UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended September 30, 2005

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

Commission file number: 0-26994

ADVENT SOFTWARE, INC.

(Exact name of registrant as specified in its charter)

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

301 Brannan Street, San Francisco, California 94107
(Address of principal executive offices and zip code)

(415) 543-7696
(Registrant’s telephone number, including area code)

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

Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Yes ý No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

The number of shares of the registrant’s Common Stock outstanding as of October 31, 2005 was 30,933,561.

INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

	September 30			December 31
	2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	55,536		$	21,177
Marketable securities	90,979			144,352
Accounts receivable, net	28,099			32,778
Prepaid expenses and other	11,926			10,415
Total current assets	186,540			208,722
Property and equipment, net	15,655			18,432
Goodwill	94,944			99,393
Other intangibles, net	10,298			14,668
Other assets, net	12,373			13,362

Total assets	$	319,810		$	354,577

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,790		$	2,825
Accrued liabilities	18,426			17,570
Deferred revenues	56,729			56,405
Income taxes payable	2,897			4,036
Total current liabilities	80,842			80,836
Deferred income taxes	2,005			2,250
Other long-term liabilities	5,392			5,816

Total liabilities	88,239			88,902

Commitments and contingencies (See Note 13)

Stockholders’ equity:
Common stock	307			327
Additional paid-in capital	324,043			339,995
Accumulated deficit	(99,739		)	(86,921		)
Accumulated other comprehensive income	6,960			12,274
Total stockholders’ equity	231,571			265,675

Total liabilities and stockholders’ equity	$	319,810		$	354,577

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

ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September 30						Nine Months Ended September 30
	2005			2004			2005		2004
Net revenues:
License and development fees	$	9,200		$	8,798		$	28,428	$	25,525
Maintenance and other recurring	27,796			24,167			79,099		70,367
Professional services and other	6,039			4,323			16,376		13,142

Total net revenues	43,035			37,288			123,903		109,034

Cost of revenues:
License and development fees	328			598			968		1,618
Maintenance and other recurring	7,314			6,754			21,951		20,954
Professional services and other	4,328			3,706			12,985		11,386
Amortization and impairment of developed technology	641			2,379			1,869		5,071

Total cost of revenues	12,611			13,437			37,773		39,029

Gross margin	30,424			23,851			86,130		70,005

Operating expenses:
Sales and marketing	9,459			9,705			30,005		27,774
Product development	6,800			7,967			22,567		24,320
General and administrative	8,007			6,329			24,288		18,517
Amortization and impairment of other intangibles	997			4,414			3,064		8,498
Restructuring charges (benefit)	116			(1		)	1,719		5,859

Total operating expenses	25,379			28,414			81,643		84,968

Income (loss) from operations	5,045			(4,563		)	4,487		(14,963		)
Interest income and other, net	977			641			6,586		625

Income (loss) before income taxes	6,022			(3,922		)	11,073		(14,338		)
Provision for (benefit from) income taxes	(207		)	1,211			784		1,190

Net income (loss)	$	6,229		$	(5,133	)	$	10,289	$	(15,528	)

Net income (loss) per share:
Basic	$	0.20		$	(0.16	)	$	0.33	$	(0.47	)
Diluted	$	0.19		$	(0.16	)	$	0.32	$	(0.47	)

Weighted average shares used to compute net income (loss) per share:
Basic	30,602			32,894			31,047		33,046
Diluted	32,301			32,894			32,091		33,046

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

ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended September 30
	2005			2004
Cash flows from operating activities:
Net income (loss)	$	10,289		$	(15,528	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Non-cash stock based compensation	—			21
Depreciation and amortization	12,004			16,681
Non-cash restructuring charges	—			863
Impairment of intangible assets	—			3,370
Loss on dispositions of fixed assets	143			388
Reduction of doubtful accounts	(191		)	(89		)
(Gain) loss on investments	(3,384		)	298
Deferred income taxes	(246		)	(26		)
Other	(929		)	(335		)
Changes in operating assets and liabilities:
Accounts receivable	4,870			5,680
Prepaid and other assets	157			6,005
Accounts payable	(35		)	(52		)
Accrued liabilities	2,562			1,219
Deferred revenues	350			(847		)
Income taxes payable	(1,139		)	541

Net cash provided by operating activities	24,451			18,189

Cash flows from investing activities:
Net cash used in acquisitions	(1,028		)	(8,513		)
Purchases of property and equipment	(4,460		)	(2,723		)
Capitalized software development costs	(1,280		)	—
Purchases of marketable securities	(105,187		)	(136,744		)
Sales and maturities of marketable securities	157,248			132,286
Proceeds from sale of other investments	3,791			—
Other	3			—

Net cash provided by (used in) investing activities	49,087			(15,694		)

Cash flows from financing activities:
Proceeds from issuance of common stock	13,505			4,372
Repurchase of common stock	(52,585		)	(11,899		)

Net cash used in financing activities	(39,080		)	(7,527		)

Effect of exchange rate changes on cash and cash equivalents	(99		)	(29		)

Net change in cash and cash equivalents	34,359			(5,061		)
Cash and cash equivalents at beginning of period	21,177			34,761

Cash and cash equivalents at end of period	$	55,536		$	29,700

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

ADVENT SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Basis of Presentation

The condensed consolidated financial statements include the accounts of Advent Software, Inc. (“Advent” or the “Company”) and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

Advent has prepared these condensed consolidated financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. Certain information and footnote disclosures included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in these interim statements pursuant to such SEC rules and regulations. These interim financial statements should be read in conjunction with the audited financial statements and related notes included in Advent’s Annual Report on Form 10-K for the year ended December 31, 2004 (see Note 2 below). Interim results are not necessarily indicative of the results to be expected for the full year, and no representation is made thereto.

These condensed consolidated financial statements include all adjustments necessary to state fairly the financial position and results of operations for each interim period shown. All such adjustments occur in the ordinary course of business and are of a normal, recurring nature. Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications do not affect net revenues, net income (loss) or stockholders’ equity.

Note 2—Restatement of Disclosure for Stock-Based Employee Compensation Expense

In connection with its preparation of the condensed consolidated financial statements for the quarter ended March 31, 2005, management of the Company determined that the financial statements for the years ending December 31, 2002, 2003 and 2004 and for the first three quarters of fiscal 2003 and 2004 cannot be relied on for the following reason. The Company’s disclosure for stock-based employee compensation expense under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS 148”), included in Note 1 to its previously issued financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (“2004 10-K”) and in the Quarterly Reports on Form 10-Q for each of the quarterly periods referred to above, contained errors in its disclosure of the pro forma effects on operating results as if Advent had elected to use the fair value approach to account for all stock-based compensation plans. Specifically, the errors related to the calculation of the effect of a stock option exchange program that took place on December 4, 2002, and the overall determination of the tax treatment of the pro forma option expense and forfeitures. As a result of these errors, Advent will restate the disclosure for stock-based employee compensation expense for fiscal 2002, 2003 and 2004 included in Note 1 to the previously issued financial statements contained in its 2004 10-K together with the associated disclosure for the first three quarters of fiscal 2003 and 2004. In addition, the Company has incorporated these corrections to its disclosure for stock-based employee compensation expense included in Note 4, “Stock-Based Compensation” to these condensed consolidated financial statements. These errors had no impact on the Company’s balance sheets, statements of operations, cash flows, comprehensive income or stockholders’ equity for any period.

The following is a summary of the effect of these corrections on the Company’s pro forma calculation of its net loss and net loss per share for the three and nine months ended September 30, 2004 had compensation been determined correctly based on the fair value at the grant date for awards (in thousands, except per share data):

	As Previously						As
	Reported			Adjustments			Restated
Three months ended September 30, 2004
Net loss - as reported	$	(5,133	)	$	—		$	(5,133	)
Stock-based employee compensation expense included in reported net loss, net of tax	3			—			3
Total stock-based employee compensation expense determined under fair value based method for all options, net of tax	(2,247		)	(1,844		)	(4,091		)

Net loss - pro forma	$	(7,377	)	$	(1,844	)	$	(9,221	)

Net loss per share:
Basic and diluted - as reported	$	(0.16	)	$	—		$	(0.16	)
Basic and diluted - pro forma	$	(0.22	)	$	(0.06	)	$	(0.28	)

Nine months ended September 30, 2004
Net loss - as reported	$	(15,528	)	$	—		$	(15,528	)
Stock-based employee compensation expense included in reported net loss, net of tax	21			—			21
Total stock-based employee compensation expense determined under fair value based method for all options, net of tax	(7,307		)	(5,275		)	(12,582		)

Net loss - pro forma	$	(22,814	)	$	(5,275	)	$	(28,089	)

Net loss per share:
Basic and diluted - as reported	$	(0.47	)	$	—		$	(0.47	)
Basic and diluted - pro forma	$	(0.69	)	$	(0.16	)	$	(0.85	)

Note 3—Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), which replaces SFAS 123 and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. In April 2005, the SEC subsequently adopted a new rule delaying compliance with SFAS 123R until the beginning of the Company’s next fiscal year, instead of the next reporting period that begins after June 15, 2005. Under the SEC’s recent rule, Advent is required to adopt SFAS 123R in the first quarter of fiscal 2006, beginning January 1, 2006. Under SFAS 123R, Advent must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition method includes prospective and retroactive adoption methods. Under the retroactive method, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R, while the retroactive method would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. Advent is evaluating the requirements of SFAS 123R and expects that the adoption of SFAS 123R will have a material impact on its condensed consolidated results of operations and earnings per share. Advent has not yet determined the method of adoption or the effect of adopting SFAS 123R, and has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.

financial measures, first-time adoption of SFAS 123R in an interim period, capitalization of compensation cost related to share-based arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS 123R, the modification of employee share options prior to adoption of SFAS 123R and disclosures in Management’s Discussion and Analysis subsequent to adoption of SFAS 123R. Advent will adopt SAB 107 in connection with its adoption of SFAS 123R, which the Company expects to have a material impact on its condensed consolidated results of operations and earnings per share.

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations – An Interpretation of FASB Statement No. 143” (“FIN 47”), to clarify the requirement to record liabilities stemming from a legal obligation to clean up and retire fixed assets, such as a plant or factory, when an asset retirement depends on a future event. The Company plans to adopt FIN 47 in the fourth quarter of fiscal 2005, and has not yet determined whether the application of FIN 47 will have a material impact on its condensed consolidated results of operations, cash flows or financial position.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). This statement applies to all voluntary changes in accounting principle and changes required by an accounting pronouncement where no specific transition provisions are included. SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Retrospective application is limited to the direct effects of the change; the indirect effects should be recognized in the period of the change. This statement carries forward without change the guidance contained in Opinion 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. However, SFAS 154 redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. The provisions of SFAS 154 are effective for accounting changes and corrections of errors made in fiscal periods that begin after December 15, 2005, although early adoption is permitted. The Company does not anticipate that the implementation of this standard will have a material impact on its condensed consolidated results of operations, cash flows or financial position.

Note 4—Stock-Based Compensation

Advent currently uses the intrinsic value-based method as prescribed in APB 25 to account for all stock-based employee compensation plans and has adopted the disclosure-only alternative of SFAS 123, as amended by SFAS 148. Advent is required to disclose the pro forma effects on operating results as if Advent had elected to use the fair value approach to account for all stock-based employee compensation plans. Stock-based compensation for non-employees is based on the fair value of the related stock or options.

The fair value of warrants, options or stock exchanged for services is expensed over the period benefited. The warrants and options are valued using the Black-Scholes option pricing model.

If compensation had been determined based on the fair value at the grant date for awards during the three and nine months ended September 30, 2005 and 2004, consistent with the provisions of SFAS 123, Advent’s net loss and net loss per share would have been as follows (in thousands, except per share data):

	Three Months Ended September 30						Nine Months Ended September 30
				(Restated,						(Restated,
				See Note 2)						See Note 2)
	2005			2004			2005			2004

Net income (loss) - as reported	$	6,229		$	(5,133	)	$	10,289		$	(15,528	)
Stock-based employee compensation expense included in reported net loss, net of tax (1)	—			3			—			21
Total stock based employee compensation expense determined under fair value based method for all options, net of tax (1)	(3,739		)	(4,091		)	(12,041		)	(12,582		)

Net loss - pro forma	$	2,490		$	(9,221	)	$	(1,752	)	$	(28,089	)

Net income (loss) per share - as reported:
Basic	$	0.20		$	(0.16	)	$	0.33		$	(0.47	)
Diluted	$	0.19		$	(0.16	)	$	0.32		$	(0.47	)

Net income (loss) per share - pro forma:
Basic	$	0.08		$	(0.28	)	$	(0.06	)	$	(0.85	)
Diluted	$	0.08		$	(0.28	)	$	(0.06	)	$	(0.85	)

(1) Assumes an effective tax rate of 0% for the three and nine months ended September 30, 2005 and 2004 due to the full valuation allowance established against the Company’s deferred tax assets during the fourth quarter of 2003.

The weighted-average grant-date fair value of options granted were $12.76 for the three months ended September 30, 2005 and $10.16 and $10.79 per option for the nine months ended September 30, 2005 and 2004, respectively. The Company did not grant options during the three months ended September 30, 2004. The weighted-average fair values of the Employee Stock Purchase Plan (“ESPP”) rights, measured on the grant date using Black-Scholes option pricing model, were $4.62 per share for the three and nine months ended September 30, 2005 and $4.47 per share for the three and nine months ended September 30, 2004.

The fair value of each option grant and ESPP rights were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	Three Months Ended September 30		Nine Months Ended September 30
Stock Options	2005	2004	2005	2004
Risk-free interest rate	4.0%	*	3.9%	2.9%
Volatility	58.1%	*	61.2%	67.0%
Expected life	5 years	*	5 years	5 years
Expected dividends	None	*	None	None

Employee Stock Purchase Plan **
Risk-free interest rate	*	*	2.8%	1.4%
Volatility	*	*	27.8%	35.8%
Expected life	*	*	6 months	6 months
Expected dividends	*	*	None	None

* There were no stock option grants or employee stock purchase plan rights during these respective periods.

** The ESPP plan offering periods begin every six months in the second and fourth quarter of each year.

Note 5—Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the sum of the weighted average number of common shares outstanding and the potential number of dilutive common shares outstanding during the period, excluding the effect of any anti-dilutive securities. Potential dilutive common shares consist of the shares issuable upon the exercise of stock options or warrants and from withholdings associated with the Company’s employee stock purchase plan.

The following table sets forth the computation of basic and diluted net income (loss) per share for the three and nine months ended September 30, 2005 and 2004 (in thousands, except per-share data):

	Three Months Ended September 30					Nine Months Ended September 30
	2005		2004			2005		2004

Numerator:
Net income (loss)	$	6,229	$	(5,133	)	$	10,289	$	(15,528	)

Denominator:
Denominator for basic net income (loss) per share- weighted average shares outstanding	30,602		32,894			31,047		33,046

Dilutive common equivalent shares:
Employee stock options and other	1,699		—			1,044		—

Denominator for diluted net income (loss) per share- weighted average shares outstanding, assuming exercise of potential dilutive common shares	32,301		32,894			32,091		33,046

Basic net income (loss) per share	$	0.20	$	(0.16	)	$	0.33	$	(0.47	)
Diluted net income (loss) per share	$	0.19	$	(0.16	)	$	0.32	$	(0.47	)

Weighted average stock options and warrants of approximately 0.5 million and 1.3 million for the three and nine months ended September 30, 2005, respectively, were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive. Similarly, weighted average stock options and warrants of approximately 5.7 million and 5.8 million for the three and nine months ended September 30, 2004, were excluded from the calculation of diluted net loss per share.

