Advent Software 10Q 2006 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2006

		or

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

Commission file number: 0-26994

ADVENT SOFTWARE, INC.

(Exact name of registrant as specified in its charter)

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

600 Townsend Street, San Francisco, California 94103

(Address of principal executive offices and zip code)

(415) 543-7696

(Registrant’s telephone number, including area code)

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 x No o

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

The number of shares of the registrant’s Common Stock outstanding as of October 31, 2006 was 27,676,350.

INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

	September 30 2006			December 31 2005
ASSETS
Current assets:
Cash and cash equivalents	$	32,628		$	70,941
Marketable securities	28,222			92,491
Accounts receivable, net	33,930			33,507
Prepaid expenses and other	15,177			12,403
Total current assets	109,957			209,342
Property and equipment, net	25,225			16,009
Goodwill	96,784			94,335
Other intangibles, net	5,929			8,758
Other assets	12,578			12,131

Total assets	$	250,473		$	340,575

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,242		$	3,945
Accrued liabilities	17,494			20,637
Deferred revenues	72,442			64,839
Income taxes payable	683			2,801
Total current liabilities	95,861			92,222
Deferred income taxes	416			1,122
Other long-term liabilities	9,784			5,252

Total liabilities	106,061			98,596

Commitments and contingencies (See Note 11)

Stockholders’ equity:
Common stock	276			311
Additional paid-in capital	308,383			331,530
Accumulated deficit	(173,417		)	(95,828		)
Accumulated other comprehensive income	9,170			5,966
Total stockholders’ equity	144,412			241,979

Total liabilities and stockholders’ equity	$	250,473		$	340,575

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
	2006		2005		2006			2005
Net revenues:
License and development fees	$	8,610	$	9,169	$	26,589		$	28,343
Maintenance and other recurring	32,535		27,771		94,121			79,030
Professional services and other	4,732		5,836		13,183			15,719

Total net revenues	45,877		42,776		133,893			123,092

Cost of revenues:
License and development fees	356		328		1,141			968
Maintenance and other recurring	7,740		7,314		23,680			21,951
Professional services and other	6,894		4,249		16,967			12,729
Amortization of developed technology	251		641		909			1,869

Total cost of revenues	15,241		12,532		42,697			37,517

Gross margin	30,636		30,244		91,196			85,575

Operating expenses:
Sales and marketing	12,115		9,453		36,466			29,990
Product development	8,849		6,800		25,599			22,567
General and administrative	8,262		7,947		23,911			24,108
Amortization of other intangibles	1,028		997		3,027			3,064
Restructuring charges	54		116		320			1,719

Total operating expenses	30,308		25,313		89,323			81,448

Income from operations	328		4,931		1,873			4,127
Interest income and other, net	656		977		3,054			6,586

Income before income taxes	984		5,908		4,927			10,713
Provision for (benefit from) income taxes	32		62		(1,030		)	192

Net income	$	952	$	5,846	$	5,957		$	10,521

Net income per share:
Basic	$	0.03	$	0.19	$	0.20		$	0.34
Diluted	$	0.03	$	0.18	$	0.19		$	0.33

Weighted average shares used to compute net income per share:
Basic	27,937		30,602		29,491			31,047
Diluted	29,448		32,301		30,882			32,091

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
	2006			2005
Cash flows from operating activities:
Net income	$	5,957		$	10,521
Adjustments to reconcile net income to net cash provided by operating activities:
Stock based compensation	10,097			—
Depreciation and amortization	10,109			11,824
Loss on dispositions of fixed assets	138			143
Provision for (reversal of) doubtful accounts	618			(191		)
Provision for (reversal of) sales returns	(1,390		)	1,957
Deferred income taxes	(706		)	(246		)
Unrealized loss (gain) on investments	210			(3,384		)
Other	(91		)	195
Changes in operating assets and liabilities:
Accounts receivable	(1,041		)	4,870
Prepaid and other assets	(1,850		)	(116		)
Accounts payable	1,297			(35		)
Accrued liabilities	(3,143		)	2,598
Deferred revenues	8,992			(822		)
Income taxes payable	(1,977		)	(1,725		)
Other long-term liabilities	4,532			(1,138		)

Net cash provided by operating activities	31,752			24,451

Cash flows from investing activities:
Net cash used in acquisitions	—			(1,028		)
Purchases of property and equipment	(15,474		)	(4,460		)
Capitalized software development costs	(800		)	(1,280		)
Purchases of marketable securities	(42,952		)	(105,187		)
Sales and maturities of marketable securities	107,420			157,248
Proceeds from sale of other investments	—			3,791
Change in restricted cash	(1,256		)	—
Other	—			3

Net cash provided by investing activities	46,938			49,087

Cash flows from financing activities:
Proceeds from issuance of common stock	10,845			13,505
Repurchase of common stock	(127,933		)	(52,585		)

Net cash used in financing activities	(117,088		)	(39,080		)

Effect of exchange rate changes on cash and cash equivalents	85			(99		)

Net change in cash and cash equivalents	(38,313		)	34,359
Cash and cash equivalents at beginning of period	70,941			21,177

Cash and cash equivalents at end of period	$	32,628		$	55,536

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. and its wholly owned subsidiaries (“Advent” or the “Company”). 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, 2005. 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 or stockholders’ equity.

Note 2—Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax provision taken or expected to be taken in a tax return. FIN 48 will be effective beginning in the first quarter of 2007. The Company is currently evaluating the impact of FIN 48 on the Company’s condensed consolidated financial statements.

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

In September 2006, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 does not change the staff’s previous guidance in SAB 99 on evaluating the materiality of misstatements. SAB 108 requires companies to evaluate the materiality of identified unadjusted errors on each financial statement and related financial statement disclosure using both the “rollover” approach and the “iron curtain” approach. The rollover approach quantifies misstatements based on the amount of the error in the current year financial statement whereas the iron curtain approach quantifies misstatements based on the effects of correcting the misstatement in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origin. Financial statements would require adjustment when either approach results in quantifying a misstatement that is material. Correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. SAB 108 is effective for interim periods of the first fiscal year ending after November 15, 2006. The provisions of SAB 108 currently have no impact on the Company’s condensed consolidated financial statements.

Note 3—Stock-Based Compensation

Description of Plans

Stock Option Plans

Advent has three stock option plans, the 2002 Stock Plan (the “Plan”), the 1998 Non-statutory Stock Option Plan (the “Non-statutory Plan”) and the 1995 Director Option Plan (the “Director Plan”).

The Plan. On May 18, 2005, the Company’s stockholders approved the amendment and restatement of Advent’s 2002 Stock Plan, originally approved by the Board of Directors (the “Board”) and stockholders in February and May, respectively, of 2002. Under the Plan, the Company may grant options to purchase common stock to employees, consultants

and directors. Options granted may be incentive stock options or non-statutory stock options and shall be granted at a price not less than fair market value on the date of grant. Fair market value (as defined in the Plan) and the vesting of these options shall be determined by the Board of Directors. The options generally vest over 5 years and expire no later than 10 years from the date of grant. Non-employee directors were eligible to receive option grants under the Director Plan, which terminated in November 2005. Effective April 1, 2005, each non-employee director became eligible to receive awards under the 2002 Plan of (i) an initial option grant of 30,000 shares upon joining the Board, which shall vest over four years with 25% of such shares vesting after one year of service and in equal monthly installments over the ensuing three years, and (ii) an annual grant of 12,000 shares vesting in twelve equal monthly installments. Unvested options on termination of employment are canceled and returned to the Plan.

The Plan permits the award of restricted stock, restricted stock units (“RSU”), stock appreciation rights (“SAR”), performance shares, and performance units under the Plan. During the first nine months of 2006, Advent granted stock-settled RSU’s and SAR’s. The RSU’s are awards of restricted stock units that generally vest over four years in two equal installments on the second and fourth anniversaries of the date of grant. Upon vesting, the RSU’s will convert into an equivalent number of shares of common stock. The value of the RSU’s is based on the closing market price of the Company’s common stock on the date of grant and is amortized on a straight-line basis over the four-year requisite service period. A SAR is the right to receive the appreciation in fair market value of common stock between the exercise date and the date of grant and generally vests over 5 years. Upon exercise, SAR’s will be settled in shares of Advent common stock. Unvested RSU’s and SAR’s on termination of employment are canceled and returned to the Plan.

Non-Statutory Plan. In November 1998, the Board approved the 1998 Non-statutory Stock Option Plan and reserved 300,000 shares of common stock for issuance thereunder. Under the Company’s 1998 Non-statutory Plan, Advent may grant options to purchase common stock to employees and consultants, excluding persons who are executive officers and directors. Options granted are non-statutory stock options and shall be granted at a price not less than fair market value on the date of grant. Fair market value (as defined in the Non-statutory Plan) and the vesting of these options shall be determined by the Board. The options generally vest over 5 years and expire no later than 10 years from the date of grant. Unvested options on termination of employment are canceled and returned to the Non-statutory Plan.

Director Plan. Advent’s Director Plan which expired on November 16, 2005, provided for the grant of non-statutory stock options to the Company’s non-employee directors (“outside directors”). As noted above, effective April 1, 2005, option grants to outside directors are issued under the 2002 Stock Plan.

