**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-Q**

 
| **x**      | ** ** | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  for the quarterly period ended September 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**

 

**ADVENTSOFTWARE, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                               | ** ** | **94-2901952**                       |
|------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or          |       | (IRS Employer Identification Number) |
| organization)                                              |       |                                 |
| ** **                                                 | ** ** | ** **                           |
| **600 Townsend Street, San Francisco,  California 94103**  |
| (Address of principal executive offices and  zip code)     |
|                                                       |       |                                 |
| **(415) 543-7696**                                    |
| (Registrant’s telephone number, including  area code) |

 

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

Yes x  No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one): Large accelerated filer  ̈   Accelerated filer x   Non-accelerated filer o

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o No x

 

The number of shares of the registrant’s Common Stock outstanding as ofOctober 31, 2007 was 26,310,161.

 

 

----

 

**TABLE OF CONTENTS**

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

 

2

----

 

**PARTI. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**ADVENT SOFTWARE, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(In thousands)**

**(Unaudited)**

** **
| ** **                                      | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|-------------------------------------------------|------------|------------------|------------|-----------------|------------|
| ** **                                      | ** ** | **2007**         | ** ** | **2006**        | ** ** |
| **ASSETS**                                      | ** ** | ** **       | ** ** | ** **      | ** ** |
| Current assets:                                 |       |             |       |            |       |
| Cash and cash equivalents                       |       | $                | 42,803     |            | $          | 30,187 |   |
| Marketable securities                           |       | —           |       | 24,881          |       |
| Accounts receivable, net                        |       | 40,531           |       | 41,336          |       |
| Deferred taxes, current                         |       | 7,954            |       | 7,950           |       |
| Prepaid expenses and other                      |       | 14,358           |       | 11,828          |       |
| Total current assets                            |       | 105,646          |       | 116,182         |       |
| Property and equipment, net                     |       | 28,243           |       | 27,338          |       |
| Goodwill                                        |       | 101,183          |       | 98,382          |       |
| Other intangibles, net                          |       | 6,579            |       | 6,294           |       |
| Deferred taxes, long-term                       |       | 75,591           |       | 75,594          |       |
| Other assets, net                               |       | 9,181            |       | 15,857          |       |
|                                            |       |             |       |            |       |
| Total assets                                    |       | $                | 326,423    |            | $          | 339,647 |   |
|                                            |       |             |       |            |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**   | ** ** | ** **       | ** ** | ** **      | ** ** |
| Current liabilities:                            |       |             |       |            |       |
| Accounts payable                                |       | $                | 3,066      |            | $          | 5,083 |   |
| Accrued liabilities                             |       | 22,676           |       | 22,992          |       |
| Deferred revenues                               |       | 94,716           |       | 82,118          |       |
| Income taxes payable                            |       | 4,482            |       | 4,989           |       |
| Total current liabilities                       |       | 124,940          |       | 115,182         |       |
| Deferred income taxes                           |       | 32               |       | 225             |       |
| Deferred revenues, long-term                    |       | 5,112            |       | 3,195           |       |
| Long-term debt                                  |       | 20,000           |       | —          |       |
| Other long-term liabilities                     |       | 15,888           |       | 11,418          |       |
|                                            |       |             |       |            |       |
| Total liabilities                               |       | 165,972          |       | 130,020         |       |
|                                            |       |             |       |            |       |
| Commitments and contingencies (See Note 12)     |       |             |       |            |       |
|                                            |       |             |       |            |       |
| Stockholders’ equity:                      |       |             |       |            |       |
| Common stock                                    |       | 259              |       | 272             |       |
| Additional paid-in capital                      |       | 311,841          |       | 309,993         |       |
| Accumulated deficit                             |       | (165,486         | )          | (111,387        | )          |
| Accumulated other comprehensive income          |       | 13,837           |       | 10,749          |       |
| Total stockholders’ equity                 |       | 160,451          |       | 209,627         |       |
|                                            |       |             |       |            |       |
| Total liabilities and stockholders’ equity |       | $                | 326,423    |            | $          | 339,647 |   |
|                                                 |            |                  |            |                 |            |  |  |  |  |

 

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

 

3

----

 

**ADVENT SOFTWARE, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
| ** **                                                     | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                                                     | ** ** | **2007**                            | ** ** | **2006**                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Net revenues:**                                              | ** ** | ** **                          | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Term license, maintenance and other  recurring                 |       | $                                   | 43,046     |                               | $          | 36,084 |   | $ | 122,782 |   | $ | 101,441 |   |
| Perpetual license fees                                         |       | 6,054                               |       | 5,061                              |       | 17,670 |   | 19,269 |   |
| Professional services and other                                |       | 6,449                               |       | 4,732                              |       | 15,452 |   | 13,183 |   |
|                                                           |       |                                |       |                               |       |   |   |   |   |
| Total net revenues                                             |       | 55,549                              |       | 45,877                             |       | 155,904 |   | 133,893 |   |
|                                                           |       |                                |       |                               |       |   |   |   |   |
| **Cost of revenues:**                                          | ** ** | ** **                          | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Term license, maintenance and other  recurring                 |       | 9,757                               |       | 7,915                              |       | 27,837 |   | 24,214 |   |
| Perpetual license fees                                         |       | 218                                 |       | 181                                |       | 632 |   | 607 |   |
| Professional services and other                                |       | 7,662                               |       | 6,894                              |       | 19,950 |   | 16,967 |   |
| Amortization of developed technology                           |       | 332                                 |       | 251                                |       | 1,018 |   | 909 |   |
|                                                           |       |                                |       |                               |       |   |   |   |   |
| Total cost of revenues                                         |       | 17,969                              |       | 15,241                             |       | 49,437 |   | 42,697 |   |
|                                                           |       |                                |       |                               |       |   |   |   |   |
| Gross margin                                                   |       | 37,580                              |       | 30,636                             |       | 106,467 |   | 91,196 |   |
|                                                           |       |                                |       |                               |       |   |   |   |   |
| **Operating expenses:**                                        | ** ** | ** **                          | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales and marketing                                            |       | 13,482                              |       | 12,115                             |       | 40,356 |   | 36,466 |   |
| Product development                                            |       | 9,334                               |       | 8,849                              |       | 30,006 |   | 25,599 |   |
| General and administrative                                     |       | 8,393                               |       | 8,262                              |       | 25,014 |   | 23,911 |   |
| Amortization of other intangibles                              |       | 463                                 |       | 1,028                              |       | 1,403 |   | 3,027 |   |
| Restructuring charges                                          |       | 113                                 |       | 54                                 |       | 902 |   | 320 |   |
|                                                           |       |                                |       |                               |       |   |   |   |   |
| Total operating expenses                                       |       | 31,785                              |       | 30,308                             |       | 97,681 |   | 89,323 |   |
|                                                           |       |                                |       |                               |       |   |   |   |   |
| Income from operations                                         |       | 5,795                               |       | 328                                |       | 8,786 |   | 1,873 |   |
| Interest and other income (expense), net                       |       | (138                                | )          | 656                                |       | 4,248 |   | 3,054 |   |
|                                                           |       |                                |       |                               |       |   |   |   |   |
| Income before income taxes                                     |       | 5,657                               |       | 984                                |       | 13,034 |   | 4,927 |   |
| Provision for (benefit from) income taxes                      |       | 2,361                               |       | 32                                 |       | 4,204 |   | (1,030 | ) |
|                                                           |       |                                |       |                               |       |   |   |   |   |
| **Net income**                                                 |       | $                                   | 3,296      |                               | $          | 952 |   | $ | 8,830 |   | $ | 5,957 |   |
|                                                           |       |                                |       |                               |       |   |   |   |   |
| Net income per share:                                          |       |                                |       |                               |       |   |   |   |   |
| Basic                                                          |       | $                                   | 0.13       |                               | $          | 0.03 |   | $ | 0.33 |   | $ | 0.20 |   |
| Diluted                                                        |       | $                                   | 0.12       |                               | $          | 0.03 |   | $ | 0.32 |   | $ | 0.19 |   |
|                                                           |       |                                |       |                               |       |   |   |   |   |
| Weighted average shares used to compute net  income per share: |       |                                |       |                               |       |   |   |   |   |
| Basic                                                          |       | 25,781                              |       | 27,937                             |       | 26,541 |   | 29,491 |   |
| Diluted                                                        |       | 27,401                              |       | 29,448                             |       | 27,911 |   | 30,882 |   |
|                                                                |            |                                     |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

4

----

 

**ADVENT SOFTWARE, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**  

 
| ** **                                                                         | ** ** | **Nine Months Ended September 30** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                           | ** ** | **2006** | ** ** |
| **Cash flows from operating activities:**                                          | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                  | 8,830      |   | $ | 5,957 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                               |       |   |   |
| Stock-based compensation                                                           |       | 10,047                             |       | 10,097 |   |
| Depreciation and amortization                                                      |       | 8,170                              |       | 10,109 |   |
| Loss on dispositions of fixed assets                                               |       | 444                                |       | 138 |   |
| Provision for doubtful accounts                                                    |       | 121                                |       | 618 |   |
| Reduction of allowance for sales returns                                           |       | (67                                | )          | (1,390 | ) |
| (Gain) loss on investments                                                         |       | (4,265                             | )          | 210 |   |
| Other-than-temporary loss on private equity  investments                           |       | 585                                |       | — |   |
| Deferred income taxes                                                              |       | (195                               | )          | (706 | ) |
| Other                                                                              |       | 54                                 |       | (91 | ) |
| Changes in operating assets and  liabilities:                                      |       |                               |       |   |   |
| Accounts receivable                                                                |       | 685                                |       | (1,041 | ) |
| Prepaid and other assets                                                           |       | (3,385                             | )          | (1,850 | ) |
| Accounts payable                                                                   |       | (1,017                             | )          | 1,297 |   |
| Accrued liabilities                                                                |       | (149                               | )          | 1,389 |   |
| Deferred revenues                                                                  |       | 14,582                             |       | 8,992 |   |
| Income taxes payable                                                               |       | 3,763                              |       | (1,977 | ) |
|                                                                               |       |                               |       |   |   |
| Net cash provided by operating activities                                          |       | 38,203                             |       | 31,752 |   |
|                                                                               |       |                               |       |   |   |
| **Cash flows from investing activities:**                                          | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Net cash used in acquisitions                                                      |       | (1,022                             | )          | — |   |
| Purchases of property and equipment                                                |       | (7,138                             | )          | (15,474 | ) |
| Capitalized software development costs                                             |       | (2,447                             | )          | (800 | ) |
| Proceeds from sale of private equity  investments                                  |       | 11,621                             |       | — |   |
| Purchases of marketable securities                                                 |       | —                             |       | (42,952 | ) |
| Sales and maturities of marketable  securities                                     |       | 24,921                             |       | 107,420 |   |
| Change in restricted cash                                                          |       | (372                               | )          | (1,256 | ) |
|                                                                               |       |                               |       |   |   |
| Net cash provided by investing activities                                          |       | 25,563                             |       | 46,938 |   |
|                                                                               |       |                               |       |   |   |
| **Cash flows from financing activities:**                                          | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Proceeds from common stock issued from  exercises of stock options                 |       | 17,937                             |       | 9,418 |   |
| Proceeds from common stock issued under the  employee stock purchase plan          |       | 1,829                              |       | 1,427 |   |
| Repurchase of common stock                                                         |       | (91,157                            | )          | (127,933 | ) |
| Proceeds from long-term borrowing                                                  |       | 25,000                             |       | — |   |
| Repayment of long-term borrowing                                                   |       | (5,000                             | )          | — |   |
|                                                                               |       |                               |       |   |   |
| Net cash used in financing activities                                              |       | (51,391                            | )          | (117,088 | ) |
|                                                                               |       |                               |       |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                      |       | 241                                |       | 85 |   |
|                                                                               |       |                               |       |   |   |
| **Net change in cash and cash equivalents**                                        |       | 12,616                             |       | (38,313 | ) |
| **Cash and cash equivalents at beginning of  period**                              |       | 30,187                             |       | 70,941 |   |
| ** **                                                                         | ** ** | ** **                         | ** ** | ** ** | ** ** |
| **Cash and cash equivalents at end of period**                                     |       | $                                  | 42,803     |   | $ | 32,628 |   |

 

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

 

5

----

 

**ADVENT SOFTWARE, INC.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1—Basis ofPresentation**

 

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

 

Advent has prepared these condensed consolidated financial statementsin accordance with the rules and regulations of the Securities and ExchangeCommission (“SEC”) applicable to interim financial information. Certaininformation and footnote disclosures included in financial statements preparedin accordance with accounting principles generally accepted in the UnitedStates of America have been omitted in these interim statements pursuant tosuch SEC rules and regulations. These interim financial statements should beread in conjunction with the audited financial statements and related notesincluded in Advent’s Annual Report on Form 10-K/A for the year endedDecember 31, 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 include alladjustments necessary to state fairly the financial position and results ofoperations for each interim period shown. All such adjustments occur in theordinary course of business and are of a normal, recurring nature.

 

Certain prior year amounts have been reclassified to conform to thecurrent presentation. These reclassifications do not affect total net revenues,net income or stockholders’ equity. Specifically, the Company changedits presentation of revenues and associated cost of revenues during the firstquarter of 2007 to more clearly show the nature and components of the Company’srevenues under a term licensing model and the predominance of revenue fromrecurring sources. Historically, the Company separated term license arrangementfees between license and maintenance revenues and allocated those revenues on a55%/45% basis, respectively. As a result of the increasing significance of termlicense revenues for the Company, Advent discontinued this practice during thefirst quarter of 2007, and now classifies all term license revenues, along withperpetual maintenance and other recurring revenues, in the caption “Termlicense, 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.

 

Additionally, the Company reclassified certain of the deferredrevenues and direct costs associated with its term service deferral from currentto long-term during the third quarter of 2007. With the evolution of the termservice deferral model, Advent is able to isolate amounts that will berecognized as revenue over 12 months from the balance sheet date. Advent hasreclassified those deferred revenues and prepaid expense amounts that will berecognized more than 12 months from the balance sheet date from current to longterm on the balance sheets. Prior period amounts, previously deemed notsignificant, have been reclassified to conform to the current presentation asfollows (in thousands):

 
| ** **                   | ** ** | **December 31, 2006** | ** ** |
|------------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **As Previously**     | ** ** | **Reclassification** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **Reported**          | ** ** | **Adjustment** | ** ** | **As Reclassified** | ** ** |
|                         |       |                  |       |   |   |   |   |
| Prepaid expenses and other   |       | $                     | 12,685     |   | $ | (857 | ) | $ | 11,828 |   |
| Other assets, net            |       | $                     | 15,000     |   | $ | 857 |   | $ | 15,857 |   |
| Deferred revenues            |       | $                     | 84,260     |   | $ | (2,142 | ) | $ | 82,118 |   |
| Deferred revenues, long-term |       | $                     | 1,053      |   | $ | 2,142 |   | $ | 3,195 |   |

 

**Note 2—RecentAccounting Pronouncements**

 

No recent accounting pronouncements have been issued which would have amaterial effect on Advent’s condensed consolidated financial position, resultsof operations, or cash flows.

 

6

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**Note 3—Stock-Based Compensation**

 

**Equity Award Activity**

 

Asummary of the status of the Company’s stock option and stock appreciationright (“SAR”) activity for the period presented follows:

 
| ** **                        | ** ** | ** **         | ** ** | ** **   | ** ** | **Weighted**         | ** ** | ** **         | ** ** |
|-----------------------------------|------------|--------------------|------------|--------------|------------|----------------------|------------|--------------------|------------|
| ** **                        | ** ** | ** **         | ** ** | **Weighted** | ** ** | **Average**          | ** ** | **Aggregate**      | ** ** |
| ** **                        | ** ** | **Number of**      | ** ** | **Average**  | ** ** | **Remaining**        | ** ** | **Intrinsic**      | ** ** |
| ** **                        | ** ** | **Shares**         | ** ** | **Exercise** | ** ** | **Contractual Life** | ** ** | **Value**          | ** ** |
| ** **                        | ** ** | **(in thousands)** | ** ** | **Price**    | ** ** | **(in years)**       | ** ** | **(in thousands)** | ** ** |
|                              |       |               |       |         |       |                 |       |               |       |
| Outstanding at December 31, 2006  |       | 5,292              |       | $            | 20.08      |                 |       |               |       |   |
| Options & SARs granted        |       | 644                |       | $            | 35.86      |                 |       |               |       |   |
| Options & SARs exercised      |       | (1,199             | )          | $            | 15.30      |                 |       |               |       |   |
| Options & SARs canceled       |       | (380               | )          | $            | 24.90      |                 |       |               |       |   |
| Outstanding at September 30, 2007 |       | 4,357              |       | $            | 23.31      |                 | 6.45       |               | $          | 103,273 |   |
| Exercisable at September 30, 2007 |       | 2,430              |       | $            | 20.52      |                 | 5.17       |               | $          | 64,434 |   |

 

Theaggregate intrinsic value is calculated as the difference between the exerciseprice of the underlying awards and the Company’s closing stock price of $46.97as of September 28, 2007 for options that were in-the-money as of that date.

 

Theweighted average grant date fair value of options and SARs granted during thenine months ended September 30, 2007 was $12.67 per share. The totalintrinsic value of options exercised during the nine months ended September 30,2007 and 2006 was $16.4 million and $7.7 million, respectively. The total cashreceived resulting from stock option exercises during the nine months endedSeptember 30, 2007 and 2006 was approximately $17.9 million and $9.4 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 nine months ended September 30, 2007 is as follows:
| ** **                        | ** ** | ** **         | ** ** | **Weighted**   | ** ** |
|-----------------------------------|------------|--------------------|------------|----------------|------------|
| ** **                        | ** ** | **Number of**      | ** ** | **Average**    | ** ** |
| ** **                        | ** ** | **Shares**         | ** ** | **Grant Date** | ** ** |
| ** **                        | ** ** | **(in thousands)** | ** ** | **Fair Value** | ** ** |
| ** **                        | ** ** | ** **         | ** ** | ** **     | ** ** |
| Outstanding at December 31, 2006  |       | 266                |       | $              | 29.81      |   |
| RSUs granted                      |       | 328                |       | $              | 36.73      |   |
| RSUs vested and released          |       | (1                 | )          | $              | 33.51      |   |
| RSUs canceled and returned        |       | (34                | )          | $              | 32.55      |   |
| Outstanding at September 30, 2007 |       | 559                |       | $              | 33.70      |   |

 

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 September 30, 2007 was $26.2million, based on the closing price of $46.97 per share as of September 28,2007.

 

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 vesting and are returned to the Company’s 2002 Stock Plan.

 

7

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

 

Duringthe nine months ended September 30, 2007, the Company issued 59,677 additionalshares under the ESPP. A total of 1,757,374 shares were reserved for futureissuance under the ESPP as of September 30, 2007.

