**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

**x**                              Annualreport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934

**Forthe fiscal year ended December 31, 2006**

**or**

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

**Forthe transition periodfrom           to**

**Commissionfile number: 0-26994**

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**ADVENT SOFTWARE, INC.**

(Exact name of registrantas specified in its charter)

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

 

**600 Townsend Street, SanFrancisco, California 94103**

**(Address of principal executiveoffices and zip code)**

**(415) 543-7696**

**(Registrant’s telephone number, includingarea code)**

**Securitiesregistered pursuant to Section 12(b) of the Act:**

| **Title of Each Class**                  |   | **Name of  Each Exchange on Which Registered**       |
|------------------------------------------|--------|------------------------------------------------------|
| Common Stock, par  value $0.01 per share |   | The NASDAQ Stock  Market LLC  (NASDAQ Global Select) |

 

Securities registeredpursuant to Section 12(g) of the Act: **None**

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Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act. Yes o No x

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

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer as defined in Rule 12b-2 of the Exchange Act. Largeaccelerated filer o Accelerated filer x Non-accelerated filer o

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

The number of shares of theregistrant’s common stock outstanding as of June 30, 2006 was 28,813,512.The aggregate market value of the registrant’s common stock held bynon-affiliates, based upon the closing price on June 30, 2006, as reportedon the NASDAQ National Market System, was approximately $501 million. Shares ofcommon stock held by each officer and director and by each person who owns 5%or more of the outstanding common stock have been excluded in that such personsmay be deemed to be affiliates. This determination of affiliate status is notnecessarily a conclusive determination for other purposes. As of February 23,2007, there were 27,460,602 shares of the registrant’s common stockoutstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portionsof the Registrants definitive Proxy Statement for the Annual Meeting ofStockholders to be held May 16, 2007 are incorporated by reference into Part IIIof this Annual Report on Form 10-K to the extent stated herein.Except with respect to information specifically incorporated by reference inthis Form 10-K, the Proxy Statement is not deemed to be filed aspart herein.

 

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**TABLEOF CONTENTS  **

| PART I   | 3      |                                                                                                               |
|---------------|--------|--------------------------------------------------------------------------------------------------------------------|
| Item 1.  |   | Business                                                                                                           | 3 |   |
| Item  1A.     |   | Risk  Factors                                                                                                      | 14 |   |
| Item 1B.      |   | Unresolved Staff Comments                                                                                          | 25 |   |
| Item 2.  |   | Properties                                                                                                         | 26 |   |
| Item 3.  |   | Legal  Proceedings                                                                                                 | 26 |   |
| Item 4.  |   | Submission of Matters to a Vote of Security Holders                                                                | 27 |   |
| PART II  | 28     |                                                                                                               |
| Item 5.  |   | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities | 28 |   |
| Item 6.  |   | Selected  Financial Data                                                                                           | 31 |   |
| Item 7.  |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        | 32 |   |
| Item 7A. |   | Quantitative and Qualitative Disclosures About Market  Risk                                                        | 59 |   |
| Item 8.  |   | Financial Statements and Supplementary Data                                                                        | 61 |   |
| Item 9.  |   | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosures                             | 105 |   |
| Item 9A. |   | Controls and Procedures                                                                                            | 105 |   |
| Item 9B. |   | Other  Information                                                                                                 | 107 |   |
| PART III | 107    |                                                                                                               |
| Item 10. |   | Directors and Executive Officers and Corporate  Governance                                                         | 107 |   |
| Item 11. |   | Executive Compensation                                                                                             | 108 |   |
| Item 12. |   | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                    | 108 |   |
| Item 13. |   | Certain Relationships and Related Transactions, and  Director Independence                                         | 108 |   |
| Item 14. |   | Principal Accounting Fees and Services                                                                             | 108 |   |
| PART IV  | 109    |                                                                                                               |
| Item 15. |   | Exhibits and Financial Statement Schedules                                                                         | 109 |   |

 

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**SPECIAL NOTEREGARDING FORWARD-LOOKING STATEMENTS**

You should read the following discussion inconjunction with our consolidated financial statements and related notes. Thefollowing discussion contains forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 as amended and Section 21E of the SecuritiesExchange Act of 1934 as amended, including, but not limited to, statementsreferencing our expectations relating to future revenues, expenses andoperating margins. Forward-looking statements can be identified by the use ofterminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,”“estimate,” “predict,” “potential,” “continue” or other similar terms and thenegative of such terms regarding beliefs, plans, expectations or intentionsregarding the future. Forward looking statements include, among others,statements regarding growth in the investment management market andopportunities for us related thereto, future expansion, acquisition, divestmentof or investment in other businesses, projections of revenues, future cost andexpense levels, expected timing and amount of amortization expenses related topast acquisitions, the adequacy of resources to meet future cash requirements,estimates or predictions of actions by customers, suppliers, competitors orregulatory authorities, future client wins, future hiring and future productintroductions. Such forward-looking statements are based on our current plansand expectations and involve known and unknown risks and uncertainties whichmay cause our actual results or performance to be materially different from anyresults or performance expressed or implied by such forward-looking statements.Such factors include, but are not limited to, the “Risk Factors” set forthbelow as well as other risks identified from time to time in other Securitiesand Exchange Commission (“SEC”) reports. You should not place undue reliance onour forward-looking statements, as they are not guarantees of future results,levels of activity or performance and represent our expectations only as of thedate they are made.

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

**PART I**

**Item 1.**                        Business

**Overview**

Advent Software, Inc. was founded andincorporated in 1983 in California and reincorporated in Delaware in November 1995.We offer integrated software solutions for automating and integrating data andwork flows across investment management organizations, as well as theinformation flows between the investment management organization and externalparties. Our products are intended to increase operational efficiency, improvethe accuracy of client information and enable better decision-making. Eachsolution focuses on specific mission-critical functions of the investmentmanagement organization and is tailored to meet the needs of the particularclient, as determined by size, assets under management and complexity of the investmentenvironment.

Our business is organized into two reportablesegments, Advent Investment Management and MicroEdge. Advent InvestmentManagement is our core business and derives revenues from the development,marketing and sale of software products, data interfaces and relatedmaintenance and services that automate, integrate and support certainmission-critical functions of investment management organizations in the UnitedStates, Europe, Middle East and Africa. MicroEdge derives revenues from the saleof software and services for grant management, matching gifts and volunteertracking for the grantmaking community. For additional information regardingour reportable segments and geographic areas, see Note 12, “Segment andGeographical Information”, to our consolidated financial statements.

We also have a wholly-owned subsidiary, Second StreetSecurities, which is an SEC-registered broker/dealer that provides brokerageservices to institutional investors and registered investment advisors 

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on a fully-disclosedbasis. Second Street Securities offers our customers the ability to pay forAdvent products through brokerage commissions and other fee-based arrangements.During the fourth quarter of 2006, we completed the wind-down of the softdollar component of Second Street Securities, as the soft dollar component isno longer aligned with our corporate strategy. However, Second StreetSecurities will continue to maintain its broker/dealer status.

Our principal executive offices are located at 600Townsend Street, San Francisco, California 94103, and our telephone number is(415) 543-7696. In October 2006, we moved our San Franciscoheadquarters facility from 301 Brannan Street to 600 Townsend Street. Ourinternet address is *www.advent.com*.On our Investor Relations web site, which is accessible through *www.advent.com*, we post the followingfilings as soon as reasonably practicable after they are electronically filedwith or furnished to the Securities and Exchange Commission: our annual reportson Form 10-K, our quarterly reports on Form 10-Q, ourcurrent reports on Form 8-K and any amendments to those reports. Allsuch filings on our Investor Relations web site are available free of charge.Information contained or referenced on our website is not incorporated byreference in and does not form a part of this Annual Report on Form 10-K.The public may also read and copy any materials we file with the SEC at the SEC’sPublic Reference Room at 100 F Street, NE, Washington DC, 20549. Thepublic may obtain information on the operation of the Public Reference Room bycalling the SEC at 1-800-SEC-0330. The SEC also maintains aninternet site at *www.sec.gov* thatcontains reports, proxy and information statements, and other informationregarding issuers that file electronically with the SEC.

Advent’s common stock(ticker symbol: ADVS) has traded on the NASDAQ Stock Market since its initialpublic offering on November 15, 1995. Our fiscal year ends on December 31st.

**Our Industry andClients**

Advent clients, which include asset managers,investment advisors, prime brokers, fund administrators, hedge funds, familyoffices, banks and trusts, are organizations that manage, advise or performrecordkeeping functions on financial assets. Our clients also includecorporations, public funds, foundations, universities and non-profitorganizations that perform similar portfolio management functions. In fiscal2006, 2005 and 2004, no single customer accounted for more than 10% of ourtotal net revenues. Our international sales represented 12% of our total netrevenues in 2006, compared to 11% in 2005 and 9% in 2004.

The investment management industry has experiencedperiods of both significant growth and contraction in recent years, whichcontributes to varying levels of demand for our software products.Nevertheless, Advent addresses a clear need in the market: investment managerscontinue to face complex portfolio accounting and management requirements aswell as extensive and evolving industry standards and government regulations.

These trends have increased the volume and complexityof information and data flows both within investment management organizationsand between these organizations and third parties, such as brokerage firms,clients, custodians, banks, pricing services and other data providers.Consequently, in order to operate efficiently, investment managementorganizations automate and integrate their mission-critical and labor-intensivefunctions, including: (i) investment decision support; (ii) tradeorder management and compliance; (iii) portfolio accounting, performancemeasurement and report generation; and (iv) client relationshipmanagement. Investment management organizations historically have relied oninternally-developed systems, third party systems, outsourced services orspreadsheet-based systems to manage these information flows. Due to limitationsin each of these types of systems, investment management organizations aredemanding highly functional, easy-to-use, scalable, flexible and cost-effectivesoftware applications.

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We experience seasonality in our license revenue. Thefourth quarter of the year typically has the highest license revenue, followedby lower license revenue in the first quarter of the succeeding year. Thisseasonality results primarily from customer budgeting cycles and to a lesserextent from the annual nature of some Assets Under Administration (“AUA”)contracts which are assessed and billed on an annual basis. We expect theimpact of this seasonality will be reduced in the future as we move more of ourlicenses to a term model, under which we generally recognize revenue from termlicenses ratably over the period of the contract term which is typically threeyears.

For additional informationregarding factors that affect the timing of the recognition of software licenserevenue, see “Management’s Discussion and Analysis of Financial Condition andResults of Operations / Critical Accounting Policies and Estimates / RevenueRecognition.”

**Strategy**

*Mission*

Our mission is tostrengthen and grow our business as a leading provider of mission-criticalproducts and services for the investment management industry.

*Customer Focus*

At December 31, 2006, we served more than 4,500customers. Our customers, and the investment management industry as a whole,generally face a tightening regulatory environment, growth in the volume andcomplexity of their trading activities, an increase in alternative investmentmarkets, and a global investment marketplace. We are committed to making therequired investments in product development to deliver mission-criticalsolutions to our customers.

We plan tostrengthen our core business by:

·       Migratingour largest and most complex Axys customers to Advent Portfolio Exchange (“APX”)or Geneva;

·       Enhancingour solution “footprint” to help our customers across their mission-criticalbusiness process;

·       Continuingour rapid product refresh cycle; and

·       Delivering high qualityservices that ensure our customers’ satisfaction and success.

With our customer focus, we are experiencing continuedloyalty from our customers. Our customers use our products for an average ofover 10 years. The average tenure of our highest value clients is 11 years.Our maintenance renewal rate, which we report one quarter in arrears, was 92%for the third quarter of 2006, and is the highest it has been for the last 3years.

We plan to grow ourcore business by:

·       Enhancingour core portfolio accounting and trade order management applications tocapitalize on new market opportunities developing from growth in alternativeinvestment and international markets; and

·       Growingour addressable market by delivering new solutions which will enable investmentmanagers to automate certain aspects of compliance, performance attribution andbilling.

We believe our strategy andcustomer focus are driving increasing market acceptance for our products. We added 346 new customers across all ourcore product areas during fiscal 2006, including 63 new APX clients. Wealso added 34 new Geneva clients during fiscal 2006 bringing the total numberof Geneva licenses sold to over 100 as of December 31, 2006.

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*Business Model*

We continue to transition our business to a termlicense model. Under this model, customers purchase a license to use oursoftware for a fixed period of time and we recognize the license revenueratably over the length of the contract. Conversely, under a perpetual pricingmodel, customers purchase a license to use our software indefinitely and werecognize all license revenue at the time of sale. Although the term licensemodel has the effect of lowering license revenues compared to a perpetual modelin its early periods, we believe the term license business model will increasethe total potential value of our customer relationships because our customerfocus, loyal customer base and the market acceptance of our products results ina long customer relationship. We believe that a term license business modelwill ultimately provide growing and more predictable revenues. At December 31,2006, we believe we are over halfway through our four- to five-year transitionto the term business model. In addition to our term license transition, wecontinue to be focused on growing our recurring revenues. Total recurringrevenues, which we define as term license, incremental AUA fees, term andperpetual maintenance, and other recurring revenues, have increased from 69% oftotal revenues in 2005 to 79% in 2006, and we expect them to increase in futureyears. These recurring revenue sources provide us with increased ability tomake strategic decisions to invest in our business while remaining confidentthat our operating results will be predictable.

In 2007, we plan to investin client support, product development, professional services and sales andmarketing in order to solidify our position as a market leader in deliveringmission-critical solutions to the front, middle and back offices of investmentmanagement organizations. Our investment in client support will enable us tocontinue to improve the services we provide to our clients in their day-to-dayuse of our software. Our investments in product development will enable us todevelop new products as well as continue enhancements and upgrades to ourexisting products to keep pace with the rapid changes our clients face. Webelieve the investments in professional services and sales and marketing willaccelerate the momentum in our Geneva and APX product sales and increasecustomer satisfaction for all of our products. Collectively, we believe theseinvestments will help us extend our strong leadership position in our market.For 2007, we have chosen to make these investments even though we expect themto cause our operating margin percentage to be approximately flat compared to2006. In the longer term, we believe that our market leadership position andour predictable revenue model will enable us to achieve operating margins inthe mid-20% range.

*Capital Strategy*

Our strategy also includesutilizing our available cash resources to repurchase shares of our outstandingcommon stock. As part of our risk management strategy in the past, wemaintained larger cash balances to fund our operating expenses and to takeadvantage of any investment opportunities. We currently believe that thepredictability of our revenues has resulted in improved reliability inestimating our future operating cash flows. Additionally, we have $75 millionavailable through our revolving line of credit that we executed in February 2007and we do not expect to make any significant income tax payments until fiscal2009. As a result of this improved reliability of revenues and enhancedfinancial flexibility from our available financing, we have reduced our cashbalances that we maintain for liquidity purposes and have repurchased shares ofour common stock. We believe the returns to our shareholders from therepurchase of shares of our outstanding common stock at its current pricelevels exceed the yields from the investment of our excess cash and are moreadvantageous than the payment of dividends. The available financing alsoprovides us with flexibility to fund acquisitions or invest in otherbusinesses, when opportunities arise.

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**Products andServices**

Advent products are intended to increase operationalefficiency, achieve timely regulatory compliance, improve the accuracy ofclient information and enable better decision-making. Each product focuses onthe specific mission-critical functions of an investment managementorganization and is configured to meet the needs of the particular client, asdetermined by size, assets under management and complexity of the investmentenvironment.

We offer solutionsfor customers in numerous markets, which include:

·       Advent®for Asset Managers 

·       Advent®for Global Asset Managers 

·       Advent®for Hedge Fund Managers 

·       Advent®for Fund Administrators 

·       Advent®for Banks and Trusts 

·       Advent®for Family Offices 

·       Advent®for Financial Advisors 

These solutions arecomprised of various combinations of Advent software products, data integrationtools and professional services all aimed at solving our clients’ criticalbusiness needs.

***SoftwareProducts***

·       ***Geneva******®*** is a global, real-time investment managementplatform designed to meet the needs of global asset managers and serviceproviders with complex, international accounting requirements and/or wideinstrument coverage needs, including alternative investments such asexchange-traded and over-the-counter (OTC) derivatives. Clients currentlyinclude hedge funds, institutional asset managers, prime brokers, and fundadministrators. Geneva offers feature-rich accounting, flexible reporting(including profit and loss reporting by strategy) and sophisticatedmulti-currency capabilities. Geneva delivers the industry’s only “main memory”database system, offering more accurate and flexible reporting, and eliminatingbatch processing and time-consuming error corrections. Geneva also unifies thegeneral ledger and portfolio sub-ledgers, for real-time reporting and seamless,automated reconciliation. Geneva features unmatched throughput for high tradingvolume across multiple instruments and currencies; fast, flexible, accuratereporting capabilities and real-time information access; rapid, global errorcorrection and instant updating throughout the system; and scalability to helpfirms increase asset and trade volumes, without adding headcount.

·       ***Advent Portfolio Exchange*****® **(APX)****is Advent’snext-generation portfolio management and reporting system that fully integratesthe front-office functions of prospecting, marketing and customer relationshipmanagement with the back-office operations of portfolio accounting andreporting. APX is an enterprise solution offering a migration path for Advent’sAxys clients and enables firms to manage a full range of instruments includingdomestic and international equities, mutual funds, fixed income, equity optionsand derivatives, and variable rate securities. APX leverages a single SQLdatabase to deliver client and prospect information to operations, marketingand portfolio managers through a browser-based user interface. APX supportsboth institutional and high-net-worth individual portfolios and separateaccounts, and offers integrated multi-currency capabilities. APX is designedfor total compatibility with Advent’s Moxy trading platform for seamlessintegration between trading and portfolio management.

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·       ***Axys******®*** is a highly functional portfolio managementand reporting system for investment management organizations of all sizes. Axysprovides investment professionals with broad portfolio accountingfunctionality, timely decision support, sophisticated performance measurementand flexible reporting. Specifically, clients can record, account for andreport on a variety of investment instruments, including equities, fixedincome, mutual funds and cash. Axys users gain access on demand to portfolioholdings, asset allocation, realized and unrealized gains and losses, actualand projected income and other valuable data. Portfolio performance can bemeasured for individual portfolios or related groups, and for any specified timeperiod. In addition, clients can easily generate fully customized reports withthe assistance of Report Writer Pro. Axys offers integrated multi-currencycapabilities which, among other things, allow reports to be restated in anycurrency, tracks reclaimable foreign withholding tax and can identifycomponents of return attributable to market prices versus currency ratefluctuations.

·       ***Moxy******®*** automates and streamlines the trading andorder management process of partial and complete executions and allows the userto send allocation results using OASYS, an external electronic allocationsystem, to communicate allocations to brokers electronically. Moxy alsoprovides internet-ready electronic order routing based on the industry standardFIX messaging protocol so that Moxy users can route trades electronically toany FIX-compliant broker or crossing network that supports the internet orother TCP/IP connections. Trades are executed, processed, settled and accountedfor without manual intervention. Moxy electronically posts allocated tradesinto Geneva, APX and Axys on demand, eliminating time-consuming and error-pronemanual entry.

·       ***Advent Partner******®***,a single source solution for onshore and offshore investor accounting andservicing, integrates with Axys, APX and Geneva. This product is specificallydesigned for hedge funds, family offices, fund administrators, and accountingfirms that face the complex and time-consuming task of consistently andaccurately accounting for and reporting on investor contributions andredemptions, capital gain/loss and income allocations, and management incentivefees. In addition, Advent Partner provides comprehensive economic and taxallocation reporting and streamlines the production of U.S. K-1partnership tax returns. 

·       ***Qube******®*** is designed to help securities professionalsdevelop and improve client relationships by automating scheduling, trackingclient communications and managing client data. Qube, whose functionality isincluded in APX, integrates with portfolio information in Axys and enablesinvestment professionals to interactively screen client investment profiles andnotes from conversations to identify appropriate candidates for variousinvestment opportunities. 

·       ***Rex******®*** enables reconciliation management. Rex isintegrated with Axys and APX and is designed for firms that want toelectronically reconcile information stored in Axys against custodialinformation. Rex works in conjunction with Advent Custodial Data, whichprovides data from a firm’s custodian(s). 

·       ***WealthLine******®*** is a Web-based wealth management reportingplatform providing tools for financial institutions to collaborate with theirclients. WealthLine gives financial advisors a sophisticated, customizable, andcost-effective solution for furnishing personalized content and exceptionalservice to their clients. 

·       ***Advent Browser Reporting******® for Enterprise Users*** allows investmentprofessionals the ability to access Axys from remote locations via the internetand run Axys reports as if they are in their own offices. 

·       ***AdventWarehouse******®*** is a datawarehouse solution designed to allow investment professionals to readily accessinvestment data regardless of how the data was created or maintained, withoutimpacting the performance of their high volume transaction-based Advent Officesystems. 

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***Data andData Integration Services***

·       ***Advent******® Custodial Data*** provides account levelinformation from a firm’s custodian(s) through a single, secure connectionto a data network managed by Advent. Using Advent Custodial Data, firms canreconcile positions, transactions and cash activity on an exceptions-onlybasis, or firms can post data directly into Axys or APX. 

·       ***Advent Corporate Actions******®*** produces customized position-level reports,facilitates corporate action elections, and creates Axys-ready transactionsincluding cost basis, taxability, and other data elements. Using AdventCorporate Actions, firms can receive timely and complete notification ofelections, update their portfolio accounting system, and track actions fromtheir announcement until they are effective. 

·       ***Advent******® Wealth Service*** is an outsourced datamanagement, reconciliation and reporting service for family offices, privateclient enterprises and high net worth advisors and managers. Advent WealthService provides complete account coverage by combining the power of theindustry’s broadest electronic account information network with our highquality data management and account consolidation services. Using Advent WealthService, advisors and managers can report on in-house managed accounts andexternally managed accounts, view complete asset allocation information, andprovide holistic advice to their clients. 

·       ***Advent******® Market Data*** is our subscription-basedand transaction-based services and allows clients to download pricing, corporateactions and other data from third party vendors such as FinancialTimes/Interactive Data (“FTID”). 

**Outsourced Services**

·       ***Advent******® Back Office Service*** delivers anoutsourced daily reconciliation and portfolio reporting service. Firms thatsubscribe to Advent Back Office Service can run performance reports locallyusing their own version of Axys, or remotely via an internet browser. AdventBack Office Service is attractive to firms that may not have the resources tomanage, support, and administer these operations in-house.

**GrantmakingCommunity and Non-profit Organizations**

Our MicroEdgesegment, a leading provider of information technology solutions to thegrantmaking community, provides the following products:

·       ***GIFTS******®*** is a suite of Windows and web-based solutionto manage grant giving. It improves workflow across the full lifecycle ofgrantmaking from receipt of application through post-grant evaluations andclosure. This robust and customizable software can be tailored to suit diverseworkflow requirements for giving organizations of any size.

·       ***FIMS*TM** is a modular, integratedinformation management system for non-profit organizations with complex fundaccounting needs. FIMS utilizes Windows and internet technologies, along with asingle database, in a solution that provides functionality for fund raising,full grants management, pooled investment management including allocations ofincome and gains, and a sophisticated fund-level general ledger with flexiblefinancial consolidations. 

·       ***FoundationPower*TM**,like FIMS, provides comprehensive fund accounting and grants managementfeatures utilizing Windows and internet technologies. However, FoundationPoweris a fully customizable solution developed for individual foundations who wishto reflect their specific procedures, policies and nomenclature within theirsoftware application.

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***Support and Maintenance Services***

Due to themission-critical nature of our products, almost all of our perpetual licenseclients purchase support and maintenance (term license clients receive supportand maintenance as part of the license offering), which entitles them totechnical support through Advent’s Client Services group and product upgradesas they become available. We continually upgrade and enhance our products torespond to changing market needs, evolving regulatory requirements and newtechnologies.

***Professional Services***

Professional servicesconsist of consulting, project management, implementation and integrationservices, custom report writing, and training. Many of Advent’s clientspurchase professional services from us to support their implementations,assist in the conversion of their historical data and provide ongoing trainingand education. Professional services may be required for as little as a fewdays or up to several months for large implementations. We believe that theseservices facilitate a client’s early success with our products, strengthen theclient relationship and generate valuable feedback for our product developmentgroup.

***Alliance Program***

Our Alliance Program isdesigned to benefit our clients and our partners. The program provides a meansby which partners can develop, promote, and sell their products, services, andsolutions in conjunction with our solutions. Advent’s Alliance Program wascreated to further extend our product and service offerings.

**Sales and Marketing**

We primarilylicense and sell Advent products and services through four sales groups, whichare organized by product and customer type and include a direct salesorganization (comprised of both field sales and telesales representatives) aswell as product marketing and product management groups, which are responsiblefor assessing market opportunities and collaborating with our productdevelopment organization on product planning and management. Product marketingcoordinates our market validation process, through which we interview existingclients and sales prospects, and gather information to define scope, featuresand functionality of new products and product upgrades. The sales groups are asfollows:

·       *Global Accounts*, selling solutions based on Geneva, MoxyPartner and Advent Custodial Data including associated services, into the primebroker, hedge fund, fund administrator and global asset management markets; 

·       *Investment Management Group,* selling solutions based on APX,Axys, Moxy, Qube, Rex and other associated products and services into assetmanagers, banks and trusts, hedge funds, family offices and financial advisors;

·       *Straight Through Processing (STP) Group,*selling solutionsfor connectivity, data integration and outsourcing based on Advent CustodialData, Advent Corporate Actions, Advent Back Office Service, Advent WealthService and other associated products and services into the asset management,banks and trusts, hedge funds, family offices and financial advisors markets;and,

·       *Grantmaking, Community and Non-profit Organizations*, sellingGifts, FIMS and FoundationPower products and associated services. 

We have sales offices throughout the United States,Europe and Middle East regions, including San Francisco, New York, Boston,London, Oslo, Copenhagen, Stockholm, Zurich and Dubai.

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Our corporate marketingorganization is responsible for providing support to the sales organizationthrough lead generation activities, sales training, marketing materials, andthe provision of marketing events, such as conferences and seminars.

**Product Development**

In fiscal 2006, 2005 and 2004, our product developmentexpenses were $34.9 million, $30.4 million and $32.3 million, respectively. Ourproduct development organization builds product enhancements and new products,incorporates new technologies into existing products and sustains the qualityof our current products. Our product development activities include theidentification and validation of product specifications as well as engineering,quality assurance and documentation. We capitalized $1.5 million of softwaredevelopment costs in 2006 and 2005, respectively.

Our new products andproduct upgrades require varying degrees of development time, depending uponthe complexity of the accounting requirements and securities regulations whichthey are intended to address, as well as the number and type of featuresincorporated. To date, we have generally relied upon internal development forour products. We have in the past acquired, and may again in the future acquire,additional technologies or products from third parties. For example, in December 2006,we acquired a developer of investmentbilling solutions to integrate their product into our software offerings.We intend to continue to support industry standard operating environments,n-tier architectures and network protocols.

**Unfilled LicenseOrders, Deferred Revenues and Backlog**

Unfilled license orders represent license orders thathave been received from our customers for the license of our software productsbut have not been shipped as of the end of the applicable fiscal period. Wenormally ship our software products shortly after receipt of customer ordersand therefore the amount of unfilled license orders at any quarter-end isgenerally small or non-existent. We do not believe that unfilled license ordersare a consistent or reliable indicator of future results. Our customersgenerally do not cancel orders for our software products. Unfilled licenseorders as of December 31, 2006 totaled $55,000, compared to $411,000 at December 31,2005.

Total deferred revenue includes both deferred licenseand services. Deferred perpetual license revenue is recognized when acontingency, such as a future product deliverable committed in the contract, isremoved. Deferred maintenance revenue is generally recognized over the serviceperiod, which is typically twelve months. Deferred professional servicesrevenue is either recognized over the period the specific services arerendered, or over the related contract period sold in conjunction with amulti-year term license.

During 2006, we continued our transition from sellingmostly perpetual licenses to a mix of perpetual and term licenses. We believethat moving to a term license model will increase the value over the long-termof each customer relationship and improve the predictability of our revenues.We generally recognize revenue from term licenses ratably over the period ofthe contract term which varies from one to five years but is typically threeyears. For these term contracts, we invoice the customer annually in advance.As a result, the first year’s contract value is included in deferred revenuewhile subsequent years of the contracted value are not (unless the subsequentyears are prepaid by the client, which is typically not the case). During thesubsequent years, annual term billing results in an increase in deferredrevenues at the commencement of each annual billing period. We define backlogas the value of multi-year term license contracts which contain a bindingcommitment for the full contract term, less any amounts from those contractsincluded in “total net revenues” on our consolidated statement of operationsand “deferred revenues” on our consolidated balance sheet. We exclude from thebacklog calculation any contracts which contain annual renewal options. If weare successful in our strategy to increase our business from term licenses, itwill result in a greater portion of license revenue being deferred and couldtherefore impact the 

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level of our profitability.Total deferred revenue was $85.3 million and $65.1 million at December 31,2006 and 2005, respectively. Our total backlog was approximately $36.7 millionand $18.2 million as of December 31, 2006 and 2005.

For additional informationregarding factors that affect the timing of the recognition of software licenserevenue, see “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Critical Accounting Policies and Estimates—RevenueRecognition.”

**Competition**

The market for investmentmanagement software is characterized by the relative size of the organizationsthat manage and advise on investment portfolios. The market is competitive andhighly fragmented, is subject to rapid change and is sensitive to new productintroductions and marketing efforts by industry participants. Our competitorsinclude providers of software and related services as well as providers ofoutsourced services. Many of our competitorshave longer operating histories and greater financial, technical, sales andmarketing resources than we do. In addition, consolidation has occurred amongsome of the competitors in our markets. Competitors vary in size, scopeof services offered and platforms supported. Our largest single source ofcompetition is from proprietary systems used by our existing and potentialclients, many of whom develop their own software for their particular needs andtherefore may be reluctant to license software products offered by independentvendors such as Advent. In 2005 and 2006,seven of our competitors were acquired with the possibility of forming evenlarger companies through additional acquisitions of companies and technologies.We believe that Advent competes effectively in terms of the mostpredominant competitive differentiators, which include product performance andfunctionality, ease of use, scalability, ability to integrate external datasources, product and company reputation, client service and price.

**IntellectualProperty and Other Proprietary Rights**

Our success depends inpart upon our proprietary technology. We currently rely on a combination ofcopyright and trademark laws, trade secrets, confidentiality procedures andcontractual provisions to protect our proprietary rights. We have registeredtrademarks for many of our products and services and will continue to evaluatethe registration of additional trademarks as appropriate. We generally enterinto confidentiality agreements with our employees and with our resellers andcustomers. We seek to safeguard our software, documentation and other writtenmaterials under trade secret and copyright laws, which afford only limitedprotection and we do not have any patents. Despite these efforts, it may bepossible for unauthorized third parties to copy certain portions of ourproducts or to reverse engineer or otherwise obtain and use our proprietaryinformation. In addition, we cannot be certain that others will not developsubstantially equivalent or superseding proprietary technology, or thatequivalent products will not be marketed in competition with our products,thereby substantially reducing the value of our proprietary rights. We cannotbe sure that we will develop proprietary products or technologies that arepatentable, that any patent, if issued, would provide us with any competitiveadvantages or would not be challenged by third parties, or that the patents ofothers will not adversely affect our ability to do business. Litigation may benecessary to protect our proprietary technology. This litigation may be time-consumingand expensive. In addition, the laws of some foreign countries do not protectproprietary rights to the same extent as do the laws of the United States. Wecannot be sure that our means of protecting our proprietary rights will beadequate or that our competitors will not independently develop similartechnology, duplicate our products or design around any patent that may beissued to us or other intellectual property rights of ours.

**Employees**

As of December 31,2006, we had 824 employees, including approximately 336 in client services andsupport, 162 in sales and marketing, 191 in product development and 135 ingeneral and administration. Of 

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theseemployees, 763 were located in the United States and 61 were based in Europeand the Middle East. We endeavor to maintain competitive compensation,benefits, equity participation and work environment policies in order toattract and retain qualified personnel. None of our employees are representedby a labor union. We have not experienced any work stoppages and webelieve our employee relations are good.

**Executive Officersof Registrant**

Thefollowing sets forth certain information regarding the executive officers ofthe Company as of March 1, 2007:

| **Name**             | ** ** | ** ** | ** ** | **Age**                                                | ** ** | **Position** |
|----------------------|------------|------------|------------|--------------------------------------------------------|------------|--------------|
| Stephanie G. DiMarco |       | 49         |       | Chief Executive Officer and President                  |
| Lily S. Chang        |       | 58         |       | Executive Vice President and Chief Technology  Officer |
| Graham V. Smith      |       | 47         |       | Chief Financial Officer and Secretary                  |
| Peter D. Hess        |       | 36         |       | Executive Vice President and General Manager           |
| John P. Brennan      |       | 50         |       | Vice  President, Human Resources                       |

 

Ms. DiMarco founded Advent in June 1983. Sheserved as Chairman of the Board from November 1995 until December 2003.Ms. DiMarco currently serves as Chief Executive Officer and Presidentsince her permanent appointment to the position in December 2003, afterserving on an interim basis from May 2003. Previously, she had served asPresident since founding Advent until April 1997 and as Chief ExecutiveOfficer until November 1999. She is a former member of the Board of Trusteesof the UC Berkeley Foundation, serves on the Advisory Board of the College ofEngineering at the University of California, Berkeley, and is a San FranciscoFoundation board member and Chairman of its Investment Committee and formermember of the Audit Committee. Ms. DiMarco holds a B.S. in BusinessAdministration from the University of California at Berkeley.

Ms. Chang joined Advent in May 1993 as VicePresident, Technology. In April 1997, Ms. Chang was promoted toExecutive Vice President, Technology and was also named Chief TechnologyOfficer. From July 1989 to May 1993, Ms. Chang held variouspositions, including Vice President, Strategic Accounts and Vice President ofOracle Financial Applications, for Oracle Corporation. Ms. Chang holds aB.S. in Biochemistry from Taiwan University.

Mr. Smith joined Advent in January of 2003as Executive Vice President, Treasurer and Chief Financial Officer designate. Mr. Smithwas appointed Chief Financial Officer and Secretary in March 2003. From2002 to 2003, Mr. Smith served as Chief Financial Officer of VitriaTechnology, an enterprise application integration software company. From 1998to 2002 Mr. Smith served as Chief Financial Officer of NuanceCommunications, a voice recognition software company. From 1987 to 1998, Mr. Smithworked for Oracle Corporation in various senior finance roles, most recently asVice President of Finance for worldwide operations. Mr. Smith holds aB.Sc. from Bristol University in England and is a member of the Institute ofChartered Accountants in England and Wales.

Mr. Hess joined Advent in 1994. Effective February 2007,Mr. Hess is responsible for our Investment Management Group and has globalresponsibility for strategy, product marketing, sales, services and support ofAdvent solutions for asset managers, banks and trusts, hedge funds, familyoffices and financial advisors with over $1 billion of assets under management.Through February 2007, Mr. Hess served as Executive Vice Presidentand General Manager of our Global Accounts group. In this role, Mr. Hesshad global responsibility for strategy, product marketing, sales, services, andsupport of Advent solutions for the asset management industry’s largest firms. Mr. Hesshas held a variety of other positions in the company including Vice Presidentof Sales and Vice President of Marketing. He also has operating responsibilityfor Advent’s Europe, Middle East and Africa (“EMEA”) operations. Mr. Hessholds a B.A. from Princeton University.

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Mr. Brennan joinedAdvent in March 2004 as Vice President of Human Resources and isresponsible for all aspects of Human Resources. Prior to joining Advent, Mr. Brennanwas Vice President of Human Resources from 1999 to 2004 for Wind River Systems,which produces embedded software for various consumer and industrialapplications. Prior to Wind River, Mr. Brennan held various positions atVisa International from 1991 to 1999. Mr. Brennan began his HumanResources career with assignments at Westinghouse Electric Company and PacificGas and Electric. Mr. Brennan has a master’s degree in Industrial andLabor Relations from Cornell University, and a bachelor’s degree in EnglishLiterature and Music from Hamilton College.

**Item 1A.**                RiskFactors

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

**Our OperatingResults May Fluctuate Significantly**

Although we are transitioning to a predominantly termlicense model, perpetual licenses still constituted approximately half of ourannual software license revenues in 2006. Until we substantially complete ourtransition to a term license model, our license revenues will be affected bythe continued reduction in perpetual license revenue and by the relativelyslower revenue recognition associated with the term license model, which is typically over a three year period.Under a perpetual model, customers purchase licenses to use our softwareindefinitely and generally we recognize all license revenue at the time ofsale; maintenance is purchased under an annual renewable contract, andrecognized ratably over the contract period. Under a term model, customerspurchase a license to use our software and receive maintenance for a limited periodof time and we recognize the revenue ratably over the length of the contract.

During fiscal 2006, we recognized 49% of licenserevenue from term licenses and incremental AUA fees as compared toapproximately 25% in fiscal 2005 and 11% in 2004. Term license contracts arecomprised of both software licenses and maintenance services and we allocate55% of the term revenue to license and 45% of the term revenue to maintenance,based on the relative economic value of these two elements. Individual perpetualsoftware licenses vary significantly in value, and the value and timing ofthese transactions can therefore cause our quarterly license revenues tofluctuate. We have often recognized a substantial portion of a quarter’sperpetual license revenues in the last month, weeks or even days of thequarter. As a result, the magnitude of quarterly fluctuations in licenserevenue may not be evident until late in or after the close of a particularquarter, and a disruption late in the quarter may have a disproportionatelylarge negative impact on revenue. In addition, some of our large professionalservices contracts contain performance milestones or acceptance clauses, andterm license revenue is not recognized until related implementation servicesare substantially completed, all of which affect the timing of revenuerecognized under such contracts. As a result of these and other factors, ourquarterly net revenues may fluctuate significantly. Our expense levels arerelatively fixed in the short-term. Due to the fixed nature of these expenses,combined with the relatively high gross margin historically achieved on ourproducts, an unanticipated decline in net revenues in any particular quartermay adversely affect our operating results.

In addition, we experience seasonality in our licenserevenue. The fourth quarter of the year typically has the highest licenserevenue, followed by lower license revenue in the first quarter of thefollowing year. We believe that this seasonality results primarily fromcustomer budgeting cycles and the annual nature of some AUA contracts, andexpect this seasonality to continue in the future.

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Because of the abovefactors, we believe that quarter-to-quarter comparisons of our operatingresults are not necessarily meaningful and that these comparisons cannot berelied upon as indicators of future performance.

**Our Sales Cycle is Long and We Have Limited Ability toForecast the Timing and Amount of Specific Sales and the Timing of SpecificImplementations**

The purchase of our software products often requiresprospective customers to provide significant executive-level sponsorship and tomake major systems architecture decisions. As a result, we must generallyengage in relatively lengthy sales and contracting efforts. Sales transactionsmay therefore be delayed during the customer decision process because we mustprovide a significant level of education to prospective customers regarding theuse and benefit of our products. For example in 2002 and 2003, existing andpotential clients reduced or canceled expenditures and delayed decisionsrelated to acquisition of software and related services. While we have seenimproved economic conditions in recent years, customers are still cautiousabout capital and information technology expenditures. As a result, the salescycle associated with the purchase of our solutions is typically between twoand twelve months depending upon the size of the client, and is subject to anumber of significant risks over which we have little or no control, includingcustomers’ budgeting constraints, internal selection procedures, and changes incustomer personnel, among others.

As a result of a lengthyand unpredictable sales cycle, we have limited ability to forecast the timingand amount of specific license sales. The timing of large individual licensesales is especially difficult to forecast, and we may not be successful inclosing large license transactions on a timely basis or at all. Customers maypostpone their purchases of our existing products or product enhancements inadvance of the anticipated introduction of new products or product enhancementsby us or our competitors. When a customer purchases a term license togetherwith implementation services we do not recognize any revenue under the contractuntil the implementation services are substantially complete. If we are notable to complete an implementation project for a term license in a quarter, itwill cause us to defer all of the contract revenues to a subsequent quarter.Because our expenses are relatively fixed in the near term, any shortfall fromanticipated revenues could result in a significant variation in our operatingresults from quarter to quarter.

**We Depend Heavilyon Our Axys®, Geneva and APX Products**

We derive a significantportion of our net revenues from the licensing of Axys and Geneva products. Inaddition, many of our other applications, such as Moxy, Partner and variousdata services have been designed with either of these two products to providean integrated solution. As a result, we believe that for the next several yearsa majority of our net revenues will depend upon continued market acceptance ofAxys and Geneva, and upgrades to those products. In addition, APX, our newestportfolio accounting and reporting product, is of critical importance inproviding an upgrade path for many of our Axys customers. Our long-term growthcould be harmed if we are unable to establish APX as a leading product in themarket. As a result, we may not be able to successfully upgrade existing Axysclients to APX, or to attract new customers to buy APX.