A summary of the status of the Company’s stock option and SAR’s activity for the nine months ended September 30, 2006 is as follows:

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
	Number of		Exercise		Contractual Life	Intrinsic
	Shares		Price		(in years)	Value
	(in thousands)					(in thousands)
Outstanding at December 31, 2005	5,489		$	19.26
Options & SAR’s granted	847		$	28.71
Options & SAR’s exercised	(541	)	$	17.39
Options & SAR’s canceled	(351	)	$	33.90
Outstanding at September 30, 2006	5,444		$	19.97	6.40	$	89,408
Exercisable at September 30, 2006	2,907		$	17.89	4.64	$	54,198

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the Company’s closing stock price of $36.21 as of September 30, 2006 for options that were in-the-money as of that date.

The weighted average grant date fair value of options & SAR’s, as determined under SFAS 123R, granted during the nine months ended September 30, 2006 was $13.84 per share. The total intrinsic value of options exercised during the nine months ended September 30, 2006 was $7.7 million. The total cash received from employees as a result of employee stock option exercises during the nine months ended September 30, 2006 was approximately $9.4 million.

The Company settles employee stock option exercises with newly issued common shares.

During the nine months ended September 30, 2006, the Company granted RSU’s under its 2002 Stock Plan. A summary of the status of the RSU’s for the nine months ended September 30, 2006 is as follows:

			Weighted
			Average
	Number of		Grant Date
	Shares		Fair Value
	(in thousands)
Outstanding at December 31, 2005	—		$	—

RSU’s granted	257		$	29.19
RSU’s canceled	(4	)	$	28.04

Outstanding at September 30, 2006	253		$	29.21

None of the RSU’s were vested at September 30, 2006.

The weighted average grant date fair value was determined based on the closing market price of the Company’s common stock on the date of the award. Aggregate intrinsic value of RSU’s outstanding at September 30, 2006 was $9.2 million, using the closing price of $36.21 per share as of September 30, 2006.

Employee Stock Purchase Plan (“ESPP”)

All individuals employed in the United States are eligible to participate in the ESPP if Advent employs them for at least 20 hours per week and at least five months per year. The ESPP permits eligible employees to purchase Advent common stock through payroll deductions at a price equal to 85% of the lower of the closing sale price for the Company’s common stock reported on the NASDAQ National Market at the beginning or the end of each six-month offering period. In any calendar year, eligible employees can withhold up to 10% of their salary and certain variable compensation up to Internal Revenue Service limits.

On May 18, 2005 Advent’s stockholders approved the 2005 ESPP with 2,000,000 shares of common stock reserved for issuance. During the nine months ended September 30, 2006, the Company issued 56,422 additional shares under the 2005 ESPP. As of September 30, 2006, 1,871,561 shares were reserved for future issuance under the 2005 ESPP.

Stock-Based Compensation Expense

Effective January 1, 2006, Advent accounts for its ESPP and stock option (including RSU’s and SAR’s) plans under the provisions of the FASB Statement of Financial Accounting Standards No. 123—revised 2004 (“SFAS 123R”), “Share-Based Payment” which replaced Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 (“APB 25”). SFAS 123R requires the recognition of the fair value of stock-based compensation in net income. The estimated fair value of the Company’s stock-based awards is amortized over the awards’ vesting period on a straight-line basis. The Company elected to adopt the modified prospective method as provided by SFAS 123R, and consequently, previously reported amounts have not been restated. Since the adoption of SFAS 123R, there have been no changes to the Company’s equity plans or modifications to outstanding stock-based awards.

As the stock-based compensation expense recognized on the condensed consolidated statements of operations for the three and nine months ended September 30, 2006 is based on awards ultimately expected to vest, such amount has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on the Company’s historical experience over the last ten years. Previously, under SFAS 123, the Company recorded forfeitures as they occurred.

Prior to adoption of SFAS 123R, benefits of tax deductions in excess of recognized compensation costs were reported as operating cash flows. SFAS 123R requires that they be reported as a financing cash inflow rather than as a reduction of taxes paid.

The effect of stock-based compensation expense recognized on Advent’s condensed consolidated statements of operations for the three and nine months ended September 30, 2006 was as follows (in thousands, except per share data):

	Three Months Ended		Nine Months Ended
	September 30, 2006		September 30, 2006
Statement of operations classification
Cost of license and development fee revenues	$	2	$	7
Cost of maintenance and other recurring revenues	198		722
Cost of professional services and other revenues	172		593
Total cost of revenues	372		1,322

Sales and marketing	1,291		3,676
Product development	692		2,217
General and administrative	1,093		2,882
Total operating expenses	3,076		8,775

Total stock-based employee compensation expense	$	3,448	$	10,097

Tax effect on stock-based employee compensation (1)	—		—

Net effect on net income	$	3,448	$	10,097

Effect on net income per share:
Basic	$	0.12	$	0.34
Diluted	$	0.12	$	0.33

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

Approximately $25,000 and $98,000 and of stock-based compensation was capitalized as software development and internal use software costs, respectively, during the three and nine months ended September 30, 2006. Previously, under SFAS 123, the Company did not capitalize stock-based compensation as part of its pro forma disclosures.

As of September 30, 2006, total unrecognized compensation cost related to unvested awards not yet recognized under all equity compensation plans, adjusted for estimated forfeitures, was $26.1 million and is expected to be recognized through the remaining vesting period of each grant. As of September 30, 2006, the weighted average remaining period was 3.3 years.

Valuation Assumptions

Advent uses the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan shares, consistent with the provisions of SFAS 123R, SEC Staff Accounting Bulletin No. 107 (“SAB 107”) and the Company’s prior period pro forma disclosures of net income (loss). The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model and the straight-line attribution approach with the following assumptions:

	Three Months Ended September 30				Nine Months Ended September 30
	2006		2005		2006		2005
Stock Awards
Expected volatility	45.07% - 46.43	%	58.1	%	43.5% - 48.5	%	61.2	%
Expected life (in years)	5		5		5		5
Risk-free interest rate	4.81% - 5.11	%	4.0	%	4.3% - 5.11	%	3.9	%
Expected dividends	None		None		None		None

Employee Stock Purchase Plan
Expected volatility	36.5	%	27.8	%	36.5	%	27.8	%
Expected life (in months)	6		6		6		6
Risk-free interest rate	4.2	%	2.8	%	4.2	%	2.8	%
Expected dividends	None		None		None		None

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

Prior to the adoption of SFAS 123R, the Company used historical volatility in deriving its expected volatility assumption. The expected stock price volatility for the three and nine months ended September 30, 2006 was determined based on an equally weighted average of historical and implied volatility of the Company’s common stock. Advent determined that a blend of implied volatility and historical volatility is more reflective of the market conditions and a better indicator of expected volatility than using purely historical volatility. The expected life for the three and nine months ended September 30, 2006 was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The dividend yield assumption is based on the Company’s history of not paying dividends and the resultant future expectation of dividend payouts.

Fiscal Periods Prior to the Adoption of SFAS 123R

Prior to the adoption of SFAS 123R, Advent used the intrinsic value-based method, as prescribed in APB 25, to account for all stock-based compensation plans, and the Company had adopted the disclosure-only alternative of SFAS 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” No employee stock-based compensation was reflected in net income for the three and nine months ended September 30, 2005, as the related options granted had an exercise price equal to the fair market value of the underlying common stock on the date of grant and the Company had no SAR’s or RSU’s outstanding as of September 30, 2005.

The pro forma information for the three and nine months ended September 30, 2005 was as follows (in thousands, except per share data):

	Three Months Ended			Nine Months Ended
	September 30, 2005			September 30, 2005

Net income - as reported	$	5,846		$	10,521

Total stock-based employee compensation expense determined under fair value based method for all options, net of tax (1)	(3,825		)	(12,236		)

Net income (loss) - pro forma	$	2,021		$	(1,715	)

Net income per share - as reported:
Basic	$	0.19		$	0.34
Diluted	$	0.18		$	0.33

Net income (loss) per share - pro forma:
Basic	$	0.07		$	(0.06	)
Diluted	$	0.06		$	(0.06	)

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

Note 4—Net Income Per Share

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income 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 common shares consist of the shares issuable upon the exercise of stock options, the vesting of restricted stock awards and from withholdings associated with the Company’s employee stock purchase plan. Potential common shares are reflected in diluted earnings per share by application of the treasury stock method, which in 2006 includes consideration of unamortized stock-based compensation and windfall tax benefits, as a result of the implementation of SFAS 123R.

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

	Three Months Ended September 30				Nine Months Ended September 30
	2006		2005		2006		2005
Numerator:
Net income	$	952	$	5,846	$	5,957	$	10,521

Denominator:
Denominator for basic net income per share-weighted average shares outstanding	27,937		30,602		29,491		31,047

Dilutive common equivalent shares:
Employee stock options and other	1,511		1,699		1,391		1,044

Denominator for diluted net income per share-weighted average shares outstanding, assuming exercise of potential dilutive common shares	29,448		32,301		30,882		32,091

Net income per share:
Basic	$	0.03	$	0.19	$	0.20	$	0.34
Diluted	$	0.03	$	0.18	$	0.19	$	0.33

Weighted average stock options, SAR’s and withholdings for ESPP of approximately 1.2 million and 1.1 million for the three and nine months ended September 30, 2006, 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 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.

Note 5—Goodwill

The changes in the carrying value of goodwill during the nine months ended September 30, 2006 were as follows (in thousands):

	Goodwill

Balance at December 31, 2005	$	94,335
Translation adjustments	2,449

Balance at September 30, 2006	$	96,784

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 2005, 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, 2006 which triggered an impairment review. Foreign currency translation adjustments totaling $2.4 million reflect the weakening of the U.S. dollar versus European currencies during the nine months ended September 30, 2006.