 

**Stock-BasedCompensation Expense**

 

Theeffect of stock-based employee compensation expense recognized on Advent’scondensed consolidated statement of operations for the three and nine monthsSeptember 30, 2007 and 2006 were as follows (in thousands):

 
| ** **                                                      | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                                                      | ** ** | **2007**                            | ** ** | **2006**                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Statement of operations classification**                      | ** ** | ** **                          | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of term license, maintenance and other  recurring revenues |       | $                                   | 295        |                               | 200        |   | $ | 870 |   | 729 |   |
| Cost of professional services and other  revenues               |       | 189                                 |       | 172                                |       | 546 |   | 593 |   |
| Total cost of revenues                                          |       | 484                                 |       | 372                                |       | 1,416 |   | 1,322 |   |
|                                                            |       |                                |       |                               |       |   |   |   |   |
| Sales and marketing                                             |       | 998                                 |       | 1,291                              |       | 3,134 |   | 3,676 |   |
| Product development                                             |       | 749                                 |       | 692                                |       | 2,386 |   | 2,217 |   |
| General and administrative                                      |       | 988                                 |       | 1,093                              |       | 3,111 |   | 2,882 |   |
| Total operating expenses                                        |       | 2,735                               |       | 3,076                              |       | 8,631 |   | 8,775 |   |
|                                                            |       |                                |       |                               |       |   |   |   |   |
| Total stock-based employee compensation  expense                |       | $                                   | 3,219      |                               | $          | 3,448 |   | $ | 10,047 |   | $ | 10,097 |   |
|                                                            |       |                                |       |                               |       |   |   |   |   |
| Tax effect on stock-based employee  compensation (1)            |       | $                                   | (1,232     | )                                  | $          | — |   | $ | (3,561 | ) | $ | — |   |
|                                                            |       |                                |       |                               |       |   |   |   |   |
| Net effect on net income                                        |       | $                                   | 1,987      |                               | $          | 3,448 |   | $ | 6,486 |   | $ | 10,097 |   |

 

----

(1)  Assumes aneffective tax rate of 0% for the three and nine months ended September 30, 2006due to the full valuation allowance established against the Company’s deferredtax assets during the fourth quarter of 2003. The valuation allowance wassubsequently released during the fourth quarter of 2006.

 

Duringthe third quarter of 2007, Advent modified its forfeiture calculation for RSUawards to better reflect both the recent experience with RSU forfeitures andthe longer cliff vesting periods. The effect of these modifications was toreduce stock-based compensation expense by $137,000 during the third quarter of2007. Refer to “Critical Accounting Policies and Estimates” in “Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations”for further information.

 

Approximately$283,000 and $123,000 of stock-based compensation was capitalized during thenine months ended September 30, 2007 and 2006, respectively, related tointernal use software, software development, and term license implementationprojects.

 

Asof September 30, 2007, total unrecognized compensation cost related to unvestedawards under all equity compensation plans, adjusted for estimated forfeitures,was $27.0 million and is expected to be recognized through the remainingvesting period of each grant, with a weighted average remaining period of3.8 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 September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|-------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                    | ** ** | **2007**                            | ** ** | **2006**                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Stock  Options & SARs** | ** ** | ** **                          | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Expected volatility           |       | 33.1% - 35.5%                       |       | 45.1% - 46.4%                      |       | 32.9% - 38.4% |   | 43.5% - 48.5% |   |
| Expected life (in years)      |       | 4.58                                |       | 5                                  |       | 4.58 |   | 5 |   |
| Risk-free interest rate       |       | 4.2% - 5.0%                         |       | 4.8% - 5.1%                        |       | 4.2% - 5.2% |   | 4.3% - 5.1% |   |
| Expected dividends            |       | None                                |       | None                               |       | None |   | None |   |

 
| **Employee  Stock Purchase Plan** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|---------------|------------|------------|------------|
| Expected volatility               |       | 35.5%      |       | 36.5%      |       | 35.5% - 36.5% |       | 36.5%      |       |
| Expected life (in months)         |       | 6          |       | 6          |       | 6             |       | 6          |       |
| Risk-free interest rate           |       | 5.0%       |       | 4.2%       |       | 4.2% - 5.0%   |       | 4.2%       |       |
| Expected dividends                |       | None       |       | None       |       | None          |       | None       |       |

 

8

----

 

Theexpected stock price volatility was determined based on an equally weightedaverage of historical and implied volatility of the Company’s commonstock. Advent determined that a blend of implied volatility andhistorical volatility is more reflective of the market conditions and a better indicatorof expected volatility than using purely historical volatility. The expected life was determined based onhistorical experience of similar awards, giving consideration to thecontractual terms of the stock-based awards, vesting schedules and expectationsof future employee behavior. The risk-free interest rate is based on theU.S. Treasury yield curve in effect at the time of grant for periodscorresponding with the expected life of the option. The dividend yieldassumption is based on the Company’s history of not paying dividends and theresultant future expectation of dividend payouts.

 

**Note 4—NetIncome 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. Potential common shares are reflected indiluted earnings per share by application of the treasury stock method, whichin the current period includes consideration of unamortized stock-basedcompensation and windfall tax benefits, as a result of the implementation of SFAS 123R.

 

The following table sets forth the computation of basic and diluted netincome per share (in thousands, except per-share data):

 
| ** **                                                                        | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                                                                        | ** ** | **2007**                            | ** ** | **2006**                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Numerator:**                                                                    | ** ** | ** **                          | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                        |       | $                                   | 3,296      |                               | $          | 952 |   | $ | 8,830 |   | $ | 5,957 |   |
|                                                                              |       |                                |       |                               |       |   |   |   |   |
| **Denominator:**                                                                  | ** ** | ** **                          | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Denominator for basic net income per  share-weighted average shares outstanding   |       | 25,781                              |       | 27,937                             |       | 26,541 |   | 29,491 |   |
|                                                                              |       |                                |       |                               |       |   |   |   |   |
| Dilutive common equivalent shares:                                                |       |                                |       |                               |       |   |   |   |   |
| Employee stock options, unvested RSUs and  other                                  |       | 1,620                               |       | 1,511                              |       | 1,370 |   | 1,391 |   |
|                                                                              |       |                                |       |                               |       |   |   |   |   |
| Denominator for diluted net income per  share-weighted average shares outstanding |       | 27,401                              |       | 29,448                             |       | 27,911 |   | 30,882 |   |
|                                                                              |       |                                |       |                               |       |   |   |   |   |
| Basic net income per share                                                        |       | $                                   | 0.13       |                               | $          | 0.03 |   | $ | 0.33 |   | $ | 0.20 |   |
| Diluted net income per share                                                      |       | $                                   | 0.12       |                               | $          | 0.03 |   | $ | 0.32 |   | $ | 0.19 |   |

 

Weighted average stock options, SARs and RSUs of approximately 0.8million and 1.4 million for the three and nine months ended September 30, 2007,respectively, were excluded from the calculation of diluted net income pershare because their inclusion would have been anti-dilutive. Similarly,weighted average stock options, SARs, RSUs and warrants of approximately 1.2million and 1.1 million for the three and nine months ended September 30, 2006,respectively, were excluded from the calculation of diluted net income pershare.

 

**Note 5—Goodwill**

 

The changes in the carrying value of goodwill for the nine months endedSeptember 30, 2007 were as follows (in thousands):

 
| ** **                    | ** ** | **Goodwill** | ** ** |
|-------------------------------|------------|--------------|------------|
|                          |       |         |       |
| Balance at December 31, 2006  |       | $            | 98,382     |   |
| Translation adjustments       |       | 2,779        |       |
| Additions                     |       | 22           |       |
|                          |       |         |       |
| Balance at September 30, 2007 |       | $            | 101,183    |   |

 

9

----

 

Foreigncurrency translation adjustments totaling $2.8 million reflect the weakening ofthe U.S. dollar versus European currencies during the nine months endedSeptember 30, 2007. Additions to goodwill of $22,000 reflected an additionalpayment related to the acquisition of East Circle Solutions, Inc.

 

**Note 6—OtherIntangibles**

 

The following is a summary of other intangibles as of September 30,2007 (in thousands):

 
| ** **                     | ** ** | **Average**      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                     | ** ** | **Amortization** | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
| ** **                     | ** ** | **Period**       | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                     | ** ** | **(Years)**      | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
| ** **                     | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Purchased technologies         |       | 4.9              |       | $                | 13,556     |             | $          | (12,899          | )          | $ | 657 |   |
| Product development costs      |       | 3.0              |       | 5,664            |       | (1,631           | )          | 4,033            |       |
|                           |       |             |       |             |       |             |       |             |       |
| Developed technology sub-total |       |             |       | 19,220           |       | (14,530          | )          | 4,690            |       |
|                           |       |             |       |             |       |             |       |             |       |
| Customer relationships         |       | 5.6              |       | 22,463           |       | (20,574          | )          | 1,889            |       |
| Other intangibles              |       | 2.5              |       | 307              |       | (307             | )          | —           |       |
|                           |       |             |       |             |       |             |       |             |       |
| Other intangibles sub-total    |       |             |       | 22,770           |       | (20,881          | )          | 1,889            |       |
|                           |       |             |       |             |       |             |       |             |       |
| Balance at September 30, 2007  |       |             |       | $                | 41,990     |             | $          | (35,411          | )          | $ | 6,579 |   |

 

The following is a summary of other intangibles as of December 31, 2006(in thousands):

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

 

The changes in the carrying value of other intangibles during the ninemonths ended September 30, 2007 were as follows (in thousands):

 
| ** **                           | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
|--------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                           | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                           | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
|                                 |       |             |       |             |       |             |       |
| Balance at December 31, 2006         |       | $                | 39,039     |             | $          | (32,745          | )          | $ | 6,294 |   |
| Additions                            |       | 2,447            |       | —           |       | 2,447            |       |
| Capitalized stock-based compensation |       | 216              |       | —           |       | 216              |       |
| Amortization                         |       | —           |       | (2,421           | )          | (2,421           | )          |
| Translation adjustments              |       | 288              |       | (245             | )          | 43               |       |
|                                 |       |             |       |             |       |             |       |
| Balance at September 30, 2007        |       | $                | 41,990     |             | $          | (35,411          | )          | $ | 6,579 |   |

 

10

----

 

Based on the carrying amount of intangible assets as of September 30,2007, the estimated future amortization is as follows (in thousands):

 
| ** **                        | ** ** | **Three**             | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|-----------------------|------------|--------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                        | ** ** | **Months Ended** | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **December 31**  | ** ** | **Years Ended December 31** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **2007**              | ** ** | **2008**                                   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **Total**  | ** ** |
| Estimated future amortization of: | ** ** | ** **            | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Developed technology              |       | $                     | 524        |                                       | $          | 1,959      |       | $          | 1,381      |       | $          | 826 |   | $ | 4,690 |   |
| Other intangibles                 |       | 465                   |       | 969                                        |       | 448        |       | 7          |       | 1,889      |       |
| Total                             |       | $                     | 989        |                                       | $          | 2,928      |       | $          | 1,829      |       | $          | 833 |   | $ | 6,579 |   |

** **

**Note7—Balance Sheet Detail**

 

The following is a summary of prepaid expenses and other (inthousands):

 
| ** **                       | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|----------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                       | ** ** | **2007**              | ** ** | **2006**             | ** ** |
| ** **                       | ** ** | ** **            | ** ** | ** **           | ** ** |
| Prepaid commission               |       | $                     | 3,849      |                 | $          | 3,121 |   |
| Prepaid contract expense         |       | 3,976                 |       | 1,847                |       |
| Prepaid royalty                  |       | 2,247                 |       | 2,027                |       |
| Other                            |       | 4,286                 |       | 4,833                |       |
| Total prepaid expenses and other |       | $                     | 14,358     |                 | $          | 11,828 |   |

 

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

 
| ** **                          | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|-------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                          | ** ** | **2007**              | ** ** | **2006**             | ** ** |
|                                |       |                  |       |                 |       |
| Long-term investments               |       | 500                   |       | 8,459                |       |
| Long-term prepaid commissions       |       | 3,349                 |       | 3,013                |       |
| Deposits                            |       | 3,404                 |       | 2,443                |       |
| Prepaid contract expense, long-term |       | 1,424                 |       | 857                  |       |
| Other                               |       | 504                   |       | 1,085                |       |
| Total other assets                  |       | $                     | 9,181      |                 | $          | 15,857 |   |
|                                     |            |                       |            |                      |            |  |  |

 

Long-terminvestments include equity investments in several privately held companies.These equity investments are carried at the lower of cost or fair value atSeptember 30, 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

----

 

At December31, 2006, deposits included restricted cash of $1.3 million to secure a bankletter of credit associated with the Company’s lease agreement with TodaDevelopment, Inc. (“Toda”) for its headquarters facility. During the ninemonths ended September 30, 2007, the Company executed amendmentsto this lease agreement whereby the Company will lease additional facilityspace of 29,000 square feet. Due to these amendments, the restricted cashrequired for the lease increased to $1.6 million at September 30, 2007.

 

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

 
| ** **                    | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|-------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                    | ** ** | **2007**              | ** ** | **2006**             | ** ** |
|                          |       |                  |       |                 |       |
| Salaries and benefits payable |       | $                     | 11,369     |                 | $          | 13,624 |   |
| Accrued restructuring         |       | 3,081                 |       | 2,650                |       |
| Other                         |       | 8,226                 |       | 6,718                |       |
| Total accrued liabilities     |       | $                     | 22,676     |                 | $          | 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):

 
| ** **                        | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|-----------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                        | ** ** | **2007**              | ** ** | **2006**             | ** ** |
|                              |       |                  |       |                 |       |
| Deferred rent                     |       | $                     | 8,508      |                 | $          | 6,451 |   |
| Accrued restructuring, long-term  |       | 2,077                 |       | 3,941                |       |
| Long-term income taxes payable    |       | 4,270                 |       | —               |       |
| Other                             |       | 1,033                 |       | 1,026                |       |
| Total other long-term liabilities |       | $                     | 15,888     |                 | $          | 11,418 |   |

 

**Note 8—Comprehensive Income**

 

Thecomponents of comprehensive income were as follows for the periods presented(in thousands):

 
| ** **                               | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                                | ** ** | **2006**                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                     |       |                                                    |       |                                                   |       |   |   |   |   |
| Net income                               |       | $                                                       | 3,296      |                                                   | $          | 952 |   | $ | 8,830 |   | $ | 5,957 |   |
| Unrealized gain on marketable securities |       | —                                                  |       | 334                                                    |       | 8 |   | 524 |   |
| Foreign currency translation adjustment  |       | 2,014                                                   |       | 332                                                    |       | 3,080 |   | 2,680 |   |
| Total comprehensive income               |       | $                                                       | 5,310      |                                                   | $          | 1,618 |   | $ | 11,918 |   | $ | 9,161 |   |

 

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

 
| ** **                                                | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                                | ** ** | **2007**              | ** ** | **2006**             | ** ** |
|                                                      |       |                  |       |                 |       |
| Accumulated foreign currency translation  adjustments     |       | $                     | 13,837     |                 | $          | 10,757 |   |
| Accumulated net unrealized loss on  marketable securities |       | —                |       | (8                   | )          |
| Total accumulated other comprehensive  income             |       | $                     | 13,837     |                 | $          | 10,749 |   |

 

12

----

 

**Note 9—Restructuring Charges**

 

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

 

##### ***During the ninemonths ended September 30, 2007, Advent recorded a net restructuring charge of$902,000 due to the update of certain sub-lease assumptions for Advent’s priorSan Francisco headquarters facility located at 301 Brannan Street, which theCompany exited in October 2006, and interest accretion.***Duringthe nine months ended September 30, 2006, Advent recorded a net restructuringcharge of $320,000 primarily to record interest and adjust original estimatesfor facilities in San Francisco, California and New York, New York.

 

The following table sets forth an analysis of the components of thepayments and restructuring charges made against the accrual during the ninemonths ended September 30, 2007 (in thousands):

 
| ** **                                              | ** ** | **Facility Exit** | ** ** | **Severance &** | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|--------------------------|------------|------------|------------|
| ** **                                              | ** ** | **Costs**              | ** ** | **Benefits**             | ** ** | **Total**  | ** ** |
|                                                    |       |                   |       |                     |       |       |       |
| Balance of restructuring accrual at  December 31, 2006  |       | $                      | 6,587      |                     | $          | 4          |       | $ | 6,591 |   |
| Restructuring charges                                   |       | 681                    |       | —                   |       | 681        |       |
| Cash payments                                           |       | (2,331                 | )          | (4                       | )          | (2,335     | )          |
| Accretion adjustment                                    |       | 221                    |       | —                   |       | 221        |       |
| Balance of restructuring accrual at  September 30, 2007 |       | $                      | 5,158      |                     | $          | —     |       | $ | 5,158 |   |

 

The remaining excess facility exit costs of $5.2 million are stated atestimated fair value, net of estimated sublease income of approximately $6.3million. Advent expects to pay the remaining obligations associated with thevacated facilities over their remaining lease terms, which expire on variousdates through 2012.

 

**Note 10—Common Stock Repurchase Program**

 

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

 

OnFebruary 9, 2007, the Company’s Board authorized the repurchase of up to anadditional 2.25 million shares of outstanding common stock. During the secondquarter of 2007, Advent completed the repurchase of shares under thisauthorization.

 

The following table provides a summary of the quarterly repurchaseactivity during the nine months ended September 30, 2007 under the stockrepurchase programs approved by the Board (in thousands, except per sharedata):

 
| ** ** | ** ** | **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 |   |
| Q3 2007    |       | —             |       | $          | —     |               | $          | — |   |
| Total (1)  |       | 2,580              |       | $          | 91,157     |               | $          | 35.33 |   |

 

----

**(1)        Total shares repurchased of2.6 million include 2.25 million shares repurchased under the February 2007authorization and 330,000 shares repurchased under the July 2006 authorization.**

 

13

----

 

**Note11—Line of Credit**

** **

OnFebruary 14, 2007, Advent and certain of its subsidiaries entered into a seniorsecured credit facility agreement (the “Facility”) with Wells Fargo Foothill,Inc. (the “Lender”) for a term of three years. Under the Facility, the Lenderwill provide the Company with a revolving line of credit up to an aggregateamount of $75.0 million to fund the repurchase of outstanding common stock,capital expenditures and general corporate requirements. The Company has theoption of selecting an interest rate for any drawdown under the Facility equalto either: (a) the Base Rate (Wells Fargo prime rate); or (b) the thenapplicable LIBOR Rate plus 1.50% per annum. The loan is secured by theCompany’s property and assets and is subject to a financial covenant. The financialcovenant in the Facility is limited to a maximum ratio of senior debt toearnings before interest, taxes, depreciation, and amortization (EBITDA),adjusted for cost capitalizations, extraordinary gains (losses) and non-cashstock-based employee compensation. Covenant testing will commence upon eitherthe occurrence of an event of default or when excess availability, defined asthe Facility line of $75.0 million less amounts drawn, plus qualified cash andcash equivalents is less than $50.0 million.

