personnel will accelerate the momentum in our Genevaand APX product sales and increase satisfaction for all of our products. Travelexpenses also increased due to the headcount increase and travel to our annualEMEA client conference. Increase in outside services also contributed to theincrease due to higher utilization of outside service providers. In addition,marketing expenses also increased due to increased advertising initiatives tomarket our record number of product releases for 2007. These increases werepartially offset by a decrease in broker fees and bad debt expense associatedwith the winding down of our soft dollar business in fiscal 2006.

Weexpect sales and marketing expenses to be slightly higher in the third quarterof 2007 relative to the second quarter due to increased marketing spending onproduct release programs.

***ProductDevelopment***
| ** **                          | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2007**                                           | ** ** | **2006**   | ** ** | **Change**                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
|                                |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Product  development (in thousands) |       | $                                                  | 10,816     |       | $          | 8,815                                            |       | $          | 2,001      |   | $ | 20,672 |   | $ | 16,750 |   | $ | 3,922 |   |
| Percent of total net  revenues      |       | 21                                                 | %          | 20         | %          |                                             |       | 21         | %          | 19 | % |   |   |
|                                     |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

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

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Productdevelopment expenses fluctuated due to the following (in thousands):
|                                                              | ** ** | **Change From**       | ** ** | **Change From**       | ** ** |
|--------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                   | ** ** | **2006 to 2007** | ** ** | **2006 to 2007** | ** ** |
| ** **                                                   | ** ** | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                                         |       |                       |       |                       |       |
| Increased  payroll and related                               |       | $                          | 2,039      |                       | $          | 3,208 |   |
| (Increased)  decreased capitalization of product development |       | (566                       | )          | 313                        |       |
| Increased  recruiting                                        |       | 99                         |       | 121                        |       |
| Various other  items                                         |       | 429                        |       | 280                        |       |
|                                                         |       |                       |       |                       |       |
| Total change                                                 |       | $                          | 2,001      |                       | $          | 3,922 |   |

 

Theincrease in product development expense during the three and six months endedJune 30, 2007 was primarily due to increases in payroll and other related costsresulting from the increase in headcount to help us meet our expanded newproduct delivery schedules for fiscal 2007. As a result of the increase inheadcount, we incurred higher recruiting fees to identify product developmentengineers to assist in developing our new products and enhancing existingproducts. The fluctuations in the capitalization of our product developmentcosts in the first half of 2007 was attributable to the timing of productreleases as we capitalized $0.6 million of costs associated with our upcomingAPX 2.0 and Moxy 6.0 products during the second quarter of 2007 as compared to$0.9 million of costs associated with APX 1.0 in the first quarter of 2006.

Weexpect product development expenses to be down slightly in the third quarter of2007 as compared to the second quarter due to increased amounts capitalizedunder SFAS 86 as our engineers work on a number of  product releases which will be in their finalbeta stage during the third quarter.

***Generaland Administrative***
| ** **                                 | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **2007**                                           | ** ** | **2006**   | ** ** | **Change**                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
|                                       |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| General and  administrative (in thousands) |       | $                                                  | 7,837      |       | $          | 7,702                                            |       | $          | 135        |   | $ | 16,621 |   | $ | 15,648 |   | $ | 973 |   |
| Percent of total net  revenues             |       | 15                                                 | %          | 17         | %          |                                             |       | 17         | %          | 18 | % |   |   |
|                                            |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Generaland administrative expenses consist primarily of personnel costs forinformation technology, finance, administration, operations and generalmanagement, as well as legal and accounting expenses.

Generaland administrative expenses fluctuated due to the following (in thousands):
|                                   | ** ** | **Change From**       | ** ** | **Change From**       | ** ** |
|-----------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                        | ** ** | **2006 to 2007** | ** ** | **2006 to 2007** | ** ** |
| ** **                        | ** ** | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                              |       |                       |       |                       |       |
| Increased  payroll and related    |       | $                          | 1,642      |                       | $          | 3,305 |   |
| Decreased  facilities             |       | (515                       | )          | (1,349                     | )          |
| Decreased  depreciation           |       | (205                       | )          | (450                       | )          |
| Decreased legal  and professional |       | (434                       | )          | (597                       | )          |
| Various other  items              |       | (353                       | )          | 64                         |       |
|                              |       |                       |       |                       |       |
| Total change                      |       | $                          | 135        |                       | $          | 973 |   |

 

Theincrease in expenses during the three and six months ended June 30, 2007 isprimarily due to the increase in payroll and other related costs as a result ofan increase in headcount and annual merit increases. This increase was offsetby a decrease in facilities and depreciation expense as we are no longerincurring rent and depreciation expenses related to our prior San Franciscoheadquarters facility located at 301 Brannan Street, which we exited in October2006. We entered into a definitive leaseagreement in January 2006 for our new headquarters facility located at 600Townsend Street in San Francisco, California resulting in rent expense at both600 Townsend and our prior headquarters facility causing higher rent expensefor the first half of 2006. Lower legal fees and professional feesresulted from decreased services provided by external legal and accountingfirms.

Weexpect general and administrative expenses to be up slightly in the thirdquarter of 2007 as compared to the second quarter.

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***Amortizationof Other Intangibles***
| ** **                                        | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                        | ** ** | **2007**                                           | ** ** | **2006**   | ** ** | **Change**                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Amortization of  other intangibles (in thousands) |       | $                                                  | 466        |       | $          | 1,020                                            |       | $          | (554       | ) | $ | 940 |   | $ | 1,999 |   | $ | (1,059 | ) |
| Percent of total net  revenues                    |       | 1                                                  | %          | 2          | %          |                                             |       | 1          | %          | 2 | % |   |   |
|                                                   |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Amortizationof other intangibles represents amortization of non-technology relatedintangible assets. The decrease in amortization of other intangibles in thefirst half of 2007 was attributed to assets becoming fully amortized duringfiscal 2006 and the first half of 2007.

Weexpect amortization of other intangibles to be slightly lower in the thirdquarter of 2007 as compared to the second quarter.

***RestructuringCharges***
| ** **                            | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2007**                                           | ** ** | **2006**   | ** ** | **Change**                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
|                                  |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Restructuring  charges (in thousands) |       | $                                                  | 227        |       | $          | 124                                              |       | $          | 103        |   | $ | 789 |   | $ | 265 |   | $ | 524 |   |
| Percent of total net  revenues        |       | 0                                                  | %          | 0          | %          |                                             |       | 1          | %          | 0 | % |   |   |
|                                       |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

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

##### During the second quarter of 2007, werecorded a restructuring charge of $227,000 which related to the modificationof certain sub-lease assumptions for our prior San Francisco headquartersfacility located at 301 Brannan Street, which the Company exited in October2006. Similarly in the first quarter of 2007, we recorded a restructuringcharge of $562,000 as a result of updates in our sub-lease assumptions for ourprior headquarters facility.

##### Duringthe second quarter of 2006, we recorded a restructuring charge of $124,000 whichrelated to the costs to exit a portion of our facility in New Rochelle, NewYork, and our entire facility in Summit, New Jersey as well as the fair valueamortization of prior period obligations. During the firstquarter of 2006, we recorded a net restructuring charge of $141,000 primarily toadjust original estimates for facilities in San Francisco, California and NewYork, New York.