Note 6—Other Intangibles, net

The following is a summary of other intangibles, net as of September 30, 2006 (in thousands):

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

Purchased technologies	4.9	$	12,726	$	(12,588	)	$	138
Product development costs	3.0	2,409		(632		)	1,777
Developed technology sub-total		15,135		(13,220		)	1,915

Customer relationships	5.6	21,470		(17,501		)	3,969
Other intangibles	2.5	307		(262		)	45

Other intangibles sub-total		21,777		(17,763		)	4,014
Balance at September 30, 2006		$	36,912	$	(30,983	)	$	5,929

The following is a summary of other intangibles, net as of December 31, 2005 (in thousands):

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

Purchased technologies	4.9	$	12,726	$	(12,167	)	$	559
Product development costs	3.0	1,511		(136		)	1,375
Developed technology sub-total		14,237		(12,303		)	1,934

Customer relationships	5.6	20,531		(13,810		)	6,721
Other intangibles	2.5	307		(204		)	103

Other intangibles sub-total		20,838		(14,014		)	6,824
Balance at December 31, 2005		$	35,075	$	(26,317	)	$	8,758

The changes in the carrying value of other intangibles during the nine months ended September 30, 2006 were as follows (in thousands):

	Other					Other
	Intangibles,		Accumulated			Intangibles,
	Gross		Amortization			Net

Balance at December 31, 2005	$	35,075	$	(26,317	)	$	8,758
Additions	800		—			800
Amortization	—		(3,936		)	(3,936		)
Stock-based compensation	98		(8		)	90
Translation adjustments	939		(722		)	217

Balance at September 30, 2006	$	36,912	$	(30,983	)	$	5,929

Based on the carrying amount of other intangibles as of September 30, 2006, the estimated future amortization is as follows (in thousands):

	Three
	Months Ended
	December 31		Years Ended December 31
	2006		2007		2008		2009		Total
Estimated future amortization of:
Developed technology	$	239	$	769	$	599	$	308	$	1,915
Other intangibles	834		1,812		928		440		4,014

Total	$	1,073	$	2,581	$	1,527	$	748	$	5,929

Note 7—Balance Sheet Detail

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

	September 30			December 31
	2006			2005
Long-term investments, gross	$	13,800		$	13,800
Accumulated write-downs due to other-than-temporary decline in value	(5,341		)	(5,341		)
Long-term investments, net	8,459			8,459
Long-term prepaid assets	1,555			2,377
Restricted cash	1,256			—
Deposits	1,308			1,295

Total other assets	$	12,578		$	12,131

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. These equity investments are carried at the lower of cost or fair value at September 30, 2006 and December 31, 2005. As of September 30, 2006, other assets included restricted cash of $1.3 million to secure a bank line of credit of $1.3 million associated with the Company’s entry into a definitive lease agreement with Toda Development, Inc. (“Toda”) in January 2006 for its new headquarters facility located at 600 Townsend Street in San Francisco, California. In the event Advent defaults under the terms of this lease agreement, Toda may draw upon the letter of credit.

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

	September 30		December 31
	2006		2005
Salaries and benefits payable	$	8,620	$	10,368
Accrued restructuring	827		1,422
Other accrued liabilities	8,047		8,847

Total accrued liabilities	$	17,494	$	20,637

Accrued restructuring charges are discussed further in Note 9, “Restructuring Charges”. Other accrued liabilities include accruals for royalties, sales and business taxes, and other miscellaneous items which are each individually less than 10% of total accrued liabilities.

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

	September 30		December 31
	2006		2005
Deferred rent	$	6,125	$	1,456
Accrued restructuring, long-term portion	2,761		3,138
Other	898		658

Total other long-term liabilities	$	9,784	$	5,252

Note 8—Comprehensive Income

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

	Three Months Ended September 30					Nine Months Ended September 30
	2006		2005			2006		2005
Net income	$	952	$	5,846		$	5,957	$	10,521
Unrealized gain (loss) on available-for-sale securities	334		(136		)	524		(226		)
Foreign currency translation adjustment	332		(155		)	2,680		(5,094		)
Total comprehensive income	$	1,618	$	5,555		$	9,161	$	5,201

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

	September 30			December 31
	2006			2005
Accumulated net unrealized loss on available-for-sale securities	$	(62	)	$	(586	)
Accumulated foreign currency translation adjustments	9,232			6,552
Total accumulated other comprehensive income	$	9,170		$	5,966

Note 9—Restructuring Charges

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

The restructuring charges recorded for the three and nine months ended September 30, 2006 and 2005 were as follows (in thousands):

	Three Months Ended September 30					Nine Months Ended September 30
	2006			2005		2006			2005
Facility exit costs	$	57		$	116	$	323		$	1,724
Severance and benefits	(3		)	—		(3		)	(5		)
Total restructuring charges	$	54		$	116	$	320		$	1,719

During the three months ended September 30, 2006, Advent recorded a restructuring charge of $54,000 which related to the present value amortization of facility exit obligations. During the three months ended June 30, 2006, we recorded a restructuring charge of $124,000 which related to the costs to exit a portion of our facility in New Rochelle, New York, and our entire facility in Summit, New Jersey as well as the fair value amortization of prior period obligations. During the three months ended March 31, 2006, Advent recorded a net restructuring charge of $141,000 primarily to adjust original estimates for facilities in San Francisco, California and New York, New York.

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 Chrysler East 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.

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, 2006 (in thousands):

	Facility Exit			Severance and
	Costs			Benefits			Total
Balance of restructuring accrual at December 31, 2005	$	4,553		$	7		$	4,560
Cash payments	(1,298		)	—			(1,298		)
Reversal of deferred rent related to facilities exited	6			—			6
Restructuring charges	134			—			134
Adjustment of prior restructuring costs	189			(3		)	186
Balance of restructuring accrual at September 30, 2006	$	3,584		$	4		$	3,588

Note 10—Common Stock Repurchase Programs

Advent’s Board has approved common stock repurchase programs authorizing management to repurchase shares of the Company’s common stock. 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 and limitations, including the price of Advent’s stock, corporate and regulatory requirements, alternative investment opportunities and other market conditions. The stock repurchase programs specify a maximum number of shares subject to repurchase, do not have an expiration date and may be limited or terminated at any time without prior notice. Repurchased shares would be returned to the status of authorized and un-issued shares of common stock. The purchases are funded from available working capital.

In May 2004, the Board authorized the repurchase of 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. In March 2006, Advent completed this common stock repurchase program. Since the inception of this program in May 2004 through March 2006, Advent repurchased 4.8 million shares for a total cost of $98.2 million and at an average price of $20.43 per share.

In April 2006, Advent’s Board approved a common stock repurchase program authorizing the repurchase of up to 2.3 million shares of the Company’s common stock. In May 2006, Advent entered into a pre-arranged Rule 10b5-1 trading plan (“Trading Plan”) with a broker to facilitate the repurchase of its shares of common stock, pursuant to the requirements of and in conformity with the provisions of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. Under the Trading Plan, Advent may continue to repurchase shares without suspension for trading blackout periods. The shares to be repurchased under the Trading Plan would be part of the stock repurchase program approved in April 2006. The Trading Plan commenced on June 1, 2006 and purchases have been made by a broker, based upon the guidelines and parameters of the Trading Plan. During the second quarter of 2006, Advent repurchased an aggregate 1.6 million shares of common stock under the repurchase program authorized in April 2006 for a total cash outlay of $52.8 million and at an average price of $33.07 per share. Of the 1.6 million shares repurchased during the second quarter, 1.0 million were repurchased under the Trading Plan.

In July 2006, Advent’s Board approved an additional common stock repurchase program authorizing the repurchase of up to 1.5 million shares of the Company’s common stock. To facilitate the stock repurchase program, stock repurchases may be made through open market or privately negotiated transactions at times and in such amounts as management deems appropriate.

During the third quarter of 2006, Advent repurchased an aggregate 1.3 million shares of common stock under the repurchase programs authorized in April and July 2006 for a total cash outlay of $41.4 million and at an average price of

$31.49 per share. During the nine months ended September 30, 2006, Advent repurchased an aggregate 4.1 million shares for a total cash outlay of $127.9 million and at an average price of $30.95.

Note 11—Commitments and Contingencies

Lease Obligations

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 generally responsible for maintenance, insurance, and property taxes for these facilities.

In January 2006, Advent entered into a definitive lease agreement with Toda whereby the Company leases approximately 105,000 square feet of office space at 600 Townsend Street in San Francisco, California. The Company’s cash obligation under this agreement is approximately $20 million, payable over the ten-year term of the lease. In October 2006, Advent moved its headquarters into the 600 Townsend facility. Additionally, approximately $11 million of leasehold improvements were made, of which $4.2 million were funded by Toda and the remainder was paid by Advent.

In October 2006, Advent extended its lease for its facility located at 619 West 54th Street in New York, New York. See Note 14, “Subsequent Event” for further discussion regarding this lease agreement.

As of September 30, 2006, Advent’s remaining operating lease commitments through 2018, including those related to the 600 Townsend Street and 619 West 54th Street facilities, were approximately $50.6 million, net of future minimum rental receipts of $8.7 million to be received under non-cancelable sub-leases.

Indemnifications

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.

Legal Contingencies

From time to time, Advent is involved in claims and legal proceedings that arise in the ordinary course of business. 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 uncertainties 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.