Note 6—Goodwill

The changes in the carrying value of goodwill during the nine months ended September 30, 2005 were as follows (in thousands):

	Goodwill

Balance at December 31, 2004	$	99,393
Translation adjustments	(4,449		)

Balance at September 30, 2005	$	94,944

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” Advent reviews goodwill for impairment annually during the fourth quarter of the fiscal year and more frequently if an event or circumstance indicates that an impairment loss has occurred. During the fourth quarter of 2004, Advent completed the annual impairment test which indicated that there was no impairment. There were no events or changes in circumstances during the nine months ended September 30, 2005 which triggered an impairment review. Foreign currency translation adjustments totaling $4.4 million reflect the strengthening of the U.S. dollar versus European currencies during the nine months ended September 30, 2005.

Note 7—Other Intangibles

The following is a summary of other intangibles as of September 30, 2005 (in thousands):

	Average
	Amortization	Other					Other
	Period	Intangibles,		Accumulated			Intangibles,
	(Years)	Gross		Amortization			Net

Purchased technologies	4.9	$	12,735	$	(11,578	)	$	1,157
Product development costs	3.0	1,280		(29		)	1,251
Customer relationships	5.6	20,857		(13,090		)	7,767
Other intangibles	2.5	307		(184		)	123

Balance at September 30, 2005		$	35,179	$	(24,881	)	$	10,298

The following is a summary of other intangibles as of December 31, 2004 (in thousands):

	Average
	Amortization	Other					Other
	Period	Intangibles,		Accumulated			Intangibles,
	(Years)	Gross		Amortization			Net

Purchased technologies	4.9	$	12,776	$	(9,779	)	$	2,997
Customer relationships	5.5	22,589		(11,099		)	11,490
Other intangibles	2.5	307		(126		)	181

Balance at December 31, 2004		$	35,672	$	(21,004	)	$	14,668

The changes in the carrying value of other intangibles during the nine months ended September 30, 2005 were as follows (in thousands):

	Other						Other
	Intangibles,			Accumulated			Intangibles,
	Gross			Amortization			Net

Balance at December 31, 2004	$	35,672		$	(21,004	)	$	14,668
Additions	1,280			—			1,280
Amortization	—			(4,933		)	(4,933		)
Translation adjustments	(1,773		)	1,056			(717		)

Balance at September 30, 2005	$	35,179		$	(24,881	)	$	10,298

Amortization and impairment of other intangibles was as follows for the periods presented (in thousands):

	Three Months Ended September 30				Nine Months Ended September 30
	2005		2004		2005		2004
Amortization and impairment of:
Technology intangibles	$	641	$	2,379	$	1,869	$	5,071
Non-technology intangibles	997		4,414		3,064		8,498

Total	$	1,638	$	6,793	$	4,933	$	13,569

In the third quarter of 2004, Advent recorded a non-cash impairment charge of $3.4 million to write off the carrying value of intangible assets related to the Techfi product line. Of this amount, $1.0 million was included in amortization and impairment of developed technology within cost of revenues as it related to existing and core technology and the remaining $2.4 million was included in operating expenses. In September 2004, the Company decided to discontinue certain products within the Techfi product line, which was acquired in July 2002, as demand for the Techfi product line has been significantly lower than expected. As a result, the Company reviewed the recoverability of its Techfi-related intangible assets. Recoverability was measured by a comparison of the assets’ carrying amount to their expected future undiscounted net cash flows. The Company determined that these intangible assets had no remaining value and wrote off the remaining carrying value in the third quarter of 2004.

Based on the carrying amount of other intangibles as of September 30, 2005, the estimated future amortization is as follows (in thousands):

	Three
	Months Ended
	December 31		Year Ended December 31
	2005		2006		2007		2008		2009		Total
Estimated future amortization of:
Technology intangibles	$	705	$	907	$	506	$	290	$	—	$	2,408
Non-technology intangibles	988		3,775		1,770		917		440		7,890

Total	$	1,693	$	4,682	$	2,276	$	1,207	$	440	$	10,298

Note 8—Balance Sheet Detail

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

	September 30			December 31
	2005			2004

Long-term investments, gross	$	13,800		$	16,300
Accumulated write-downs due to other-than-temporary decline in value	(5,341		)	(7,658		)
Long-term investments, net	8,459			8,642
Long-term prepaid assets	2,604			3,303
Deposits	1,310			1,417

Total other assets, net	$	12,373		$	13,362

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

In 2002, Advent acquired approximately 15% of the outstanding voting stock of LatentZero Limited (“LatentZero”), a privately-held company located in the United Kingdom, for $7.0 million. Through December 28, 2004, LatentZero was accounted for under the equity method of accounting as Advent’s Chief Executive Officer was a member of LatentZero’s board of directors and Advent accordingly considered itself to have significant influence over this company. During the three and nine months ended September 30, 2004, Advent recorded income of $322,000 and a loss of $284,000, respectively, resulting from Advent’s pro rata share of net income and losses on this equity method investment which was included in interest income and other, net on Advent’s condensed consolidated statement of operations. Effective December 28, 2004, Advent’s Chief Executive Officer resigned her seat on the investee’s board of directors and as a result, Advent no longer believes it has significant influence over LatentZero. Therefore, this investment is carried at the lower of cost or fair value at December 31, 2004 and September 30, 2005, similar to the Company’s other non-marketable investments.

During the second quarter of 2005, Advent sold its private equity investment in PlusFunds Group Inc. with a carrying value of $183,000 for total proceeds of $3.8 million. The Company recorded the associated gain on sale of this investment of $3.6 million in interest income and other, net on Advent’s condensed consolidated statement of operations for the nine months ended September 30, 2005.

The following is a summary of accrued liabilities (in thousands):

	September 30		December 31
	2005		2004

Salaries and benefits payable	$	7,548	$	8,208
Accrued restructuring	1,392		1,127
Other	9,486		8,235

Total accrued liabilities	$	18,426	$	17,570

Accrued restructuring charges are discussed further in Note 10, “Restructuring Charges”. Other accrued liabilities include accruals for royalties, sales and business taxes, acquisition related costs, and other miscellaneous items.

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

	September 30		December 31
	2005		2004

Deferred rent	$	1,450	$	2,456
Accrued restructuring, long-term portion	3,310		3,042
Other	632		318

Total other long-term liabilities	$	5,392	$	5,816

Deferred Rent. Certain deferred rent liabilities have been reclassified from long-term to short-term. Advent has historically classified all amounts accrued for deferred rent as “other long-term liabilities” on the condensed consolidated balance sheet. Based upon Advent’s re-evaluation of these liabilities, the Company has reclassified deferred rent liabilities that are to be recognized within a year of the balance sheet date to “accrued liabilities” on the condensed consolidated balance sheets. These reclassifications had no impact on the Company’s results of operations or cash flows. The following is a summary of the effect of these reclassifications on the Company’s condensed consolidated balance sheet as of December 31, 2004 (in thousands):

	Condensed Consolidated Balance Sheet
	As Previously					As
December 31, 2004	Reported		Reclassifications			Reclassified
Accrued liabilities	$	16,855	$	715		$	17,570
Total current liabilities	$	80,121	$	715		$	80,836
Other long-term liabilities	$	6,531	$	(715	)	$	5,816
Total liabilities	$	88,902	$	—		$	88,902

Note 9—Comprehensive Income (Loss)

The components of comprehensive income (loss) were as follows for the periods presented (in thousands):

	Three Months Ended September 30						Nine Months Ended September 30
	2005			2004			2005			2004

Net income (loss)	$	6,229		$	(5,133	)	$	10,289		$	(15,528	)
Unrealized gain (loss) on marketable securities, net of tax	(136		)	407			(226		)	(149		)
Foreign currency translation adjustment	(156		)	778			(5,088		)	(598		)
Total comprehensive income (loss)	$	5,937		$	(3,948	)	$	4,975		$	(16,275	)

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

	September 30			December 31
	2005			2004

Accumulated net unrealized loss on marketable securities, net of tax	$	(628	)	$	(402	)
Accumulated foreign currency translation adjustments	7,588			12,676
Total accumulated other comprehensive income	$	6,960		$	12,274

Note 10—Restructuring Charges

In response to the downturn in the financial services industry, the decline in information technology spending, duplicative efforts in parts of the business as a result of various acquisitions, and excess facilities capacity, Advent implemented several phases of restructuring beginning in 2003. These plans were implemented to reduce costs and improve operating efficiencies by better aligning Advent’s resources to the Company’s near-term revenue opportunities.

The restructuring charges recorded for the three and nine months ended September 30, 2005 and 2004 were as follows (in thousands):

	Three Months Ended September 30					Nine Months Ended September 30
	2005		2004			2005			2004

Facility exit costs	$	116	$	(1	)	$	1,724		$	4,864
Severance and benefits	—		—			(5		)	132
Property and equipment abandoned	—		—			—			863
Total restructuring charges (benefit)	$	116	$	(1	)	$	1,719		$	5,859

During the nine months ended September 30, 2005, Advent recorded total restructuring charges of $1.7 million consisting of charges of $83,000, $1.5 million and $116,000 recorded in the first, second and third quarters, respectively, of 2005. The second quarter charge of $1.5 million primarily consisted of net facility and exit costs related to sub-leasing one floor of its office space in New York, New York. The net restructuring charges of $83,000 and $116,000 recorded in the first and third quarters, respectively, were to adjust original estimates for vacated facilities.

During the nine months ended September 30, 2004, Advent recorded total restructuring charges of $5.9 million consisting of a benefit of $43,000 recorded in the first quarter of fiscal 2004 and a charge of approximately $5.9 million recorded in the second quarter of fiscal 2004. The benefit of $43,000 incurred in the first quarter of fiscal 2004 consisted of a $163,000 adjustment related to entering a final sub-lease agreement on one of the vacated facilities in New York, New York and a $16,000 adjustment to non-cash severance. These adjustments were partially offset by a restructuring charge of $136,000 related to the termination of nine employees, located primarily in New York. The $5.9 million charged incurred in the second quarter of fiscal 2004 consisted of $4.9 million of facility exit costs and $0.9 million of property and equipment impairment charges related to vacating a facility in San Francisco, California, $72,000 related to vacating a portion of a facility in Cambridge, Massachusetts and a $12,000 adjustment related to severance for terminated employees in the first quarter of 2004.

The following table sets forth an analysis of the components of the restructuring charges and the payments and non-cash charges made against the accrual during the nine months ended September 30, 2005 (in thousands):

	Facility Exit			Severance &
	Costs			Benefits			Total

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	704			—			704
Cash payments	(1,890		)	—			(1,890		)
Adjustment of prior restructuring costs	252			(5		)	247
Balance of restructuring accrual at September 30, 2005	$	4,695		$	7		$	4,702

Of the remaining restructuring accrual of $4.7 million at September 30, 2005, $1.4 million and $3.3 million are included in accrued liabilities and other long-term liabilities, respectively, on the accompanying condensed consolidated balance sheet. The remaining excess facility costs of $4.7 million are stated at estimated fair value, net of estimated sublease income of approximately $8.7 million. Advent expects to pay the remaining obligations associated with the vacated facilities no later than over the remaining lease terms, which expire on various dates through 2012. Advent expects to pay the remaining severance and benefits in 2005.

Note 11—Common Stock Repurchase Programs

Advent’s Board of Directors (the “Board”) has approved common stock repurchase programs authorizing management to repurchase shares of the Company’s common stock in the open market. The timing and actual number of shares subject to repurchase are at the discretion of Advent’s management and are contingent on a number of factors, including the price of Advent’s stock, general market conditions and alternative investment opportunities. The purchases are funded from available working capital.

During 2001 and 2002, the Board authorized the repurchase of up to 4.0 million shares of outstanding common stock. Through May 2004 when this program was terminated, Advent had repurchased and retired 3.8 million shares of common stock since inception of this stock repurchase program at a total cost of $78.8 million and an average price of $20.82 per share.

In May 2004, the Board authorized the repurchase of an additional 1.2 million shares of outstanding common stock. In September 2004, February 2005 and May 2005, the Board authorized an extension of this stock repurchase program to cover the

repurchase of an additional 0.8 million, 1.8 million and 1.0 million shares of outstanding common stock, respectively. The following table summarizes the Company’s total cost, number of shares repurchased and average price of common stock repurchased during the first three quarters of 2005 (in thousands, except for average price per repurchased share):

	Three Months Ended
	March 31		June 30		September 30
	2005		2005		2005

Total cost	$	38,020	$	10,731	$	3,833
Number of shares repurchased	2,124		555		156
Average price per repurchased share	$	17.90	$	19.32	$	24.65

Since the inception of this program in May 2004 through September 30, 2005, Advent has repurchased 3.6 million shares for a total cost of $64.5 million and an average price of $18.02 per share. As of September 30, 2005, approximately 1.2 million shares were available to be repurchased under this share repurchase plan.

Note 12—Acquisitions

In May 2004, Advent acquired the remaining independent distributor businesses from its independent European distributor, Advent Europe Holding BV (“Advent Europe”), in the United Kingdom and Switzerland, as well as certain assets of Advent Europe. Advent made these acquisitions in order to gain direct control over all of its European operations, which it views as an increasingly important market. The consideration of $6.0 million consisted of $5.7 million in cash, $242,000 of assumed liabilities and $83,000 of closing costs. A total of $5.5 million of the cash consideration was paid at closing and the remaining $0.2 million was paid by the Company during the second quarter of 2005. In addition, the Company paid an earn-out distribution of approximately $1.8 million under a formula based on revenue bookings, which was recorded as additional goodwill in the second quarter of 2004. No further earn-out distributions were earned or paid.

The acquisition has been accounted for using the purchase method of accounting and accordingly, the purchase price has been allocated to the tangible and identifiable intangible assets and liabilities acquired on the basis of their respective fair values on the acquisition date. The amounts allocated to identifiable intangibles were determined based upon management’s estimates using established valuation techniques. The results of operations of Advent United Kingdom and Advent Switzerland are included in the condensed consolidated statement of operations from the date of acquisition.

The allocation of the purchase price for Advent United Kingdom, Advent Switzerland and certain assets of Advent Europe at the date of purchase was as follows (in thousands, 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 been recorded based on the purchase price remaining after allocating the purchase price to the fair market value of assets purchased less liabilities assumed and to identifiable intangible assets. Residual goodwill arises as a result of, among other factors, new customers as well as the implicit value of future cost savings as a result of the combining of entities. Goodwill resulting from this acquisition was assigned to the Advent Investment Management segment and was expected to be non-deductible for tax purposes under Internal Revenue Code Section 197.

The following unaudited pro forma summary presents the consolidated results of operations as if the acquisitions had occurred at the beginning of the period presented. This does not purport to be indicative of the results that would have been achieved had the acquisition been made as of those dates nor of the results which may occur in the future (in thousands, except per share data):

	Three Months			Nine Months
	Ended			Ended
	September 30, 2004			September 30, 2004
Net revenues	$	37,288		$	110,165
Net loss	$	(5,133	)	$	(16,460	)
Net loss per share - basic and diluted	$	(0.16	)	$	(0.50	)

Note 13—Commitments and Contingencies

Advent leases office space and equipment under non-cancelable operating lease agreements, which expire at various dates through May 2012. Certain operating leases contain escalation provisions for adjustments in the consumer price index. Advent is responsible for maintenance, insurance, and property taxes. As of September 30, 2005, Advent’s remaining operating lease commitments through 2012 were approximately $23.6 million, net of future minimum rental income of $10.1 million to be received under non-cancelable sub-leases.