Thefollowing table sets forth an analysis of the components of the payments andrestructuring charges made against the accrual during the six months ended June30, 2007 (in thousands):
| ** **                                             | ** ** | **Facility Exit** | ** ** | **Severance &** | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|--------------------------|------------|------------|------------|
| ** **                                             | ** ** | **Costs**              | ** ** | **Benefits**             | ** ** | **Total**  | ** ** |
|                                                   |       |                   |       |                     |       |       |       |
| Balance of  restructuring accrual at December 31, 2006 |       | $                      | 6,587      |                     | $          | 4          |       | $ | 6,591 |   |
| Restructuring  charges                                 |       | 635                    |       | —                   |       | 635        |       |
| Cash payments                                          |       | (1,530                 | )          | (4                       | )          | (1,534     | )          |
| Accretion  adjustment                                  |       | 154                    |       | —                   |       | 154        |       |
|                                                   |       |                   |       |                     |       |       |       |
| Balance of  restructuring accrual at June 30, 2007     |       | $                      | 5,846      |                     | $          | —     |       | $ | 5,846 |   |

 

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***OperatingIncome by Segment***
| ** **                                          | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| **(in thousands)**                             | ** ** | **2007**                                           | ** ** | **2006**   | ** ** | **Change**                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
|                                                |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Advent  Investment Management                       |       | $                                                  | 5,647      |       | $          | 4,560                                            |       | $          | 1,087      |   | $ | 8,507 |   | $ | 9,673 |   | $ | (1,166 | ) |
| MicroEdge                                           |       | 1,764                                              |       | 1,172      |       | 592                                              |       | 2,938      |       | 2,123 |   | 815 |   |
| Other                                               |       | —                                             |       | (477       | )          | 477                                              |       | —     |       | (945 | ) | 945 |   |
| Unallocated  corporate operating costs and expenses |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Stock-based employee compensation                   |       | (3,582                                             | )          | (3,475     | )          | (107                                             | )          | (6,828     | )          | (6,649 | ) | (179 | ) |
| Amortization of developed technology                |       | (322                                               | )          | (263       | )          | (59                                              | )          | (686       | )          | (657 | ) | (29 | ) |
| Amortization of other intangibles                   |       | (466                                               | )          | (1,020     | )          | 554                                              |       | (940       | )          | (1,999 | ) | 1,059 |   |
|                                                |       |                                               |       |       |       |                                             |       |       |       |   |   |   |   |
| Total operating  income                             |       | $                                                  | 3,041      |       | $          | 497                                              |       | $          | 2,544      |   | $ | 2,991 |   | $ | 1,546 |   | $ | 1,445 |   |

 

Operating income for the AIM segment increased byapproximately $1.1 million in the second quarter of 2007 compared with the secondquarter of 2006 primarily as a result of an increase in total revenue of $7.5million and, to a lesser extent, an increase in product development costcapitalization of $0.6 million. These increases to operating income were offsetby an increase in payroll and other related costs resulting from higherheadcount of 771 employees at June 30, 2007 from 679 at June 30, 2006, as theAIM segment has added personnel primarily in the client support, productdevelopment, professional services and sales and marketing groups. Operating income for the AIM segment decreased byapproximately $1.2 million in the first half of 2007 compared with the firsthalf of 2006 primarily as a result of an increase in total AIM expenses of$12.7 million during the first half of 2007 primarily as a result of anincrease in payroll and other related costs resulting from higherheadcount. This increase in AIM’s expenseswas partially offset by AIM’s revenue growth of $11.5 million during the firsthalf of 2007. Operating income for the 2007 periods continue to bereduced by the larger deferral of professional services revenues and costsunder SOP 97-2.

MicroEdge’s operating income increased by $592,000 and$815,000 during the three and six months ended June 30, 2007, as compared to comparableperiods of 2006, primarily due to an increase in revenues of $1.0 million and$1.6 million partially offset by an increase in total operating costs of $0.4million and $0.7 million.  Operatingexpenses increased due to an increase in payroll and other related costsresulting from 12 additional employees that were hired since June 30, 2006.

Operating loss for our “Other” segment was $477,000 and$945,000 for the three and six month ended June 30, 2006 compared to zero forthe comparable periods in 2007, as we completed the wind down of the softdollar component of our broker/dealer in 2006 which resulted in significant baddebt expense and broker fees in the prior year periods.

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

| ** **                                            | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                            | ** ** | **2007**                                           | ** ** | **2006**   | ** ** | **Change**                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Interest income  and other income, net (in thousands) |       | $                                                  | 3,868      |       | $          | 1,051                                            |       | $          | 2,817      |   | $ | 4,386 |   | $ | 2,397 |   | $ | 1,989 |   |
| Percent of total net  revenues                        |       | 7                                                  | %          | 2          | %          |                                             |       | 4          | %          | 3 | % |   |   |
|                                                       |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

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

Interestincome and other income, net fluctuated due to the following (in thousands):
|                                                           | ** ** | **Change From**       | ** ** | **Change From**       | ** ** |
|-----------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                | ** ** | **2006 to 2007** | ** ** | **2006 to 2007** | ** ** |
| ** **                                                | ** ** | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                                      |       |                       |       |                       |       |
| Increase in gain  on sale of private equity investments   |       | $                          | 4,247      |                       | $          | 4,247 |   |
| Increase in  impairment loss of private equity investment |       | (585                       | )          | (585                       | )          |
| Decrease in  interest income                              |       | (661                       | )          | (1,563                     | )          |
| Increase in interest  expense                             |       | (236                       | )          | (264                       | )          |
| Various other  items                                      |       | 52                         |       | 154                        |       |
|                                                      |       |                       |       |                       |       |
| Total change                                              |       | $                          | 2,817      |                       | $          | 1,989 |   |

 

During the second quarter of 2007, interest income andother income included an aggregate gain of $4.2 million from the sale oftwo private equity investments, including our investment in LatentZero Limited,partially offset by an impairment loss of $585,000 associated with a thirdprivate equity investment. The net gain of $3.7 million from private equityinvestment activity was partially offset by lower interest income due to ourlower level of cash, cash equivalents and marketable securities balances duringthe first half of 2007, as we liquidated part of our portfolio to fund oursignificant stock repurchases in fiscal 2006 and the first half of 2007. Inaddition, we drew down $25.0 million on our credit facility in June 2007resulting in higher interest expense during the second quarter of 2007.

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### ***Provision for (Benefit from) Income Taxes***

| ** **                                                | ** ** | **Three Months Ended June 30** | ** ** | ** ** | ** ** | **Six Months Ended June 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                                | ** ** | **2007**                                           | ** ** | **2006**   | ** ** | **Change**                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Provision for  (benefit from) income taxes (in thousands) |       | $                                                  | 1,814      |       | $          | (55                                              | )          | $          | 1,869      |   | $ | 1,843 |   | $ | (1,062 | ) | $ | 2,905 |   |
| Effective tax rate                                        |       | 26                                                 | %          | -4         | %          |                                             |       | 25         | %          | -27 | % |   |   |
|                                                           |            |                                                    |            |            |            |                                                  |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Duringthe three months ended June 30, 2007, we recorded a provision of $1.8 millionwith an effective tax rate of 26% which includes discrete tax benefitsrecognized during the quarter. This provision reflects a projected fiscal 2007effective tax rate of 51.1%, less year-to-date discrete tax benefits for taxdeductions due to disqualifying dispositions of incentive stock options andemployee stock purchase plan shares whose associated stock-based employeecompensation has been expensed under FAS 123R, and the release of the valuationallowance associated with our capital losses as a result of the recognition ofcapital gains during the quarter. The fiscal 2007 effective tax rateexceeds the statutory rate primarily due to state income taxes, expectedforeign losses for which the company cannot recognize deferred tax assets andnon-deductible stock-based employee compensation relating to incentive stockoptions and the Company’s employee stock purchase plan. This impact ispartially offset by the tax benefit associated with federal and Californiaresearch credits.  During the three months ended June 30, 2006, wecontinued to carry a full valuation allowance against our deferred tax assetswhich resulted in a tax provision (benefit) primarily based on anticipatedcurrent income tax expense including federal alternative minimum tax. Thebenefit from income taxes of $55,000 for the three months ended June 30, 2006primarily reflects a reduction in the anticipated current income taxes for theyear resulting in a lower forecasted 2006 effective tax rate from the firstquarter of 2006.