In September 2003, NetJets Aviation, Inc. (formerly known as Executive Jet Aviation, Inc.) filed suit against B. Douglas Morriss, Rueben Morriss and Barbara Morriss in the Circuit Court of the County of Saint Louis, Missouri for their alleged failure to pay for their use of private jet aircraft leased and managed by plaintiffs. In April 2005, plaintiffs amended their complaint to join approximately 15 additional entities allegedly controlled by B. Morriss as defendants in the suit, including Kinexus Corporation, which was acquired by Advent after the alleged conduct in plaintiffs’ lawsuit. The complaint alleged breach of contract and seeks approximately $1.1 million in damages, as well as interest and attorneys’ fees. At mediation amongst the parties on October 10, 2006, the parties agreed to settle the case and Kinexus agreed to pay $10,000.

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 July 11, 2006, a former independent consultant filed suit against Advent in the Supreme Court of the State of New York. The complaint alleges that Advent failed to pay plaintiff commissions due for his services as a consultant to Advent. The plaintiff is seeking approximately $101,000 in commissions and $2.0 million in unspecified consequential damages, as well as interest and attorney’s fees. 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.

Note 12—Segment and Geographic 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. Advent has determined that its operations are organized into two reportable segments: 1) Advent Investment Management; and 2) MicroEdge. Future changes to this organizational structure may result in changes to the business segments disclosed. 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, matching gifts and volunteer tracking 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 stock-based compensation expense, and amortization 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
	2006			2005		2006		2005
Net revenues:
Advent Investment Management	$	40,975		$	36,957	$	118,573	$	106,513
MicroEdge	5,121			4,986		14,822		14,488
Other	(219		)	833		498		2,091

Total net revenues	$	45,877		$	42,776	$	133,893	$	123,092

	Three Months Ended September 30						Nine Months Ended September 30
	2006			2005			2006			2005
Income from operations:
Advent Investment Management	$	4,210		$	5,409		$	13,883		$	6,864
MicroEdge	1,418			997			3,541			1,947
Other	(573		)	163			(1,518		)	249
Unallocated corporate operating costs and expenses:
Stock-based compensation	(3,448		)	—			(10,097		)	—
Amortization of developed technology	(251		)	(641		)	(909		)	(1,869		)
Amortization of other intangibles	(1,028		)	(997		)	(3,027		)	(3,064		)

Total income from operations	$	328		$	4,931		$	1,873		$	4,127

Major Customers

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

Note 13—Related Party Transactions

As of September 30, 2005, Citigroup, Inc. (“Citigroup”) owned more than 10% of the voting stock of Advent. Effective December 1, 2005, Citigroup sold the Asset Management division of Citigroup Global Markets Inc. to Legg Mason, Inc. (“Legg Mason”). As of December 31, 2005, Citigroup owned less than 5% of the voting stock of Advent. Advent recognized approximately $0.5 million and $1.5 million of revenue from Citigroup during the three and nine months ended September 30, 2005, respectively. The Company’s accounts receivable from Citigroup was $307,000 as of December 31, 2005. As of December 31, 2005 and September 30, 2006, Legg Mason owned approximately 15% of the voting stock of Advent. Advent recognized approximately $0.1 million and $0.3 million of revenue from Legg Mason during the three and nine months ended September 30, 2006 respectively. The Company’s accounts receivable from Legg Mason was $40,000 and $100,000 as of September 30, 2006 and December 31, 2005.

Advent acts as trustee for the Company’s short-term disability plan—Advent Software California Voluntary Disability Plan (“VDI”). Employee withholdings were $69,000 and $273,000 during the three and nine months ended September 30, 2006, respectively. Disbursements on behalf of the VDI were $91,000 and $230,000 during the three and nine months ended September 30, 2006, respectively. Cash held by Advent related to the VDI was $352,000 and $309,000 as of September 30, 2006 and December 31, 2005, respectively, and are included in “other assets” on the condensed consolidated balance sheets.

Note 14—Subsequent Event

On October 25, 2006, the Company entered into a definitive lease extension and modification agreement with 619 Owners Corp. (the “Landlord”) whereby the parties have agreed to extend the lease relating to the entire tenth floor of the facility located at 619 West 54th Street in New York, New York, which the Company currently leases. The pre-existing lease was set to expire on December 31, 2008, and has been extended for a term of ten years, commencing on January 1, 2009, to and including December 31, 2018. Advent’s contractual operating lease obligation to the Landlord under this agreement is approximately $11 million, payable over the ten-year term of the lease.

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 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 that 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, those set forth in “Item 1A. Risk Factors” in this Form 10-Q, 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”, the “Company” and “Advent” refer to Advent Software, Inc. and its subsidiaries.

Overview

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.

Our revenues for the third quarter of 2006 were $45.9 million which was a 7% increase from $42.8 million in the same quarter of 2005. Total expenses, including cost of revenues, for the third quarter of 2006 were $45.5 million, compared with $37.8 million in the same quarter last year.

During the third quarter of 2006, we:

· increased headcount. Total company headcount at September 30, 2006 was 806 which represented an increase of 40 new employees from June 30, 2006. The majority of these new hires were in our sales and services groups, and to a lesser extent in product development.

· expanded customer relationships and acceptance of our product offerings. We signed 80 customer agreements in the third quarter with 8 new Geneva clients and 13 clients choosing Advent Portfolio Exchange (“APX”);

· conducted our Advent Client Conference in Washington, D.C. This was our 20th and largest annual Client Conference with nearly 1,000 participants attending from 42 states and 15 countries; and

· added more term license bookings. In the third quarter, we signed a total of $10.6 million of term licenses with an average term of 2.9 years. These results are in addition to term license bookings of $12.9 million in the second quarter with an average term of 3.1 years and $7.9 million in the first quarter with an average term of 2.5 years.

We are in the midst of converting our software licensing model from a perpetual model to a term model for our Advent Investment Management segment. Under a perpetual model, customers purchase a license to use our software indefinitely and generally we recognize all license revenue at the time of sale; maintenance is purchased under an annual renewable contract, and recognized ratably over the contract period. Under a term model, customers purchase a license to use our software and receive maintenance for a limited period of time and we recognize the revenue ratably over the length of the contract.

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

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

When a customer purchases a term license together with implementation services we do not recognize any revenue under the contract until the implementation services are complete. If the implementation services are still in progress as of a quarter-end, we will defer all of the contract revenues to a subsequent quarter. During the third quarter of 2006, we deferred $1.4 million in total net revenues and $0.4 million of directly related expenses as the implementation services associated with the related term license arrangements were in progress as of September 30, 2006. These deferred amounts reflect both revenues and expenses deferred in the current quarter offset by amounts recognized from previously deferred amounts.

Although the transition to a term model decreases revenues from new contracts in the early periods, we believe this change to our business model is extremely significant for the long term growth and value of the business because it leverages the long-term “stickiness” of Advent’s products and services. We believe that once our products are implemented, our clients are motivated to continue using Advent’s products and services due to improved workflow efficiencies and additional controls they gain over their business.

Total net revenues for the third quarter of 2006 grew 7% over the third quarter of 2005 while our maintenance and recurring revenues were up 17% year over year. Despite our transition to a predominantly term licensing model, we have grown net revenue 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 that we are not requiring to convert to term licenses when they expand the usage (e.g. order additional seats) of products they already own.

During the third quarter of 2006, we recognized approximately 59% of license revenue from term licenses and signed new term licenses with a total contract value for license and maintenance of $10.6 million over the terms of the initial contracts which averaged 2.9 years, as compared to $4.9 million in the third quarter of 2005 with an average term of 3.3 years. Total recurring revenues, which we define as term license, term and perpetual maintenance, and other recurring revenues, have increased to 82% of total revenues during the third quarter of 2006, as compared to 65% during the third quarter of 2004, when we began our transition to a term model.

During the third quarter of 2006, total expenses, including cost of revenues were $45.5 million, compared with $43.9 million in the second quarter of 2006, and $37.8 million in the same quarter last year. Expenses for the third quarter included $1.1 million relating to the 2006 Advent Client Conference. Our expenses came in higher than we expected largely as a result of higher bonus accruals based on strong bookings performance, lower capitalization of expenses under FAS 86 and additional costs resulting from winding down Second Street Securities.

During the first quarter of 2006, we began to wind down the soft dollar business of our SEC-registered broker/dealer subsidiary, Second Street Securities, as it no longer fit with our corporate strategy. Second Street Securities offered our customers the ability to pay for Advent products and other third party services through brokerage commissions and other fee-based arrangements. We continued to wind down the soft dollar business in the third quarter of 2006 and anticipate that this activity will be completed during the fourth quarter of 2006. Subsequent to the wind down of the soft dollar business, Second Street Securities will continue to maintain its broker/dealer status.

On January 1, 2006, we adopted SFAS 123R. As a result of this adoption and due to the issuance of restricted stock units (“RSU’s”) and stock appreciation rights (“SAR’s”) to employees during the nine months of 2006, we recorded stock-based employee compensation expense of $3.4 million in the third quarter of 2006. We earned net income of $952,000, resulting in diluted earnings per share of $0.03 for the third quarter of 2006. In addition, we generated operating cash flow of approximately $10.4 million during the third quarter of 2006.

During the third quarter of 2006, we repurchased 1.3 million shares, under the repurchase programs authorized in April and July 2006, for a total outlay of $41.4 million and an average price of $31.49.

Looking forward, we continue to focus on improving our long-term profitability as we transition to a term license model. While recent economic trends have been positive and our customers have been more willing to commit to new software purchases, improving our profitability will depend upon our introducing new products, licensing software to new and existing customers, selling services to new and existing customers and renewing license, maintenance and recurring revenue contracts at similar levels to those we achieved during fiscal 2005 and the first nine months of 2006. The success of our transition to a term license model will also depend on future renewal rates, which we will evaluate as our term license contracts expire. We will continue our focus on aggressively managing costs. We will also continue to invest in areas we deem appropriate.