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

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

On March 8, 2005, certain of the former shareholders of Kinexus and the shareholders’ representative filed suit against Advent in the Delaware Chancery Court. The complaint alleges that Advent breached the Agreement and Plan of Merger dated as of December 31, 2001 pursuant to which Advent acquired all of the outstanding shares of Kinexus due principally to the fact that no amount was paid by Advent on an earn-out of up to $115 million. The earn-out, which was payable in cash or stock at the election of Advent, was based upon Kinexus meeting certain revenue targets in both 2002 and 2003. The complaint seeks unspecified compensatory damages, an accounting and restitution for unjust enrichment. Advent advised the shareholders’ representative in January 2003 that the earn-out terms had not been met in 2002 and accordingly no earn-out was payable for 2002 and would not be payable for 2003. Advent disputes the plaintiffs’ claims and believes that it has meritorious defenses and intends to vigorously defend this action. Management believes that any potential loss associated with this litigation is neither probable nor reasonably estimable at this time and accordingly has not accrued any amounts for any potential loss.

On May 26, 2005, certain of the former members of Advent Outsource Data Management LLC (“plaintiffs”) filed suit against Advent in San Francisco Superior Court. The complaint asserts claims for breach of contract, breach of the covenant of good faith and fair dealing, fraud, conversion, declaratory relief and accounting relating to alleged breaches of the Agreement and Plan of Merger dated October 31, 2002 (“Agreement”). Pursuant to the Agreement, in addition to cash compensation, Advent agreed to pay plaintiffs an “earn-out” payment based on “2003 Net Revenues” and “2004 Net Revenues” from sales of “Relevant Products” as defined by the Agreement with a maximum earn-out payment of $5 million. Advent has made earn-out payments to plaintiffs totaling approximately $3.9 million. However, plaintiffs claim that the earn-out payment should have been the maximum amount of $5 million. Based on these allegations, plaintiffs seek compensatory damages of approximately $1.1 million and other special damages including attorneys’ fees. Advent disputes the plaintiffs’ claims and believes that it has meritorious defenses and intends to vigorously defend this action. In addition, on September 12, 2005 and September 19, 2005,

a total of four former employees of Advent Outsource Data Management, LLC filed suits against Advent in San Francisco Superior Court. Each of the complaints alleges substantially the same causes of action, including breach of contract, breach of the covenant of good faith and fair dealing, conversion, and violations of various labor codes relating to alleged breaches of the respective employment agreements in place with Advent. Pursuant to the employees' employment agreements, each of which was for a term ending December 31, 2004, Advent agreed to pay incentive compensation based on amounts received for customer contracts for certain products, with a maximum incentive compensation of $100,000 per employee for calendar year 2003 and 2004. Advent has made the incentive compensation payments to these employees totaling $121,000; however, the employees claim that the incentive commission is not limited by the term of the employment agreement and should have been the maximum amount of $100,000 per calendar year during the existence of the relevant customer contracts. Based on these allegations, the employees are seeking compensatory damages and other special damages, including attorneys fees and costs of suit. Advent disputes the employee’s claims and believes that it has meritorious defenses and intends to vigorously defend these actions. Management believes that any potential loss associated with these lawsuits is neither probable nor reasonably estimable at this time and accordingly has not accrued any amounts for any potential loss.

Note 14—Segment Information

Description of Segments

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” established standards for reporting information about operating segments in annual financial statements and requires disclosure of selected information about operating segments in interim reports. It also established standards for related disclosures about products and services, major customers and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”), or decision making group, in deciding how to allocate resources and in assessing performance. Advent’s CODM is the Chief Executive Officer.

Advent’s organizational structure is based on a number of factors that the CODM uses to evaluate, view and run its business operations which include, but are not limited to, customer base, homogeneity of products and technology. Advent’s operating segments are based on this organizational structure and information reviewed by Advent’s CODM to evaluate the operating segment results. During fiscal 2004, Advent determined that its operations were organized into two reportable segments: 1) Advent Investment Management; and 2) MicroEdge. The segment information for the three and nine months ended September 30, 2005 and 2004 below reflect this organizational change. Future changes to this organizational structure may result in changes to the business segments. A description of the types of products and services provided by each operating segment follows.

Advent Investment Management is the Company’s core business and derives revenues from the development, marketing and sale of software products, data interfaces and related maintenance and services that automate, integrate and support certain mission critical functions of investment management organizations. MicroEdge derives revenues from the sale of software and services for grant management and matching gifts for the grant-making community worldwide.

Segment Data

The results of the operating segments are derived directly from Advent’s internal management reporting system. The accounting policies used to derive operating segment results are substantially the same as those used by the consolidated company. Management measures the performance of each operating segment based on several metrics, including income (loss) from operations. These results are used, in part, to evaluate the performance of, and to assign resources to, each of the operating segments. Certain operating expenses, including amortization and impairment of developed technology and other intangibles, which Advent manages separately at the corporate level, are not allocated to the operating segments. Advent does not separately accumulate and review asset information by segment.

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

	Three Months Ended September 30						Nine Months Ended September 30
	2005			2004			2005			2004
Net revenues:
Advent Investment Management	$	37,216		$	32,207		$	107,324		$	94,607
MicroEdge	4,986			4,425			14,488			12,428
Other	833			656			2,091			1,999

Total net revenues	$	43,035		$	37,288		$	123,903		$	109,034

Income (loss) from operations:
Advent Investment Management	$	5,523		$	1,926		$	7,224		$	(1,891	)
MicroEdge	997			222			1,947			334
Other	163			82			249			163
Unallocated corporate operating costs and expenses:
Amortization of developed technology	(641		)	(2,379		)	(1,869		)	(5,071		)
Amortization of other intangibles	(997		)	(4,414		)	(3,064		)	(8,498		)

Total income (loss) from operations	$	5,045		$	(4,563	)	$	4,487		$	(14,963	)

Major Customers

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

Note 15—Related Party Transactions

As of September 30, 2005, Citigroup, Inc. (“Citigroup”) owned more than 10% of the voting stock of Advent. Advent recognized approximately $533,000 and $1.5 million of revenue from Citigroup during the three and nine months ended September 30, 2005, respectively. During the three and nine months ended September 30, 2004, Advent recognized approximately $260,000 and $734,000 of revenue from Citigroup. The Company’s accounts receivable from Citigroup was $794,000 and $659,000 as of September 30, 2005 and December 31, 2004, respectively.

In addition, Advent acts as a trustee for the Company’s short-term disability plan—Advent Software California Voluntary Disability Plan (VDI). For the three and nine months ended September 30, 2005, withholdings totaled $87,000 and $311,000 respectively. Cash held by Advent related to the VDI was $315,000 and $162,000 as of September 30, 2005 and December 31, 2004, respectively, which are included in “other assets, net” in the condensed consolidated balance sheets.

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

You should read the following discussion in conjunction with our condensed consolidated financial statements and related notes. The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended, including, but not limited to statements referencing our expectations relating to future revenues and expenses. Forward-looking statements can be identified by the use of terminology such as “may”, “will”, “should”, “expect”, “plan” “anticipate”, “believe”, “estimate”, “predict”, “potential”, “continue” or other similar terms and the negative of such terms regarding beliefs, plans, expectations or intentions regarding the future. Forward looking statements include, among others, statements regarding growth in the investment management market and opportunities for us related thereto, future expansion, acquisition, divestment of or investment in other businesses, projections of revenues, future cost and expense levels, expected timing and amount of amortization expenses related to past acquisitions, the adequacy of resources to meet future cash requirements, estimates or predictions of actions by customers, suppliers, competitors or regulatory authorities, future client wins, future hiring and future product introductions. Such forward-looking statements are based on our current plans and expectations and involve known and unknown risks and uncertainties which may cause our actual results or performance to be materially different from any results or performance expressed or implied by such forward-looking statements. Such factors include, but are not limited to the “Risk Factors” set forth below as well as other risks identified 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 performance and represent our expectations only as of the date they are made.

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

Overview and Strategy

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

During the third quarter of 2005, we continued to experience positive results: revenue growth, progress on our term pricing transition, new client wins, achieving positive earnings per share for the third consecutive quarter, operating cash flow, expense management, and new product launches.

Net revenues for the third quarter of 2005 grew 4% from the previous quarter and over 15% year over year. We continued our transition to term licensing in the third quarter. Term licensing has the effect, depending on the signing dates of a particular quarter’s contracts, of deferring all or almost all of that quarter’s license revenue into future periods, whereas with a predominantly perpetual licensing model most of a quarter’s license revenue is typically recognized in that quarter. Over the past five quarters, we have been able to manage this transition with steady top-line growth measured year over year for two reasons:

• Our diverse mix of products has allowed us to phase in term licensing by product; and

• We have a large installed base of customers, whom we are not requiring to convert to term licenses for upgrades or additional licenses on products they already own.

In the third quarter, we launched Advent Portfolio Exchange (“APX”), our next generation portfolio management and client reporting platform. APX will be sold on a term license model, and, as a result will, we believe, cause a higher percentage of our license revenue to be deferred into future periods.

We began to accelerate the conversion to term licensing in the second half of 2004 as part of our long-term strategy to build recurring revenue streams and increase the lifetime value of our customers. Over the past five quarters, we have cumulatively sold $21.2 million in term contracts, which includes third quarter contracts totaling $4.9 million with an average term of 3.3 years. Going forward, we anticipate that term licensing will become more prevalent which will eventually enhance the growth and predictability of our revenues. However, in the short term, our revenues and operating margins will be lower than they would be in a perpetual licensing model.

In the third quarter of 2005, we added 79 new clients, including four Geneva clients and 17 coming from our Advent Office Essentials product offering.

We generated positive earnings per share for the third consecutive quarter and generated positive cash flow from operations for the eighth consecutive quarter. Although we have not yet returned to our historical levels of profitability, and the transition to term licensing has a negative impact on profitability in the short term, we have nevertheless made steady progress in improving our operating performance.

During 2005, we continue to manage our expenses. Total third quarter of 2005 expenses of $38.0 million were down from $41.8 million in the second quarter of 2005 and $41.9 million in the third quarter of 2004. In the second quarter of 2005, we recorded a restructuring charge of $1.5 million as a result of sub-leasing one floor of our New York City office space. Our total headcount as of September 30, 2005 was 737, flat with 734 as of June 30, 2005, down from 750 as of March 31, 2005, and down from its high of 980 as of December 31, 2003.

The third quarter of 2005 was also a significant quarter for us in terms of product launches. In September 2005, we launched APX for which we have received positive feedback. We already have clients in production on APX and others going into production in the fourth quarter. APX combines portfolio accounting, reporting and client relationship management into a single platform, and features an industry-standard relational database and sophisticated security and audit features, combining both front and back office operations in a single, customizable solution. APX is positioned between Axys and Geneva, expanding our product portfolio and allowing us to offer a comprehensive product to firms that have been underserved in the past.

Earlier in the quarter, we introduced the latest version of Axys, which continues to be a very important product for us, and for the approximately 4,000 customers using it. This version of Axys features new reporting capabilities, improved support for operating systems and third-party technologies, and greater automation for managers. This release is consistent with our future plans for Axys. We will continue to add functionality to address changes in areas such as the regulatory environment, operating system platform requirements, third-party technologies and demand for new reports. Clients seeking platform upgrades, increased integration with other products, or significant new functionality will likely want to migrate to either our APX or Geneva products.

Also in the third quarter, our services and support organization was recognized when Advent received Support Center Practices Certification for the delivery of world-class customer support. We are the first company in the investment management software industry to receive this designation.

Our focus for the remainder of 2005 continues to be on three areas:

• First, improving our financial performance. We will continue to exercise tight control over headcount and expenses and are taking steps to further improve our efficiency;

• Second, growing our customer base across all the markets we serve; and

• Third, continuing to launch leading edge products that help our customers grow their businesses.

Over the longer term, we expect a continued challenging business environment and limited visibility. In addition, we may, from time to time, invest in areas we deem appropriate.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements and related notes, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an ongoing basis, we evaluate our process used to develop estimates, including those related to product returns, accounts receivable, investments, intangible assets, income taxes, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

Revenue recognition. We recognize revenue from software licenses, development fees, maintenance, other recurring revenues, professional services and other revenues. In addition, we earn commissions from customers who use our broker/dealer, Second Street Securities, to “soft dollar” the purchase of non-Advent products and services with “soft dollars”. “Soft dollaring” enables the customers to use the commissions earned on trades to pay all or part of the fees owed to us for non-Advent products or services, which are initially paid for by Second Street Securities. The commission revenues earned from “soft dollar” purchases of non-Advent products or services are recorded as other revenues in professional services and other revenues on our condensed consolidated statements of operations.

We offer a wide variety of products and services to a large number of financially sophisticated customers. While many of our lower-priced license transactions, maintenance contracts, subscription-based transactions and professional services projects conform to a standard structure, many of our larger transactions are complex and may require significant review and judgment in our application of generally accepted accounting principles.

Software license and development fees. We recognize revenue from the licensing of software when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable and collection of the resulting receivable is probable. We generally use a signed license agreement as evidence of an arrangement. Sales through our distributors are evidenced by a master agreement governing the relationship together with binding order forms and signed contracts from the distributor’s customers. Revenue is recognized upon shipment to the distributor’s customer and when all other revenue recognition criteria have been met. Delivery occurs when product is delivered to a common carrier F.O.B shipping point. Some of our arrangements include acceptance provisions, and if such acceptance provisions are provided, delivery is deemed to occur upon acceptance. We assess whether the fee is fixed or determinable based on the payment terms

associated with the transaction. We assess whether the collectibility of the resulting receivable is probable based on a number of factors, including the credit worthiness of the customer determined through review of credit reports, our transaction history with the customer, other available information and pertinent country risk if the customer is located outside the United States. Our standard payment terms are due at 180 days or less unless the transaction is part of a soft dollar arrangement through our in-house broker/dealer subsidiary, Second Street Securities, for which payment is then required within one year; however, terms may vary based on the country in which the agreement is executed. Software licenses are sold with maintenance and, frequently, professional services. We allocate revenue to delivered components, normally the license component of the arrangement, using the residual method, based on vendor specific objective evidence, or VSOE, of fair value of the undelivered elements (generally the maintenance and professional services components), which is specific to us. We determine the fair value of the undelivered elements based on the historical evidence of the Company’s stand-alone sales of these elements to third parties, or also, in the case of maintenance, substantive renewal rates. When VSOE does not exist for undelivered elements, then the entire arrangement fee is deferred until delivery of the element.

We offer term licenses as an alternative to perpetual licenses and generally recognize revenue for term licenses ratably over the period of the contract term. The term license contract price includes both the software license fee and maintenance and support fees, and, as a result, we allocate approximately half of the contract price to license revenue and the other half to maintenance and recurring revenues, based on our assessment of the relative fair value of the two elements. We have begun a transition from selling mostly perpetual licenses to selling a mix of term and perpetual contracts, and we expect term license revenue to increase as a proportion of total license revenue in the future. Including our entry level product, Advent Office Essentials, we recognized approximately 27% and 23% of license revenue from term licenses during the three and nine months ended September 30, 2005, respectively, as compared to 7% in the comparable periods of 2004.

Development fees are derived from contracts that we have entered into with other companies, including customers and development partners. Agreements for which we receive development fees generally provide for the development of technologies and products that are expected to become part of our general product offerings in the future. Revenues for license development projects are recognized primarily using the percentage-of-completion method of accounting, based on costs incurred to date compared with the estimated cost of completion, or using the completed contract method, when the development project is finished.

If a customer buys our software and chooses to enter into a “soft dollar” arrangement through our in-house broker/dealer subsidiary, Second Street Securities, the “soft dollar” arrangement does not change or modify the original fixed or determinable fee in the written contract. The customer is required to pay the original fee for our software within one year. If insufficient trading volume is generated to pay the entire original fee within one year, the customer is still required to render payment within one year. If the customer chooses to use a third-party broker/dealer, the original payment terms apply, regardless of the arrangement with the third-party broker/dealer. The option to “soft dollar” a transaction does not alter the underlying revenue recognition for the transaction; all the revenue recognition criteria listed in the “Software license” section above must be assessed in determining how the revenue will be recognized.