**Uncertain Economicand Financial Market Conditions May Continue to Affect Our Revenues**

We believe that the marketfor large investment management software systems may be affected by a number offactors, including reductions in capital expenditures by large customers andpoor performance of major financial markets. The target clients for ourproducts include a range of financial services organizations that manageinvestment portfolios. In addition in our MicroEdge business segment, we targetcorporations, public funds, universities and non-profit organizations, whichalso manage investment portfolios and have many of the same needs. The successof many of our clients is intrinsically linked to the 

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healthof the financial markets. We believe that demand for our solutions has been,and could continue to be, disproportionately affected by fluctuations,disruptions, instability or downturns in the economy and financial servicesindustry which may cause clients and potential clients to exit the industry ordelay, cancel or reduce any planned expenditures for investment managementsystems and software products. In addition, a slowdown in the formation of newinvestment firms, especially hedge funds, or a decline in the growth of assetsunder management would cause a decline in demand for our solutions. We have, inthe past, experienced a number of market downturns in the financial servicesindustry and resulting declines in information technology spending, which hascaused longer sales and contracting cycles, deferral or delay of informationtechnology projects and generally reduced expenditures for software and relatedservices, and we believe that future uncertainty about financial markets andthe financial services sector could have a material adverse effect on ourrevenues.

**We Face Competition**

The market for investmentmanagement software is competitive and highly fragmented, is subject to rapidchange and is sensitive to new product introductions and marketing efforts byindustry participants. Our largest single source of competition is fromproprietary systems used by existing and potential clients, many of whomdevelop their own software for their particular needs and therefore may bereluctant to license software products offered by independent vendors such asAdvent. Other competitors include providers of software and related services aswell as providers of outsourced services. Many of our competitors have longeroperating histories and greater financial, technical, sales and marketingresources than we do. In addition, consolidation has occurred among some of thecompetitors in our markets. Competitors vary in size, scope of services offeredand platforms supported. In 2005 and 2006, seven of our competitors were acquiredwith the possibility of forming even larger companies through additionalacquisitions of companies and technologies. Any further consolidation among ourcompetitors may result in stronger competitors in our markets and may thereforeeither result in a loss of market share or harm our results of operations. Inaddition, we also face competition from potential new entrants into our marketthat may develop innovative technologies or business models. We cannotguarantee that we will be able to compete successfully against current andfuture competitors or that competitive pressure will not result in pricereductions, reduced operating margins or loss of market share, any one of whichcould seriously harm our business.

**We Must Continue toIntroduce New Products and Product Enhancements**

The market for ourproducts is characterized by rapid technological change, changes in customerdemands, evolving industry standards and new regulatory requirements. Newproducts based on new technologies or new industry standards can renderexisting products obsolete and unmarketable. As a result, our future successwill continue to depend upon our ability to develop new products, such as ourAPX product, or product enhancements, that address the future needs of ourtarget markets and to respond to their changing standards and practices. We maynot be successful in developing, introducing, marketing and licensing our newproducts or product enhancements on a timely and cost effective basis, or atall, and our new products and product enhancements may not adequately meet therequirements of the marketplace or achieve market acceptance. Delays in thecommencement of commercial shipments of new products or enhancements may resultin client dissatisfaction and delay or loss of product revenues. In addition,clients may delay purchases in anticipation of new products or productenhancements. Our ability to develop new products and product enhancements isalso dependent upon the products of other software vendors, including certainsystem software vendors, such as Microsoft Corporation, Sun Microsystems,database vendors and development tool vendors. If the products of such vendorshave design defects or flaws, are unexpectedly delayed in their introduction,or are unavailable on acceptable terms, our business could be seriously harmed.

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**If We Fail to Appropriately Scale Our Operations inResponse to Changes in Demand for Our Existing Products and Services or to theDemand for New Products Requested by Our Customers, Our Business Could be Materiallyand Adversely Affected**

To achieve our business objectives, we anticipate thatwe will need to continue to expand. We have experienced a period of rapidgrowth in the past. Through internal growth, we significantly increased thescope of our operations and expanded our workforce from 736 employees at December 31,2005 to 824 employees at December 31, 2006. Nonetheless, we may notbe able to expand our workforce and operations in a sufficiently timely mannerto respond effectively to changes in demand for our existing products andservices or to the demand for new products requested by our customers. Forexample, to keep pace with the strong demand for our products experienced in2006, we have increased headcount in our client services and consulting groups.In 2007, we expect to continue adding headcount to support increased productdevelopment, enhancements and implementations. In addition, to support ourgrowth, in January 2006, we signed a $20 million lease agreement underwhich we relocated our headquarters in October 2006 to a larger facilitythat will enable us to centralize all of our San Francisco employees in onebuilding. However, if we are unable to expand our workforce sufficiently or toeffectively manage our expanding operations, we may be unable to meet demandand exploit potential market opportunities and our current or future businesscould be materially and adversely affected. Additionally, we may not be able tocomplete implementation projects for term licenses in a timely or cost-effectivemanner, which will cause us to defer all of the contract revenues to asubsequent quarter or incur more costs by deploying higher cost externalcontractors to complete projects.

Conversely, if we expandour operations and workforce too rapidly in anticipation of increased demandfor our products, and such demand does not materialize at the pace at which weexpect, the rate of increase in our cost of revenues or operating expenses mayexceed the rate of increase, if any, in our revenues. Moreover, if weexperience another slowdown in the investment management software market inwhich we operate similar to the one experienced in 2002, we may not be able toscale back our operating expenses in a sufficiently timely or effective manner.In that event, our business, financial condition and results of operationswould be materially and adversely affected.

**We Must Retain andRecruit Key Employees**

We believe that our future success isdependent on the continued employment of our senior management and our abilityto identify, attract, motivate and retain qualified technical, sales and otherpersonnel. Members of our executive management team have acquiredspecialized knowledge and skills with respect to Advent. We need technicalresources such as our product development engineers to develop new products andenhance existing products; we rely upon sales personnel to sell our productsand services and maintain healthy business relationships; we must recruitprofessional service consultants to support the anticipated increase in productimplementations; we must hire client services personnel to provide technicalsupport to our growing installed base of customers; and we must attract andretain financial and accounting personnel to comply with the requirements of Section 404of the Sarbanes-Oxley Act of 2002. Therefore, we need to identify,attract, motivate and retain such employees with the requisite education,backgrounds and industry experience. However, experienced personnel in theinformation technology industry are in high demand and competition for theirtalents is intense, especially in the San Francisco Bay Area where themajority of our employees are located. For example, in February 2007, oneof our executives resigned from the Company to become the Chief ExecutiveOfficer of an internet company.

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

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We may also choose tocreate additional performance and retention incentives in order to retain ouremployees, including the granting of additional stock options, restrictedstock, restricted stock units, stock appreciation rights, performance shares orperformance units to employees or issuing incentive cash bonuses. Suchincentives may either dilute our existing stockholder base or result in unforeseenoperating expenses which may have a material adverse effect on our operatingresults, which may result in our stock price falling; or may not be valued ashighly by our employees which may create retention issues.

**We Face Challengesin Expanding Our International Operations**

We market and sellour products in the United States and, to a lesser extent, internationally. In1999, we entered into a distributor relationship with Advent Europe GmbH, anindependent distributor of our products in selected European markets. In November 2001,we acquired the Norwegian, Swedish, and Danish subsidiaries of this independentdistributor. In September 2002, we purchased their Greek subsidiary (“AdventHellas”), which we subsequently sold in the fourth quarter of 2005; in May 2003,we purchased their Dutch subsidiary; and in May 2004, we purchased theirremaining subsidiaries in the United Kingdom and Switzerland and certain assetsof Advent Europe. To further expand our international operations, we would needto establish additional locations, acquire other businesses or enter intoadditional distribution relationships in other parts of the world. Any furtherexpansion of our existing international operations and entry into newinternational markets could require significant management attention andfinancial resources. We cannot be certain that establishing businesses in othercountries will produce the desired levels of revenues, such as in the case ofAdvent Hellas 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:

·       theimpact of recessions in economies outside the United States;

·       greaterdifficulty in accounts receivable collection and longer collection periods;

·       unexpectedchanges in regulatory requirements;

·       difficultiesin successfully adapting our products to the language, regulatory andtechnology standards of other countries;

·       difficultiesin and costs of staffing and managing foreign operations;

·       reducedprotection for intellectual property rights in some countries;

·       potentiallyadverse tax consequences; and

·       politicaland economic instability.

The revenues, expenses,assets and liabilities of our international subsidiaries are primarilydenominated in local currencies. We have not historically undertaken foreignexchange hedging transactions to cover potential foreign currency exposure.Future fluctuations in currency exchange rates may adversely affect revenuesand accounts receivable from international sales and the U.S. dollar value ofour foreign subsidiaries’ revenues, expenses, assets and liabilities. Ourinternational service revenues and certain license revenues from our Europeansubsidiaries are generally denominated in local foreign currencies.

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**Difficulties in Integrating Our Acquisitions andExpanding Into New Business Areas Have Impacted and Could Continue to AdverselyImpact Our Business and We Face Risks Associated with Potential Acquisitions,Investments, Divestitures and Expansion**

From 2001 through the middle of 2003, our strategyfocused on growth through the acquisition of additional complementarybusinesses. During those years, we made five major acquisitions includingKinexus Corporation, Techfi Corporation and Advent Outsource Data ManagementLLC, and also acquired all of the common stock of five of our Europeandistributor’s subsidiaries. In addition, we purchased our Europeandistributor’s remaining two subsidiaries in the United Kingdom and Switzerlandin May 2004. More recently, in December 2006, we acquired East CircleSolutions, Inc., a developer of investment billing solutions to integratetheir product into our software offerings.

The complex process of integrating our acquisitionshas required and will continue to require significant resources, particularlyin light of our relative inexperience in integrating acquisitions. Integratingthese acquisitions in the past has been time-consuming, expensive anddisruptive to our business. This integration process has strained our managerialresources, resulting in the diversion of these resources from our core businessobjectives and may do so in the future. Failure to achieve the anticipatedbenefits of these acquisitions or to successfully integrate the operations ofthese entities has harmed and could potentially harm our business, results ofoperations and cash flows in future periods. For example, in the first quarterof 2003, we closed our Australian subsidiary because it failed to perform at asatisfactory profit level and similarly in the fourth quarter of 2005, wedisposed of our Advent Hellas subsidiary because of less than satisfactoryprofitability. In addition, as we have expanded into new business areas andbuilt new offerings through strategic alliances and internal development, aswell as acquisitions, some of this expansion has required significantmanagement time and resources without generating required revenues. We have haddifficulty and may continue to have difficulty creating demand for suchofferings. For example, demand for our Techfi product line was significantlylower than expected and thus we discontinued certain products within our Techfiproduct line in September 2004. As a result, we recorded a non-cashimpairment charge of $3.4 million in the third quarter of 2004 to write-off thecarrying value of certain Techfi-related intangible assets. Furthermore, we mayface other unanticipated costs from our acquisitions, such as the disputesinvolving earn-out and incentive compensation amounts, similar to those we haveexperienced with our Kinexus and Advent Outsource acquisitions.

We may make additionalacquisitions of complementary companies, products or technologies in thefuture. In addition, we periodically evaluate the performance of all ourproducts and services and may sell or discontinue current products andservices. Failure to achieve the anticipated benefits of any future acquisitionor divestiture could harm our business, results of operations and cash flows.Furthermore, we may have to incur debt, write-off investments, infrastructurecosts or other assets, incur severance liabilities, write-off impaired goodwillor other intangible assets or issue equity securities to pay for any futureacquisitions. The issuance of equity securities could dilute our existingstockholders’ ownership. Finally, we may not identify suitable businesses toacquire or negotiate acceptable terms for future acquisitions.

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

We have made and may makefuture investments in privately held companies, many of which are considered inthe start-up or development stages. These investments, which we classify asother assets on our consolidated balance sheets, are inherently risky, as themarket for the technologies or products these companies have under developmentis typically in the early stages and may never materialize. The value of theinvestment in these companies is influenced by many factors, including theoperating effectiveness of these companies, the overall health of these companies’industries, the strength of the private equity markets and general marketconditions. Due to these and other factors, we have previously determined, andmay in the future determine, that the value of these investments is impaired,which has caused and 

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wouldcause us to write down the carrying value of these investments, such as thewrite-down of our investments of $2.0 million and $13.5 million in fiscal 2003and 2002, respectively. Furthermore, we cannot be sure that future investment,license, fixed asset or other asset write-downs will not occur. If future write-downsdo occur, they could harm our business and results of operations.

**Information WeProvide to Investors Is Accurate Only as of the Date We Disseminate It**

From time to time, we maypublicly disseminate forward-looking information or guidance in compliance withRegulation FD. This information or guidance represents our outlook only as ofthe date we disseminate it, and we do not undertake to update such informationor guidance.

**Our Stock PriceMay Fluctuate Significantly**

Like many companies in thetechnology and emerging growth sector, our stock price may be subject to widefluctuations, particularly during times of high market volatility. If netrevenues or earnings in any quarter or our financial guidance for futureperiods fail to meet the investment community’s expectations, our stock priceis likely to decline. In addition, our stock price is affected by trends in thefinancial services sector and by broader market trends unrelated to ourperformance. For instance, in the event of increased hostilities abroad orterrorist attacks on U.S. soil, there could be increased market volatility,which could negatively impact our stock price.

**If Our Relationshipwith Financial Times/Interactive Data Is Terminated, Our Business May BeHarmed**

Many of our clients useour proprietary interface to electronically retrieve pricing and other datafrom Financial Times/Interactive Data (“FTID”). FTID pays us a commission basedon their revenues from providing this data to our clients. Our softwareproducts have been customized to be compatible with their system and thissoftware would need to be redesigned if their services were unavailable for anyreason. Termination of our agreement with FTID would require at least two yearsnotice by either us or them, or 90 days in the case of material breach.Our revenue could be adversely impacted if our relationship with FTID wasterminated or their services were unavailable to our clients for any reason.

**If We Are Unable to Protect Our Intellectual PropertyWe May Be Subject to Increased Competition that Could Seriously Harm OurBusiness**

Our success dependssignificantly upon our proprietary technology. We currently rely on acombination of copyright and trademark laws, trade secrets, confidentialityprocedures and contractual provisions to protect our proprietary rights. Wehave registered trademarks for many of our products and services and willcontinue to evaluate the registration of additional trademarks as appropriate.We generally enter into confidentiality agreements with our employees and withour resellers and customers. We seek to protect our software, documentation andother written materials under trade secret and copyright laws, which affordonly limited protection and we do not have any patents. Despite these efforts,it may be possible for unauthorized third parties to copy certain portions ofour products or to reverse engineer or otherwise obtain and use our proprietaryinformation. In addition, we cannot be certain that others will not developsubstantially equivalent or superseding proprietary technology, or thatequivalent products will not be marketed in competition with our products,thereby substantially reducing the value of our proprietary rights. We cannotbe sure that we will develop proprietary products or technologies that arepatentable, that any patent, if issued, would provide us with any competitiveadvantages or would not be challenged by third parties, or that the patents ofothers will not adversely affect our ability to do business. Litigation may benecessary to protect our proprietary technology which may be time-consuming andexpensive. Despite our efforts to protect our proprietary rights, unauthorizedparties may attempt to copy aspects of our products or to obtain and useinformation that we regard as proprietary. In addition, the laws of someforeign countries do not protect proprietary rights to as great an extent as dothe laws of 

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theUnited States. We cannot be sure that our means of protecting our proprietaryrights will be adequate or that our competitors will not independently developsimilar technology, duplicate our products or design around any patent that maybe issued to us or other intellectual property rights of ours.

**If We Infringe the Intellectual Property Rights ofOthers, We May Incur Additional Costs or Be Prevented from Selling OurProducts and Services**

We cannot be certain thatour products or services do not infringe the intellectual property rights ofothers. As a result, we may be subject to litigation and claims, includingclaims of infringement of patents, copyrights and other intellectual propertyrights of third parties that would be time-consuming and costly to resolve. Ifwe discovered that our products or services violated the intellectual propertyrights of third parties, we may have to make substantial changes to ourproducts or services or obtain licenses from such third parties. We might notbe able to obtain such licenses on favorable terms or at all, and we may beunable to change our products successfully or in a timely manner. Failure toresolve an infringement matter successfully or in a timely manner, would forceus to incur significant costs, including damages, redevelopment costs,diversion of management’s attention and satisfaction of indemnificationobligations that we have with our clients, as well as prevent us from sellingcertain products or services.

**Catastrophic EventsCould Adversely Affect Our Business**

Our operations are exposed to potential disruption byfire, earthquake, power loss, telecommunications failure, and other eventsbeyond our control. Additionally, we are vulnerable to interruption caused byterrorist incidents. For example, our facilities in New York were temporarily closeddue to the September 11, 2001 terrorist attacks. Immediately after theterrorist attacks, our clients who were located in the World Trade Center areawere concentrating on disaster recovery rather than licensing additionalsoftware components, while the grounding of transportation impeded ourprofessional services employees’ ability to travel to client sites.Additionally, during the temporary closure of the U.S. stock markets, ourclients did not use our market data services. Our corporate headquarters arelocated in the San Francisco Bay Area, which is a region with significantseismic activity. Earthquakes such as that experienced in 1989 could disruptour business. Such disruptions could affect our ability to sell and deliverproducts and services and other critical functions of our business. Further,such disruptions could cause instability in the financial markets upon which wedepend.

Further, terrorist acts,conflicts or wars may cause damage or disruption to our customers. Thepotential for future attacks, the national and international responses toattacks or perceived threats to national security and other actual or potentialconflicts or wars, including the ongoing crisis in the Middle East, havecreated many economic and political uncertainties. Although it is impossible topredict the occurrences or consequences of any such events, they could unsettlethe financial markets or result in a decline in information technologyspending, which could have a material adverse effect on our revenues. 

**Undetected Software Errors or Failures Found in NewProducts May Result in Loss of or Delay in Market Acceptance of OurProducts that Could Seriously Harm Our Business**

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

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**Changes inSecurities Laws and Regulations May Increase Our Costs**

The Sarbanes-Oxley Act (“theAct”) of 2002 required changes in some of our corporate governance andsecurities disclosure and/or compliance practices. As part of the Act’srequirements, the SEC has enacted new rules on a variety of subjects, andthe Nasdaq Stock Market has enacted new corporate governance listingrequirements. These developments have increased and may in the future increaseour accounting and legal compliance costs and could also expose us toadditional liability if we fail to comply with these new rules andreporting requirements. In fiscal 2006 and 2005, we incurred approximately$1.3 million and $1.8 million, respectively, in Sarbanes-Oxley relatedexpenses consisting of external consulting costs and auditor fees, and theCompany anticipates similarly spending a significant amount for its 2007compliance activities. In addition, such developments may make retention andrecruitment of qualified persons to serve on our board of directors, or asexecutive officers, more difficult. We continue to evaluate and monitorregulatory and legislative developments and cannot reliably estimate the timingor magnitude of all costs we may incur as a result of the Act or other relatedlegislation or regulation.

**Changes in, orInterpretations of, Accounting Principles Could Result in UnfavorableAccounting Charges**

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

·       Softwarerevenue recognition

·       Accountingfor stock-based compensation

·       Accountingfor income taxes

·       Accountingfor business combinations and related goodwill

In particular, in the first quarter of 2006, weadopted SFAS 123R which requires the measurement of all stock-basedcompensation to employees, including grants of employee stock options,restricted stock units and stock appreciation rights, using a fair-value-basedmethod and the recording of such expense in our consolidated statements ofoperations. The adoption of SFAS 123R had a significant adverse effect on ourresults of operations. It will continue to significantly adversely affect ourresults of operations and may impact the way in which we conduct our business. 

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

We currently use the Black-Scholes option pricingmodel to determine the fair value of stock-based compensation awards andemployee stock purchase plan shares. The Black-Scholes option pricing model wasdeveloped for use in estimating the fair value of traded options that have novesting restrictions and are fully transferable, characteristics not present inour option grants and employee stock purchase plan shares. Existing valuationmodels, including the Black-Scholes and lattice binomial models, may notprovide reliable measures of the fair values of our stock-based compensation.Consequently, there is a risk that our estimates of the fair values of 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 

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zero intrinsic value ascompared to the fair values originally estimated on the grant date and reportedin our consolidated financial statements. Alternatively, value may be realizedfrom these instruments that are significantly higher than the fair valuesoriginally estimated on the grant date and reported in our financialstatements. There currently is no market-based mechanism or other practicalapplication to verify the reliability and accuracy of the estimates stemmingfrom these valuation models, nor is there a means to compare and adjust theestimates to actual values. 

See Note 9, “Stock-BasedCompensation”, to the consolidated financial statements for further informationregarding the adoption of SFAS 123R. 

**Potential Changes in Securities Laws and RegulationGoverning the Investment Industry’s Use of Soft Dollars May Reduce OurRevenues**

As of December 31, 2006, approximately 400 of ourclients utilize trading commissions (“soft dollar arrangements”) to pay forsoftware products and services. During fiscal 2006 and 2005, the total value ofAdvent products and services paid with soft dollars was approximately 5% and 6%of our total billings. Such soft dollar arrangements could be impacted bychanges in the regulations governing those arrangements. 

During the fourth quarter of 2006, we completed thewind down of the “soft dollar” business of our SEC-registered broker/dealersubsidiary, Second Street Securities, as it no longer fits with our corporatestrategy. Second Street Securities offered our customers the ability to pay forAdvent products and other third party products and services through brokeragecommissions and other fee-based arrangements. We will continue to allow clientsto utilize soft dollar arrangements to pay for Advent software products andservices through other independent broker/dealers. 

In July 2006, the SECpublished an Interpretive Release that provides guidance on money managers’ useof client commissions to pay for brokerage and research services under the “softdollars” safe harbor, which is set forth in Section 28(e) of theSecurities Exchange Act of 1934. The Interpretive Release clarifies that moneymanagers may use client commissions to pay only for eligible brokerage andresearch services. Among other matters, the Interpretive Release states thateligible brokerage includes those products and services that relate to theexecution of the trade from the point at which the money manager communicateswith the broker-dealer for the purpose of transmitting an order for execution,through the point at which funds or securities are delivered or credited to theadvised account. In addition, for “mixed-use” items (such as trade ordermanagement systems) that are partly eligible and partly ineligible, theInterpretive Release states that money managers must make a reasonableallocation of client commissions in accordance with the eligible and ineligibleuses of the items. Based on this new guidance, our customers may change theirmethod of paying for certain Advent products or services from soft to harddollars, and as a result seek to reduce their usage of these products orservices in order to avoid increasing expenses, which could cause our revenuesto decrease.

**Covenants in OurCredit Facility Agreement Could Adversely Affect our Financial Condition**

In February 2007, weentered into a senior secured facility agreement which provides us with arevolving line of credit up to an aggregate amount of $75 million. Ourcontinued ability to borrow under our credit facility is subject to compliancewith certain financial and non-financial covenants. The financial covenant islimited to a maximum ratio of senior debt to adjusted earnings before interest,taxes, depreciation, and amortization (EBITDA). Our failure to comply with suchcovenants could cause default under the agreement, and we may then be requiredto repay such debt with capital from other sources. Under those circumstances,other sources of capital may not be available to us, or be available only onunfavorable terms. 

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**Security Risks May HarmOur Business**

The secure transmission ofconfidential information over public networks is essential to commerce andcommunications, particularly in the market in which Advent operates. Advancesin computer capabilities, new discoveries in the field of cryptography or otherevents or developments could result in compromises or breaches of our securitysystems. Anyone who circumvents our security measures could misappropriateproprietary information or cause interruptions in our services or operations.In addition, computer viruses or software programs that disable or impaircomputers could be introduced into our systems or those of our customers orother third parties, which could disrupt or make our systems inaccessible tocustomers. Our security measures may be inadequate to prevent securitybreaches, exposing us to a risk of loss, litigation and other possibleliabilities, as well as possibly requiring us to expend significant capital andother resources to protect against the threat of security breaches or toalleviate problems caused by such breaches. 

**If We Fail to Maintain an Effective System of InternalControl, We May Not be Able to Accurately Report Our Financial Results orOur Filings May Not be Timely. As a Result, Current and PotentialStockholders Could Lose Confidence in Our Financial Reporting, Which Would HarmOur Business and the Trading Price of Our Stock**

Effective internal control is necessary for us toprovide reliable financial reports. If we cannot provide reliable financialreports, our business and operating results could be harmed. We have in thepast discovered, and may in the future discover, areas of our internal controlthat need improvement including control deficiencies that may constitutematerial weaknesses. For example, as of December 31, 2005, the Company didnot maintain effective controls over the accounting for income taxes, includingthe determination of deferred income tax liabilities and the related income taxprovision. This control deficiency resulted in adjustments to the fourthquarter of 2004 and 2005 financial statements and a restatement of the Company’sfinancial statements for each of the first three quarters of fiscal 2004and 2005. 

The Company also did not maintain effective controlsover the accuracy, presentation and disclosure of the pro forma stock-basedcompensation expense in conformity with generally accepted accounting principlesas of December 31, 2005. As a result of this control deficiency, theCompany’s disclosure of stock-based compensation expense for fiscal 2003 and2004 and first three quarters of 2004 and 2005 were revised. 

During 2006, we have implemented controls and proceduresto improve our internal control over financial reporting and have determinedthat we have completed the remediation of the prior year material weaknesses.Consequently, management has concluded that the Company’s internal control overfinancial reporting was effective as of December 31, 2006.

We do not expect that our internal control overfinancial reporting will prevent all errors or fraud. A control system, nomatter how well designed and operated, can provide only reasonable, notabsolute, assurance that the control system’s objectives will be met. Further,the design of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Controls can be circumvented by individual acts of some persons, bycollusion of two or more people, or by management override of the controls.Over time, controls may become inadequate because changes in conditions ordeterioration in the degree of compliance with policies or procedures mayoccur. Because of the inherent limitations in a cost-effective control system,misstatements due to error or fraud may occur and not be detected. 

Any failure to implementor maintain improvements in our internal control over financial reporting, ordifficulties encountered in the implementation of these improvements in ourcontrols, could cause significant deficiencies or material weaknesses in ourinternal controls and consequently cause us to fail to 

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meet ourreporting obligations. Any failure to implement or maintain required new orimproved internal controls could also cause investors to lose confidence in ourreported financial information, which could have a negative impact on thetrading price of our stock.

**Our Ability to Conclude that a Control Deficiency isNot a Material Weakness or that an Accounting Error Does Not Require aRestatement is Limited, in Part, by Our Level of Pre-Tax Income (Loss)**

Under the Sarbanes-Oxley Act of 2002, our managementis required to assess the impact of control deficiencies based upon bothquantitative and qualitative factors, and depending upon that analysis weclassify such identified deficiencies as either a control deficiency,significant deficiency or a material weakness.

Our current expectation is that our fiscal 2007pre-tax income will range from breakeven to a modest amount, due primarily tothe impact of expensing for stock-based compensation, the short-term negativeimpact on net revenues from our transition to a term license model, and theinvestment in the development and growth of our business. One element of ourquantitative analysis of any control deficiency is its actual or potentialfinancial impact, and any impact that is greater than 5% of our pre-tax income(loss) in any quarter may be more likely to result in that deficiency beingdetermined to be a significant deficiency or a material weakness. Accordingly,our projection of fiscal 2007 pre-tax income at a breakeven level to a modestprofit will make it statistically less likely for us and our independentregistered public accounting firm to determine that a control deficiency is nota material weakness.

In addition, if managementor our independent registered public accountants identify errors in our interimor annual financial statements during 2007, it is statistically more likelythat such errors may meet the quantitative threshold established under StaffAccounting Bulletin No. 99, “Materiality”, that could, depending upon thecomplete qualitative and quantitative analysis, result in our having to restatepreviously issued financial statements.

**Item 1B.**               UnresolvedStaff Comments

None.

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**Item 2.**                        Properties

Ourprincipal executive offices are located in San Francisco, California. The tablebelow summarizes the principal properties that we leased as of December 31,2006:

| ** **                             | ** ** | ** ** | ** ** | **Segment**                  | ** ** | **Use of Property**      | ** ** |
|----------------------------------------|------------|------------|------------|------------------------------|------------|------------------------------------|------------|
| **Location**                           | ** ** | ** ** | ** ** | **Approx.  Square  Footage** | ** ** | **Advent  Investment  Management** | ** ** | **MicroEdge** | ** ** | **Other** | ** ** | **Sales and  Support** | ** ** | **Marketing** | ** ** | **Product  Development** | ** ** | **Administrative** | ** ** |
| ***United  States:***                  |       |       |       |                         |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| San Francisco, CA (4 properties)* |       | 263,796    |       |                         | X          |                               |       |   |   |   |   |   | X |   |   |   | X |   |   |   | X |   |   |   | X |   |   |   | X |   |   |
| New York, NY (3 properties)*      |       | 80,990     |       |                         | X          |                               |       |   | X |   |   |   |   |   |   |   | X |   |   |   | X |   |   |   | X |   |   |   | X |   |   |
| New Rochelle, NY                       |       | 5,795      |       |                         | X          |                               |       |   |   |   |   |   |   |   |   |   | X |   |   |   | X |   |   |   |   |   |   |   |   |   |   |
| Boston, MA                             |       | 8,061      |       |                         | X          |                               |       |   |   |   |   |   |   |   |   |   | X |   |   |   | X |   |   |   |   |   |   |   |   |   |   |
| Concord, NH (2 properties)        |       | 7,395      |       |                         |       |                               |       |   | X |   |   |   |   |   |   |   | X |   |   |   | X |   |   |   | X |   |   |   | X |   |   |
| Middlebury, CT                         |       | 2,996      |       |                         |       |                               |       |   | X |   |   |   |   |   |   |   | X |   |   |   | X |   |   |   | X |   |   |   |   |   |   |
| Excelsior, MN                          |       | 2,407      |       |                         |       |                               |       |   | X |   |   |   |   |   |   |   | X |   |   |   | X |   |   |   |   |   |   |   | X |   |   |
| ***Europe**:***                        |       |       |       |                         |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Copenhagen,  Denmark                   |       | 3,475      |       |                         | X          |                               |       |   |   |   |   |   |   |   |   |   | X |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Oslo, Norway                           |       | 3,002      |       |                         | X          |                               |       |   |   |   |   |   |   |   |   |   | X |   |   |   | X |   |   |   |   |   |   |   |   |   |   |
| London, United Kingdom                 |       | 2,150      |       |                         | X          |                               |       |   |   |   |   |   |   |   |   |   | X |   |   |   | X |   |   |   |   |   |   |   | X |   |   |
| Stockholm, Sweden                      |       | 2,400      |       |                         | X          |                               |       |   |   |   |   |   |   |   |   |   | X |   |   |   | X |   |   |   |   |   |   |   | X |   |   |
| Total leased  square footage           |       | 382,467    |       |                         |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                        |            |            |            |                              |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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*                    As part of ourrestructuring activities, we vacated properties in New York, New York and SanFrancisco, California. Approximately 119,000 square feet of New York andCalifornia property has been subleased as of December 31, 2006. In 2004and 2005, we entered into sub-lease agreements for certain New York properties.In 2004 and 2006, we entered into sub-lease agreements for certain San Franciscoproperties. 

**             We also havenon-principal offices in Switzerland and United Arab Emirates.

We continue to assess ourneeds with respect to office space and may in the future vacate or addadditional facilities.

**Item 3.**                        LegalProceedings

On March 8, 2005, certain of the formershareholders of Kinexus and the shareholders’ representative filed suit againstAdvent in the Delaware Chancery Court. The complaint alleges that Adventbreached the Agreement and Plan of Merger dated as of December 31, 2001pursuant to which Advent acquired all of the outstanding shares of Kinexus dueprincipally to the fact that no amount was paid by Advent on an earn-out of upto $115 million. The earn-out, which was payable in cash or stock at theelection of Advent, was based upon Kinexus meeting certain revenue targets inboth 2002 and 2003. The complaint seeks 

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unspecified compensatorydamages, an accounting and restitution for unjust enrichment. Advent advisedthe shareholders’ representative in January 2003 that the earn-out termshad not been met in 2002 and accordingly no earn-out was payable for 2002 andwould not be payable for 2003. Advent disputes the plaintiffs’ claims andbelieves that it has meritorious defenses and intends to vigorously defend thisaction. Management believes that any potential loss associated with thislitigation is neither probable nor reasonably estimable at this time andaccordingly has not accrued any amounts for any potential loss.

On July 11, 2006, a former independent consultantfiled suit against the Company in the Supreme Court of the State of New York. Thecomplaint alleges that Advent failed to pay plaintiff commissions due for hisservices as a consultant to Advent. The plaintiff is seeking approximately$101,000 in commissions and $2.0 million in unspecified consequential damages,as well as interest and attorney’s fees. We dispute the plaintiffs’ claims andbelieve that we have meritorious defenses and intend to vigorously defend thisaction. Management believes that any potential loss associated with thislitigation is neither probably nor reasonably estimable at this time andaccordingly has not accrued any amounts for any potential loss.

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

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

None.

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**PART II**

**Item 5.**                        Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities

***Market Information for Common Stock***

Ourcommon stock is listed on the NASDAQ Stock Market under the symbol “ADVS.” Theclosing price of our common stock on February 23, 2007 was $37.46. Thetable below summarizes the range of high and low reported sales prices on theNASDAQ Stock Market for our common stock for the periods indicated.

| ** **     | ** ** | **Price Range** | ** ** |
|----------------|------------|----------------------|------------|
| ** **     | ** ** | **High**             | ** ** | **Low** | ** ** |
| Fiscal 2006    |       |                 |       |   |   |
| First quarter  |       | $                    | 30.50      |   | $ | 25.90 |   |
| Second quarter |       | $                    | 36.43      |   | $ | 27.32 |   |
| Third quarter  |       | $                    | 37.56      |   | $ | 26.96 |   |
| Fourth quarter |       | $                    | 38.45      |   | $ | 34.65 |   |
| Fiscal 2005    |       |                 |       |   |   |
| First quarter  |       | $                    | 20.67      |   | $ | 16.26 |   |
| Second quarter |       | $                    | 21.05      |   | $ | 16.60 |   |
| Third quarter  |       | $                    | 28.75      |   | $ | 20.60 |   |
| Fourth quarter |       | $                    | 33.17      |   | $ | 26.14 |   |

 

***Stockholders***

As of February 23,2007, there were 152 holders of record of our common stock. However, becausemany of our shares of common stock are held by brokers and other institutionson behalf of stockholders, we are unable to estimate with any level of accuracythe total number of stockholders represented by these record holders.

***Dividends***

We have never declared orpaid any cash dividends on our common stock. We currently anticipate that wewill retain future earnings to fund development and growth of our business andto repurchase our common stock, and do not anticipate paying cash dividends inthe foreseeable future.

***Recent Sales of Unregistered Securities***

None.

***Purchases of Equity Securities by the Issuer andAffiliated Purchasers***

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

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Thefollowing is a summary of the repurchase programs authorized by the Boardduring fiscal 2004, 2005 and 2006 (in thousands):

| ** **                          | ** ** | **Number**         | ** ** |
|-------------------------------------|------------|--------------------|------------|
| ** **                          | ** ** | **of Shares** | ** ** |
| **Date of Authorization** | ** ** | ** **         | ** ** | **Authorized** | ** ** |
| May 2004                       |       |               | 1,200      |   |   |
| September 2004                 |       |               | 800        |   |   |
| February 2005                  |       |               | 1,800      |   |   |
| May 2005                       |       |               | 1,000      |   |   |
| April 2006                     |       |               | 2,300      |   |   |
| July 2006                      |       |               | 1,500      |   |   |
| Total                               |       |               | 8,600      |   |   |
|                                     |            |                    |            |  |  |  |  |

 

Thefollowing is a summary of the Company’s repurchase activity during fiscal 2004,2005 and 2006 (in thousands, except per share data):

| ** **           | ** ** | **Total**          | ** ** | ** **      | ** ** | **Average**       | ** ** |
|----------------------|------------|--------------------|------------|-----------------|------------|-------------------|------------|
| ** **           | ** ** | **Number**         | ** ** | ** **      | ** ** | **Price**         | ** ** |
| ** **           | ** ** | **of Shares** | ** ** | ** **      | ** ** | **Paid Per** | ** ** |
| **Fiscal Year** | ** ** | ** **         | ** ** | **Repurchased** | ** ** | **Cost**          | ** ** | **Share** | ** ** |
| 2004                 |       |               | 744        |            |       | $                 | 11,899     |   |   | $ | 15.99 |   |   |
| 2005                 |       |               | 2,835      |            |       | $                 | 52,584     |   |   | $ | 18.55 |   |   |
| 2006                 |       |               | 4,691      |            |       | $                 | 148,602    |   |   | $ | 31.68 |   |   |
| Total                |       |               | 8,270      |            |       | $                 | 213,085    |   |   | $ | 25.77 |   |   |
|                      |            |                    |            |                 |            |                   |            |  |  |  |  |  |  |  |  |

 

Thefollowing is a summary of the Company’s repurchase activity during the fourthquarter of 2006 (in thousands, except per share data):

| ** **         | ** ** | ** **                          | ** ** | ** **         | ** ** | **Maximum**                              | ** ** |
|--------------------|------------|-------------------------------------|------------|--------------------|------------|------------------------------------------|------------|
| ** **         | ** ** | **Total**                           | ** ** | **Average**        | ** ** | **Number of Shares That** | ** ** |
| ** **         | ** ** | **Number**                          | ** ** | **Price**          | ** ** | **May Yet Be Purchased**  | ** ** |
| ** **         | ** ** | **of Shares**                  | ** ** | **Paid**           | ** ** | **Under Our Share**            | ** ** |
| ** **         | ** ** | **Purchased(1)**                    | ** ** | **Per Share** | ** ** | **Repurchase Programs**             | ** ** |
| ** **         | ** ** | **(shares in thousands)** | ** ** |
| October 2006  |       |                                | —     |               |       |                                     | $          | — |   |   |   | 888 |   |   |
| November 2006 |       |                                | 317        |               |       |                                     | $          | 37.16 |   |   |   | 571 |   |   |
| December 2006 |       |                                | 241        |               |       |                                     | $          | 36.83 |   |   |   | 330 |   |   |
| Total              |       |                                | 558        |               |       |                                     | $          | 37.02 |   |   |   | 330 |   |   |

----

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

As of December 31,2006, approximately 330,000 shares were available to be repurchased under themost recent Board authorized share repurchase plan approved in July 2006.On February 9, 2007, our Board authorized the repurchase of up to anadditional 2.25 million shares of outstanding common stock.

***Securities Authorized for Issuance Under EquityCompensation Plans***

Information regardingsecurities authorized for issuance under equity compensation plans isincorporated by reference from our Proxy Statement to be filed for our May 2007Annual Meeting of Stockholders.

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***Performance Graph***

***COMPARISON OF 5 YEAR CUMULATIVETOTAL RETURN****AmongAdvent Software, Inc., The S & P 500 IndexAnd the NASDAQ Computer & Data Processing Index

****

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*                    $100 investedon 12/31/01 in stock or Index-including reinvestment of dividends. Fiscal yearending December 31.

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**Item6.**                        SelectedFinancial Data

Thefollowing selected financial data are derived from our consolidated financialstatements. This data should be read in conjunction with the consolidatedfinancial statements and notes thereto, and “Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations”.

| ** **                                       | ** ** | **Fiscal Years**                                              | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **2006(1)(2)**                                                     | ** ** | **2005(3)(4)** | ** ** | **2004(5)(6)(7)** | ** ** | **2003(8)** | ** ** | **2002(9)** | ** ** |
| ** **                                       | ** ** | **(in thousands, except per share data)** | ** ** |
| **STATEMENT OF OPERATIONS**                      | ** ** |                                                               | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| Net revenues                                     |       |                                                               | $          | 184,093 |   |   |   | $ | 168,701 | ** ** |   |   | $ | 149,990 |   |   | $ | 137,159 |   | $ | 159,436 |   |
| Gross margin                                     |       |                                                               | $          | 125,291 |   |   |   | $ | 116,904 | ** ** |   |   | $ | 97,035 |   |   | $ | 80,135 |   | $ | 109,764 |   |
| Income (loss)  from operations                   |       |                                                               | $          | (282 | ) |   |   | $ | 6,336 | ** ** |   |   | $ | (18,064 | ) |   | $ | (39,659 | ) | $ | (15,533 | ) |
| Net income (loss)                                |       |                                                               | $          | 82,602 |   |   |   | $ | 14,135 | ** ** |   |   | $ | (16,179 | ) |   | $ | (92,933 | ) | $ | (19,236 | ) |
| Basic net income  (loss) per share               |       |                                                               | $          | 2.85 |   |   |   | $ | 0.46 | ** ** |   |   | $ | (0.49 | ) |   | $ | (2.86 | ) | $ | (0.57 | ) |
| Diluted net  income (loss) per share             |       |                                                               | $          | 2.70 |   |   |   | $ | 0.44 | ** ** |   |   | $ | (0.49 | ) |   | $ | (2.86 | ) | $ | (0.57 | ) |
| **BALANCE  SHEET**                               | ** ** |                                                               | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** |
| Cash, cash  equivalents and marketable securties |       |                                                               | $          | 55,068 |   |   |   | $ | 163,432 | ** ** |   |   | $ | 165,529 |   |   | $ | 160,072 |   | $ | 173,829 |   |
| Working capital                                  |       |                                                               | $          | (285 | ) |   |   | $ | 115,844 | ** ** |   |   | $ | 127,886 |   |   | $ | 133,545 |   | $ | 161,347 |   |
| Total assets                                     |       |                                                               | $          | 339,647 |   |   |   | $ | 340,575 | ** ** |   |   | $ | 354,642 |   |   | $ | 346,503 |   | $ | 433,910 |   |
| Long-term  liabilities                           |       |                                                               | $          | 12,696 |   |   |   | $ | 6,374 | ** ** |   |   | $ | 8,066 |   |   | $ | 6,294 |   | $ | 5,479 |   |
| Stockholders’ equity                        |       |                                                               | $          | 209,627 |   |   |   | $ | 241,979 | ** ** |   |   | $ | 265,740 |   |   | $ | 283,069 |   | $ | 373,355 |   |

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(1)          Ourresults of operations for 2006 included a benefit from income taxes of $79.0million as a result of releasing the valuation allowance against our deferredtax assets originally recorded in fiscal 2003, stock-based employeecompensation expense of $13.6 million and restructuring charges of $3.7million.