Recent Developments

In the latter half of October 2006, we moved our San Francisco, California headquarters facility from 301 Brannan Street to 600 Townsend Street. We expect to have vacated and made the 301 Brannan facility available for sublease before November 30, 2006. Accordingly, we expect to record a restructuring charge of approximately $3 million related to the liability for costs that will continue to be incurred under our 301 Brannan facility for its remaining term without economic benefit.

On October 25, 2006, we entered into a definitive lease extension and modification agreement with 619 Owners Corp. (the “Landlord”) whereby the parties have agreed to extend the lease relating to the entire tenth floor of the facility located at 619 West 54th Street in New York, New York, which we currently lease. The pre-existing lease was set to expire on December 31, 2008, and has been extended for a term of ten years, commencing on January 1, 2009, to and including December 31, 2018. Our contractual operating lease obligation to the Landlord under this agreement is approximately $11 million, payable over the ten-year term of the lease.

Critical Accounting Policies and Estimates

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 the process we use to develop estimates, including those related to product returns, bad debts, investments, intangible assets, income taxes, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe are 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 have earned commissions from customers who used our broker/dealer, Second Street Securities, to “soft dollar” the purchase of non-Advent products and services with “soft dollars”. “Soft dollaring” enabled those 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 consolidated statements of operations. As noted above, we continue to wind down the soft dollar component of Second Street Securities, as it no longer fit with our corporate strategy. We anticipate that we will complete the wind down of soft dollaring Advent or third party products and services through Second Street Securities during the fourth quarter of 2006.

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 reasonably assured. 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 once shipment to the distributor’s customer has taken

place 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 reasonably assured 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 was part of a soft dollar arrangement through our in-house broker/dealer subsidiary, Second Street Securities, for which payment was then required within one year; however, payment terms may vary based on the country in which the agreement is executed. Software licenses are sold with maintenance and, frequently, professional services.

Licenses. We have continued our transition from selling mostly perpetual licenses to selling a mix of perpetual and term licenses, and we expect term license revenue to increase as a proportion of total license revenue in the future. We recognized approximately 59% and 27% of license revenue from term licenses during the third quarter of 2006 and 2005, respectively. Revenue recognition for software licensed under perpetual and term license models differs depending on which type of contract a customer signs:

· Perpetual licenses

We allocate revenue to delivered components, normally the license component of the arrangement, using the residual method, based on vendor specific objective evidence, or VSOE, of fair value of 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. If VSOE of fair value does not exist for any undelivered elements, then the entire arrangement fee is deferred until delivery of that element has occurred.

· Term licenses

Term license contract prices include both the software license fees and maintenance fees, and, as a result, we typically allocate 55% of the contract price to license revenue and 45% to maintenance and recurring revenues, based on our assessment of the relative economic value of the two elements.

To date, we have offered multi-year term licenses by which a customer makes a binding commitment to license the software for a fixed multi-year term — typically three to five years. For multi-year term licenses we have not established VSOE of fair value for the term license and maintenance components, and, as a result, in situations where we are also performing related professional services, we defer all revenue and directly related expenses under the arrangement until the professional services are substantially complete. At the point professional services are substantially completed, we recognize a pro rata amount of the term license and maintenance revenue, professional services fees earned and related expenses, based on the elapsed time from the start of the term license to the substantial completion of professional services. The remaining deferred professional services revenue and related expenses are recognized ratably over the remaining contract length. Term license and maintenance revenue for the remaining contract years is recognized ratably over the remaining period of the contract. When multi-year term licenses are sold and do not include related professional services, we recognize the entire term license and maintenance revenue ratably over the period of the contract term from the effective date of the license agreement.

We occasionally offer single-year term licenses. Revenue on delivered components will be allocated and recognized using the residual method, based on vendor specific objective evidence, or VSOE, of fair value of the undelivered elements (license, maintenance and professional services components), which is specific to us. While fair value of the undelivered professional services component is based on the historical evidence of the Company’s stand-alone sales of these components to third parties, VSOE for the term license and the related maintenance components will be determined by the stated optional renewal rate. If VSOE of fair value does not exist for any undelivered elements, then the entire arrangement fee is deferred until delivery of that element has occurred.

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 normally 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 purchased our software and chose to enter into a soft dollar arrangement through our in-house broker/dealer subsidiary, Second Street Securities, the soft dollar arrangement did 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 two situations where we provide a contractual limited right of return to end-user customers only: in shrink-wrap license agreements for Advent products, and certain MicroEdge products. The shrink-wrap license agreement for Advent products provides for a right of return within seven days of delivery of the software. Certain MicroEdge software license agreements allow for either a thirty-day money back guarantee or 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 to adjust revenue for these situations based on our historical experience. We have recorded sales reserve benefits of $48,000 and $135,000 in the third quarter of 2006 and 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 the credits to license revenue during the three months ended September 30, 2006 and 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 under perpetual licenses in the initial licensing year and charged separately for renewals of annual maintenance in subsequent years. Fair value for maintenance is based upon renewal rates stated in the contracts or, in limited cases, separate sales of renewals to other customers. Generally, we recognize maintenance revenue ratably over the contract term, except in the case of multi-year term license contracts which are described in the “term licenses” section above. We recognized approximately 8% and 3% of maintenance and other recurring revenue from term licenses during the third quarter of fiscal 2006 and 2005, respectively.

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. We recognize revenue from recurring revenue transactions either ratably over the subscription period or as the transactions occur.

Based on our historical experience, we have recorded sales reserve benefits to adjust revenues for estimated returns for maintenance and other recurring revenues of $248,000 and $594,000 for the third quarter of fiscal 2006 and 2005, respectively. We have an algorithm for calculating the value of reserves that takes the last 18 months of experience into account, which resulted in the above credits to revenue in the third quarter of 2006 and 2005.

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 client conferences. We recognize revenue as these professional services are performed except in the case of multi-year term license contracts which are described in the “term licenses” section above. Certain professional services arrangements involve acceptance criteria. In these cases, revenue and directly related expenses are deferred and then recognized upon acceptance.

Based on our historical experience, we have recorded sales reserve benefits to adjust revenues for the estimated returns for professional services and other revenues of $11,000 and $28,000 for the third quarter of fiscal 2006 and 2005, respectively.

Directly related expenses. When we defer service revenues, we also defer the direct costs incurred in the delivery of those services to the extent those costs are recoverable through the future revenues on non-cancellable contracts. We recognize

those deferred costs as costs of professional services revenues proportionally and over the same period that the deferred revenue is recognized as service revenue. When we defer license revenue, we defer the direct incremental costs incurred (i.e. sales commissions earned by the sales force as a part of their overall compensation) related to the license revenues because those costs would not have been incurred but for the acquisition of that contract. We recognize those costs as sales and marketing expense proportionally and over the same period as the license revenues.

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 the fourth quarter of 2003, we determined that based on our history of successive quarterly 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. Since the beginning of 2004, we have continued to maintain a full valuation allowance against our deferred tax assets (except for deferred tax assets in the United Kingdom, Switzerland and the Netherlands) due to our history of losses through fiscal 2004. However, if our recent trend of profitability continues, we may determine that there is sufficient positive evidence to support a reversal of, or decrease in, the valuation allowance. If we were to reverse all or some part of our valuation allowance and recognize all or some part of our deferred tax assets, our financial statements in the period of reversal would reflect an increase in assets on our balance sheet and a corresponding tax benefit to our statement of operations in the amount of the reversal.

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, 2005. 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 2005, we completed our annual impairment test which did not indicate impairment. During the third quarter of 2006, there were no events or circumstances which triggered an impairment review. Therefore, the first step of the impairment test was not necessary to perform.

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.

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 consolidated balance sheets.

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.

Stock-based compensation. Effective January 1, 2006, we adopted the provisions of, and account for stock-based compensation in accordance with, the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards No. 123—revised 2004 (“SFAS 123R”), “Share-Based Payment” which replaced Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. We elected to implement this statement using the modified-prospective method, under which prior periods are not restated for comparative purposes. Under the modified prospective method, the valuation provisions of SFAS 123R apply to new grants and to grants that were outstanding as of the effective date. Estimated compensation expense for grants that were outstanding as of the effective date will be recognized over the remaining service period using the compensation cost estimated for the SFAS 123 pro forma disclosures. We make quarterly assessments of the adequacy of our tax credit pool to determine if there are any deficiencies which require recognition in our condensed consolidated statements of operations.

We currently use the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan shares. The fair value of our restricted stock units is calculated based on the fair market value of our stock on the date of grant. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends.

We estimate the volatility of our common stock based on an equally weighted average of historical and implied volatility of the Company’s common stock. We determined that a blend of historical and implied volatility is more reflective of the market conditions and a better indicator of expected volatility than using purely historical volatility. We estimate the expected life of options granted based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. We base the risk-free interest rate on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.

We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option pricing model. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on the Company’s historical experience over the last ten years.

The guidance in SFAS 123R and SAB 107 is relatively new. The application of these principles may be subject to further interpretation and refinement over time. There are significant differences among valuation models, and there is a possibility that we will adopt different valuation models in the future. This may result in a lack of consistency in future periods and could materially affect the fair value estimate of stock-based payments. It may also result in a lack of comparability with other companies that use different models, methods and assumptions.

The adoption of SFAS 123R had a material impact on our condensed consolidated financial position and results of operations. See Note 3, “Stock Based Compensation”, for further information regarding our stock-based compensation assumptions and expense, including pro forma disclosures for prior periods as if we had recorded stock-based compensation expense.