Our standard practice is to enforce our contract terms and not allow our customers to return software. We have, however, allowed customers to return software on a limited case-by-case basis and have recorded sales returns reserves as offsets to revenue in the period the sales return becomes probable, in accordance with FASB Statement No. 48, “Revenue Recognition when Right of Return Exists”. The estimates for returns are adjusted periodically based upon historical rates of returns and other related factors.

We do have three situations where we provide a contractual limited right of return to end-user customers only: in shrink-wrap license agreements for Advent products, our MicroEdge product and our NPO product. The shrink-wrap license agreement for Advent products provides for a right of return within seven days of delivery of the software. The MicroEdge software license agreement allows for a thirty-day money back guarantee. The NPO license agreement allows for a seven-day right of return. We recognize revenue on delivery since the fee is fixed or determinable, the buyer is obligated to pay, the risk of loss passes to the customer, and we have the ability to estimate returns. Our ability to estimate returns is based on a long history of experience with relatively homogenous transactions and the fact that the return period is short. We have recorded a sales returns reserve (contra revenue account) to account for these situations based on our historical experience of approximately $(135,000) and $203,000 for the three and nine months ended September 30, 2005, respectively. We have an algorithm for calculating the value of reserves that takes the previous 18 months of experience into account which we have applied consistently and resulted in a credit of $135,000 to license revenue during the three months ended September 30, 2005.

Maintenance and other recurring revenues. We offer annual maintenance programs that provide for technical support and updates to our software products. Maintenance fees are bundled in the initial licensing year and charged separately for renewals of annual maintenance in subsequent years. We offer other recurring revenue services that are either subscription-based or transaction-based, and primarily include the provision of software interfaces to, and the capability to download

securities information from, third party data providers. Fair value for maintenance is based upon renewal rates stated in the contracts or, in limited cases, separate sales of renewals to other customers. We recognize revenue for maintenance ratably over the contract term. We recognize revenue from recurring revenue transactions either ratably over the subscription period or as the transactions occur. Term license contracts include fees for both software and maintenance and support. As noted above, we allocate approximately half of term license fees to maintenance and recurring revenues, based on our estimate of the relative fair value of the maintenance and support fees as a percentage of the total contract price. Our ability to estimate returns is based on a long history of experience with relatively homogenous transactions and the fact that the return period is short. We have recorded a returns reserve (contra revenue account) to account for these situations based on our historical experience of $(231,000) and $1.5 million for the three and nine months ended September 30, 2005, respectively. During the third quarter of 2005, we recognized a net benefit from reducing our maintenance revenue reserves by approximately $500,000. We have an algorithm for calculating the value of reserves that takes the previous 18 months of experience into account which we have applied consistently and resulted in a credit to revenue during the three months ended September 30, 2005.

Subscription-based revenues and any related set-up fees are recognized ratably over the term of the agreement.

Professional services and other revenues. We offer a variety of professional services that include project management, implementation, data conversion, integration, custom report writing and training. Fair value for professional services is based upon separate sales of these services by us to other customers. Our professional services are generally billed based on hourly rates together with reimbursement for travel and accommodation expenses. Our professional services and other revenue also include revenue from our annual user conferences. We generally recognize revenue as these professional services are performed. Certain professional services arrangements involve acceptance criteria. In these cases, revenue and related expenses are recognized upon acceptance.

Commission revenues received from “soft dollar” transactions for products and services not related to Advent products and services are recorded as other revenues on a net basis as we are not the primary obligor in these transactions. Revenues for these “soft dollar” transactions are recognized on a trade-date basis as securities transactions occur.

Income taxes. We account for worldwide income taxes under an asset and liability approach that requires the expected future tax consequences of temporary differences between book and tax bases of assets and liabilities be recognized as deferred tax assets and liabilities. Generally accepted accounting principles require us to evaluate whether or not we will realize a benefit from net deferred tax assets on an ongoing basis. A valuation allowance is recorded to reduce the net deferred tax assets to an amount that will more likely than not be realized. Significant factors considered by management in assessing the need for a valuation allowance include the following:

• our historical operating results;

• the length of time over which the differences will be realized;

• tax planning opportunities; and

• expectations for future earnings.

In considering whether or not we will realize a benefit from net deferred tax assets, recent losses must be given substantially more weight than any projections of future profitability. In 2003, we determined that, under applicable accounting principles, based on our history of consecutive losses since the second quarter of 2002, it was more likely than not that we would not realize any value for our net deferred tax assets. Accordingly, we established a valuation allowance equal to 100% of the amount of these assets. In fiscal 2004 and fiscal year-to-date 2005, we continued to maintain a full valuation allowance against our deferred tax assets due to our history of losses through fiscal 2004. Income tax expense recorded in the future will be reduced to the extent sufficient positive evidence materializes to support a reversal of, or decrease in, the valuation allowance. A history of cumulative profitability is generally considered as sufficient positive evidence to support the more likely than not criterion for a decrease in or reversal of a valuation allowance.

Impairment of long-lived assets. We review our goodwill for impairment annually during the fourth quarter of our fiscal year (as of November 1) and more frequently if an event or circumstance indicates that an impairment loss has occurred. We are required to test our goodwill for impairment at the reporting unit level. We have determined that we had five reporting units as of November 1, 2004. The test for goodwill impairment is a two-step process:

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

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

The process for evaluating the potential impairment of goodwill is subjective and requires judgment at many points during the test including future revenue forecasts, discount rates and various reporting unit allocations. During the fourth quarter of 2004, we completed our annual impairment test which did not indicate impairment. Therefore, the second step of the impairment test was not necessary to perform. There were no events or changes in circumstances during the nine months ended September 30, 2005 which triggered an impairment review.

We review our other long-lived assets including property and equipment and other intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

• significant underperformance relative to expected historical or projected future operating results;

• significant changes in the manner of our use of the acquired assets or the strategy for our overall business;

• significant negative market or economic trends;

• significant decline in our stock price for a sustained period; and

• our market capitalization relative to net book value.

Recoverability is measured by a comparison of the assets’ carrying amount to their expected future undiscounted net cash flows. If such assets are considered to be impaired, the impairment to be recognized is measured based on the amount by which the carrying amount of the asset exceeds its fair value. For example, demand for our Techfi product line was significantly lower than expected and thus we discontinued certain products within our Techfi product line in September 2004. As a result, we recorded a non-cash impairment charge of $3.4 million in the third quarter of 2004 to write-off the carrying value of certain Techfi-related intangible assets.

We hold minority interests in several privately held companies having operations or technology in areas within our strategic focus. Most of these investments can be considered as early stage investment opportunities and are classified as other assets and valued at the lower of cost or fair value on our condensed consolidated balance sheets. Through December 28, 2004, one of these investments had been accounted for under the equity method of accounting as our Chief Executive Officer was a member of this investee’s board of directors. Effective December 28, 2004, our Chief Executive Officer resigned her seat on this investee’s board of directors and as a result, we no longer believe we have significant influence over this investee. Therefore, this investment is carried at the lower of cost or fair value at December 31, 2004 and September 30, 2005, similar to our other investments.

Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future. We estimate an investment’s carrying value using a variety of valuation methodologies. Such methodologies include comparing the private company with publicly traded companies in similar lines of business, applying revenue multiples to estimated future operating results for the private company and estimating discounted cash flows for that company.

Restructuring charges and related accruals. Since 2003, we have developed and implemented formalized plans for restructuring our business to better align our resources to market conditions and recorded significant charges. In connection with these plans, we recorded estimated expenses for severance and benefits, lease cancellations, asset write-offs and other restructuring costs. Given the significance of, and the timing of the execution of such activities, this process is complex and involves periodic reassessments of estimates made at the time the original decisions were made, including evaluating real estate market conditions for expected vacancy periods and sub-lease rents. We continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. Although we believe that these estimates accurately reflect the costs of our restructuring plans, actual results may differ, thereby requiring us to record additional provisions or reverse a portion of such provisions.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and supercedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees (“APB 25”). SFAS 123R requires all share-based payments to employees, including grants of employee stock

options, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. In April 2005, the SEC subsequently adopted a new rule delaying compliance with SFAS 123R until the beginning of our next fiscal year, instead of the next reporting period, that begins after June 15, 2005. Under the SEC’s recent rule, we are required to adopt SFAS 123R in our first quarter of fiscal 2006, beginning January 1, 2006. Under SFAS 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition method includes prospective and retroactive adoption methods. Under the retroactive method, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R, while the retroactive method would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. We are evaluating the requirements of SFAS 123R and we expect that the adoption of SFAS 123R will have a material impact on our consolidated results of operations and earnings per share. We have not yet determined the method of adoption or the effect of adopting SFAS 123R, and we have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the staff’s interpretation of Share-Based Payments. This interpretation expresses the views of the staff regarding the interaction between SFAS 123R and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements for publicly traded companies. In particular, SAB 107 provides guidance related to share-based payment transactions with non-employees, the transition from nonpublic to public entity status, valuation methods, the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of SFAS 123R in an interim period, capitalization of compensation cost related to share-based arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS 123R, the modification of employee share options prior to adoption of SFAS 123R and disclosures in Management’s Discussion and Analysis subsequent to adoption of SFAS 123R. We will adopt SAB 107 in connection with our adoption of SFAS 123R, which is expected to have a material impact on our condensed consolidated results of operations and earnings per share.

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations – An Interpretation of FASB Statement No. 143” (“FIN 47”), to clarify the requirement to record liabilities stemming from a legal obligation to clean up and retire fixed assets, such as a plant or factory, when an asset retirement depends on a future event. We plan to adopt FIN 47 in the fourth quarter of fiscal 2005, and have not yet determined whether the application of FIN 47 will have a material impact on our condensed consolidated results of operations, cash flows or financial position.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3 (“SFAS 154”). This statement applies to all voluntary changes in accounting principle and changes required by an accounting pronouncement where no specific transition provisions are included. SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Retrospective application is limited to the direct effects of the change; the indirect effects should be recognized in the period of the change. This statement carries forward without change the guidance contained in Opinion 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. However, SFAS 154 redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. The provisions of SFAS 154 are effective for accounting changes and corrections of errors made in fiscal periods that begin after December 15, 2005, although early adoption is permitted. We do not anticipate that the implementation of this standard will have a material impact on our condensed consolidated results of operations, cash flows or financial position.

Restatement of Disclosure for Stock-Based Employee Compensation Expense

In connection with our preparation of the condensed consolidated financial statements for the quarter ended March 31, 2005, we determined that the financial statements for the years ending December 31, 2002, 2003 and 2004 and for the first three quarters of fiscal 2003 and 2004 cannot be relied upon for the following reason. Our disclosure for stock-based employee compensation expense under SFAS 123, as amended by SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure”, included in Note 1 to the previously issued financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2004 (“2004 10-K”) and in the Quarterly Reports on Form 10-Q for each of the quarterly periods referred to above, included errors in our disclosure of the pro forma effects on operating results as if we had elected to use the fair value approach to account for all stock-based compensation plans. Specifically, the errors related to the calculation of the effect of a stock option exchange program that took place on December 4, 2002, and the overall determination of the tax treatment of the pro forma option expense and forfeitures. As a result of these errors, we will restate the disclosure for stock-based employee compensation expense for fiscal 2002, 2003 and 2004 included in Note 1 to the

previously issued financial statements contained in our 2004 10-K together with the associated disclosure for the first three quarters of fiscal 2003 and 2004. In addition, we have incorporated these corrections to our disclosure for stock-based employee compensation expense included in Note 4, “Stock-Based Compensation” to these condensed consolidated financial statements. These errors had no impact on our balance sheets, statements of operations, cash flows, comprehensive income or stockholders’ equity for any period.

The following is a summary of the effect of these corrections on the pro forma calculation of our net loss and net loss per share for the three and nine months ended September 30, 2004 had compensation been determined based on the fair value at the grant date for awards (in thousands, except per share data):

	As Previously						As
	Reported			Adjustments			Restated
Three months ended September 30, 2004
Net loss - as reported	$	(5,133	)	$	—		$	(5,133	)
Stock-based employee compensation expense included in reported net loss, net of tax	3			—			3
Total stock-based employee compensation expense determined under fair value based method for all options, net of tax	(2,247		)	(1,844		)	(4,091		)

Net loss - pro forma	$	(7,377	)	$	(1,844	)	$	(9,221	)

Net loss per share:
Basic and diluted - as reported	$	(0.16	)	$	—		$	(0.16	)
Basic and diluted - pro forma	$	(0.22	)	$	(0.06	)	$	(0.28	)

Nine months ended September 30, 2004
Net loss - as reported	$	(15,528	)	$	—		$	(15,528	)
Stock-based employee compensation expense included in reported net loss, net of tax	21			—			21
Total stock-based employee compensation expense determined under fair value based method for all options, net of tax	(7,307		)	(5,275		)	(12,582		)

Net loss - pro forma	$	(22,814	)	$	(5,275	)	$	(28,089	)

Net loss per share:
Basic and diluted - as reported	$	(0.47	)	$	—		$	(0.47	)
Basic and diluted - pro forma	$	(0.69	)	$	(0.16	)	$	(0.85	)

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation to better reflect our view of the current business. These reclassifications do not affect total net revenues, net income (loss), cash flows, or stockholders’ equity.

Deferred Rent. Certain deferred rent liabilities have been reclassified from long-term to short-term. We have historically classified all amounts accrued for deferred rent as “other long-term liabilities” on the condensed consolidated balance sheets. Based upon our re-evaluation of these liabilities, we have reclassified deferred rent liabilities that are to be recognized within a year of the balance sheet date to “accrued liabilities” on the condensed consolidated balance sheets. These reclassifications had no impact on our results of operations or cash flows. The following is a summary of the effect of these reclassifications on our condensed consolidated balance sheet as of December 31, 2004 (in thousands):

	Condensed Consolidated Balance Sheet
	As Previously					As
December 31, 2004	Reported		Reclassifications			Reclassified
Accrued liabilities	$	16,855	$	715		$	17,570
Total current liabilities	$	80,121	$	715		$	80,836
Other long-term liabilities	$	6,531	$	(715	)	$	5,816
Total liabilities	$	88,902	$	—		$	88,902

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

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

	Three Months Ended September 30				Nine Months Ended September 30
	2005		2004		2005		2004

Net revenues:
License and development fees	21	%	24	%	23	%	23	%
Maintenance and other recurring	65		64		64		65
Professional services and other	14		12		13		12

Total net revenues	100		100		100		100

Cost of revenues:
License and development fees	1		2		1		2
Maintenance and other recurring	17		18		18		19
Professional services and other	10		10		10		10
Amortization and impairment of developed technology	1		6		1		5

Total cost of revenues	29		36		30		36

Gross margin	71		64		70		64

Operating expenses:
Sales and marketing	22		26		24		26
Product development	16		21		18		22
General and administrative	19		17		20		17
Amortization and impairment of other intangibles	2		12		3		8
Restructuring charges (benefit)	0		(0	)	1		5

Total operating expenses	59		76		66		78

Income (loss) from operations	12		(12	)	4		(14	)
Interest income and other, net	2		1		5		1

Income (loss) before income taxes	14		(11	)	9		(13	)
Provision for (benefit from) income taxes	(0	)	3		1		1

Net income (loss)	14	%	(14	)%	8	%	(14	)%

NET REVENUES

	Three Months Ended September 30						Nine Months Ended September 30
	2005		2004		Change		2005		2004		Change

Total net revenues (in thousands)	$	43,035	$	37,288	$	5,747	$	123,903	$	109,034	$	14,869

Our net revenues are made up of three components: license and development fees; maintenance and other recurring; and professional services and other. License revenues are derived from the licensing of software products, while development fees are derived from development contracts that we have entered into with other companies, including customers and development partners. Maintenance and other recurring revenues are derived from maintenance fees charged in the initial licensing year, renewals of annual maintenance services in subsequent years and recurring revenues derived from our subscription-based and transaction-based services. Professional services and other revenues include fees for consulting, training services, commission revenues from “soft dollaring” of third-party products and services and our user conferences.