(2)          EffectiveJanuary 1, 2006, we adopted SFAS 123R, “Share-Based Payment”, whichrequires the recognition of the fair value of stock-based compensation in netincome. During 2006, we recognized stock-based compensation expense of$13.6 million.

(3)          Wehad historically classified all amounts accrued for prepaid sales commissionsas “prepaid expenses and other” on the consolidated balance sheets. EffectiveJanuary 1, 2005, certain prepaid sales commissions of that are to berecognized in excess of a year from the balance sheet date are classified as“other assets” within non-current assets on the consolidated balance sheets. Asof December 31, 2005, prepaid sales commissions of $1.2 million wereclassified as “other assets”. This does not affect total assets for any periodpresented.

(4)          Ourresults of operations for 2005 included restructuring charges of $2.0 million.

(5)          EffectiveJanuary 1, 2004, commission revenues received from “soft dollar”transactions for products and services not related to Advent products andservices, are recorded as other revenues on a net basis as we are not theprimary obligor in these transactions. This does not affect gross margin,operating loss, or net income (loss) for any period presented.

(6)          Ourresults of operations for 2004 included intangible asset impairments of $5.4million, restructuring charges of $5.1 million and the operating results ofAdvent United Kingdom and Switzerland, subsequent to their acquisition in thesecond quarter of 2004. 

(7)          Wehad historically classified all amounts accrued for deferred rent as “other long-termliabilities” on the consolidated balance sheets. Effective January 1,2004, certain deferred rent liabilities that are to be recognized within a yearof the balance sheet date are classified as “accrued liabilities” on theconsolidated balance sheets. This does not affect total liabilities for anyperiod presented.

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(8)          Our results ofoperations for 2003 included a provision for income taxes of $54.8 million as aresult of recording a full valuation allowance against our deferred tax assetsin the United States, restructuring charges of $9.1 million and animpairment charge of $0.9 million related to the write-off of developedtechnology acquired.

(9)          Ourresults of operations for 2002 included a write-down of $13.5 million forother-than-temporary declines in the estimated fair market value of ourprivately-held investments and additional intangible amortization expense.

**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

**SPECIAL NOTEREGARDING FORWARD-LOOKING STATEMENTS**

You should read the following discussion inconjunction with our consolidated financial statements and related notes. Thefollowing discussion contains forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 as amended and Section 21E of the SecuritiesExchange Act of 1934 as amended, including, but not limited to statementsreferencing our expectations relating to future revenues, expenses andoperating margins. Forward-looking statements can be identified by the use ofterminology such as “may,” “will,” “should,” “expect,” “plan” “anticipate,” “believe,”“estimate,” “predict,” “potential,” “continue” or other similar terms and thenegative of such terms regarding beliefs, plans, expectations or intentionsregarding the future. Forward looking statements include, among others, statementsregarding growth in the investment management market and opportunities for usrelated thereto, future expansion, acquisition, divestment of or investment inother businesses, projections of revenues, future cost and expense levels,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 whichmay cause our actual results or performance to be materially different from anyresults or performance expressed or implied by such forward-looking statements.Such factors include, but are not limited to the “Risk Factors” set forth in “Item1A. Risk Factors” in this Form 10-K, as well as other risksidentified from time to time in other Securities and Exchange Commission (“SEC”)reports. You should not place undue reliance on our forward-looking statements,as they are not guarantees of future results, levels of activity or performanceand represent our expectations only as of the date they are made.

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

**Overview**

We offer integrated software solutions for automatingand integrating data and work flows across the investment managementorganization, as well as the information flows between the investmentmanagement organization and external parties. Our products are intended toincrease operational efficiency, improve the accuracy of client information andenable better decision-making. Each solution focuses on specificmission-critical functions of the front, middle and back offices of investmentmanagement organizations and is tailored to meet the needs of the particular client,as determined by size, assets under management and complexity of the investmentenvironment.

During fiscal 2006,we:

·       Expandedcustomer relationships and acceptance of our product offerings. During 2006, wesigned 346 new customer agreements and experienced continued strong demand forboth our newest and largest portfolio management and accounting platforms:Advent Portfolio Exchange (“APX”) and Geneva, respectively. We sold 63 APXlicenses bringing the total number of licenses sold to 84 for a 

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product that has beengenerally available for just over a year. We also achieved a significantmilestone with Geneva as we added 34 new Geneva clients during fiscal 2006,compared to 17 new customers in 2005, bringing the total number of Genevalicenses sold to over 100 as of December 31, 2006.

·       Releasednew products. We introduced several product upgrades and enhancements:

·        APX 1.5, which deliversexpanded scalability and enhanced integration of relationship and portfoliomanagement features. APX 1.5 enables asset managers and single- or multi-familyoffices the ability to provide enhanced client service in a single solution,thus reducing the cost and complexity of managing multiple systems;

·        Geneva 6.0, which providesa lower total cost of ownership through reduced hardware costs, ease ofintegration with enhanced third party accelerators, and improved scalabilitythrough technology enhancements;

·        Moxy 5.2, which offersincreased scalability and enables higher trade volume execution;

·        Advent Partner 6.0, whichenables hedge funds and fund administrators to use a single solution for bothonshore and offshore investor servicing and accounting; and

·        GIFTS 6.1, which is afollow-on upgrade on MicroEdge’s GIFTS 6 grant-making software, and includesthe ability to automate and schedule the creation and delivery of GIFTSreports; a wide range of compatibility certifications not previously available;single sign-on support for GIFTS Connections; and background scheduling ofdatabase maintenance.

·       Increasedterm license bookings. In 2006, we signed a total of $48.8 million of termlicenses, versus $22.7 million in 2005.

·       Increased headcount. Totalcompany headcount at December 31, 2006 was 824 which represented anincrease of 88 new employees, or 12%, from December 31, 2005. The majorityof these new hires were in our sales and services groups, and to a lesserextent in product development.

*Term LicenseTransition*

We are in the process of converting our softwarelicensing model from a perpetual model to a term model for our AdventInvestment Management segment. Under aperpetual model, customers purchase a license to use our software indefinitelyand generally we recognize all license revenue at the time of sale; maintenanceis purchased under an annual renewable contract, and recognized ratably overthe contract period. Under a term model, customers purchase a license to useour software and receive maintenance for a limited period of time and werecognize the revenue ratably over the length of the contract.

The transition to a term model has the effect oflowering license revenues in the early stages of the transition, but increasingthe total potential value of the customer relationship. Moving our corebusiness new customer sales to term has had the effect of lowering our revenuegrowth in 2006 and may continue to slow our revenue growth over the nextseveral years when compared to a perpetual license model.

The transition to a term model also has the effect ofdecreasing our operating cash flows in the early stages of the transition.Under perpetual pricing, the entire license fee is generally billed andcollected at the commencement of the arrangement. Under term pricing, a typicalcontract term is three years. We generally bill and collect license fees overthe term of the arrangement in equal installments in advance of each annualperiod. The amount of the annual term billing is less than the perpetualbilling, resulting in lower cash flows in the initial term license period.Annual term billing results in an increase in deferred revenues and an increasein operating cash flows at the commencement of each annual billing period.

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When a customer purchases a term license together withimplementation services we do not recognize any revenue under the contractuntil the implementation services are complete. If the implementation servicesare still in progress as of a quarter-end, we will defer all of the contractrevenues to a subsequent quarter. As of December 31, 2006, we havedeferred $9.4 million in net revenues and $2.9 million of directly relatedexpenses (which are classified as “deferred revenues” and “prepaid expenses andother”, respectively, on the consolidated balance sheet) as the implementationservices associated with the related term license arrangements were in progressas of December 31, 2006. As of December 31, 2005, $1.1 million of netrevenues and $0.4 million of directly related expenses, respectively, weredeferred.

Although the transition to a term model decreasesrevenues from new contracts in the early periods, we believe this change to ourbusiness model is extremely significant for the long-term growth and value ofthe business because it leverages the mission-critical nature of Advent’sproducts and services. We believe that once our products are implemented, ourclients are motivated to continue using Advent’s products and services due toimproved workflow efficiencies and additional controls they gain over theircore business operations.

Thefollowing table (unaudited) summarizes the term license bookings (in thousands)and associated average term (in years) by quarter for fiscal 2006, 2005 and2004:

| ** **       | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** | ** ** | ** ** |
|------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|
| ** **       | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Total**  | ** ** |
| 2006 Bookings(1) |       |        | $          | 7,864       |       |        | $          | 12,872      |       | $          | 10,600     |   | $ | 17,474 |   | $ | 48,810 |   |
| Average Term(2)  |       |        | 2.5        |        |       | 3.1         |       | 2.9         |       | 3.2        |       | 3.0 |   |
| 2005 Bookings(1) |       |        | $          | 6,378       |       |        | $          | 3,967       |       | $          | 4,924      |   | $ | 7,464 |   | $ | 22,733 |   |
| Average Term(2)  |       |        | 4.7        |        |       | 2.9         |       | 3.3         |       | 2.7        |       | 3.2 |   |
| 2004 Bookings(1) |       |        | $          | 71          |       |        | $          | 296         |       | $          | 4,492      |   | $ | 1,443 |   | $ | 6,302 |   |
| Average Term(2)  |       |        | 1.4        |        |       | 1.7         |       | 3.7         |       | 2.8        |       | 3.2 |   |

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(1)          Bookings reflect thetotal value of all new term licenses signed by clients in the period.

(2)          Averageterm is weighted by contract value for all new term licenses signed in theperiod.

*FinancialHighlights*

We recognizedrecord revenues of $184.1 million during 2006, as compared to $168.7 million infiscal 2005 and $150.0 million in 2004. The year-over-year increase in 2006reflects essentially flat license revenues due to our transition to termlicenses, while our maintenance and recurring revenues were up $19.7 million or18% year-over-year. Despite our transition to a predominantly term licensingmodel, we have grown net revenue year-over-year for two reasons:

·       Ourdiverse mix of products has allowed us to phase in term licensing by product;and

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

During 2006, we recognized approximately 49% of licenserevenue from term licenses and incremental AUA fees versus 25% in 2005. Totalrecurring revenues, which we define as term license, incremental AUA fees, termand perpetual maintenance, and other recurring revenues, have increased to 79%of total revenues during 2006, as compared to 69% during 2005.

Total expenses, including cost of revenues, were$184.4 million in fiscal 2006, compared with $162.4 million in 2005 and$168.1 million in 2004. Our expenses increased in 2006 from 2005 largely as aresult of increases in headcount, stock-based compensation expense of $13.6million (or 7.4% of total net revenues) and a $1.7 million increase inrestructuring charges and, to a lesser extent, higher bonuses based 

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on strong bookingsperformance and additional costs resulting from winding down the soft dollarcomponent of Second Street Securities.

During 2006, we incurred restructuring charges of $3.7million primarily relating to the exit of our previous headquarters facility.To accommodate our expansion and headcount growth, we moved our San Franciscoheadquarters in October 2006 from our prior facility located at 301Brannan Street to a new facility located at 600 Townsend Street. As a result ofcompletely exiting our former headquarters facility and making it available forsub-lease in November 2006, we incurred facility and exit costs of $3.4million related to the 301 Brannan facility that will continue to be incurredwithout economic benefit to us.

The costs associated with stock-based compensation andrestructuring, which totaled approximately $17.3 million (or 9% of total netrevenues) for fiscal 2006, had a significant adverse impact on our results ofoperations, resulting in an operating loss of $0.3 million compared tooperating income of $6.3 million in fiscal 2005.

During the first quarterof 2006, we began to wind down the soft dollar component of our SEC-registeredbroker/dealer subsidiary, Second Street Securities, as it no longer fits withour corporate strategy. Second Street Securities offered our customers theability to pay for Advent products and other third-party services throughbrokerage commissions and other fee-based arrangements. We completed thewind-down in the fourth quarter of 2006. Subsequent to the wind-down, SecondStreet Securities will continue to maintain its broker/dealer status.

During 2006, we recognized a benefit from income taxesof $79.0 million due primarily to the release of the valuation allowanceagainst deferred tax assets originally established in the fourth quarter of 2003as we now believe that our deferred tax assets are more likely than not berealized.

We earned net income of $82.6 million, resulting indiluted earnings per share of $2.70 for 2006. In addition, we generatedoperating cash flow of approximately $46.8 million in 2006.

During 2006, we repurchased 4.7 million shares underour Board-authorized share repurchase plans, for a total cash outlay of $148.6million and an average price of $31.68.

Looking forward, wecontinue to focus on improving our long-term profitability as we complete thetransition to a term license model. While recent economic trends have beenpositive and our customers have been more willing to commit to new softwarepurchases, improving our profitability will depend upon our introducing newproducts, licensing software to new and existing customers, selling services tonew and existing customers and renewing license, maintenance and recurringrevenue contracts at similar levels to those which we achieved during fiscal2006. The success of our transition to a term license model will also depend onfuture renewal rates, which we will evaluate as our term license contractsexpire. We will continue our focus on aggressively managing costs and will alsocontinue to invest in areas we deem appropriate.

**Critical AccountingPolicies and Estimates**

Management’s discussion and analysis of our financialcondition and results of operations are based upon our consolidated financialstatements and related notes, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America. We review theaccounting policies used in reporting our financial results on a regular basis.The preparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent liabilities.

On an ongoing basis, we evaluate the process we use todevelop estimates. We base our estimates on historical experience and on otherinformation that we believe are reasonable for making judgments at the time theestimates are made. Actual results may differ from our estimates due to actualoutcomes being different from those on which we based our assumptions.

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We believe the followingaccounting policies contain the more significant judgments and estimates usedin the preparation of our consolidated financial statements.

·       Goodwill

·       Revenuerecognition and deferred revenues

·       Incometaxes

·       Stock-basedcompensation

·       Restructuringcharges and related accruals

·       Impairmentof long-lived assets

·       Legalcontingencies

·       Salesreturns and accounts receivable allowances

**Goodwill.****  **We review our goodwill for impairment annually duringthe fourth quarter of our fiscal year (as of November 1) and morefrequently if an event or circumstance indicates that an impairment loss hasoccurred. We are required to test our goodwill for impairment at the reportingunit level. We have determined that we had three reporting units as of November 1,2006. The test for goodwill impairment is a two-step process.

The first step compares the fair value of eachreporting unit with its respective carrying amount, including goodwill. If thefair value of the reporting unit exceeds its carrying amount, goodwill of ourreporting unit is considered not impaired, thus the second step of theimpairment test is unnecessary.

The second step, used to measure the amount ofimpairment loss, compares the implied fair value of each reporting unit’sgoodwill with the respective carrying amount of that goodwill. If the carryingamount of the reporting unit goodwill exceeds the implied fair value of thatgoodwill, an impairment loss shall be recognized in an amount equal to thatexcess.

Determining the fair value of a reporting unit issubjective and requires judgment at many points during the test including thedevelopment of future revenue and expense forecasts used to calculate futurecash flows, the selection of risk-adjusted discount rates, and determination ofmarket comparable entities. During the fourth quarter of 2006, we completed ourannual impairment test which did not indicate impairment for any of ourreporting units.

**Revenuerecognition and deferred revenues.**   Our revenuerecognition policies contain our most significant judgments and estimates. Ourrevenue policy is further described in Note 1, “Summary of SignificantAccounting Policies” to the consolidated financial statements.

We recognize revenue from software licenses,development fees, maintenance, other recurring revenues, professional servicesand other revenues. We offer a wide variety of products and services to a largenumber of financially sophisticated customers. While many of our lower-pricedlicense transactions, maintenance contracts, subscription-based transactionsand professional services projects conform to a standard structure, many of ourlarger transactions are complex and may require significant judgment in theapplication of generally accepted accounting principles.

*Softwarelicense and development fees.*   We recognizerevenue from the licensing of software when persuasive evidence of anarrangement exists, the product has been delivered, the fee is fixed ordeterminable and collection of the resulting receivable is reasonably assured.We generally use a signed license agreement as evidence of an arrangement.Sales through our distributors are evidenced by a master agreement governingthe relationship together with binding order forms and signed contracts fromthe distributor’s customers. Revenue is recognized once shipment to thedistributor’s customer has taken place and when all other revenue recognitioncriteria have been met. Delivery occurs when product is delivered 

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to a common carrier F.O.Bshipping point. Some of our arrangements include acceptance provisions, and ifsuch acceptance provisions are provided, delivery is deemed to occur uponacceptance. We assess whether the fee is fixed or determinable based on thepayment terms associated with the transaction. We also assess whether thecollectibility of the resulting receivable is reasonably assured based on anumber of factors, including the credit worthiness of the customer determinedthrough review of credit reports, our transaction history with the customer,other available information and pertinent country risk if the customer islocated outside the United States. Our standard payment terms are due at 180days or less, unless the transaction was part of a soft dollar arrangement throughour in-house broker/dealer subsidiary, Second Street Securities, for whichpayment was then required within one year; however, payment terms may varybased on the country in which the agreement is executed. Software licenses aresold with maintenance and, frequently, professional services.

*Licenses:*   Wehave continued the transition from selling mostly perpetual licenses to sellinga mix of perpetual and term contracts, and expect term license revenue toincrease as a proportion of total license revenue in the future. We recognizedapproximately 49%, 25% and 11% of license revenue from term licenses andincremental AUA fees during fiscal 2006, 2005 and 2004, respectively. Revenuerecognition for software licensed under perpetual- and term-based license modelsdiffers depending on which type of contract a customer signs:

·       *Perpetual licenses*

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

·       *Term licenses*

Term license contract prices include both the softwarelicense fees and maintenance fees, and, as a result, we allocate 55% of thecontract price to license revenue and 45% to maintenance and recurringrevenues, based on our assessment of the relative economic value of the twoelements. We used our judgment in determining the allocation of revenues forterm license contracts. We believe our methodology provides the best estimateof the gross margins of our revenue streams. Our assessment of the relativeeconomic value is based on an analysis of the revenue stream that could beexpected from a perpetual license and associated maintenance renewals over athree-year term, which is the length of most of our term licenses with bundledmaintenance. As a percentage of the total term arrangement fee, the maintenancecomponent was calculated to be approximately 45% of the overall arrangement feeover a three-year period.

To date, we have offered multi-year term licenses bywhich a customer makes a binding commitment to license the software for a fixedmulti-year term—typically three years. For multi-year term licenses, we havenot established VSOE of fair value for the term license and maintenancecomponents, and, as a result, in situations where we are also performingrelated professional services, we defer all revenue and directly relatedexpenses under the arrangement until the professional services aresubstantially complete. At the point professional services are substantiallycompleted, we recognize a pro-rata amount of the term license and maintenancerevenue, professional services fees earned and related expenses, based on theelapsed time from the start of the term license to the substantial completionof professional services. The remaining deferred professional services revenueand related expenses are recognized ratably over the remaining contract length.Term license and maintenance revenue for the remaining contract years isrecognized ratably over the remaining period 

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of the contract. Whenmulti-year term licenses are sold and do not include related professionalservices, we recognize the entire term license and maintenance revenue ratablyover the period of the contract term from the effective date of the licenseagreement assuming all other revenue recognition criteria have been met.

Certain of our perpetual and term license contractscontain fee structures that provide additional revenues based on the assetsthat the client manages using our software (“Assets Under Administration” or “AUA”).Contracts containing an AUA fee structure have a defined measurement periodwhich requires the client to self report actual AUA in arrears of the specifiedperiod. AUA fees above the stated minimum fee for the same period areconsidered incremental fees. Because incremental fees are not determinableuntil the conclusion of the measurement period, they are both earned andrecognized in arrears, on a quarterly or annual basis.

If a customer purchased our software and chose toenter into a soft dollar arrangement through our in-house broker/dealersubsidiary, Second Street Securities, the soft dollar arrangement did notchange or modify the original fixed or determinable fee in the writtencontract. The customer is required to pay the original fee for our softwarewithin one year. If insufficient trading volume is generated to pay the entireoriginal fee within one year, the customer is still required to render paymentwithin one year. If the customer chooses to use a third-party broker/dealer,the original payment terms apply, regardless of the arrangement with thethird-party broker/dealer. The option to soft dollar a transaction does notalter the underlying revenue recognition for the transaction; all the revenuerecognition criteria listed in the “Software license” section above must beassessed in determining how the revenue will be recognized.

*Maintenanceand other recurring revenues.*   We offer annualmaintenance programs that provide for technical support and updates to oursoftware products. Maintenance fees are bundled under perpetual licenses in theinitial licensing year and charged separately for renewals of annualmaintenance in subsequent years. Fair value for maintenance is based uponrenewal rates stated in the contracts or, in limited cases, separate sales ofrenewals to other customers. Generally, we recognize maintenance revenueratably over the contract term, except in the case of multi-year term licensecontracts which are described in the “term licenses” section above. Revenuesfrom term licenses represented approximately 6%, 3% and 1% of maintenance andother recurring revenue during 2006, 2005 and 2004, respectively.

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.

*Professionalservices and other revenues.*   We offer a varietyof professional services that include project management, implementation, dataconversion, integration, custom report writing and training. Fair value forprofessional services is based upon separate sales of these services by us toother customers. Our professional services are generally billed based on hourlyrates together with reimbursement for travel and accommodation expenses. Ourprofessional services and other revenue also include revenue from our annualclient conferences. We recognize revenue as these professional services areperformed except in the case of multi-year term license contracts which aredescribed in the “term licenses” section above. Certain professional servicesarrangements involve acceptance criteria. In these cases, revenue and directlyrelated expenses are deferred and then recognized upon acceptance.

*Directlyrelated expenses.**  *When wedefer service revenues, we also defer the direct costs incurred in the deliveryof those services to the extent those costs are recoverable through the futurerevenues on non-cancelable contracts. We recognize those deferred costs ascosts of professional services revenues proportionally and over the same periodthat the deferred revenue is recognized as service revenue. When we deferlicense revenue, we defer the direct incremental costs incurred as a result ofselling the contract (i.e. sales commissions earned by the salesforce as a partof their overall compensation) because those 

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costs would not have beenincurred but for the acquisition of that contract. We recognize those costs assales and marketing expense proportionally and over the same period as thelicense revenues.

**Incometaxes.**   We account for worldwide income taxesunder an asset and liability approach that requires the expected future taxconsequences of temporary differences between book and tax bases of assets andliabilities be recognized as deferred tax assets and liabilities. Significantjudgment is required to determine our worldwide income tax provision. In theordinary course of business, there are many transactions and calculations wherethe ultimate tax outcome is uncertain. Many of these uncertainties arise as aconsequence of cost reimbursement arrangements among related entities, theprocess of identifying items of revenue and expense that have differing orpreferential tax treatment and segregation of foreign and domestic income andexpense to the appropriate taxing jurisdictions to reasonably allocateearnings. Although we believe that our judgments and estimates are reasonable,the final outcome could be different from that which is reflected in our incometax 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.We consider forecasted earnings, future taxable income and prudent andreasonable tax planning strategies in determining the need for a valuationallowance.

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 are subject to audits by state, federal and foreigntax authorities. Our estimates for potential outcome for any uncertain taxmatter are judgmental. We believe we have adequately provided for anyreasonably foreseeable outcome related to these matters. However, our futureresults may include adjustments to our estimated tax liabilities.

**Stock-basedcompensation.**   The adoption of SFAS 123R onJanuary 1, 2006 had a material adverse impact on our consolidatedfinancial position and results of operations. See Note 9, “Stock-BasedCompensation”, to the consolidated financial statements for additionaldiscussion regarding our stock-based compensation including pro formadisclosures for prior periods as if we had recorded stock-based compensationexpense. The calculation of stock-based compensation requires reliance onsignificant assumptions, judgments and estimates.

Management judgment was required in the initialselection and implementation of policies to conform with the requirements ofSFAS 123R. Management elected to adopt the standard using the modifiedprospective method, to utilize the Black-Scholes option pricing model todetermine 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 ourrestricted stock units is calculated based on the fair market value of ourstock on the date of grant. The determination of the fair value of stock-basedpayment awards on the date of grant using an option-pricing model is affectedby our stock price as well as assumptions regarding a number of complex andsubjective variables. These variables include our expected stock pricevolatility over the term of the awards, actual and projected employee exercisebehavior, the risk-free interest rate and expected dividends. We use anexternal service provider to assist us in making reasonable estimates.

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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 the stock-basedawards, vesting schedules and expectations of future employee behavior. We basethe risk-free interest rate on the U.S. Treasury yield curve in effect at thetime of grant for periods corresponding with the expected life of the optionand SAR. We do not anticipate paying any cash dividends in the foreseeablefuture and therefore use an expected dividend yield of zero in the optionpricing model. SFAS 123R requires forfeitures to be estimated at the time ofgrant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates. Forfeitures were estimated based on the Company’shistorical experience over the last ten years.

Thesevariables are sensitive and change on a daily basis. As a result, the financialresult from issuing the same number of options or SAR’s can vary oversignificantly over time. The following table reflects the change in the fairvalue of a hypothetical option or SAR as a result of a hypothetical change inthe underlying assumptions:

| ** **               | ** ** | ** ** | ** ** | **Assumption**     | ** ** | **Value**  | ** ** | **Assumption** | ** ** | **Value**  | ** ** |
|--------------------------|------------|------------|------------|--------------------|------------|------------|------------|----------------|------------|------------|------------|
| **Assumption**           | ** ** | ** ** | ** ** | **Base Case** | ** ** | **Change** | ** ** | **Change**     | ** ** | **Change** | ** ** | **Change** | ** ** |
| Grant and stock  price   |       |       | $          | 35.00              |       |       |       | +$1            |       |       | $          | 0.35 |   |   | -$1 |   |   | $ | (0.35 | ) |
| Risk-free  interest rate |       |       | 4.5        | %                  |       |       | +0.5%      |           |       | $          | 0.23       |   |   | -.0.5% |   |   | $ | (0.23 | ) |
| Volatility               |       |       | 45.0       | %                  |       |       | +5%        |           |       | $          | 1.12       |   |   | –5% |   |   | $ | (1.15 | ) |
| Expected life  (years)   |       |       | 5.0        |               |       |       | + 1  year  |           |       | $          | 0.70       |   |   | -1 year |   |   | $ | (0.91 | ) |
| Expected dividend  yield |       |       | 3.0        | %                  |       |       | +1%        |           |       | $          | (1.04      | ) |   | -1% |   |   | $ | 1.12 |   |
| Base Option Value        |       |       | $          | 12.30              |       |       |       |           |       |       |       |   |   |   |   |   |   |   |
|                          |            |            |            |                    |            |            |            |                |            |            |            |  |  |  |  |  |  |  |  |  |  |  |

 

**Restructuringcharges and related accruals.**   Since 2003, wehave developed and implemented formalized plans for restructuring our businessto better align our resources to market conditions and recorded significantcharges. In connection with these plans, we recorded estimated expenses forseverance and benefits, lease cancellations, asset write-offs and otherrestructuring costs. Given the significance of, and the timing of the executionof such activities, this process is complex and involves periodic reassessmentsof estimates made at the time the original decisions were made, includingevaluating real estate market conditions for expected vacancy periods andsub-lease rents. We continually evaluate the adequacy of the remainingliabilities under our restructuring initiatives. Although we believe that theseestimates accurately reflect the costs of our restructuring plans, actualresults may differ, thereby requiring us to record additional provisions orreverse a portion of such provisions.

**Impairmentof long-lived assets.****  **Wereview our other long-lived assets including property and equipment and otherintangibles for impairment whenever events or changes in circumstances indicatethat the carrying amount of these assets may not be recoverable. Determiningwhether an impairment trigger has occurred is subjective and requires judgment.Our recoverability test compares the assets’ carrying amount to their expectedfuture undiscounted net cash flows. We estimate future revenue and expenseamounts to calculate future cash flows. We believe our forecast revenue andexpense amounts are reasonable but forecast amounts are inherently uncertainand unpredictable.

**LegalContingencies.****  **Fromtime to time, Advent is involved in claims and legal proceedings that arise inthe ordinary course of business. We use our judgment to assess both thelikelihood and potential amount of a contingency. We periodically review ourassessment whenever there is a change in the facts and circumstances of theseproceedings. Litigation is subject to inherent uncertainties and our view ofthese matters may change in the future. Were an unfavorable outcome to occur,there exists the possibility 

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of a material adverseimpact on our financial position and results of operations for the period inwhich the unfavorable outcome occurs, and potentially in future periods.

**SalesReturns and Accounts Receivable Allowances.****  **Our standard practice is to enforce our contractterms and not allow our customers to return software. We have, however,allowed customers to return software on a limited case-by-case basis and haverecorded sales returns provisions as offsets to revenue in the period the salesreturn becomes probable. We use our judgment in estimating our sales returns. Weanalyze customer demand and acceptance of product and historical returns whenevaluating the adequacy of the allowance for sales returns, which are notgenerally provided to customers. Specifically, we have an algorithm forcalculating the value of reserves that takes the last 18 months of experienceinto account, which resulted in the above adjustments to revenue. Our abilityto estimate returns is based on our long history of experience with relativelyhomogenous transactions and the fact that the return period is short. Theestimates for returns are adjusted periodically based upon changes inhistorical rates of returns and other related factors. We have recorded a salesreturns provision (benefit) to decrease (increase) revenue for these situationsbased on our historical experience of $(0.8) million, $2.2 million and $4.6million in fiscal 2006, 2005 and 2004, respectively.

We use our judgment inestimating our allowance for doubtful accounts. In order to estimate ourallowance for doubtful accounts, we analyze specific accounts receivable,historical bad debts, customer concentrations, customer credit-worthiness,current economic trends and changes in its customer payment terms. We haverecorded a provision for (reduction of) bad debt of $1.0 million, $(0.4)million and $36,000 in fiscal 2006, 2005, and 2004, respectively.

**Reclassifications**

Certain prior periodamounts have been reclassified to conform to the current period presentation tobetter reflect our view of the current business. These reclassifications do notaffect total net revenues, net income (loss), cash flows, or stockholders’equity.

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**Results ofOperations for Fiscal Years 2006, 2005 and 2004**

Thefollowing table summarizes, for the periods indicated, certain items in theconsolidated statements of operations as a percentage of net revenues. Thefinancial information and the ensuing discussion should be read in conjunctionwith the accompanying consolidated financial statements and notes thereto.

| ** **                                           | ** ** | **Fiscal Years** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Net revenues:**                                    |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| License and  development fees                        |       |                  | 21         | % |   |   | 23 | % |   |   | 24 | % |   |
| Maintenance and  other recurring                     |       |                  | 69         |   |   |   | 64 |   |   |   | 63 |   |   |
| Professional  services and other                     |       |                  | 10         |   |   |   | 13 |   |   |   | 13 |   |   |
| Total net revenues                                   |       |                  | 100        |   |   |   | 100 |   |   |   | 100 |   |   |
| **Cost of  revenues:**                               |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| License and  development fees                        |       |                  | 1          |   |   |   | 1 |   |   |   | 1 |   |   |
| Maintenance and  other recurring                     |       |                  | 18         |   |   |   | 17 |   |   |   | 19 |   |   |
| Professional  services and other                     |       |                  | 13         |   |   |   | 11 |   |   |   | 11 |   |   |
| Amortization and  impairment of developed technology |       |                  | 1          |   |   |   | 2 |   |   |   | 4 |   |   |
| Total cost of revenues                               |       |                  | 32         |   |   |   | 31 |   |   |   | 35 |   |   |
| Gross margin                                         |       |                  | 68         |   |   |   | 69 |   |   |   | 65 |   |   |
| **Operating  expenses:**                             |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Sales and  marketing                                 |       |                  | 27         |   |   |   | 24 |   |   |   | 26 |   |   |
| Product  development                                 |       |                  | 19         |   |   |   | 18 |   |   |   | 22 |   |   |
| General and  administrative                          |       |                  | 18         |   |   |   | 20 |   |   |   | 18 |   |   |
| Amortization and  impairment of other intangibles    |       |                  | 2          |   |   |   | 2 |   |   |   | 8 |   |   |
| Restructuring  charges                               |       |                  | 2          |   |   |   | 1 |   |   |   | 3 |   |   |
| Total operating expenses                             |       |                  | 68         |   |   |   | 65 |   |   |   | 77 |   |   |
| Income (loss) from operations                        |       |                  | (0         | ) |   |   | 4 |   |   |   | (12 | ) |   |
| Interest income  and other expense, net              |       |                  | 2          |   |   |   | 3 |   |   |   | 1 |   |   |
| Gain on sale of  equity investments                  |       |                  | —     |   |   |   | 2 |   |   |   | — |   |   |
| Income (loss) before income taxes                    |       |                  | 2          |   |   |   | 9 |   |   |   | (11 | ) |   |
| Provision for  (benefit from) income taxes           |       |                  | (43        | ) |   |   | 1 |   |   |   | 0 |   |   |
| **Net  income (loss)**                               |       |                  | 45         | % |   |   | 8 | % |   |   | (11 | )% |   |

 

**NET REVENUES**

| ** **                      | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|-------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                      | ** ** | **(in thousands, except percentages)** | ** ** |
| Total net  revenues             |       | $                                                     | 184,093    |     | $          | 168,701  |       | $ | 149,990 |   |
| Change over prior  year         |       | $                                                     | 15,392     |     | $          | 18,711   |       |   |   |
| Percent change over  prior year |       | 9                                                     | %          | 12       | %          |     |       |
|                                 |            |                                                       |            |          |            |          |            |  |  |  |

 

Our net revenues are made up of three components:license and development fees; maintenance and other recurring; and professionalservices and other. License revenues are derived from the licensing of softwareproducts. Maintenance and other recurring revenues are derived from maintenancefees charged in the initial licensing year, renewals of annual maintenanceservices in subsequent years and recurring revenues derived from our subscription-basedor transaction-based services. Term license contract prices 

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include both the softwarelicense fees and maintenance fees, and, as a result, we allocate 55% of thecontract price to license revenue and 45% to maintenance and recurringrevenues, based on our assessment of the relative economic value of the twoelements. Professional services and other revenues include fees for consulting,training services, commission revenues from “soft dollaring” of third-partyproducts and services and our client conferences.

Each of the major revenue categories has historicallyvaried as a percentage of net revenues, and we expect this variability tocontinue in the near term. This variability is partially due to the timing ofthe introduction of new products, the relative size and timing of individualperpetual software licenses, as well as the size of the implementation, theresulting proportion of the maintenance and professional services components ofthese license transactions and the amount of client use of pricing and relateddata. We are currently transitioning the majority of our license revenue toterm license agreements. Once our transition to term licensing is complete, weexpect less variability between our major categories of revenues because thevariation from large perpetual license deals will decrease.

Net revenues increased in 2006 and 2005 due to growinginformation technology spending by our customers, as well as a general increasein demand for many of our products and services. The increases reflectedimproving economic conditions and growth in the financial markets. Theyear-over-year growth in net revenues included large increases in term license,maintenance and recurring revenues, as well as increased revenue frominternational sales. These increases were partially offset by decreases inperpetual license revenues and professional services and other revenuesattributable to our continued transition to a term license sales model. Afteradverse economic conditions negatively impacted revenues across the industry in2002 and 2003, the economy stabilized in 2004 and has continued to strengtheninto 2005 and 2006, resulting in shorter sales cycles, growing investment ininformation technology projects, and a general increase in expenditures for softwarerelated services. Going forward, we expect normal seasonal weakness to impactrevenues and bookings in the first quarter of 2007, followed by modest growthas the year progresses resulting in total net revenues for fiscal 2007 ofbetween $206 million and $211 million.

International sales, whichare based on the location to which the product is shipped, also contributed toour growth in 2006 and 2005, representing 12% of our net revenues in 2006,compared to 11% in 2005 and 9% in 2004. We expect revenue growth in EMEA in2007 to be consistent with our overall revenue growth. The revenues fromcustomers in any single international country did not exceed 10% of totalrevenues.

***License andDevelopment Fees***

| ** **                      | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|-------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                      | ** ** | **(in thousands, except percentages)** | ** ** |
| License and  development fees   |       | $                                                     | 38,205     |     | $          | 39,166   |       | $ | 35,665 |   |
| Percent of net  revenues        |       | 21                                                    | %          | 23       | %          | 24       | %          |
| Change over prior  year         |       | $                                                     | (961       | )        | $          | 3,501    |       |   |   |
| Percent change over  prior year |       | (2                                                    | )%         | 10       | %          |     |       |
|                                 |            |                                                       |            |          |            |          |            |  |  |  |

 

The increase in license and development fee revenuesin 2006 and 2005 as compared to 2004 primarily reflected the improving economicand industry conditions resulting in increased capital spending by ourcustomers as well as increased acceptance of our APX and Geneva products. However,the decrease in 2006 as compared to 2005 is a direct result of the transitionto selling our core products under a term model where license revenue isamortized over the term of the contract, as opposed to being recognized upfront with perpetual contracts. Perpetual license revenue decreased $11.8million to $18.9 million during fiscal 2006 compared to $30.6 million in 2005,and decreased $2.9 million in 2005 compared with $33.5 million in 2004. Revenuerecognized from term license contracts and incremental AUA fees increased $9.3million to $18.8 million, or 49% of license revenue, during fiscal 2006, ascompared to $9.6 million, or 25% 

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of license revenue, duringfiscal 2005, and $3.9 million or 11% of license revenue in 2004. Term contractsales have the effect of lowering recognizedlicense revenues in the short term, but we believe increase the total potentiallong-term value of the customer relationship. We continue to sign morecontracts on a term basis as term license bookings increased from $6.3 millionin fiscal year 2004, to $22.7 million and $48.8 million in fiscal 2005 and2006, respectively.

Improving financial markets in these periods resultedin a more favorable business climate as our customers were more willing tocommit to new software purchases as well as existing customer upgrades. Foreach of the periods presented, the Axys, APX, Moxy, Partner, Qube, Geneva andGIFTS products accounted for the majority of license revenue, both term andperpetual. License and development fee revenues in 2006 also reflected anincrease in Geneva-related assets under administration (“AUA”) revenues and, aspreviously mentioned, increasing term license revenues as our transition to aterm model continued. Our AUA revenues from incremental AUA fees increased by$1.6 million during 2006 as a result of the growth in assets underadministration of certain fund administration clients, whose Geneva contractsprovide for incremental fees based on assets under administration, resulting insignificant recurring quarterly and annual revenue.

We typically license our products on a per server, peruser basis with the price per customer varying based on the selection of theproducts licensed, the number of site installations, the number of authorizedusers, the size of the customer and the customer’s line of business. Ourpricing can vary in different market segments to maintain our competitiveposition. We earn development fees when we provide product solutions that arenot part of our standard product offering but that will be incorporated intoour future releases. For fiscal years 2006, 2005 and 2004, revenue fromdevelopment fees was 1.0%, 1.8% and 3.4% of total license and development feesrevenue.

Soft dollar revenues generated by Second StreetSecurities from Advent-related licenses paid for through soft dollartransactions in fiscal 2006, 2005 and 2004 were $0.8 million, $0.7 million and$0.9 million, respectively, and represented 2.0%, 1.8% and 2.6% of totallicense and development fee revenues.Due to the winding down of our soft dollar component during fiscal 2006,we do not expect to recognize soft dollar revenues through Second StreetSecurities in fiscal 2007.