Recent Accounting Pronouncements

In September 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax provision taken or expected to be taken in a tax return. FIN 48 will be effective beginning in the first quarter of 2007. We are currently evaluating the impact of FIN 48 on our condensed consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS 157 will be effective in the first quarter of 2008. We are currently evaluating the impact of the provisions of SFAS 157.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

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
	2006		2005		2006		2005

Net revenues:
License and development fees	19	%	21	%	20	%	23	%
Maintenance and other recurring	71		65		70		64
Professional services and other	10		14		10		13

Total net revenues	100		100		100		100

Cost of revenues:
License and development fees	1		1		1		1
Maintenance and other recurring	17		17		18		18
Professional services and other	15		10		13		10
Amortization of developed technology	1		1		1		1

Total cost of revenues	33		29		32		30

Gross margin	67		71		68		70

Operating expenses:
Sales and marketing	26		22		27		25
Product development	19		16		19		18
General and administrative	18		19		18		20
Amortization of other intangibles	2		2		2		3
Restructuring charges	—		—		0		1

Total operating expenses	66		59		67		67

Income from operations	1		12		1		3
Interest income and other, net	1		2		2		6

Income before income taxes	2		14		4		9
Provision for (benefit from) income taxes	—		—		(1	)	—

Net income	2	%	14	%	4	%	9	%

NET REVENUES

	Three Months Ended September 30						Nine Months Ended September 30
	2006		2005		Change		2006		2005		Change

Total net revenues (in thousands)	$	45,877	$	42,776	$	3,101	$	133,893	$	123,092	$	10,801

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. Term license contract prices include both the software license fees and maintenance fees, and, as a result, we typically allocate 55% of the contract price to license revenue and 45% to maintenance and recurring revenues, based on our assessment of the relative economic value of the two elements. Professional services and other revenues include fees for consulting, training services, commission revenues from “soft dollaring” of third-party products and services and our client 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 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 are currently transitioning the majority of our license revenue to term license agreements. Once our transition to term licensing is complete, we expect less variability between our major categories of revenues because the variation from large perpetual license deals will decrease.

During the third quarter of 2006, we recorded a catch-up adjustment of approximately $529,000 to net revenues related to three term license invoices which were not sent to customers in a timely manner. The revenue associated with these invoices should have been recorded in three roughly equal quarterly amounts between the fourth quarter of 2005 and the second quarter of 2006. The amount of this adjustment was allocated 55% to license revenue and 45% to maintenance revenue.

We expect total net revenues for the fourth quarter of 2006 to be between $48 million and $50 million, an increase over the third quarter due to seasonality as further noted below.

License and Development Fees

	Three Months Ended September 30									Nine Months Ended September 30
	2006			2005			Change			2006			2005			Change

License and development fees (in thousands)	$	8,610		$	9,169		$	(559	)	$	26,589		$	28,343		$	(1,754	)
Percent of total net revenues	19		%	21		%				20		%	23		%

We typically license our products on a per user basis with the price for each customer varying based on the selection of the products licensed, the number of authorized users and the size of the customer, typically measured by assets under management. 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. The decrease in license revenue and development fees during the three and nine months ended September 30, 2006 reflects our focus on transitioning sales of our core products to a term model where license revenue is amortized over the term of the contract, as opposed to being recognized up front with perpetual contracts. As a result, perpetual license revenue decreased $3.7 million during the third quarter of 2006 versus the comparable period in 2005. Revenue recognized from term license contracts increased $3.1 million to $5.1 million, or 59% of license revenue, during the third quarter of 2006, as compared to $2.5 million, or 27% of license revenue, during the third quarter of 2005. Revenue recognized from term license contracts was approximately 46% and 24% of license revenue during the nine months ended September 30, 2006 and 2005, respectively.

Term sales have the effect of lowering license revenues in the short term, but increase the total potential value of the customer relationship. We continue to sign more contracts on a term basis as term bookings increased from $4.9 million during the third quarter of 2005 to $10.6 million during the third quarter of 2006, which primarily reflects 8 new Geneva customers and 13 new APX customers.

Due to the winding down of our soft dollar business during fiscal 2006, for the three months ended September 30, 2006 and 2005, soft dollar revenues generated by Second Street Securities from Advent-related licenses paid for through soft dollar transactions were zero and $0.2 million, respectively, and represented 0% and 2% of total license and development revenues.

We expect license and development fee revenues to increase in the fourth quarter of 2006, due to certain Assets Under Administration (AUA) clients whom we assess and bill on an annual basis.

Maintenance and Other Recurring Revenues

	Three Months Ended September 30								Nine Months Ended September 30
	2006			2005			Change		2006			2005			Change

Maintenance revenues (in thousands)	$	22,896		$	19,091		$	3,805	$	65,385		$	53,779		$	11,606
Other recurring revenues (in thousands)	9,639			8,680			959		28,736			25,251			3,485
Total maintenance and other recurring revenues (in thousands)	$	32,535		$	27,771		$	4,764	$	94,121		$	79,030		$	15,091
Percent of total net revenues	71		%	65		%			70		%	64		%

The increase in maintenance and other recurring revenues in the three and nine month periods reflected an increase in new maintenance contracts as a result of the increase in the number of new license contracts (both term and perpetual), price increases and service level upgrades to our installed customer base, an increase in demand for our data services and an increase in our recurring revenue sharing. We disclose our maintenance renewal rate one quarter in arrears. The maintenance renewal rate for the second quarter of 2006 of 89% and was within the range of 86% to 90% that we have experienced since the second quarter of 2005. Maintenance revenues increased $3.8 million and $11.6 million during the three and nine months ended

September 30, 2006, respectively, reflecting an increase in new maintenance support contracts as a result of new license contracts, price increases and service level upgrades from maintenance contracts for our installed customer base. Recurring revenue increased by $1.0 million and $3.5 million during the three and nine months ended September 30, 2006, respectively, primarily as a result of increases in revenue sharing from a partner program that began in 2004, as well as increases in volume and prices in our subscription and data management revenue streams, especially Advent Custodial Data (ACD).

Maintenance revenue has remained relatively flat as a proportion of total maintenance and recurring revenues at approximately 68% to 70% in the three and nine months ended September 30, 2006 and 2005. We expect maintenance and recurring revenues will increase slightly in the fourth quarter of 2006 compared to the third quarter, reflecting additions to the customer base and maintenance price increases with existing customers, partially offset by attrition within our existing customer base.

Professional Services and Other Revenues

	Three Months Ended September 30									Nine Months Ended September 30
	2006			2005			Change			2006			2005			Change
Professional services and other revenues (in thousands)	$	4,732		$	5,836		$	(1,104	)	$	13,183		$	15,719		$	(2,536	)
Percent of total net revenues	10		%	14		%				10		%	13		%

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 in a relatively short time period while services related to Geneva and APX 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.

Professional services and other revenues decreased $1.1 million and $2.5 million during the three and nine months ended September 30, 2006, respectively. These decreases are primarily attributable to the net deferral of professional services revenue for the three and nine months ended September 30, 2006, respectively, for services performed on term license implementations which were still in progress as of September 30, 2006. We have experienced an increase of implementation services with the launch of our APX product and sales traction for our Geneva product, which are generally sold under the term license model. As there were more term license implementation projects in progress as of September 30, 2006 compared to the prior year, we have experienced an increase in the deferral of professional services revenue. We deferred net professional services revenues of approximately $0.9 million during the third quarter of 2006 as compared to $0.2 million during the third quarter of 2005. During the nine months ended September 30, 2006, we deferred net professional services revenues of approximately $4.2 million as compared to only $0.7 million during the corresponding period of 2005. In addition, revenues earned from third party products paid for through soft dollar transactions decreased due to fewer transactions as we continued our winding down the soft dollar business of Second Street Securities beginning in the first quarter of 2006. These decreases in professional services and other revenues were offset by $0.9 million in revenue generated during the third quarter of 2006 from our Annual Client Conference held in September 2006 previously held in the fourth quarter of 2005.

We expect revenues from professional services to remain relatively flat in the fourth quarter of 2006 compared to the third quarter. Our third quarter of 2006 results include $0.9 million of revenue from the annual Advent Client Conference, which will not recur in the fourth quarter of 2006. However, in the fourth quarter we expect this decrease in revenue will be offset by approximately $0.5 million of revenue generated by the MicroEdge Client Conference, which was held in October 2006.

Revenues by Segment

	Three Months Ended September 30								Nine Months Ended September 30
	2006			2005		Change			2006		2005		Change
	(in thousands)
Advent Investment Management	$	40,975		$	36,957	$	4,018		$	118,573	$	106,513	$	12,060
MicroEdge	5,121			4,986		135			14,822		14,488		334
Other	(219		)	833		(1,052		)	498		2,091		(1,593		)

Total	$	45,877		$	42,776	$	3,101		$	133,893	$	123,092	$	10,801

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, matching gifts and volunteer tracking for the grant-making community worldwide.

The 11% increase in AIM’s revenue in both the three and nine months ended September 30, 2006 reflected an increase in new maintenance support contracts as a result of new license contracts, price increases and service level upgrades from maintenance contracts for our installed customer base.

The slight increases in MicroEdge revenues in the three and nine months ended September 30, 2006 primarily reflected increase in maintenance revenues due to price increases and continued strong customer retention.