### **LIQUIDITY AND CAPITAL RESOURCES**

Ouraggregate cash, cash equivalents and marketable securities were $34.1 millionat June 30, 2007, compared with $55.1 million at December 31, 2006. Cashequivalents are comprised of highly liquid investments purchased with anoriginal or remaining maturity of 90 days or less at the date of purchase.

Thetable below, for the periods indicated, provides selected cash flow information(in thousands):
|                                            | ** ** | **Six Months Ended June 30** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                 | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                                       |       |                                             |       |   |   |
| Net cash  provided by operating activities |       | $                                                | 25,759     |   | $ | 21,379 |   |
| Net cash  provided by investing activities |       | $                                                | 29,310     |   | $ | 24,160 |   |
| Net cash used in  financing activities     |       | $                                                | (51,254    | ) | $ | (77,585 | ) |

 

***CashFlows from Operating Activities***

Our cash flows from operating activities represent themost significant source of funding for our operations. The major uses of ouroperating cash include funding payroll (salaries, commissions, bonuses andbenefits), general operating expenses (marketing, travel, computers andtelecommunications, legal and professional expenses, and office rent) and costof revenues. Our cash provided by operating activities generally follows thetrend in our net revenues, operating results and the increase in deferredrevenues resulting from term license bookings.

 Our cash providedby operating activities of $25.8 million during the six months ended June 30,2007 was primarily the result of our net income and non-cash charges includingstock-based compensation and depreciation and amortization during the sixmonths ended June 30, 2007, partially off-set by a net gain from equityinvestment activity. Cash flows resulting from changes in assets andliabilities included decreases in accounts receivable and increases in deferredrevenue. The decrease in accounts receivable primarily reflected improvedcollections during the first half of 2007. Days’ sales outstanding decreased to67 days during the first half of 2007 from 75 days in the fourth quarter of2006. 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 installments in advance of each annualperiod. These amounts are deferred at billing and recognized over the annualterm period. This has the effect of increasing deferred revenue when comparedto a perpetual license model where no license revenue is deferred. See furtherdiscussion of the effects of our transition to a term model in the “Overview”section. Other changes in assets and liabilities included an increase in ourincome taxes payables and prepaid and other assets and decreases in accountspayable and accrued liabilities. The decreases in accounts payable and accruedliabilities reflected cash payments of fiscal 2006 liabilities includingyear-end payables and bonuses, commissions and payroll taxes.

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Our cash provided by operating activities during the sixmonths ended June 30, 2006 of $21.4 million was primarily the result of our netincome and non-cash charges including stock-based compensation, depreciationand amortization. Other sources of cash during the six months ended June 30,2006 included increases in deferred rent and deferred revenue. The increase indeferred rent resulted from the entry into a material definitive leaseagreement on January 2006 for our future headquarters facility located at 600Townsend Street in San Francisco. The increase in deferred revenue primarilyreflected our continued transition to the term license model. Uses of ouroperating cash included a reduction of our sales reserves, an increase in ourprepaid and other assets and decreases in accrued liabilities and income taxespayable. The increase in prepaid and other assets primarily reflected areceivable established for the tenant improvement allowance associated with our600 Townsend lease agreement, which was partially offset by cash payments bythe lessor during the six months ended June 30, 2006. The decreases in accountspayable and accrued liabilities reflected cash payments of December 31, 2005liabilities including year-end payables and bonuses, commissions, payrolltaxes, settlement of claims of certain former members and employees of AdventOutsource Data Management, and legal costs associated with the discovery phaseof the Kinexus earnout litigation. The decrease in income taxes payable duringthe six months ended June 30, 2006 reflected cash payments related to stateincome taxes and reductions in other projected tax liabilities.

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

***Cash Flows from Investing Activities***

Net cash provided by investing activities of $29.3million for the six months ended June 30, 2007 is primarily from the proceedsof $24.9 million from the sale of short term investments and from the proceedsof $11.6 million from the sale of two private equity investments, including ourstake in LatentZero Limited. This was partially offset by capital expendituresof $5.3 million, capitalized software development costs of $0.5 million and aninstallment payment totaling $1.0 million related to the acquisition of EastCircle Solutions, Inc. In addition, restricted cash increased by $0.4 millionassociated with amendments to the lease agreement with Toda Development, Inc.(“Toda”) to increase our rentable square footage at our headquarter facilitylocated at 600 Townsend Street in San Francisco, California. In the event thatwe default under the terms of this lease agreement, the letter of credit may bedrawn upon by Toda.

Net cash provided by investing activities of $24.2 millionfor the six months ended June 30, 2006, consisted primarily of net sales andmaturities of marketable securities of $34.1 million. During the six monthsended June 30, 2006, we liquidated investments to provide the cash required torepurchase our common stock. These cash proceeds were offset by capitalexpenditures of $7.9 million, a change in restricted cash of $1.2 million tosecure a bank letter of credit, and capitalized software development costs of$0.8 million. Duringthe first six months of 2006, restricted cash increased $1.2 million as wesecured a bank line of credit of $1.2 million associated with the Company’sentry into a definitive lease agreement with Toda Development, Inc. in January2006 for our headquarters facility.

***CashFlows from Financing Activities***

Net cash used in financing activities for the six monthsended June 30, 2007 of $51.3 million reflected the repurchase of 2.6 millionshares of our common stock for $91.2 million. This was partially offset by adraw-down of $25.0 million against our credit facility and proceeds receivedfrom the issuance of common stock of $14.9 million.

Net cash used in financing activities for the six monthsended June 30, 2006 of $77.6 million reflected the repurchase of 2.8 millionshares of our common stock for $86.5 million, partially offset by proceedsreceived from the issuance of common stock of $8.9 million.

Our liquidity and capital resources in any period couldbe affected by the exercise of outstanding stock options and issuance of commonstock under our employee stock purchase plan. The resulting increase inthe number of outstanding shares from this and from the issuance of commonstock from our other outstanding equity awards (RSUs and SARs) could alsoaffect our per share results of operations. However, we cannot predict thetiming or amount of proceeds from the exercise of stock options or SARs, orwhether they will be exercised at all. Furthermore,our Board may authorize additional share repurchase programs and we maycontinue our stock repurchase activity. As of June 30, 2007, we have completed the stock repurchases under theshare repurchase authorization that was approved by the Board and publiclyannounced in February 2007.

At June 30, 2007, we had negative working capital of$30.1 million, compared to negative working capital of $0.3 million at December31, 2006. Our negative working capital is primarily due to using our excesscash to finance common stock repurchases, totaling $148.6 million during fiscal2006 and $91.2 million during the first half of 2007, and to a lesser extentdeferred revenue growth.

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We currently have commitments under our operating leases,which increased from $49.0 million at December 31, 2006 to $52.6 million atJune 30, 2007, primarily as a result from expanding the rentable square footageat our corporate headquarters facility located at 600 Townsend Street in SanFrancisco, California during the first half of 2007.