Each of the major revenue categories has historically varied as a percentage of net revenues and we expect this variability to continue in future periods. This variability is partially due to the timing of the introduction of new products, the relative size and timing of individual perpetual and term software licenses, as well as the size of the implementation, the resulting proportion of the maintenance and professional services components of these license transactions and the amount of client use of pricing and related data. We expect total net revenues for the fourth quarter of 2005 to be between $41 million and $43 million.

License and Development Fees

	Three Months Ended September 30								Nine Months Ended September 30
	2005			2004			Change		2005			2004			Change

License and development fees (in thousands)	$	9,200		$	8,798		$	402	$	28,428		$	25,525		$	2,903
Percent of total net revenues	21		%	24		%			23		%	23		%

The increase in license revenue and development fees reflected an improved overall economy and improved conditions within the financial services industry, which contributed to increases in capital expenditures by our customers. License and development fee revenue in the three and nine months periods reflected an increase in Geneva-related assets under administration (AUA) revenues, and increasing term license revenues as our transition to a term license model continued. During the third quarter of 2005, we recognized approximately $800,000 from deferred license revenue as a result of shipping APX to two customers and from completing a large MicroEdge development contract. Our Geneva-related AUA revenues increased $0.7 million and $3.6 million during the three and nine months ended September 30, 2005, respectively, from the same periods in 2004 as a result of the growth in assets under administration of certain fund administration clients, whose Geneva contracts provide for quarterly fees based on assets, resulting in significant recurring quarterly revenue. While perpetual license revenue decreased $2.0 million and $2.4 million in the three and nine month periods, respectively, due to our transition towards selling more contracts on a term basis, revenue recognized from our core products from term license deals increased $1.2 million and $1.3 million in the three and nine month periods, respectively. In addition, we had significant overall revenue growth from our MicroEdge subsidiary product lines. We expect license and development fee revenues to increase slightly in the fourth quarter of 2005 as we earn higher revenues under our AUA revenue model.

We typically license our products on a per server, per user basis with the price per customer varying based on the selection of the products licensed, the number of site installations and the number of authorized users. We earn development fees when we provide product solutions which are not part of our standard product offering but will be incorporated into our future releases. For the three and nine months ended September 30, 2005 and 2004, revenue from development fees was less than 4% of total license and development fees revenue. For the three and nine months ended September 30, 2005 and 2004, soft dollar revenues generated from Advent related licenses paid for through soft dollar transactions represented less than 3% of total license and development revenues.

Maintenance and Other Recurring Revenues

	Three Months Ended September 30								Nine Months Ended September 30
	2005			2004			Change		2005			2004			Change
Maintenance and other recurring revenues (in thousands)	$	27,796		$	24,167		$	3,629	$	79,099		$	70,367		$	8,732
Percent of total net revenues	65		%	64		%			64		%	65		%

The increase in maintenance and other recurring revenues in the three and nine month periods reflected new maintenance support contracts as a result of new license deals, price increases to our installed customer base, an increase in demand for our data services and an increase in our recurring revenue stream. Term license maintenance also increased $687,000 and $1.7 million during the three and nine month periods, respectively, due to our term license pricing transition. We disclose our maintenance renewal rate one quarter in arrears in order to include all payments received against maintenance invoices. The maintenance renewal rate for the second quarter of 2005 of 86% was within the range of 80% to 90% that we have experienced since the second quarter of 2004. During the third quarter of 2005, we also recognized a net benefit from reducing our maintenance revenue reserves by approximately $500,000. We have an algorithm for calculating the value of reserves that takes the previous 18 months of experience into account which we have applied consistently and resulted in a

credit to revenue during the three months ended September 30, 2005. Recurring revenue increased $1.1 million and $3.2 million during the three and nine months ended September 30, 2005, respectively, as a result of growth in our subscription and data management revenue streams, as well as our receiving a revenue share from transaction charges generated by a partner program that began in early 2004.

Maintenance revenue has remained relatively flat as a proportion of total maintenance and recurring revenues at approximately 68% to 69% in the three and nine months ended September 30, 2005 and 2004. We expect maintenance and recurring revenues will decrease slightly in the fourth quarter of 2005 primarily as a result of a non-recurring benefit received from a reduction in the revenue reserves balance during the third quarter of 2005. Our revenue reserves are calculated from our experience of returns over the most recent 18-month period.

Professional Services and Other Revenues

	Three Months Ended September 30								Nine Months Ended September 30
	2005			2004			Change		2005			2004			Change
Professional services and other revenues (in thousands)	$	6,039		$	4,323		$	1,716	$	16,376		$	13,142		$	3,234
Percent of total net revenues	14		%	12		%			13		%	12		%

Professional services and other revenues include consulting, project management, custom integration, custom work, training and soft dollar transactions for products and services not related to Advent product or services. Professional services related to Advent Office products generally can be completed and accepted in a relatively short time period while services related to Geneva products may require a six to nine month implementation period. Therefore, the revenues associated with professional services reflect a mix of services related to current quarter license revenue as well as transactions from prior quarters. Generally, our consulting revenues lag our license revenues by one or two quarters, but can also be affected by specific milestone completions.

For the three and nine month periods ended September 30, 2005, professional services and other revenues grew 40% and 25% respectively, with the majority of the growth coming from general consulting revenue. This growth is due to a general rise in demand for our products and services, with both new customers and existing clients upgrading their suite of products. During the third quarter of 2005, we recognized approximately $400,000 of service revenue from deferred revenue as a result of shipping APX to two customers. We expect revenues from professional services to increase in the fourth quarter of 2005 as a result of our annual user conference in October 2005.

Revenues by Segment

	Three Months Ended September 30						Nine Months Ended September 30
	2005		2004		Change		2005		2004		Change
	(in thousands)
Advent Investment Management	$	37,216	$	32,207	$	5,009	$	107,324	$	94,607	$	12,717
MicroEdge	4,986		4,425		561		14,488		12,428		2,060
Other	833		656		177		2,091		1,999		92

Total net revenues	$	43,035	$	37,288	$	5,747	$	123,903	$	109,034	$	14,869

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

The 16% and 13% increase in AIM’s revenue in the three and nine months ended September 30, 2005, respectively, reflected the improved economic conditions and growth in the financial markets, as well as the continued focus on selling our Advent Office and Geneva products. Our assets under administration revenues increased significantly from the same periods in 2004, as a result of the growth in assets under administration for our fund administration clients, where certain Geneva contracts provide for quarterly fees based on assets, resulting in significant recurring quarterly revenue. AIM’s revenue increase during the first nine months of 2005 also reflected an increase in new maintenance support contracts as a result of new license deals and price increases for maintenance contracts from our customer installed base, partially offset by attrition from within our existing customer base. We also had growth in international sales, partly attributable to our acquisitions in the UK and Switzerland in May 2004.

The technology spending patterns of organizations in MicroEdge’s primary markets (independent foundations, community foundations and corporations) are directly affected by economic fluctuations as foundation budgets are largely

driven by endowment income which often contains market-exposed components. Foundation spending typically decreases in an economic downturn. Community foundations are subject to similar influences, compounded by the fact that in many cases much of their ongoing funding and endowment comes from active donors who may increase or reduce their giving depending on the economic climate and the related effect on their income and wealth. Corporations typically fund charitable activities from operating budgets, and the allocation to charitable donations and supporting company charitable operations is often closely tied to a company’s performance. Thus, corporate philanthropy and spending on related technology are correlated with company and overall economic performance.

The 13% and 17% increase in MicroEdge revenue in the three and nine months ended September 30, 2005 also reflected the improved economic conditions and growth in the financial markets which resulted in increased charitable contributions. This increase in charitable contributions received by the foundations sector in the first nine months of 2005 enabled foundations to increase their information technology expenditures which resulted in the increase in MicroEdge revenue in the first nine months of 2005.

COST OF REVENUES

	Three Months Ended September 30									Nine Months Ended September 30
	2005			2004			Change			2005			2004			Change

Total cost of revenues (in thousands)	$	12,611		$	13,437		$	(826	)	$	37,773		$	39,029		$	(1,256	)
Percent of total net revenues	29		%	36		%				30		%	36		%

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

Cost of License and Development Fees

	Three Months Ended September 30									Nine Months Ended September 30
	2005			2004			Change			2005			2004			Change

Cost of license and development fees (in thousands)	$	328		$	598		$	(270	)	$	968		$	1,618		$	(650	)
Percent of total license revenues	4		%	7		%				3		%	6		%

Cost of license and development fees consists primarily of royalties and other fees paid to third parties, the fixed direct labor involved in producing and distributing our software, labor costs associated with generating development fees and cost of product media including duplication, manuals and packaging materials. The decrease in the three and nine months ended September 30, 2005 primarily reflected a decrease in royalties paid to third party vendors related to products sold, which included their technology, and decreased shipping and related product costs. Although we expect license and development fee revenue to increase slightly during the fourth quarter of 2005, we expect cost of license and development fees to remain flat in the fourth quarter of 2005 as there are no incremental costs associated with our AUA revenue model.

Cost of Maintenance and Other Recurring

	Three Months Ended September 30								Nine Months Ended September 30
	2005			2004			Change		2005			2004			Change

Cost of maintenance and other recurring (in thousands)	$	7,314		$	6,754		$	560	$	21,951		$	20,954		$	997
Percent of total maintenance revenue	26		%	28		%			28		%	30		%

Cost of maintenance and other recurring revenues is primarily comprised of the direct costs of providing technical support and other services for recurring revenues and royalties paid to third party subscription-based and transaction-based vendors. The increase in the three and nine months ended September 30, 2005 was primarily due to an increase in salaries, employee bonus programs and royalties paid to third party vendors related to product sold, which included their technology. This increase was partially offset by a decrease in outside services. We expect cost of maintenance and other recurring revenues to remain flat to slightly up in the fourth quarter of 2005.

Cost of Professional Services and Other

	Three Months Ended September 30								Nine Months Ended September 30
	2005			2004			Change		2005			2004			Change

Cost of professional services and other (in thousands)	$	4,328		$	3,706		$	622	$	12,985		$	11,386		$	1,599
Percent of total professional services revenues	72		%	86		%			79		%	87		%

Cost of professional services and other revenue consists primarily of personnel related costs associated with the client services and support organization in providing consulting, custom report writing and conversions of data from clients’ previous

systems. Also included are direct costs associated with third-party consultants and travel expenses. The increase in the three and nine months ended September 30, 2005 was primarily due to an increase in headcount of 10% and employee bonus programs. The increase was partially offset by decreases in outside services. Gross margin on professional services and other improved to 28% and 21% for three and nine months ended September 30, 2005, respectively, as compared to 14% and 13% during the three and nine months ended September 30, 2004. These improvements were due to higher utilization of consultants in our support and services organization during fiscal 2005 and also due to recognition of service revenue from the implementation of our new product, APX, with two new customers during the third quarter of 2005 which had relatively higher margins. We expect cost of professional services and other revenues to increase in the fourth quarter of 2005 as a result of costs associated with our annual user conference during October 2005 and higher bonus costs.

Amortization and Impairment of Developed Technology

	Three Months Ended September 30									Nine Months Ended September 30
	2005			2004			Change			2005			2004			Change
Amortization and impairment of developed technology (in thousands)	$	641		$	2,379		$	(1,738	)	$	1,869		$	5,071		$	(3,202	)
Percent of total net revenues	1		%	6		%				1		%	5		%

Amortization and impairment of developed technology represents amortization and impairment of acquisition-related intangible assets and amortization of capitalized software development costs. Amortization of developed technology decreased, reflecting technology related intangible assets from prior acquisitions becoming fully amortized, and the write-off of Techfi and Advent Wealth Services developed technology intangible assets during the second half of 2004. During the third quarter of 2004, we recorded a non-cash impairment charge of $1.0 million to write-off our Techfi core and existing technology which was a result of our decision to sunset certain products within our Techfi product line. We expect amortization of developed technology to be approximately $700,000 in the fourth quarter of 2005.

OPERATING EXPENSES

Sales and Marketing

	Three Months Ended September 30									Nine Months Ended September 30
	2005			2004			Change			2005			2004			Change

Sales and marketing (in thousands)	$	9,459		$	9,705		$	(246	)	$	30,005		$	27,774		$	2,231
Percent of total net revenues	22		%	26		%				24		%	26		%

Sales and marketing expenses consist primarily of the costs of personnel involved in the sales and marketing process, sales commissions, advertising and promotional materials, sales facilities expense, trade shows, and seminars. The slight decrease in expense for the three months ended September 30, 2005 was primarily due to decreased outside services and royalties. The increase in expenses for the nine months ended September 30, 2005 was primarily due to increased salary expense of $2.6 million, partially offset by a decrease in outside services of $470,000. The increase in salary expense resulted from severance related to a reduction in headcount and increased employee bonus programs. We expect sales and marketing expenses to increase in the fourth quarter of 2005 due primarily to higher commission expense and higher travel and accommodation costs associated with our user conference.

Product Development

	Three Months Ended September 30									Nine Months Ended September 30
	2005			2004			Change			2005			2004			Change

Product development (in thousands)	$	6,800		$	7,967		$	(1,167	)	$	22,567		$	24,320		$	(1,753	)
Percent of total net revenues	16		%	21		%				18		%	22		%

Product development expenses consist primarily of salary and benefits for our development staff as well as contractors’ fees and other costs associated with the enhancements of existing products and services and development of new products and services. We account for product development costs in accordance with SFAS 2, “Accounting for Research and Development Costs”, and SFAS 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”, which specifies that costs incurred to develop computer software products should be charged to expense as incurred until technological feasibility is reached for the products. Once technological feasibility is reached, all software costs should be capitalized until the product is made available for general release to customers.

The decrease in expenses for the three and nine months ended September 30, 2005 was primarily due to the capitalization of software development costs incurred in the second and third quarter of 2005 of $461,000 and $819,000, respectively. During the third quarter of 2005, we had several major products, including APX, in their final beta phase. The

capitalized costs will be amortized over approximately three years. We expect product development expenses to increase in the fourth quarter of 2005 as the level of software capitalization returns to a lower level following the completion of the APX beta.

General and Administrative

	Three Months Ended September 30								Nine Months Ended September 30
	2005			2004			Change		2005			2004			Change

General and administrative (in thousands)	$	8,007		$	6,329		$	1,678	$	24,288		$	18,517		$	5,771
Percent of total net revenues	19		%	17		%			20		%	17		%

General and administrative expenses consist primarily of personnel costs for finance, administration, operations and general management, as well as legal and accounting expenses. The increase in the three and nine months ended September 30, 2005 was primarily due to increases in personnel and related costs of $303,000 and $2.3 million, respectively, professional fees of $609,000 and $2.1 million, respectively, and outside services of $807,000 and $960,000, respectively. The increase in personnel and related costs was primarily due to severance for terminated employees and additional headcount associated with the acquisition of our remaining independent distributor business in the United Kingdom and Switzerland in May 2004. The increase in professional fees was the result of higher legal fees incurred for various inquiries and disputes and costs associated with complying with the Sarbanes-Oxley Act of 2002. The increase in outside services was primarily due to costs associated with increased utilization of outside contractors. We expect general and administrative expenses to decrease slightly in the fourth quarter of 2005 due to one-time severance charges incurred in the third quarter of 2005.