 

InJune 2007, the Company drew down $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 contract expired and the Company paid down the credit facilityby $5.0 million. Advent re-entered into another LIBOR rate contract on theremaining $20.0 million which bears a three month LIBOR contract rate of 5.58%and an applicable margin of 1.5% for an aggregate rate of 7.08%. As ofSeptember 30, 2007, Advent was in compliance with all associated covenants.

 

#### **Note 12—Commitments andContingencies**

####  

*Lease Obligations*

 

Advent leases office space and equipment under non-cancelable operatinglease agreements, which expire at various dates through December 2018. Someoperating leases contain escalation provisions for adjustments in the consumerprice index. Under some leases, Advent is responsible for maintenance,insurance, and property taxes. During the nine months ended September 30, 2007,the Company executed several amendments to the lease agreement for its 600Townsend Street headquarters facility whereby the Company will lease additionalfacility space of 29,000 square feet. As of September 30, 2007, Advent’sremaining operating lease commitments through 2018 were approximately $51.4million, net of future minimum rental receipts of $7.2 million to be receivedunder 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.

 

On March 8, 2005, certain of the former shareholders of Kinexus and theshareholders’ representative filed suit against Advent in the Delaware ChanceryCourt. The complaint alleges that Advent breached the Agreement and Plan of 

 

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Merger dated as of December 31, 2001 pursuant to which Advent acquiredall of the outstanding shares of Kinexus due principally to the fact that noamount was paid by Advent on an earn-out of up to $115 million. The earn-out,which was payable in cash or stock at the election of Advent, was based uponKinexus meeting certain revenue targets in both 2002 and 2003. The complaintseeks unspecified compensatory damages, an accounting and restitution forunjust enrichment. Advent advised the shareholders’ representative in January2003 that the earn-out terms had not been met in 2002 and accordingly noearn-out was 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 disputesthe plaintiffs’ claims and believes that it has meritorious defenses andintends to vigorously defend this action. Management believes that anypotential loss associated with this litigation is neither probable norreasonably estimable at this time and accordingly has not accrued any amountsfor any potential loss.

 

**Note13—Segment Information**

 

*Description of Segments*

 

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

 

Advent’s organizational structure is based on a number of factors thatthe Chief Executive Officer (CEO) uses to evaluate, view and run its businessoperations which include, but are not limited to, customer base, homogeneity ofproducts and technology. Advent’s operating segments are based on thisorganizational structure and information reviewed by Advent’s CEO to evaluatethe operating segment results. Advent has determined that its operations areorganized into two reportable segments: 1) Advent Investment Management; and 2) MicroEdge. Future changes tothis organizational structure may result in changes to the business segmentsdisclosed. A description of the types of products and services provided by eachoperating segment follows.

 

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

 

*Segment Data*

 

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

 

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Segment information for the periods presentedis as follows (in thousands):

 
| ** **                                           | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                                | ** ** | **2006**                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net  revenues:                                       |       |                                                    |       |                                                   |       |   |   |   |   |
| Advent  Investment Management                        |       | $                                                       | 49,892     |                                                   | $          | 40,975 |   | $ | 138,992 |   | $ | 118,573 |   |
| MicroEdge                                            |       | 5,657                                                   |       | 5,121                                                  |       | 16,912 |   | 14,822 |   |
| Other                                                |       | —                                                  |       | (219                                                   | )          | — |   | 498 |   |
|                                                 |       |                                                    |       |                                                   |       |   |   |   |   |
| Total net  revenues                                  |       | $                                                       | 55,549     |                                                   | $          | 45,877 |   | $ | 155,904 |   | $ | 133,893 |   |
|                                                 |       |                                                    |       |                                                   |       |   |   |   |   |
| Income from  operations:                             |       |                                                    |       |                                                   |       |   |   |   |   |
| Advent  Investment Management                        |       | $                                                       | 8,522      |                                                   | $          | 4,210 |   | $ | 17,029 |   | $ | 13,883 |   |
| MicroEdge                                            |       | 1,287                                                   |       | 1,418                                                  |       | 4,225 |   | 3,541 |   |
| Other                                                |       | —                                                  |       | (573                                                   | )          | — |   | (1,518 | ) |
| Unallocated  corporate operating costs and expenses: |       |                                                    |       |                                                   |       |   |   |   |   |
| Stock-based  employee compensation                   |       | (3,219                                                  | )          | (3,448                                                 | )          | (10,047 | ) | (10,097 | ) |
| Amortization  of developed technology                |       | (332                                                    | )          | (251                                                   | )          | (1,018 | ) | (909 | ) |
| Amortization  of other intangibles                   |       | (463                                                    | )          | (1,028                                                 | )          | (1,403 | ) | (3,027 | ) |
|                                                 |       |                                                    |       |                                                   |       |   |   |   |   |
| Total income  from operations                        |       | $                                                       | 5,795      |                                                   | $          | 328 |   | $ | 8,786 |   | $ | 1,873 |   |

 

*Major Customers*

 

No single customer represented 10% or more ofAdvent’s total net revenues in any period presented.

 

**Note 14—Related Party Transactions**

 

As of December 31, 2006, Legg Mason ownedapproximately 17% of the voting stock of Advent. Advent recognizedapproximately $139,000 and $337,000 of revenue from Legg Mason during the threeand nine months ended September 30, 2007, respectively. The Company’saccounts receivable from Legg Mason were $28,000 and $10,000 as of September 30,2007 and December 31, 2006, respectively.

 

Advent acts as trustee for the Company’s short-termdisability plan—Advent Software California Voluntary Disability Plan (“VDI”).Employee withholdings were $59,000 and $226,000 during the three and ninemonths ended September 30, 2007, respectively. Disbursements were $79,000and $257,000 during the three and nine months ended September 30, 2007,respectively. Cash held by Advent related to the VDI was $274,000 and $305,000as of September 30, 2007 and December 31, 2006, respectively, and areincluded in “Other assets, net” on the condensed consolidated balance sheets.

 

**Note 15—Income Taxes**

 

On January 1, 2007,Advent adopted the provisions of Financial Accounting Standards BoardInterpretation No. 48, “Accountingfor Uncertainty in Income Taxes”**(“FIN 48”).As of January 1, 2007, Advent accrued $4.9 million of unrecognizedtax benefits. If recognized, the portion of unrecognized tax benefits thatwould decrease the Company’s provision for income taxes and increase net incomeis $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 September 30, 2007, Advent’s unrecognized tax benefitstotaled $5.3 million and are primarily included in “Other long-termliabilities” on the condensed consolidated balance sheet. The totalunrecognized tax benefits at September 30, 2007 and December 31, 2006relate primarily to federal research and California research and enterprisezone tax credits, various state net operating losses, and potential penaltiesand interest on amended state and local tax returns.

 

Advent recognizes interestand penalties accrued on unrecognized tax benefits as well as interest receivedfrom favorable settlements within “Provision for (benefit from) income taxes”on the condensed consolidated statement of operations. As of September 30,2007, the Company had $0.2 million of interest and penalties accrued associatedwith unrecognized tax benefits.

 

Advent is subject totaxation in the U.S. and various states and foreign jurisdictions. Advent isnot under examination in any income tax jurisdiction at the present time anddoes not anticipate the total amount of its unrecognized tax benefits tosignificantly change over the next 12 months. The material jurisdictions thatare subject to examination by tax authorities include California for tax yearsafter fiscal 2001 and the U.S. and New York for tax years after 2002.

 

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**Note 16—Subsequent Event**

 

On November 6, 2007, Advent’s Board electedRobert Ettl to the Company’s Board of Directors. Also, effective on this date,the Board approved an amendment to Section 3.2 of the Company’s Bylaws toincrease the membership of the Board from six to seven members in connectionwith the election of Mr. Ettl to the Company’s Board.

 

**Item2.****Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

**SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

You should read the following discussion inconjunction with our condensed consolidated financial statements and relatednotes. The following discussion contains forward-looking statements within themeaning of Section 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; continued market acceptance of ourGeneva, APX and Moxy products, future expansion, acquisition or investment inother businesses; our move to a predominantly term licensing model, projectionsof revenues, future cost and expense levels (including for the fourth quarterof 2007); expected timing and amount of amortization expenses related to pastacquisitions; the adequacy of resources to meet future cash requirements;estimates or predictions of actions by customers, suppliers, competitors orregulatory authorities; future client wins; future hiring; and future productintroductions. Such forward-looking statements are based on our current plansand expectations, and involve known and unknown risks and uncertainties that may causeour actual results or performance to be materially different from any resultsor performance expressed or implied by such forward-looking statements. Suchfactors include, but are not limited to, those set forth in “Item 1A. RiskFactors” in this Form 10-Q, as well as other risks identified from time totime in other Securities and Exchange Commission (“SEC”) reports. You shouldnot place undue reliance on our forward-looking statements, as they are notguarantees of future results, levels of activity or performance and representour expectations only as of the date they are made.

 

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

 

**Overview**

 

Ourbusiness is organized into two reportable segments, Advent InvestmentManagement (“AIM”) and MicroEdge. Advent Investment Management is our corebusiness and 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 principally in the United States and theEurope, Middle East and Africa (EMEA) region. MicroEdge derives revenues fromthe sale of software and services for grant management, matching gifts and volunteertracking for the grant-making community. For additional information regardingour reportable segments, see Note 13, “Segment Information,” to our condensedconsolidated financial statements.

 

Weoffer integrated software solutions for automating and integrating data andwork flows across the investment management organization, as well as theinformation flows between the investment management organization and externalparties. Each solution focuses on specific mission-critical functions of theinvestment management organization and is tailored to meet the needs of theparticular client, as determined by size, assets under management andcomplexity of the investment environment. Our products are intended to increaseoperational efficiency, improve the accuracy of client information and enablebetter decision-making.

 

*Operating Overview*

 

During the third quarter of 2007, we continued toexecute on our strategy of strengthening and growing our core business ofdelivering mission-critical software and services to the investment managementcommunity by winning new customers, expanding our product footprint withexisting customers, growing our services organization and investing ininnovation to increase the reach of our product suite.

 

We grew our core business by signing 14 newcustomers for Geneva and 26 new contracts for Advent Portfolio Exchange (“APX”).Term contract bookings were $18.3 million, representing growth of 73% from thethird quarter of 2006.

 

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Theaverage term of our third quarter bookings was 3.6 years, reflecting four largeGeneva contracts signed with prime brokers and hedge fund administrators, whichhad 5-year terms. We also held our Advent Client Conference in September 2007.This was our largest annual Client Conference with nearly 1,200 participants,including executives from the many market segments we serve including: assetmanagers, financial advisors, hedge funds, prime brokers, fund administrators,family offices, banks, broker dealers and trusts.

 

We also launched two major new releases of our mostimportant accounting platforms. We launched APX 2.0 with enhanced fixed incomefunctionality and new performance analytics functionality which includesperformance attribution, contribution and ex-post risk statistics. We believethis added functionality will provide our clients the tools to deliver robustreporting and client service without increasing operational costs or overhead.Additionally, we released Geneva 7.0 during the third quarter which provides acompletely new user interface, data browser, and reporting infrastructure.

 

During the third quarter, we continued the expansionof our services organization to address the general increase in the volume ofconsulting and training services demanded as a result of higher licensebookings. Gross margins are negatively affected by headcount additions in ourclient services and consulting groups as new employees undergo a trainingperiod, typically of six months before becoming fully billable. Additionally,the deferral of professional services revenues and costs associated with ourterm license implementations also negatively affects our gross margin as wedefer only the direct costs associated with the services performed. However, webelieve our gross margins will improve as the deferred professional servicesrevenue and expense associated with term licenses flow back into our operatingresults.

 

We continued to invest in innovation to increase thebreadth of our product suite during the three months ended September 30,2007. Product development expenses, net of capitalized costs of $2.1 million,were $9.3 million during the third quarter of 2007, which represented 17% oftotal net revenues, as compared to $8.8 million (net of capitalized costs of$4,000), or 19% of total net revenues, in the same quarter of 2006. We arecurrently preparing for the fourth quarter release of Advent Rules Manager,our new solution for pre- and post-trade compliance, which is in beta testingat several client sites.

 

We will continue to increase headcount and invest inproduct development, sales, implementation and client services capacity tosupport our new bookings.

 

*Financial Overview*

 

A financial summary of our third quarter of 2007includes:

 

•                  Revenueswere $55.5 million, representing growth of 21% from $45.9 million in the thirdquarter of 2006;

•                  Revenuesrecognized from recurring sources represented 77% of total revenues for thethird quarter of 2007, compared to 79% in the third quarter of 2006;

•                  Operatingexpenses, including the cost of revenues, were $49.8 million, which was a 9%increase from $45.5 million in the third quarter of 2006. Operating expensesbenefited from the capitalization of $2.1 million of product development costsin the third quarter of 2007 as compared with $4,000 in the same period of2006;

•                  Netincome was $3.3 million, or $0.12 earnings per diluted share;

•                  Cashprovided by operating activities was $12.4 million, representing a 20% increasefrom $10.4 million in the third quarter of 2006; and

•                  Repaymentof $5.0 million on our outstanding loan, reducing the loan balance to $20.0million as of September 30, 2007.

 

*Term License and Term License Deferral*

 

We are continuing the process of converting theCompany’s license revenues from a perpetual model to a term model. Under a perpetual pricing model, customerspurchase a license to use our software indefinitely and generally we recognizeall license revenue at the time of sale; maintenance is purchased under anannual renewable contract, and recognized ratably over the contract period.Under a term pricing model, customers purchase a license to use our softwareand receive maintenance for a limited period of time and we recognize all ofthe revenue ratably over the length of the contract. This has the effect oflowering revenues in the early stages of the transition, but increasing thetotal potential value of the customer relationship. Moving AIM’s new customersales from a perpetual to a term licensing model has had the effect of loweringour reported revenue growth rates over the past two years and will, dependingon our new term license bookings, continue to have an impact through 2008.However, because our products are used by customers for an average ofapproximately eight years, we believe this change to our business model isextremely significant for the long-term growth and value of the business. Forexample,

 

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over an eight-year period, a customer may enterinto two or more contracts for the same software product and services under aterm license model.

 

When a customer purchases a term licensetogether with implementation services, we do not recognize any revenue underthe contract until the implementation services are substantially complete. Ifthe implementation services are still in progress as of quarter-end, we willdefer all of the contract revenues to a subsequent quarter. At the pointprofessional services are substantially completed, we recognize a pro-rataamount of the term license revenue, professional services fees earned andrelated expenses, based on the elapsed time from the start of the term licenseto the substantial completion of professional services. Term license revenuefor the remaining contract years and the remaining deferred professionalservices revenue and related expenses are recognized ratably over the remainingcontract length.

 

During the third quarter of 2007, we deferrednet revenues of $3.0 million and directly-related expenses of $0.9 millionassociated with our term licensing model. The impact of these deferrals on ouroperating income was approximately $2.1 million. The $3.0 million net deferralof revenue is composed of a net deferral of $2.2 million of professionalservices revenue and a net deferral of $0.8 million of term license revenue.Professional services and term license revenue deferrals continued to increaseas the deferral for current projects exceeded the amount recognized fromcompleted past projects. We expect that the term license component of thedeferred revenue balance will increase or decrease in the future based on thenumber of implementations that reach substantial completion in a particularquarter. We currently expect that the professional services component of the deferredrevenue balance will continue to increase through at least 2008.

 

Amounts of revenues and directly-relatedexpenses deferred as of September 30, 2007 and December 31, 2006associated with our term licensing deferral were as follows (in millions):

 
| ** **                 | ** ** | ** **                      | ** ** | ** **           | ** ** | **Prior**            | ** ** |
|----------------------------|------------|---------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                 | ** ** | **Current Classification** | ** ** | **Classification**   | ** ** |
| ** **                 | ** ** | **September 30**           | ** ** | **December 31** | ** ** | **December 31** | ** ** |
| ** **                 | ** ** | **2007**                        | ** ** | **2006**             | ** ** | **2006**             | ** ** |
| Deferred  revenues         | ** ** | ** **                      | ** ** | ** **           | ** ** | ** **           | ** ** |
| Short-term                 |       | $                               | 13.4       |                 | $          | 7.2                  |       | $ | 9.3 |   |
| Long-term                  |       | 3.6                             |       | 2.1                  |       | —               |       |
|                       |       |                            |       |                 |       |                 |       |
| Total                      |       | $                               | 17.0       |                 | $          | 9.3                  |       | $ | 9.3 |   |
|                       |       |                            |       |                 |       |                 |       |
| Directly-related  expenses |       |                            |       |                 |       |                 |       |
| Short-term                 |       | $                               | 4.3        |                 | $          | 2.0                  |       | $ | 2.9 |   |
| Long-term                  |       | 1.4                             |       | 0.9                  |       | —               |       |
|                       |       |                            |       |                 |       |                 |       |
| Total                      |       | $                               | 5.7        |                 | $          | 2.9                  |       | $ | 2.9 |   |

 

Deferred net revenues and directly-relatedexpenses are classified as “Deferred revenues” (short-term and long-term), and “Prepaidexpenses and other,” and “Other assets, net,” respectively, on the condensedconsolidated balance sheets. In the third quarter of 2007, wereclassified certain of the deferred revenues and direct costs associated with ourterm service deferral from current to long-term. With the evolution of the termservice deferral model, we are now able to determine the amounts that will berecognized as revenue more than 12 months from the balance sheet date. We havereclassified those deferred revenues and prepaid expense amounts that will berecognized more than 12 months from the balance sheet date from current tolong-term on the balance sheets. Prior period amounts have been reclassified toconform to the current presentation.

 

The transition to a term model also has theeffect of decreasing operating cash flows in the early stages of thetransition. Under perpetual pricing, the entire license fee and the first yearof maintenance is generally billed and collected at the commencement of thearrangement. Under term pricing, a typical contract term is three years. Wegenerally bill and collect term license fee installments in advance of eachannual period. The amount of the annual term billing is less than the perpetualbilling, resulting in lower cash flows in the initial annual term licenseperiod. Annual term billing results in an increase in deferred revenues and anincrease in operating cash flows at the commencement of each annual billingperiod.

 

*Recurring Revenue Model and Revenue Presentation*

 

During the third quarter of 2007, we recognizedapproximately 77% of total net revenue from recurring sources, which we defineas revenues from term license, maintenance on perpetual licenses and otherrecurring. This high proportion of recurring revenues allows us to take along-term view and invest in our business while remaining confident that ouroperating results will be reasonably predictable.

 

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During the first quarter of 2007, we changed ourpresentation of revenue and associated cost of revenues to more clearly showthe nature and components of our revenues under a term licensing model and thepredominance 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.