We expect license anddevelopment fees revenues to be up significantly in amount and as a percentageof total net revenues in 2007 as we have reached the turning point in ourtransition to a term model and expect to grow license revenues compared to 2006due principally to continued bookings of both term and some perpetual licensesand recognition of term license revenue deferred in prior years. As we sellmore products on a term license model, we defer a greater portion of licenserevenue over the term of the contract, instead of recognizing the licenserevenue up front. The net effect, assuming most customers renew their contractsupon expiration of the initial term, is to build a long-term license andmaintenance stream and also enhance predictability of license revenues.

***Maintenance andOther Recurring Revenues***

| ** **                                      | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                      | ** ** | **(in thousands, except percentages)** | ** ** |
| Maintenance  revenues                           |       | $                                                     | 88,766     |     | $          | 73,269   |       | $ | 65,338 |   |
| Other recurring  revenues                       |       | 38,231                                                |       | 34,051   |       | 29,760   |       |
| Total maintenance  and other recurring revenues |       | $                                                     | 126,997    |     | $          | 107,320  |       | $ | 95,098 |   |
| Change over prior  year                         |       | $                                                     | 19,677     |     | $          | 12,222   |       |   |   |
| Percent change over  prior year                 |       | 18                                                    | %          | 13       | %          |     |       |

 

The increases in maintenance and other recurringrevenues in 2006 and 2005 reflected an increase in new maintenance supportcontracts as a result of the increase in the number of new license contracts,price increases and service level upgrades to our installed customer base, anincrease in demand for our data 

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services and an increasein our recurring revenue sharing. We disclose our maintenance renewal rate onequarter in arrears. The maintenance renewal rate for the third quarter of 2006of 92% which is the highest it hasbeen for the last three years.

Maintenance revenues increased by $15.5 million and$7.9 million in 2006 and 2005, respectively, reflecting an increase in newmaintenance support contracts as a result of the increase in the number of newlicense deals (both perpetual and term) and price increases to our installedcustomer base. Perpetual maintenance revenue increased $10.6 million or 15%over the prior year reflecting the annual increase in maintenance pricing andup-selling to higher value maintenance plans. Term maintenance increased $4.9million or 168% over fiscal 2005 reflecting the continued success of the termmodel for Geneva, APX, Partner and Moxy products. Recurring revenues increasedby $4.2 million and $4.3 million in 2006 and 2005, respectively, primarilyreflecting increased revenue from our Advent Custodial Data services.

Maintenance revenue hasremained relatively flat as a proportion of total maintenance and recurringrevenues at approximately 68% to 70% for fiscal 2006, 2005 and 2004, and weexpect this percentage to be consistent in 2007. We expect that maintenance andrecurring revenues will continue to increase in 2007, but at a slower rate thanin 2006 which experienced 18% growth, due to the volume of new contracts, ahistorically high contract renewal rate, and expected price increases in 2007,partially offset by normal attrition within our existing customer base.

***ProfessionalServices and Other Revenues***

| ** **                                | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                | ** ** | **(in thousands, except percentages)** | ** ** |
| Professional  services and other revenues |       | $                                                     | 18,891     |     | $          | 22,215   |       | $ | 19,227 |   |
| Percent of net  revenues                  |       | 10                                                    | %          | 13       | %          | 13       | %          |
| Change over prior  year                   |       | $                                                     | (3,324     | )        | $          | 2,988    |       |   |   |
| Percent change over  prior year           |       | (15                                                   | )%         | 16       | %          |     |       |
|                                           |            |                                                       |            |          |            |          |            |  |  |  |

 

Professional services and other revenues includeconsulting, project management, custom integration, custom work, training andsoft dollar transactions for products and services not related to Adventproduct or services. Professional services projects related to Axys, Moxy andPartner products generally can be completed in a two-to six-month time period,while services related to Geneva and APX products may require a four- tonine-month implementation period.

The decrease in professional services and otherrevenues of $3.3 million in 2006 was primarily attributable to the net deferralof professional services revenue for services performed on term licenseimplementations. When services are performed with term license implementations,service revenue is deferred until the implementation is complete. Then servicerevenues are recognized over the remaining license term. We have experienced anincrease in implementation services after the launch of our APX product and thesales success of our Geneva product, which are sold under a term license model.There were more term license implementation projects in progress as of December 31,2006 compared with the prior year, and as a result there was a significantincrease in the deferral of professional services revenue. We deferred netprofessional services revenues of approximately $5.7 million in 2006 ascompared to $1.0 million in 2005. In addition, revenues earned from third-partyproducts paid for through soft dollar transactions decreased due to fewertransactions as we completed the wind down of the soft dollar component ofSecond Street Securities in the fourth quarter of 2006.

The increase in professional services and otherrevenues of $3.0 million in 2005 was primarily due to a general increase in thevolume of consulting and training services demanded as a result of higherlicense sales.

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We expect thatprofessional services and other revenues will increase in 2007 as we expect toadd more billable headcount to support project implementation growth, and weexpect to recognize revenue from 2006 term deals upon completion ofimplementation during 2007.

***Revenues by Segment***

| ** **                    | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                    | ** ** | **(in thousands)** | ** ** |
| Advent Investment  Management |       | $                       | 162,609    |     | $          | 145,897  |       | $ | 130,358 |   |
| MicroEdge                     |       | 21,182                  |       | 20,026   |       | 16,967   |       |
| Other                         |       | 302                     |       | 2,778    |       | 2,665    |       |
| Total                         |       | $                       | 184,093    |     | $          | 168,701  |       | $ | 149,990 |   |

 

We have two reportable segments: Advent InvestmentManagement (“AIM”) and MicroEdge. AIM derives revenues from the development,marketing and sale of software products, data interfaces and relatedmaintenance and services that automate, integrate and support certainmission-critical functions of investment management organizations. MicroEdgederives revenues from the sale of software and services for grant management, giftsmatching and volunteer tracking for the grant-making community. See Note 12,“Segment and Geographical Information”, to our consolidated financialstatements.

The 11% and 12% increases in AIM’s revenues in fiscal2006 and 2005, respectively, reflected the improved economic conditions andgrowth in the financial markets, as well as the continued focus on selling ourAxys, APX, Moxy, Partner and Geneva products. AIM’s revenue increases in 2006and 2005 also reflected an increase in new maintenance support contracts as aresult of new license deals, up-selling existing customers to higher valuemaintenance plans and price increases for maintenance contracts from ourinstalled customer base, partially offset by attrition from within our existinginstalled customer base. We also had growth in international sales in bothperiods, partly attributable to our acquisitions of distributor businesses inthe UK and Switzerland in May 2004. Our assets under administrationrevenues increased by $1.6 million and $2.7 million in 2006 and 2005,respectively, as a result of the growth in assets under administration for ourfund administration clients, where certain Geneva contracts provide for feesbased on assets under administration, resulting in significant recurring revenue.

The technology spending patterns of organizations inMicroEdge’s primary markets (independent foundations, community foundations andcorporations) are directly affected by economic fluctuations as foundationbudgets are largely driven by endowment income. Given that endowments oftencontain market-exposed components, they are significantly affected by theeconomy. For instance, foundation spending decreases in an economic downturn.Community foundations are subject to similar influences, compounded by the factthat in many cases much of their ongoing funding and endowment comes fromactive donors who may increase or reduce their giving depending on the economicclimate and the related effect on their income and wealth. Corporationstypically fund charitable activities from operating budgets, and the allocationto charitable donations and supporting company charitable operations is oftenclosely tied to a company’s performance. Thus, corporate philanthropy andspending on related technology are correlated with company and overall economicperformance.

The 6% increase in MicroEdge revenues in fiscal 2006primarily reflected an increase in maintenance revenues due to price increasesand continued strong customer retention. The 18% increase in MicroEdge revenuesin fiscal 2005 reflected the improved economic conditions and growth in thefinancial markets which resulted in increased charitable contributions. Theincrease in charitable contributions received by the foundations sector inthese periods enabled foundations to increase their information technologyexpenditures which resulted in the increase in MicroEdge revenues.

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The revenue decrease inour Other segment in fiscal 2006 primarily resulted from the winding down ofthe soft dollar component of our broker/dealer subsidiary.

**COST OF REVENUES**
|                                 | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|-------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                      | ** ** | **(in thousands, except percentages)** | ** ** |
| Total cost of  revenues         |       | $                                                     | 58,802     |     | $          | 51,797   |       | $ | 52,955 |   |
| Percent of net  revenues        |       | 32                                                    | %          | 31       | %          | 35       | %          |
| Change over prior  year         |       | $                                                     | 7,005      |     | $          | (1,158   | )          |   |   |
| Percent change over  prior year |       | 14                                                    | %          | (2       | )%         |     |       |
|                                 |            |                                                       |            |          |            |          |            |  |  |  |

 

Our cost of revenues ismade up of four components: cost of license and development fees; cost ofmaintenance and other recurring; cost of professional services and other;amortization and impairment of developed technology; and stock-basedcompensation expense for fiscal 2006.

***Cost of License andDevelopment Fees***
|                                       | ** ** | **  2006  **                      | ** ** | **   2005   ** | ** ** | **  2004  ** | ** ** |
|---------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **(in thousands, except percentages)** | ** ** |
| Cost of license  and development fees |       | $                                                     | 1,539      |                                         |       | $                                | 1,400      |   |   | $ | 2,138 |   |
| Percent of total  license revenues    |       | 4                                                     | %          |                                         | 4          | %                                |       | 6 | % |
| Change over prior  year               |       | $                                                     | 139        |                                         |       | $                                | (738       | ) |   |   |   |
| Percent change over  prior year       |       | 10                                                    | %          |                                         | (35        | )%                               |       |   |   |
|                                       |            |                                                       |            |                                              |            |                                  |            |  |  |  |  |  |

 

Cost of license and development fees consistsprimarily of royalties and other fees paid to third parties, the fixed directlabor involved in producing and distributing our software, labor costsassociated with generating development fees and cost of product media includingduplication, manuals and packaging materials. The increase in costs during 2006was primarily due to increase in payroll-related expenses and higherutilization of outside contractors. Payroll-related expenses increased by$94,000 due to an additional employee in the department during fiscal 2006 ascompared to fiscal 2005. Higher utilization of outside services alsocontributed to $57,000 of the increase during 2006. The decrease in 2005reflected decreased outside service costs, and shipping and related productdemo costs.

In absolute dollars, weexpect cost of license and development fees in 2007 to be slightly highercompared with 2006.

***Cost of Maintenanceand Other Recurring***
|                                                           | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                | ** ** | **(in thousands, except percentages)** | ** ** |
| Cost of  maintenance and other recurring                  |       | $                                                     | 32,246     |     | $          | 29,499   |       | $ | 27,820 |   |
| Percent of total  maintenance and other recurring revenue |       | 25                                                    | %          | 27       | %          | 29       | %          |
| Change over prior  year                                   |       | $                                                     | 2,747      |     | $          | 1,679    |       |   |   |
| Percent change over  prior year                           |       | 9                                                     | %          | 6        | %          |     |       |
|                                                           |            |                                                       |            |          |            |          |            |  |  |  |

 

Cost of maintenance and other recurring revenues isprimarily comprised of the direct costs of providing technical support andother services for recurring revenues and royalties paid to third party vendorsfor subscription or transaction based revenues. The increase of $2.7 million in2006 was due primarily to an increase in compensation and related costs of $2.6million, respectively, resulting from an increase in stock-based compensationcosts and headcount. Specifically, stock-based compensation costs of $972,000were recognized during fiscal 2006 primarily as a result of implementing SFAS123R effective 

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January 1, 2006 andissuing restricted stock units (“RSU”) compared with zero in 2005. Payrollrelated expenses increased by $1.6 million as a result of an increase inheadcount from 186 at December 31, 2005 to 206 at December 31, 2006.Consistent with the increase in headcount, travel expenses and recruiting costsincreased by $551,000 during 2006. This increase was offset by a decrease inroyalty expense of $0.4 million for 2006. The increase in 2005 wasprimarily due to increased compensation expense of $1.2 million associatedwith higher headcount during 2005 and royalty expense of $0.5 million.

We expect cost ofmaintenance and other recurring revenues in 2007 to increase significantlycompared with 2006 to support higher maintenance and other recurring revenuegrowth.

***Cost ofProfessional Services and Other***
|                                                  | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                       | ** ** | **(in thousands, except percentages)** | ** ** |
| Cost of  professional services and other         |       | $                                                     | 23,817     |     | $          | 18,323   |       | $ | 16,526 |   |
| Percent of total  professional services revenues |       | 126                                                   | %          | 82       | %          | 86       | %          |
| Change over prior  year                          |       | $                                                     | 5,494      |     | $          | 1,797    |       |   |   |
| Percent change over  prior year                  |       | 30                                                    | %          | 11       | %          |     |       |
|                                                  |            |                                                       |            |          |            |          |            |  |  |  |

 

Cost of professional services and other revenueconsists primarily of personnel related costs associated with the clientservices and support organization in providing consulting, custom reportwriting and conversions of data from clients’ previous systems. Also includedare direct costs associated with third-party consultants and travel expenses.

The increase in 2006 primarily reflects the highercosts from payroll and related expenses, higher utilization of outside services,recruiting expenses, and travel costs. Payroll related expenses increased by$2.8 million during 2006 as a result of an increase in headcount andstock-based compensation. As a result of the increases in our licensetransactions and customer base in 2006, we have increased headcount in ourclient services and consulting groups to 125 at December 31, 2006 from 96at December 31, 2005. Consistent with the increase in headcount,recruiting costs increased by $396,000 during fiscal 2006. Stock-based compensationcosts of $788,000 were recognized during 2006, compared with zero in 2005.Higher utilization of outside services, including third parties to assist inour professional service projects, also contributed to $420,000 of the increaseduring 2006. In addition, travel expenses increased by $1.1 million due totravel associated with more professional service projects.

These cost increases were partially offset by largernet deferrals of professional services costs under SOP 97-2 related toservices performed on term license implementations. We have experienced anincrease in implementation services with the launch of our APX product andsales of our Geneva product, which are principally sold under the term licensemodel. As there were more term license implementation projects in progress asof December 31, 2006 compared to the prior year, we have experienced anincrease in the deferral of professional service costs. We deferred netprofessional services costs of $2.3 million during 2006 compared to $0.4 millionin 2005.

Gross margins for 2006 were negatively impacted by ourdeferral of professional services revenues and costs under SOP 97-2, aswe defer only the direct costs associated with services performed on termlicense arrangements. As a result, indirect costs such as management and otheroverhead expenses are recognized in the period in which they are incurred, withno revenue to offset them. In addition, we have added headcount in both ourclient services and consulting groups. Since these new employees undergo atraining period typically of six months before becoming fully billable, theirassociated costs have a near-term negative impact on margins. Gross margin for2006 was also negatively impacted by $0.6 million of write-offs and reservesincurred in the first quarter of 2006 associated with third party products paidthrough soft dollar transactions. Excluding the effects of our deferrals andthe headcount increases, we forecast a 5-10% 

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gross margin on ourprofessional services. However, we presently expect our deferrals and headcountincreases to negatively affect our professional services gross margins for atleast the next twelve months.

The increase in 2005 was primarily due to highercompensation expense of $1.2 million as a result of our incurring a full yearof payroll expense from additional headcount related to our acquisitions ofdistributor businesses in the United Kingdom and Switzerland in May 2004,and additional costs of $0.5 million from our annual user conference.

We anticipate cost ofprofessional services and other revenues in 2007 to increase significantly (butat a slower rate than revenue) over 2006 as we expect to add headcount tosupport an increased number of implementations, the majority of which will besold on a term basis.

***Amortization andImpairment of Developed Technology***
|                                                      | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                           | ** ** | **(in thousands, except percentages)** | ** ** |
| Amortization and  impairment of developed technology |       | $                                                     | 1,200      |     | $          | 2,575    |       | $ | 6,471 |   |
| Percent of net  revenues                             |       | 1                                                     | %          | 2        | %          | 4        | %          |
| Change over prior  year                              |       | $                                                     | (1,375     | )        | $          | (3,896   | )          |   |   |
| Percent change over  prior year                      |       | (53                                                   | )%         | (60      | )%         |     |       |
|                                                      |            |                                                       |            |          |            |          |            |  |  |  |

 

Amortization and impairment of developed technologyrepresents amortization and impairment of acquisition-related intangibleassets, and amortization of capitalized software development costs. During2004, we recorded non-cash impairment charges totaling $1.3 million. Thisamount included $1.0 million to write-off Techfi core and existing technologyresulting from our decision to sunset certain products within our Techfiproduct line and $0.3 million to write-off Advent Wealth Services (“AWS”)acquired technology resulting from significant underperformance by AWS relativeto historical and projected future operating results as well as our decision tore-focus our strategic direction on our core businesses. The decrease inamortization of developed technology in fiscal 2005 and 2006 also reflectedtechnology related intangible assets from prior acquisitions becoming fullyamortized during fiscal 2005 and 2006.

We expect amortization ofdeveloped technology to be approximately flat in 2007.

**OPERATING EXPENSES**

***Sales and Marketing***
|                                 | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|-------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                      | ** ** | **(in thousands, except percentages)** | ** ** |
| Sales and  marketing            |       | $                                                     | 50,177     |     | $          | 40,269   |       | $ | 38,893 |   |
| Percent of net  revenues        |       | 27                                                    | %          | 24       | %          | 26       | %          |
| Change over prior  year         |       | $                                                     | 9,908      |     | $          | 1,376    |       |   |   |
| Percent change over  prior year |       | 25                                                    | %          | 4        | %          |     |       |
|                                 |            |                                                       |            |          |            |          |            |  |  |  |

 

Sales and marketing expenses consist primarily ofsalary, stock-based compensation and benefits of personnel involved in oursales and marketing function, sales commissions, advertising and promotionalmaterials, sales facilities expense, trade shows, and seminars. The increase inexpense for 2006 was primarily due to stock-based compensation expense of $4.8million (or 2.6% of total net revenues). We incurred approximately $0.6 millionof bad debt expense during 2006 associated with the winding down of our softdollar component. Travel expense and marketing expense increased by $963,000and $866,000, respectively, during 2006. Payroll related expenses increased by$1.0 million during 2006 due to higher bonus and incentive awards resultingfrom strong bookings performance, a headcount increase from 149 at 

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December 31, 2005 to162 at December 31, 2006, and the allocation of IT personnel costs ascertain IT employees were working on projects specifically relating to thesales and marketing function.

The increase in 2005 was attributable to increasedcompensation expenses of $2.4 million due to higher commissions and bonusexpense associated with higher levels of revenue. Marketing expenses increased$0.5 million primarily as a result of our APX product launch. These increaseswere partially offset by decreases of $1.0 million in bad debt and royaltyexpenses and $0.6 million in outside services associated with decreasedutilization of external consultants.

We expect sales andmarketing expenses in 2007 to increase in dollar amount and remain relativelyflat as a percentage of total net revenues compared with 2006 as we increase marketingactivities in support of product launches and add to our salesforce.

***Product Development***
|                                 | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|-------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                      | ** ** | **(in thousands, except percentages)** | ** ** |
| Product  development            |       | $                                                     | 34,859     |     | $          | 30,446   |       | $ | 32,260 |   |
| Percent of net  revenues        |       | 19                                                    | %          | 18       | %          | 22       | %          |
| Change over prior  year         |       | $                                                     | 4,413      |     | $          | (1,814   | )          |   |   |
| Percent change over  prior year |       | 14                                                    | %          | (6       | )%         |     |       |
|                                 |            |                                                       |            |          |            |          |            |  |  |  |

 

Product development expenses consist primarily ofsalary, stock-based compensation and benefits for our development staff as wellas contractors’ fees and other costs associated with the enhancements ofexisting products and services and development of new products and services.

The increase in product development expense in 2006was primarily due to stock-based compensation expense of $3.1 million (or 1.6%of total net revenues). In addition, payroll and other related costs increasedby $1.7 million during 2006 as a result of an increase in headcount. Wecapitalized $1.5 million of software development costs in both fiscal 2006 and2005.

The decrease in 2005 was due primarily to thecapitalization of software development costs of $1.5 million during 2005.In fiscal 2005, we had several major products, including APX, in their finalbeta phase. The remaining decrease in product development expense in 2005 wasdue to lower compensation expense as a result of lower headcount fromrestructuring activities in 2003 and 2004.

We expect productdevelopment expenses to increase in dollar amount in 2007 as we makeinvestments in headcount to support new product development.

***General andAdministrative***
|                                 | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|-------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                      | ** ** | **(in thousands, except percentages)** | ** ** |
| General and  administrative     |       | $                                                     | 32,936     |     | $          | 33,773   |       | $ | 26,576 |   |
| Percent of net  revenues        |       | 18                                                    | %          | 20       | %          | 18       | %          |
| Change over prior  year         |       | $                                                     | (837       | )        | $          | 7,197    |       |   |   |
| Percent change over  prior year |       | (2                                                    | )%         | 27       | %          |     |       |
|                                 |            |                                                       |            |          |            |          |            |  |  |  |

 

General and administrative expenses consist primarilyof salary, stock-based compensation and benefits for finance, administration,operations and general management, as well as legal and accounting expenses.During 2006, we allocated payroll and related costs for certain IT personnel tosales and marketing expense and cost of professional services as these ITemployees were working on projects specifically relating to these functions. Theoverall fluctuations were also attributable to a decrease in legal 

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fees of $2.8 million in2006 as compared to fiscal 2005 which included costs for various legaldisputes. A decrease in depreciation expense of $0.8 million for 2006 alsocontributed to the overall decrease in general and administrative expense whichprimarily resulted from assets being fully depreciated in 2005. Outside servicecosts decreased by $902,000 in 2006 as fewer external consultants were usedduring the current year. These decreases were offset by an increase instock-based compensation expense of $4.0 million (or 2.2% of total netrevenues) during 2006, and an increase in rent expense of approximately $1.1million. We entered into a definitive leaseagreement in January 2006 for our new headquarters facility located at 600Townsend Street in San Francisco, California and since then we incurred rentexpense at both 600 Townsend and our prior headquarters facility located at 301Brannan Street for the majority of fiscal 2006 which resulted in higher rentexpense for 2006.

The increase of $7.2 million in 2005 was primarily dueto higher legal and professional fees of $4.0 million, payroll and relatedcosts of $2.5 million, outside service costs of $1.2 million and computer andtelecom expense of $1.0 million, partially offset by decreased facility expenseof $1.2 million. The increase in professional fees was primarily due to anincrease in legal fees of $1.8 million for various inquiries and disputes,including our ongoing litigation with the former shareholders of Kinexus, costsof $1.0 million to settle the claims of certain former members and employees ofAdvent Outsource Data Management, and additional accounting costs of $1.4million for our year-end audit of financial statements and internal controlsand other associated compliance costs. The increase in personnel and relatedcosts of $2.5 million in 2005 was primarily due to severance for terminatedemployees and a full year of payroll expense from additional headcount related toour acquisitions of our remaining independent distributor businesses in theUnited Kingdom and Switzerland in May 2004. The increase in outsideservices of $1.2 million was primarily due to costs associated withincreased utilization of outside contractors. These increases in general andadministrative expenses during 2005 were partially offset by decreased facilityexpense as a result of our restructuring activities to reduce excess officespace.

We expect general andadministrative expenses to be approximately flat in dollar amount but todecrease as a percentage of total net revenues in 2007 compared with 2006.

***Amortization andImpairment of Other Intangibles***
|                                                   | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                        | ** ** | **(in thousands, except percentages)** | ** ** |
| Amortization and  impairment of other intangibles |       | $                                                     | 3,866      |     | $          | 4,041    |       | $ | 12,237 |   |
| Percent of net  revenues                          |       | 2                                                     | %          | 2        | %          | 8        | %          |
| Change over prior  year                           |       | $                                                     | (175       | )        | $          | (8,196   | )          |   |   |
| Percent change over  prior year                   |       | (4                                                    | )%         | (67      | )%         |     |       |
|                                                   |            |                                                       |            |          |            |          |            |  |  |  |

 

Amortization and impairment of other intangiblesrepresents amortization and impairment of our non-technology related intangibleassets. During 2004, we recorded non-cash impairment charges totaling $4.1million. This amount included $2.4 million to write-off the carrying value ofTechfi non-compete agreements and maintenance contracts resulting from ourdecision to sunset certain products within our Techfi product line, and $0.4million and $1.4 million to write-off the carrying value of AWS andAdvent Hellas’ customer relationships and trademarks, respectively, as aresult of significant underperformance by AWS and Advent Hellas relative tohistorical and projected future operating results, as well as our decision tore-focus our strategic direction on our core businesses. The decrease inamortization and impairment of other intangibles in 2006 and 2005 also was aresult of intangible assets from prior acquisitions becoming fully amortizedduring fiscal 2005 and 2006.

We expect amortization ofother intangibles to be approximately $1.9 million in 2007.

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***RestructuringCharges***
|                                 | ** ** | **2006**                                              | ** ** | **    2005    ** | ** ** | **2004** | ** ** |
|---------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------------|------------|----------|------------|
| ** **                      | ** ** | **(in thousands, except percentages)** | ** ** |
| Restructuring  charges          |       | $                                                     | 3,735      |                                                     |       | $        | 2,039      |   |   | $ | 5,133 |   |
| Percent of net  revenues        |       | 2                                                     | %          |                                                     | 1          | %        |       | 3 | % |
| Change over prior  year         |       | $                                                     | 1,696      |                                                     |       | $        | (3,094     | ) |   |   |   |
| Percent change over  prior year |       | 83                                                    | %          |                                                     | (60        | )%       |       |   |   |
|                                 |            |                                                       |            |                                                          |            |          |            |  |  |  |  |  |

 

Restructuring initiatives have been implemented in ourAIM and Other operating segments to reduce costs and improve operatingefficiencies by better aligning our resources to near-term revenue opportunities.These initiatives have resulted in restructuring charges comprised primarily ofcosts related to properties abandoned in connection with facilitiesconsolidation, related write-down of leasehold improvements and severance andassociated employee termination costs related to headcount reductions. Ourrestructuring charges included accruals for estimated losses on facility costsbased on our contractual obligations net of estimated sublease income. Wereassess this liability periodically based on market conditions.

For fiscal 2006, we recorded total restructuringcharges of $3.7 million which primarily related to facility and exit costsassociated with the relocation of ourcorporate headquarters facility in San Francisco during the fourth quarter of2006. Restructuring charges in 2006 also included costs associated with exitinga portion of our facility in New Rochelle, New York, and our entire facility inSummit, New Jersey, and adjustments to original estimates for facilities in SanFrancisco, California and New York, New York.

For fiscal 2005, we recorded total restructuringcharges of $2.0 million consisting of facility and exit costs of $1.5 millionrelated to the sub-leasing of one floor of the Company’s office in New York,New York and additional charges of $567,000 during 2005 primarily toadjust original estimates of facility maintenance expenses and real estatetaxes of vacated facilities.

For fiscal 2004, we recorded total restructuringcharges of $5.1 million consisting of $5.0 million to exit leased facilities,$0.9 million for the write-off of property and equipment, $136,000 forseverance and benefits associated with the termination of nine employees, andnet benefits of $893,000 to adjust original estimates for vacated facilitiesand severance charges. We continued to consolidate office space during 2004 andincurred charges of $4.9 million for facility and exit costs and $0.9 millionof property and equipment impairment charges related to vacating a facility inSan Francisco, California, and $78,000 to vacate a portion of a facility inCambridge, Massachusetts. We estimated the cost of exiting the facility leasesbased on the contractual terms of the agreements and real estate marketconditions. During the year, we entered into sublease agreements on vacatedfacilities in San Francisco and New York, and recorded accretion expense toadjust the present value of lease obligations on vacated facilities at December 31,2004, resulting in a net adjustment to our original estimates of $794,000. Duringthe year we also incurred charges of $136,000 for severance and benefitsrelated to the termination of nine employees located primarily in New York, andreversed $99,000 of severance and benefits primarily related to employeesterminated in 2003, as costs were lower than previously anticipated.

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Thefollowing table sets forth an analysis of the components of the restructuringcharges and the payments and non-cash charges made against the accrual duringfiscal 2004, 2005 and 2006 (in thousands):

| ** **                                                  | ** ** | ** **             | ** ** | ** **             | ** ** | **Property &** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                                  | ** ** | **Facility Exit** | ** ** | **Severance and** | ** ** | **Equipment**           | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | **Costs**              | ** ** | **Benefits**           | ** ** | **Abandoned**           | ** ** | **Total**  | ** ** |
| Balance of  restructuring accrual at December 31, 2003 |       |                   | $          | 2,181                  |       |                    |       | $          | 164        |   |   |   | $ | — |   |   | $ | 2,345 |   |
| Restructuring charges                                       |       |                   | 5,027      |                   |       |                    | 136        |       |       |   | 863 |   |   | 6,026 |   |
| Reversal of deferred rent related to facilities  exited     |       |                   | 272        |                   |       |                    | —     |       |       |   | — |   |   | 272 |   |
| Cash payments                                               |       |                   | (2,529     | )                      |       |                    | (189       | )          |       |   | — |   |   | (2,718 | ) |
| Non-cash charges                                            |       |                   | —     |                   |       |                    | —     |       |       |   | (863 | ) |   | (863 | ) |
| Adjustment of prior restructuring costs                     |       |                   | (794       | )                      |       |                    | (99        | )          |       |   | — |   |   | (893 | ) |
| Balance of  restructuring accrual at December 31, 2004 |       |                   | $          | 4,157                  |       |                    |       | $          | 12         |   |   |   | $ | — |   |   | $ | 4,169 |   |
| Restructuring charges                                       |       |                   | 1,472      |                   |       |                    | —     |       |       |   | — |   |   | 1,472 |   |
| Reversal of deferred rent related to facilities  exited     |       |                   | 703        |                   |       |                    | —     |       |       |   | — |   |   | 703 |   |
| Cash payments                                               |       |                   | (2,351     | )                      |       |                    | —     |       |       |   | — |   |   | (2,351 | ) |
| Adjustment of prior restructuring costs                     |       |                   | 572        |                   |       |                    | (5         | )          |       |   | — |   |   | 567 |   |
| Balance of  restructuring accrual at December 31, 2005 |       |                   | $          | 4,553                  |       |                    |       | $          | 7          |   |   |   | $ | — |   |   | $ | 4,560 |   |
| Restructuring charges                                       |       |                   | 3,549      |                   |       |                    | —     |       |       |   | — |   |   | 3,549 |   |
| Reversal of deferred rent related to facilities  exited     |       |                   | 666        |                   |       |                    | —     |       |       |   | — |   |   | 666 |   |
| Cash payments                                               |       |                   | (2,370     | )                      |       |                    | —     |       |       |   | — |   |   | (2,370 | ) |
| Adjustment of prior restructuring costs                     |       |                   | 189        |                   |       |                    | (3         | )          |       |   | — |   |   | 186 |   |
| Balance of restructuring  accrual at December 31, 2006 |       |                   | $          | 6,587                  |       |                    |       | $          | 4          |   |   |   | $ | — |   |   | $ | 6,591 |   |

 

Of the remaining restructuringaccrual of $6.6 million at December 31, 2006, $2.7 million and $3.9 millionare included in accrued liabilities and other long-term liabilities,respectively. The accrued excess facility costs of $6.6 million are stated atestimated fair value, net of estimated sub-lease income of $7.8 million. Weexpect to pay the remaining obligations in connection with vacated facilitiesover the remaining lease terms, which will expire on various dates through2012. We do not anticipate incurring significant restructuring charges in 2007.

***Operating Income(Loss) by Segment***
|                                                      | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                           | ** ** | **(in thousands)** | ** ** |
| Advent Investment  Management                        |       | $                       | 14,921     |     | $          | 9,599    |       | $ | (74 | ) |
| MicroEdge                                            |       | 5,361                   |       | 2,979    |       | 675      |       |
| Other                                                |       | (1,902                  | )          | 374      |       | 43       |       |
| Unallocated corporate  operating costs and expenses: |       |                    |       |     |       |     |       |
| Stock-based compensation                             |       | (13,596                 | )          | —   |       | —   |       |
| Amortization and impairment of developed technology  |       | (1,200                  | )          | (2,575   | )          | (6,471   | )          |
| Amortization and impairment of other intangibles     |       | (3,866                  | )          | (4,041   | )          | (12,237  | )          |
| Total                                                |       | $                       | (282       | )        | $          | 6,336    |       | $ | (18,064 | ) |

 

Our AIM segment improved its operating income to $14.9million in 2006 from $9.6 million in 2005. This improvement reflects anincrease in AIM revenues of $16.7 million offset by an increase in payroll andrelated costs due to the increase in headcount from 651 employees at December 31,2005 to 735 employees at December 31, 2006. Our AIM segment improved itsoperating income to $9.6 million in 2005 from an operating loss of $74,000 in2004. This improvement reflects an increase in AIM revenues of 

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$15.5 million offsetby higher general and administrative costs including higher legal andprofessional fees relating to various inquiries and disputes including ourongoing litigation with the former shareholders of Kinexus, costs to settle theclaim of former members and employees of Advent Outsource Data Management, andaccounting costs associated with our year-end audit and compliance with theSarbanes-Oxley Act of 2002.

MicroEdge’s operating income increased by $2.4 millionin 2006 due to decreased marketing costs and outside services cost associatedwith lower utilization of outside contractors. MicroEdge’s operating incomeincreased by $2.3 million in 2005 as a result of revenue growth of $3.1 millionpartially offset by increased recruiting costs and higher outside services costassociated with increased utilization of outside contractors.

Operating losses for our Other segment increased by$2.3 million in 2006 due to a decrease in revenue and higher costs associatedwith the winding down of our soft dollar component in 2006.

See Note 12, “Segment andGeographical Information”, to the consolidated financial statements foradditional information regarding our segments.

***Interest Income andOther Expense, net***

| ** **                              | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                              | ** ** | **(in thousands, except percentages)** | ** ** |
| Interest income  and other expense, net |       | $                                                     | 3,853      |     | $          | 4,596    |       | $ | 1,905 |   |
| Percent of net  revenues                |       | 2                                                     | %          | 3        | %          | 1        | %          |
| Change over prior  year                 |       | $                                                     | (743       | )        | $          | 2,691    |       |   |   |
| Percent change over  prior year         |       | (16                                                   | )%         | 141      | %          |     |       |
|                                         |            |                                                       |            |          |            |          |            |  |  |  |

 

Interest income and other, net consists of interestincome, realized gains and losses on investments and foreign currency gains andlosses. The decrease in interest income for 2006 was a result of our loweraggregate cash and short-term investment balance, as we liquidated part of ourinvestment portfolio to fund our stock repurchase activity in fiscal 2006. Theincrease in 2005 was primarily attributable to an increase in interest incomeof $1.8 million as a result of higher average interest rates and interest bearingcash balances. Interest income and other expense, net for fiscal 2004 alsoreflects our pro rata share of loss on our equity method investment of$257,000.

We expect interest incomeand other expense, net to be in the range of $3.0 million to $4.0 million forfiscal 2007, excluding the impact from stock repurchases which we mayundertake.

***Gain on Sale of Equity Investments***

| ** **                          | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------|------------|-------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                          | ** ** | **(in thousands, except percentages)** | ** ** |
| Gain on sale of  equity investments |       | $                                                     | —     |     | $          | 3,608    |       |   | $ | — |   |   |
| Percent of net  revenues            |       | 0                                                     | %          | 2        | %          |     | 0          | % |   |
| Change over prior  year             |       | $                                                     | (3,608     | )        | $          | 3,608    |       |   |   |   |   |
| Percent change over  prior year     |       | (100                                                  | )%         | 0        | %          |     |       |   |   |

 

Gain on sale of equity investments includes realizedgains on sale of our investments in privately held companies. The increase in2005 reflects a gain on sale of a private equity investment of $3.6 millionduring 2005.

We do not anticipate anygain or loss on sale of investments in 2007; however, we will continue toevaluate our investments for impairment in accordance with our internalpolicies and generally accepted accounting principles.

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***Provision for(benefit from) Income Taxes***

| ** **                                 | ** ** | **2006**                                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                 | ** ** | **(in thousands, except percentages)** | ** ** |
| Provision for  (benefit from) income taxes |       | $                                                     | (79,031    | )        | $          | 405      |       |   | $ | 20 |   |   |
| Percent of net  revenues                   |       | (43                                                   | )%         | 1        | %          |     | 0          | % |   |
| Change over prior  year                    |       | $                                                     | (79,436    | )        | $          | 385      |       |   |   |   |   |
| Percent change over  prior year            |       | (19,614                                               | )%         | 1,925    | %          |     |       |   |   |

 

During 2003, weestablished a full valuation allowance against our deferred tax assets in theUnited States because we determined it was more likely than not that thesedeferred tax assets would not be realized against taxable income in theforeseeable future based on our history of operating losses. As a result, theprovision for income taxes was primarily based on our current income taxes owedin 2005 and 2004 and was $405,000 and 20,000, respectively. During 2006, wedetermined that it was more likely than not that $83.6 million of our deferredtax assets, including $1.1 million related to goodwill, that had previouslybeen offset with a valuation allowance would be realized in the foreseeablefuture. We evaluated the positive and negative evidence and determined that theeventual realization of these assets became more likely than not in the fourthquarter of 2006. This assessment was primarily based on our consistentlypositive financial results over the previous eight quarters and a positiveincome outlook that is supported by recurring revenue streams, many of whichare generated by customer agreements already under contract. We continue tomaintain a valuation allowance against deferred tax assets relating to capitallosses and investment reserves of $9.3 million and assorted state net operatinglosses of $2.3 million because we have determined that the likelihood of theirrealization is not currently more likely than not. The $83.6 million reductionto our valuation allowance related to the income statement partially offset bynet income tax expense accruals of $3.5 million, resulted in a net benefit fromincome taxes of $79.0 million in 2006. We expect our effective tax rate for fiscal2007 to be in the range of 40% to 45% of profit before taxes. Despite thisincrease in our effective tax rate, our cash payments for income taxes willcontinue to be nominal over the next few years as we have significant netoperating losses, capital losses and tax credit carryforwards to utilizeagainst current income taxes.

**Liquidity andCapital Resources**

Our aggregate cash, cash equivalents and marketablesecurities at December 31, 2006 were $55.1 million, compared with $163.4million at December 31, 2005. Cash equivalents are comprised of highlyliquid investments purchased with an original or remaining maturity of 90 daysor less at the date of purchase.

The table below, for theperiods indicated, provides selected consolidated cash flow information (inthousands):

| ** **                                           | ** ** | **Fiscal Years** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net cash provided  by operating activities           |       | $                     | 46,776     |   | $ | 36,703 |   | $ | 24,985 |   |
| Net cash provided  by (used in) investing activities |       | $                     | 46,021     |   | $ | 45,194 |   | $ | (34,105 | ) |
| Net cash used in  financing activities               |       | $                     | (133,712   | ) | $ | (32,012 | ) | $ | (4,619 | ) |

 

***Cash flows from Operating Activities***

Our cash flows from operating activities represent themost significant source of funding for our operations. The major uses of ouroperating cash include funding payroll (salaries, commissions, bonuses andbenefits), general operating expenses (marketing, travel, computer andtelecommunications, legal and professional expenses, and office rent) and costof revenues.

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Operating activities provided $46.8 million, $36.7million, and $25.0 million in 2006, 2005 and 2004, respectively. Our cashprovided by operating activities generally follows the trend in our netrevenues and operating results. Cash provided by operating activities of $46.8million during fiscal 2006 primarily consisted of our income before tax of $3.6million and adjustments to reconcile net income to cash flow from operatingactivities driven by non-cash charges including stock-based compensation of $13.6 million, and depreciation and amortization of $12.8 million. Cash flowsresulting from changes in assets and liabilities included increases in deferred revenue of $20.2 million, accruedliabilities of $8.8 million and income taxes payable of $2.2 million. Theincrease in deferred revenue primarily reflected our continued transition to aterm license model. Under the term model, we generally bill and collectfor a term arrangement in equal installments in advance of each annual period.These amounts are deferred at billing and recognized over the annual termperiod. This has the effect of increasing deferred revenue when compared with aperpetual license model where no license revenue is deferred. See furtherdiscussion of the effects of our transition to a term model in the “Overview”section. The increase in accrued liabilities primarily reflected increases inaccrued bonuses and restructuring expenses relating to the relocation of ourcorporate headquarters. Other adjustments to cash flows resulting from changesin assets and liabilities included anincrease in deferred taxes of $83.4 million primarily due to the release of avaluation allowance in the fourth quarter of 2006.

Cash provided by operating activities of $36.7 millionduring fiscal 2005 primarily consisted of our net income of $14.1 million andnon-cash charges including depreciation and amortization of $15.3 million. Cashflows resulting from changes in assets and liabilities included increases inaccrued liabilities of $4.6 million and deferred revenues of $6.7 million. Theincrease in accrued liabilities primarily reflected increases in accruedbonuses and accrued legal fees. The increase in deferred revenues reflected newmaintenance contracts, existing maintenance contracts renewed at higher prices,and more contracts signed on a term model. These sources of cash were offset bynet non-operating gains on investments of $3.3 million primarily resulting froma gain on sale of a private equity investment of $3.6 million and decreases indeferred income taxes of $1.1 million and income taxes payable of $1.2 million.The decrease in deferred income taxes reflected the amortization of foreigndeferred tax liabilities. The decrease in income taxes payable reflected thepayment of a tax settlement. Other major uses of our operating cash includingfunding payroll (salaries, bonuses and benefits) and general operating expenses(marketing, travel, computer and telecommunications, legal and professionalexpenses, and office rent).