Amortization and Impairment of Other Intangibles

	Three Months Ended September 30									Nine Months Ended September 30
	2005			2004			Change			2005			2004			Change
Amortization and impairment of other intangibles (in thousands)	$	997		$	4,414		$	(3,417	)	$	3,064		$	8,498		$	(5,434	)
Percent of total net revenues	2		%	12		%				3		%	8		%

Amortization and impairment of other intangibles represents amortization and impairment of non-technology related intangible assets. Amortization of other intangibles decreased, reflecting the write-off of other intangibles related to our Techfi, Advent Wealth Services and Advent Hellas subsidiaries during the second half of 2004, partially offset by additional amortization of other intangibles associated with our acquisitions in the United Kingdom and Switzerland in May 2004. During the third quarter of 2004, we recorded a non-cash impairment charge of $2.4 million to write off the carrying value of our Techfi non-compete agreements and maintenance contracts resulting from our decision to sunset certain products within our Techfi product line. We expect amortization of other intangibles to be approximately $1.0 million in the fourth quarter of 2005.

Restructuring Charges (Benefit)

	Three Months Ended September 30								Nine Months Ended September 30
	2005			2004			Change		2005			2004			Change

Restructuring charges (benefit) (in thousands)	$	116		$	(1	)	$	117	$	1,719		$	5,859		$	(4,140	)
Percent of total net revenues	0		%	0		%			1		%	5		%

In response to the downturn in the financial services industry, the decline in information technology spending, duplicative efforts in parts of our business as a result of our acquisitions, and excess facilities capacity, we implemented several phases of restructuring beginning in 2003. These plans were implemented to reduce costs and improve operating efficiencies by better aligning our resources to our near term revenue opportunities.

During the nine months ended September 30, 2005, we recorded total restructuring charges of $1.7 million consisting of charges of $83,000, $1.5 million and $116,000 recorded in the first, second and third quarters, respectively, of 2005. The second quarter charge of $1.5 million primarily consisted of net facility and exit costs related to sub-leasing one floor of our office space in New York, New York. The net restructuring charges of $83,000 and $116,000 recorded in first and third quarters, respectively, were to adjust original estimates for vacated facilities.

During the nine months ended September 30, 2004, we recorded total restructuring charges of $5.9 million consisting of a benefit of $43,000 recorded in the first quarter of fiscal 2004 and a charge of approximately $5.9 million recorded in the second quarter of fiscal 2004. The benefit of $43,000 incurred in the first quarter of fiscal 2004 consisted of a $163,000 adjustment related to entering a final sub-lease agreement on one of the vacated facilities in New York, New York and a $16,000 adjustment to non-cash severance. These adjustments were partially offset by a restructuring charge of $136,000 related to the termination of nine employees, located primarily in New York. The $5.9 million charged incurred in the second quarter of fiscal 2004 consisted of $4.9 million of facility exit costs and $0.9 million of property and equipment impairment

charges related to vacating a facility in San Francisco, California, $72,000 related to vacating a portion of a facility in Cambridge, Massachusetts and a $12,000 adjustment related to severance for terminated employees in the first quarter of 2004.

	Facility Exit			Severance &
	Costs			Benefits			Total

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	704			—			704
Cash payments	(1,890		)	—			(1,890		)
Adjustment of prior restructuring costs	252			(5		)	247
Balance of restructuring accrual at September 30, 2005	$	4,695		$	7		$	4,702

Of the remaining restructuring accrual of $4.7 million at September 30, 2005, $1.4 million and $3.3 million are included in accrued liabilities and other long-term liabilities, respectively, on the accompanying condensed consolidated balance sheet. As of September 30, 2005, the remaining excess facility costs of $4.7 million are stated at estimated fair value, net of estimated sublease income of approximately $8.7 million. We expect to pay remaining obligations in connection with vacated facilities no later than over the remaining lease terms, which expire on various dates through 2012. We expect to pay the remaining severance and benefits in 2005. As the result of our restructuring activities implemented to date, we have reduced our total expenses by approximately $15 million on an annual basis.

Operating Income (Loss) by Segment

	Three Months Ended September 30								Nine Months Ended September 30
	2005			2004			Change		2005			2004			Change
	(in thousands)
Advent Investment Management	$	5,523		$	1,926		$	3,597	$	7,224		$	(1,891	)	$	9,115
MicroEdge	997			222			775		1,947			334			1,613
Other	163			82			81		249			163			86
Unallocated corporate operating costs and expenses:
Amortization and impairment of developed technology	(641		)	(2,379		)	1,738		(1,869		)	(5,071		)	3,202
Amortization and impairment of other intangibles	(997		)	(4,414		)	3,417		(3,064		)	(8,498		)	5,434

Total operating income (loss)	$	5,045		$	(4,563	)	$	9,608	$	4,487		$	(14,963	)	$	19,450

Operating income for the AIM segment was $5.5 million and $7.2 million for the three and nine months ended September 30, 2005, respectively. Operating income (loss) for the AIM segment was $1.9 million and $(1.9) million for the three and nine months ended September 30, 2004, respectively. The increases from the comparable periods in 2004 were primarily the result of AIM’s revenue growth of $5.0 million and $12.7 million during the three and nine months ended September 30, 2005, respectively, and improved gross margins during the periods. In addition, AIM’s restructuring charges decreased by $4.1 million during the nine months ended September 30, 2005 relative to the comparable period in 2004. These were offset by increases in certain operating expenses including personnel and related costs, severance, retention bonuses, legal fees, compliance costs for Sarbanes Oxley, and accelerated depreciation on assets we abandoned in our New York office space that we have been sub-leased. The increase in personnel and related costs was due to additional headcount associated with the acquisition of our remaining independent distributor businesses in the United Kingdom and Switzerland in May 2004.

MicroEdge’s operating income during the three and nine months ended September 30, 2005 increased by $775,000 and $1.6 million, respectively, from the comparable periods of 2004 primarily due to increases in revenue of $561,000 and $2.1 million. The increases in MicroEdge’s revenues during these periods were partially offset by increases in operating activity resulting in higher compensation, marketing and outsourcing costs.

Interest Income and Other, Net

	Three Months Ended September 30								Nine Months Ended September 30
	2005			2004			Change		2005			2004			Change

Interest income and other, net (in thousands)	$	977		$	641		$	336	$	6,586		$	625		$	5,961
Percent of total net revenues	2		%	1		%			5		%	1		%

Interest income and other, net consists of interest income, realized gains and losses on short-term investments, our pro rata share of net income or loss on our equity method investment and foreign currency gains and losses. The increases in interest income and other, net for the three and nine months ended September 30, 2005 reflected increases in net interest income of $298,000 and $1.3 million, respectively, as a result of higher average interest rates. The increase during the nine months ended September 30, 2005 also reflects a gain on sale of a private equity investment of $3.6 million during the second quarter of 2005. Interest income and other, net for the three and nine months ended September 30, 2004 also included our pro rata share of net income (losses) on our equity method investment of $322,000 and $(284,000), respectively. Effective December 28, 2004, our Chief Executive Officer resigned her seat on LatentZero’s board of directors. As a result, we no longer believe we have significant influence over LatentZero and therefore are not required to adjust the carrying amount of this investment to recognize our share of LatentZero’s earnings or losses. This investment is carried at the lower of cost or fair value at December 31, 2004 and September 30, 2005, similar to the Company’s other non-marketable investments. The remaining components of interest income and other, net fluctuate primarily due to foreign currency gains and losses and gains and losses from sales of short-term investments. Foreign exchange losses decreased $94,000 and $83,000 during the three and nine months ended September 30, 2005, respectively, while losses on investments decreased $236,000 during the three and nine months ended September 30, 2005. During the fourth quarter of 2005, we expect to sell our Advent Hellas subsidiary (“Hellas”) to its current management for proceeds of approximately $20,000. Due to this anticipated sale, we expect interest income and other, net to increase during the fourth quarter of 2005 as we anticipate a gain on sale of Hellas currently estimated at approximately $1.8 million, resulting from foreign currency translation gains. These currency translation gains are associated primarily with an increase in the value of goodwill as a result of the strengthening of the Euro against the U.S. dollar since the acquisition of Hellas in September 2002.

Provision For (Benefit From) Income Taxes

	Three Months Ended September 30									Nine Months Ended September 30
	2005			2004			Change			2005			2004			Change
Provision for (benefit from) income taxes (in thousands)	$	(207	)	$	1,211		$	(1,418	)	$	784		$	1,190		$	(406	)
Percent of total net revenues	0		%	3		%				1		%	1		%

For the three and nine months ended September 30, 2005, we recorded a benefit from income taxes of $207,000 and a provision for income taxes of $784,000, respectively, compared to a provision of $1.2 million in the three and nine months ended September 30, 2004. We account for income taxes under an asset and liability approach that requires the expected future tax consequences of temporary differences between book and tax bases of assets and liabilities to be recognized as deferred tax assets and liabilities. During the fourth quarter of 2003, we established a full valuation allowance against our deferred tax assets in the United States because we determined it is more likely than not that these deferred tax assets will not be realized in the foreseeable future. The decrease in the provision for income taxes for the three and nine months ended September 30, 2005 primarily reflects an increase in our provision for certain state income taxes in the U.S. during the third quarter of 2004. The remaining components of income taxes reflect changes in foreign, state and federal alternative minimum tax charges.

LIQUIDITY AND CAPITAL RESOURCES

Our aggregate cash, cash equivalents and marketable securities were $146.5 million at September 30, 2005, compared with $165.5 million at December 31, 2004. Cash equivalents are comprised of highly liquid investments purchased with an original or remaining maturity of 90 days or less at the date of purchase.

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

	Nine Months Ended September 30
	2005			2004

Net cash provided by operating activities	$	24,451		$	18,189
Net cash provided by (used in) investing activities	$	49,087		$	(15,694	)
Net cash used in financing activities	$	(39,080	)	$	(7,527	)

Cash Flows from Operating Activities

Our cash flows from operating activities represent the most significant source of funding for our operations. Our cash provided by operating activities generally follows the trend in our net revenues and operating results. Our cash provided by operating activities of $24.5 million during the nine months ended September 30, 2005 was primarily the result of our net income and non-cash charges including depreciation and amortization, partially offset by a non-operating gain from the sale of an equity investment. Other sources of cash during the first nine months of 2005 included a decrease in accounts receivable, and increases in accrued liabilities and deferred revenue. The decrease in accounts receivable primarily reflected strong collections during the first

nine months of 2005. Days’ sales outstanding decreased from 73 days to 60 days during this period. The increase in accrued liabilities was primarily due to restructuring charges for facility exit costs during the second quarter of 2005. The increase in deferred revenue primarily reflected an increase in deferred maintenance. Uses of our operating cash included a reduction in income taxes payable as a result of the payment of a tax settlement of $1.2 million. Other major uses of cash include funding payroll (salaries, bonuses and benefits), general operating expenses (marketing, travel and office rent) and cost of revenues.

Our cash provided by operating activities of $18.2 million during the nine months ended September 30, 2004 included decreases in accounts receivable, prepaid and other assets, income taxes receivable and an increase in accrued liabilities. The decrease in accounts receivable reflected strong collections during the period. The decrease in prepaid and other assets reflected prepaid expense amortization and collection of a receivable for a litigation settlement recorded in the fourth quarter of 2003. The decrease in income taxes receivable reflected the receipt of a federal tax refund. The increase in accrued liabilities was primarily due to additional accrued restructuring charges during the period. Uses of cash included a decrease in deferred revenues which reflects revenue recognized in the second quarter of 2004 related to license contracts signed in the prior year.

We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors including fluctuations in our net revenues and operating results, amount of revenue deferred, collection of accounts receivable, and timing of payments.

Cash Flows from Investing Activities

Net cash provided by investing activities of $49.1 million for the nine months ended September 30, 2005, consisted primarily of net sales and maturities of marketable securities of $52.1 million and proceeds from the sale of a private equity investment of $3.8 million offset by capital expenditures of $4.5 million and cash used in acquisitions of $1.0 million related to the final earn-out payment made to the shareholders of Advent Outsource Data Management and the final payment made to Advent Europe relating to the acquisition of Advent United Kingdom and Switzerland in May 2004.

Net cash used in investing activities of $15.7 million for the nine months ended September 30, 2004 consisted of net purchases of marketable securities of $4.5 million, cash used in acquisitions, including payments of assumed liabilities, of $8.5 million and capital expenditures of $2.7 million.

Cash Flows from Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2005 of $39.1 million reflected the repurchase of 2.8 million shares of our common stock for $52.6 million, partially offset by proceeds received from the issuance of common stock related to employee stock options and our employee stock purchase plan of $13.5 million. Net cash used in financing activities for the nine months ended September 30, 2004 of $7.5 million primarily reflected the repurchase of 744,000 shares of common stock for $11.9 million partially offset by proceeds of $4.4 million from the issuance of common stock related to employee stock options and our employee stock purchase plan.

Our liquidity and capital resources in any period could be affected by the exercise of outstanding stock options and issuance of common stock under our employee stock purchase plan. The resulting increase in the number of outstanding shares could also affect our per share results of operations. However, we cannot predict the timing or amount of proceeds from the exercise of these securities, or whether they will be exercised at all. Furthermore, we may continue our stock repurchase activity under the share repurchase program approved by the Board of Directors and publicly announced in May 2004. As of September 30, 2005, approximately 1.2 million shares were available to be repurchased under our current share repurchase plan.

At September 30, 2005, we had $105.7 million in working capital. We currently have no significant capital commitments other than commitments under our operating leases, which declined from $31.5 million at December 31, 2004 to $23.6 million at September 30, 2005.

The following table summarizes our contractual cash obligations as of September 30, 2005 (in thousands):

	Three Months Ended
	December 31		Year Ended December 31
	2005		2006		2007		2008		2009		Thereafter		Total
Operating lease obligations, net of sub-lease income	$	2,040	$	6,918	$	5,184	$	4,883	$	1,941	$	2,584	$	23,550

At September 30, 2005 and December 31, 2004, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. 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.

We have taken numerous actions over the last two years to strengthen our cash position and balance sheet and to improve our ability to generate positive cash flow from operating activities. Many of these actions were taken in the last half of 2003 in order to offset the negative impacts of the economic downturn and decreased information technology spending which negatively impacted our net revenues.

We expect that for the foreseeable future, our operating expenses will continue to constitute a significant use of cash flow. In addition, we may use cash to fund acquisitions or invest in other businesses. Based upon our past performance and current expectations, we believe that our cash and cash equivalents, marketable securities and cash generated from operations will be sufficient to satisfy our working capital needs, capital expenditures, investment requirements, stock repurchases and financing activities for at least the next twelve months.

Off-Balance Sheet Arrangements and Contractual Obligations

Our off-balance sheet arrangements as of September 30, 2005 consist of obligations under operating leases. See Note 13, “Commitments and Contingencies” to the condensed consolidated financial statements and the “Liquidity and Capital Resources” section above for further discussion and a tabular presentation of our contractual obligations.

RISK FACTORS

Investors should carefully consider the risks described below before making an investment decision. These risks are not the only ones we face. Additional risks we are not presently aware of or that we currently believe are immaterial may also impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q filed with the SEC, including our condensed consolidated financial statements and related notes thereto.

Our Operating Results May Fluctuate Significantly.

Although we are transitioning to a predominant term license model, perpetual licenses still constitute over two-thirds of our quarterly software license revenues. Individual perpetual software licenses vary significantly in value, and the value and timing of these transactions can therefore cause our quarterly license revenues to fluctuate. We have often recognized a substantial portion of each quarter’s license revenues in the last month, weeks or even days of the quarter. As a result, the magnitude of quarterly fluctuations in license revenue may not be evident until late in or after the close of a particular quarter and a disruption late in the quarter may have a disproportionately large negative impact on revenue. In addition, some of our large professional services contracts contain performance milestones or acceptance clauses, which affect the timing of revenue recognized under such contracts. As a result of these and other factors, our quarterly net revenues may fluctuate significantly. Our expense levels are based in significant part on our expectations of future revenues and therefore are relatively fixed in the short term. Due to the fixed nature of these expenses, combined with the relatively high gross margin historically achieved on our products, an unanticipated decline in net revenues in any particular quarter may adversely affect our operating results. These factors have impacted and may continue to impact our operating results.