We also have significant commitments associated with ourcredit facility. In February 2007, we and certain of our domesticsubsidiaries entered into a senior secured credit facility agreement (the “Facility”)with Wells Fargo Foothill, Inc. (the “Lender”). Under the Facility, the Lenderwill provide the Company with a revolving line of credit up to an aggregateamount of $75.0 million, subject to a borrowing base formula, to provide backupliquidity for general corporate purposes, including stock repurchases, orinvestment opportunities for a period of three years.

In June 2007, we drew $25.0 million against this Facilitywhich bears interest at an aggregate rate of 6.86%, consisting of a three monthLIBOR contract rate of 5.36% and an applicable margin of 1.5%. In September2007, the LIBOR rate contract will expire and we will have the option to eitherre-enter into another LIBOR rate contract, choose the Base Rate, or pay off theexisting loan balance. We currently intend to roll the loan for anotherthree-month LIBOR term and repay this draw at the end of the credit facilityterm in February 2010.

**ContractualObligations**

The following table summarizes our contractual cashobligations as of June 30, 2007 (in thousands):
| ** **                                            | ** ** | **Six**               | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|--------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                                            | ** ** | **Months Ended** | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **December 31**  | ** ** | **Years Ended December 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **2007**              | ** ** | **2008**                                   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** |
| Operating lease  obligations, net of sub-lease income |       | $                     | 3,470      |                                       | $          | 7,693      |       | $          | 5,930      |       | $          | 5,451          |       | $          | 4,945      |   | $ | 25,151 |   | $ | 52,640 |   |
| Repayment of long-term  debt                          |       | —                |       | —                                     |       | —     |       | 25,000     |       | —     |       | —         |       | 25,000     |       |
|                                                  |       |                  |       |                                       |       |       |       |       |       |       |       |           |       |       |       |
| Total commitments (1)                                 |       | $                     | 3,470      |                                       | $          | 7,693      |       | $          | 5,930      |       | $          | 30,451         |       | $          | 4,945      |   | $ | 25,151 |   | $ | 77,640 |   |

 

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(1)                                  At June 30, 2007, we hada gross liability of $5.2 million for uncertain tax positions associated withthe adoption of FIN 48. Since almost all of this liability relates to reservesagainst deferred tax assets that we do not expect to utilize in the short term,we cannot estimate the timing of potential future cash settlements and have notincluded any estimates in the table of contractual cash obligations.

At June 30, 2007 and December 31, 2006, we did not haveany relationships with unconsolidated entities or financial partnerships, suchas entities often referred to as structured finance or special purposeentities, which would have been established for the purpose of facilitatingoff-balance sheet arrangements or other contractually narrow or limitedpurposes. As such, we are not materially exposed to any financing, liquidity,market or credit risk that could arise if we had engaged in such relationships.

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 and repurchase common stock, or invest in other businesses, whenopportunities arise. Based upon our past performance and current expectations,we believe that our cash and cash equivalents, marketable securities, cashgenerated from operations and availability under our Facility will besufficient to satisfy our working capital needs, capital expenditures,investment requirements, stock repurchases and financing activities for thenext year.

**Off-BalanceSheet Arrangements**

Ouroff-balance sheet arrangements as of June 30, 2007 consist of obligations underoperating leases. See Note 12, “Commitments and Contingencies” to the condensedconsolidated financial statements and the “Liquidity and Capital Resources”section above for further discussion and a tabular presentation of ourcontractual obligations. As of June 30, 2007, we were in compliance with allour financial covenants and expect to remain within compliance in the next 12months. We are comfortable with these limitations and believe they will notimpact our cash or credit in the coming year or restrict our ability to executeour business plan.

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

Weare exposed to financial market risks, including changes in foreign currencyexchange rates and interest rates. Historically, much of our revenues andcapital spending was transacted in U.S. dollars. However, since the acquisitionsof

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Advent Denmark,Advent Norway, Advent Sweden, Advent Netherlands, and Advent Europe’s remainingdistributors in the United Kingdom and Switzerland, whose service and certainlicense revenues and capital spending, are transacted in local country currencies,we have greater exposure to foreign currency fluctuations. Additionally as ofJune 30, 2007, $40.2 million of goodwill and $0.7 million of other intangiblesfrom the acquisition of these entities is denominated in foreign currency.Therefore a hypothetical weakening (strengthening) of the U.S. dollar of 10%relative to certain European currencies could increase (decrease) our assetsand equity by approximately $4 million. We do not believe that a hypothetical10% change in foreign currency exchange rates would have a material adverseeffect on our condensed consolidated results of operations or cash flows.

Historically,our interest rate risk related primarily to our investment portfolio, whichconsisted of $20.2 million in cash equivalents and $24.9 million in marketablesecurities as of December 31, 2006 and $34.1 million in cash equivalents andzero in marketable securities as of June 30, 2007. An immediate sharp increasein interest rates could have a material adverse effect on the fair value of ourinvestment portfolio. Conversely, immediate sharp declines in interest ratescould seriously harm interest earnings of our investment portfolio. We do notcurrently use derivative financial instruments in our investment portfolio, norhedge for these interest rate exposures.

Bypolicy, we limit our exposure to longer-term investments, and the majority ofour investment portfolio at December 31, 2006 had interest rate maturities ofless than one year. As a result of the relatively short duration of our portfolio,an immediate hypothetical parallel shift to the yield curve of plus 25 basispoints (“BPS”), 50 BPS and 100 BPS would result in a reduction of 0.11%($51,000), 0.23% ($103,000) and 0.46% ($205,000), respectively, in the marketvalue of our investment portfolio as of December 31, 2006. During the firsthalf of 2007, we liquidated our investment portfolio to fund our stockrepurchase program resulting in a zero balance as of June 30, 2007.

EffectiveFebruary 2007, we also have interest rate risk relating to debt under ourcredit facility which is indexed to LIBOR or a Wells Fargo prime rate. In June 2007, we drew $25.0 million against thiscredit facility which bears interest at an aggregate rate of 6.86%, consistingof a three month LIBOR contract rate of 5.36% and an applicable margin of 1.5%.In September 2007, the LIBOR rate contract will expire and Advent will have theoption either re-enter into another LIBOR rate contract, choose the Base Rate,or pay off the existing loan balance. A hypothetical 100 basis point increasein the LIBOR rate from the rate of 5.36% associated with our $25.0 million drawin June 2007 would result in an increase in quarterly and annualinterest expense of approximately $63,000 and $250,000, respectively.

Wehave also invested in several privately-held companies. These non-marketableinvestments are classified as other assets on our condensed consolidatedbalance sheets. Our investments in privately-held companies could be affectedby an adverse movement in the financial markets for publicly-traded equitysecurities, although the impact cannot be directly quantified. Theseinvestments are inherently risky as the market for the technologies or productsthese privately-held companies have under development are typically in theearly stages and may never materialize. It is our policy to review investmentsin privately held companies on a regular basis to evaluate the carrying amountand economic viability of these companies. This policy includes, but is notlimited to, reviewing each of the companies cash position, financing needs,earnings/revenue outlook, operational performance, management/ownership changesand competition. The evaluation process is based on information that we requestfrom these privately held companies. This information is not subject to thesame disclosure regulations as U.S. publicly traded companies, and as such, thebasis for these evaluations is subject to timing and the accuracy of the datareceived from these companies.