 

*Non-Cash Operating Expenses*

 

We recorded stock-based compensation expense of $3.2million, total amortization expense of $0.8 million, and restructuring chargesof $0.1 million in the third quarter of 2007; these expenses totaled $4.1million or 7% of revenues.

 

*Capital Structure*

 

In February 2007, we and certain of ourdomestic subsidiaries entered into a senior secured credit facility agreement(the “Facility”) with Wells Fargo Foothill, Inc. (the “Lender”). Under theFacility, we have a revolving line of credit up to an aggregate amount of $75.0million, subject to a borrowing base formula, to provide backup liquidity for aperiod of three years for general corporate purposes, including stockrepurchases, or investment opportunities. This Facility provides us with theflexibility to run our business with lower cash balances. During the secondquarter of 2007, we drew down $25.0 million on the Facility at a three-monthborrowing rate of 6.86% to help fund the repurchase of shares. In the thirdquarter of 2007, we repaid $5.0 million of our outstanding loan leaving a $20.0million balance as of September 30, 2007, which bears interest at 7.08%.See Note 11, “Line of Credit” for further description of our credit facility.

 

**Critical Accounting Policies and Estimates**

 

Management’s discussion and analysis of ourfinancial condition and results of operations are based on our condensedconsolidated financial statements and related notes, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America. We review the accounting policies used in reporting ourfinancial results on a regular basis. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent liabilities.

 

On an ongoing basis, we evaluate the process we useto develop estimates. We base our estimates on historical experience and onother information that we believe are reasonable for making judgments at thetime they are made. Actual results may differ from these estimates due toactual outcomes being different from those on which we based our assumptions.

 

We believe the following accounting policies containthe more significant judgments and estimates used in the preparation of ourcondensed consolidated financial statements.

 

•                  Goodwill;

 

•                  Revenuerecognition and deferred revenues;

 

•                  Incometaxes;

 

•                  Stock-basedcompensation;

 

•                  Restructuringcharges and related accruals;

 

•                  Impairmentof long-lived assets;

 

•                  Legalcontingencies; and

 

•                  Salesreturns and accounts receivable allowances

 

There have been no significant changes in ourcritical accounting policies and estimates during the nine months ended September 30,2007 as compared to the critical accounting policies and estimates disclosed in“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” included in our Annual Report on Form 10-K/A for the yearended December 31, 2006, except as described below.

 

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**Revenue recognition**. We recognize revenue from term license, maintenance and other recurring; perpetual licensefees, and professional services and other.We offer a wide variety of products and services to a large number offinancially sophisticated customers. While many of our lower-priced licensetransactions, maintenance contracts, subscription-based transactions andprofessional services projects conform to a standard structure, many ofour larger transactions are complex and may require significant review andjudgment in our application of generally accepted accounting principles.

 

*Software licenses.* We recognize revenue from the licensing of software when persuasiveevidence of an arrangement exists, the product has been delivered, the fee isfixed or determinable and collection of the resulting receivable is reasonablyassured. We generally use a signed license agreement as evidence of anarrangement. Sales through our distributors are evidenced by a master agreementgoverning the relationship together with binding order forms and signedcontracts from the distributor’s customers. Revenue is recognized once shipmentto the distributor’s customer has taken place and when all other revenuerecognition criteria have been met. Delivery occurs when a product is deliveredto a common carrier F.O.B shipping point. Some of our arrangements includeacceptance provisions, and if such acceptance provisions are present, deliveryis deemed to occur upon acceptance. We assess whether the fee is fixed ordeterminable based on the payment terms associated with the transaction. Weassess whether the collectibility of the resulting receivable is reasonablyassured based on a number of factors, including the credit worthiness of thecustomer determined through review of credit reports, our transaction historywith the customer, other available information and pertinent country risk ifthe customer is located outside the United States. Our standard payment termsare due at 180 days or less, but payment terms may vary based on thecountry in which the agreement is executed. Software licenses are sold withmaintenance 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 havecontinued our transition from selling mostly perpetual licenses to selling amix of term and perpetual licenses, and we expect term license revenue toincrease as a proportion of total recurring revenues (which we define as termlicense, maintenance and other recurring revenues) in the future. Term licenserevenue comprised approximately 22% and 12% of term license, maintenance andother recurring revenues during the first nine months of 2007 and 2006,respectively. Revenue recognition for software licensed under term andperpetual license models differs depending on which type of contract a customersigns:

 

•                  Term licenses

 

Term license contract prices include fees for boththe software license and maintenance. We offer multi-year term licenses bywhich a customer makes a binding commitment that typically spans three years.For multi-year term licenses, we have not established VSOE of fair value forthe software license and maintenance components and, as a result, in situationswhere we are also performing related professional services, we defer allrevenue and directly related expenses under the arrangement until theprofessional services are substantially complete. At the point professionalservices are substantially completed, we recognize a pro-rata amount of theterm license 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 revenue for the remainingcontract years and the remaining deferred professional services revenue andrelated expenses are recognized ratably over the remaining contract length.When multi-year term licenses are sold and do not include related professionalservices, we recognize the entire term license revenue ratably over the periodof the contract term from the effective date of the license agreement assumingall other revenue recognition criteria have been met. Revenues from termlicenses are included in “Term license, maintenance and other recurring”revenues on the condensed consolidated statement of operations.

 

•                  Perpetual licenses

 

We allocate revenue to delivered components,normally the license component of the arrangement, using the residual method,based on vendor specific objective evidence, or VSOE, of fair value of theundelivered elements (generally the maintenance and professional servicescomponents), which is specific to us. We determine the fair value of theundelivered elements based on the historical evidence of the Company’sstand-alone sales of these elements to third parties. If VSOE of fair valuedoes not exist for any undelivered elements, then the entire arrangement fee isdeferred until delivery of that element has occurred. Revenues from perpetuallicenses are included in “Perpetual license fees” revenue on the condensedconsolidated statement of operations.

 

Certain of our perpetual and term license contractsinclude asset-based fee structures that provide additional revenues based onthe assets that the client manages using our software (“Assets UnderAdministration” or “AUA”). Contracts containing an AUA fee structure have adefined measurement period which requires the client to self-report actual AUAin arrears of the specified period. AUA fees above the stated minimum feefor the same period are considered incremental fees. Because incrementalfees are not determinable until the conclusion of the measurement period, theyare both earned and

 

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recognizedin arrears, on a quarterly or annual basis. Incremental fees from perpetual AUAcontracts are included in “Perpetual license fees” on the condensed consolidatedstatement of operations. Incremental fees from term AUA contracts are includedin “Term license, maintenance and other recurring revenue” revenue on thecondensed consolidated statement of operations.

 

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 third quarter of2007 was an increase to term license revenue of approximately $56,000.

 

For existing term license arrangements signed priorto 2006 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 onperpetual licenses that provide for technical support and updates to oursoftware products. Maintenance fees are bundled with perpetual license fees inthe initial licensing year and charged separately for renewals of annualmaintenance in subsequent years. Fair value for maintenance is based uponeither renewal rates stated in the perpetual license contracts or, separatesales of renewals to customers. Generally, we recognize maintenance revenueratably over the contract term.

 

We offer other recurring revenue services that areeither subscription-based or transaction-based, and primarily include theprovision of software interfaces to, and the capability to download securitiesinformation from, third party data providers. We recognize revenue fromrecurring revenue transactions either ratably over the subscription period oras the transactions occur.

 

*Professional services and other revenues.* We offer a variety of professional servicesthat include project management, implementation, data conversion, integration,custom report writing and training. We base fair value for professionalservices upon separate sales of these services to customers. Our professionalservices are generally billed based on hourly rates together with reimbursementfor travel and accommodation expenses. We recognize revenue as professionalservices are performed, except in the case of multi-year term license contractswhich are described in the “term licenses” section above. Certainprofessional services arrangements involve acceptance criteria and in thesecases, revenue and related expenses are recognized upon acceptance.Professional services and other revenues also include revenue from our userconferences.

 

**Sales returns and accounts receivable****allowances.**Our standard practice is to enforce our contract terms and not allowour customers to return software. We have, however, allowed customers toreturn software on a limited case-by-case basis and have recorded sales returnsprovisions as offsets to revenue in the period the sales return becomesprobable. We use our judgment in estimating our sales returns. We analyzecustomer demand, acceptance of products and historical returns when evaluatingthe adequacy of the allowance for sales returns, which are not generallyprovided to customers. Beginning in 2004, we used an algorithm to supplementour judgment for calculating the value of reserves that considered the last 18months of experience into account. Beginning in the second quarter of 2007, wechanged our algorithm to include the last 12 months of experience. The changeto using 12 months of experience reflects ongoing improvements in collectionsas our accounts receivables are materially collected within one year. Under ourterm arrangements, we generally bill and collect in advance of each annualperiod and therefore, our revenue risk rarely exceeds 12 months.

 

Our ability to estimate returns is based on our longhistory of experience with relatively homogenous transactions and the fact thatthe return period is short. The estimates for returns are adjusted periodicallybased upon changes in historical rates of returns and other related factors.

 

We use our judgment in estimating our allowance fordoubtful accounts. In order to estimate our allowance for doubtful accounts, weanalyze specific accounts receivables, historical bad debts, customerconcentrations, customer credit-worthiness, current economic trends and changesin customer payment terms.

 

**Income taxes.**We account for worldwide income taxes under an asset and liability approachthat requires the expected future tax consequences of temporary differencesbetween book and tax bases of assets and liabilities to be

 

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recognizedas deferred tax assets and liabilities. Significant judgment is required todetermine our worldwide income tax 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. Additionally,the projections of pre-tax income for the year by legal entity can varysignificantly from quarter-to-quarter which can have a significant impact onour projected effective tax rate. Although we believe that our judgments andestimates are reasonable, the final outcome could be different from that whichis reflected in our income tax provision and accruals.

 

A valuation allowance is recorded to reduce the netdeferred tax assets to an amount that will more likely than not be realized. Inorder for us to realize our deferred tax assets, we must be able to generatesufficient taxable income in the jurisdiction where the tax asset is located. Weconsider forecasted earnings, future taxable income and prudent and reasonabletax planning strategies in determining the need for a valuation allowance.

 

We calculate our current and deferred tax provisionbased on estimates and assumptions that could differ from the actual resultsreflected in income tax returns filed during the subsequent year. Adjustmentsbased on filed returns are generally recorded in the period when the return isfiled and the tax implication is known.

 

We recognize 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. We are subject to audits by state,federal and foreign tax authorities. Our estimates for the potential outcome ofany uncertain tax matter are judgmental. We believe we have adequately providedfor any reasonably foreseeable outcome related to these matters. However, ourfuture results may include adjustments to our estimated tax liabilities.We do not currently expect to make payments related to uncertain tax positionsin the next 12 months. Accordingly, we have reclassified amounts related touncertain tax positions as long-term liabilities.

 

**Stock-based compensation**. The calculation of stock-based compensation requires reliance onsignificant assumptions, judgments and estimates. Management judgment wasrequired in the initial selection and implementation of policies to conform withthe requirements of SFAS 123R. Management elected to adopt the standard usingthe modified prospective method, to utilize the Black-Scholes option pricingmodel to determine the fair value of expense and to recognize the stock-basedcompensation expense on a straight-line basis over the service period. Hadmanagement selected other implementation, valuation or recognitionmethodologies, the presented result could vary significantly.

 

We currently use the Black-Scholes option pricingmodel to determine the fair value of stock options, stock appreciation rights (“SAR”)and employee stock purchase plan shares. The fair value of our restricted stockunits is calculated based on the fair market value of our stock on the date ofgrant. The determination of the fair value of stock-based payment awards on thedate of grant using an option-pricing model is affected by our stock price aswell as assumptions regarding a number of complex and subjective variables.These variables include our expected stock price volatility over the term of theawards, actual and projected employee exercise behavior, the risk-free interestrate and expected dividends. We use an external service provider to assist usin making reasonable estimates.

 

We estimate the volatility of our common stock basedon an equally weighted average of historical and implied volatility of theCompany’s common stock. We determined that a blend of historical and impliedvolatility is more reflective of the market conditions and a better indicatorof expected volatility than using purely historical volatility. We estimate theexpected life of options and SAR’s granted based on historical experience ofsimilar awards, giving consideration to the contractual terms of thestock-based awards, vesting schedules and expectations of future employeebehavior. We base the risk-free interest rate on the U.S. Treasury yield curvein effect at the time of grant for periods corresponding with the expected lifeof the option and SAR. We do not anticipate paying any cash dividends in theforeseeable future and therefore use an expected dividend yield of zero in theoption pricing model.

 

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These variables are sensitive and change on a dailybasis. As a result, the financial result from issuing the same number ofoptions or SAR’s can vary significantly over time. The following table reflectsthe change in the fair value of a hypothetical option or SAR as a result of ahypothetical change in the underlying assumptions:

 
| ** **               | ** ** | ** **         | ** ** | **Assumption** | ** ** | **Value**  | ** ** | **Assumption** | ** ** | **Value**  | ** ** |
|--------------------------|------------|--------------------|------------|----------------|------------|------------|------------|----------------|------------|------------|------------|
| **Assumption**           | ** ** | **Base Case** | ** ** | **Change**     | ** ** | **Change** | ** ** | **Change**     | ** ** | **Change** | ** ** |
|                     |       |               |       |           |       |       |       |           |       |       |       |
| Grant and  stock price   |       | $                  | 50.00      |           | +$1        |       | $          | 0.37           |       | -$1        |       | $ | (0.37 | ) |
| Risk-free  interest rate |       | 4.2                | %          | +0.5%          |       | $          | 0.43       |           | -0.5%      |       | $          | (0.42 | ) |
| Volatility               |       | 35.5               | %          | +5%            |       | $          | 1.73       |           | -5%        |       | $          | (1.75 | ) |
| Expected  life (years)   |       | 4.6                |       | + 1 year       |       | $          | 2.02       |           | - 1 year   |       | $          | (2.27 | ) |
| Expected  dividend yield |       | 0.0                | %          | +2%            |       | $          | (3.14      | )              | n/a        |       |       | n/a |   |
|                     |       |               |       |           |       |       |       |           |       |       |       |
| Base Option  Value       |       | $                  | 18.30      |           |       |       |       |           |       |       |       |   |

 

Our SAR and stock option awards granted to employeescliff vest 20% after one year. Our RSU awards cliff vest 50% after two yearsand 50% after four years. SFAS 123R requires forfeitures to be estimated at thetime of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. Forfeitures are estimated based on ourannual forfeiture rate. The annual forfeiture rate is based on our historicalforfeiture experience over the last ten years. We use an external serviceprovider to assist us in making reasonable estimates of the annual forfeiturerate. During the third quarter, we modified our forfeiture calculation for RSUawards to better reflect both the recent experience with RSU forfeitures and toreflect the longer cliff vesting periods. The effect of these modifications wasto reduce stock-based compensation expense by $137,000 during the third quarterof 2007.

 

**Recent Developments**

 

On November 6, 2007, our Board of Directors(the “Board”) elected Robert Ettl to the Company’s Board.

 

**Recent Accounting Pronouncements**

 

No recent accountingpronouncements have been issued which would currently have a material effect onour condensed consolidated financial position, results of operations, or cashflows.

 

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** RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHSENDED SEPTEMBER 30, 2007 AND 2006**

 

The following tablesets forth, for the periods indicated, certain financial information as apercentage of total net revenues. The financial information and the ensuingdiscussion should be read in conjunction with the accompanying condensedconsolidated financial statements and notes thereto: 

 
| ** **                                     | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                     | ** ** | **2007**                                                | ** ** | **2006**                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Net  revenues:**                             |       |                                                    |       |                                                   |       |   |   |   |   |
| Term  license, maintenance and other recurring |       | 77                                                      | %          | 79                                                     | %          | 79 | % | 76 | % |
| Perpetual  license fees                        |       | 11                                                      |       | 11                                                     |       | 11 |   | 14 |   |
| Professional  services and other               |       | 12                                                      |       | 10                                                     |       | 10 |   | 10 |   |
|                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Total net  revenues                            |       | 100                                                     |       | 100                                                    |       | 100 |   | 100 |   |
|                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| **Cost of  revenues:**                         |       |                                                    |       |                                                   |       |   |   |   |   |
| Term  license, maintenance and other recurring |       | 18                                                      |       | 17                                                     |       | 18 |   | 18 |   |
| Perpetual  license fees                        |       | 0                                                       |       | 0                                                      |       | 0 |   | 0 |   |
| Professional  services and other               |       | 14                                                      |       | 15                                                     |       | 13 |   | 13 |   |
| Amortization  of developed technology          |       | 1                                                       |       | 1                                                      |       | 1 |   | 1 |   |
|                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Total cost  of revenues                        |       | 32                                                      |       | 33                                                     |       | 32 |   | 32 |   |
|                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Gross margin                                   |       | 68                                                      |       | 67                                                     |       | 68 |   | 68 |   |
|                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| **Operating  expenses:**                       |       |                                                    |       |                                                   |       |   |   |   |   |
| Sales and  marketing                           |       | 24                                                      |       | 26                                                     |       | 26 |   | 27 |   |
| Product  development                           |       | 17                                                      |       | 19                                                     |       | 19 |   | 19 |   |
| General and  administrative                    |       | 15                                                      |       | 18                                                     |       | 16 |   | 18 |   |
| Amortization  of other intangibles             |       | 1                                                       |       | 2                                                      |       | 1 |   | 2 |   |
| Restructuring  charges                         |       | 0                                                       |       | 0                                                      |       | 1 |   | 0 |   |
|                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Total  operating expenses                      |       | 57                                                      |       | 66                                                     |       | 63 |   | 67 |   |
|                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Income from  operations                        |       | 10                                                      |       | 1                                                      |       | 6 |   | 1 |   |
| Interest and  other income (expense), net      |       | 0                                                       |       | 1                                                      |       | 3 |   | 2 |   |
|                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Income  before income taxes                    |       | 10                                                      |       | 2                                                      |       | 8 |   | 4 |   |
| Provision  for (benefit from) income taxes     |       | 4                                                       |       | 0                                                      |       | 3 |   | (1 | ) |
|                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| **Net  income**                                |       | 6                                                       | %          | 2                                                      | %          | 6 | % | 4 | % |

 

**NET REVENUES**

 
| ** **                         | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change**                                             | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| ** **                         | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total net  revenues (in thousands) |       | $                                                       | 55,549     |       | $          | 45,877                                                 |       | $          | 9,672      |   | $ | 155,904 |   | $ | 133,893 |   | $ | 22,011 |   |
|                                    |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

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

 

Historically, our components of revenuevaried as a percentage of net revenues due principally to the relative size andtiming of individual perpetual software licenses and the timing of new productintroductions. In addition, our components of revenue can vary based on thetiming of client implementations and the amount of our data used by clients. Weare now more than halfway through our transition to a term licensing model, andwe expect that for the remainder of 2007 and beyond, approximately 80% of ournet revenues will come from our recurring revenue sources and that perpetuallicense fees will decrease as a percentage of net revenues. As we substantiallycomplete our transition to term licensing, we expect less variability betweenour major categories of revenues because the variation from large perpetuallicense deals will decrease.