Our net loss during fiscal 2004 was more than offsetby non-cash charges. Cash flows resulting from changes in assets andliabilities during fiscal 2004 included decreases in accounts receivable,prepaid and other assets, income taxes receivable and increases in accruedliabilities and deferred revenues.

We expect that cash provided by operating activitiesmay fluctuate in future periods as a result of a number of factors includingfluctuations in our net revenues and operating results, the amount of revenuedeferred resulting from our shift to a term license model, collection ofaccounts receivable, and timing of payments.

We expect operating cashflow to be between $54 million to $57 million for fiscal 2007.

***Cash Flows from Investing Activities***

Net cash provided by investing activities in 2006 of$46.0 million consisted primarily of net sales and maturities of marketablesecurities of $67.9 million. We liquidated investments to provide the cashrequired to repurchase our common stock. These cash proceeds were offset bycapital expenditures of $19.2 million primarily relating to the completion of ournew corporate headquarters facility build-out, an increase in restricted cashof $1.3 million to secure a bank line of credit associated with the lease ofour new headquarters facility, and capitalized software development costs of$1.4 million.

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Net cash provided by investing activities in 2005 of$45.2 million consisted of net sales and maturities of marketable securities of$50.4 million and proceeds from the sale of a private equity investment of $3.8million, offset by capital expenditures of $6.4 million, capitalized softwaredevelopment costs of $1.5 million and acquisition related costs of $1.0million.

Net cash used in investing activities in 2004 of $34.1million consisted of net purchases of marketable securities of $20.8 million,cash used in acquisitions of $9.6 million and capital expenditures of $3.7million. Cash used in acquisitions reflected the acquisition of the remainingdistributor businesses of Advent Europe in the United Kingdom and Switzerlandin May 2004, and earn-out payments made to the shareholders of AdventOutsource. During 2004, we added significant customers in the EMEA region andview this as an increasingly important market for us in the future. See Note 3,“Acquisitions”, to the consolidated financial statements for additionalinformation regarding acquisitions.

We expect a decreasein our capital expenditures in 2007, as we incurred significant capitalexpenditures in 2006 related to the build-out of our new corporate headquartersfacility.

***Cash Flows from Financing Activities***

Net cash used in financing activities in 2006 of$133.7 million reflected the repurchase of 4.7 million shares of our commonstock for $148.6 million, partially offset by proceeds received from theissuance of common stock of $14.5 million.

Net cash used in financing activities in 2005 of $32.0million reflected the repurchase of 2.8 million shares of our common stock for$52.6 million, partially offset by proceeds received from the issuance ofcommon stock related to stock options and our employee stock purchase plantotaling $20.6 million.

Net cash used in financingactivities in 2004 of $4.6 million reflected the repurchase of 744,000 sharesof our common stock for $11.9 million, partially offset by stock issued throughemployee stock purchase and stock option plans totaling $7.3 million.

***Common Stock Repurchases***

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

The purchase price for the shares of our common stockrepurchased was reflected as a reduction to stockholders’ equity. In accordancewith Accounting Principles Board Opinion No. 6, “Status of AccountingResearch Bulletins,” we are required to allocate the purchase price of therepurchased shares as (i) an increase to accumulated deficit and (ii) areduction of common stock and additional paid-in capital. Issuance of commonstock and the tax benefit related to employee stock option plans are recordedas an increase to common stock and additional paid-in capital. As a result offuture repurchases, we may continue to report an accumulated deficit includedin stockholders’ equity in our consolidated balance sheets.

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Thefollowing is a summary of the repurchase programs authorized by the Boardduring fiscal 2004, 2005 and 2006 (in thousands):

| ** **                          | ** ** | **Number**         | ** ** |
|-------------------------------------|------------|--------------------|------------|
| ** **                          | ** ** | **of Shares** | ** ** |
| **Date of Authorization** | ** ** | ** **         | ** ** | **Authorized** | ** ** |
| May 2004                       |       |               | 1,200      |   |   |
| September 2004                 |       |               | 800        |   |   |
| February 2005                  |       |               | 1,800      |   |   |
| May 2005                       |       |               | 1,000      |   |   |
| April 2006                     |       |               | 2,300      |   |   |
| July 2006                      |       |               | 1,500      |   |   |
| Total                               |       |               | 8,600      |   |   |
|                                     |            |                    |            |  |  |  |  |

The following is a summaryof the Company’s repurchase activity during fiscal 2004, 2005 and 2006 (inthousands, except per share data:

| ** **           | ** ** | **Total**          | ** ** | ** **      | ** ** | **Average**       | ** ** |
|----------------------|------------|--------------------|------------|-----------------|------------|-------------------|------------|
| ** **           | ** ** | **Number**         | ** ** | ** **      | ** ** | **Price**         | ** ** |
| ** **           | ** ** | **of Shares** | ** ** | ** **      | ** ** | **Paid Per** | ** ** |
| **Fiscal Year** | ** ** | ** **         | ** ** | **Repurchased** | ** ** | **Cost**          | ** ** | **Share** | ** ** |
| 2004                 |       |               | 744        |            |       | $                 | 11,899     |   |   | $ | 15.99 |   |   |
| 2005                 |       |               | 2,835      |            |       | $                 | 52,584     |   |   | $ | 18.55 |   |   |
| 2006                 |       |               | 4,691      |            |       | $                 | 148,602    |   |   | $ | 31.68 |   |   |
| Total                |       |               | 8,270      |            |       | $                 | 213,085    |   |   | $ | 25.77 |   |   |
|                      |            |                    |            |                 |            |                   |            |  |  |  |  |  |  |  |  |

As of December 31,2006, approximately 330,000 shares were available to be repurchased under themost recent Board authorized share repurchase plan approved in July 2006.On February 9, 2007, our Board authorized the repurchase of up to anadditional 2.25 million shares of outstanding common stock.

Our liquidity and capital resources in any periodcould be affected by the exercise of outstanding stock options and issuance ofcommon stock under our employee stock purchase plan. The resulting increase inthe number of outstanding shares from this and from the issuance of commonstock from our other outstanding equity awards (RSU’s and SAR’s) could alsoaffect our per share results of operations. However, we cannot predict thetiming or amount of proceeds from the exercise of these securities, or whetherthey will be exercised at all. Furthermore, cash reserves may be used tocontinue our common stock repurchase activity.

At December 31, 2006, we had negative workingcapital of $0.3 million, down from working capital of $115.8 million at December 31,2005, primarily as a result of our common stock repurchases totaling $148.6million during 2006, and to a lesser extent deferred revenue growth.

We currently have no significant capital commitmentsother than commitments under our operating leases, which increased from $21.9million at December 31, 2005 to $49.0 million at December 31, 2006,primarily as a result of our entry into lease agreements in January and October 2006for our facilities located at 600 Townsend Street in San Francisco, Californiaand 619 West 54th Street in New York, New York,respectively.

The following tablesummarizes our contractual cash obligations as of December 31, 2006 (inthousands):

| ** **                                            | ** ** | **Fiscal Years** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|------------|------------|------------|------------|
| ** **                                            | ** ** | **2007**              | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Operating lease  obligations, net of sub-lease income |       | $                     | 5,879      |       | $          | 7,090      |       | $ | 5,322 |   | $ | 4,778 |   | $ | 4,272 |   |   | $ | 21,615 |   |   | $ | 48,956 |   |
|                                                       |            |                       |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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At December 31, 2006 and 2005, we did not haveany relationships with unconsolidated entities or financial partnerships, suchas entities often referred to as structured finance or special purposeentities, which would have been established for the purpose of facilitatingoff-balance sheet arrangements or other contractually narrow or limitedpurposes. As such, we are not materially exposed to any financing, liquidity,market or credit risk that could arise if we had engaged in such relationships.

In February 2007, we and certain of our domesticsubsidiaries entered into a senior secured credit facility agreement (the “Facility”)with Wells Fargo Foothill, Inc. (the “Lender”). Under the Facility, theLender will provide the Company with a revolving line of credit up to anaggregate amount of $75 million, subject to a borrowing base formula, toprovide backup liquidity for general corporate purposes, including stockrepurchases, or investment opportunities for a period of three years.

We expect that for theforeseeable future, our operating expenses and common stock repurchases willcontinue to constitute a significant use of cash flow. In addition, we may usecash to fund acquisitions or invest in other businesses, when opportunitiesarise. Based upon our past performance and current expectations, we believethat our cash and cash equivalents, marketable securities, cash generated fromoperations and availability under our Facility will be sufficient to satisfyour working capital needs, capital expenditures, investment requirements, stockrepurchases and financing activities for the foreseeable future.

**Off-Balance SheetArrangements and Contractual Obligations**

Our off-balance sheetarrangements as of December 31, 2006 consist of obligations underoperating leases. See Note 8, “Commitments and Contingencies” to the consolidatedfinancial statements and the Liquidity and Capital Resources section above forfurther discussion and a tabular presentation of our contractual obligations.

**Recent Developments**

On February 9, 2007, our Board authorized therepurchase of up to an additional 2.25 million shares of outstanding commonstock.

On February 14, 2007,we entered into a senior secured credit facility agreement (the “Facility”)with Wells Fargo Foothill, Inc. (the “Lender”) for a term of three years.Under the Facility, the Lender will provide the Company with a revolving lineof credit up to an aggregate amount of $75 million to fund the repurchase ofoutstanding common stock, working capital, capital expenditures and generalcorporate requirements. The Company has the option of selecting an interestrate for any drawdown under the Facility equal to either: (a) the BaseRate; or (b) the then applicable LIBOR Rate plus 1.50% per annum. The loanis secured by the Company’s property and assets and is subject to a financialcovenant. The financial covenant in the Facility is limited to a maximum ratioof senior debt to adjusted earnings before interest, taxes, depreciation, andamortization (EBITDA). Covenant testing will commence upon either theoccurrence of an event of default or when excess availability under theFacility plus qualified cash and cash equivalents is less than $50 million.

**Recent AccountingPronouncements**

Refer to Note 1, “Summaryof Significant Accounting Policies”, to the consolidated financial statementsfor a discussion of recent accounting standards and pronouncements.

**Item 7A.**                Quantitativeand Qualitative Disclosures About Market Risk

We are exposed to financial market risks, includingchanges in foreign currency exchange rates and interest rates. Historically,much of our revenues and capital spending was transacted in U.S. dollars. 

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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 December 31, 2006,$39.2 million and $1.1 million of goodwill and intangibles from the acquisitionof these entities is denominated in foreign currency. Therefore a hypotheticalchange of 10% could increase or decrease our assets and equity by $4 million.We do not believe that a hypothetical 10% change in foreign currency exchangerates would have a material adverse effect on our consolidated results ofoperations or cash flows.

Our interest rate risk relates primarily to ourinvestment portfolio, which consisted of $20.2 million in cash equivalents and$24.9 million in marketable securities as of December 31, 2006. Animmediate sharp increase in interest rates could have a material adverse effecton the fair value of our investment portfolio. Conversely, immediate sharpdeclines in interest rates could seriously harm interest earnings of ourinvestment portfolio. We do not currently use derivative financial instrumentsin our investment portfolio, nor hedge for these interest rate exposures.

By policy, we limit our exposure to longer-terminvestments, and the majority of our investment portfolio at December 31,2006 and 2005 had interest rate maturities of less than one year. As a resultof the relatively short duration of our portfolio, an immediate hypotheticalparallel shift to the yield curve of plus 25 basis points (“BPS”), 50 BPS and100 BPS would result in a reduction of 0.11% ($51,000), 0.23% ($103,000) and0.46% ($205,000), respectively, in the market value of our investment portfolioas of December 31, 2006.

We have also invested in several privately-heldcompanies, most of which can still be considered in the start-up or developmentstages. These non-marketable investments are classified as other assets on ourconsolidated balance sheets. Our investments in privately-held companies couldbe affected by an adverse movement in the financial markets for publicly-tradedequity securities, 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.

Our investments in privately held companies areassessed for impairment when a review of the investee’s operations indicatesthat a decline in value of the investment is other than temporary. Suchindicators include, but are not limited to, limited capital resources, limitedprospects of receiving additional financing, and prospects for liquidity of therelated securities. Impaired investments in privately held companies arewritten down to estimated fair value. We estimate fair value using a variety ofvaluation methodologies. Such methodologies include comparing the privatecompany with publicly traded companies in similar lines of business, applyingrevenue multiples to estimated future operating results for the private companyand estimating discounted cash flows for that company. We could lose our entireinvestment in these companies. At December 31, 2006, our net investmentsin privately-held companies totaled $8.5 million, which was principallycomprised of our investment in LatentZero Limited, a privately held companylocated in the United Kingdom.

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**Item 8.**                        FinancialStatements and Supplementary Data

**MANAGEMENT’S REPORTON INTERNAL CONTROL OVER FINANCIAL REPORTING**

Management of the Company is responsible forestablishing and maintaining adequate internal control over financial reportingas defined in Rules 13a-15(f) and 15d-15(f) underthe Securities Exchange Act of 1934. The Company’s internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally acceptedaccounting principles. Internal control over financial reporting includes thosepolicies and procedures that (i) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of assets of the Company; (ii) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the Company are being made only in accordancewith authorizations of management and directors of the Company; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the Company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions or thatthe degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness ofthe Company’s internal control over financial reporting as of December 31,2006. In making this assessment, management used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO) in *Internal Control—Integrated Framework*. Basedon management’s assessment using the COSO criteria, management has concludedthat the Company maintained effective internal control over financial reportingas of December 31, 2006.

Management’sassessment of the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2006 has been audited byPricewaterhouseCoopers LLP, an independent registered public accounting firm,as stated in its report which is included herein.
| /s/ STEPHANIE G. DIMARCO                 |   | /s/ GRAHAM V.  SMITH      |
|------------------------------------------|--------|---------------------------|
| Stephanie G.  DiMarco                    |   | Graham V. Smith           |
| *President  and Chief Executive Officer* |   | *Chief Financial Officer* |

 

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders of AdventSoftware, Inc.:

We have completed integrated audits of Advent Software, Inc.’sconsolidated financial statements and of its internal control over financialreporting as of December 31, 2006 in accordance with the standards of thePublic Company Accounting Oversight Board (United States). Our opinions, basedon our audits, are presented below.

*Consolidated financial statements and financial statement schedule*

In our opinion, theconsolidated financial statements listed in the indexappearing under Item 15(a)(1) present fairly, in all materialrespects, the financial position of Advent Software, Inc. and itssubsidiaries at December 31, 2006 and 2005, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2006****in conformitywith accounting principles generally accepted in the United States of America. In addition, in our opinion, the financialstatement schedule listed in the index appearing under Item 15(a)(2) presentsfairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated****financial statements. Thesefinancial statements and financial statement schedule****arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements and financial statementschedule****based on our audits. We conducted ouraudits of these statements in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit offinancial statements includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

As discussed inNote 1 to the consolidated financial statements, effective January 1,2006, the Company changed its method of accounting for stock-based compensation.

*Internal controlover financial reporting*

Also, in our opinion, management’s assessment,included in Management’s Report on Internal Control Over Financial Reportingappearing under Item 8, that the Company maintained effective internal controlover financial reporting as of December 31, 2006 based on criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), is fairly stated, in all material respects, based on those criteria.Furthermore, in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31,2006, based on criteria established in *Internal Control—IntegratedFramework* issued by the COSO. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express opinions on management’s assessmentand on the effectiveness of the Company’s internal control over financialreporting based on our audit. We conducted our audit of internal control overfinancial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. An audit of internal control over financial reportingincludes obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we consider necessary in the circumstances. We believe thatour audit provides a reasonable basis for our opinions.

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A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of the company;and (iii) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.
| /s/ PricewaterhouseCoopers LLP |   |
|--------------------------------|--------|
| PricewaterhouseCoopers  LLP    |
| San Jose,  California          |
| March 16,  2007           |

 

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**ADVENT SOFTWARE, INC.CONSOLIDATED BALANCE SHEETS(In thousands, except per share amounts)**

| ** **                                                                                                  | ** ** | **December 31** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                  | ** ** | **2006**             | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                  | ** ** | ** **           | ** ** | ** ** | ** ** |
| Current assets:                                                                                             |       |                 |       |   |   |
| Cash and cash  equivalents                                                                                  |       | $                    | 30,187     |   | $ | 70,941 |   |
| Marketable  securities                                                                                      |       | 24,881               |       | 92,491 |   |
| Accounts receivable,  net of allowance for doubtful accounts of $270 and $146, respectively                 |       | 41,336               |       | 33,507 |   |
| Deferred taxes,  current                                                                                    |       | 7,950                |       | — |   |
| Prepaid expenses  and other                                                                                 |       | 12,685               |       | 11,127 |   |
| Total current  assets                                                                                       |       | 117,039              |       | 208,066 |   |
| Property and  equipment, net                                                                                |       | 27,338               |       | 16,009 |   |
| Goodwill                                                                                                    |       | 98,382               |       | 94,335 |   |
| Other  intangibles, net                                                                                     |       | 6,294                |       | 8,758 |   |
| Deferred taxes,  long-term                                                                                  |       | 75,594               |       | 112 |   |
| Other assets                                                                                                |       | 15,000               |       | 13,295 |   |
| Total assets                                                                                                |       | $                    | 339,647    |   | $ | 340,575 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                              | ** ** | ** **           | ** ** | ** ** | ** ** |
| Current liabilities:                                                                                        |       |                 |       |   |   |
| Accounts payable                                                                                            |       | $                    | 5,083      |   | $ | 3,945 |   |
| Accrued  liabilities                                                                                        |       | 22,992               |       | 20,637 |   |
| Deferred revenues                                                                                           |       | 84,260               |       | 64,839 |   |
| Income taxes  payable                                                                                       |       | 4,989                |       | 2,801 |   |
| Total current  liabilities                                                                                  |       | 117,324              |       | 92,222 |   |
| Deferred income  taxes                                                                                      |       | 225                  |       | 1,122 |   |
| Other long-term  liabilities                                                                                |       | 12,471               |       | 5,252 |   |
| Total liabilities                                                                                           |       | 130,020              |       | 98,596 |   |
| Commitments and  contingencies (See Note 8)                                                                 |       |                 |       |   |   |
| Stockholders’  equity:                                                                                 |       |                 |       |   |   |
| Preferred stock;  $0.01 par value: 2,000 shares authorized; none issued                                     |       | —               |       | — |   |
| Common stock;  $0.01 par value: 120,000 shares authorized; 27,231 and 31,147 shares issued  and outstanding |       | 272                  |       | 311 |   |
| Additional  paid-in capital                                                                                 |       | 309,993              |       | 331,530 |   |
| Accumulated  deficit                                                                                        |       | (111,387             | )          | (95,828 | ) |
| Accumulated other  comprehensive income                                                                     |       | 10,749               |       | 5,966 |   |
| Total stockholders’  equity                                                                            |       | 209,627              |       | 241,979 |   |
| Total liabilities and  stockholders’ equity                                                            |       | $                    | 339,647    |   | $ | 340,575 |   |

 

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

64

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**ADVENT SOFTWARE, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data)**

| ** **                                                                             | ** ** | **Years Ended December 31** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                             | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Net revenues:**                                                                      | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| License and  development fees                                                          |       | $                                          | 38,205     |   | $ | 39,166 |   | $ | 35,665 |   |
| Maintenance and  other recurring                                                       |       | 126,997                                    |       | 107,320 |   | 95,098 |   |
| Professional  services and other                                                       |       | 18,891                                     |       | 22,215 |   | 19,227 |   |
| Total net  revenues                                                                    |       | 184,093                                    |       | 168,701 |   | 149,990 |   |
| **Cost of  revenues:**                                                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| License and  development fees                                                          |       | 1,539                                      |       | 1,400 |   | 2,138 |   |
| Maintenance and  other recurring                                                       |       | 32,246                                     |       | 29,499 |   | 27,820 |   |
| Professional  services and other                                                       |       | 23,817                                     |       | 18,323 |   | 16,526 |   |
| Amortization and  impairment of developed technology                                   |       | 1,200                                      |       | 2,575 |   | 6,471 |   |
| Total cost of  revenues                                                                |       | 58,802                                     |       | 51,797 |   | 52,955 |   |
| Gross margin                                                                           |       | 125,291                                    |       | 116,904 |   | 97,035 |   |
| **Operating  expenses:**                                                               | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales and  marketing                                                                   |       | 50,177                                     |       | 40,269 |   | 38,893 |   |
| Product  development                                                                   |       | 34,859                                     |       | 30,446 |   | 32,260 |   |
| General and  administrative                                                            |       | 32,936                                     |       | 33,773 |   | 26,576 |   |
| Amortization and  impairment of other intangibles                                      |       | 3,866                                      |       | 4,041 |   | 12,237 |   |
| Restructuring  charges                                                                 |       | 3,735                                      |       | 2,039 |   | 5,133 |   |
| Total operating  expenses                                                              |       | 125,573                                    |       | 110,568 |   | 115,099 |   |
| Income (loss) from operations                                                          |       | (282                                       | )          | 6,336 |   | (18,064 | ) |
| Interest income  and other expense, net                                                |       | 3,853                                      |       | 4,596 |   | 1,905 |   |
| Gain on sale of  equity investments                                                    |       | —                                     |       | 3,608 |   | — |   |
| Income (loss) before income taxes                                                      |       | 3,571                                      |       | 14,540 |   | (16,159 | ) |
| Provision for  (benefit from) income taxes                                             |       | (79,031                                    | )          | 405 |   | 20 |   |
| **Net  income (loss)**                                                                 |       | $                                          | 82,602     |   | $ | 14,135 |   | $ | (16,179 | ) |
| Net income (loss)  per share:                                                          |       |                                       |       |   |   |   |   |
| Basic                                                                                  |       | $                                          | 2.85       |   | $ | 0.46 |   | $ | (0.49 | ) |
| Diluted                                                                                |       | $                                          | 2.70       |   | $ | 0.44 |   | $ | (0.49 | ) |
| Weighted average shares used to compute basic and  diluted net income (loss) per share |       |                                       |       |   |   |   |   |
| Basic                                                                                  |       | 29,003                                     |       | 31,031 |   | 32,944 |   |
| Diluted                                                                                |       | 30,537                                     |       | 32,474 |   | 32,944 |   |

 

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

65

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**ADVENT SOFTWARE, INC.**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME**

**(LOSS)**

**(In thousands)**

| ** **                                              | ** ** | ** **             | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| ** **                                              | ** ** | ** **             | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **        | ** ** | **Other**              | ** ** | **Total**  | ** ** |
| ** **                                              | ** ** | **Comprehensive**      | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | **Stockholders’** | ** ** |
| ** **                                              | ** ** | **Income (Loss)** | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit**       | ** ** | **Income**             | ** ** | **Equity** | ** ** |
| Balances,  December 31, 2003                       |       |                   |       |                  |       |        | 32,938     |            |       |              | $          | 329                    |       |       |       | $ | 340,394 |   |   |   | $ | (66,483 | ) |   |   | $ | 8,829 |   |   |   | $ | 283,069 |   |   |
| Exercise of stock  options                              |       |                   | $          | —                |       |        |       | 377             |       |              |       | 4                      |       |       |       | 4,738 |   |   |   | — |   |   |   | — |   |   |   | 4,742 |   |   |
| Common stock  repurchased and retired                   |       |                   | —     |                  |       |        | (744       | )               |       |              | (8         | )                      |       |       | (7,705     | ) |   |   | (4,186 | ) |   |   | — |   |   |   | (11,899 | ) |   |
| Common stock  issued under employee stock purchase plan |       |                   | —     |                  |       |        | 162        |            |       |              | 2          |                   |       |       | 2,536      |   |   |   | — |   |   |   | — |   |   |   | 2,538 |   |   |
| Stock-based  compensation                               |       |                   | —     |                  |       |        | —     |            |       |              | —     |                   |       |       | 21         |   |   |   | — |   |   |   | — |   |   |   | 21 |   |   |
| Tax benefit from  exercise of stock options             |       |                   | —     |                  |       |        | —     |            |       |              | —     |                   |       |       | 11         |   |   |   | — |   |   |   | — |   |   |   | 11 |   |   |
| Other                                                   |       |                   | —     |                  |       |        | —     |            |       |              | —     |                   |       |       | —     |   |   |   | (8 | ) |   |   | — |   |   |   | (8 | ) |   |
| Net loss                                                |       |                   | (16,179    | )                     |       |        | —     |            |       |              | —     |                   |       |       | —     |   |   |   | (16,179 | ) |   |   | — |   |   |   | (16,179 | ) |   |
| Unrealized loss on  marketable securities               |       |                   | (335       | )                     |       |        | —     |            |       |              | —     |                   |       |       | —     |   |   |   | — |   |   |   | (335 | ) |   |   | (335 | ) |   |
| Foreign currency  translation adjustments               |       |                   | 3,780      |                  |       |        | —     |            |       |              | —     |                   |       |       | —     |   |   |   | — |   |   |   | 3,780 |   |   |   | 3,780 |   |   |
| Comprehensive loss  for fiscal 2004                     |       |                   | $          | (12,734               | )          |        |       |            |       |              |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balances,  December 31, 2004                       |       |                   |       |                  |       |        | 32,733     |            |       |              | $          | 327                    |       |       |       | $ | 339,995 |   |   |   | $ | (86,856 | ) |   |   | $ | 12,274 |   |   |   | $ | 265,740 |   |   |
| Exercise of stock  options                              |       |                   | $          | —                |       |        |       | 1,099           |       |              |       | 11                     |       |       |       | 18,043 |   |   |   | — |   |   |   | — |   |   |   | 18,054 |   |   |
| Common stock  repurchased and retired                   |       |                   | —     |                  |       |        | (2,834     | )               |       |              | (28        | )                      |       |       | (29,449    | ) |   |   | (23,107 | ) |   |   | — |   |   |   | (52,584 | ) |   |
| Common stock  issued under employee stock purchase plan |       |                   | —     |                  |       |        | 149        |            |       |              | 1          |                   |       |       | 2,517      |   |   |   | — |   |   |   | — |   |   |   | 2,518 |   |   |
| Tax benefit from  exercise of stock options             |       |                   | —     |                  |       |        | —     |            |       |              | —     |                   |       |       | 424        |   |   |   | — |   |   |   | — |   |   |   | 424 |   |   |
| Net income                                              |       |                   | 14,135     |                  |       |        | —     |            |       |              | —     |                   |       |       | —     |   |   |   | 14,135 |   |   |   | — |   |   |   | 14,135 |   |   |
| Unrealized loss on  marketable securities               |       |                   | (184       | )                     |       |        | —     |            |       |              | —     |                   |       |       | —     |   |   |   | — |   |   |   | (184 | ) |   |   | (184 | ) |   |
| Foreign currency  translation adjustments               |       |                   | (6,124     | )                     |       |        | —     |            |       |              | —     |                   |       |       | —     |   |   |   | — |   |   |   | (6,124 | ) |   |   | (6,124 | ) |   |
| Comprehensive  income for fiscal 2005                   |       |                   | $          | 7,827                 |       |        |       |            |       |              |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balances,  December 31, 2005                       |       |                   |       |                  |       |        | 31,147     |            |       |              | $          | 311                    |       |       |       | $ | 331,530 |   |   |   | $ | (95,828 | ) |   |   | $ | 5,966 |   |   |   | $ | 241,979 |   |   |
| Exercise of stock  options                              |       |                   | $          | —                |       |        |       | 665             |       |              |       | 7                      |       |       |       | 11,505 |   |   |   | — |   |   |   | — |   |   |   | 11,512 |   |   |
| Common stock  repurchased and retired                   |       |                   | —     |                  |       |        | (4,692     | )               |       |              | (47        | )                      |       |       | (50,394    | ) |   |   | (98,161 | ) |   |   | — |   |   |   | (148,602 | ) |   |
| Common stock  issued under employee stock purchase plan |       |                   | —     |                  |       |        | 111        |            |       |              | 1          |                   |       |       | 3,020      |   |   |   | — |   |   |   | — |   |   |   | 3,021 |   |   |
| Stock-based  compensation                               |       |                   | —     |                  |       |        | —     |            |       |              | —     |                   |       |       | 13,768     |   |   |   | — |   |   |   |   |   |   |   | 13,768 |   |   |
| Tax benefit from  exercise of stock options             |       |                   | —     |                  |       |        | —     |            |       |              | —     |                   |       |       | 564        |   |   |   | — |   |   |   | — |   |   |   | 564 |   |   |
| Net income                                              |       |                   | 82,602     |                  |       |        | —     |            |       |              | —     |                   |       |       | —     |   |   |   | 82,602 |   |   |   | — |   |   |   | 82,602 |   |   |
| Unrealized gain on  marketable securities               |       |                   | 578        |                  |       |        | —     |            |       |              | —     |                   |       |       | —     |   |   |   | — |   |   |   | 578 |   |   |   | 578 |   |   |
| Foreign currency  translation adjustments               |       |                   | 4,205      |                  |       |        | —     |            |       |              | —     |                   |       |       | —     |   |   |   | — |   |   |   | 4,205 |   |   |   | 4,205 |   |   |
| Comprehensive  income for fiscal 2006                   |       |                   | $          | 87,385                |       |        |       |            |       |              |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balances,  December 31, 2006                       |       |                   |       |                  |       |        | 27,231     |            |       |              | $          | 272                    |       |       |       | $ | 309,993 |   |   |   | $ | (111,387 | ) |   |   | $ | 10,749 |   |   |   | $ | 209,627 |   |   |

 

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

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**ADVENT SOFTWARE, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**

| ** **                                                                                | ** ** | **Years Ended December 31** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash flows from operating  activities:**                                                | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                                                                         |       | $                                          | 82,602     |   | $ | 14,135 |   | $ | (16,179 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                                       |       |   |   |   |   |
| Tax benefit from exercise of stock options                                                |       | —                                     |       | 424 |   | 11 |   |
| Stock-based compensation                                                                  |       | 13,596                                     |       | — |   | 21 |   |
| Depreciation and amortization                                                             |       | 12,764                                     |       | 15,300 |   | 21,786 |   |
| Provision for (reduction of) doubtful accounts                                            |       | 988                                        |       | (436 | ) | 36 |   |
| Provision for (reduction of) sales returns                                                |       | (776                                       | )          | 2,182 |   | 4,623 |   |
| Loss on sale of fixed assets                                                              |       | 205                                        |       | — |   | — |   |
| Non-cash impairment loss                                                                  |       | —                                     |       | — |   | 6,275 |   |
| (Gain) loss on investments                                                                |       | 219                                        |       | (3,333 | ) | 401 |   |
| Deferred income taxes                                                                     |       | (83,380                                    | )          | (1,128 | ) | (900 | ) |
| Other                                                                                     |       | (146                                       | )          | (1,010 | ) | (347 | ) |
| Changes in  operating assets and liabilities, net of effect of acquisitions:              |       |                                       |       |   |   |   |   |
| Accounts receivable                                                                       |       | (8,782                                     | )          | (293 | ) | 1,477 |   |
| Prepaid and other assets                                                                  |       | (1,809                                     | )          | 93 |   | 4,290 |   |
| Income taxes receivable                                                                   |       | 1                                          |       | (1 | ) | 1,641 |   |
| Accounts payable                                                                          |       | 63                                         |       | 1,120 |   | 396 |   |
| Accrued liabilities                                                                       |       | 8,847                                      |       | 4,570 |   | 1,531 |   |
| Deferred revenues                                                                         |       | 20,197                                     |       | 6,315 |   | (515 | ) |
| Income taxes payable                                                                      |       | 2,187                                      |       | (1,235 | ) | 438 |   |
| Net cash provided by operating activities                                                 |       | 46,776                                     |       | 36,703 |   | 24,985 |   |
| **Cash  flows from investing activities:**                                                | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash used in acquisitions, net of cash acquired                                           |       | (97                                        | )          | (1,028 | ) | (9,632 | ) |
| Purchases of property and equipment                                                       |       | (19,155                                    | )          | (6,440 | ) | (3,667 | ) |
| Capitalized software development costs                                                    |       | (1,352                                     | )          | (1,511 | ) | — |   |
| Proceeds from sales of investments                                                        |       | —                                     |       | 3,791 |   | — |   |
| Purchases of marketable securities                                                        |       | (47,882                                    | )          | (123,652 | ) | (188,319 | ) |
| Sales and maturities of marketable securities                                             |       | 115,763                                    |       | 174,030 |   | 167,513 |   |
| Increase in restricted cash                                                               |       | (1,256                                     | )          | — |   | — |   |
| Other                                                                                     |       | —                                     |       | 4 |   | — |   |
| Net cash provided by (used in) investing activities                                       |       | 46,021                                     |       | 45,194 |   | (34,105 | ) |
| **Cash  flows from financing activities:**                                                | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds from exercises of stock options                                                  |       | 11,512                                     |       | 18,054 |   | 4,742 |   |
| Common stock repurchased and retired                                                      |       | (148,602                                   | )          | (52,584 | ) | (11,899 | ) |
| Proceeds from common stock issued under the employee  stock purchase plan                 |       | 3,021                                      |       | 2,518 |   | 2,538 |   |
| Excess tax benefits from stock-based compensation                                         |       | 357                                        |       | — |   | — |   |
| Net cash used in financing activities                                                     |       | (133,712                                   | )          | (32,012 | ) | (4,619 | ) |
| Effect of exchange rate changes on cash and cash  equivalents                             |       | 161                                        |       | (121 | ) | 155 |   |
| Net increase (decrease) in cash and cash equivalents                                      |       | (40,754                                    | )          | 49,764 |   | (13,584 | ) |
| Cash and cash equivalents at beginning of period                                          |       | 70,941                                     |       | 21,177 |   | 34,761 |   |
| Cash and cash equivalents at end of period                                                |       | $                                          | 30,187     |   | $ | 70,941 |   | $ | 21,177 |   |
| **Supplemental  disclosure of cash flow information:**                                    | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash paid (received) for income taxes, net of refunds                                     |       | $                                          | 1,932      |   | $ | 2,010 |   | $ | (858 | ) |
| Cash paid for  interest                                                                   |       | $                                          | 88         |   | $ | 24 |   | $ | 87 |   |

 

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

67

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 1—Summary ofSignificant Accounting Policies**

*Businessdescription:*   Advent Software, Inc. (“Advent”or “the Company”) provides stand-alone and client/server software products,data and data interfaces and related maintenance and services that automate,integrate and support certain mission-critical functions of the front, middleand back offices of investment management organizations. Advent’s clients varysignificantly in size and assets under management and include investmentadvisors, brokerage firms, banks, hedge funds, corporations, public funds,foundations, universities and non-profit organizations.

*Basisof presentation:*   The consolidated financialstatements include the accounts of Advent and its wholly-owned subsidiaries.All intercompany transactions and amounts have been eliminated.

*YearEnd:*   Advent’s fiscal year ends on December 31st.

*Foreigncurrency translation:*   The functional currency ofthe Company’s foreign subsidiaries is their local currencies. All assets andliabilities denominated in foreign functional currencies are translated intoU.S. dollars at the exchange rate on the balance sheet date. Revenues, costs andexpenses in foreign functional currencies are translated at the average rate ofexchange during the period.

*Foreigncurrency measurement:*   Asset and liabilitiesdenominated in currencies other than the functional currencies are re-measuredinto the functional currency with gains or losses recorded in “interest incomeand other, net” on the consolidated statement of operations.

*Useof estimates:*   The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.These estimates are based on information available as of the date of thefinancial statements. Actual results could differ from those estimates. Adventbelieves the following critical accounting policies affect its more significantjudgments and estimates used in the preparation of its consolidated financialstatements: Goodwill; Revenue Recognition; Income Taxes; Restructuring Chargesand Related Accruals; Impairment of Long-Lived Assets; Legal Contingencies;Sales Returns and Accounts Receivable Allowances; and Stock-Based Compensation.

*Fairvalue of financial instruments:*   The amountsreported for cash equivalents, marketable securities, receivables, and accountspayable are considered to approximate their market values based on comparablemarket information available at the respective balance sheet dates and theirshort-term nature.

*Cashand cash equivalents:*   Cash equivalents arecomprised of highly liquid investments purchased with an original or remainingmaturity of 90 days or less at the date of purchase. These securities aremaintained with major financial institutions.

*Marketablesecurities:*   All of Advent’s marketablesecurities are classified as available-for-sale and are carried at fair value.The unrealized gains and losses, net of any related tax effect, are reported inaccumulated comprehensive income in stockholders’ equity in the accompanyingconsolidated financial statements, with the exception of Advent’s broker/dealersubsidiary, which reports unrealized gains and losses in “interest income andother, net” on the consolidated statement of operations. Realized gains andlosses and declines in value judged to be other-than-temporary onavailable-for-sale securities are also included in “interest income and other,net”.

68

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*Investments:*   Investmentsare recorded at the lower of cost or fair value and included in “other assets”on the consolidated balance sheets and consist of non-marketable investments inprivately held companies, most of which can be considered in the start-up ordevelopment stages. It is Advent’s policy to review investments in privatelyheld companies on a regular basis to evaluate the carrying amount and economicviability of these companies. This policy includes, but is not limited to,reviewing each of the companies cash position, financing needs,earnings/revenue outlook, operational performance, management/ownership changesand competition. The evaluation process is based on information that Adventrequests from these privately held companies. This information is not subjectto the same disclosure regulations as U.S. publicly traded companies, and assuch, the basis for these evaluations is subject to timing and the accuracy ofthe data received from these companies.

The Company’s investments in privately held companiesare assessed for impairment when a review of the investee’s operationsindicates that a decline in value of the investment is other than temporary.Such indicators include, but are not limited to, limited capital resources,limited prospects of receiving additional financing, and prospects forliquidity of the related securities. Impaired investments in privately held companiesare written down to estimated fair value. The Company estimates fair valueusing a variety of valuation methodologies. Such methodologies includecomparing the private company with publicly traded companies in similar linesof business, applying revenue multiples to estimated future operating resultsfor the private company and estimating discounted cash flows for that company.

*Productdevelopment:*   Product development expensesconsist primarily of salary, benefits and stock-based compensation for theCompany’s development and technical support staff, contractors’ fees and othercosts associated with the enhancements of existing products and services anddevelopment of new products and services. Costs incurred for softwaredevelopment prior to technological feasibility are expensed as productdevelopment costs in the period incurred. Once the point of technologicalfeasibility is reached, which is generally the completion of a workingprototype that has no critical bugs and is a release candidate, developmentcosts are capitalized until the product is ready for general release and areclassified “other intangible assets, net” on the consolidated balance sheets.The Company amortizes capitalized software development costs using the greaterof the ratio of the products’ current gross revenues to the total of currentexpected gross revenues or on a straight-line basis over the estimated economiclife of the related product, which is typically three years.

*Capitalizationof internal use software:*   Certain costs relatedto computer software developed or obtained for internal use are capitalized inaccordance with American Institute of Certified Public Accountants Statement ofPosition No. 98-1, “Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use.” The Company amortizes internal usesoftware costs over their estimated useful lives, which typically range fromtwo to five years. Costs of $2.8 million, $1.2 million and $403,000 related tothe development of internal use software were capitalized in 2006, 2005 and2004, respectively, and are included in “property and equipment, net” on theconsolidated balance sheets.

Additionally, Advent capitalizes certain costsincurred for web site design and development in accordance with Emerging IssueTask Force No. 00-2, “Accounting for Web Site Development costs.”These costs are amortized over their estimated useful lives, which typicallyrange from two to five years. Web site design and development costs of $221,000and $108,000 were capitalized in 2005 and 2004, respectively. There were nowebsite development costs capitalized in 2006.

*Property and equipment:*   Propertyand equipment are stated at cost, less accumulated depreciation andamortization. Advent calculates depreciation and amortization using thestraight-line method over the 

69

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

assets’ estimated useful lives. Amortization ofleasehold improvements is computed using the straight-line method over theshorter of the estimated useful life of the assets or the remaining lease term.The cost and related accumulated depreciation applicable to property andequipment sold or no longer in service are eliminated from the accounts and anygains or losses are generally included in operating expenses. Useful lives byprincipal classifications are as follows:

| Computer  equipment and software |   | 1 to  6 years                 |   |
|----------------------------------|--------|-------------------------------|--------|
| Leasehold  improvements          |   | 2  years to end of lease term |   |
| Furniture and  fixtures          |   | 3 to  5 years                 |   |
| Telephone system                 |   | 1 to 10 years                 |   |

 

Repairs and maintenance expenditures, which are notconsidered improvements and do not extend the useful life of the property andequipment, are expensed as incurred.