The revenue decreases in our Other segment primarily resulted from the winding down of the soft dollar business of our broker/dealer subsidiary. During this transition, we determined that we needed to write-off certain broker receivable balances. Due to our requirement to report revenue net of expenses for this segment, the write-off resulted in negative revenues during the three months ended September 30, 2006 since we have no significant revenue to offset the write-off in the period.

COST OF REVENUES

	Three Months Ended September 30								Nine Months Ended September 30
	2006			2005			Change		2006			2005			Change

Total cost of revenues (in thousands)	$	15,241		$	12,532		$	2,709	$	42,697		$	37,517		$	5,180
Percent of total net revenues	33		%	29		%			32		%	30		%

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
	2006			2005			Change		2006			2005			Change

Cost of license and development fees (in thousands)	$	356		$	328		$	28	$	1,141		$	968		$	173
Percent of total license revenues	4		%	4		%			4		%	3		%

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. These costs have remained relatively flat during the three months ended September 30, 2006 compared to the prior year period. The increase in costs for the nine months ended September 30, 2006 primarily reflect increases in payroll and related expenses, higher utilization of outside contractors and royalties. Payroll related expenses increased by $76,000 due to an additional employee in the department during fiscal 2006 as compared to fiscal 2005. Higher utilization of outside services also contributed to $48,000 of the increase during the nine months ended September 30, 2006. We expect cost of license and development fees to remain flat in the fourth quarter of 2006 compared to the third quarter of 2006.

Cost of Maintenance and Other Recurring

	Three Months Ended September 30								Nine Months Ended September 30
	2006			2005			Change		2006			2005			Change

Cost of maintenance and other recurring (in thousands)	$	7,740		$	7,314		$	426	$	23,680		$	21,951		$	1,729
Percent of total maintenance revenue	24		%	26		%			25		%	28		%

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 during the three and nine months ended September 30, 2006 was due primarily to an increase in compensation and related costs of $744,000 and $1.7 million, respectively, resulting from an increase in stock-based compensation costs and headcount. Specifically, stock-based compensation costs, which are included in compensation and related costs, of $198,000 and $722,000 were recognized during the three and nine months ended September 30, 2006, respectively, as a result of implementing SFAS 123R effective January 1, 2006, and from issuing RSU’s and SAR’s to employees during 2006. Payroll related expenses increased by $513,000 and $946,000 during the three and nine months ended September 30, 2006 as a result of an increase in headcount. This increase was offset by a decrease in royalty expense of $316,000 and $276,000 for the three and nine months ended September 30, 2006. We expect cost of maintenance and other recurring revenues to increase consistent with the associated revenue increase in the fourth quarter of 2006 compared to the third quarter of 2006.

Cost of Professional Services and Other

	Three Months Ended September 30								Nine Months Ended September 30
	2006			2005			Change		2006			2005			Change

Cost of professional services and other (in thousands)	$	6,894		$	4,249		$	2,645	$	16,967		$	12,729		$	4,238
Percent of total professional services revenues	146		%	73		%			129		%	81		%

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 increases in the 2006 periods primarily reflect the cost of Advent’s Annual Client Conference, increases in payroll and related costs, recruiting expenses, and travel costs. Our annual Advent client conference was held in September this year and we recorded approximately $1.1 million of costs during the third quarter of 2006. In the prior year, our client conference was held in the fourth quarter and therefore we recorded no client conference costs in the third quarter of 2005. Payroll related expenses increased by $1.3 million and $1.9 million during the three and nine months ended September 30, 2006 as a result of an increase in headcount and stock based compensation. To keep pace with the strong demand for our products in 2006, we have increased headcount in our professional services group. Headcount increased to 117 at September 30, 2006 from 93 at September 30, 2005, primarily reflecting increases in our client services and consulting groups. Stock-based compensation costs of $172,000 and $593,000, which are included in payroll related expenses, were recognized during the three and nine months ended September 30, 2006, respectively, as a result of implementing SFAS 123R effective January 1, 2006, and from issuing RSU’s and SAR’s to employees during 2006. Consistent with the increase in headcount, recruiting costs increased by $90,000 and $315,000 during the three and nine months ended September 30, 2006, respectively. In addition, travel expenses increased by $143,000 and $666,000 during the three and nine months ended September 30, 2006, respectively, due to travel associated with more professional service projects. Costs for the nine months ended September 30, 2006 also reflect $0.6 million of write-offs and reserves incurred in the first quarter of 2006 associated with third party products paid through soft dollar transactions.

These increases in costs were partially offset by larger net deferrals of professional services costs under SOP 97-2 related to services performed on term license implementations which were in progress at period end. We have experienced an increase of implementation services with the launch of our APX product and sales traction for our Geneva product, which are principally sold under the term license model. As there were more term license implementation projects in progress as of September 30, 2006 compared to the prior year, we have experienced an increase in the deferral of professional service costs. We deferred net professional services costs of $0.9 million during the third quarter of 2006 compared to only $0.2 million during the third quarter of 2005. We deferred net professional services costs of $4.2 million during the nine months ended September 30, 2006 compared to only $0.7 million in the corresponding period of 2005.

Gross margins for the three and nine months ended September 30, 2006 were negatively impacted by our deferral of professional services costs under SOP 97-2 as we defer only the direct costs associated with services performed on term license arrangements which were in progress at each quarter-end. As a result, indirect costs such as management and other overhead expenses are recognized in the period in which they arise, with no revenue to offset them. In addition, we have added headcount in both our client services and consulting groups. Since these new employees undergo a training period to become fully functional or billable, their associated costs have a near-term negative impact on margins. Gross margin for the nine months ended September 30, 2006 was also impacted by the $0.6 million of write-offs and reserves incurred in the first quarter of 2006 associated with third party products paid through soft dollar transactions. Excluding the effects of our deferrals and the headcount increases, we forecast a 5-10% gross margin on our professional services. However, we presently expect our deferrals and headcount increases to negatively affect our professional services gross margins for the foreseeable future.

We expect cost of professional services and other revenues to decrease in the fourth quarter of 2006 compared to the third quarter. Of the expected decrease, $1.1 million is attributed to Advent’s Annual Client Conference held in September 2006 which will not recur in the fourth quarter, partially offset by $0.5 million of MicroEdge client conference related expenses.

Amortization of Developed Technology

	Three Months Ended September 30									Nine Months Ended September 30
	2006			2005			Change			2006			2005			Change

Amortization of developed technology (in thousands)	$	251		$	641		$	(390	)	$	909		$	1,869		$	(960	)
Percent of total net revenues	1		%	1		%				1		%	2		%

Amortization of developed technology represents amortization of acquisition-related intangible assets and internal product development costs. The decrease in amortization of developed technology reflected technology related intangible assets from prior acquisitions becoming fully amortized during fiscal 2005 and the first nine months of 2006. We expect amortization of developed technology to be approximately $0.3 million in the fourth quarter of 2006.

OPERATING EXPENSES

Sales and Marketing

	Three Months Ended September 30								Nine Months Ended September 30
	2006			2005			Change		2006			2005			Change

Sales and marketing (in thousands)	$	12,115		$	9,453		$	2,662	$	36,466		$	29,990		$	6,476
Percent of total net revenues	26		%	22		%			27		%	25		%

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 increase in expense for the three and nine months ended September 30, 2006 was primarily due to stock-based compensation expense of $1.3 million and $3.7 million, respectively, as a result of implementing SFAS 123(R), effective January 1, 2006, and from issuing RSU’s and SAR’s to employees during 2006. We incurred approximately $0.2 million and $0.5 million of bad debt expense during the three and nine months ended September 2006, respectively, associated with the winding down of our soft dollar business. Travel expenses increased by $370,000 and $554,000 for the three and nine months ended September 30, 2006, respectively. Payroll related expenses increased by $724,000 during the three months ended September 30, 2006 as a result of higher bonuses resulting from strong bookings performance and an increase in headcount. Payroll related expenses increased by only $549,000 during the nine months ended September 30, 2006 as our average headcount in our sales and marketing group during the first half of 2006 was less than the comparable period in 2005. This resulted in a decrease in payroll related expenses during the first half of 2006 but an overall increase of $549,000 increase during the nine months ended September 30, 2006. We allocated payroll and related costs of certain IT personnel from general and administrative expense to sales and marketing expense as these IT employees were working on specific projects relating to the sales and marketing function. We expect sales and marketing expenses to be up in the fourth quarter of 2006 compared to the third quarter of 2006, due primarily to corporate marketing programs and year-end compensation accelerators.

Product Development

	Three Months Ended September 30								Nine Months Ended September 30
	2006			2005			Change		2006			2005			Change

Product development (in thousands)	$	8,849		$	6,800		$	2,049	$	25,599		$	22,567		$	3,032
Percent of total net revenues	19		%	16		%			19		%	18		%

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 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 capitalized costs will be amortized using the greater of the ratio of the products current gross revenues to the total of current expected gross revenues or on a straight-line basis over the software’s estimated economic life of approximately three years.

The increase in product development expense during the three and nine months ended September 30, 2006 was primarily due to stock-based compensation expense of $0.7 million and $2.2 million, respectively, as a result of implementing SFAS 123(R), effective January 1, 2006, and from issuing RSU’s and SAR’s to employees during 2006. In addition, payroll and other related costs increased by $1.6 million and 1.2 million during the three and nine months ended September 30, 2006 as a result of an increase in headcount and less capitalization of product development costs under SFAS 86. During the three and nine months ended September 30, 2006, we capitalized $4,000 and $898,000 of software development costs, whereas we capitalized $819,000 and $1.3 million during the comparable periods of 2005. We expect product development expenses to be flat to slightly down in the fourth quarter of 2006 compared to the third quarter as we expect more products to enter their beta phase and will therefore capitalize more costs under SFAS 86 compared to the third quarter of 2006. The effect of the expected SFAS 86 capitalization will be partially offset by expected headcount growth.