 

We expect total net revenues for the fourthquarter of 2007 to be between $56 million and $59 million.

 

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

 
| **(in thousands, except percent of**      | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| **total net revenues)**                             | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change**                                             | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
|                                                          |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Term license revenues                                         |       | $                                                       | 10,179     |       | $          | 6,077                                                  |       | $          | 4,102      |   | $ | 27,312 |   | $ | 12,451 |   | $ | 14,861 |   |
| Maintenance revenues                                          |       | 21,500                                                  |       | 20,368     |       | 1,132                                                  |       | 63,278     |       | 60,254 |   | 3,024 |   |
| Other recurring revenues                                      |       | 11,367                                                  |       | 9,639      |       | 1,728                                                  |       | 32,192     |       | 28,736 |   | 3,456 |   |
| Total term license, maintenance and other recurring  revenues |       | $                                                       | 43,046     |       | $          | 36,084                                                 |       | $          | 6,962      |   | $ | 122,782 |   | $ | 101,441 |   | $ | 21,341 |   |
| Percent of total net revenues                                 |       | 77                                                      | %          | 79         | %          |                                                   |       | 79         | %          | 76 | % |   |   |

 

Term license revenues, which include software license and maintenancefees for term licenses, represented 24% of total term license, maintenance andother recurring revenues in the third quarter of 2007, up from 17% in the thirdquarter of 2006. Term license revenues continue to grow as we sign morecontracts on a term basis. Term license bookings were $18.3 million in thethird quarter of 2007, an increase of 73% from $10.6 million in the same periodof 2006. As a percentage of total net revenues, total term license, maintenanceand other recurring revenues decreased to 77% during the third quarter of 2007from 79% in the third quarter of 2006. This decrease as a percentage of totalnet revenues was attributable to the 36% increase in our professional servicesrevenue associated with growth in our implementation projects and clientconference revenues.

 

Maintenance revenues increased $1.1 million and $3.0 million during thethree and nine months ended September 30, 2007, respectively, compared to thesame periods of 2006. These increases are attributable to the impact of priceincreases on annual perpetual maintenance renewals purchased by our installedcustomer base and, to a lesser extent, an increase in new perpetual maintenancesupport contracts, partially offset by maintenance de-activations anddowngrades. We disclose our maintenance renewal rate one quarter in arrears inorder to include substantially all payments received against the maintenanceinvoices for that quarter. Our maintenance renewal rate has been in the rangeof 89% to 94% over the previous four quarters and was 94% for the second quarterof 2007.

 

Other recurring revenues increased $1.7 million and $3.5 million duringthe three and nine months ended September 30, 2007, respectively, mainly as aresult of growth in our subscription, data management revenue streams andoutsourced services including Advent Back Office Service (ABOS).

 

During the third quarter of 2007, we also recognized a net benefit of$67,000 to term license, maintenance and other recurring revenues resultingfrom the correction of errors associated with the first and second quarters of2007.

 

***Perpetual License Fees***

 
|                                  | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change**                                             | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| ** **                            | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Perpetual license fees (in thousands) |       | $                                                       | 6,054      |       | $          | 5,061                                                  |       | $          | 993        |   | $ | 17,670 |   | $ | 19,269 |   | $ | (1,599 | ) |
| Percent of total net revenues         |       | 11                                                      | %          | 11         | %          |                                                   |       | 11         | %          | 14 | % |   |   |
|                                       |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Perpetual license fees increased $1.0 million or 20% during the threemonths ended September 30, 2007 compared to the same period of 2006. For ourcustomers who have licensed our products on a perpetual basis, we allow them topurchase additional seats on a perpetual basis. Additionally, the vast majorityof our MicroEdge product sales are on a perpetual basis. The increase in thethird quarter of 2007 is a result of increased activity within these customergroups. Despite the increase in perpetual license fees in the third quarter of2007, the transition of our core products to a term pricing model has resultedin a decrease in perpetual license fees of $1.6 million during the nine monthsended September 30, 2007 as compared to the same period of 2006. IncrementalAUA fees from perpetual licenses included in the “Perpetual license fees”caption were $1.5 million and $4.8 million for the three and nine months endedSeptember 30, 2007, respectively, and were flat as compared to the same periodsin 2006.

 

We expect perpetual license fees will increase in the fourth quarter of2007 compared to the third quarter, primarily as a result of two perpetual AUAcontracts that are measured annually in the fourth quarter of each year.

 

***Professional Services and Other Revenues***

 
| ** **                                               | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                               | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change**                                             | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Professional services and other revenues (in  thousands) |       | $                                                       | 6,449      |       | $          | 4,732                                                  |       | $          | 1,717      |   | $ | 15,452 |   | $ | 13,183 |   | $ | 2,269 |   |
| Percent of total net revenues                            |       | 12                                                      | %          | 10         | %          |                                                   |       | 10         | %          | 10 | % |   |   |
|                                                          |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Professional services and other revenues primarily include consulting,project management, custom integration, custom work, and training. Professionalservices projects related to Axys, Moxy and Partner products generally can be

 

26

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completed in a two- to six-month time period, while services related toGeneva and APX products may require a four- to nine-month implementationperiod.

 

During the three and nine months ended September 30, 2007, professionalservices revenue increased as we experienced growth in our project management,data conversion and custom reporting revenues associated with implementationsof our APX and Geneva products.

 

These increases were partially offset by lower services revenuesassociated with Axys implementations and an increase in the net deferral ofprofessional services revenue for services performed on term licenseimplementations. When services are performed with term license implementations,service revenue is deferred until the implementation is substantially complete.Then service revenues are recognized over the remaining license term. We have experiencedan increase in implementation services after the launch of our APX product andthe sales success of our Geneva product, which are both sold under a termlicense model. We deferred professional services revenue of $2.2 million in thethird quarter of 2007, which represented a $1.2 million increase from therevenue deferral of $0.9 million in the comparable period of 2006 and was theresult of having more term license implementation projects in progress,primarily related to Geneva. Also, included in professional services revenuewere $1.4 million of revenues from the Advent Client Conference which was anincrease of $0.5 million from the prior year.

 

We expect that revenues from professional services and other willdecrease in the fourth quarter of 2007 relative to the third quarter, primarilydue to our annual client conference that occurred in the third quarter of 2007.

 

***Revenues by Segment***

 
| ** **                   | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| **(in thousands)**      | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change**                                             | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
|                         |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Advent Investment Management |       | $                                                       | 49,892     |       | $          | 40,975                                                 |       | $          | 8,917      |   | $ | 138,992 |   | $ | 118,573 |   | $ | 20,419 |   |
| MicroEdge                    |       | 5,657                                                   |       | 5,121      |       | 536                                                    |       | 16,912     |       | 14,822 |   | 2,090 |   |
| Other                        |       | —                                                  |       | (219       | )          | 219                                                    |       | —     |       | 498 |   | (498 | ) |
|                         |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Total net revenues           |       | $                                                       | 55,549     |       | $          | 45,877                                                 |       | $          | 9,672      |   | $ | 155,904 |   | $ | 133,893 |   | $ | 22,011 |   |

 

We have two reportable segments: Advent Investment Management (“AIM”)and MicroEdge. AIM derives revenues from the development, marketing and sale ofsoftware products, data interfaces and related maintenance and services thatautomate, integrate and support certain mission critical functions ofinvestment management organizations. MicroEdge derives revenues from the saleof software and services for grant management, matching gifts and volunteertracking for the grant-making community.

 

The 22% and 17% increase in AIM’s revenue in the three and nine monthsended September 30, 2007 primarily reflects generally healthy economicconditions and growth in financial markets, as well as the continued focus onselling our Axys, APX, Moxy, Partner and Geneva products. AIM’s revenueincrease in the first nine months of 2007 also reflected an increase in newmaintenance support contracts as a result of new license deals and priceincreases for maintenance contracts from our installed customer base, partiallyoffset by attrition from within our existing installed customer base.

 

The technology spending patterns of organizations in MicroEdge’sprimary markets (independent foundations, community foundations andcorporations) are directly affected by economic fluctuations as foundationbudgets are largely driven by endowment income which often containsmarket-exposed components. Foundation spending typically decreases in an economicdownturn. Community foundations are subject to similar influences, compoundedby the fact that in many cases much of their ongoing funding and endowmentcomes from active donors who may increase or reduce their giving depending onthe economic climate and the related effect on their income and wealth.Corporations typically fund charitable activities from operating budgets, andthe allocation to charitable donations and supporting company charitableoperations is often closely tied to a company’s performance. Thus, corporatephilanthropy and spending on related technology are correlated with company andoverall economic performance.

 

The 10% and 14% increase in MicroEdge’s revenue during the three andnine months ended September 30, 2007 reflects the generally healthy economicconditions and general trend of increased charitable contributions that haspersisted for the past few years. This increase in charitable contributionsreceived by the foundations sector has enabled foundations to increase their informationtechnology expenditures which resulted in the increase in MicroEdge revenue inthe first nine months of 2007.

 

27

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The elimination of revenue in our “Other” segment resulted from thewinding down of the soft dollar component of our broker/dealer subsidiary infiscal 2006.

 

### **TOTALEXPENSES**

###  

We expect total expenses, including cost of revenues, for the fourthquarter of 2007 to be between $52 million and $53 million as compared to $49.8million during the third quarter of 2007.

 

### **COST OFREVENUES**

 
| ** **                            | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change**                                             | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| ** **                            | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total cost of revenues (in thousands) |       | $                                                       | 17,969     |       | $          | 15,241                                                 |       | $          | 2,728      |   | $ | 49,437 |   | $ | 42,697 |   | $ | 6,740 |   |
| Percent of total net revenues         |       | 32                                                      | %          | 33         | %          |                                                   |       | 32         | %          | 32 | % |   |   |
|                                       |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Our cost of revenues is made up of four components: cost of termlicense, maintenance and other recurring; cost of perpetual license fees; costof professional services and other; and amortization of developed technology.

 

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

 
| ** **                                                            | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                                            | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change**                                             | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Cost of term license, maintenance and other  recurring (in thousands) |       | $                                                       | 9,757      |       | $          | 7,915                                                  |       | $          | 1,842      |   | $ | 27,837 |   | $ | 24,214 |   | $ | 3,623 |   |
| Percent of total term license, maintenance and  recurring revenue     |       | 23                                                      | %          | 22         | %          |                                                   |       | 23         | %          | 24 | % |   |   |
|                                                                       |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

*** ***

Cost of term license fees consists primarily of royalties and otherfees paid to third parties, the fixed direct labor involved in producing anddistributing our software, and cost of product media including duplication,manuals and packaging materials. Cost of maintenance and other recurringrevenues is primarily comprised of the direct costs of providing technicalsupport for term license and maintenance revenues and other services forrecurring revenues, and royalties paid to third party subscription-based andtransaction-based vendors.

 

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

 
| ** **                                  | ** **   | **Change From**       | ** ** | **Change From**       | ** ** |
|---------------------------------------------|--------------|----------------------------|------------|----------------------------|------------|
| ** **                                  | ** **   | **2006 to 2007** | ** ** | **2006 to 2007** | ** ** |
| ** **                                  | ** **   | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                        |         |                       |       |                       |       |
| Increased payroll and related               |         | $                          | 1,112      |                       | $          | 3,354 |   |
| Increased (decreased) royalty               |         | 278                        |       | (132                       | )          |
| Increased travel and entertainment          |         | 8                          |       | 125                        |       |
| Increased maintenance and computer supplies |         | 120                        |       | 122                        |       |
| Various other items                         |         | 324                        |       | 154                        |       |
|                                        |         |                       |       |                       |       |
|                                        | Total change |                       | $          | 1,842                      |       | $ | 3,623 |   |
|                                             |              |                            |            |                            |            |  |  |  |

 

The increases for the three and nine months ended September 30, 2007were due primarily to an increase in compensation and related costs resultingfrom increases in salary costs and headcount which enables us to deliver theservices we provide to our growing number of clients in their day-to-day use ofour software.

 

We expect cost of term license, maintenance and other recurring revenuein the fourth quarter of 2007 to increase as compared to the third quarter dueto the continued hiring of personnel.

 

***Cost of Perpetual License Fees***

 
| ** **                                     | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                     | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change**                                             | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
|                                           |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Cost of perpetual license fees (in  thousands) |       | $                                                       | 218        |       | $          | 181                                                    |       | $          | 37         |   | $ | 632 |   | $ | 607 |   | $ | 25 |   |
| Percent of total perpetual license revenues    |       | 4                                                       | %          | 4          | %          |                                                   |       | 4          | %          | 3 | % |   |   |
|                                                |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

28

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Cost of perpetual license fees consists primarily of royalties andother fees paid to third parties, the fixed direct labor involved in producingand distributing our software, and cost of product media including duplication,manuals and packaging materials. The cost of perpetual license fees hasremained consistent with the same period in the prior fiscal year.

 

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

 
| ** **                                                 | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                                 | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change**                                             | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Cost of professional services and other (in  thousands)    |       | $                                                       | 7,662      |       | $          | 6,894                                                  |       | $          | 768        |   | $ | 19,950 |   | $ | 16,967 |   | $ | 2,983 |   |
| Percent of total professional services and other  revenues |       | 119                                                     | %          | 146        | %          |                                                   |       | 129        | %          | 129 | % |   |   |
|                                                            |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

* *

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

 

Cost of professional services and other fluctuated due to the following(in thousands):

 
| ** **                                               | ** **   | **Change From**       | ** ** | **Change From**       | ** ** |
|----------------------------------------------------------|--------------|----------------------------|------------|----------------------------|------------|
| ** **                                               | ** **   | **2006 to 2007** | ** ** | **2006 to 2007** | ** ** |
| ** **                                               | ** **   | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                                     |         |                       |       |                       |       |
| Increased payroll and related                            |         | $                          | 393        |                       | $          | 2,169 |   |
| Increased outside services                               |         | 560                        |       | 568                        |       |
| Increased travel and entertainment                       |         | 171                        |       | 440                        |       |
| Increased marketing                                      |         | 63                         |       | 139                        |       |
| Increased recruiting                                     |         | 50                         |       | 342                        |       |
| Increased implementation service cost  deferral for term |         | (500                       | )          | (874                       | )          |
| Various other items                                      |         | 31                         |       | 199                        |       |
|                                                     |         |                       |       |                       |       |
|                                                     | Total change |                       | $          | 768                        |       | $ | 2,983 |   |
|                                                          |              |                            |            |                            |            |  |  |  |

 

The increase during the three and nine months ended September 30, 2007was due primarily to an increase in payroll and related expenses resulting fromthe increase in headcount and higher utilization of third party implementationconsultants to address the general increase in demand for consulting andtraining services demanded as a result of higher license sales. The increase inoutside services is principally a result of increased costs associated with thelarger Client Conference in September 2007 compared to September 2006. Travelcosts increased during the 2007 periods due to travel associated with moreservice projects and rising cost of air travel and accommodations. Consistentwith the headcount increase, recruiting costs also increased in the fiscal 2007periods.

 

We have experienced an increase in implementation services with thelaunch of our APX product and sales of our Geneva product, which are both soldunder the term license model. As there were more term license implementationprojects, primarily Geneva-related, in progress as of September 30, 2007compared to September 30, 2006, we have experienced an increase in the deferralof professional service costs. We deferred net professional service costs of$0.9 million and $2.6 million during the three and nine months ended September30, 2007, compared to $0.4 million and $1.7 million in the comparable periodsof 2006.

 

Gross margins for the 2007 periods continue to be negative as a resultof the significant deferral of professional services revenues and costsassociated with our term license implementation. We defer only the direct costsassociated with services performed on these arrangements. Indirect costs suchas management and other overhead expenses are recognized in the period in whichthey are incurred, with no revenue to offset them. In addition, we have addedheadcount in our consulting group. Since these new employees undergo a trainingperiod, typically of six months, before becoming fully billable, theirassociated costs have a near-term negative impact on gross margins.

 

We expect cost of professional services and other in the fourth quarterof 2007 to decrease as compared to the third quarter, primarily due to ourannual client conference that occurred in the third quarter of 2007.

 

29

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***Amortization of Developed Technology***

 
| ** **                                          | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                          | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change**                                             | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Amortization of developed techology (in  thousands) |       | $                                                       | 332        |       | $          | 251                                                    |       | $          | 81         |   | $ | 1,018 |   | $ | 909 |   | $ | 109 |   |
| Percent of total net revenues                       |       | 1                                                       | %          | 1          | %          |                                                   |       | 1          | %          | 1 | % |   |   |
|                                                     |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Amortization of developed technology represents amortization ofacquisition-related intangible assets and internal product development costs.The increase in amortization of developed technology reflected additionalexpense from the amortization of capitalized internally developed softwarecosts relating to product upgrades since September 30, 2006.

 

### **OPERATINGEXPENSES**

### ** **

***Sales and Marketing***

 
| ** **                         | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change**                                             | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| ** **                         | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales and marketing (in thousands) |       | $                                                       | 13,482     |       | $          | 12,115                                                 |       | $          | 1,367      |   | $ | 40,356 |   | $ | 36,466 |   | $ | 3,890 |   |
| Percent of total net revenues      |       | 24                                                      | %          | 26         | %          |                                                   |       | 26         | %          | 27 | % |   |   |
|                                    |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

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

 

Sales and marketing expenses fluctuated due to the following (inthousands):

 
| ** **                         | ** **   | **Change From**       | ** ** | **Change From**       | ** ** |
|------------------------------------|--------------|----------------------------|------------|----------------------------|------------|
| ** **                         | ** **   | **2006 to 2007** | ** ** | **2006 to 2007** | ** ** |
| ** **                         | ** **   | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                               |         |                       |       |                       |       |
| Increased payroll and related      |         | $                          | 487        |                       | $          | 2,633 |   |
| Increased travel and entertainment |         | 494                        |       | 842                        |       |
| Increased marketing                |         | 173                        |       | 591                        |       |
| Increased outside services         |         | 104                        |       | 357                        |       |
| Decreased bad debt and broker fees |         | (144                       | )          | (1,043                     | )          |
| Various other items                |         | 253                        |       | 510                        |       |
|                               |         |                       |       |                       |       |
|                               | Total change |                       | $          | 1,367                      |       | $ | 3,890 |   |
|                                    |              |                            |            |                            |            |  |  |  |

 

The increase in expenses for the three and nine months endedSeptember 30, 2007 reflected the growth of our business, while the decrease ofexpenses as a percentage of revenues during the 2007 periods reflected ourachievement of improved productivity. The increases in payroll and other related costs were aresult of an increase in headcount to 167 at September 30, 2007 from 161 atSeptember 30, 2006 and increases in variable compensation paid to theseindividuals as a result of higher bookings. We believe this investment inpersonnel will accelerate the momentum in our Geneva and APX product sales andincrease satisfaction for all of our products. Travel expenses increased due to the headcount increase and travel andlodging associated with our annual Advent client conference in September 2007.Marketing and outside service expenses increased due to increased advertisinginitiatives to market our significant number of product releases for 2007.These increases were partially offset by a decrease in broker fees and bad debt expense associated with the winding down of oursoft dollar business in fiscal 2006.