Ourinvestments in privately held companies are assessed for impairment when areview of the investee’s operations indicates that a decline in value of theinvestment is other than temporary. Such indicators include, but are notlimited to, limited capital resources, limited prospects of receivingadditional financing, and prospects for liquidity of the related securities.Impaired investments in privately held companies are written down to estimatedfair value. We estimate fair value using a variety of valuation methodologies.Such methodologies include comparing the private company with publicly tradedcompanies in similar lines of business, applying revenue and price/earningsmultiples to estimated future operating results for the private company andestimating discounted cash flows for that company. We could lose our entireinvestment in these companies. During the second quarter of 2007, we sold twoof our investments, including our investment in LatentZero Limited, andimpaired another. At June 30, 2007, our net investments in privately-heldcompanies totaled $0.5 million. See Note 7, “Balance Sheet Detail”, to ourcondensed consolidated financial statements for further discussion.

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**Item 4. Controls and Procedures**

**Evaluation of disclosurecontrols and procedures.**

TheCompany’s management evaluated, with the participation of the Chief ExecutiveOfficer and Chief Financial Officer, the effectiveness of the Company’sdisclosure controls and procedures, as such term is defined under Rule13a-15(f) of the Securities and Exchange Act of 1934, as of the end of theperiod covered by this Quarterly Report on Form 10-Q. Based on this evaluation,the Chief Executive Officer and Chief Financial Officer have concluded ourdisclosure controls and procedures were effective as of June 30, 2007 to ensurethat information we are required to disclose in reports that we file or submitunder the Securities Exchange Act of 1934 (i) is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms and (ii) is accumulated and communicated toAdvent’s management, including our Chief Executive Officer and our ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure.

**Changesin internal control over financial reporting.**

Therewere no changes in our internal control over financial reporting which wereidentified in connection with the evaluation required by Rule 13a-15(e) ofthe Exchange Act that occurred during the second quarter ended June 30, 2007that has materially affected, or is reasonably likely to materially affect,Advent’s internal control over financial reporting.

**PART II. OTHERINFORMATION**

**Item 1.    LegalProceedings**

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

OnMarch 8, 2005, certain of the former shareholders of Kinexus and theshareholders’ representative filed suit against Advent in the Delaware ChanceryCourt. The complaint alleges that Advent breached the Agreement and Plan ofMerger dated as of December 31, 2001 pursuant to which Advent acquired all ofthe outstanding shares of Kinexus due principally to the fact that no amountwas paid by Advent on an earn-out of up to $115 million. The earn-out, whichwas payable in cash or stock at the election of Advent, was based upon Kinexusmeeting certain revenue targets in both 2002 and 2003. The complaint seeksunspecified compensatory damages, an accounting and restitution for unjustenrichment. Advent advised the shareholders’ representative in January 2003that the earn-out terms had not been met in 2002 and accordingly no earn-outwas payable for 2002 and would not be payable for 2003. ****Some discovery wasconducted by plaintiffs in 2005, but no further discovery has been conductedsince December 2005 and Advent has received no further communication fromplaintiffs since that time.****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.

**Item 1A. Risk Factors**

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

The purchase of our software products often requiresprospective customers to provide significant executive-level sponsorship and tomake major systems architecture decisions. As a result, we must generallyengage in relatively lengthy sales and contracting efforts. Sales transactionsmay therefore be delayed during the customer decision process because we mustprovide a significant level of education to prospective customers regarding theuse and benefit of our products. While we have seen improved economicconditions in recent years, customers are still cautious about capital andinformation technology expenditures. As a result, the sales cycle associatedwith the purchase of our solutions is typically between two and twelve monthsdepending upon the size of the client, and is subject to a number ofsignificant risks over which we have little or no control, including customers’budgeting constraints, internal selection procedures, and changes in customerpersonnel, among others.

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

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

We derive a significant portion of our net revenues fromthe licensing of Axys and Geneva products. In addition, many of our otherapplications, such as Moxy, Partner and various data services have beendesigned to provide an integrated solution with either of these two products.As a result, we believe that for the next several years a majority of our netrevenues will depend upon continued market acceptance of Axys and Geneva, andupgrades to those products. In addition, APX, our newest portfolio accountingand reporting product, is of critical importance in providing an upgrade pathfor many of our Axys customers. Our long-term growth could be harmed if we areunable to establish APX as a leading product in the market. As a result, we maynot be able to successfully upgrade existing Axys clients to APX, or to attractnew customers to buy APX.

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

We believe that the market for large investmentmanagement software systems may be affected by a number of factors, includingreductions in capital expenditures by large customers and poor performance ofmajor financial markets. The target clients for our products include a range offinancial services organizations that manage investment portfolios. In additionin our MicroEdge business segment, we target corporations, public funds,universities and non-profit organizations, which also manage investmentportfolios and have many of the same needs. The success of many of our clientsis intrinsically linked to the health of the financial markets. We believe thatdemand for our solutions has been, and could continue to be, disproportionatelyaffected by fluctuations, disruptions, instability or downturns in the economyand financial services industry which may cause clients and potential clientsto exit the industry or delay, cancel or reduce any planned expenditures forinvestment management systems and software products. 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. We have, in the past, experienced a number of market downturns inthe financial services industry and resulting declines in informationtechnology spending, which has caused longer sales and contracting cycles,deferral or delay of information technology projects and generally reducedexpenditures for software and related services, and we believe that futureuncertainty about financial markets and the financial services sector couldhave a material adverse effect on our revenues.

**If Our Existing Customers Do Not Renew Their Perpetual MaintenanceContracts, Our Business Will Suffer**

Despite Advent’s transition toterm licensing, we expect to continue to derive a significant portion of ourrevenue from our client’s renewal of perpetual maintenance contracts and suchrenewals are critical to our future success. Factors that may affect therenewal rate of our maintenance contracts include:

·                  The price, performance and functionality of oursolutions;

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

·                  The effectiveness of our maintenance and supportservices; and

·                  Our ability to develop complementary products andservices.

Mostof our perpetual license customers renew their annual maintenance although ourcustomers have no obligation to renew such maintenance after the first year oftheir license agreements. In addition, our customers may select maintenancelevels less advantageous to us upon renewal, which may reduce recurring revenuefrom these customers.

**We Face Competition**

The market for investment management software iscompetitive and highly fragmented, is subject to rapid change and is sensitiveto new product introductions and marketing efforts by industry participants.Our largest single source of competition is from proprietary systems used byexisting and potential clients, many of whom develop their own software fortheir particular needs and therefore may be reluctant to license softwareproducts offered by independent vendors such as Advent. Other 

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competitors include providers of software and related services as wellas providers of outsourced services. Many of our competitors have longeroperating histories and greater financial, technical, sales and marketingresources than we do. In addition, consolidation has occurred among some of thecompetitors in our markets. Competitors vary in size, scope of servicesoffered and platforms supported. In 2005 and2006, seven of our competitors were acquired with the possibility of formingeven larger companies through additional acquisitions of companies andtechnologies.Any furtherconsolidation among our competitors may result in stronger competitors in ourmarkets and may therefore either result in a loss of market share or harm ourresults of operations. In addition, we also face competition from potential newentrants into our market that may develop innovative technologies or businessmodels. We cannot guarantee that we will be able to compete successfullyagainst current and future competitors or that competitive pressure will notresult in price reductions, reduced operating margins or loss of market share,any one of which could seriously harm our business.