*Accountingfor long-lived assets:*   Advent reviews goodwillfor impairment annually during the fourth quarter of the fiscal year (as of November 1)and more frequently if an event or circumstance indicates that an impairmentloss has occurred. Advent is required to test goodwill for impairment at thereporting unit level. Advent has determined that its operations were organizedinto three reporting units as of November 1, 2006. The test for goodwillimpairment is a two-step process:

The first step compares the fair value of eachreporting unit with its respective carrying amount, including goodwill. If thefair value of the reporting unit exceeds its carrying amount, goodwill of thereporting unit is considered not impaired, thus the second step of theimpairment test is unnecessary.

The second step, used to measure the amount ofimpairment loss, compares the implied fair value of each reporting unit’sgoodwill with the respective carrying amount of that goodwill. If the carryingamount of the reporting unit goodwill exceeds the implied fair value of thatgoodwill, an impairment loss shall be recognized in an amount equal to thatexcess.

The process for evaluating the potential impairment ofgoodwill is subjective and requires judgment at many points during the testincluding future revenue forecasts, discount rates and various reporting unitallocations. During the fourth quarter of 2006, Advent completed the first stepof its annual impairment test which did not indicate impairment. Therefore, thesecond step of the impairment test was not necessary to perform.

Advent also reviewsits other long-lived assets including property and equipment and otherintangibles for impairment whenever events or changes in circumstances indicatethat the carrying amount of these assets may not be recoverable. Factors theCompany considers important which could trigger an impairment review includethe following:

·       significantunderperformance relative to expected historical or projected future operatingresults;

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

·       significantnegative market or economic trends;

·       significantdecline in the Company’s stock price for a sustained period; and

·       marketcapitalization relative to net book value.

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Recoverability is measured by a comparison of theassets’ carrying amount to their expected future undiscounted net cash flows.If such assets are considered to be impaired, the impairment to be recognizedis measured based on the amount by which the carrying amount of the assetexceeds its fair value.

Otherintangible assets mainly represent completed technology, distributor licenses,customer lists, trade names acquired in business combinations, and capitalizedsoftware development costs. Identifiable intangibles are amortized on astraight line basis over their estimated useful lives as follows:

| Software  development costs |   | 3  years      |   |
|-----------------------------|--------|---------------|--------|
| Purchased  technology       |   | 3 to  7 years |   |
| Customer relationships      |   | 4 to 7 years  |   |

 

*Revenuerecognition:*   Advent recognizes revenue fromsoftware licenses, development fees, maintenance, other recurring revenues,professional services and other revenues. In addition, Advent earns commissionsfrom customers who use the Company’s broker/dealer, Second Street Securities,to soft dollar the purchase of Advent and non-Advent products and services withsoft dollars. Soft dollaring enables the customers to use the commissionsearned on trades to pay all or part of the fees owed to the Company fornon-Advent products or services, which are initially paid for by Second StreetSecurities. The commission revenues earned from soft dollar purchases ofnon-Advent products or services are recorded as other revenues in professionalservices and other revenues on the Company’s consolidated statements ofoperations.

Advent offers a wide variety of products and servicesto a large number of financially sophisticated customers. While many of theCompany’s lower-priced license transactions, maintenance contracts,subscription-based transactions and professional services projects conform to astandard structure, many of Advent’s larger transactions are complex and mayrequire significant review and judgment in Advent’s application of generallyaccepted accounting principles.

*Softwarelicense and development fees.*   Advent recognizesrevenue from the licensing of software when persuasive evidence of anarrangement exists, the product has been delivered, the fee is fixed ordeterminable and collection of the resulting receivable is probable. Adventgenerally uses a signed license agreement as evidence of an arrangement. Salesthrough the Company’s 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 product is deliveredto a common carrier F.O.B shipping point. Some of Advent’s arrangements includeacceptance provisions, and if such acceptance provisions are provided, deliveryis deemed to occur upon acceptance. Advent assesses whether the fee is fixed ordeterminable based on the payment terms associated with the transaction. TheCompany assesses whether the collectibility of the resulting receivable isprobable based on a number of factors, including the credit worthiness of thecustomer determined through review of credit reports, Advent’s transactionhistory with the customer, other available information and pertinent countryrisk if the customer is located outside the United States. Advent’s standardpayment terms are due at 180 days or less unless the transaction is part of asoft dollar arrangement through the Company’s in-house broker/dealersubsidiary, Second Street Securities, for which payment is then required withinone year; however, payment terms may vary based on the country in which theagreement is executed. Software licenses are sold with maintenance and,frequently, professional services.

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*Licenses.**  *Advent has continued its transition from sellingmostly perpetual licenses to selling a mix of perpetual and term contracts, andexpects term license revenue to increase as a proportion of total licenserevenue in the future. Advent recognized approximately 49%, 25% and 11% oflicense revenue from term licenses and incremental AUA fees during fiscal 2006,2005 and 2004, respectively. Revenue recognition for software licensed underperpetual and term-based license models differs depending on which type of contracta customer signs:

·       *Perpetual licenses*

Advent allocates 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 Advent. Advent determines the fair value ofthe undelivered 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.

·       *Term licenses*

Term license contract prices include both the softwarelicense fees and maintenance fees, and, as a result, Advent allocates 55% ofthe contract price to license revenue and 45% to maintenance and recurringrevenues, based on the Company’s assessment of the relative economic value ofthe two elements.

To date, Advent has offered multi-year term licensesby which a customer makes a binding commitment to license the software for afixed multi-year term—typically three years. For multi-year term licenses theCompany has not established VSOE of fair value for the term license andmaintenance components, and, as a result, in situations where the Company isalso performing related professional services, Advent defers all revenue anddirectly related expenses under the arrangement until the professional servicesare substantially complete. At the point professional services aresubstantially completed, the Company recognizes a pro rata amount of the termlicense and maintenance revenue, professional services fees earned and relatedexpenses, based on the elapsed time from the start of the term license to thesubstantial completion of professional services. The remaining deferredprofessional services revenue and related expenses are recognized ratably overthe remaining contract length. Term license and maintenance revenue for theremaining contract years is recognized ratably over the remaining period of thecontract. When multi-year term licenses are sold and do not include relatedprofessional services, Advent recognizes the entire term license andmaintenance revenue ratably over the period of the contract term from theeffective date of the license agreement assuming all other revenue recognitioncriteria have been met.

Advent occasionally offers single-year term licenses.Revenue on delivered components will be allocated and recognized, based onvendor specific objective evidence, or VSOE, of fair value of the elements(license, maintenance and professional services components), which is specificto the Company. While fair value of the undelivered professional servicescomponent is based on the historical evidence of the Company’s stand-alonesales of these components to third parties, VSOE for the term license and therelated maintenance components will be determined by the stated optionalrenewal rate. If VSOE of fair value does not exist for any undeliveredelements, then the entire arrangement fee is deferred until delivery of thatelement has occurred.

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Development fees are derived from contracts thatAdvent has entered into with other companies, including customers and developmentpartners. Agreements for which the Company receives development fees normallyprovide for the development of technologies and products that are expected tobecome part of Advent’s general product offerings in the future. Revenues forlicense development projects are recognized primarily using thepercentage-of-completion method of accounting, based on costs incurred to datecompared with the estimated cost of completion, or using the completed contractmethod, when the development project is finished.

Certain of our perpetual and term license contractscontain fee structures that provide additional revenues based on the assetsthat the client manages using our software (“Assets Under Administration” or “AUA”).Contracts containing an AUA fee structure have a defined measurement periodwhich requires the client to self report actual AUA in arrears of the specifiedperiod. AUA fees above the stated minimum fee for the same period areconsidered incremental fees. Because incremental fees are not determinableuntil the conclusion of the measurement period, they are both earned andrecognized in arrears, on a quarterly or annual basis.

If a customer purchased Advent’s software and chose toenter into a soft dollar arrangement through our in-house broker/dealersubsidiary, Second Street Securities, the soft dollar arrangement did notchange or modify the original fixed or determinable fee in the writtencontract. The customer is required to pay the original fee for the Company’ssoftware within one year. If insufficient trading volume is generated to paythe entire original fee within one year, the customer is still required torender payment within one year. If the customer chooses to use a third-partybroker/dealer, the original payment terms apply, regardless of the arrangementwith the third-party broker/dealer. The option to soft dollar a transactiondoes not alter the underlying revenue recognition for the transaction; all therevenue recognition criteria listed in the “Software license” section abovemust be assessed in determining how the revenue will be recognized.

Advent’s standard practice is to enforce its contractterms and not allow its customers to return software. Advent has, however,allowed customers to return software on a limited case-by-case basis and haverecorded sales returns provisions as offsets to revenue in the period the salesreturn becomes probable, in accordance with FASB Statement No. 48, “RevenueRecognition when Right of Return Exists”. The estimates for returns areadjusted periodically based upon historical rates of returns and other relatedfactors.

The Company does have two situations where it providesa contractual limited right of return to end-user customers only: inshrink-wrap license agreements for Advent products, and certain MicroEdgeproducts. The shrink-wrap license agreement for Advent products providesfor a right of return within seven days of delivery of thesoftware. Certain MicroEdge software license agreements allow for either athirty-day money back guarantee or a seven-day right of return. Adventrecognizes revenue on delivery since the fee is fixed or determinable, thebuyer is obligated to pay, the risk of loss passes to the customer, and theCompany has the ability to estimate returns. Advent’s ability to estimatereturns is based on a long history of experience with relatively homogenoustransactions and the fact that the return period is short. Advent has analgorithm for calculating the value of reserves that takes the previous 18months of experience into account. Advent has recorded a sales returnsprovision (benefit) to decrease (increase) revenue for these situations basedon our historical experience of $(0.5) million, $0.2 million and $0.3 millionin fiscal 2006, 2005 and 2004, respectively.

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*Maintenanceand other recurring revenues.*   Advent offersannual maintenance programs that provide for technical support and updates tothe Company’s software products. Maintenance fees are bundled under perpetuallicenses in the initial licensing year and charged separately for renewals ofannual maintenance in subsequent years. Fair value for maintenance is basedupon renewal rates stated in the contracts or, in limited cases, separate salesof renewals to other customers. Generally, Advent recognizes maintenancerevenue ratably over the contract term, except in the case of multi-year termlicense contracts which are described in the “term licenses” section above.Revenues from term licenses represented approximately 6%, 3% and 1% ofmaintenance and other recurring revenue during 2006, 2005 and 2004,respectively.

Advent offers other recurring revenue services thatare either subscription-based or transaction-based, and primarily include theprovision of software interfaces to, and the capability to download securitiesinformation from, third party data providers. The Company recognizes revenuefrom recurring revenue transactions either ratably over the subscription periodor as the transactions occur.

Based on the Company’s historical experience, Adventhas recorded sales benefit to increase revenues for estimated returns formaintenance and other recurring revenues of $1.2 million, $0.3 million and$0.9 million for fiscal 2006, 2005 and 2004, respectively. Advent has analgorithm for calculating the value of reserves that takes the last 18 monthsof experience into account, which resulted in the above adjustments to revenue.

*Professionalservices and other revenues.*   Advent offers avariety of professional services that include project management,implementation, data conversion, integration, custom report writing andtraining. Fair value for professional services is based upon separate sales ofthese services by the Company to other customers. Advent’s professionalservices are generally billed based on hourly rates together with reimbursementfor travel and accommodation expenses. Advent’s professional services and otherrevenue also include revenue from the Company’s annual user conferences. Adventgenerally recognizes revenue as these professional services are performed,except in the case of multi-year term license contracts which are described inthe “term licenses” section above. Certain professional services arrangementsinvolve acceptance criteria. In these cases, revenue and related expenses arerecognized upon acceptance.

Commission revenues received from “soft dollar”transactions for products and services not related to the Company’s productsand services, are recorded as other revenues on a net basis as Advent is notthe primary obligor in these transactions. Revenues from these “soft dollar”transactions are recognized on a trade-date basis as securities transactionsoccur.

Advent’s ability to estimate revenue reserves forprofessional services is based on a long history of experience with relativelyhomogenous transactions and the fact that the return period is short. TheCompany has recorded a reserve to account for these situations based on itshistorical experience of $0.9 million, $2.3 million and $5.2 million forfiscal 2006, 2005 and 2004, respectively.

*Directlyrelated expenses.**  *WhenAdvent defers service revenues, it also defers the direct costs incurred in thedelivery of those services to the extent those costs are recoverable throughthe future revenues on non-cancellable contracts. Advent recognizes thosedeferred costs as costs of professional services revenues proportionally andover the same period that the deferred revenue is recognized as servicerevenue. When Advent defers license revenue, the Company defers the directincremental costs incurred as a result of selling the contract (i.e. salescommissions earned by the salesforce as a part of their overall compensation)because those costs would not have been incurred but for the acquisition ofthat 

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

contract. Adventrecognizes those costs as sales and marketing expense proportionally and overthe same period as the license revenues.

*Allowancefor doubtful accounts and sales returns:*   Adventanalyzes specific accounts receivable, historical bad debts, customerconcentrations, customer credit-worthiness, current economic trends and changesin its customer payment terms when evaluating the adequacy of the allowance fordoubtful accounts. Advent also analyzes customer demand and acceptance ofproduct and historical returns when evaluating the adequacy of the allowancefor sales returns, which are not generally provided to customers. Allowancesfor sales returns are accounted for as deductions to net revenues and increasesto reserves within deferred revenues.

*Advertisingcosts:**  *TheCompany expenses advertising costs as incurred and classifies these costs undersales and marketing expense. Total advertising expenses were $656,000,$465,000, and $215,000 for fiscal 2006, 2005 and 2004, respectively.

*Stock-basedcompensation:**  *EffectiveJanuary 1, 2006, Advent adopted the provisions of, and accounts forstock-based compensation in accordance with, the Financial Accounting StandardsBoard’s (“FASB”) Statement of Financial Accounting Standards No. 123—revised2004 (“SFAS 123R”), “Share-Based Payment” which replaced Statement ofFinancial Accounting Standards No. 123 (“SFAS 123”), “Accounting forStock-Based Compensation” and supersedes APB Opinion No. 25 (“APB 25”),“Accounting for Stock Issued to Employees.”

Under the fair value recognition provisions of thisstatement, stock-based compensation cost is measured at the grant date based onthe fair value of the award and is recognized as expense on a straight-linebasis over the requisite service period, which is the vesting period. The Companyelected to implement this statement using the modified-prospective method,under which prior periods are not restated for comparative purposes. Under themodified prospective method, the valuation provisions of SFAS 123R apply to newgrants and to grants that were outstanding as of the effective date. Estimatedcompensation expense for grants that were outstanding as of the effective datewill be recognized over the remaining service period using the compensationcost estimated for the SFAS 123 pro forma disclosures. Advent makes quarterlyassessments of the adequacy of our tax credit pool to determine if there areany deficiencies which require recognition in the Company’s consolidatedstatements of operations.

Advent uses the Black-Scholes option pricing model todetermine the fair value of stock options, stock appreciation rights (“SAR”)and employee stock purchase plan shares. The fair value of the Company’srestricted stock units is calculated based on the fair market value of Advent’sstock on the date of grant. The determination of the fair value of stock-basedpayment awards on the date of grant using an option-pricing model isaffected by Advent’s stock price as well as assumptions regarding a number ofcomplex and subjective variables. These variables include Advent’s expectedstock price volatility over the term of the awards, actual and projectedemployee exercise behaviors, risk-free interest rate and expected dividends.

Advent estimates the volatility of the Company’scommon stock based on an equally weighted average of historical and impliedvolatility of the Company’s common stock. Advent determined that a blend ofhistorical and implied volatility is more reflective of the market conditionsand a better indicator of expected volatility than using purely historicalvolatility. The Company estimates the expected life of options and SAR’sgranted based on historical experience of similar awards, giving considerationto the contractual terms of the stock-based awards, vesting schedules and expectationsof future employee 

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

behavior. The Companybases the risk-free interest rate on the U.S. Treasury yield curve in effect atthe time of grant for periods corresponding with the expected life of theoption and SAR. The Company does not anticipate paying any cash dividends inthe foreseeable future and therefore use an expected dividend yield of zero inthe option pricing model. SFAS 123R requires forfeitures to be estimated at thetime of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. Forfeitures were estimated based onthe Company’s historical experience over the last ten years. Prior to theadoption of SFAS 123R, the Company accounted for forfeitures as they occurred.

The adoption of SFAS 123R had a material impact onAdvent’s consolidated financial position and results of operations. See Note 9,“Stock Based Compensation”, for further information regarding Advent’sstock-based compensation assumptions and expense, including pro forma disclosuresfor prior periods as if the Company had recorded stock-based compensationexpense.

*Restructuringcharges and related accruals:*   Since 2003, Adventhas developed and implemented formalized plans for restructuring the businessto better align its resources to market conditions and recorded significantcharges. In connection with these plans, Advent has recorded estimated expensesfor severance and benefits, lease cancellations, asset write-offs and otherrestructuring costs. Given the significance of, and the timing of the executionof such activities, this process is complex and involves periodic reassessmentsof estimates made at the time the original decisions were made, includingevaluating real estate market conditions for expected vacancy periods andsub-lease rental income. Advent continually evaluates the adequacy of theremaining liabilities under its restructuring initiatives. Although the Companybelieves that these estimates accurately reflect the costs of our restructuringplans, actual results may differ, thereby requiring Advent to record additionalprovisions or reverse a portion of such provisions.

*Incometaxes:*   Advent accounts for worldwide incometaxes under an asset and liability approach that requires the expected futuretax consequences of temporary differences between book and tax bases of assetsand liabilities be recognized as deferred tax assets and liabilities. Avaluation allowance is recorded to reduce the net deferred tax assets to anamount that is more likely than not to be realized.

The Company has elected to use the “with and without”approach as described in EITF Topic No. D-32 in determining theorder in which tax attributes are utilized. As a result, the Company will onlyrecognize a tax benefit from stock-based awards in additional paid-in capitalif an incremental tax benefit is realized after all other tax attributescurrently available to the Company have been utilized. In addition, the Companyhas elected to account for the impact of stock-based awards on other taxattributes, such as the research tax credit, through the consolidated statementof operations.

During the fourth quarter of 2006, Advent determinedthat there was sufficient positive evidence to support a significant decreasein the Company’s valuation allowance. As a result of this release of a majorityof its valuation allowance and recognition of deferred tax assets, Advent’sfinancial statements for fiscal 2006 reflect an increase in assets on itsbalance sheet, a decrease in goodwill relating to the recognition of acquireddeferred tax assets that were offset by a valuation allowance in purchaseaccounting and a tax benefit to the Company’s statement of operations in theamount of the reversal.

*Netincome (loss) per share:*   Basic net income (loss)per share is computed by dividing net income (loss) by the weighted averagenumber of common shares outstanding for that period. Diluted net income pershare is computed giving effect to all dilutive potential common shares thatwere outstanding during the period. Dilutive potential shares consist ofincremental common shares issuable upon exercise of stock 

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

options, stockappreciation rights and restricted stock units and conversion of preferredstock (none outstanding) for all periods, except in situations where inclusionis anti-dilutive.

*Comprehensiveincome (loss):**  *Comprehensiveincome (loss) consists of net income (loss), net unrealized foreign currencytranslation adjustments and net unrealized gains or losses onavailable-for-sale marketable securities and is presented in the consolidatedstatements of stockholders’ equity and comprehensive income.

*Segmentinformation:**  *TheCompany has determined that it has the following two reportable segments: 1)Advent Investment Management, and 2) MicroEdge. Advent Investment Managementderives revenues from the development, marketing and sale of software products,data interfaces and related maintenance and services that automate, integrateand support certain mission-critical functions of investment managementorganizations. MicroEdge derives revenues from the sale of software andservices for grant management, matching gifts and volunteer tracking for thegrantmaking community.

International sales, which are based on the locationto which the product is shipped or services are delivered, represented 12%,11%, and 9% of the Company’s net revenues for fiscal 2006, 2005 and 2004,respectively. No single customer accounted for more than 10% of net revenuesfor fiscal 2006, 2005 or 2004.

*Certainrisks and concentrations:**  *Product revenues are concentrated in the investmentmanagement software industry, which is highly competitive and rapidly changing.Significant technological changes in the industry or customer requirements, orthe emergence of competitive products with new capabilities or technologiescould adversely affect operating results. Additionally, Advent derives asignificant portion of its revenues from its Axys, Geneva and Advent PortfolioExchange applications and ancillary products and services, and therefore theirmarket acceptance is essential to the Company’s success.

Financial instruments that potentially subject theCompany to concentrations of credit risks comprise, principally, cash,short-term marketable securities, and trade accounts receivable. Advent investsexcess cash through banks, mutual funds, and brokerage houses primarily inhighly liquid securities and has investment policies and procedures thatminimize credit risk. Advent’s marketable securities consist of diversifiedinvestment grade securities traded in the United States of America. The Companybelieves no significant concentration of credit risk exists with respect tothese securities.

With respect to accounts receivable, Advent performsongoing credit evaluations of its customers and generally does not requirecollateral. The Company maintains reserves for potential credit losses oncustomer accounts when deemed necessary. At December 31, 2006 and 2005, nosingle customer accounted for more than 10% of accounts receivable.

*Reclassifications:**  *Certain prior year amounts havebeen reclassified to conform to the current year presentation. Adventreclassified $1.2 million in prepaid sales commissions from “prepaid expensesand other” to “other assets” on the consolidated balance sheet as of December 31,2005. Such reclassifications had no effect on the Company’s total assets,results of operations or stockholders’ equity.

*CommonStock Repurchases:**  *Adventaccounts for common stock repurchases by allocating the cash paid in excess ofpar value to additional paid-in capital and accumulated deficit. The Companycalculates the average additional paid-in capital per outstanding share at thebeginning of each monthly period in which stock was repurchased and records thedifference between the repurchase price per share and the sum of the par valueand average paid-in capital per share as an increase to accumulated deficit.

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*RecentAccounting Pronouncements**  *In June 2006, the Financial Accounting StandardsBoard (“FASB”) issued FASB Interpretation No. (“FIN”) 48, Accounting forUncertainty in Income Taxes—An Interpretation of FASB Statement No. 109,which prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax provision taken orexpected to be taken in a tax return. FIN 48 will be effective beginning in thefirst quarter of 2007. Advent does not expect the adoption of FIN 48 to have amaterial impact on its consolidated financial position, results of operationsor cash flows.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS157”). SFAS 157 defines fair value, establishes a framework for measuring fairvalue in accordance with generally accepted accounting principles, and expandsdisclosures about fair value measurements. The provisions of SFAS 157 will beeffective in the first quarter of 2008. The Company is currently evaluating theimpact of the provisions of SFAS 157.

In September 2006, the U.S. Securities andExchange Commission issued Staff Accounting Bulletin (SAB) No. 108, “Consideringthe Effects of Prior Year Misstatements in Current Year Financial Statements” (“SAB108”). SAB 108 does not change the staff’s previous guidance in SAB 99 onevaluating the materiality of misstatements. SAB 108 requires companies toevaluate the materiality of identified unadjusted errors on each financialstatement and related financial statement disclosure using both the “rollover”approach and the “iron curtain” approach. The rollover approach quantifiesmisstatements based on the amount of the error in the current year financialstatement whereas the iron curtain approach quantifies misstatements based onthe effects of correcting the misstatement in the balance sheet at the end ofthe current year, irrespective of the misstatement’s year(s) of origin.Financial statements would require adjustment when either approach results inquantifying a misstatement that is material. Correcting prior year financialstatements for immaterial errors would not require previously filed reports tobe amended. SAB 108 is effective for interim periods of the first fiscal yearending after November 15, 2006. The provisions of SAB 108 had no impact onthe Company’s consolidated financial statements as of December 31, 2006.

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities—Including an Amendment of FASB Statement No. 115,” (“SFAS159”). This standard permits an entity to choose to measure many financialinstruments and certain other items at fair value. Most of the provisions inSFAS 159 are elective; however, the amendment to FASB Statement No. 115, “Accountingfor Certain Investments in Debt and Equity Securities,” applies to all entitieswith available-for-sale and trading securities. The fair value optionestablished by SFAS 159 permits all entities to choose to measure eligibleitems at fair value at specified election dates. A business entity will reportunrealized gains and losses on items for which the fair value option has beenelected in earnings at each subsequent reporting date. The fair value option (a) maybe applied instrument by instrument, with a few exceptions, such as investmentsotherwise accounted for by the equity method, (b) is irrevocable (unless anew election date occurs), and (c) is applied only to entire arrangementsand not to portions of instruments. SFAS 159 is effective as of the beginningof an entity’s first fiscal year that begins after November 15, 2007.Early adoption is permitted as of the beginning of the previous fiscal yearprovided that the entity makes that choice in the first 120 days of that fiscalyear and also elects to apply the provisions of SFAS No. 157. The Companyis currently evaluating the impact of the provisions of SFAS 159.

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 2—MarketableSecurities**

At December 31,2006, marketable securities were summarized as follows (in thousands):

| ** **                                      | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **          | ** ** |
|-------------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------------|------------|
| ** **                                      | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Aggregate**       | ** ** |
| ** **                                      | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Fair Value** | ** ** |
| Corporate debt  securities and commercial paper |       |          | $          | 40,626         |       |           |       | $                   | 40         |   |   |   | $ | (44 | ) |   |   | $ | 40,622 |   |   |
| U.S. government  debt securities                |       |          | 4,427      |           |       |           | 12         |                |       |   | (16 | ) |   |   | 4,423 |   |   |
| Total                                           |       |          | $          | 45,053         |       |           |       | $                   | 52         |   |   |   | $ | (60 | ) |   |   | $ | 45,045 |   |   |
| Reported as:                                    |       |          |       |           |       |           |       |                |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                      |       |          |       |           |       |           |       |                |       |   |   |   |   |   | $ | 20,164 |   |   |
| Short-term  marketable securities               |       |          |       |           |       |           |       |                |       |   |   |   |   |   | 24,881 |   |   |
| Total                                           |       |          |       |           |       |           |       |                |       |   |   |   |   |   | $ | 45,045 |   |   |

 

At December 31,2005, marketable securities were summarized as follows (in thousands):

| ** **                                      | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **          | ** ** |
|-------------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------------|------------|
| ** **                                      | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Aggregate**       | ** ** |
| ** **                                      | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Fair Value** | ** ** |
| Corporate debt  securities and commercial paper |       | $             | 100,755    |           |       | $              | 12         |                |       |   | $ | (260 | ) |   | $ | 100,507 |   |
| U.S. government  debt securities                |       | 56,447        |       |           | 58         |           |       |                | (394       | ) |   | 56,111 |   |
| Municipalities                                  |       | 602           |       |           | —     |           |       |                | (2         | ) |   | 600 |   |
| Total                                           |       | $             | 157,804    |           |       | $              | 70         |                |       |   | $ | (656 | ) |   | $ | 157,218 |   |
| Reported as:                                    |       |          |       |           |       |           |       |                |       |   |   |   |   |
| Cash and cash  equivalents                      |       |          |       |           |       |           |       |                |       |   |   | $ | 64,727 |   |
| Short-term  marketable securities               |       |          |       |           |       |           |       |                |       |   |   | 92,491 |   |
| Total                                           |       |          |       |           |       |           |       |                |       |   |   | $ | 157,218 |   |

 

Thefollowing table summarizes marketable securities with unrealized losses bycontractual maturity dates at December 31, 2006 (in thousands):

| ** **                                       | ** ** | **Less than 12 months** | ** ** | **Greater than 12 months** | ** ** | **Total**                                     | ** ** |
|--------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                       | ** ** | ** **                             | ** ** | **Gross**                                 | ** ** | ** **                                    | ** ** | **Gross** | ** ** | ** ** | ** ** | **Gross** | ** ** |
| ** **                                       | ** ** | **Fair**                               | ** ** | **Unrealized**                            | ** ** | **Fair**                                      | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                                       | ** ** | **Value**                              | ** ** | **Losses**                                | ** ** | **   Value   ** | ** ** | **   Losses   ** | ** ** | **Value** | ** ** | **Losses** | ** ** |
| Commercial debt  securities and commercial paper |       | $                                      | 10,292     |                                      |       | $                                             | (15        | ) |   |   | $ | 5,551 |   |   |   | $ | (29 | ) |   | $ | 15,843 |   |   | $ | (44 | ) |   |
| U.S. government  debt securities                 |       | 469                                    |       |                                      | —     |                                          |       |   | 2,293 |   |   |   | (16 | ) |   | 2,762 |   |   | (16 | ) |   |
| Total                                            |       | $                                      | 10,761     |                                      |       | $                                             | (15        | ) |   |   | $ | 7,844 |   |   |   | $ | (45 | ) |   | $ | 18,605 |   |   | $ | (60 | ) |   |

 

Thegross unrealized losses related to investments are primarily due to a decreasein the fair value of debt securities as a result of an increase in interestrates during fiscal 2006. Advent has determined that the gross unrealizedlosses on its investments at December 31, 2006 are temporary in nature.Advent regularly reviews its investment portfolio to identify and evaluateinvestments that have indications of possible impairment. Factors considered indetermining whether a loss is temporary include the length of time and extentto which fair value has been less than the cost basis, the financial condition,credit quality and 

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

near-term prospects of the investee, and Advent’sability to hold the investment for a period of time sufficient to allow for anyanticipated recovery in market value.

Thefollowing table summarizes marketable securities with unrealized losses bycontractual maturity dates at December 31, 2005 (in thousands):

| ** **                                       | ** ** | **Less than 12 months** | ** ** | **Greater than 12 months** | ** ** | **Total**       | ** ** |
|--------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------------|------------|-----------------|------------|
| ** **                                       | ** ** | **Fair  Value**                        | ** ** | **Gross  Unrealized  Losses**             | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| Commercial debt  securities and commercial paper |       | $                                      | 35,886     |                                      |       | $               | (139       | ) |   | $ | 11,729 |   |   | $ | (121 | ) |   | $ | 47,615 |   |   | $ | (260 | ) |   |
| U.S. government  debt securities                 |       | 18,253                                 |       |                                      | (105       | )               |       | 27,800 |   |   | (289 | ) |   | 46,053 |   |   | (394 | ) |   |
| Municipalities                                   |       | 600                                    |       |                                      | (2         | )               |       | — |   |   | — |   |   | 600 |   |   | (2 | ) |   |
| Total                                            |       | $                                      | 54,739     |                                      |       | $               | (246       | ) |   | $ | 39,529 |   |   | $ | (410 | ) |   | $ | 94,268 |   |   | $ | (656 | ) |   |

 

Thefollowing table summarizes the maturities of marketable securities at December 31,2006 by contractual maturity dates (in thousands):

| ** **                 | ** ** | **Amortized** | ** ** | **Aggregate**       | ** ** |
|----------------------------|------------|---------------|------------|---------------------|------------|
| ** **                 | ** ** | **Cost**      | ** ** | **Fair Value** | ** ** |
| Due less than one  year    |       |          | $          | 36,749              |       |   |   | $ | 36,744 |   |   |
| Due greater than  one year |       |          | 8,304      |                |       |   | 8,301 |   |   |
| Total                      |       |          | $          | 45,053              |       |   |   | $ | 45,045 |   |   |

 

Advent’s marketable securities are classified asavailable-for-sale. Management has the ability and intent, if necessary, toliquidate any of these investments in order to meet the Company’s liquidityneeds within the normal operating cycle. Accordingly, all marketable securitiesare classified as current assets.

Thefollowing table summarizes gross realized gains and losses related to theCompany’s investments (in thousands):

| ** **             | ** ** | **Fiscal Years** | ** ** |
|------------------------|------------|-----------------------|------------|
| ** **             | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Gross realized  gains  |       | $                     | 239        |   | $ | 23 |   | $ | 173 |   |
| Gross realized  losses |       | (458                  | )          | (286 | ) | (232 | ) |
| Net realized  losses   |       | $                     | (219       | ) | $ | (263 | ) | $ | (59 | ) |

 

Gross realized losses for2006 resulted from the liquidation of a portion of the Company’s investmentportfolio to fund stock repurchase activity during 2006.

**Note 3—Acquisitionsand Divestiture**

*Advent UnitedKingdom and Switzerland*

On May 3, 2004, Advent acquired the remainingindependent distributor businesses from its independent European distributor,Advent Europe Holding BV (“Advent Europe”), in the United Kingdom andSwitzerland, as well as certain assets of Advent Europe. Advent made theseacquisitions in order to gain direct control over all of its Europeanoperations, which it views as an increasingly important 

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

market. The considerationof $6.0 million consisted of $5.7 million in cash, $242,000 of assumedliabilities and $83,000 of closing costs. A total of $5.5 million of the cashconsideration was paid at closing and the remaining $0.2 million was paid bythe Company during the second quarter of 2005. In addition, the Company paid anearn-out distribution of approximately $1.8 million under a formula based onrevenue bookings, which was recorded as additional goodwill in the secondquarter of 2004. No further earn-out distributions were earned or paid.

The acquisition has been accounted for using thepurchase method of accounting and accordingly, the purchase price has beenallocated to the tangible and identifiable intangible assets and liabilitiesacquired on the basis of their respective fair values on the acquisition date.The amounts allocated to identifiable intangibles were determined based upon management’sestimates using established valuation techniques. The results of operations ofAdvent United Kingdom and Advent Switzerland are included in the consolidatedstatement of operations subsequent to the acquisition date.

Theallocation of the purchase price for Advent United Kingdom, Advent Switzerlandand certain assets of Advent Europe at the date of purchase was as follows (inthousands, except estimated remaining useful life):

| ** **                | ** ** | **Estimated**        | ** ** | ** **              | ** ** |
|---------------------------|------------|----------------------|------------|-------------------------|------------|
| ** **                | ** ** | **Remaining**        | ** ** | ** **              | ** ** |
| ** **                | ** ** | **Useful Life** | ** ** | **Purchase Price** | ** ** |
| ** **                | ** ** | **(Years)**          | ** ** | **Allocation**          | ** ** |
| Goodwill                  |       |                 |       |                    |       |   | $ | 3,765 |   |   |
| Customer  relationships   |       |                 | 4          |                    |       |   | 326 |   |   |
| Sub-licensing  agreements |       |                 | 4          |                    |       |   | 913 |   |   |
| Employment  agreements    |       |                 | 3          |                    |       |   | 232 |   |   |
| Developed  technology     |       |                 | 3          |                    |       |   | 710 |   |   |
| Tangible assets           |       |                 |       |                    |       |   | 2,754 |   |   |
| Current  liabilities      |       |                 |       |                    |       |   | (2,387 | ) |   |
| Deferred tax  liabilities |       |                 |       |                    |       |   | (337 | ) |   |
| Total purchase  price     |       |                 |       |                    |       |   | $ | 5,976 |   |   |

 

Residual goodwill has beenrecorded based on the purchase price remaining after allocating the purchaseprice to the fair market value of assets purchased less liabilities assumed andto identifiable intangible assets. Residual goodwill arises as a result of,among other factors, new customers as well as the implicit value of future costsavings as a result of the combining of entities. Goodwill resulting from this acquisitionwas assigned to the Advent Investment Management segment and was determined tobe non-deductible for tax purposes under Internal Revenue Code 197.

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*Pro formaInformation*

Thefollowing supplemental unaudited pro forma information presents selectedfinancial information as though the purchases of Advent United Kingdom andSwitzerland, acquired in 2004, had been completed at the beginning of eachperiod presented after giving effect to purchase accounting adjustments. Thepro forma consolidated net loss amounts include certain pro forma adjustments,primarily the amortization of identifiable intangible assets and theelimination of interest income on cash used in the acquisition (in thousands,except per share data):

| ** **                            | ** ** | **Fiscal Year** | ** ** |
|---------------------------------------|------------|----------------------|------------|
| ** **                            | ** ** | **2004**             | ** ** |
| Net revenues                          |       |                 | $          | 151,121 |   |   |
| Net loss                              |       |                 | $          | (17,111 | ) |   |
| Net loss per share-basic  and diluted |       |                 | $          | (0.52 | ) |   |

 

In December 2005, the Company sold its AdventHellas subsidiary. Terms of the sale were not material to Advent’s financialcondition or results of operations.

In December 2006, theCompany acquired East Circle Solutions, Inc. (“East Circle”), whichdevelops software to automate the billing process for investment managementorganizations. Terms of the acquisition were not material to Advent’s financialcondition, results of operations or cash flows.

**Note 4—BalanceSheet Detail**

*Prepaid expensesand other*

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

| ** **                        | ** ** | **December 31** | ** ** |
|-----------------------------------|------------|----------------------|------------|
| ** **                        | ** ** | **2006**             | ** ** | **2005** | ** ** |
| Prepaid  commission               |       | $                    | 3,121      |   | $ | 1,674 |   |
| Prepaid royalty                   |       | 2,027                |       | 1,888 |   |
| Prepaid contract  expense         |       | 2,704                |       | 456 |   |
| Prepaid product  fee expense      |       | 374                  |       | 3,515 |   |
| Other                             |       | 4,459                |       | 3,594 |   |
| Total prepaid  expenses and other |       | $                    | 12,685     |   | $ | 11,127 |   |

 

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*Property andequipment, net*

Thefollowing is a summary of property and equipment (in thousands):

| ** **                       | ** ** | **December 31** | ** ** |
|----------------------------------|------------|----------------------|------------|
| ** **                       | ** ** | **2006**             | ** ** | **2005** | ** ** |
| Computer  equipment and software |       |                 | $          | 29,779 |   |   | $ | 30,054 |   |
| Leasehold  improvements          |       |                 | 20,664     |   |   | 21,556 |   |
| Furniture and  fixtures          |       |                 | 2,197      |   |   | 2,946 |   |
| Telephone system                 |       |                 | 720        |   |   | 1,760 |   |
| Construction in  process         |       |                 | 2,529      |   |   | 1,565 |   |
| Property and equipment, gross    |       |                 | $          | 55,889 |   |   | $ | 57,881 |   |
| Accumulated  depreciation        |       |                 | (28,551    | ) |   | (41,872 | ) |
| Property and  equipment, net     |       |                 | $          | 27,338 |   |   | $ | 16,009 |   |

 

Depreciation expense was$7.7 million, $8.7 million and $8.5 million for fiscal 2006, 2005 and 2004,respectively. In January 2006, Advent entered into a definitive leaseagreement with Toda Development, Inc. (“Toda”) whereby the Company leasesapproximately 105,000 square feet of office space at 600 Townsend Street in SanFrancisco, California. In October 2006, Advent moved its headquarters intothe 600 Townsend facility. Additionally, approximately $11.2 million ofleasehold improvements were made, of which $4.2 million were funded by Toda andthe remainder was paid by Advent.

*Goodwill*

Thechanges in the carrying value of goodwill by segment for fiscal 2006 and 2005were as follows (in thousands):

| ** **                                    | ** ** | **Advent**     | ** ** | ** **    | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|----------------|------------|---------------|------------|------------|------------|
| ** **                                    | ** ** | **Investment** | ** ** | ** **    | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Management** | ** ** | **MicroEdge** | ** ** | **Total**  | ** ** |
| Balance at  December 31, 2004            |       |           | $          | 96,257        |       |       |       | $ | 3,136 |   |   | $ | 99,393 |   |
| Translation  adjustments                      |       |           | (5,058     | )             |       |       | —     |   |   | (5,058 | ) |
| Balance at December 31, 2005             |       |           | $          | 91,199        |       |       |       | $ | 3,136 |   |   | $ | 94,335 |   |
| Additions                                     |       |           | 1,212      |          |       |       | —     |   |   | 1,212 |   |
| Translation  adjustments                      |       |           | 3,896      |          |       |       | —     |   |   | 3,896 |   |
| Recognition of  deferred tax asset adjustment |       |           | (1,061     | )             |       |       | —     |   |   | (1,061 | ) |
| Balance at  December 31, 2006            |       |           | $          | 95,246        |       |       |       | $ | 3,136 |   |   | $ | 98,382 |   |

 

Additions to goodwill of $1.2 million in 2006 relatedto the acquisition of East Circle in December 2006. Translationadjustments of $3.9 million represent the weakening of the U.S. dollar againstEuropean currencies during fiscal 2006. During the fourth quarter of 2006, theCompany recognized $1.1 million of previously unrecognized state deferredtax assets purchased with the Kinexus acquisition in 2003. Upon recognition ofthis deferred tax asset, the original goodwill from the purchase was reduced.

Translation adjustments of$5.1 million in fiscal 2005 represent the strengthening of the U.S. dollarrelative to certain European currencies during the year.