We are in a transition from selling predominantly perpetual licenses to selling a mix of perpetual and multi-year term licenses, and we expect term license revenue to increase as a proportion of total license revenue in the future. We recognize revenue for term licenses ratably over the period of the contract term, which is typically three to five years. Including our entry level product, Advent Office Essentials, we recognized approximately 27% of license revenue from term licenses in the third quarter of 2005. If we are successful in our strategy to increase the proportion of our business signed on term license contracts, it will result in a greater portion of license revenue being deferred and as a result, our license revenue and profitability could be reduced in the short term. However, over the long-term the increases in deferred license revenue and backlog, which we define as the value of multi-year term license contracts not included in deferred revenue, will lower the quarterly variability of license revenues.

In addition, we experience seasonality in our license revenue. The fourth quarter of the year typically has the highest license revenue, followed by lower license revenue in the first quarter of the succeeding year. We believe that this seasonality

results primarily from customer budgeting cycles and expect this seasonality to continue in the future, although if we are successful in moving more of our licenses to a term model, we believe the impact of this seasonality will likely decrease.

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

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

The purchase of our software products often requires prospective customers to provide significant executive-level sponsorship and to make major systems architecture decisions. As a result, we must generally engage in a relatively lengthy sales and contracting efforts. Sales transactions may therefore be delayed during the customer decision process because we must provide a significant level of education to prospective customers regarding the use and benefit of our products. This has been exacerbated by the adverse and uncertain economic conditions that have caused existing and potential clients to reduce or cancel expenditures and delay decisions related to acquisition of software and related services. While we have seen somewhat improved economic conditions over the past few quarters, customers are still cautious about capital and information technology expenditures. As a result, the sales cycle associated with the purchase of our solutions is typically between two and twelve months depending upon the size of the client, and is subject to a number of significant risks over which we have little or no control, including customers’ budgeting constraints, internal selection procedures, and changes in customer personnel, among others. As a result of a lengthy and unpredictable sales cycle, we have limited ability to forecast the timing and amount of specific license sales. The timing of large individual license sales is especially difficult to forecast, and we may not be successful in closing large license transactions on a timely basis or at all. In addition, customers may postpone their purchases of our existing products or product enhancements in advance of the anticipated introduction of new products or product enhancements by us or our competitors. Because our expenses are relatively fixed in the near term, any shortfall from anticipated revenues could result in a significant variation in our operating results from quarter to quarter.

We Depend Heavily on Our Product, Axys®.

Historically, we have derived a significant portion of our net revenues from the licensing of Axys, and related ancillary products and services. In addition, many of our other applications, such as Partner, Moxy, Qube and various data interfaces were designed to operate with Axys to provide an integrated solution. As a result, we believe that for the foreseeable future a majority of our net revenues will depend upon continued market acceptance of Axys, as well as enhancements or upgrades to those products and related products and services. As our clients include a range of financial services organizations, including asset managers, investment advisors, brokerage firms, banks, family offices, hedge funds and others, continued market acceptance also will depend on the number of firms within each type of organization and the degree to which Axys has previously penetrated those firms and our ability to introduce new and upgraded products, such as APX, to those firms as well as new customers.

We Depend upon Financial Markets.

The target clients for our products include a range of financial services organizations that manage investment portfolios, including asset managers, investment advisors, brokerage firms, banks, family offices, hedge funds and others. In addition, we target corporations, public funds, universities and non-profit organizations, which also manage investment portfolios and have many of the same needs. The success of many of our clients is intrinsically linked to the health of 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 financial services industry which may cause clients and potential clients to exit the industry or delay, cancel or reduce any planned expenditures for investment management systems and software products. In addition, a slowdown in the formation of new investment firms, especially hedge funds, or a decline in the growth of assets under management would cause a decline in demand for our solutions. We believe that the downturn in the financial services industry and the decline in information technology spending had a negative impact on the demand for our products in fiscal 2002 and 2003, and that future uncertainty about financial markets and the financial services sector could have a material adverse effect on our business and results of operations.

Uncertain Economic Conditions May Continue to Affect Our Revenues.

We believe that the market for large investment management software systems may be negatively impacted by a number of factors, including reductions in capital expenditures by large customers, poor performance of major financial markets, and increasing competition. Those factors may, in turn, give rise to a number of market trends which we experienced in fiscal 2002 and 2003 that have slowed revenue growth across the financial services industry, including longer sales and contracting cycles, deferral or delay of information technology projects and generally reduced expenditures for software and related services. If there were a significant downturn in the financial services industry and information technology spending, the presence of these factors

in the market for large investment management solutions will likely materially adversely affect our business and results of operations.

We Face Intense Competition.

The market for investment management software is intensely competitive and highly fragmented, is subject to rapid change and is sensitive to new product introductions and marketing efforts by industry participants. Our largest single source of competition is from proprietary systems used by existing and potential clients, many of whom develop their own software for their particular needs and therefore may be reluctant to license software products offered by independent vendors like Advent. Other competitors include providers of software and related services as well as providers of outsourced services, and include some of the following vendors: Beauchamp, Charles River Development, CheckFree Corporation, DST International, the Eagle subsidiary of Mellon Financial Corporation, Eze Castle Software, FT Integretorsia, IBSI, Indata, LatentZero, Linedata, Macgregor Financial Technologies, Schwab Performance Technologies, Simcorp A/S, SS&C Technologies, Inc., SunGard, and the Portia Division of Thomson Financial.

Our competitors vary in size, scope of services offered and platforms supported. Many of our competitors have longer operating histories and greater financial, technical, sales and marketing resources than we do. During 2005, two competitors have announced plans to be bought out by private equity firms, with the possibility of forming even larger companies through additional acquisitions of companies and technologies. In addition, we also face competition from potential new entrants into our market that may develop innovative technologies or business models. We cannot guarantee that we will be able to compete successfully against current and future competitors or that competitive pressure will not result in price reductions, reduced operating margins or loss of market share, any one of which could seriously harm our business.

We Must Continue to Introduce New Products and Product Enhancements.

The market for our products is characterized by rapid technological change, changes in customer demands and evolving industry standards. New products based on new technologies or new industry standards can render existing products obsolete and unmarketable. As a result, our future success will continue to depend upon our ability to develop new products or product enhancements that address the future needs of our target markets and to respond to these changing standards and practices, such as our APX product. We may not be successful in developing, introducing, marketing and licensing our APX product or other new products or product enhancements on a timely and cost effective basis, or at all, and our new products and product enhancements may not adequately meet the requirements of the marketplace or achieve market acceptance. Delays in the commencement of commercial shipments of new products or enhancements may result in client dissatisfaction and delay or loss of product revenues. In addition, clients may delay purchases in anticipation of new products or product enhancements. If we are unable, for technological or other reasons, to develop and introduce new products or enhancements of existing products in a timely manner in response to changing market conditions or client requirements, or if new products or new versions of existing products do not achieve market acceptance, our business would be seriously harmed. In addition, our ability to develop new products and product enhancements is dependent upon the products of other software vendors, including certain system software vendors, such as Microsoft Corporation, Sun Microsystems, database vendors and development tool vendors. If the products of such vendors have design defects or flaws, are unexpectedly delayed in their introduction, or are unavailable on acceptable terms, our business could be seriously harmed. Our software products are complex and may contain undetected defects or errors when first introduced or as new versions are released. Although we have not experienced adverse effects resulting from any software errors, we cannot be sure that, despite testing by us and our clients, defects or errors will not be found in new products after commencement of commercial shipments, resulting in loss of or delay in market acceptance, which could seriously harm our business.

We Must Retain and Recruit Key Employees.

We believe that our future success is dependent on the continued employment of our senior management and our ability to identify, attract, motivate and retain qualified technical, sales and other personnel. We need technical resources such as our product development engineers to develop new products and enhance existing products and we rely upon sales personnel to sell our products and services and maintain healthy business relationships. We therefore need to identify, attract, motivate and retain such employees with the requisite education, backgrounds and industry experience. If we are unable to do so, our business could be harmed. In addition, we must attract and retain financial and accounting personnel to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.

We have relied on our ability to grant equity compensation as one mechanism for recruiting and retaining such highly skilled personnel. Recently enacted accounting regulations requiring the expensing of equity compensation may impair our ability to provide these incentives without incurring significant compensation costs. If we are unable to continue to successfully attract and retain key personnel, our business may be harmed.

We may also choose to create additional performance and retention incentives in order to retain our employees, including the granting of additional stock options to employees or issuing incentive cash bonuses. Such incentives may either dilute our existing stockholder base or result in unforeseen operating expenses, which may cause our stock price to fall.

We Face Challenges in Expanding Our International Operations.

We market and sell our products in the United States and, to a lesser extent, internationally. In 1999, we entered into a distributor relationship with Advent Europe, an independent distributor of our products in selected European markets. In November 2001, we acquired the Norwegian, Swedish, and Danish companies of this independent distributor. In September 2002, we purchased their Greek subsidiary; in May 2003, we purchased their Dutch subsidiary; and in May 2004, we purchased their remaining subsidiaries in the United Kingdom and Switzerland and certain assets of Advent Europe. To further expand our international operations, we would need to establish additional locations, acquire other businesses or enter into additional distribution relationships in other parts of the world. Any further expansion of our existing international operations and entry into new international markets could require significant management attention and financial resources. We cannot be certain that establishing businesses in other countries will produce the desired levels of revenues. We currently have limited experience in developing localized versions of our products and marketing and distributing our products internationally. In addition, international operations are subject to other inherent risks, including:

• the impact of recessions in economies outside the United States;

• greater difficulty in accounts receivable collection and longer collection periods;

• unexpected changes in regulatory requirements;

• difficulties in successfully adapting our products to the language, regulatory and technology standards of other countries;

• difficulties in and costs of staffing and managing foreign operations;

• reduced protection for intellectual property rights in some countries;

• potentially adverse tax consequences; and

• political and economic instability.

The revenues, expenses, assets and liabilities of our international subsidiaries are primarily denominated in local currencies. We have not historically undertaken foreign exchange hedging transactions to cover potential foreign currency exposure. Future fluctuations in currency exchange rates may adversely affect revenues and accounts receivable from international sales and the U.S. dollar value of our foreign subsidiaries’ revenues, expenses, assets and liabilities. Our international revenues from our European subsidiaries are generally denominated in local foreign currencies, with the exception of our Geneva license transactions.

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

From 2001 through the middle of 2003, our strategy focused on growth through the acquisition of additional complementary businesses. During those years, we made five major acquisitions including Kinexus Corporation, Techfi Corporation and Advent Outsource Data Management LLC, and also acquired all of the common stock of five of our European distributor’s subsidiaries. In addition, we purchased our European distributor’s remaining two subsidiaries in the United Kingdom and Switzerland in May 2004.

The complex process of integrating our acquisitions has required and will continue to require significant resources, particularly in light of our relative inexperience in integrating acquisitions. Integrating these acquisitions has been and will continue to be time-consuming, expensive and disruptive to our business. This integration process has strained and could continue to strain our managerial resources, resulting in the diversion of these resources from our core business objectives. Failure to achieve the anticipated benefits of these acquisitions or to successfully integrate the operations of these entities has harmed and could continue to harm our business, results of operations and cash flows. For example, in the first quarter of 2003, we closed our Australian subsidiary because it failed to perform at a satisfactory profit level. In addition, as we have expanded into new business areas and offerings through strategic alliances and internal development, as well as acquisitions, some of this expansion has required significant management time and resources without generating significant revenues. We have had difficulty and may continue to have difficulty creating demand for such offerings, and revenue growth for these newer business areas has suffered and may continue to suffer. For example, demand for our Techfi product line was significantly lower than expected and thus we discontinued certain products within our Techfi product line in September 2004. As a result, we recorded a non-cash impairment charge of $3.4 million in the third quarter of 2004 to write-off the carrying value of certain Techfi-related intangible assets.

We may not realize the anticipated benefits from our acquisitions because of the following significant challenges:

• expected synergy benefits from these acquisitions, such as lower costs or increased revenues, may not be realized or may be realized more slowly than anticipated, particularly with regard to costs associated with reductions in headcount and facilities;

• potentially incompatible cultural differences between the companies;

• incorporating these companies’ technologies and products into our current and future product lines;

• geographic dispersion of operations and the complexities of international operations;

• integrating the technical teams of these companies with our engineering organizations;

• generating market demand for an expanded product line;

• integrating the products of these companies with our business, because we do not have distribution, manufacturing, marketing or support experience for these products;

• the difficulty of leveraging our combined technologies and capabilities across all product lines and customer bases; and

• our inability to retain significant customers or key employees of these entities.

We have incurred and expect to continue to incur significant costs and commit significant management time in integrating the operations, technology, development programs, products, administrative and information systems, customers and personnel of these acquisitions. These costs have been and will likely continue to be substantial and include costs for:

• integrating and reorganizing operations, including combining teams, facilities and processes in various functional areas;

• identifying duplicative or redundant resources and facilities, developing plans for resource consolidation and implementing those plans;

• fees and expenses of professionals and consultants involved in completing the integration process;

• settling existing liabilities of these companies;

• uncovering through our audit process new issues reflected on the companies’ financial statements;

• vacating, sub-leasing and closing facilities;

• employee relocation, redeployment or severance costs;

• discontinuing certain products and services;

• integrating technology and products; and

• other transaction costs associated with the acquisition, including financial advisor, attorney, accountant and exchange agent fees.

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

Writing Off Investments Could Harm Our Results of Operations.

We have made investments in privately held companies, which we classify as other assets on our condensed consolidated balance sheets. The value of these investments is influenced by many factors, including the operating effectiveness of these companies, the overall health of these companies’ industries, the strength of the private equity markets and general market conditions. Due to these and other factors, we have previously determined, and may in the future determine, that the value of these investments is impaired, which has caused and would cause us to write down the carrying value of these investments, such as the write-downs of our investments of $2.0 million and $13.5 million in fiscal 2003 and 2002, respectively. Furthermore, we cannot be sure that future investment, license, fixed asset or other asset write-downs will not happen. If future write-downs do occur, they could harm our business and results of operations.

Information We Provide to Investors Is Accurate Only as of the Date We Disseminate It.

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

Our Stock Price Has Fluctuated Significantly.

Like many companies in the technology and emerging growth sector, our stock price may be subject to wide fluctuations, particularly during times of high market volatility. If net revenues or earnings in any quarter fail to meet the investment community’s expectations, our stock price is likely to decline. In addition, our stock price is affected by trends in the financial services sector and by broader market trends unrelated to our performance. For instance, in the event of increased hostilities abroad or additional terrorist attacks, there could be increased market volatility, which could negatively impact our stock price.

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

Many of our clients use our proprietary interface to electronically retrieve pricing and other data from Financial Times/Interactive Data (FTID). FTID pays us a commission based on their revenues from providing this data to our clients. Our software products have been customized to be compatible with their system and this software would need to be redesigned if their services were unavailable for any reason. Termination of our agreement with FTID would require at least two years notice 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 was terminated or their services were unavailable to our clients for any reason.

Potential Changes in Securities Laws and Regulation Governing the Investment Industry’s Use of Soft Dollars May Reduce Our Revenues.

Approximately 600 of our clients utilize soft dollars to pay for software products and services, both through our broker/dealer subsidiary, Second Street Securities, and through other independent broker/dealers. During the nine months ended September 30, 2005, the total value of Advent products and services paid with soft dollars was approximately 6% of our total billings. In May of 2004, the SEC and the National Association of Securities Dealers (the “NASD”) set up a task force to consider soft dollar arrangements in the industry, and to provide the SEC with guidance on improving the transparency of fund transaction costs and distribution arrangements. Phase I of the task force focused on soft dollars and concluded with “The Report of the Mutual Fund Task Force on Soft Dollars and Portfolio Transaction Costs”, delivered to the SEC in November 2004 and recommending the SEC to:

• Narrow the definition of “research” to items that principally benefit the fund’s clients rather than the manager;

• Enhance disclosure of expenses, soft dollar policies, and broker allocations to fund boards as well as clients and prospects; and

• Consider soft-dollar issues raised by other managed advisory accounts.