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

The market for our products is characterized by rapidtechnological change, changes in customer demands, evolving industry standardsand new regulatory requirements. New products based on new technologies or newindustry standards can render existing products obsolete and unmarketable. As aresult, our future success will continue to depend upon our ability to developnew products or product enhancements that address the future needs of ourtarget markets and to respond to their changing standards and practices. Forexample, we are currently engaged in validation and beta cycles for major newreleases of several key products, including APX and Geneva. Additionally in thelatter half of 2007, we plan to add two new product functionalities to oursuite: 1) a trading compliance solution; and, 2) an analytics solution whichwill be integrated into our APX 2.0 release.

We may not be successful in developing, introducing,marketing and licensing our new products or product enhancements on a timelyand cost effective basis, or at all, and our new products and productenhancements may not adequately meet the requirements of the marketplace orachieve market acceptance. Delays in the commencement of commercial shipmentsof new products or enhancements may result in client dissatisfaction and delayor loss of product revenues. In addition, clients may delay purchases inanticipation of new products or product enhancements. Our ability to developnew products and product enhancements is also dependent upon the products ofother software vendors, including certain system software vendors, such asMicrosoft Corporation, Sun Microsystems, database vendors and development toolvendors. If the products of such vendors have design defects or flaws, areunexpectedly delayed in their introduction, or are unavailable on acceptableterms, our business could be seriously harmed.

**Our Operating Results May Fluctuate Significantly**

We are more than halfway through our transition to apredominantly term license model. Until we substantially complete ourtransition to a term license model, our net revenues will be affected by thecontinued reduction in perpetual license revenue and by the relatively slowerrevenue recognition associated with the term license model, which is typically over a three-year period.Under a perpetual model, customers purchase licenses to use our softwareindefinitely and generally we recognize all license revenue at the time ofsale; maintenance is purchased under an annual renewable contract, andrecognized ratably over the contract period. Under a term model, customerspurchase a license to use our software and receive maintenance for a limitedperiod of time and we recognize the revenue ratably over the length of thecontract.

During the six months ended June 30 2007, termlicense revenues comprised approximately 21% of term license,maintenance and other recurring revenues as compared to approximately 10% inthe first half of 2006. Term licensecontracts are comprised of both software licenses and maintenance services.Individual perpetual software licenses vary significantly in value, and thevalue and timing of these transactions can therefore cause our quarterlyperpetual license revenues to fluctuate.

When a customer purchases a term license together withimplementation services we do not recognize any revenue under the contractuntil the implementation services are substantially completed. If theimplementation services are still in progress as of quarter-end, we will deferall of the contract revenues to a subsequent quarter. As a result of these andother factors, our quarterly net revenues may fluctuate significantly. Ourexpense levels are relatively fixed in the short-term. Due to the fixed natureof these expenses, combined with the relatively high gross margin historicallyachieved on our products, an unanticipated decline in net revenues in anyparticular quarter may adversely affect our operating results. For example,during the second quarter of 2007, we deferred net revenues of $1.4 million anddeferred directly related expenses of $0.9 million. The impact of these deferralson our operating income for the second quarter of 2007 was approximately $0.5million.

In addition, we experience seasonality in our perpetuallicense revenue. The fourth quarter of the year typically has the highestperpetual license fee revenue, followed by lower perpetual license revenue inthe first quarter of the following year. We believe that this seasonalityresults primarily from customer budgeting cycles and the annual nature of someAUA contracts, and expect this seasonality to continue in the future.

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

**Our Operating Results May Not Be Reflective of Our Future Financial Performance**

During the second quarter of2007, we recognized approximately 80% 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 significantdecline in new business generated in any quarter may not affect our results ofoperations in that quarter but will have an impact on our revenue growth ratein future quarters. Additionally, a decline in renewals of term agreements,maintenance or data contracts during a quarter will not be fully reflected inour financial performance in that quarter. For example, because we recognizerevenue ratably, the non-renewal of term agreements or maintenance contractslate in a quarter may have very little impact on revenue for that quarter, butwill reduce revenue in future quarters. In addition, we may be unable to adjustour costs in response to reduced revenue.

Further, solely relying on ourhistorical operating results on a generally accepted accounting principles(GAAP) basis may not be useful in predicting our future operating results.Non-GAAP information that we report, such as our quarterly bookings andmaintenance renewal rates, may assist investors in evaluating our futurefinancial position. However, placing undue reliance upon non-GAAP or operatinginformation is not appropriate because this information is neither standardizedacross companies nor subjected to the same control activities and auditprocedures that produce our GAAP financial results.

**We Must Retain and Recruit Key Employees**

We believe that our future success is dependenton the continued employment of our senior management and our ability toidentify, attract, motivate and retain qualified technical, sales and otherpersonnel. 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. Therefore, we needto identify, attract, motivate and retain such employees with therequisite education, backgrounds and industry experience.  However,experienced personnel in the information technology industry are in high demandand competition for their talents is intense, especially in the San FranciscoBay Area where the majority of our employees are located. For example, inFebruary 2007, one of our executives resigned from the Company to become theChief Executive Officer of an internet company.

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

We may also choose to create additional performance andretention incentives in order to retain our employees, including the grantingof additional stock options, restricted stock, restricted stock units, stockappreciation rights, performance shares or performance units to employees orissuing incentive cash bonuses. Such incentives may either dilute our existingstockholder base or result in unforeseen operating expenses which may have a materialadverse effect on our operating results, which may result in our stock pricefalling; or may not be valued as highly by our employees which may createretention issues.

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

We market and sell our products in the United States and,to a lesser extent, internationally. To further expand our internationaloperations, we would need to establish additional locations, acquire otherbusinesses or enter into additional distribution relationships in other partsof the world. Any further expansion of our existing international operationsand entry into new international markets could require significant managementattention and financial resources. We cannot be certain that establishingbusinesses in other countries will produce the desired levels of revenues, suchas in the case of Advent Hellas which produced less than satisfactory revenuesand profitability before its sale in 2005. We currently have limited experiencein developing localized versions of our products and marketing and distributingour products internationally. In addition, international operations are subjectto other inherent risks, including:

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·                  the impact of recessions in economies outside theUnited States;

·                  greater difficulty in accounts receivablecollection and longer collection periods;

·                  unexpected changes in regulatory requirements;

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

·                  difficulties in and costs of staffing and managingforeign operations;

·                  reduced protection for intellectual propertyrights in some countries;

·                  potentially adverse tax consequences; and

·                  political and economic instability.

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

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

From 2001 through the middle of 2003, our strategyfocused on growth through the acquisition of additional complementarybusinesses. During those years, we made five major acquisitions includingKinexus Corporation, Techfi Corporation and Advent Outsource Data ManagementLLC, and also acquired all of the common stock of five of our Europeandistributor’s subsidiaries. In addition, we purchased our European distributor’sremaining two subsidiaries in the United Kingdom and Switzerland in May 2004.More recently, in December 2006, we acquired East Circle Solutions, Inc., adeveloper of investment management billing solutions to integrate their productinto our software offerings.