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*Other intangibles,net*

Thefollowing is a summary of intangible assets (in thousands, except weightedaverage amortization period):

| ** **                         | ** ** | **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 |   |   |

 

| ** **                         | ** ** | **Average**      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                         | ** ** | **Amortization** | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
| ** **                         | ** ** | **Period**       | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                         | ** ** | **(Years)**      | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
| Purchased  technologies            |       |             | 4.9        |             |       |             | $          | 12,726           |       |   |   | $ | (12,167 | ) |   |   | $ | 559 |   |   |
| Product development  costs         |       |             | 3.0        |             |       |             | 1,511      |             |       |   | (136 | ) |   |   | 1,375 |   |   |
| Developed technology sub-total     |       |             |       |             |       |             | 14,237     |             |       |   | (12,303 | ) |   |   | 1,934 |   |   |
| Customer relationships             |       |             | 5.6        |             |       |             | 20,531     |             |       |   | (13,810 | ) |   |   | 6,721 |   |   |
| Other intangibles                  |       |             | 2.5        |             |       |             | 307        |             |       |   | (204 | ) |   |   | 103 |   |   |
| Other intangibles sub-total        |       |             |       |             |       |             | 20,838     |             |       |   | (14,014 | ) |   |   | 6,824 |   |   |
| Balance at  December 31, 2005 |       |             |       |             |       |             | $          | 35,075           |       |   |   | $ | (26,317 | ) |   |   | $ | 8,758 |   |   |

 

Thechanges in the carrying value of intangible assets for fiscal 2006 and 2005were as follows (in thousands):

| ** **                         | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                         | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
| Balance at  December 31, 2004 |       | $          | 35,672     |             |       | $          | (21,004    | ) |   | $ | 14,668 |   |
| Additions                          |       | 1,511      |       |             | —     |       |       | 1,511 |   |
| Amortization                       |       | —     |       |             | (6,616     | )          |       | (6,616 | ) |
| Translation  adjustments           |       | (2,108     | )          |             | 1,303      |       |       | (805 | ) |
| Balance at December 31, 2005  |       | $          | 35,075     |             |       | $          | (26,317    | ) |   | $ | 8,758 |   |
| Additions                          |       | 2,212      |       |             | —     |       |       | 2,212 |   |
| Amortization                       |       | —     |       |             | (5,041     | )          |       | (5,041 | ) |
| Stock-based  compensation          |       | 138        |       |             | (25        | )          |       | 113 |   |
| Translation  adjustments           |       | 1,614      |       |             | (1,362     | )          |       | 252 |   |
| Balance at  December 31, 2006 |       | $          | 39,039     |             |       | $          | (32,745    | ) |   | $ | 6,294 |   |

 

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Additions to intangible assets of $2.2 million in 2006include capitalized product development costs of approximately $1.5 million andintangible asset additions of $860,000 from the acquisition of East Circle.Additions to intangible assets of $1.5 million in 2005 represent capitalizedproduct development costs.

Translation adjustments of $0.3 million and $(0.8)million in fiscal 2006 and 2005, respectively, represent translationadjustments as the U.S. dollar weakened (strengthened) relative to certain Europeancurrencies during 2006 and 2005, respectively.

Thefollowing is a summary of amortization and impairment of the Company’sdeveloped technology and other intangible assets for the periods presented (inthousands): 

| ** **                                          | ** ** | **Fiscal Years** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Developed  technology:                              |       |                  |       |   |   |   |   |   |   |
| Amortization—purchased  technologies           |       | $                     | 497        |   |   | $ | 2,439 |   |   | $ | 5,187 |   |
| Amortization—product  development costs        |       | 703                   |       |   | 136 |   |   | — |   |
| Impairment—purchased  technologies             |       | —                |       |   | — |   |   | 1,284 |   |
| Amortization and impairment of developed technology |       | $                     | 1,200      |   |   | $ | 2,575 |   |   | $ | 6,471 |   |
| Other intangibles:                                  |       |                  |       |   |   |   |   |   |   |
| Amortization—customer  relationships           |       | 3,789                 |       |   | 3,964 |   |   | 7,292 |   |
| Amortization—other  intangibles                |       | 77                    |       |   | 77 |   |   | 817 |   |
| Impairment—other  intangibles                  |       | —                |       |   | — |   |   | 4,128 |   |
| Amortization and impairment of other intangibles    |       | $                     | 3,866      |   |   | $ | 4,041 |   |   | $ | 12,237 |   |
| Total  amortization and impairment                  |       | $                     | 5,066      |   |   | $ | 6,616 |   |   | $ | 18,708 |   |

 

The intangible asset impairment charges incurred infiscal 2004 were associated with the Advent Investment Management reportingsegment.

During 2004, Advent recorded a non-cash impairmentcharge of $3.4 million to write off the carrying value of intangible assetsrelated to the Techfi product line. Of this amount, $1.0 million was includedin amortization and impairment of developed technology as it related toexisting and core technology and the remaining $2.4 million was included inamortization and impairment of other intangibles. In September 2004, theCompany decided to discontinue certain products within the Techfi product line,which was acquired in July 2002, as demand for the Techfi product line hadbeen significantly lower than expected. As a result of this triggering event,the Company began a review of the recoverability of its Techfi-relatedintangible assets. Recoverability was measured by a comparison of the assets’carrying amount to their expected future undiscounted net cash flows. TheCompany determined that these intangible assets had no remaining value andwrote off the remaining carrying value in 2004.

During 2004, Advent recorded a non-cash impairmentcharge of $681,000 to write off the carrying value of intangible assets relatedto Advent Wealth Services (“AWS”). Of this amount, $255,000 was included inamortization and impairment of developed technology as it related to existingand core technology and the remaining $426,000 was included in operatingexpenses. During the fourth quarter of 2004, as a result of the combinedtriggering events of significant underperformance by AWS relative to historicaland projected future operating results, as well as Advent’s decision tore-focus the Company’s direction on its core businesses, the Company began areview of the recoverability of its AWS-related intangible assets.Recoverability was measured by a comparison of the assets’ carrying amount totheir 

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

expected futureundiscounted net cash flows. The Company determined that these intangibleassets had no remaining value and wrote off the remaining carrying value in2004.

Also during 2004, Advent recorded a non-cashimpairment charge of $1.4 million, included in amortization and impairment ofother intangibles, to write off the carrying value of intangible assets relatedto Advent Hellas. During the fourth quarter of 2004, as a result of thetriggering event of significant underperformance by Advent Hellas relative tohistorical and projected future operating results, the Company began a reviewof the recoverability of its Advent Hellas intangible assets. Recoverabilitywas measured by a comparison of the assets’ carrying amount to their expectedfuture undiscounted net cash flows. The Company determined that theseintangible assets had no remaining value and wrote off the remaining carryingvalue in 2004.

Basedon the carrying amount of intangible assets as of December 31, 2006, the estimatedfuture amortization is as follows (in thousands):

| ** **                           | ** ** | **Fiscal Years** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|-----------------------|------------|------------|------------|
| ** **                           | ** ** | **2007**              | ** ** | **2008**   | ** ** | **2009** | ** ** | **2010** | ** ** | **Total** | ** ** |
| *Estimated  future amortization of:* | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Developed  technology                |       | $                     | 1,071      |       | $          | 933 |   | $ | 851 |   | $ | 190 |   | $ | 3,045 |   |
| Other intangibles                    |       | 1,852                 |       | 942        |       | 448 |   | 7 |   | 3,249 |   |
| Total                                |       | $                     | 2,923      |       | $          | 1,875 |   | $ | 1,299 |   | $ | 197 |   | $ | 6,294 |   |

 

*Other assets*

The following is a summary of other assets (inthousands):

| ** **                                                            | ** ** | **December 31** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                            | ** ** | **2006**             | ** ** | **2005** | ** ** |
| Long-term  investments, gross                                         |       | $                    | 13,800     |   | $ | 13,800 |   |
| Accumulated  write-downs due to other-than-temporary decline in value |       | (5,341               | )          | (5,341 | ) |
| Long-term  investments, net                                           |       | $                    | 8,459      |   | $ | 8,459 |   |
| Long-term  prepaids                                                   |       | 4,098                |       | 3,541 |   |
| Deposits                                                              |       | 2,443                |       | 1,295 |   |
| Total other  assets                                                   |       | $                    | 15,000     |   | $ | 13,295 |   |

 

Long-term investments include equity investments inseveral privately held companies, most of which can still be considered in thestart-up or development stages.

In 2002, Advent acquired approximately 15% of theoutstanding stock of LatentZero Limited (“LatentZero”), a privately-heldcompany located in the United Kingdom, for $7 million. Through December 28,2004, LatentZero was accounted for under the equity method of accounting asAdvent’s Chief Executive Officer was a member of LatentZero’s board ofdirectors and Advent accordingly considered itself to have significantinfluence over this company. The Company’s portion of net loss from thisinvestee was $257,000 for fiscal 2004. Effective December 28, 2004, Advent’sChief Executive Officer resigned her seat on the investee’s board of directorsand as a result, Advent no longer believes it has significant influence overLatentZero. Therefore, this investment is carried at the lower of cost or fairvalue at December 31, 2005 and 2006, consistent with the Company’s otherinvestments.

During2005, Advent sold one of its private equity investments for proceeds of $3.8million resulting in a gain on sale of $3.6 million.

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*Accrued liabilities*

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

| ** **                              | ** ** | **December 31** | ** ** |
|-----------------------------------------|------------|----------------------|------------|
| ** **                              | ** ** | **2006**             | ** ** | **2005** | ** ** |
| Salaries and  benefits payable          |       | $                    | 13,624     |   | $ | 10,368 |   |
| Accrued  restructuring, current portion |       | 2,650                |       | 1,422 |   |
| Other                                   |       | 6,718                |       | 8,847 |   |
| Total accrued  liabilities              |       | $                    | 22,992     |   | $ | 20,637 |   |

 

***Otherlong-term liabilities***

The following is a summaryof other long-term liabilities (in thousands):

| ** **                                | ** ** | **December 31** | ** ** |
|-------------------------------------------|------------|----------------------|------------|
| ** **                                | ** ** | **2006**             | ** ** | **2005** | ** ** |
| Deferred rent                             |       | $                    | 6,451      |   | $ | 1,456 |   |
| Accrued  restructuring, long-term portion |       | 3,941                |       | 3,138 |   |
| Deferred revenue,  long-term portion      |       | 1,053                |       | 333 |   |
| Other                                     |       | 1,026                |       | 325 |   |
| Total other  long-term liabilities        |       | $                    | 12,471     |   | $ | 5,252 |   |

**Note5—Accumulated Other Comprehensive Income**

The components ofaccumulated other comprehensive income were as follows (in thousands):

| ** **                                                | ** ** | **December 31** | ** ** |
|-----------------------------------------------------------|------------|----------------------|------------|
| ** **                                                | ** ** | **2006**             | ** ** | **2005** | ** ** |
| Accumulated net  unrealized loss on marketable securities |       | $                    | (8         | ) | $ | (586 | ) |
| Accumulated  foreign currency translation adjustments     |       | 10,757               |       | 6,552 |   |
| Accumulated other  comprehensive income                   |       | $                    | 10,749     |   | $ | 5,966 |   |

**Note6—Restructuring Charges**

Restructuring initiatives have been implemented in theCompany’s Advent Investment Management and Other operating segments to reducecosts and improve operating efficiencies by better aligning the Company’sresources to its near-term revenue opportunities. These initiatives haveresulted in restructuring charges comprised primarily of costs related toproperties abandoned in connection with facilities consolidation, relatedwrite-down of leasehold improvements and severance and associated employeetermination costs related to headcount reductions. Advent’s restructuringcharges included accruals for estimated losses on facility costs based on theCompany’s contractual obligations net of estimated sublease income. Adventreassesses this liability periodically based on market conditions.

For fiscal 2006, Advent recorded total restructuringcharges of $3.7 million which primarily related to facility and exit costsassociated with the relocation of itscorporate headquarters facility in San Francisco during the fourth quarter of2006. Restructuring charges in 2006 also included costs associated with exitinga portion of the Company’s facility in New Rochelle, New York, and an entirefacility in Summit, 

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

New Jersey, andadjustments to original estimates for facilities in San Francisco, Californiaand New York, New York.

For fiscal 2005, Advent recorded total restructuringcharges of $2.0 million consisting of facility and exit costs of $1.5 millionrelated to the sub-leasing of one floor of the Company’s office in New York,New York and additional charges of $567,000 during 2005 primarily toadjust original estimates of facility maintenance expenses and real estatetaxes of vacated facilities.

For fiscal 2004, Advent recorded total restructuringcharges of $5.1 million consisting of $5.0 million to exit leased facilities,$0.9 million for the write-off of property and equipment, $136,000 forseverance and benefits associated with the termination of nine employees, andnet benefits of $893,000 to adjust original estimates for vacated facilitiesand severance charges.

The following table setsforth an analysis of the components of the restructuring charges and thepayments and non-cash charges made against the accrual during fiscal 2004, 2005and 2006 (in thousands):

| ** **                                                  | ** ** | ** **             | ** ** | ** **             | ** ** | **Property &** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                                  | ** ** | **Facility Exit** | ** ** | **Severance and** | ** ** | **Equipment**           | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | **Costs**              | ** ** | **Benefits**           | ** ** | **Abandoned**           | ** ** | **Total**  | ** ** |
| Balance of  restructuring accrual at December 31, 2003 |       |                   | $          | 2,181                  |       |                    |       | $          | 164        |   |   |   | $ | — |   |   | $ | 2,345 |   |
| Restructuring  charges                                      |       |                   | 5,027      |                   |       |                    | 136        |       |       |   | 863 |   |   | 6,026 |   |
| Reversal of  deferred rent related to facilities exited     |       |                   | 272        |                   |       |                    | —     |       |       |   | — |   |   | 272 |   |
| Cash payments                                               |       |                   | (2,529     | )                      |       |                    | (189       | )          |       |   | — |   |   | (2,718 | ) |
| Non-cash charges                                            |       |                   | —     |                   |       |                    | —     |       |       |   | (863 | ) |   | (863 | ) |
| Adjustment of  prior restructuring costs                    |       |                   | (794       | )                      |       |                    | (99        | )          |       |   | — |   |   | (893 | ) |
| Balance of  restructuring accrual at December 31, 2004 |       |                   | $          | 4,157                  |       |                    |       | $          | 12         |   |   |   | $ | — |   |   | $ | 4,169 |   |
| Restructuring  charges                                      |       |                   | 1,472      |                   |       |                    | —     |       |       |   | — |   |   | 1,472 |   |
| Reversal of  deferred rent related to facilities exited     |       |                   | 703        |                   |       |                    | —     |       |       |   | — |   |   | 703 |   |
| Cash payments                                               |       |                   | (2,351     | )                      |       |                    | —     |       |       |   | — |   |   | (2,351 | ) |
| Adjustment of  prior restructuring costs                    |       |                   | 572        |                   |       |                    | (5         | )          |       |   | — |   |   | 567 |   |
| Balance of  restructuring accrual at December 31, 2005 |       |                   | $          | 4,553                  |       |                    |       | $          | 7          |   |   |   | $ | — |   |   | $ | 4,560 |   |
| Restructuring  charges                                      |       |                   | 3,549      |                   |       |                    | —     |       |       |   | — |   |   | 3,549 |   |
| Reversal of deferred  rent related to facilities exited     |       |                   | 666        |                   |       |                    | —     |       |       |   | — |   |   | 666 |   |
| Cash payments                                               |       |                   | (2,370     | )                      |       |                    | —     |       |       |   | — |   |   | (2,370 | ) |
| Adjustment of  prior restructuring costs                    |       |                   | 189        |                   |       |                    | (3         | )          |       |   | — |   |   | 186 |   |
| Balance of restructuring  accrual at December 31, 2006 |       |                   | $          | 6,587                  |       |                    |       | $          | 4          |   |   |   | $ | — |   |   | $ | 6,591 |   |

The accrued excess facility costs of $6.6 million arestated at estimated fair value, net of estimated sub-lease income of $7.8million. Advent expects to pay the remaining obligations in connection withvacated facilities over the remaining lease terms, which will expire on variousdates through 2012. Advent expects to pay the remaining severance and benefitsin 2007.

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 7—Income Taxes**

The components ofincome (loss) before income taxes were as follows (in thousands):

| ** ** | ** ** | **Fiscal Years** | ** ** |
|------------|------------|-----------------------|------------|
| ** ** | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| U.S.       |       | $                     | 5,906      |   | $ | 17,375 |   | $ | (12,021 | ) |
| Foreign    |       | (2,335                | )          | (2,835 | ) | (4,138 | ) |
| Total      |       | $                     | 3,571      |   | $ | 14,540 |   | $ | (16,159 | ) |

The components of theprovision for (benefit from) income taxes included (in thousands):

| ** ** | ** ** | **Fiscal Years** | ** ** |
|------------|------------|-----------------------|------------|
| ** ** | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:   |       |                  |       |   |   |   |   |
| Federal    |       | $                     | 2,314      |   | $ | 203 |   | $ | — |   |
| State      |       | 1,569                 |       | 808 |   | 903 |   |
| Foreign    |       | 380                   |       | 347 |   | 303 |   |
| Deferred:  |       |                  |       |   |   |   |   |
| Federal    |       | (68,187               | )          | — |   | — |   |
| State      |       | (14,296               | )          | — |   | — |   |
| Foreign    |       | (811                  | )          | (953 | ) | (1,186 | ) |
| Total      |       | $                     | (79,031    | ) | $ | 405 |   | $ | 20 |   |

 

The effective income taxrate on earnings differed from the United States statutory tax rate as follows:

| ** **                                                                                 | ** ** | **Fiscal Years** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                 | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Statutory federal  rate                                                                    |       | 35.0                  | %          | 35.0 | % | (35.0 | )% |
| State taxes                                                                                |       | 4.6                   |       | 5.5 |   | 5.6 |   |
| Stock  compensation relating to incentive stock options and employee stock purchase  plans |       | 75.1                  |       | — |   | — |   |
| Research and  development tax credits                                                      |       | (61.4                 | )          | (6.8 | ) | (9.2 | ) |
| Change in  valuation allowance                                                             |       | (2,248.1              | )          | (35.7 | ) | 34.7 |   |
| California audit  adjustment                                                               |       | (14.6                 | )          | — |   | — |   |
| Reserve  adjustment due to statute closing                                                 |       | (17.8                 | )          | — |   | — |   |
| Foreign taxes                                                                              |       | 10.8                  |       | 2.7 |   | 1.5 |   |
| Other, net                                                                                 |       | 3.3                   |       | 2.1 |   | 2.5 |   |
| Total                                                                                      |       | (2,213.1              | )%         | 2.8 | % | 0.1 | % |

 

As of December 31, 2006, Advent made no provisionfor a cumulative total of $1.7 million of undistributed earnings for certainnon-U.S. subsidiaries, which are deemed to be permanently reinvested.

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The tax effects of temporary differences that gaverise to significant portions of the deferred tax assets and liabilities were asfollows (in thousands):

| ** **                                                     | ** ** | **December 31** | ** ** |
|----------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                     | ** ** | **2006**             | ** ** | **2005** | ** ** |
| Current deferred tax  assets:                                  |       |                 |       |   |   |
| Deferred revenue                                               |       | $                    | 440        |   | $ | 190 |   |
| Other accrued liabilities and reserves                         |       | 5,117                |       | 3,653 |   |
| State taxes                                                    |       | —               |       | (124 | ) |
| Other                                                          |       | 2,393                |       | 12 |   |
| Valuation allowance                                            |       | —               |       | (3,731 | ) |
| Total current                                                  |       | 7,950                |       | — |   |
| Non-current deferred tax  assets:                              |       |                 |       |   |   |
| Depreciation and amortization                                  |       | 15,403               |       | 16,388 |   |
| Net operating losses, capital losses and credit  carryforwards |       | 68,796               |       | 82,846 |   |
| Other                                                          |       | 2,971                |       | 873 |   |
| Valuation allowance                                            |       | (11,576              | )          | (99,995 | ) |
| Total non-current                                              |       | 75,594               |       | 112 |   |
| Deferred tax  assets                                           |       | 83,544               |       | 112 |   |
| Deferred tax  liabilities                                      |       | (225                 | )          | (1,122 | ) |
| Net deferred tax  assets (liabilities)                         |       | $                    | 83,319     |   | $ | (1,010 | ) |

During the fourth quarterof 2006, management determined that $83.6 million of deferred tax assets thathad previously been offset by a valuation allowance would more likely than notbe realized in future periods. This assessment was primarily based on theCompany’s consistently positive financial results over the previous eightquarters and a positive income outlook that is supported by recurring revenuestreams. Therefore, the valuation allowance was decreased by $83.6 million inthe fourth quarter of 2006.

The Company continues to maintain a valuationallowance against its deferred tax assets relating to capital losses andreserves of $9.3 million and certain state net operating losses of $2.3 milliondue to the uncertainty surrounding the realization of the favorable taxattributes in future tax returns. The capital loss carryforwards expire between2007 and 2010. If it is determined in the future that it is more likely thannot that these deferred tax assets will be realized, the valuation allowancewill be further reduced.

At December 31, 2006, Advent had federal netoperating loss carryforwards of approximately $118 million, which includesstock-based compensation deductions of $24 million. Utilization of these losscarryforwards, including losses obtained from acquisitions, is subject tocertain limitations under the federal income tax laws. These net operating losscarryforwards expire between 2010 and 2024. Also at December 31, 2006,Advent had state net operating loss carryforwards in various states in which itfiles tax returns.

Advent also had federalresearch credits of $12.4 million which expire between 2019 and 2026 and Californiaresearch credits of $9.7 million which do not expire.

**Note 8—Commitmentsand Contingencies**

Advent leases office spaceand equipment under non-cancelable operating lease agreements, which expire atvarious dates through December 2018. Some operating leases containescalation provisions for 

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

adjustmentsin the consumer price index. Advent is responsible for maintenance, insurance,and property taxes. In January 2006, Advent entered into a lease agreementfor the Company’s facilities located at 600 Townsend in San Francisco,California, and in October 2006, Advent extended its lease agreement forits facilities located at 619 West 54th Street in New York, New York. Future minimumpayments and receipts under the non-cancelable operating leases consisted of thefollowing at December 31, 2006 (in thousands):

| ** ** | ** ** | **Future**              | ** ** |
|------------|------------|-------------------------|------------|
| ** ** | ** ** | **Lease Payments** | ** ** | **Sub-lease Income** | ** ** | **Net Lease Payments** | ** ** |
| 2007       |       |                    | $          | 8,350 |   |   |   | $ | 2,471 |   |   |   | $ | 5,879 |   |   |
| 2008       |       |                    | 9,529      |   |   |   | 2,439 |   |   |   | 7,090 |   |   |
| 2009       |       |                    | 7,083      |   |   |   | 1,761 |   |   |   | 5,322 |   |   |
| 2010       |       |                    | 5,979      |   |   |   | 1,201 |   |   |   | 4,778 |   |   |
| 2011       |       |                    | 5,073      |   |   |   | 801 |   |   |   | 4,272 |   |   |
| Thereafter |       |                    | 21,925     |   |   |   | 310 |   |   |   | 21,615 |   |   |
| Total      |       |                    | $          | 57,939 |   |   |   | $ | 8,983 |   |   |   | $ | 48,956 |   |   |

Rent expense for fiscal2006, 2005 and 2004 was $7.4 million, $6.7 million and $7.7 million,respectively, net of sub-lease income from non-restructured facilities of$108,000, $97,000 and $236,000 in fiscal 2006, 2005 and 2004, respectively.

***Indemnifications***

As permitted or requiredunder Delaware law and to the maximum extent allowable under that law, Adventhas certain obligations to indemnify its current and former officers anddirectors for certain events or occurrences while the officer or director is,or was serving, at Advent’s request in such capacity. These indemnificationobligations are valid as long as the director or officer acted in good faithand in a manner the person reasonably believed to be in or not opposed to thebest interests of the corporation, and, with respect to any criminal action orproceeding, had no reasonable cause to believe his or her conduct was unlawful.The maximum potential amount of future payments Advent could be required tomake under these indemnification obligations is unlimited; however, Advent hasa director and officer insurance policy that mitigates Advent’s exposure andenables Advent to recover a portion of any future amounts paid. The Companybelieves the estimated fair value of these indemnification obligations isminimal.

***LegalContingencies***

From time to time, Advent is involved in claims andlegal proceedings that arise in the ordinary course of business. Based oncurrently available information, management does not believe that the ultimateoutcome of these unresolved matters, individually and in the aggregate, islikely to have a material adverse effect on Advent’s financial position orresults of operations. However, litigation is subject to inherent uncertaintiesand Advent’s view of these matters may change in the future. Were anunfavorable outcome to occur, there exists the possibility of a materialadverse impact on Advent’s financial position and results of operations for theperiod in which the unfavorable outcome occurs, and potentially in futureperiods.

On March 8, 2005, certain of the formershareholders of Kinexus and the shareholders’ representative filed suit againstAdvent in the Delaware Chancery Court. The complaint alleges that Adventbreached the Agreement and Plan of Merger dated as of December 31, 2001pursuant to which Advent acquired all of the outstanding shares of Kinexus dueprincipally to the fact that no amount was paid by Advent on an 

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

earn-out of up to $115million. The earn-out, which was payable in cash or stock at the election ofAdvent, was based upon Kinexus meeting certain revenue targets in both 2002 and2003. The complaint seeks unspecified compensatory damages, an accounting andrestitution for unjust enrichment. Advent advised the shareholders’representative in January 2003 that the earn-out terms had not been met in2002 and accordingly no earn-out was payable for 2002 and would not be payablefor 2003. Advent disputes the plaintiffs’ claims and believes that it hasmeritorious defenses and intends to vigorously defend this action. Managementbelieves that any potential loss associated with this litigation is neitherprobable nor reasonably estimable at this time and accordingly has not accruedany amounts for any potential loss.

On July 11, 2006, aformer independent consultant filed suit against Advent in the Supreme Court ofthe State of New York. The complaint alleges that Advent failed to pay plaintiffcommissions due for his services as a consultant to Advent. The plaintiff isseeking approximately $101,000 in commissions and $2.0 million inunspecified consequential damages, as well as interest and attorney’s fees. Adventdisputes the plaintiffs’ claims and believes that it has meritorious defensesand intends 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.

**Note 9—Stock-BasedCompensation**

**Stock-BasedCompensation Expense in Fiscal 2006**

Since the adoption of SFAS 123R, there have been nochanges to the Company’s equity plans or modifications to outstanding stock-basedawards.

As the stock-based compensation expense recognized onthe consolidated statements of operations for fiscal 2006 is based on awardsultimately expected to vest, such amount has been reduced for estimatedforfeitures. SFAS 123R requires forfeitures to be estimated at the time ofgrant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates. Forfeitures were estimated based on the Company’shistorical experience over the last ten years. Previously, under SFAS 123, theCompany recorded forfeitures as they occurred.

Prior to adoption of SFAS 123R, benefits of taxdeductions in excess of recognized compensation costs were reported asoperating cash flows. SFAS 123R requires that cash flows resulting from excesstax benefits to be reported as a financing cash inflow rather than as areduction of taxes paid.

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Stock-basedcompensation expense related to stock options, SAR’s, ESPP and RSU’s wasrecognized on Advent’s consolidated statement of operations for fiscal 2006 asfollows (in thousands, except per share data):

| ** **                                        | ** ** | **Fiscal Year 2006** | ** ** |
|---------------------------------------------------|------------|--------------------------------|------------|
| ** **                                        | ** ** | **Options,**                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **SAR’s**                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **ESPP(1)**                    | ** ** | **RSU’s(2)** | ** ** | **Total** | ** ** |
| **Statement of operations  classification**       |       |                           |       |   |   |   |   |   |   |
| Cost of license  and development fee revenues     |       | $                              | 9          |   |   | $ | 1 |   |   | $ | 10 |   |
| Cost of  maintenance and other recurring revenues |       | 910                            |       |   | 62 |   |   | 972 |   |
| Cost of  professional services and other revenues |       | 746                            |       |   | 42 |   |   | 788 |   |
| Total cost of revenues                            |       | 1,665                          |       |   | 105 |   |   | 1,770 |   |
| Sales and marketing                               |       | 4,605                          |       |   | 187 |   |   | 4,792 |   |
| Product  development                              |       | 2,906                          |       |   | 152 |   |   | 3,058 |   |
| General and  administrative                       |       | 3,824                          |       |   | 152 |   |   | 3,976 |   |
| Total operating expenses                          |       | 11,335                         |       |   | 491 |   |   | 11,826 |   |
| Total stock-based employee compensation expense   |       | $                              | 13,000     |   |   | $ | 596 |   |   | $ | 13,596 |   |
| Tax effect on stock-based employee compensation   |       | (2,298                         | )          |   | (236 | ) |   | (2,534 | ) |
| Net effect on net income                          |       | $                              | 10,702     |   |   | $ | 360 |   |   | $ | 11,062 |   |
| Effect on net  income per share:                  |       |                           |       |   |   |   |   |   |   |
| Basic                                             |       | $                              | 0.37       |   |   | $ | 0.01 |   |   | $ | 0.38 |   |
| Diluted                                           |       | $                              | 0.35       |   |   | $ | 0.01 |   |   | $ | 0.36 |   |

----

(1)          Represents thestock-based compensation expense impact of adopting SFAS 123R on January 1,2006.

(2)          Represents thestock-based compensation expense impact from RSU’s. During 2006, the Companychanged its employee equity compensation instruments from stock options toprimarily a mix of SAR’s and RSU’s to minimize the dilutive effect from theCompany’s equity plans on the Company’s common shares outstanding. As a result,the Company recorded stock-based compensation expense from RSU’s during 2006which would have been recognized under APB 25, regardless of the Company’sadoption of SFAS 123R on January 1, 2006.

As of December 31,2006, total unrecognized compensation cost related to unvested awards not yetrecognized under all equity compensation plans, adjusted for estimatedforfeitures, was $24.5 million and is expected to be recognized through theremaining vesting period of each grant. As of December 31, 2006, the weightedaverage remaining period was 3.1 years.

**Stock-BasedCompensation Expense in Fiscal Periods Prior to the Adoption of SFAS 123R**

Prior to the adoption of SFAS 123R, Advent used theintrinsic value-based method, as prescribed in APB 25, to account for allstock-based compensation plans, and the Company had adopted the disclosure-onlyalternative of SFAS 123, “Accounting for Stock-Based Compensation,” as amendedby SFAS No. 148, “Accounting for Stock-Based Compensation—Transition andDisclosure.

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The pro forma information for the years ended December 31,2005 and 2004, respectively, would have been as follows (in thousands, exceptper share data):

| ** **                                                                                                                | ** ** | **Fiscal Years** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Net income (loss)—as  reported                                                                                       |       | $                     | 14,135     |   | $ | (16,179 | ) |
| Total stock-based  employee compensation expense determined under fair value based method for  all options, net of tax(1) |       | (15,913               | )          | (17,432 | ) |
| Stock-based  employee compensation expense included in reported net loss, net of tax                                      |       | —                |       | 21 |   |
| Net loss—pro forma                                                                                                   |       | $                     | (1,778     | ) | $ | (33,611 | ) |
| Net income (loss) per share                                                                                               |       |                  |       |   |   |
| Basic—as reported                                                                                                    |       | $                     | 0.46       |   | $ | (0.49 | ) |
| Diluted—as  reported                                                                                                 |       | $                     | 0.44       |   | $ | (0.49 | ) |
| Basic and diluted—pro  forma:                                                                                        |       | $                     | (0.06      | ) | $ | (1.02 | ) |

----

(1)          Amountsare shown net of tax expense for fiscal 2005 and 2004.

**ValuationAssumptions**

Advent uses the Black-Scholes option pricing model todetermine the fair value of equity compensation awards (stock options,restricted stock units (“RSU”) and stock appreciation rights (“SAR”)) andemployee stock purchase plan shares, consistent with the provisions of SFAS123R and SEC Staff Accounting Bulletin No. 107 (“SAB 107”).

Thefair value of each equity award grant is estimated on the date of grant usingthe Black-Scholes option valuation model and the straight-line attributionapproach with the following assumptions:

| ** **                                    | ** ** | **Fiscal Years** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Stock Options/ Stock  Appreciation Rights** | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Risk-free interest rate                       |       | 4.3% - 5.1            | %          | 3.96 | % |   | 3.10 | % |   |
| Volatility                                    |       | 42.7% - 48.           | 5%         | 60.5 | % |   | 66.6 | % |   |
| Expected life                                 |       | 5 years               |       | 5 years |   | 5 years |   |
| Expected dividends                            |       | None                  |       | None |   | None |   |
| **Employee  Stock Purchase Plan***            |       |                  |       |   |   |   |   |
| Risk-free interest rate                       |       | 3.7% - 4.             | 2%         | 3.2 | % |   | 1.8 | % |   |
| Volatility                                    |       | 34.4% - 36.           | 5%         | 30.6 | % |   | 32.3 | % |   |
| Expected life                                 |       | 6 months              |       | 6 months |   | 6 months |   |
| Expected dividends                            |       | None                  |       | None |   | None |   |

----

*                    The ESPPperiods begin every six months in the second and fourth quarter of each year.

Prior to the adoption of SFAS 123R, the Company usedhistorical volatility in deriving its expected volatility assumption. Theexpected stock price volatility for fiscal 2006 was determined based on anequally weighted average of historical and implied volatility of the Company’scommon stock. Advent determined that a blend of implied volatility andhistorical volatility is more reflective of the market 

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

conditions and a betterindicator of expected volatility than using purely historical volatility. Theexpected life for fiscal 2006, 2005 and 2004 was determined based on historicalexperience of similar awards, giving consideration to the contractual terms of thestock-based awards, vesting schedules and expectations of future employeebehavior. The risk-free interest rate is based on the U.S. Treasury yieldcurve in effect at the time of grant for periods corresponding with theexpected life of the option or SAR. The dividend yield assumption is based onthe Company’s history of not paying dividends and the resultant futureexpectation of zero dividend payouts.

The fair value of RSU’s onthe date of grant is the Advent share price.

**Equity AwardActivity**

Asummary of the status of the Company’s stock option, SAR and warrant activityfor the period presented is as follows (in thousands except weighted averageexercise price):

| ** **                                   | ** ** | **2006**           | ** ** | **2005**     | ** ** | **2004**           | ** ** |
|----------------------------------------------|------------|--------------------|------------|--------------|------------|--------------------|------------|
| ** **                                   | ** ** | ** **         | ** ** | **Weighted** | ** ** | ** **         | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                   | ** ** | ** **         | ** ** | **Average**  | ** ** | ** **         | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                   | ** ** | **Number of** | ** ** | **Exercise** | ** ** | **Number of** | ** ** | **Exercise** | ** ** | **Number of** | ** ** | **Exercise** | ** ** |
| ** **                                   | ** ** | **Shares**         | ** ** | **Price**    | ** ** | **Shares**         | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** |
| Outstanding at beginning  of year            |       |               | 5,489      |         |       |               | $          | 19.26 |   |   |   | 5,710 |   |   |   | $ | 18.69 |   |   |   | 5,205 |   |   |   | $ | 18.51 |   |   |
| Options & SAR’s  granted       |       |               | 877        |         |       |               | $          | 29.00 |   |   |   | 1,403 |   |   |   | $ | 19.81 |   |   |   | 1,468 |   |   |   | $ | 19.29 |   |   |
| Options & SAR’s  exercised     |       |               | (665       | )            |       |               | $          | 17.31 |   |   |   | (1,099 | ) |   |   | $ | 16.42 |   |   |   | (377 | ) |   |   | $ | 12.56 |   |   |
| Options, SAR’s &  warrants canceled |       |               | (409       | )            |       |               | $          | 32.67 |   |   |   | (525 | ) |   |   | $ | 20.47 |   |   |   | (586 | ) |   |   | $ | 22.60 |   |   |
| Outstanding at end of  year                  |       |               | 5,292      |         |       |               | $          | 20.08 |   |   |   | 5,489 |   |   |   | $ | 19.26 |   |   |   | 5,710 |   |   |   | $ | 18.69 |   |   |
| Exercisable at end of  year                  |       |               | 2,990      |         |       |               | $          | 18.22 |   |   |   | 2,685 |   |   |   | $ | 19.32 |   |   |   | 3,165 |   |   |   | $ | 18.54 |   |   |

 

The aggregate intrinsic value of options and SAR’soutstanding and exercisable as of December 31, 2006 was $81.7 million and$52.2 million, respectively. The intrinsic value is calculated as thedifference between the Company’s closing stock price of $35.29 as of December 31,2006 and the exercise price of the underlying awards for options or SAR’s thatwere in-the-money as of that date.

The weighted average grant date fair value of options &SAR’s, as determined under SFAS 123R, granted during the fiscal 2006 was $13.96per share. The total intrinsic value of options exercised during fiscal2006 was $10.2 million. The total cash received from employees as a result ofemployee stock option exercises during fiscal 2006 was approximately $11.5million. No SAR’s were exercised during fiscal 2006.

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Theoptions outstanding and currently exercisable by exercise price at December 31,2006 were as follows:

| ** **              | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **              | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | ** **                   | ** ** | **Average**                  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **              | ** ** | ** **                   | ** ** | **Remaining**                | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **              | ** ** | **Number**                   | ** ** | **Contractual**              | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Exercise Price** | ** ** | ** **                   | ** ** | **Outstanding**              | ** ** | **Life (in years)** | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
| ** **              | ** ** | **(in thousands)**      | ** ** | ** **                   | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| $8.2920 -  $14.0800     |       |                         | 891        |                         |       |   | 1.92 |   |   |   | $ | 10.54 |   |   |   | 825 |   |   |   | $ | 10.26 |   |   |
| $14.209 -  $17.9500     |       |                         | 1,038      |                         |       |   | 7.49 |   |   |   | $ | 17.41 |   |   |   | 402 |   |   |   | $ | 17.20 |   |   |
| $18.060 -  $18.8800     |       |                         | 1,249      |                         |       |   | 6.20 |   |   |   | $ | 18.52 |   |   |   | 878 |   |   |   | $ | 18.61 |   |   |
| $18.950 -  $25.5630     |       |                         | 961        |                         |       |   | 5.70 |   |   |   | $ | 21.06 |   |   |   | 659 |   |   |   | $ | 21.39 |   |   |
| $27.4600 -  $31.6000    |       |                         | 913        |                         |       |   | 9.16 |   |   |   | $ | 28.48 |   |   |   | 86 |   |   |   | $ | 30.25 |   |   |
| $32.23 - $60.3750       |       |                         | 240        |                         |       |   | 6.51 |   |   |   | $ | 39.39 |   |   |   | 141 |   |   |   | $ | 43.05 |   |   |
|                    |       |                         | 5,292      |                         |       |   | 6.16 |   |   |   | $ | 20.08 |   |   |   | 2,990 |   |   |   | $ | 18.22 |   |   |
|                         |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The equityawards available for grant for the periods presented were as follows (inthousands):

| ** **                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Beginning balance                          |       | 3,068    |       | 2,509    |       | 2,736    |       |
| Options authorized                         |       | —   |       | 1,582    |       | 655      |       |
| Options &  SAR’s granted     |       | (877     | )          | (1,403   | )          | (1,468   | )          |
| Options, SAR’s  and warrants canceled |       | 409      |       | 525      |       | 586      |       |
| Option expired                             |       | (4       | )          | (145     | )          | —   |       |
| RSU’s granted                         |       | (279     | )          | —   |       | —   |       |
| RSU’s canceled                        |       | 13       |       | —   |       | —   |       |
| Warrants expired                           |       | (192     | )          | —   |       | —   |       |
| Ending balance                             |       | 2,138    |       | 3,068    |       | 2,509    |       |

 

Duringfiscal 2006, the Company granted RSU’s under its 2002 Stock Plan. A summary ofRSU activity during 2006 is as follows:

| ** **                             | ** ** | ** **              | ** ** | **Weighted**        | ** ** |
|----------------------------------------|------------|-------------------------|------------|---------------------|------------|
| ** **                             | ** ** | ** **              | ** ** | **Average**         | ** ** |
| ** **                             | ** ** | **Number of**      | ** ** | **Grant Date** | ** ** |
| ** **                             | ** ** | **Shares**              | ** ** | **Fair Value** | ** ** |
| ** **                             | ** ** | **(in thousands)** | ** ** | ** **          | ** ** |
| Outstanding at  December 31, 2005 |       |                    | —     |                |       |   | $ | — |   |   |
| RSU’s granted                     |       |                    | 279        |                |       |   | $ | 29.81 |   |   |
| RSU’s canceled                    |       |                    | (13        | )                   |       |   | $ | 29.75 |   |   |
| Outstanding at  December 31, 2006 |       |                    | 266        |                |       |   | $ | 29.81 |   |   |

 

None of the RSU’s outstanding at December 31,2006 were vested.

The weighted average grant date fair value wasdetermined based on the closing market price of the Company’s common stock onthe date of the award. Aggregate intrinsic value of RSU’s outstanding at December 31,2006 was $9.4 million, using the closing price of $35.29 per share as of December 31,2006.