 

***Product Development***

 
| ** **                         | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change**                                             | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
|                               |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Product development (in thousands) |       | $                                                       | 9,334      |       | $          | 8,849                                                  |       | $          | 485        |   | $ | 30,006 |   | $ | 25,599 |   | $ | 4,407 |   |
| Percent of total net revenues      |       | 17                                                      | %          | 19         | %          |                                                   |       | 19         | %          | 19 | % |   |   |
|                                    |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

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

 

30

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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.

 

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

 
| ** **                                       | ** **   | **Change From**       | ** ** | **Change From**       | ** ** |
|--------------------------------------------------|--------------|----------------------------|------------|----------------------------|------------|
| ** **                                       | ** **   | **2006 to 2007** | ** ** | **2006 to 2007** | ** ** |
| ** **                                       | ** **   | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                             |         |                       |       |                       |       |
| Increased payroll and related                    |         | $                          | 2,065      |                       | $          | 5,272 |   |
| Increased capitalization of product  development |         | (2,078                     | )          | (1,765                     | )          |
| Increased allocation of corporate expenses       |         | 295                        |       | 432                        |       |
| Increased outside services                       |         | 120                        |       | 58                         |       |
| Increased computer and telecom                   |         | 83                         |       | 132                        |       |
| Increased recruiting                             |         | 2                          |       | 122                        |       |
| Various other items                              |         | (2                         | )          | 156                        |       |
|                                             |         |                       |       |                       |       |
|                                             | Total change |                       | $          | 485                        |       | $ | 4,407 |   |
|                                                  |              |                            |            |                            |            |  |  |  |

 

Theincrease in product development expense during the three and nine months endedSeptember 30, 2007 was primarily due to increases in payroll and other relatedcosts resulting from the increase in headcount to help us meet ourexpanded product delivery schedules for fiscal 2007. As a result of the increasein headcount, our product development group incurred additional costs from ahigher allocation of corporate expenses (information technology and facilities)as well as increased recruiting fees to identify product development engineersto assist in developing our new products and enhancing existing products. Thefluctuations in the capitalization of our product development costs in thethree and nine months ended September 30, 2007 was attributable to the timingof product releases as we capitalized $2.1 million and $2.7 million,respectively, of costs associated with our Geneva 7.0, APX 2.0 and Moxy 6.0products during 2007 as compared with $4,000 and $0.9 million of costs in thecomparable periods of 2006 primarily associated with APX 1.0, and was theprincipal reason that product development costs decreased as a percentage ofrevenues in the third quarter of 2007.

 

We expect product development expenses to increase in the fourthquarter of 2007 as compared to the third quarter due to decreased amountscapitalized under SFAS 86. Our engineers worked on a number of product releaseswhich were in their final beta stage during the third quarter.

 

***General and Administrative***

 
| ** **                                | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change**                                             | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| ** **                                | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and administrative (in thousands) |       | $                                                       | 8,393      |       | $          | 8,262                                                  |       | $          | 131        |   | $ | 25,014 |   | $ | 23,911 |   | $ | 1,103 |   |
| Percent of total net revenues             |       | 15                                                      | %          | 18         | %          |                                                   |       | 16         | %          | 18 | % |   |   |
|                                           |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

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

 

General and administrative expenses fluctuated due to the following (inthousands):

 
| ** **                             | ** **   | **Change From**       | ** ** | **Change From**       | ** ** |
|----------------------------------------|--------------|----------------------------|------------|----------------------------|------------|
| ** **                             | ** **   | **2006 to 2007** | ** ** | **2006 to 2007** | ** ** |
| ** **                             | ** **   | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                   |         |                       |       |                       |       |
| Increased payroll and related          |         | $                          | 1,283      |                       | $          | 4,588 |   |
| Increase in loss on disposal of assets |         | 379                        |       | 319                        |       |
| Increased recruiting                   |         | 150                        |       | 440                        |       |
| Increased (decreased) depreciation     |         | 51                         |       | (398                       | )          |
| Decreased facilities                   |         | (501                       | )          | (1,850                     | )          |
| Decreased outside services             |         | (340                       | )          | (1,134                     | )          |
| Decreased legal and professional       |         | (313                       | )          | (910                       | )          |
| Various other items                    |         | (578                       | )          | 48                         |       |
|                                   |         |                       |       |                       |       |
|                                   | Total change |                       | $          | 131                        |       | $ | 1,103 |   |
|                                        |              |                            |            |                            |            |  |  |  |

 

The increase in expenses during the three and nine months endedSeptember 30, 2007 is primarily due to payroll and other related costsbeing higher as a result of an increase in headcount and annual meritincreases. The headcount increases reflected our investment in informationtechnology infrastructure to assist in automating key business processes tosupport the Company’s growth. In the third quarter of 2007, we wrote off$331,000 of construction-in-progress assets at our 303 Second

 

31

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Street facility in San Francisco, California, as a result of ourdecision to relocate this data center. This increase was offset by adecrease in facilities and depreciation expense as we are no longer incurringrent and depreciation expenses related to our prior San Francisco headquartersfacility located at 301 Brannan Street, which we exited in October 2006. Weentered into a definitive lease agreement in January 2006 for our newheadquarters facility located at 600 Townsend Street in San Francisco,California resulting in rent expense at both 600 Townsend and our priorheadquarters facility causing higher rent expense for the first nine months of2006. Lower legal fees andprofessional fees resulted from decreased services provided by Sarbanes-Oxleycompliance consultants, and external legal and accounting firms.

 

***Amortization of Other Intangibles***

 
| ** **                                        | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                        | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change**                                             | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Amortization of other intangibles (in  thousands) |       | $                                                       | 463        |       | $          | 1,028                                                  |       | $          | (565       | ) | $ | 1,403 |   | $ | 3,027 |   | $ | (1,624 | ) |
| Percent of total net revenues                     |       | 1                                                       | %          | 2          | %          |                                                   |       | 1          | %          | 2 | % |   |   |
|                                                   |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

* *

Amortization of other intangibles represents amortization ofnon-technology related intangible assets. The decreases in amortization ofother intangibles in the 2007 periods were attributed to assets becoming fullyamortized during fiscal 2006 and the first nine months of 2007.

 

***Restructuring Charges***

 
| ** **                           | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                           | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change**                                             | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
|                                 |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Restructuring charges (in thousands) |       | $                                                       | 113        |       | $          | 54                                                     |       | $          | 59         |   | $ | 902 |   | $ | 320 |   | $ | 582 |   |
| 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 ninemonths ended September 30, 2007, we recorded aggregate restructuring charges of$902,000 which primarily related to the modification of certain sub-leaseassumptions for our prior San Francisco headquarters facility located at 301Brannan Street, which the Company exited in October 2006.***

#####  

##### ***During the three months endedSeptember 30, 2006, we recorded a restructuring charge of $54,000 which relatedto the present value amortization of facility exit obligations. During thethree months ended June 30, 2006, we recorded a restructuring charge of$124,000 which related to the costs to exit a portion of our facility in New Rochelle,New York, and our entire facility in Summit, New Jersey as well as the fairvalue amortization 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.

#####  

The following table sets forth an analysis of the components of thepayments and restructuring charges made against the accrual during the ninemonths ended September 30, 2007 (in thousands):

 
| ** **                                              | ** ** | **Facility Exit** | ** ** | **Severance &** | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|--------------------------|------------|------------|------------|
| ** **                                              | ** ** | **Costs**              | ** ** | **Benefits**             | ** ** | **Total**  | ** ** |
|                                                    |       |                   |       |                     |       |       |       |
| Balance of restructuring accrual at  December 31, 2006  |       | $                      | 6,587      |                     | $          | 4          |       | $ | 6,591 |   |
| Restructuring charges                                   |       | 681                    |       | —                   |       | 681        |       |
| Cash payments                                           |       | (2,331                 | )          | (4                       | )          | (2,335     | )          |
| Accretion adjustment                                    |       | 221                    |       | —                   |       | 221        |       |
|                                                    |       |                   |       |                     |       |       |       |
| Balance of restructuring accrual at  September 30, 2007 |       | $                      | 5,158      |                     | $          | —     |       | $ | 5,158 |   |

 

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***Operating Income by Segment***

 
| ** **                                          | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| **(in thousands)**                             | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change**                                             | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
|                                                |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Advent Investment  Management                       |       | $                                                       | 8,522      |       | $          | 4,210                                                  |       | $          | 4,312      |   | $ | 17,029 |   | $ | 13,883 |   | $ | 3,146 |   |
| MicroEdge                                           |       | 1,287                                                   |       | 1,418      |       | (131                                                   | )          | 4,225      |       | 3,541 |   | 684 |   |
| Other                                               |       | —                                                  |       | (573       | )          | 573                                                    |       | —     |       | (1,518 | ) | 1,518 |   |
| Unallocated  corporate operating costs and expenses |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Stock-based  employee compensation                  |       | (3,219                                                  | )          | (3,448     | )          | 229                                                    |       | (10,047    | )          | (10,097 | ) | 50 |   |
| Amortization of  developed technology               |       | (332                                                    | )          | (251       | )          | (81                                                    | )          | (1,018     | )          | (909 | ) | (109 | ) |
| Amortization of  other intangibles                  |       | (463                                                    | )          | (1,028     | )          | 565                                                    |       | (1,403     | )          | (3,027 | ) | 1,624 |   |
|                                                |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Total operating  income                             |       | $                                                       | 5,795      |       | $          | 328                                                    |       | $          | 5,467      |   | $ | 8,786 |   | $ | 1,873 |   | $ | 6,913 |   |

 

Operating income for the AIM segment increased by approximately $4.3million and $3.1 million in the three and nine months ended September 30, 2007,respectively, compared with the comparable periods of 2006, principally as aresult of our improved productivity. Increases in total AIM revenues of $8.9million and $20.4 million, which contributed to our fiscal 2007 operatingprofit increases, exceeded our payroll and other related cost increases as theAIM segment has added personnel, primarily in the client support, productdevelopment, professional services and sales and marketing groups. To a lesserextent, operating income increased due to an increase in product developmentcost capitalization. However, operating income for the 2007 periodscontinue to be reduced by the larger deferral of professional services revenuesand costs associated with our term license implementations.

 

MicroEdge’s operating income decreased by $131,000 during the threemonths ended September 30, 2007, as compared to the comparable period of 2006,while operating income increased by $684,000 during the nine months endedSeptember 30, 2007, primarily due to an increase in revenues of $536,000 and$2.1 million partially offset by an increase in total operating costs of$666,000 and $1.4 million.  Operatingexpenses increased due to an increase in payroll and other related costsresulting from 11 additional employees that were hired since September 30,2006.

 

Operating loss for our “Other” segment was $573,000 and $1.5 millionfor the three and nine months ended September 30, 2006 compared to zero for thecomparable periods in 2007, as we completed the wind down of the soft dollarcomponent of our broker/dealer in 2006 which resulted in significant bad debtexpense and broker fees in the prior year periods.

 

***Interest and Other Income (Expense),Net***

 
| ** **                                               | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                               | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change**                                             | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Interest and other income (expense), net  (in thousands) |       | $                                                       | (138       | )          | $          | 656                                                    |       | $          | (794       | ) | $ | 4,248 |   | $ | 3,054 |   | $ | 1,194 |   |
| Percent of total net revenues                            |       | 0                                                       | %          | 1          | %          |                                                   |       | 3          | %          | 2 | % |   |   |
|                                                          |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Interest and other income (expense), net consists of interest incomeand expense, realized gains and losses on investments and foreign currencygains and losses.

 

Interest and other income (expense), net fluctuated due to thefollowing (in thousands):

 
| ** **                                                | ** ** | **Change From**       | ** ** | **Change From**       | ** ** |
|-----------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                | ** ** | **2006 to 2007** | ** ** | **2006 to 2007** | ** ** |
| ** **                                                | ** ** | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                                      |       |                       |       |                       |       |
| Increase in interest expense                              |       | $                          | (512       | )                          | $          | (776 | ) |
| Decrease in interest income                               |       | (328                       | )          | (1,891                     | )          |
| Increase in gain on sale of private equity  investments   |       | —                     |       | 4,247                      |       |
| Increase in impairment loss of private  equity investment |       | —                     |       | (585                       | )          |
| Various other items                                       |       | 46                         |       | 199                        |       |
|                                                      |       |                       |       |                       |       |
| Total change                                              |       | $                          | (794       | )                          | $          | 1,194 |   |

 

The decrease in income during the third quarter of 2007 was due to anincrease in interest expense as we drew down $25.0 million on our creditfacility in June 2007 of which $5.0 million was repaid in September 2007.Additionally, interest income decreased due to our lower level of cash, cashequivalents and marketable securities balances during the first nine months of2007, as we liquidated part of our portfolio to fund our significant stockrepurchases in fiscal 2006 and the first half of 2007. The increase in interestand other income during the nine months ended September 30, 2007 wasattributable to an aggregate gain of $4.2 million from the sale of two privateequity investments, including our investment in LatentZero Limited, partiallyoffset by an impairment loss of $585,000 associated with a third private equityinvestment.

 

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

 
| ** **                                                | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                                | ** ** | **2007**                                                | ** ** | **2006**   | ** ** | **Change**                                             | ** ** | **2007**   | ** ** | **2006** | ** ** | **Change** | ** ** |
| Provision for (benefit from) income taxes (in  thousands) |       | $                                                       | 2,361      |       | $          | 32                                                     |       | $          | 2,329      |   | $ | 4,204 |   | $ | (1,030 | ) | $ | 5,234 |   |
| Effective tax rate                                        |       | 42                                                      | %          | 3          | %          |                                                   |       | 32         | %          | -21 | % |   |   |
|                                                           |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

During the three months ended September 30, 2007, we recorded aprovision of $2.4 million resulting in a 42% effective tax rate for the thirdquarter of 2007. During the third quarter of 2006, we continued to carry avaluation allowance against our deferred tax assets resulting in a minimal taxprovision.  The increase over the prioryear third quarter is attributed to the reversal of the majority of ourvaluation allowance against our deferred tax assets in the fourth quarter of2006.

 

During the nine months ended September 30, 2007, we recorded aprovision of $4.2 million resulting in a year-to-date effective tax rate of32%. The increase in income tax expense over the prior year period is alsoattributed to the reversal of most of our valuation allowance against deferredtax assets in the fourth quarter of 2006. During the nine months ended September 30, 2006, we continued tocarry a full valuation allowance against our deferred tax assets resulting in aminimal tax provision. In addition, we recognized income tax benefits inthe first quarter of 2006 as a result of the receipt of a state tax refund of$0.5 million and the reduction of projected tax liabilities associated withexpiration of a federal income tax return contingency of approximately $0.6million.

 

We currently expect an annual effective tax rate for 2007 between 30%and 35%. Our expectation is based on a projected fiscal 2007 effectivetax rate of 49.2%, adjusted for discrete tax benefits for tax deductions due todisqualifying dispositions of incentive stock options and employee stockpurchase plan shares, and the release of the valuation allowance associatedwith capital losses as a result of the recognition of capital gains during thesecond quarter of 2007.

 

### **LIQUIDITY AND CAPITAL RESOURCES**

###  

Our aggregate cash, cash equivalents and marketable securities were$42.8 million at September 30, 2007, compared with $55.1 million at December31, 2006. Cash equivalents are comprised of highly liquid investments purchasedwith an original or remaining maturity of 90 days or less at the date ofpurchase.

 

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

 
| ** **                                | ** ** | **Nine Months Ended September 30** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                               | ** ** | **2006** | ** ** |
|                                      |       |                                                   |       |   |   |
| Net cash provided by operating activities |       | $                                                      | 38,203     |   | $ | 31,752 |   |
| Net cash provided by investing activities |       | $                                                      | 25,563     |   | $ | 46,938 |   |
| Net cash used in financing activities     |       | $                                                      | (51,391    | ) | $ | (117,088 | ) |

 

***Cash Flows from Operating Activities***

*** ***

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

 

 Our cash provided by operatingactivities of $38.2 million during the nine months ended September 30, 2007 wasprimarily the result of our net income, increase in deferred revenue,collection of accounts receivable, and non-cash expenses including stock-basedcompensation and depreciation and amortization during the period, partiallyoff-set by a net gain from equity investment activity. The increase in deferredrevenue primarily reflected our continued transition to the term license model.Under the term model, we generally bill and collect for a term agreement ininstallments in advance of each annual period. These amounts are deferred atbilling and recognized over the annual term period. This has the effect ofincreasing deferred revenue when compared to a perpetual license model where nolicense revenue is deferred. See further discussion of the effects of ourtransition to a term model in the “Overview” section. The decrease in accountsreceivable primarily reflected improved collections during the first ninemonths of 2007. Days’ sales outstanding decreased to 66 days at the end of thethird quarter of 2007 from 75 days in the fourth quarter of 2006. Other changesin assets and liabilities included an increase in our income taxes payables and

 

34

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decreases in prepaid and other assets, accounts payable and accruedliabilities. The decreases in accounts payable and accrued liabilitiesreflected cash payments of fiscal 2006 liabilities including year-end payablesand bonuses, commissions and payroll taxes.

 

Our cash provided by operating activities during the nine months endedSeptember 30, 2006 of $31.8 million was primarily the result of our net incomeadjusted for non-cash charges including stock-based compensation, depreciationand amortization. Other sources of cash during the nine months ended September30, 2006 included increases in deferred rent and deferred revenue. The increasein deferred rent resulted from the signing of a definitive lease agreement onJanuary 2006 for our new headquarters facility located at 600 Townsend Streetin San Francisco. The increase in deferred revenue primarily reflected our continuedtransition to a term license model. Uses of our operating cash included areduction of our sales reserves, an increase in our prepaid and other assetsand decreases in accrued liabilities and income taxes payable. The increase inprepaid and other assets primarily reflected a receivable established for thetenant improvement allowance associated with our 600 Townsend lease agreement,which was partially offset by cash payments by the lessor during the ninemonths ended September 30, 2006. The decreases in accrued liabilities reflectedcash payments for December 31, 2005 liabilities including year-end payables andbonuses, commissions, payroll taxes, settlement of claims of certain formermembers and employees of Advent Outsource Data Management, and legal costsassociated with the discovery phase of the Kinexus earnout litigation. Thedecrease in income taxes payable during the nine months ended September 30,2006 reflected cash payments related to state income taxes and reductions inother projected tax liabilities.