Phase II of the task force focused on distribution arrangements, including 12b-1 fees and revenue sharing, and its recommendations are detailed in “Report of the Mutual Fund Task Force – Mutual Fund Distribution”.

Additionally, in March 2005, the UK Financial Services Agency (the “FSA”) published a consultation paper to address lack of transparency and management of conflicts of interest regarding soft commissions and bundled brokerage arrangements. The FSA focused on limiting commissions to the purchase of execution and narrowing the definition of research services along with enhancing disclosures regarding costs of execution and research.

The SEC has proposed a rule on soft or bundled commissions as it appears to be taking into consideration a wide range of issues relating to mutual fund regulation. If additional rules are issued that narrow the definition of research, which results in our clients being unable to use soft dollar arrangements to pay for Advent products and services, our revenues could decrease.

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

Our success depends significantly upon our proprietary technology. We currently rely on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. We have registered trademarks for many of our products and services and will continue to evaluate the registration of additional trademarks as appropriate. We generally enter into confidentiality agreements with our employees and with our resellers and customers. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. Despite these efforts, it may be possible for unauthorized third parties to copy certain portions of our products or to reverse engineer or otherwise obtain and use our proprietary information. We do not have any patents, and existing copyright and trade secret laws afford only limited protection. In addition, we cannot be certain that others will not develop substantially

equivalent or superseding proprietary technology, or that equivalent products will not be marketed in competition with our products, thereby substantially reducing the value of our proprietary rights. We cannot be sure that we will develop proprietary products or technologies that are patentable, that any patent, if issued, would provide us with any competitive advantages or would not be challenged by third parties, or that the patents of others will not adversely affect our ability to do business. Litigation may be necessary to protect our proprietary technology which may be time-consuming and expensive. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States. We cannot be sure that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology, duplicate our products or design around any patent that may be issued to us or other intellectual property rights of ours.

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

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

Business Disruptions Could Adversely Affect Our Business.

Our operations are exposed to potential disruption by fire, earthquake, power loss, telecommunications failure, and other events beyond our control. Additionally, we are vulnerable to interruption caused by political and terrorist incidents. For example, our facilities in New York were temporarily closed due to the September 11, 2001 terrorist attacks. Immediately after the terrorist attacks, our clients who were located in the World Trade Center area were concentrating on disaster recovery rather than licensing additional software components, while the grounding of transportation impeded our ability to deliver professional services at client sites. Additionally, during the temporary closure of the U.S. stock markets, our clients did not use our market data services. Our corporate headquarters are located in the San Francisco Bay Area, which is a region with significant seismic activity. Earthquakes such as that experienced in 1989 could disrupt our business. Such disruptions could affect our ability to sell and deliver products and services and other critical functions of our business and could seriously harm us. Further, such disruptions could cause instability in the financial markets upon which we depend.

Undetected Software Errors or Failures Found in New Products May Result in Loss of or Delay in Market Acceptance of Our Products that Could Seriously Harm Our Business.

Our products may contain undetected software errors or failures or scalability limitations at any point in the life of the product, but particularly when first introduced or as new versions are released. Despite testing by us and by current and potential customers, errors may not be found in new products until after commencement of commercial shipments, resulting in a loss of or a delay in market acceptance, damage to our reputation, customer dissatisfaction and reductions in revenues and margins, any of which could seriously harm our business. Additionally, our agreements with customers that attempt to limit our exposure to liability claims may not be enforceable in jurisdictions where we operate.

Recently Enacted and Proposed Changes in Securities Laws and Regulations Will Increase Our Costs.

The Sarbanes-Oxley Act (“the Act”) of 2002, which became law in July 2002, required changes in some of our corporate governance and securities disclosure and/or compliance practices. As part of the Act’s requirements, the SEC has enacted new rules on a variety of subjects, and the NASDAQ Stock Market has enacted new corporate governance listing requirements. These developments have increased and may in the future increase our accounting and legal compliance costs and could also expose us to additional liability if we fail to comply with these new rules and reporting requirements. In fiscal 2004, we incurred approximately $2.1 million in Sarbanes-Oxley related expenses. In addition, such developments may make retention and recruitment of qualified persons to serve on our board of directors or in executive management positions more difficult. We continue to evaluate and monitor regulatory and legislative developments and cannot reliably estimate the timing or magnitude of all costs we may incur as a result of the Act or other related legislation or regulation.

Our Financial Results Will be Affected by Changes in the Accounting Rules Governing the Recognition of Stock-based Compensation Expense.

We measure compensation expense for our employee stock compensation plans under the intrinsic value method of accounting prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). In December 2004, the FASB issued SFAS No. 123R, which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) and supercedes APB 25. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. In April 2005, the SEC subsequently adopted a new rule delaying compliance with SFAS 123R until the beginning of the Company’s next fiscal year, instead of the next reporting period, that begins after June 15, 2005. Under the SEC’s recent rule, we are required to adopt SFAS 123R in our first quarter of fiscal 2006, beginning January 1, 2006. Under SFAS 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition method includes prospective and retroactive adoption methods. Under the retroactive method, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R, while the retroactive method would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. We are evaluating the requirements of SFAS 123R and we expect that the adoption of SFAS 123R will have a material impact on our consolidated results of operations and earnings per share. We have not yet determined the method of adoption or the effect of adopting SFAS 123R, and we have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.

Security Risks May Harm Our Business.

The secure transmission of confidential information over public networks is essential to commerce and communications, particularly in the market in which Advent operates. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments could result in compromises or breaches of our security systems. Anyone who circumvents our security measures could misappropriate proprietary information or cause interruptions in our services or operations. In addition, computer viruses or software programs that disable or impair computers could be introduced into our systems or those of our customers or other third parties, which could disrupt or make our systems inaccessible to customers. Our security measures may be inadequate to prevent security breaches, which could harm our business, exposing us to a risk of loss, litigation and other possible liabilities, as well as possibly requiring us to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by such breaches.

If We Fail to Maintain an Effective System of Internal Control, We May Not be Able to Accurately Report Our Financial Results. As a Result, Current and Potential Stockholders Could Lose Confidence in Our Financial Reporting, Which Would Harm Our Business and the Trading Price of Our Stock.

Effective internal control is necessary for us to provide reliable financial reports. If we can not provide reliable financial reports, our business and operating results could be harmed. We have in the past discovered, and may in the future discover, areas of our internal control that need improvement including control deficiencies that may constitute material weaknesses. For example, as of December 31, 2004, the Company did not maintain effective controls over the valuation of its property and equipment accounts, including the related restructuring provision. Specifically, the Company’s impairment analysis of its property and equipment accounts related to our decision to vacate a facility failed to identify and include all applicable assets. This control deficiency resulted in a restatement of the Company’s financial statements for the quarters ended June 30, 2004 and September 30, 2004 and an adjustment to the fourth quarter 2004 financial statements.

The Company also did not maintain effective controls over the accounting for income taxes, including the determination of income taxes payable, deferred income tax assets and liabilities and the related income tax provision as of December 31, 2004. Specifically, the Company did not have controls to identify that deferred income tax assets and related deferred income tax valuation allowances had been inappropriately recorded. Further, the Company did not have controls in place to include all state income tax liabilities in its income taxes payable account. These control deficiencies resulted in a restatement of the Company’s financial statements for the year ended December 31, 2003, the quarters ended March 31, 2004, June 30, 2004 and September 30, 2004, and an adjustment to the fourth quarter 2004 financial statements.

Management has determined that these control deficiencies constituted material weaknesses as of December 31, 2004. Consequently, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2004 based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. The Company has begun executing on a remediation plan, as discussed in

“Management’s Report on Internal Control over Financial Reporting” included in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2004 (“2004 10-K”), and has implemented the new control procedures and has hired additional tax accounting resources as of the end of the third quarter of 2005.

The Company also did not maintain effective controls over its disclosure for stock-based employee compensation expense under SFAS 123, as amended by SFAS 148, including the calculation of the effect of a stock option exchange program that took place on December 4, 2002, and the overall determination of the tax treatment of the pro forma option expense. This control deficiency will result in a restatement of the disclosure for stock-based employee compensation expense for fiscal 2002, 2003 and 2004 included in Note 1 to the previously issued financial statements contained in our 2004 10-K together with the associated disclosure for the first three quarters of fiscal 2003 and 2004. Management has determined that this control deficiency also constituted a material weakness as of December 31, 2004, March 31, 2005, June 30, 2005 and September 30, 2005. The Company has added an additional item to its remediation plan to improve controls over its disclosure of stock-based employee compensation expense based on this deficiency and expects to have implemented these control procedures by the end of fiscal 2005.

Any failure to implement or maintain the improvements in our internal control over financial reporting, or difficulties encountered in the implementation of these improvements in our controls, could cause us to fail to meet our reporting obligations. Any failure to improve our internal control to address these identified weaknesses could also cause investors to lose confidence in our reported financial information, which could have a negative impact on the trading price of our stock.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial market risks, including changes in foreign currency exchange rates and interest rates. Historically, much of our revenues and capital spending was transacted in U.S. dollars. However, since the acquisitions of Advent Denmark, Advent Norway, Advent Sweden, Advent Hellas, Advent Netherlands, and the recent acquisitions of Advent Europe’s remaining distributors in the United Kingdom and Switzerland, whose revenues, with the exception of Geneva transactions and capital spending, are transacted in local country currencies, we have greater exposure to foreign currency fluctuations. Because the results of operations from these territories are not material to our operating results, a hypothetical 10% change in foreign currency exchange rates would not have a materially adverse effect on our consolidated financial position, results of operations or cash flows.

Our interest rate risk relates primarily to our investment portfolio, which consisted of $48.9 million in cash equivalents and $91.0 million in marketable securities as of September 30, 2005. An immediate sharp increase in interest rates could have a material adverse affect on the fair value of our investment portfolio. Conversely, immediate sharp declines in interest rates could seriously harm interest earnings of our investment portfolio. We do not currently use derivative financial instruments in our investment portfolio, nor hedge for these interest rate exposures.

By policy, we limit our exposure to longer-term investments, and a majority of our investment portfolio at September 30, 2005 and December 31, 2004 had maturities of less than one year. As a result of the relatively short duration of our portfolio, an immediate hypothetical parallel shift to the yield curve of plus 25 basis points (BPS), 50 BPS and 100 BPS would result in a reduction of 0.15% ($211,000), 0.30% ($423,000) and 0.60% ($846,000), respectively, in the market value of our investment portfolio as of September 30, 2005.

We have also invested in several privately-held companies, most of which can still be considered in the start-up or development stages. These non-marketable investments are classified as other assets on our balance sheet. Our investments in privately-held companies could be affected by an adverse movement in the financial markets for publicly-traded equity securities, although the impact cannot be directly quantified. These investments are inherently risky as the market for the technologies or products these privately-held companies have under development are typically in the early stages and may never materialize. The value of these investments is also influenced by factors including the operating effectiveness of these companies, the overall health of the companies’ industries and the strength of the private equity markets. We could lose our entire investment in these companies. At September 30, 2005 our net investments in privately-held companies totaled $8.5 million.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures.

The Company’s management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(f) of the Securities and Exchange Act of 1934, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that because the material weakness in

internal control over financial reporting relating to the accounting for income taxes which was previously identified in “Management’s Report on Internal Control over Financial Reporting” included in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2004 (“2004 10-K”) has not yet been remediated, and because of the additional material weakness relating to the disclosure for stock-based employee compensation as previously described in “Evaluation of disclosure controls and procedures” included in Item 4 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, our disclosure controls and procedures were ineffective as of September 30, 2005 to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) is accumulated and communicated to Advent’s management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting.

Management has implemented the following changes in our internal control over financial reporting during the third quarter ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, Advent’s internal control over financial reporting. Management continues to work on its remediation plan to address the material weakness relating to the accounting for income taxes identified in our 2004 10-K and the material weakness relating to the disclosure for stock-based employee compensation expense identified on May 6, 2005 described in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2005. During the third quarter of 2005, Advent hired additional tax personnel and is also utilizing the services of an outside tax consultant. Advent intends to complete the remediation of its material weakness related to the disclosure for stock-based employee compensation expense during the fourth quarter of 2005. During the quarter, Advent utilized the services of outside consultants to assist in completing remedial work on our employee options database and applied internal resources to preparing the calculations for the tax impact of employee option exercises. However, because the requirement of PricewaterhouseCoopers LLP, our independent registered public accounting firm, to perform an evaluation of management’s assessment and their own audit of the Company’s internal control over financial reporting is an annual one, there is a risk that PricewaterhouseCoopers LLP will not concur with management’s assessment that the material weaknesses related to the accounting for income taxes and the disclosure for stock-based employee compensation expense have been remediated, nor may they concur with our opinion that the material weakness relating to the valuation of its property and equipment accounts, including the related restructuring provision was remediated during the second quarter of 2005, when they perform their audit work for the year ending December 31, 2005.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

respective employment agreements in place with Advent. Pursuant to the employees' employment agreements, each of which was for a term ending December 31, 2004, Advent agreed to pay an incentive compensation based on amounts received for customer contracts for certain products, with a maximum incentive compensation of $100,000 per employee for calendar year 2003 and 2004. Advent has made the incentive compensation payments to these employees totaling $121,000; however, the employees claim that the incentive commission is not limited by the term of the employment agreement and should have been the maximum amount of $100,000 per calendar year during the existence of the relevant customer contracts. Based on these allegations, the employees are seeking compensatory damages and other special damages, including attorney’s fees and costs of suit. Advent disputes the employee’s claims and believes that it has meritorious defenses and intends to vigorously defend these actions. Management believes that any potential loss associated with these lawsuits is neither probable nor reasonably estimable at this time and accordingly has not accrued any amounts for any potential loss.

From time to time, we are involved in claims and legal proceedings that arise in the ordinary course of business activities including commercial, employment and other matters. Based on currently available information, management does not believe that the ultimate outcome of these unresolved matters, individually and in the aggregate, is likely to have a material adverse effect on the Company’s financial position or results of operations. However, litigation is subject to inherent uncertainties and our view of these matters may change in the future. Were an unfavorable outcome to occur, there exists the possibility of a material adverse impact on our financial position and results of operations for the period in which the unfavorable outcome occurs, and potentially in future periods.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

In May 2004, the Board of Directors approved a plan to repurchase up to an additional 1.2 million shares of Advent’s common stock in the open market. In September 2004, February 2005 and May 2005, the Board authorized extensions of this stock repurchase program to cover the repurchase of an additional 0.8 million, 1.8 million and 1.0 million shares of outstanding common stock, respectively.

The following table provides a month-to-month summary of the repurchase activity under the current stock repurchase program during the three months ended September 30, 2005:

				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)

July 2005	—	$	—	1,377
August 2005	156	24.65		1,221
September 2005	—	—		1,221

Total	156	$	24.65	1,221

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

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

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

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

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

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

SIGNATURES

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

	ADVENT SOFTWARE, INC.

Dated: November 9, 2005	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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Advent Software Inactive 10-Q2005 Q3 Quarterly report

Content analysis

Note 12—Acquisitions

Note 13—Commitments and Contingencies

NET REVENUES

COST OF REVENUES

OPERATING EXPENSES

Operating Income (Loss) by Segment

Interest Income and Other, Net

Provision For (Benefit From) Income Taxes

LIQUIDITY AND CAPITAL RESOURCES

RISK FACTORS