The complex process of integrating our acquisitions hasrequired and will continue to require significant resources, particularly inlight of our relative inexperience in integrating acquisitions. Integratingthese acquisitions in the past has been time-consuming, expensive and disruptiveto our business. This integration process has strained our managerialresources, resulting in the diversion of these resources from our core businessobjectives and may do so in the future. Failure to achieve the anticipatedbenefits of these acquisitions or to successfully integrate the operations ofthese entities has harmed and could potentially harm our business, results ofoperations and cash flows in future periods. For example, in the first quarterof 2003, we closed our Australian subsidiary because it failed to perform at asatisfactory profit level and similarly in the fourth quarter of 2005, wedisposed of our Advent Hellas subsidiary because of less than satisfactoryprofitability. In addition, as we have expanded into new business areas and builtnew offerings through strategic alliances and internal development, as well asacquisitions, some of this expansion has required significant management timeand resources without generating required revenues. We have had difficulty andmay continue to have difficulty creating demand for such offerings. Forexample, demand for our Techfi product line was significantly lower thanexpected and thus we discontinued certain products within our Techfi productline in September 2004. As a result, we recorded a non-cash impairmentcharge of $3.4 million in the third quarter of 2004 to write-off the carryingvalue of certain Techfi-related intangible assets. Furthermore, we may face other unanticipated costs from ouracquisitions, such as the disputes involving earn-out and incentivecompensation amounts, similar to those we have experienced with our Kinexus andAdvent Outsource acquisitions.

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

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

We have made and may make future investments in privatelyheld companies, many of which are considered in the start-up or developmentstages. These investments, which we classify as other assets on our condensedconsolidated balance sheets, are inherently risky, as the market for thetechnologies or products these companies have under development is typically inthe early stages and may never materialize. The value of the investment inthese companies is influenced by many factors, including the operatingeffectiveness of these companies, the overall health of these companies’industries, the strength of the private equity 

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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 orother asset write-downs will not occur. If future write-downs do occur, theycould harm our business and results of operations.

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

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

**Our Stock Price May Fluctuate Significantly**

Like many companies in the technology and emerging growthsector, our stock price may be subject to wide fluctuations, particularlyduring times of high market volatility. If net revenues or earnings in anyquarter or our financial guidance for future periods fail to meet theinvestment community’s expectations, our stock price is likely to decline. Inaddition, our stock price is affected by trends in the financial servicessector and by broader market trends unrelated to our performance. For instance,in the event of increased hostilities abroad or terrorist attacks on U.S. soil,there could be increased market volatility, which could negatively impact ourstock price.

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

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

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

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

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

We cannot be certain that our products or services do notinfringe the intellectual property rights of others. As a result, we may besubject to litigation and claims, including claims of infringement of patents,copyrights and other intellectual property rights of third parties that wouldbe time-consuming and costly to resolve. If we discovered that our products orservices violated the intellectual property rights of third parties, we mayhave to make substantial changes to our products or services or obtain licensesfrom such third parties. We might not be able to obtain such licenses onfavorable terms or at all, and we may be unable to change our productssuccessfully or in a timely manner. Failure to resolve an infringement mattersuccessfully or in a timely 

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manner, would force us to incur significant costs, including damages,redevelopment costs, diversion of management’s attention and satisfaction ofindemnification obligations that we have with our clients, as well as preventus from selling certain products or services.

**Catastrophic Events Could Adversely Affect Our Business**

Our operations are exposed to potential disruption byfire, earthquake, power loss, telecommunications failure, and other eventsbeyond our control. Additionally, we are vulnerable to interruption caused byterrorist incidents. For example, our facilities in New York were temporarilyclosed due to the September 11, 2001 terrorist attacks. Immediately afterthe terrorist attacks, our clients who were located in the World Trade Centerarea were concentrating on disaster recovery rather than licensing additionalsoftware components, while the grounding of transportation impeded ourprofessional services employees’ ability to travel to client sites.Additionally, during the temporary closure of the U.S. stock markets, our clientsdid not use our market data services. 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 upon which wedepend.

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

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

Our products may contain undetected software errors orscalability limitations at any point in their lives, but particularly whenfirst introduced, such as our APX product, or as new versions are released.Despite testing by us and by current and potential customers, errors may not befound in new products until after commencement of commercial shipments,resulting in a loss of or a delay in market acceptance, damage to ourreputation, customer dissatisfaction and reductions in revenues and margins,any of which could seriously harm our business. Additionally, our agreementswith customers that attempt to limit our exposure to liability claims may notbe 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**

OurChief Executive Officer and the Chairman of our board of directors beneficiallyown or control, indirectly or directly, a substantial number of shares of ourcommon stock (approximately 33% as of the record date of March 23, 2007 for ourmost recent Annual Meeting of Stockholders). As a result, if these persons acttogether, they will have the ability to exert significant influence on matterssubmitted to our stockholders for approval, such as the election and removal ofdirectors, amendments to our certificate of incorporation and the approval ofany business combination. These actions may be taken even if they are opposedby other stockholders or it may be difficult to approve these actions withouttheir consent. This concentration of ownership may also have the effect ofdelaying or preventing a change of control of our company or discouragingothers from making tender offers for our shares, which could prevent ourstockholders from receiving a premium for their shares.

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

The Sarbanes-Oxley Act (“the Act”) of 2002 requiredchanges in some of our corporate governance and securities disclosure and/orcompliance practices. As part of the Act’s requirements, the SEC has enactednew rules on a variety of subjects, and the Nasdaq Stock Market has enacted newcorporate governance listing requirements. These developments have increased andmay in the future increase our accounting and legal compliance costs and couldalso expose us to additional liability if we fail to comply with these newrules and reporting requirements. In fiscal 2006 and 2005, we incurredapproximately $1.3 million and $1.8 million, respectively, in Sarbanes-Oxleyrelated expenses consisting of external consulting costs and auditor fees, andthe Company anticipates similarly spending a significant amount for its 2007compliance 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.

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

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

·                  Software revenue recognition

·                  Accounting for stock-based compensation

·                  Accounting for income taxes

·                  Accounting for business combinations and relatedgoodwill

In particular, in the firstquarter of 2006, we adopted SFAS 123R which requires the measurement of allstock-based compensation to employees, including grants of employee stockoptions, restricted stock units and stock appreciation rights, using afair-value-based method and the recording of such expense in our condensedconsolidated statements of operations. The adoption of SFAS 123R had asignificant adverse effect on our results of operations. It will continue tosignificantly adversely affect our results of operations and may impact the wayin which we conduct our business.

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

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

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

As of December 31, 2006, approximately 400 of our clientsutilize trading commissions (“soft dollar arrangements”) to pay for softwareproducts and services. During fiscal 2006 and 2005, the total value of Adventproducts and services paid with soft dollars was approximately 5% and 6% 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 offered our customers the ability to pay for Advent products andother third party products and services through brokerage commissions and otherfee-based arrangements. We will continue to allow clients to utilize softdollar arrangements to pay for Advent software products and services throughother independent broker/dealers.

InJuly 2006, the SEC published an Interpretive Release that provides guidance onmoney managers’ use of client commissions to pay for brokerage and researchservices under the “soft dollars” safe harbor, which is set forth in Section28(e) of the Securities Exchange Act of 1934. The Interpretive Releaseclarifies that money managers may use client commissions to pay only foreligible brokerage and research services. Among other matters, the InterpretiveRelease states that eligible brokerage includes those products and servicesthat relate to the execution of the trade from the point at which the moneymanager communicates with the broker-dealer for the purpose of transmitting anorder for execution, through the point at which funds or securities aredelivered or credited to the advised account. In addition, for “mixed-use” items (such as trade order managementsystems) that are partly eligible and partly ineligible, the InterpretiveRelease states that money managers 

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must make areasonable allocation of client commissions in accordance with the eligible andineligible uses of the items. Based on this new guidance, our customers maychange their method of paying for certain Advent products or services from softto hard dollars, and as a result seek to reduce their usage of these productsor services in order to avoid increasing expenses, which could cause ourrevenues to decrease.