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Description ofPlans**

**Stock Option Plans**

Advent has equity awards outstanding under three stockoption plans, the 2002 Stock Plan (the “Plan”), the 1998 Non-statutory StockOption Plan (the “Non-statutory Plan”) and the 1995 Director Option Plan (the “DirectorPlan”).

**ThePlan.****  **OnMay 18, 2005, the Company’s stockholders approved the amendment andrestatement of Advent’s 2002 Stock Plan, originally approved by the Board ofDirectors (the “Board”) and stockholders in February and May,respectively, of 2002. Under the Plan, the Company may grant options topurchase common stock to employees, consultants and directors. Options grantedmay be incentive stock options or non-statutory stock options and shall begranted at a price not less than fair market value on the date of grant. Fairmarket value (as defined in the Plan) and the vesting of these options shall bedetermined by the Board. The options generally vest over 5 years and expire nolater than 10 years from the date of grant. The Company settles employee stockoption exercises with newly issued common shares. The Plan permits the award ofrestricted stock, RSU’s, SAR’s, performance shares, and performance units underthe Plan.

During 2006, Advent granted stock-settled RSU’s andSAR’s. The RSU’s are awards of restricted stock units that generally vest overfour years in two equal installments on the second and fourth anniversaries ofthe date of grant. Upon vesting, the RSU’s will convert into an equivalentnumber of shares of common stock. The value of the RSU’s is based on theclosing market price of the Company’s common stock on the date of grant and isamortized on a straight-line basis over the four-year requisite service period.A SAR is the right to receive the appreciation in fair market value of commonstock between the exercise date and the date of grant and generally vests over5 years. Upon exercise, SAR’s will be settled in shares of Advent common stock.Unvested RSU’s and SAR’s on termination of employee employment are canceled andreturned to the Plan.

Non-employee directors were eligible to receive optiongrants under the Director Plan, which terminated in November 2005.Effective April 1, 2005, each non-employee director became eligible toreceive awards under the 2002 Plan of (i) an initial option grant of30,000 shares upon joining the Board, which shall vest over four years with 25%of such shares vesting after one year of service and in equal monthlyinstallments over the ensuing three years, and (ii) an annual grant of12,000 shares vesting in twelve equal monthly installments. Upon retirementfrom the Board, unvested options are canceled and returned to the Plan.Effective February 26, 2007, each non-employee director became eligible toreceive awards under the 2002 Plan (i) upon joining the Board, an initialone-time grant of 21,000 shares of SAR’s, which vest over four years with 25%of such shares vesting one year after date of grant and in equal monthlyinstallments over the ensuing three years, and 4,500 shares of RSU, which vestover four years with 50% of such shares vesting two years after date of grantand 50% vesting four years after the date of grant; and (ii) annual grantsof 8,400 shares of SAR’s and 1,800 shares of RSU’s, which vest 100% one yearafter date of grant. Upon retirement from the Board, unvested SAR’s and RSU’sare canceled and returned to the Plan.

**Non-StatutoryPlan.****  **InNovember 1998, the Board approved the 1998 Non-statutory Stock Option Planand reserved 300,000 shares of common stock for issuance thereunder. Under theCompany’s 1998 Non-statutory Plan, Advent may grant options to purchase commonstock to employees and consultants, excluding persons who are executiveofficers and directors. Options granted are non-statutory stock options andshall be granted at a price not less than fair market value on the date ofgrant. Fair market value (as defined in the Non-statutory Plan) and the vestingof these options shall be determined by the 

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Board. The optionsgenerally vest over 5 years and expire no later than 10 years from the date ofgrant. Unvested options on termination of employment are canceled and returnedto the Non-statutory Plan. On February 26, 2007, the Board terminated theNon-statutory Plan.

**Director Plan.****  **Advent’s Director Plan which expiredon November 16, 2005, provided for the grant of non-statutory stockoptions to the Company’s non-employee directors (“outside directors”). As notedabove, effective April 1, 2005, option grants to outside directors areissued under the 2002 Stock Plan.

**Warrants**

In March 2001, theCompany issued a fully vested non-forfeitable stock purchase warrant topurchase a total of 191,644 shares of Advent common stock to a customer fromwhom Advent had revenue of approximately $70,000, $8,000 and $580,000 in 2006,2005 and 2004, respectively. The warrant was issued for cash consideration of$5 million, which was the estimated Black-Scholes fair value. The warrant hadan exercise price of $45.375 per share, was immediately exercisable, andexpired unexercised in March 2006.

**Employee StockPurchase Plan (“ESPP”)**

All individuals employedby Advent are eligible to participate in the ESPP if Advent employs them for atleast 20 hours per week and at least five months per year. The ESPP permitseligible employees to purchase Advent common stock through payroll deductionsat a price equal to 85% of the lower of the closing sale price for the Company’scommon stock reported on the NASDAQ National Market at the beginning or the endof each six-month offering period. In any calendar year, eligible employees canwithhold up to 10% of their salary and certain variable compensation.

*1995 ESPP*

In the second quarter of2003, Advent’s shareholders approved an amendment to the 1995 ESPP to increasethe number of shares of common stock reserved for issuance by 600,000. Through October 5, 2005 when the planexpired, 1,245,289 shares had been issued out of a total of 1,500,000shares of common stock reserved for issuance under the 1995 ESPP. The Companyissued approximately 76,744 and 162,000 shares under the 1995 ESPP at averageprices of $17.00 and $15.69 in 2005 and 2004, respectively.

*2005 ESPP*

On May 18, 2005Advent’s shareholders approved the 2005 ESPP with 2,000,000 shares of commonstock reserved for issuance. During fiscal 2006 and 2005, the Company issued110,932 and 72,017 shares under the 2005 ESPP at an average price of $27.18 and$16.86, respectively. As of December 31, 2006, 1,817,051 shares werereserved for future issuance under the 2005 ESPP.

**401(k) Plan**

Advent sponsors a 401(k) Planto provide retirement benefits for its U.S. employees. This Plan provides fortax-deferred salary deductions for eligible employees. Employees may contributebetween 1% and 70% of their compensation to this Plan, limited by an annualmaximum amount as determined by the Internal Revenue Service. The Company alsomakes a 50% matching contribution of up to 6% of employee compensation. TheCompany’s matching contributions to this plan totaled $1.8 million, $1.8 million,and $1.4 million for fiscal 2006, 2005 and 2004, respectively. In addition tothe employer 

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

matchingcontribution, Advent may make profit sharing contributions at the discretion ofthe Board of Directors. Advent did not make any profit sharing contributions infiscal 2006, 2005 or 2004.

**Note 10—Net Income(Loss) per Share**

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

| ** **                                                                                                                                           | ** ** | **Fiscal Years** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                           | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ***Numerator:***                                                                                                                                     |       |                  |       |   |   |   |   |
| Net income (loss)                                                                                                                                    |       | $                     | 82,602     |   | $ | 14,135 |   | $ | (16,179 | ) |
| ***Denominator:***                                                                                                                                   |       |                  |       |   |   |   |   |
| Denominator for  basic net income (loss) per share-weighted average shares outstanding                                                               |       | 29,003                |       | 31,031 |   | 32,944 |   |
| Dilutive common  equivalent shares:                                                                                                                  |       |                  |       |   |   |   |   |
| Employee stock options and other                                                                                                                     |       | 1,534                 |       | 1,443 |   | — |   |
| Denominator for diluted net income (loss) per share-weighted average  shares outstanding, assuming exercise of potential dilutive common shares |       | 30,537                |       | 32,474 |   | 32,944 |   |
| Basic net income (loss) per share                                                                                                                    |       | $                     | 2.85       |   | $ | 0.46 |   | $ | (0.49 | ) |
| Diluted net income  (loss) per share                                                                                                                 |       | $                     | 2.70       |   | $ | 0.44 |   | $ | (0.49 | ) |

 

Weighted average stockoptions and SAR’s of approximately 1.0 million and 0.6 million were excludedfrom the computation of diluted net income per share for fiscal 2006 and 2005,respectively, because their inclusion would have been anti-dilutive. As theCompany incurred net losses in fiscal 2004 gross outstanding options and warrantsof 5.7 million were excluded from the calculation of diluted net loss per shareas the effect would have been anti-dilutive.

**Note 11—**CommonStock Repurchase Programs

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

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Thefollowing is a summary of the repurchase programs authorized by Advent’s Boardduring fiscal 2004, 2005 and 2006 (in thousands):

| ** **                          | ** ** | **Number**         | ** ** |
|-------------------------------------|------------|--------------------|------------|
| ** **                          | ** ** | **of Shares** | ** ** |
| **Date of Authorization** | ** ** | ** **         | ** ** | **Authorized** | ** ** |
| May 2004                       |       |               | 1,200      |   |   |
| September 2004                 |       |               | 800        |   |   |
| February 2005                  |       |               | 1,800      |   |   |
| May 2005                       |       |               | 1,000      |   |   |
| April 2006                     |       |               | 2,300      |   |   |
| July 2006                      |       |               | 1,500      |   |   |
| Total                               |       |               | 8,600      |   |   |
|                                     |            |                    |            |  |  |  |  |

 

Thefollowing is a summary of the Company’s repurchase activity during fiscal 2004,2005 and 2006 (in thousands, except per share data):

| ** **           | ** ** | **Total**          | ** ** | ** **      | ** ** | **Average**       | ** ** |
|----------------------|------------|--------------------|------------|-----------------|------------|-------------------|------------|
| ** **           | ** ** | **Number**         | ** ** | ** **      | ** ** | **Price**         | ** ** |
| ** **           | ** ** | **of Shares** | ** ** | ** **      | ** ** | **Paid Per** | ** ** |
| **Fiscal Year** | ** ** | ** **         | ** ** | **Repurchased** | ** ** | **Cost**          | ** ** | **Share** | ** ** |
| 2004                 |       |               | 744        |            |       | $                 | 11,899     |   |   | $ | 15.99 |   |   |
| 2005                 |       |               | 2,835      |            |       | $                 | 52,584     |   |   | $ | 18.55 |   |   |
| 2006                 |       |               | 4,691      |            |       | $                 | 148,602    |   |   | $ | 31.68 |   |   |
| Total                |       |               | 8,270      |            |       | $                 | 213,085    |   |   | $ | 25.77 |   |   |
|                      |            |                    |            |                 |            |                   |            |  |  |  |  |  |  |  |  |

 

As of December 31,2006, approximately 330,000 shares were available to be repurchased under themost recent Board authorized share repurchase plan approved in July 2006.On February 9, 2007, the Company’s Board authorized the repurchase of upto an additional 2.25 million shares of outstanding common stock.

**Note 12—Segment andGeographical Information**

*Description ofSegments*

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 numberof factors that the CODM uses to evaluate, view and run its business operationswhich include, but are not limited to, customer base, homogeneity of productsand technology. Advent’s operating segments are based on this organizationalstructure and information reviewed by Advent’s CODM to evaluate the operatingsegment results. Advent has determined that its operations are organized intotwo reportable segments: 1) Advent Investment Management; and 2) MicroEdge.Future changes to this organizational structure may result in changes to thebusiness segments disclosed.

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

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

*Segment Data*

The results of the operating segments are deriveddirectly from Advent’s internal management reporting system. The accountingpolicies used to derive operating segment results are substantially the same asthose used by the consolidated company. Management measures the performance ofeach operating segment based on several metrics, including income (loss) fromoperations. These results are used, in part, to evaluate the performance of,and to assign resources to, each of the operating segments. Certain operatingexpenses, including stock-based compensation and amortization and impairment 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.

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

| ** **                                           | ** ** | **Fiscal Years** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net revenues:                                        |       |                  |       |   |   |   |   |
| Advent Investment Management                         |       | $                     | 162,609    |   | $ | 145,897 |   | $ | 130,358 |   |
| MicroEdge                                            |       | 21,182                |       | 20,026 |   | 16,967 |   |
| Other                                                |       | 302                   |       | 2,778 |   | 2,665 |   |
| Total net revenues                                   |       | $                     | 184,093    |   | $ | 168,701 |   | $ | 149,990 |   |
| Income (loss)  from operations:                      |       |                  |       |   |   |   |   |
| Advent Investment Management                         |       | $                     | 14,921     |   | $ | 9,599 |   | $ | (74 | ) |
| MicroEdge                                            |       | 5,361                 |       | 2,979 |   | 675 |   |
| Other                                                |       | (1,902                | )          | 374 |   | 43 |   |
| Unallocated  corporate operating costs and expenses: |       |                  |       |   |   |   |   |
| Stock-based compensation                             |       | (13,596               | )          | — |   | — |   |
| Amortization and impairment of developed technology  |       | (1,200                | )          | (2,575 | ) | (6,471 | ) |
| Amortization and impairment of other intangibles     |       | (3,866                | )          | (4,041 | ) | (12,237 | ) |
| Total income (loss) from operations                  |       | $                     | (282       | ) | $ | 6,336 |   | $ | (18,064 | ) |
| Depreciation  expense:                               |       |                  |       |   |   |   |   |
| Advent Investment Management                         |       | $                     | 7,026      |   | $ | 7,977 |   | $ | 7,730 |   |
| MicroEdge                                            |       | 637                   |       | 668 |   | 729 |   |
| Other                                                |       | 35                    |       | 39 |   | 31 |   |
| Total  depreciation expense                          |       | $                     | 7,698      |   | $ | 8,684 |   | $ | 8,490 |   |

 

*Major Customers*

No single customer represented10% or more of Advent’s total net revenues in any fiscal year presented.

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*GeographicInformation*

Geographicalinformation as of and for the periods presented is as follows (in thousands):

| ** **               | ** ** | **December 31** | ** ** |
|--------------------------|------------|----------------------|------------|
| ** **               | ** ** | **2006**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Long-lived  assets(1):   |       |                 |       |   |   |   |   |
| United States            |       | $                    | 32,914     |   | $ | 19,153 |   | $ | 22,730 |   |
| International            |       | 965                  |       | 527 |   | 486 |   |
| Total long-lived  assets |       | $                    | 33,879     |   | $ | 19,680 |   | $ | 23,216 |   |

 

| ** **                | ** ** | **Fiscal Years** | ** ** |
|---------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Geographic net  sales(2): |       |                  |       |   |   |   |   |
| United States             |       | $                     | 161,861    |   | $ | 150,051 |   | $ | 136,804 |   |
| International             |       | 22,232                |       | 18,650 |   | 13,186 |   |
| Total net sales           |       | $                     | 184,093    |   | $ | 168,701 |   | $ | 149,990 |   |

----

(1)          Long-lived assetsexclude goodwill, intangible assets, financial instruments and deferred taxassets. 

(2)          Geographicnet sales are based on the location to which the product is shipped. 

**Note 13—RelatedParty Transactions**

Through December 28, 2004, Stephanie DiMarco,Chief Executive Officer of the Company, was a director of LatentZero. EffectiveDecember 28, 2004, Ms. DiMarco resigned her seat on LatentZero’sboard. When purchasing certain Advent products, customers have the option topurchase LatentZero products to provide additional functionality. Based onsales of the LatentZero products by the Company, Advent pays a royalty fee toLatentZero. Advent made royalty payments to LatentZero of $0.5 million duringfiscal 2004. The Company owed amounts to LatentZero totaling $0.2 million as ofDecember 31, 2004. During fiscal 2004, Advent entered into a sub-leaseagreement with LatentZero on one of Advent’s facilities in New York, New York.Sub-lease income from LatentZero was $70,000 for fiscal 2004. Accountsreceivable from LatentZero was $11,000 as of December 31, 2004.

As of December 31, 2004, Citigroup, Inc. (“Citigroup”)owned approximately 12% of the voting stock of Advent. Effective December 1,2005, Citigroup sold the Asset Management division of Citigroup Global MarketsInc. to Legg Mason, Inc. (“Legg Mason”). As of December 31, 2005,Citigroup owned less than 5% of the voting stock of Advent. Advent recognizedapproximately $2.1 million and $1.1 million of revenue from Citigroup duringfiscal 2005 and 2004, respectively. The Company’s accounts receivable fromCitigroup was $0.3 million and $0.7 million as of December 31, 2005 and2004, respectively. As of December 31, 2005 and 2006, Legg Mason ownedapproximately 15% and 17% of the voting stock of Advent, respectively. Adventrecognized approximately $0.5 million and $0.4 million of revenue from LeggMason during fiscal 2006 and 2005, respectively. The Company’s accountsreceivable from Legg Mason were $10,000 and $0.1 million as of December 31,2006 and 2005, respectively.

In addition, Advent actsas trustee for the company’s short-term disability plan—Advent SoftwareCalifornia Voluntary Disability Plan (“VDI”). Fiscal 2006 employee withholdingsand disbursements totaled $0.3 million, respectively. Fiscal 2005 employeewithholdings and disbursements totaled $0.4 million and $0.2 million,respectively. As of December 31, 2006 and 2005, cash held by Adventrelated to 

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**ADVENT SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

the VDIwas $0.3 million, respectively, which are included in “other assets” on theconsolidated balance sheets.

**Note 14—SubsequentEvents**

On February 9, 2007, the Company’s Boardauthorized the repurchase of up to an additional 2.25 million shares ofoutstanding common stock.

On February 14, 2007, Advent entered and certainof its subsidiaries into a senior secured credit facility agreement (the “Facility”)with Wells Fargo Foothill, Inc. (the “Lender”) for a term of three years.Under the Facility, the Lender will provide the Company with a revolving lineof credit up to an aggregate amount of $75 million to fund the repurchase ofoutstanding common stock, working capital, capital expenditures and generalcorporate requirements. The Company has the option of selecting an interestrate for any drawdown under the Facility equal to either: (a) the BaseRate; or (b) the then applicable LIBOR Rate plus 1.50% per annum. The loanis secured by the Company’s property and assets and is subject to a financialcovenant. The financial covenant in the Facility is limited to a maximum ratioof senior debt to adjusted earnings before interest, taxes, depreciation, andamortization (EBITDA). Covenant testing will commence upon either theoccurrence of an event of default or when excess availability under theFacility plus qualified cash and cash equivalents is less than $50 million.

From January 1, 2007through February 28, 2007, the Company repurchased 361,000 shares of itscommon stock for a total cost of $13.3 million and an average price of $34.03.

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**Supplementary Quarterly Financial Data (Unaudited)**

| ** **                         | ** ** | **First**                                                          | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|------------------------------------|------------|--------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                         | ** ** | **Quarter**                                                        | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| ** **                         | ** ** | **(in thousands, except per share data)** | ** ** |
| *2006(1)(2):*                      | ** ** | ** **                                                         | ** ** | ** **  |       |        |       |        |       |
| Net revenues                       |       | $                                                                  | 43,656     |        | $          | 44,360      |       | $           | 45,877     |   | $ | 50,200 |   |
| Gross margin                       |       | $                                                                  | 30,192     |        | $          | 30,367      |       | $           | 30,636     |   | $ | 34,095 |   |
| Income (loss)  from operations     |       | $                                                                  | 1,049      |        | $          | 497         |       | $           | 328        |   | $ | (2,156 | ) |
| Net income                         |       | $                                                                  | 3,402      |        | $          | 1,603       |       | $           | 952        |   | $ | 76,645 |   |
| Net income per  share—basic   |       | $                                                                  | 0.11       |        | $          | 0.05        |       | $           | 0.03       |   | $ | 2.79 |   |
| Net income per  share—diluted |       | $                                                                  | 0.11       |        | $          | 0.05        |       | $           | 0.03       |   | $ | 2.62 |   |
| *2005(3)(4):*                      | ** ** | ** **                                                         | ** ** | ** **  |       |        |       |        |       |
| Net revenues                       |       | $                                                                  | 39,389     |        | $          | 40,927      |       | $           | 42,776     |   | $ | 45,609 |   |
| Gross margin                       |       | $                                                                  | 27,356     |        | $          | 27,975      |       | $           | 30,244     |   | $ | 31,329 |   |
| Income (loss)  from operations     |       | $                                                                  | (146       | )           | $          | (658        | )          | $           | 4,931      |   | $ | 2,209 |   |
| Net income                         |       | $                                                                  | 737        |        | $          | 3,938       |       | $           | 5,846      |   | $ | 3,614 |   |
| Net income per  share—basic   |       | $                                                                  | 0.02       |        | $          | 0.13        |       | $           | 0.19       |   | $ | 0.12 |   |
| Net income per share—diluted  |       | $                                                                  | 0.02       |        | $          | 0.13        |       | $           | 0.18       |   | $ | 0.11 |   |

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(1)          EffectiveJanuary 1, 2006, Advent adopted SFAS 123R, “Share-Based Payment”, whichrequires the recognition of the fair value of stock-based compensation in netincome. Advent recorded stock-based compensation expense of $3.2 million, $3.5million, $3.4 million and $3.5 million, in the first, second, third and fourthquarters of 2006, respectively. 

(2)          The Company’s results ofoperations for the fourth quarter of 2006 included a benefit from income taxesof $78.0 million primarily as a result of releasing the valuation allowanceagainst its deferred tax assets originally recorded in the fourth quarter of2003. Additionally, Advent recorded a net restructuring charge of $3.4 millionduring the fourth quarter of 2006 primarily consisting of facility and exitcosts related to exiting its former corporate facilities at 301 Brannan Streetin San Francisco, California.

(3)          In the second quarter of2005, Advent recorded a net restructuring charge of $1.5 million primarilyconsisting of facility and exit costs related to sub-leasing one floor of itsoffice space in New York, New York.

(4)          Inthe fourth quarter of 2005, Advent incurred costs of approximately $1.0 millionto settle the claims of certain former members and employees of AdventOutsource Data Management.

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**Item9.**                        Changes inand Disagreements with Accountants on Accounting and Financial Disclosure

None.

**Item9A.**                Controls andProcedures

**Evaluation of disclosure controls and procedures**

The Company maintainsdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the“Exchange Act”)) that are designed to ensure that information required to bedisclosed in the Company’s reports under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicatedto management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure. The Company’s management evaluated, with the participation of theChief Executive Officer and Chief Financial Officer, the effectiveness of theCompany’s disclosure controls and procedures as of the end of the periodcovered by this Annual Report on Form 10-K. Based on thisevaluation, the Chief Executive Officer and Chief Financial Officer haveconcluded that our disclosure controls and procedures were effective as of December 31,2006.

**Remediation of material weaknesses in internal controlover financial reporting**

As of December 31,2005, the Company identified the following material weaknesses in itsassessment of the Company’s internal control over financial reporting:

1.                TheCompany did not maintain effective controls over the accounting for incometaxes, including the completeness and accuracy of its deferred income taxliabilities and related income tax provision. Specifically, the Company did notmaintain effective controls to (i) include the benefit from the reversalof the deferred tax liability associated with the amortization of intangibleassets of its European subsidiaries, or (ii) properly estimate thereduction in the valuation allowance associated with the deferred tax assets inthe United States, in the calculation of its income tax provision.

2.                TheCompany did not maintain effective controls over the completeness and accuracyof its pro forma stock-based employee compensation expense. Specifically, theCompany did not maintain effective controls to ensure that pro formastock-based employee compensation expense from certain stock compensationarrangements, including those with non-standard vesting terms or performancevesting conditions, were expensed over the proper attribution period in conformitywith generally accepted accounting principles.

Because of the abovematerial weaknesses, management had concluded that the Company did not maintaineffective internal control over financial reporting at December 31, 2005based on the criteria set forth in the COSO *InternalControl—Integrated Framework*.

During 2006, the Company’smanagement implemented the following changes in internal control over financialreporting to address the material weaknesses in our internal control overfinancial reporting described above:

*Income Taxes*

·       Implementedquarterly controls to include the benefit from the reversal of the deferred taxliability associated with the amortization of intangible assets of our Europeansubsidiaries in the calculation of our income tax provision;

·       Addedadditional resources and improved the Company’s internal expertise in the areaof accounting for income taxes through the hiring of a new Tax Director, whoseposition was newly created, and a new Tax Manager;

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·       Engagedexternal tax consultants to assist in the preparation and review of thequarterly and annual tax provision calculations and disclosures;

·       Maintainedand improved the tax technical and accounting expertise of the internal taxdepartment through attendance at tax seminars and review of technicalliterature disseminated by the Big 4 public accounting firms; and

·       Improved the documentationof the calculation, review and approval procedures for the quarterly and annualtax provision.

*Stock-basedcompensation expense*

·       Furtherstandardization of the equity granting process through the formation of theNon-Executive Stock Option Committee which approves equity awards tonon-executives within pre-established guidelines and budget;

·       Establisheda standardized communication process for identifying stock compensationagreements with non-standard vesting terms or performance vesting conditionsbetween the Compensation Committee of the Board of Directors, human resources,business units and finance departments;

·       Upgradedand enhanced our E*Trade Equity Edge stock administration software;

·       Improvedthe skills, knowledge and experience available to the Company throughattendance of stock administration training and conferences;

·       Utilizedexternal consultants to validate our process for the calculation of stock-basedcompensation expense. Specifically, the Company used these additional resourcesto ensure that the calculation of stock-based compensation expense isadequately prepared. In addition, the Company has made available externalconsultants to provide equity compensation guidance to the Company’smanagement, when necessary;

·       Improvedthe level of expertise in the calculation and review of: i) option grantagreements, including stock compensation agreements with non-standard vestingterms or performance vesting conditions, and ii) preparation of our stock-basedemployee compensation expense recognized in the Company’s financial statementseffective with the adoption of SFAS 123R in the first quarter of 2006 throughthe hiring of a stock administration manager and allocation of additionalfinance personnel to these areas; and

·       Improvedthe documentation of the calculation and accounting procedures for equitycompensation.

As of December 31, 2006, we completed the execution ofour remediation plan, evaluated and tested the effectiveness of the controls asof December 31, 2006, and determined that the material weaknesses describedabove have been remediated.

See “Management’s Reporton Internal Control Over Financial Reporting” in Item 8.

**Changes in internalcontrol over financial reporting**

The remediation of theaforementioned material weaknesses resulted in a change in our internal controlover financial reporting during the quarter ended December 31, 2006 thatmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

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**Item 9B.**               OtherInformation

None.

**PART III**

**Item 10.**                 Directors,Executive Officers and Corporate Governance

The information on Directors appearing under theheading “Corporate Governance” and “Proposal No. 1: Election of Directors”in the Notice of the 2007 Annual Meeting of Stockholders and 2007 ProxyStatement, to be filed pursuant to Rule 14a-6(b) under theSecurities and Exchange Act of 1934 (the “Exchange Act”), in connection withthe Company’s 2007 Annual Meeting of Stockholders (the “2007 Proxy Statement”),is incorporated by reference in this Annual Report on Form 10-K.Information required by this Item related to the executive officers can befound in the section captioned “Executive Officers of the Registrant” under Part I,“Item 1. Business” of this Annual Report on Form 10-K, and is alsoincorporated herein by reference. Information required by this Item regardingany material changes to the process by which security holders may recommendnominees to the Board of Directors appears under the heading “ProceduralMatters” in our 2007 Proxy Statement and is incorporated herein by reference.

The information contained under the headings “BeneficialSecurity Ownership of Management and Certain Beneficial Owners” and “Compliancewith Section 16(a) of the Exchange Act” in the 2007 Proxy Statementare incorporated by reference in this Annual Report on Form 10-K.

The current members of the audit committee are TerryH. Carlitz, James D. Kirsner, Wendell Van Auken (Chair) and William F. Zuendt,each of whom is “independent” as defined by current NASD listing standards. TheBoard has determined that all members of the audit committee are financialexperts as defined by Item 401(h) of Regulation S-K of the Exchange Actand are independent within the meaning of Item 7(d)(3)(iv) of Schedule 14Aof the Exchange Act.

The Company has acode of business ethics and conduct that applies to all of the Company’semployees, including its Principal Executive Officer, Principal Financial andAccounting Officer and its Board of Directors. A copy of this code, “Code ofBusiness Ethics and Conduct”, is available on the Company’s website at *www.advent.com* and may be found asfollows:

1.                Fromour main web page, first click on “About Advent”;

2.                Next,click on “Investor Relations”;

3.                Next,click on “Corporate Governance”;

4.                Next,click on “Conduct”; and

5.                Finally,click on “Advent’s Code of Business Ethics and Conduct.” 

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The Company intends todisclose any changes in or waivers from its code of ethics by posting suchinformation on its website or by filing a Form 8-K.

**Item 11.**                 ExecutiveCompensation

Information required bythis Item is incorporated by reference to our Proxy Statement for our 2007Annual Meeting of Stockholders, where it is included under the caption “CompensationCommittee Matters.”

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

Information required bythis Item is incorporated by reference to our Proxy Statement for our 2007Annual Meeting of Stockholders, where it is included under the captions“Beneficial Security Ownership of Management and Certain Beneficial Owners,”and “Equity Compensation Plan Information.”

**Item 13.**                 CertainRelationships and Related Transactions, and Director Independence

Information required bythis Item is incorporated by reference to our Proxy Statement for our 2007Annual Meeting of Stockholders, where it is included under the caption “CertainRelationships and Related Transactions” and “Corporate Governance.”

**Item 14.**                 PrincipalAccounting Fees and Services

Information required by this Item is incorporated byreference to our Proxy Statement for our 2007 Annual Meeting of Stockholders,where it is included under the caption “Fees to Independent Registered PublicAccounting Firm.”

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**PART IV**

**Item 15.**                 Exhibitsand Financial Statement Schedules

**(a) The following documents are filed as partof this Report**

**1.Financial Statements**

The following are includedin Item 8:

|                                                                                                                                                   | ** ** | Page |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|------|
| Management’s Report on Internal Control Over Financial  Reporting                                                                            |       | 61   |
| Report of Independent Registered Public Accounting  Firm                                                                                          |       | 62   |
| Consolidated  Balance Sheets as of December 31, 2006 and 2005                                                                                |       | 64   |
| Consolidated Statements of Operations for the years  ended December 31, 2006, 2005, and 2004                                                 |       | 65   |
| Consolidated Statements of Stockholders’ Equity and  Comprehensive Income (Loss) for the years ended December 31, 2006, 2005,  and 2004 |       | 66   |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2006, 2005, and 2004                                                 |       | 67   |
| Notes to Consolidated Financial Statements                                                                                                        |       | 68   |

 

 

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**2. FinancialStatement Schedules**

The following financial statement schedule for theyears ended December 31, 2006, 2005 and 2004 should be read in conjunctionwith the consolidated financial statements of Advent Software, Inc. filedas part of this Annual Report on Form 10-K:

**ScheduleII**

**ADVENT SOFTWARE, INC**

**VALUATION AND QUALIFYING ACCOUNTS**

**For theyears ended December 31, 2006, 2005 and 2004**

| ** **                               | ** ** | ** **              | ** ** | **Additions**    | ** ** | ** **     | ** ** | ** **          | ** ** |
|------------------------------------------|------------|-------------------------|------------|------------------|------------|----------------|------------|---------------------|------------|
| ** **                               | ** ** | **Balance at**     | ** ** | **(Reductions)** | ** ** | ** **     | ** ** | **Balance at** | ** ** |
| ** **                               | ** ** | **Beginning**           | ** ** | **Charged to**   | ** ** | ** **     | ** ** | **End of**          | ** ** |
| ** **                               | ** ** | **of Period**      | ** ** | **Expense**      | ** ** | **Write-offs** | ** ** | **Period**          | ** ** |
| ** **                               | ** ** | **(in thousands)** | ** ** |
| Allowance for doubtful  accounts:        |       |                    |       |             |       |           |       |                |       |   |   |   |   |
| 2004                                     |       | $                       | 641        |             |       | $              | 36         |                |       |   | $ | 66 |   |   | $ | 611 |   |
| 2005                                     |       | $                       | 611        |             |       | $              | (436       | )                   |       |   | $ | 29 |   |   | $ | 146 |   |
| 2006                                     |       | $                       | 146        |             |       | $              | 988        |                |       |   | $ | 864 |   |   | $ | 270 |   |
| Allowance for  sales returns:            |       |                    |       |             |       |           |       |                |       |   |   |   |   |
| 2004                                     |       | $                       | 1,970      |             |       | $              | 4,623      |                |       |   | $ | 3,252 |   |   | $ | 3,341 |   |
| 2005                                     |       | $                       | 3,341      |             |       | $              | 2,182      |                |       |   | $ | 2,470 |   |   | $ | 3,053 |   |
| 2006                                     |       | $                       | 3,053      |             |       | $              | (776       | )                   |       |   | $ | 142 |   |   | $ | 2,135 |   |
| Deferred tax  asset valuation allowance: |       |                    |       |             |       |           |       |                |       |   |   |   |   |
| 2004                                     |       | $                       | 86,728     |             |       | $              | 14,629     |                |       |   | $ | — |   |   | $ | 101,357 |   |
| 2005                                     |       | $                       | 101,357    |             |       | $              | 2,369      |                |       |   | $ | — |   |   | $ | 103,726 |   |
| 2006                                     |       | $                       | 103,726    |             |       | $              | (92,150    | )                   |       |   | $ | — |   |   | $ | 11,576 |   |

 

Schedules other than those listed above have beenomitted since they are either not required, not applicable, or because theinformation required is included in the consolidated financial statements orthe notes thereto.

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**3. Exhibits**

The following exhibits are filed as a part of, orincorporated by reference into this Form 10-K:

| Exhibit    | ** ** | ** **                                                                                                                                                                           | ** ** | **Incorporated by Reference** | ** ** | **Filed**  |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|------------|
| **Number** | ** ** | ** **                                                                                                                                                                           | ** ** | **Exhibit Description**  | ** ** | **Form**   | ** ** | **Date** | ** ** | **Number** | ** ** | **Herewith** |
| 2.1        |       | Agreement and Plan of Merger by and among Advent  Softare, Inc. (“Advent”), Kayak Acquisition Corp., and Kinexus Corporation  dated as of December 31, 2001 |       | 8-K                           |       | 2/28/2002  |   | 2.1 |   |   |
| 3.1        |       | Second Amended and Restated Certificate of  Incorporation of Registrant                                                                                                              |       | 10-K                          |       | 3/12/2001  |   | 3.1 |   |   |
| 3.2        |       | Amended and Restated Bylaws of Registrant                                                                                                                                            |       | 8-K                           |       | 1/23/2006  |   | 3.1 |   |   |
| 4.1        |       | Specimen Common Stock Certificate of Registrant                                                                                                                                      |       | SB-2                          |       | 11/15/1995 |   | *** |   |   |
| 10.1       |       | Form of Indemnification Agreement for Executive  Officers and Directors*                                                                                                        |       | SB-2                          |       | 11/15/1995 |   | *** |   |   |
| 10.2       |       | 1992 Stock Plan, as amended*                                                                                                                                                         |       | S-8                           |       | 5/28/1999  |   | 4.1 |   |   |
| 10.3       |       | 1993 Profit Sharing & Employee Savings  Plan, as amended*                                                                                                                   |       | SB-2                          |       | 11/15/1995 |   | *** |   |   |
| 10.4       |       | 1995 Employee Stock Purchase Plan*                                                                                                                                                   |       | SB-2                          |       | 11/15/1995 |   | *** |   |   |
| 10.5       |       | 1995 Director Option Plan*                                                                                                                                                           |       | S-8                           |       | 8/11/2000  |   | 4.1 |   |   |
| 10.6       |       | 2002 Stock Option Plan, as amended*                                                                                                                                                  |       | DEF 14A                       |       | 4/22/2005  |   | Appendix B |   |   |
| 10.7       |       | Severance Agreement between Advent and Peter M. Caswell  dated December 10, 1993*                                                                                               |       | SB-2                          |       | 11/15/1995 |   | *** |   |   |
| 10.8       |       | Agreement between Advent and Interactive Data Corporation  dated January 1, 1995**                                                                                              |       | SB-2                          |       | 11/15/1995 |   | *** |   |   |
| 10.9       |       | Office Lease dated August 1, 1998, between SOMA  Partners, L.P. and Advent for facilities located at 301 Brannan in San  Francisco, California                                  |       | 10-K                          |       | 3/26/1999  |   | 10.14 |   |   |
| 10.10      |       | Office Lease dated July 22, 1999, between 405  Lexington, L.L.C. and Advent for facilities located at 666 Third Avenue in  New York, New York                              |       | 10-K                          |       | 3/17/2000  |   | 10.15 |   |   |
| 10.11      |       | 2005 Employee Stock Purchase Plan*                                                                                                                                                   |       | DEF 14A                       |       | 4/22/2005  |   | Appendix A |   |   |
| 10.12      |       | Office Lease dated January 6, 2006, between  Toda Development, Inc. and Advent for facilities located at 600 Townsend  Street in San Francisco, California.                |       | 8-K                           |       | 1/12/2006  |   | 10.1 |   |   |
|            |            |                                                                                                                                                                                      |            |                               |            |            |  |  |  |  |  |  |  |  |  |  |  |  |

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| 10.13 |   | Executive Severance Plan dated March 14, 2006*                                                |   | 10-K   |   | 3/31/2006 |   | 10.13  |   |   |
|-------|--------|----------------------------------------------------------------------------------------------------|--------|--------|--------|-----------|--------|--------|--------|--------|
| 10.14 |   | Credit Facility                                                                                    |   |   |   |      |   |   |   | X      |
| 21.1  |   | Subsidiaries of Advent                                                                             |   |   |   |      |   |   |   | X      |
| 23.1  |   | Consent of PricewaterhouseCoopers LLP, Independent  Registered Public Accounting Firm              |   |   |   |      |   |   |   | X      |
| 24.1  |   | Power of Attorney (included on page 114 of this  Form 10-K)                              |   |   |   |      |   |   |   | X      |
| 31.1  |   | Certification of Chief Executive Officer under  Section 302 of the Sarbanes-Oxley Act of 2002 |   |   |   |      |   |   |   | X      |
| 31.2  |   | Certification of Chief Financial Officer under  Section 302 of the Sarbanes-Oxley Act of 2002 |   |   |   |      |   |   |   | X      |
| 32.1  |   | Certification of Chief Executive Officer under  Section 906 of the Sarbanes-Oxley Act of 2002 |   |   |   |      |   |   |   | X      |
| 32.2  |   | Certification of Chief Financial Officer under  Section 906 of the Sarbanes-Oxley Act of 2002 |   |   |   |      |   |   |   | X      |

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*                                 Denotesmanagement contract or compensatory plan or arrangement required to be filed asan Exhibit to this Form 10-K.

**                          Confidentialtreatment requested as to certain portions of this exhibit.

***                   Incorporatedby reference to the exhibit filed with Advent’s registration statement filed onForm SB-2 (commission file number 33-97912-LA), declaredeffective on November 15, 1995.

 

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned thereunto duly authorized, on this 16th day of March, 2007.

|        | ADVENT SOFTWARE, INC. |
|--------|-----------------------|
|   |                  |   |
|   | 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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**POWER OF ATTORNEY**

KNOW ALL PERSONS BY THESE PRESENTS, that each personwhose signature appears below constitutes and appoints Graham V. Smith andJaime A. Villagomez his or her attorney-in-fact, with full power ofsubstitution, for him in any and all capacities, to sign any amendments to thisReport on Form 10-K and to file the same, with exhibits thereto andother documents in connection therewith, with the Securities and ExchangeCommission, hereby ratifying and confirming all that each of said attorneys-in-fact,or his substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in the capacitiesand on the dates indicated.

|                                | **Signature** | ** **                                    | ** ** | ** **          | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|--------------------------------|---------------|-----------------------------------------------|------------|---------------------|-----------|------------|------------|------------|----------|------------|
| /s/ STEPHANIE G. DIMARCO  |          | Chief Executive Officer and President         |       | March 16, 2007 |
| **Stephanie G. DiMarco**       |          | (Principal  Executive Officer)                |       |                |
| /s/** **GRAHAM V. sMITH   |          | Executive Vice President, Chief Financial     |       | March 16, 2007 |
| **Graham V. Smith**            |          | Officer  and Secretary                        |       |                |
| ** **                     |          | (Principal  Financial and Accounting Officer) |       |                |
| /s/ A. GEORGE  BATTLE     |          | Director                                      |       | March 16, 2007 |
| **A. George Battle**           |          |                                          |       |                |
| /s/ TERRY  H. CARLITZ     |          | Director                                      |       | March 16, 2007 |
| **Terry H. Carlitz**           |          |                                          |       |                |
| /s/ JAMES  D. KIRSNER     |          | Director                                      |       | March 16, 2007 |
| **James D. Kirsner**           |          |                                          |       |                |
| /s/ JAMES  P. ROEMER      |          | Director                                      |       | March 16, 2007 |
| **James P. Roemer**            |          |                                          |       |                |
| /s/ JOHN  H. SCULLY       |          | Chairman of the Board                         |       | March 16, 2007 |
| **John H. Scully**             |          |                                          |       |                |
| /s/ WENDELL  G. VAN AUKEN |          | Director                                      |       | March 16, 2007 |
| **Wendell G. Van Auken**       |          |                                          |       |                |
| /s/ WILLIAM  F. ZUENDT    |          | Director                                      |       | March 16, 2007 |
| **William  F. Zuendt**         |          |                                          |       |                |

 

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