 

We expect our cash flow from operating activities for fiscal 2007 to bein the range of $54 million to $57 million.

 

***Cash Flows from Investing Activities***

* *

Net cash provided by investing activities of $25.6 million for the ninemonths ended September 30, 2007 is primarily from proceeds of $24.9 millionfrom the sale of short term investments and from the proceeds of $11.6 millionfrom the sale of two private equity investments, including our stake inLatentZero Limited. This was partially offset by capital expenditures of $7.1million, capitalized software development costs of $2.4 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 $46.9 million for the ninemonths ended September 30, 2006, consisted primarily of net sales andmaturities of marketable securities of $64.5 million. During the nine monthsended September 30, 2006, we liquidated investments to provide the cashrequired to repurchase our common stock. These cash proceeds were offset bycapital expenditures of $15.5 million, a change in restricted cash of $1.3million to secure a bank line of credit associated with the lease of our newheadquarter facilities, and capitalized software development costs of $0.8million.

 

***Cash Flows from Financing Activities***

* *

Net cash used in financing activities for the nine months endedSeptember 30, 2007 of $51.4 million reflected the repurchase of 2.6 millionshares of our common stock for $91.2 million and the repayment of $5.0 millionon our credit facility. This was partially offset by a draw-down of $25.0 millionagainst our credit facility and proceeds received from the issuance of commonstock of $19.8 million under our employee stock option and purchase plans.

 

Net cash used in financing activities for the nine months endedSeptember 30, 2006 of $117.1 million reflected the repurchase of 4.1 millionshares of our common stock for $127.9 million, partially offset by proceedsreceived from the issuance of common stock of $10.8 million.

 

Our liquidity and capital resources in any period could be affected bythe exercise of outstanding stock options and issuance of common stock underour employee stock purchase plan. The resulting increase in the numberof outstanding shares from this and from the issuance of common stock from ourother outstanding equity awards (RSUs and SARs) could also affect our per shareresults of operations. However, we cannot predict the timing or amount ofproceeds from the exercise of stock options, or whether they will be exercisedat all. Furthermore, our Board may authorize additional share repurchaseprograms and we may continue our stock repurchase activity. As of September 30,2007, we have completed the stock repurchases under the share repurchaseauthorization that was approved by the Board and publicly announced in February2007.

 

At September 30, 2007, we had negative working capital of $19.3million, compared to negative working capital of $0.3 million at December 31,2006. Our negative working capital is primarily due to our use of excess cashfrom the growth in deferred revenue to finance common stock repurchases,totaling $148.6 million during fiscal 2006 and $91.2 million during the firstnine

 

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months of 2007. We may continue to have negative working capital in thefuture. However, we have relatively predictable cash flows from operations as aresult of the high proportion of recurring revenues in our business model. Thisallows us to make long-term investments in our business while remainingconfident that we will have sufficient liquidity for future operations.

 

We currently have commitments under our operating leases, whichincreased from $49.0 million at December 31, 2006 to $51.4 million at September30, 2007, primarily as a result from expanding the rentable square footage atour corporate headquarters facility located at 600 Townsend Street in SanFrancisco, California during the first nine months of 2007.

 

We also have significant commitments associated with our creditfacility. In February 2007, we and certain of our domestic subsidiariesentered into a senior secured credit facility agreement (the “Facility”) withWells Fargo Foothill, Inc. (the “Lender”). Under the Facility, the Lender willprovide the Company with a revolving line of credit up to an aggregate amount of$75.0 million, subject to a borrowing base formula, to provide backup liquidityfor general corporate purposes, including stock repurchases, or investmentopportunities for a period of three years.

 

In June 2007, we drew $25.0 million against this Facility which bearsinterest at an aggregate rate of 6.86%, consisting of a three month LIBORcontract rate of 5.36% and an applicable margin of 1.5%. In September 2007, theCompany paid down $5.0 million of the loan. Additionally, the LIBOR contractexpired and Advent re-entered into another LIBOR rate contract on theoutstanding loan balance of $20.0 million which bears a three month LIBORcontract rate of 5.58% and an applicable margin of 1.5%. As of September 30,2007, Advent was in compliance with all associated covenants. We currentlyintend to roll the loan for another three-month term and are contractuallyobligated to repay the remaining loan balance of $20 million at the end of thecredit facility term in February 2010. However, we may elect to repay portionsof the $20.0 million balance prior to February 2010.

 

**Contractual Obligations**

 

The following table summarizes our contractual cash obligations as ofSeptember 30, 2007 (in thousands):

 
| ** **                                           | ** ** | **Three**             | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|--------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                                           | ** ** | **Months Ended** | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **December 31**  | ** ** | **Years Ended December 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **2007**              | ** ** | **2008**                                   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** |
| Operating lease obligations, net of sub-lease income | ** ** | $                     | 2,017      |                                       | $          | 7,715      |       | $          | 5,953      |       | $          | 5,476          |       | $          | 4,969      |   | $ | 25,285 |   | $ | 51,415 |   |
| Repayment of long-term debt (1)                      |       | —                |       | —                                     |       | —     |       | 20,000     |       | —     |       | —         |       | 20,000     |       |
|                                                 |       |                  |       |                                       |       |       |       |       |       |       |       |           |       |       |       |
| Total commitments (2)                                |       | $                     | 2,017      |                                       | $          | 7,715      |       | $          | 5,953      |       | $          | 25,476         |       | $          | 4,969      |   | $ | 25,285 |   | $ | 71,415 |   |

 

----

(1)                                 At September 30, 2007, we are contractuallyobligated to repay our long-term debt at the end of our credit facility term in2010. However, we may elect to repay portions of the $20.0 million balanceprior to February 2010.

 

(2)                                 At September 30, 2007, we had a grossliability of $5.3 million for uncertain tax positions associated with theadoption 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 September 30, 2007 and December 31, 2006, we did not have anyrelationships with unconsolidated entities or financial partnerships, such asentities often referred to as structured finance or special purpose entities,which would have been established for the purpose of facilitating off-balancesheet arrangements or other contractually narrow or limited purposes. As such,we are not materially exposed to any financing, liquidity, market or creditrisk 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, repay our debt under our credit facility and repurchase commonstock, or invest in other businesses, when opportunities arise. Based upon thepredominance of our revenues from recurring sources, bookings performance andcurrent expectations, we believe that our cash and cash equivalents, cash generatedfrom operations and availability under our Facility will be sufficient tosatisfy our working capital needs, capital expenditures, investmentrequirements, stock repurchases and financing activities for the next year.

 

**Off-Balance Sheet Arrangements**

** **

Ouroff-balance sheet arrangements as of September 30, 2007 consist of obligationsunder operating leases. See Note 12, “Commitments and Contingencies” to thecondensed consolidated financial statements and the “Liquidity and CapitalResources” section above for further discussion and a tabular presentation ofour contractual obligations. As of September 30, 2007,

 

36

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wewere in compliance with all our financial covenants and expect to remain withincompliance in the next 12 months. We are comfortable with these limitations andbelieve they will not impact our cash or credit in the coming year or restrictour ability to execute our 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 theacquisitions of Advent Denmark, Advent Norway, Advent Sweden, AdventNetherlands, and Advent Europe’s remaining distributors in the United Kingdomand Switzerland, whose service and certain license revenues and capitalspending, are transacted in local country currencies, we have greater exposureto foreign currency fluctuations. Additionally as of September 30, 2007, $42.0million of goodwill and $0.5 million of other intangibles from the acquisitionof these entities is denominated in foreign currency. Therefore a hypotheticalweakening (strengthening) of the U.S. dollar of 10% relative to certainEuropean currencies could increase (decrease) our assets and equity byapproximately $4 million. We do not believe that a hypothetical 10% change inforeign currency exchange rates would have a material adverse effect on ourcondensed consolidated results of operations or cash flows.

 

Historically,our interest rate risk related primarily to our investment portfolio, whichconsisted of $20.2 million in cash equivalents and $24.9 million in marketablesecurities as of December 31, 2006 and $42.8 million in cash equivalents andzero in marketable securities as of September 30, 2007. An immediate sharpincrease in interest rates could have a material adverse effect on the fairvalue of our investment portfolio. Conversely, immediate sharp declines ininterest rates could seriously harm interest earnings of our investmentportfolio. We do not currently use derivative financial instruments in ourinvestment portfolio, nor hedge for these interest rate exposures.

 

Bypolicy, we limit our exposure to longer-term investments, and the majority ofour investment portfolio at December 31, 2006 had interest rate maturities ofless than one year. As a result of the relatively short duration of ourportfolio, an immediate hypothetical parallel shift to the yield curve of plus25 basis points (“BPS”), 50 BPS and 100 BPS would result in a reduction of0.11% ($51,000), 0.23% ($103,000) and 0.46% ($205,000), respectively, in themarket value of our investment portfolio as of December 31, 2006. During thenine months offended September 30, 2007, we liquidated our investment portfolioto fund our stock repurchase program resulting in a zero balance as ofSeptember 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. AtSeptember 30, 2007, we have debt of $20.0 million under this facility which bearsinterest at an aggregate rate of 7.08%, consisting of a three month LIBORcontract rate of 5.58% and an applicable margin of 1.5%. In December 2007, theLIBOR rate contract will expire and Advent will have the option to eitherre-enter into another LIBOR rate contract, choose the Base Rate, or pay off theexisting loan balance. A hypothetical 100 basis point increase in the LIBORrate from the rate of 5.58% associated with our debt of $20.0 million atSeptember 30, 2007 would result in an increase in quarterly and annual interest expense of approximately$50,000 and $200,000, 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

 

37

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Limited,and impaired another. At September 30, 2007, our net investments inprivately-held companies totaled $0.5 million. See Note 7, “Balance SheetDetail”, to our condensed consolidated financial statements for furtherdiscussion.

 

**Item 4. Controls and Procedures**

 

**Evaluation of disclosurecontrols and procedures.**

** **

The Company’smanagement evaluated, with the participation of the Chief Executive Officer andChief Financial Officer, the effectiveness of the Company’s disclosure controlsand procedures, as such term is defined under Rule 13a-15(f) of the Securitiesand Exchange Act of 1934, as of the end of the period covered by this QuarterlyReport on Form 10-Q. Based on this evaluation, the Chief Executive Officer andChief Financial Officer have concluded our disclosure controls and procedureswere effective as of September 30, 2007 to ensure that information we arerequired to disclose in reports that we file or submit under the SecuritiesExchange Act of 1934 (i) is recorded, processed, summarized and reported withinthe time periods specified in Securities and Exchange Commission rules andforms and (ii) is accumulated and communicated to Advent’s management,including our Chief Executive Officer and our Chief Financial Officer, asappropriate to allow timely decisions regarding required disclosure.

 

**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 third quarter ended September 30,2007 that has materially affected, or is reasonably likely to materiallyaffect, Advent’s internal control over financial reporting.

 

**PARTII. OTHER INFORMATION**

 

**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.

 

On March 8, 2005, certain of the former shareholders of Kinexus and theshareholders’ representative filed suit against Advent in the Delaware ChanceryCourt. The complaint alleges that Advent breached the Agreement and Plan ofMerger dated as of December 31, 2001 pursuant to which Advent acquired all ofthe outstanding shares of Kinexus due principally to the fact that no amountwas paid by Advent on an earn-out of up to $115 million. The earn-out, whichwas payable in cash or stock at the election of Advent, was based upon Kinexusmeeting certain revenue targets in both 2002 and 2003. The complaint seeksunspecified compensatory damages, an accounting and restitution for unjustenrichment. Advent advised the shareholders’ representative in January 2003 thatthe earn-out terms had not been met in 2002 and accordingly no earn-out waspayable 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 disputesthe plaintiffs’ claims and believes that it has meritorious defenses andintends to vigorously defend this action. Management believes that anypotential loss associated with this litigation is neither probable norreasonably estimable at this time and accordingly has not accrued any amountsfor any potential loss.

 

**Item 1A. Risk Factors**

** **

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

 

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

 

The purchase of our software products often requires prospectivecustomers to provide significant executive-level sponsorship and to make majorsystems architecture decisions. As a result, we must generally engage inrelatively lengthy sales and contracting efforts. Sales transactions maytherefore be delayed during the customer decision process because we mustprovide a significant level of education to prospective customers regarding theuse and benefit of our products. 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.

 

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

 

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

 

We derive a significant portion of our net revenues from the licensingof Axys and Geneva products. In addition, many of our other applications, suchas Moxy, Partner and various data services have been designed to provide anintegrated solution with either of these two products. As a result, we believethat for the next several years a majority of our net revenues will depend uponcontinued market acceptance of Axys and Geneva, and upgrades to those products.In addition, APX, our newest portfolio accounting and reporting product, is of criticalimportance in providing an upgrade path for many of our Axys customers. Ourlong-term growth could be harmed if we are unable to establish APX as a leadingproduct in the market. As a result, we may not be able to successfully upgradeexisting Axys clients to APX, or to attract new customers to buy APX.

 

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

 

We believe that the market for large investment management softwaresystems may be affected by a number of factors, including reductions in capitalexpenditures by large customers and poor performance of major financialmarkets. The target clients for our products include a range of financialservices organizations that manage investment portfolios. In addition in ourMicroEdge business segment, we target corporations, public funds, universitiesand non-profit organizations, which also manage investment portfolios and havemany of the same needs. The success of many of our clients is intrinsicallylinked to the health of the financial markets. We believe that demand for oursolutions has been, and could continue to be, disproportionately affected byfluctuations, disruptions, instability or downturns in the economy andfinancial services industry which may cause clients and potential clients toexit the industry or delay, cancel or reduce any planned expenditures forinvestment management systems and software products. 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 Term License, PerpetualMaintenance or Other Recurring Contracts, Our Business Will Suffer**

 

In the third quarter of 2007, revenues recognized from these recurringcontracts represented 77% of total revenues. We expect to continue to derive asignificant portion of our revenue from our clients’ renewal of term license,perpetual maintenance and other recurring contracts and such renewals are criticalto our future success. Factors that may affect the renewal rate of ourcontracts include:

 

•              The price,performance and functionality of our solutions;

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

•              The effectiveness ofour maintenance and support services; and

•              Our ability todevelop complementary products and services.

 

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Most of our perpetual license customers renew their annual maintenancealthough our customers have no obligation to renew such maintenance after thefirst year of their license agreements. In addition, our customers may selectmaintenance levels less advantageous to us upon renewal, which may reducerecurring revenue from these customers.

 

                During the third quarter of 2007, wecommenced renewing term contracts signed in the third quarter of 2004.  These are the first three-year term contractsto be renewed by Advent since our transition to a term pricing model began. Ourcustomers have no obligation to renew their term contracts and given the smallnumber of contracts to be renewed in the third quarter of 2007, we can not yetconclude whether customers will renew in a manner consistent with our perpetualmaintenance customers.  Additionally, wecan not predict whether the renewals will be less advantageous to us than theoriginal term contract. For example, customers may request shorter renewalperiods than our original term contract or customers may request a reduction inthe number of users or products licensed, resulting in a lower annual termlicense fee.  Further, customers mayelect to not renew their term license contracts at all. Additionally, we mayincur significantly more costs in securing our term license contract renewalsthan we incur for our perpetual maintenance renewals. If our term contractcustomers renew under terms less favorable to us or choose not to renew theircontracts or if it costs significantly more to secure a renewal for us, ouroperating results may be harmed.

 

**We Face Competition**

 

The market for investment management software is competitive and highlyfragmented, is subject to rapid change and is sensitive to new productintroductions and marketing efforts by industry participants. Our largestsingle source of competition is from proprietary systems used by existing andpotential clients, many of whom develop their own software for their particularneeds and therefore may be reluctant to license software products offered byindependent vendors such as Advent. Other competitors include providers ofsoftware and related services as well as providers of outsourced services. Manyof our competitors have longer operating histories and greater financial,technical, sales and marketing resources than we do. In addition, consolidationhas occurred among some of the competitors in our markets. Competitorsvary in size, scope of services offered and platforms supported. In 2005and 2006, seven of our competitors were acquired with the possibility offorming even larger companies through additional acquisitions of companies andtechnologies. Any further consolidation among our competitors may result instronger competitors in our markets and may therefore either result in a lossof market share or harm our results of operations. In addition, we also facecompetition from potential new entrants into our market that may developinnovative technologies or business models. We cannot guarantee that we will beable to compete successfully against current and future competitors or thatcompetitive pressure will not result in price reductions, reduced operatingmargins or loss of market share, any one of which could seriously harm ourbusiness.

 

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

 

The market for our products is characterized by rapid technologicalchange, changes in customer demands, evolving industry standards and newregulatory requirements. New products based on new technologies or new industrystandards can render existing products obsolete and unmarketable. As a result,our future success will continue to depend upon our ability to develop newproducts or product enhancements that address the future needs of our targetmarkets and to respond to their changing standards and practices. In the fourthquarter of 2007, we plan to add a new trading compliance solution, Advent RulesManager, to our suite of products.

 

We may not be successful in developing, introducing, marketing andlicensing our new products or product enhancements on a timely and costeffective basis, or at all, and our new products and product enhancements maynot adequately meet the requirements of the marketplace or achieve marketacceptance. Delays in the commencement of commercial shipments of new productsor enhancements or delays in client implementations or migrations may result inclient dissatisfaction and delay or loss of product revenues. Additionally,existing clients may be reluctant to go through the sometimes complex and timeconsuming process of converting from our Axys to APX product, which may slowthe conversion of our customer base to APX. In addition, clients may delaypurchases in anticipation of new products or product enhancements. Our abilityto develop new products and product enhancements is also dependent upon theproducts of other software vendors, including certain system software vendors,such as Microsoft Corporation, Sun Microsystems, database vendors anddevelopment tool vendors. If the products of such vendors have design defectsor flaws, are unexpectedly delayed in their introduction, or are unavailable onacceptable terms, our business could be seriously harmed.

 

**Our Operating Results May Fluctuate Significantly**

 

We are more than halfway through our transition to a predominantly termlicense model. Until we substantially complete our transition to a term licensemodel, our net revenues will be affected by the continued reduction inperpetual license revenue and by the relatively slower revenue recognitionassociated 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.

 

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Duringthe nine months ended September 30 2007, term license revenues comprisedapproximately 22% of term license, maintenance and other recurringrevenues as compared to approximately 12% in the first nine months of 2006.Term license contracts are comprised of both software licenses and maintenanceservices. Individual perpetual software licenses vary significantly in value,and the value and timing of these transactions can therefore cause ourquarterly perpetual license revenues to fluctuate.

 

When a customer purchases a term license together with implementationservices we do not recognize any revenue under the contract until theimplementation services are substantially completed. If the implementationservices are still in progress as of quarter-end, we will defer all of thecontract revenues to a subsequent quarter. As a result of these and otherfactors, our quarterly net revenues may fluctuate significantly. Our expenselevels are relatively fixed in the short-term. Due to the fixed nature of theseexpenses, combined with the relatively high gross margin historically achievedon our products, an unanticipated decline in net revenues in any particularquarter may adversely affect our operating results. For example, during thethird quarter of 2007, we deferred net revenues of $3.0 million and deferreddirectly related expenses of $0.9 million. The impact of these deferrals on ouroperating income for the third quarter of 2007 was approximately $2.1 million.