**Covenants in Our Credit Facility Agreement Could Adversely Affect ourFinancial Condition**

In February 2007, we entered into a senior securedfacility agreement which provides us with a revolving line of credit up to anaggregate amount of $75.0 million. Our continued ability to borrow under ourcredit facility is subject to compliance with certain financial andnon-financial covenants. The financial covenant is limited to a maximum ratioof senior debt to 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 theprescribed timeframe, the assets of the Company (subject to the amountborrowed) may be attached or seized by the lender.

**Security Risks May Harm Our Business**

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

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

Effectiveinternal control is necessary for us to provide reliable financial reports. Ifwe cannot provide reliable financial reports, our business and operatingresults could be harmed. We have in the past discovered, and may in the futurediscover, areas of our internal control that need improvement including controldeficiencies that may constitute material weaknesses. For example, as 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 of thiscontrol deficiency, the Company’s disclosure of stock-based compensationexpense for fiscal 2003 and 2004 and first three quarters of 2004 and 2005 wererevised.

During 2006, weimplemented controls and procedures to improve our internal control overfinancial reporting and address the material weaknesses identified in fiscal2004 and 2005. As a result, management concluded that the Company’s internalcontrol over financial reporting was effective as of December 31, 2006 and June30, 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 be detected.

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Any failure to implementor maintain improvements in our internal control over financial reporting, ordifficulties encountered in the implementation of these improvements in ourcontrols, could cause significant deficiencies or material weaknesses in ourinternal controls and consequently cause us to fail to meet our reportingobligations. Any failure to implement or maintain required new or improvedinternal controls could also cause investors to lose confidence in our reportedfinancial information, which could have a negative impact on the trading priceof our stock.

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

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

Ourcurrent expectation is that our fiscal 2007 pre-tax income will be a modestamount, due primarily to the impact of expensing for stock-based compensation,the short-term negative impact on net revenues from our transition to a termlicense model, and the investment in the development and growth of ourbusiness. One element of our quantitative analysis of any control deficiency isits actual or potential financial impact, and any impact that is greater than5% of our pre-tax income (loss) in any quarter may be more likely to result inthat deficiency being determined to be a significant deficiency or a materialweakness. Accordingly, our projection of fiscal 2007 pre-tax income at a modestprofit will make it statistically less likely for us and our independentregistered public accounting firm to determine that a control deficiency is nota material weakness.

Inaddition, if management or our independent registered public accountants identifyerrors in our interim or annual financial statements during 2007, it isstatistically more likely that such errors may meet the quantitative thresholdestablished under Staff Accounting Bulletin No. 99, “Materiality”, that could,depending upon the complete qualitative and quantitative analysis, result inour having to restate previously issued financial statements.

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

**Issuer Purchases of Equity Securities**

Our Board of Directors (the “Board”) has approved commonstock repurchase programs authorizing management to repurchase shares of theCompany’s common stock in the open market to enhance shareholder value. Thetiming and actual number of shares subject to repurchase are at the discretionof management and are contingent on a number of factors, including the price ofour stock, general market conditions and alternative investment opportunities.The purchases are funded from available working capital or debt.

OnFebruary 9, 2007, the Company’s Board authorized the repurchase of up to anadditional 2.25 million shares of outstanding common stock. During the secondquarter of 2007, Advent completed the share repurchases under this program andrepurchased an aggregate 1.7 million shares of common stock for a total cashoutlay of $61.0 million and at an average price of $35.01 per share. The following table provides a month-to-monthsummary of the repurchase activity under the stock repurchase programs approvedby the Board in February 2007 during the three months ended June 30, 2007:
|            | ** ** | ** **                          | ** ** | ** **         | ** ** | **Maximum**                              | ** ** |
|------------|------------|-------------------------------------|------------|--------------------|------------|------------------------------------------|------------|
| ** ** | ** ** | **Total**                           | ** ** | **Average**        | ** ** | **Number of Shares That** | ** ** |
| ** ** | ** ** | **Number**                          | ** ** | **Price**          | ** ** | **May Yet Be Purchased**  | ** ** |
| ** ** | ** ** | **of Shares**                  | ** ** | **Paid**           | ** ** | **Under Our Share**            | ** ** |
| ** ** | ** ** | **Purchased (1)**              | ** ** | **Per Share** | ** ** | **Repurchase Programs**             | ** ** |
| ** ** | ** ** | **(shares in thousands)** | ** ** |
|       |       |                                |       |               |       |                                     |       |
| April 2007 |       | —                              |       | $                  | —     |                                     | 1,743      |   |
| May 2007   |       | 1,159                               |       | $                  | 34.47      |                                     | 584        |   |
| June 2007  |       | 584                                 |       | $                  | 36.08      |                                     | —     |   |
|       |       |                                |       |               |       |                                     |       |
| Total      |       | 1,743                               |       | $                  | 35.01      |                                     | —     |   |

 

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(1) All shareswere repurchased as part of publicly announced plans.

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**Item 3.    DefaultsUpon Senior Securities**

None.

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

The Annual Meeting of Stockholders (the “Annual Meeting”)of Advent Software, Inc. was held at the principal office of the Company at 600Townsend Street, San Francisco, California 94103 on May 16, 2007. Stockholdersof record at the close of business on March 23, 2007 (the “Record Date”) wereentitled to notice of and to vote at the meeting. As of the Record Date,26,982,974 shares of the Company’s common stock were issued and outstanding,and a quorum of 26,093,231 shares of common stock was represented in person orby proxy at the Annual Meeting.

At the Annual Meeting, two items were voted upon:

1.                                       To elect six directors to serve for the ensuingyear and until their successors are duly elected and qualified.
|                       | ** ** | **Number of Shares** | ** ** |
|-----------------------|------------|--------------------------------|------------|
| ** **            | ** ** | **Voted For**             | ** ** | **Withheld** | ** ** |
|                  |       |                           |       |   |   |
| A. George Battle      |       | 26,031,875                     |       | 61,356 |   |
| Stephanie G.  DiMarco |       | 26,057,964                     |       | 35,267 |   |
| James D. Kirsner      |       | 26,047,533                     |       | 45,698 |   |
| James P. Roemer       |       | 26,046,586                     |       | 46,645 |   |
| John H. Scully        |       | 25,347,467                     |       | 745,764 |   |
| Wendell G. Van Auken  |       | 25,741,606                     |       | 351,625 |   |

 

2.                                       To ratify the appointment ofPricewaterhouseCoopers LLP as the independent registered public accounting firmof the Company for the year ending December 31, 2007.
| ** **                                                 | ** ** | **Number of Shares** | ** ** |
|------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                 | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Broker** | ** ** |
| ** **                                                 | ** ** | **For**                        | ** ** | **Against** | ** ** | **Abstained** | ** ** | **Non-Votes** | ** ** |
| Ratification of  appointment of PricewaterhouseCoopers LLP |       | 25,732,899                     |       | 355,424 |   | 4,908 |   | — |   |

 

**Item 5.    OtherInformation**

None.

**Item 6.    Exhibits**

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

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

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

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

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**SIGNATURES**

Pursuant to the requirements of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.
|                        | ADVENT SOFTWARE, INC. |
|------------------------|-----------------------|
|                   |                  |
| Dated: August 9,  2007 | By:                   | /s/ Graham V. Smith |
|                   |                  | Graham V. Smith |
|                   |                  | *Executive Vice President, Chief Financial Officer  and Secretary  (Principal Financial and Accounting Officer)* |

 

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