 

In addition, we experience seasonality in our perpetual licenserevenue. The fourth quarter of the year typically has the highest perpetuallicense fee revenue, followed by lower perpetual license revenue in the firstquarter of the following year. We believe that this seasonality resultsprimarily from customer budgeting cycles and the annual nature of some AUAcontracts, and expect this seasonality to continue in the future.

 

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

 

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

 

During the third quarter of 2007, we recognized 77% of total netrevenues from recurring sources, which we define as revenues from term license,maintenance on perpetual licenses and other recurring revenue. We generallyrecognize revenue from these sources ratably over the terms of theseagreements, which typically range from one to three years. As a result, almostall of our revenues in any quarter are generated from contracts entered intoduring previous periods.

 

Consequently, a significant decline in new business generated in anyquarter may not affect our results of operations in that quarter but will havean impact on our revenue growth rate in future quarters. Additionally, adecline in renewals of term agreements, maintenance or data contracts during aquarter will not be fully reflected in our financial performance in thatquarter. For example, because we recognize revenue ratably, the non-renewal ofterm agreements or maintenance contracts late in a quarter may have very littleimpact on revenue for that quarter, but will reduce revenue in future quarters.In addition, we may be unable to adjust our costs in response to reducedrevenue.

 

Further, solely relying on our historical operating results on agenerally accepted accounting principles (GAAP) basis may not be useful inpredicting our future operating results. Non-GAAP information that we report,such as our quarterly bookings and maintenance renewal rates, may assistinvestors in evaluating our future financial position. However, placing unduereliance upon non-GAAP or operating information is not appropriate because thisinformation is neither standardized across companies nor subjected to the samecontrol activities and audit procedures that produce our GAAP financialresults.

 

**We Must Retain and Recruit Key Employees**

 

We believe that our future success is dependent on thecontinued employment of our senior management and our ability to identify,attract, motivate and retain qualified technical, sales and otherpersonnel. Members of our executive management team have acquired specializedknowledge and skills with respect to Advent. We need technical resources suchas our product development engineers to develop new products and enhanceexisting products; we rely upon sales personnel to sell our products andservices and maintain healthy business relationships; we must recruitprofessional service consultants to support the anticipated increase in productimplementations; we must hire client services personnel to provide technicalsupport to our growing installed base of customers; and we must attract andretain financial and accounting personnel to comply with the requirements ofSection 404 of the Sarbanes-Oxley Act of 2002. Therefore, we needto identify, attract, motivate and retain such employees with therequisite education, backgrounds and industry experience.  However,experienced personnel in the information technology industry are in high demandand competition for their talents is intense, especially in the San FranciscoBay Area where the majority of our employees are located. For example, inFebruary 2007, one of our executives resigned from the Company to become theChief Executive Officer of an internet company. Additionally, our ChiefFinancial Officer will resign from the Company in December 2007 to pursue anopportunity at another software company and we have not yet named a new 

 

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individual to fill that position. If we are unable to secure areplacement in a timely manner for our chief financial officer position, ourresults of operations may be harmed and our ability to report our financialresults may be impaired.

 

We have relied on our ability to grant equity compensation as onemechanism for recruiting and retaining such highly skilled personnel. Recentlyenacted accounting regulations requiring the expensing of equity compensationimpair our ability to provide these incentives without reporting significantcompensation costs.

 

We may also choose to create additional performance and retentionincentives in order to retain our employees, including the granting ofadditional 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 amaterial adverse effect on our operating results, which may result in our stockprice falling; 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 lesserextent, internationally. To further expand our international operations, wewould need to establish additional locations, acquire other businesses or enterinto additional distribution relationships in other parts of the world. Anyfurther expansion of our existing international operations and entry into newinternational markets could require significant management attention andfinancial resources. We cannot be certain that establishing businesses in othercountries will produce the desired levels of revenues, such as in the case ofAdvent Hellas which produced less than satisfactory revenues and profitabilitybefore its sale in 2005. We currently have limited experience in developinglocalized versions of our products and marketing and distributing our productsinternationally. In addition, international operations are subject to otherinherent risks, including:

 

•      the impact of recessions ineconomies outside the United States;

•      greater difficulty inaccounts receivable collection and longer collection periods;

•      unexpected changes inregulatory requirements;

•      difficulties in successfullyadapting our products to the language, regulatory and technology standards ofother countries;

•      difficulties in and costs ofstaffing and managing foreign operations;

•      reduced protection forintellectual property rights in some countries;

•      potentially adverse taxconsequences; and

•      political and economicinstability.

 

The revenues, expenses, assets and liabilities of our internationalsubsidiaries are primarily denominated in local currencies. We have nothistorically 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 strategy focused on growththrough the acquisition of additional complementary businesses. During thoseyears, we made five major acquisitions including Kinexus Corporation, TechfiCorporation and Advent Outsource Data Management LLC, and also acquired all ofthe common stock of five of our European distributor’s subsidiaries. Inaddition, we purchased our European distributor’s remaining two subsidiaries inthe United Kingdom and Switzerland in May 2004. More recently, in December2006, we acquired East Circle Solutions, Inc., a developer of investment managementbilling solutions to integrate their product into our software offerings.

 

The complex process of integrating our acquisitions has required andwill continue to require significant resources, particularly in light of ourrelative inexperience in integrating acquisitions. Integrating theseacquisitions in the past has been time-consuming, expensive and disruptive toour business. This integration process has strained our managerial resources,resulting in the diversion of these resources from our core business objectivesand may do so in the future. Failure to achieve the anticipated benefits ofthese acquisitions or to successfully integrate the operations of theseentities 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 

 

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and built new offerings through strategic alliances and internaldevelopment, as well as acquisitions, some of this expansion has requiredsignificant management time and resources without generating required revenues.We have had difficulty and may continue to have difficulty creating demand forsuch offerings. For example, demand for our Techfi product line wassignificantly lower than expected and thus we discontinued certain productswithin our Techfi product line in September 2004. As a result, we recorded anon-cash impairment charge of $3.4 million in the third quarter of 2004 towrite-off the carrying value of certain Techfi-related intangible assets.Furthermore, we may face other unanticipated costs from our acquisitions, suchas the disputes involving earn-out and incentive compensation amounts, similarto those we have experienced with our Kinexus and Advent Outsourceacquisitions.

 

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

 

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

 

We have made and may make future investments in privately held companies,many of which are considered in the start-up or development stages. Theseinvestments, which we classify as other assets on our condensed consolidatedbalance sheets, are inherently risky, as the market for the technologies orproducts these companies have under development is typically in the earlystages and may never materialize. The value of the investment in thesecompanies is influenced by many factors, including the operating effectivenessof these companies, the overall health of these companies’ industries, thestrength of the private equity markets and general market conditions. Due tothese and other factors, we have previously determined, and may in the futuredetermine, that the value of these investments is impaired, which has causedand would cause us to write down the carrying value of these investments, suchas the $0.6 million write-down of one of our investments during the secondquarter of 2007. Furthermore, we cannot be sure that future investment,license, fixed asset or other asset write-downs will not occur. If futurewrite-downs do occur, they could harm our business and results of operations.

 

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

 

From time to time, we may publicly disseminate forward-lookinginformation or guidance in compliance with Regulation FD. This information orguidance represents our outlook only as of the date we disseminate it, and wedo not undertake to update such information or guidance.

 

**Our Stock Price May Fluctuate Significantly**

 

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

 

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

 

Many of our clients use our proprietary interface to electronicallyretrieve pricing and other data from Financial Times/Interactive Data (“FTID”).FTID pays us a commission based on their revenues from providing this data toour clients. Our software products have been customized to be compatible withtheir system and this software would need to be redesigned if their serviceswere unavailable for any reason. Termination of our agreement with FTID wouldrequire at least two years notice by either us or them, or 90 days in thecase of material breach. Our revenue would be adversely impacted if ourrelationship with FTID was terminated or their services were unavailable to ourclients 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 proprietary technology. Wecurrently rely on a combination of copyright and trademark laws, trade secrets,confidentiality procedures and contractual provisions to protect ourproprietary rights. We have registered trademarks for many of our products andservices and will continue to evaluate the registration of additionaltrademarks 

 

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as appropriate. We generally enter into confidentiality agreements withour employees and with our resellers and customers. We seek to protect oursoftware, documentation and other written materials under trade secret and copyrightlaws, which afford only limited protection and we do not have any patents.Despite these efforts, it may be possible for unauthorized third parties tocopy certain portions of our products or to reverse engineer or otherwiseobtain and use our proprietary information. In addition, we cannot be certainthat others will not develop substantially equivalent or supersedingproprietary technology, or that equivalent products will not be marketed incompetition with our products, thereby substantially reducing the value of ourproprietary rights. We cannot be sure that we will develop proprietary productsor technologies that are patentable, that any patent, if issued, would provideus with any competitive advantages or would not be challenged by third parties,or that the patents of others will not adversely affect our ability to dobusiness. Litigation may be necessary to protect our 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 not infringe theintellectual property rights of others. As a result, we may be subject tolitigation and claims, including claims of infringement of patents, copyrightsand other intellectual property rights of third parties that would betime-consuming and costly to resolve. If we discovered that our products orservices violated the intellectual property rights of third parties, we mayhave to make substantial changes to our products or services or obtain licensesfrom such third parties. We might not be able to obtain such licenses onfavorable terms or at all, and we may be unable to change our productssuccessfully or in a timely manner. Failure to resolve an infringement mattersuccessfully or in a timely manner, would force us to incur significant costs,including damages, redevelopment costs, diversion of management’s attention andsatisfaction of indemnification obligations that we have with our clients, aswell as prevent us from selling certain products or services.

 

**Catastrophic Events Could Adversely Affect Our Business**

 

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

 

Further, terrorist acts, conflicts or wars may cause damage or disruptionto our customers. The potential for future attacks, the national andinternational responses to attacks or perceived threats to national securityand other actual or potential conflicts or wars, including the ongoing crisisin the Middle East, have created many economic and political uncertainties.Although it is impossible to predict the occurrences or consequences of anysuch events, they could unsettle the financial markets or result in a declinein information technology spending, which could have a material adverse effecton 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 or scalabilitylimitations at any point in their lives, but particularly when firstintroduced, such as our APX product, or as new versions are released. Despitetesting by us and by current and potential customers, errors may not be foundin new products until after commencement of commercial shipments, resulting ina loss of or a delay in market acceptance, damage to our reputation, customerdissatisfaction and reductions in revenues and margins, any of which couldseriously harm our business. Additionally, our agreements with customers thatattempt to limit our exposure to liability claims may not be enforceable injurisdictions where we operate.

 

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**Two of Our Principal StockholdersHave an Influence Over our Business Affairs and May Make Business Decisionswith Which You Disagree and Which May Adversely Affect the Value of YourInvestment**

 

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 37% as of October 31, 2007). As a result, if thesepersons act together, they will have the ability to exert significant influenceon matters submitted to our stockholders for approval, such as the election andremoval of directors, amendments to our certificate of incorporation and theapproval of any business combination. These actions may be taken even if theyare opposed by other stockholders or it may be difficult to approve theseactions without their consent. This concentration of ownership may also havethe effect of delaying or preventing a change of control of our company ordiscouraging others from making tender offers for our shares, which couldprevent our stockholders 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 required changes in some ofour corporate governance and securities disclosure and/or compliance practices.As part of the Act’s requirements, the SEC has enacted new rules on a varietyof subjects, and the Nasdaq Stock Market has enacted new corporate governancelisting requirements. These developments have increased and may in the futureincrease our accounting and legal compliance costs and could also expose us toadditional liability if we fail to comply with these new rules and reportingrequirements. In fiscal 2006 and 2005, we incurred approximately $1.3 millionand $1.8 million, respectively, in Sarbanes-Oxley related expenses consistingof external consulting costs and auditor fees, and the Company anticipatessimilarly spending a significant amount for its 2007 compliance activities. Inaddition, such developments may make retention and recruitment of qualifiedpersons to serve on our board of directors, or as executive officers, moredifficult. We continue to evaluate and monitor regulatory and legislativedevelopments and cannot reliably estimate the timing or magnitude of all costswe may incur as a result of the Act or other related legislation or regulation.

 

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

 

We prepare our condensed consolidated financial statements inconformity with accounting principles generally accepted in the United Statesof America. These principles are subject to interpretation by us, the SEC andvarious bodies formed to interpret and create accounting principles. A changein these principles or a change in the interpretations of these principles canhave a significant effect on our reported results and may even retroactivelyaffect previously reported transactions. Our accounting principles thatrecently have been or may be affected include:

 

•      Software revenue recognition

•      Accounting for stock-basedcompensation

•      Accounting for income taxes

•      Accounting for businesscombinations and related goodwill

 

In particular, in the first quarter of 2006, we adopted SFAS 123R whichrequires the measurement of all stock-based compensation to employees,including grants of employee stock options, restricted stock units and stockappreciation rights, using a fair-value-based method and the recording of suchexpense in our condensed consolidated statements of operations. The adoption ofSFAS 123R had a significant adverse effect on our results of operations. Itwill continue to significantly adversely affect our results of operations andmay impact the way in which we conduct our business.

 

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

 

Wecurrently use the Black-Scholes option pricing model to determine the fairvalue of stock-based compensation awards and employee stock purchase planshares. The Black-Scholes option pricing model was developed for use inestimating the fair value of traded options that have no vesting restrictionsand are fully transferable, characteristics not present in our option grantsand employee stock purchase plan shares. Existing valuation models, includingthe Black-Scholes and lattice binomial models, may not provide reliablemeasures of the fair values of our stock-based compensation. Consequently,there is a risk that our estimates of the fair values of our stock-basedcompensation awards on the grant dates may bear little resemblance to theactual values realized upon the exercise, expiration, early termination orforfeiture of those stock-based payments in the future. Certain stock-basedpayments, such as employee stock options, restricted stock units and stockappreciation rights, may expire worthless or otherwise result in zero intrinsicvalue as compared to the fair values originally estimated on the grant date andreported in our condensed consolidated financial statements. Alternatively,value may be realized from these instruments that are significantly higher thanthe fair values originally estimated on the grant date and reported in ourfinancial statements. There currently is no market-based mechanism or otherpractical application to verify the reliability and accuracy of the estimatesstemming from these valuation models, nor is there a means to compare andadjust the estimates to actual values.

 

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

 

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

 

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

 

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

 

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

 

InFebruary 2007, we entered into a senior secured facility agreement whichprovides us with a revolving line of credit up to an aggregate amount of $75.0million. Our continued ability to borrow under our credit facility is subjectto compliance with certain financial and non-financial covenants. The financialcovenant is limited to a maximum ratio of senior debt to earnings beforeinterest, taxes, depreciation, and amortization (EBITDA), adjusted for costcapitalizations, extraordinary gains (losses) and non-cash stock compensation.Our failure to comply with such covenants could cause default under theagreement, and we may then be required to repay such debt with capital fromother sources. Under those circumstances, other sources of capital may not beavailable to us, or be available only on unfavorable terms. In the event ofdefault which is not remedied within the prescribed timeframe, the assets ofthe Company (subject to the amount borrowed) may be attached or seized by thelender.

 

**Security Risks May Harm Our Business**

 

The secure transmission of confidential information over publicnetworks is essential to commerce and communications, particularly in themarket 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 We Fail to Maintain an Effective System of Internal Control, We MayNot be Able to Accurately Report Our Financial Results or Our Filings May Notbe Timely. As a Result, Current and Potential Stockholders Could LoseConfidence in Our Financial Reporting, Which Would Harm Our Business and theTrading Price of Our Stock**

 

Effectiveinternal control is necessary for us to provide reliable financial reports. Ifwe cannot provide reliable financial reports, our business and operatingresults could be harmed. We have in the past discovered, and may in the futurediscover, areas of our internal control that need improvement including controldeficiencies that may constitute material weaknesses. For example, as ofDecember 31, 2005, the Company did not maintain effective controls overthe accounting for 

 

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incometaxes, including the determination of deferred income tax liabilities and therelated income tax provision. This control deficiency resulted in adjustmentsto the fourth quarter of 2004 and 2005 financial statements and a restatementof the Company’s financial statements for each of the first three quarters offiscal 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, we implementedcontrols and procedures to improve our internal control over financial reportingand address the material weaknesses identified in fiscal 2004 and 2005. As aresult, management concluded that the Company’s internal control over financialreporting was effective as of December 31, 2006 and September 30, 2007.

 

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

 

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

 

**OurAbility to Conclude that a Control Deficiency is Not a Material Weakness orthat an Accounting Error Does Not Require a Restatement Can be Affected By aNumber of Factors Including Our Level of Pre-Tax Income**

 

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

 

Oneelement of our quantitative analysis of any control deficiency is its actual orpotential financial impact, and any impact that is greater than 5% of ourpre-tax income in any quarter may be more likely to result in that deficiencybeing determined to be a significant deficiency or a material weakness. Forexample, our pre-tax income for fiscal 2006 was $3.6 million and although weproject our fiscal 2007 pre-tax income to increase compared to fiscal 2006, ourassessment of a control deficiency as a significant deficiency or materialweakness remains dependent in part on our level of profitability during aparticular quarter. If our quarterly or fiscal year pre-tax income were todecrease to levels similar to those in fiscal 2006, this will make itstatistically less likely for us and our independent registered public accountingfirm to determine that a control deficiency is not a material weakness.

 

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

 

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

 

**Issuer Purchases of Equity Securities**

 

Our Board of Directors (the “Board”) has approved common stockrepurchase programs authorizing management to repurchase shares of the Company’scommon stock in the open market to enhance shareholder value. The timing andactual number of shares subject to repurchase are at the discretion ofmanagement 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.

 

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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. As such,there was no repurchase activity during the three months ended September30, 2007.

 

**Item 3.****  DefaultsUpon Senior Securities**

 

None.

 

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

 

None.

 

**Item 5.****  OtherInformation**

 

None.

 

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

 

31.1     Certification of Chief Executive Officer underSection 302 of the Sarbanes-Oxley Act of 2002

 

31.2     Certification of Chief Financial Officer underSection 302 of the Sarbanes-Oxley Act of 2002

 

32.1     Certification of Chief Executive Officer underSection 906 of the Sarbanes-Oxley Act of 2002

 

32.2     Certification of Chief Financial Officer underSection 906 of the Sarbanes-Oxley Act of 2002

 

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**SIGNATURES**

 

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

 

 
|   |                    | ADVENT SOFTWARE, INC. |
|--------|-------------------------|-----------------------|
|   |                    |                  |   |
|   | Dated: November 8, 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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