General and Administrative

	Three Months Ended September 30								Nine Months Ended September 30
	2006			2005			Change		2006			2005			Change

General and administrative (in thousands)	$	8,262		$	7,947		$	315	$	23,911		$	24,108		$	(197	)
Percent of total net revenues	18		%	19		%			18		%	20		%

General and administrative expenses consist primarily of personnel costs for finance, administration, operations and general management, as well as legal and accounting expenses. During the three and nine months ended September 30, 2006, we allocated payroll and related costs for certain IT personnel to sales and marketing expense and cost of professional services as these IT employees were working on specific projects relating to these functions. The overall fluctuations were also attributable to lower legal fees of $0.3 million and $1.1 million during the three and nine months ended September 30, 2006 as the comparative 2005 periods included costs for various legal disputes. Decreases in depreciation expense of $0.3 million and $0.9 million for the three and nine months ended September 30, 2006, respectively, also contributed to the overall decrease in general and administrative expense which primarily resulted from assets being fully depreciated subsequent to September 30, 2005 and also from the exit of one floor of our office space in New York, New York in the second quarter of 2005. Outside service costs decreased by $636,000 and $650,000 for the three and nine months ended September 30, 2006 as fewer external consultants were used during that period. These decreases were offset by increases in stock-based compensation expense of $1.1 million and $2.9 million during the three and nine months ended September 30, 2006, respectively, as a result of adopting SFAS 123R in the first quarter of 2006, and from issuing RSU’s and SAR’s to employees during 2006 and an increase in rent expense of approximately $251,000 and $869,000 during the three and nine months ended September 30, 2006, respectively. We entered into a definitive lease agreement in January 2006 for our new headquarters facility located at 600 Townsend Street in San Francisco, California and since then we have incurred rent expense at both 600 Townsend and our prior headquarter facility located at 301 Brannan Street resulting in higher rent expense for 2006. Also, accounting fees increased $0.3 million and $0.4 million during the three and nine months ended September 30, 2006, respectively, due to higher external Sarbanes-Oxley compliance costs. We expect general and administrative expenses to be down slightly in the fourth quarter of 2006 compared to the third quarter as we expect a decrease in rent expense resulting from the exit of our 301 Brannan facility in San Francisco, California.

Amortization of Other Intangibles

	Three Months Ended September 30								Nine Months Ended September 30
	2006			2005			Change		2006			2005			Change

Amortization of other intangibles (in thousands)	$	1,028		$	997		$	31	$	3,027		$	3,064		$	(37	)
Percent of total net revenues	2		%	2		%			2		%	3		%

Amortization of other intangibles represents amortization of non-technology related intangible assets. Amortization of other intangibles has remained flat during the three and nine months ended September 30, 2006 as we continue to amortize our non-technology intangibles through their estimated useful lives. We expect amortization of other intangibles to be approximately $1.0 million in the fourth quarter of 2006.

Restructuring Charges

	Three Months Ended September 30									Nine Months Ended September 30
	2006			2005			Change			2006			2005			Change

Restructuring charges (in thousands)	$	54		$	116		$	(62	)	$	320		$	1,719		$	(1,399	)
Percent of total net revenues	0		%	0		%				0		%	1		%

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

During the three months ended September 30, 2006, we recorded a restructuring charge of $54,000 which related to the present value amortization of facility exit obligations. During the three months ended June 30, 2006, we recorded a restructuring charge of $124,000 which related to the costs to exit a portion of our facility in New Rochelle, New York, and our entire facility in Summit, New Jersey as well as the fair value amortization of prior period obligations. During the three months ended March 31, 2006, Advent recorded a net restructuring charge of $141,000 primarily to adjust original estimates for facilities in San Francisco, California and New York, New York.

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 Chrysler East 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.

	Facility Exit			Severance and
	Costs			Benefits			Total

Balance of restructuring accrual at December 31, 2005	$	4,553		$	7		$	4,560
Cash payments	(1,298		)	—			(1,298		)
Reversal of deferred rent related to facilities exited	6			—			6
Restructuring charges	134			—			134
Adjustment of prior restructuring costs	189			(3		)	186
Balance of restructuring accrual at September 30, 2006	$	3,584		$	4		$	3,588

Of the remaining restructuring accrual of $3.6 million at September 30, 2006, $0.8 million and $2.8 million are included in accrued liabilities and other long-term liabilities, respectively, on the accompanying condensed consolidated balance sheet. As of September 30, 2006, the remaining excess facility costs of $3.6 million are stated at estimated fair value, net of estimated sublease income of approximately $7.5 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 2006. As a result of our restructuring activities implemented to date, we have reduced our total expenses by approximately $15 million on an annual basis. We anticipate incurring a restructuring charge of approximately $3 million in relation to our corporate headquarters facility move in the fourth quarter of 2006.

Operating Income by Segment

	Three Months Ended September 30									Nine Months Ended September 30
	2006			2005			Change			2006			2005			Change
	(in thousands)
Advent Investment Management	$	4,210		$	5,409		$	(1,199	)	$	13,883		$	6,864		$	7,019
MicroEdge	1,418			997			421			3,541			1,947			1,594
Other	(573		)	163			(736		)	(1,518		)	249			(1,767		)
Unallocated corporate operating costs and expenses
Stock-based compensation	(3,448		)	—			(3,448		)	(10,097		)	—			(10,097		)
Amortization of developed technology	(251		)	(641		)	390			(909		)	(1,869		)	960
Amortization of other intangibles	(1,028		)	(997		)	(31		)	(3,027		)	(3,064		)	37

Total operating income	$	328		$	4,931		$	(4,603	)	$	1,873		$	4,127		$	(2,254	)

Operating income for the AIM segment decreased by $1.2 million and increased $7.0 million during the three and nine months ended September 30, 2006, respectively. As noted in the “net revenues” section above, we recorded a catch-up adjustment of approximately $529,000 related to three term license invoices which were not sent to customers in a timely manner during the third quarter of 2006. The effect of this adjustment positively effected AIM’s net revenues and operating income for the three and nine months ended September 30, 2006. The decrease of $1.2 million in AIM’s operating income for the third quarter of 2006 reflected higher costs of $1.1 million from our Annual Advent Client Conference held in September 2006 (previously held in the fourth quarter of 2005), payroll related costs associated with the AIM’s increase in headcount, lower SFAS 86 capitalization of software development costs, and higher bonuses accruals based on strong bookings performance. These decreases were partially offset by AIM’s revenue growth of $4.0 million during the three months ended September 30, 2006. The increase in AIM’s operating income for the nine months ended September 30, 2006 generally reflected the increase in AIM’s revenue of $12.1 million partially offset by higher payroll related expenses associated with the increase in headcount and less SFAS 86 capitalization.

MicroEdge’s operating income increased by $0.4 million and $1.6 million during the three and nine months ended September 30, 2006 primarily due to decreased marketing costs and outside services cost associated with lower utilization of outside contractors.

Operating losses for our Other segment increased by $0.7 million and $1.8 million during the three and nine months ended September 30, 2006, due to decreases in revenue and incurring costs resulting primarily from the winding down of our soft dollar business in 2006.

Interest Income and Other, Net

	Three Months Ended September 30									Nine Months Ended September 30
	2006			2005			Change			2006			2005			Change

Interest income and other, net (in thousands)	$	656		$	977		$	(321	)	$	3,054		$	6,586		$	(3,532	)
Percent of total net revenues	1		%	2		%				2		%	5		%

Interest income and other, net consists of interest income, realized gains and losses on investments and foreign currency gains and losses. The decrease in interest income during the three months ended September 30, 2006 was a result of our lower cash balance, as we liquidated part of our portfolio to fund the significant stock repurchases in fiscal 2006. Interest income and other, net during the nine months ended September 30, 2005 included a gain on sale of a private equity investment of $3.6 million during the second quarter of 2005, accounting for the majority of the decrease of $3.5 million during the nine months ended September 30, 2006.

Provision For (Benefit From) Income Taxes

	Three Months Ended September 30									Nine Months Ended September 30
	2006			2005			Change			2006			2005			Change

Provision for (benefit from) income taxes (in thousands)	$	32		$	62		$	(30	)	$	(1,030	)	$	192		$	(1,222	)
Percent of total net revenues	0		%	0		%				-1		%	0		%

For the three and nine months ended September 30, 2006, we recorded a provision for income taxes of $32,000 and a benefit from income taxes of $1.0 million respectively, compared to provisions of $62,000 and $192,000 in the three and nine months ended September 30, 2005, respectively. 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 that it was more likely than not that these deferred tax assets would not be realized in the foreseeable future. The small provision for income taxes for the three months ended September 30, 2006 is primarily due to statutory income tax expense being fully offset by a decrease in the valuation allowance and the recognition of some foreign deferred tax benefits. The benefit from income taxes of $1.0 million for the nine months ended September 30, 2006 is primarily due to the receipt of a state income tax refund of $0.5 million and a reduction in other projected tax liabilities associated with the expiration of a federal income tax return contingency of approximately $0.6 million.

If our recent trend of profitability continues, we may determine that there is sufficient positive evidence to support a reversal of, or decrease in, the valuation allowance. We continue to monitor and evaluate the facts pertaining to the possible recoverability of our deferred tax assets. One of the key indicators we are monitoring is the rolling twelve-quarter cumulative pre-tax net income or loss position at the end of each quarter. At the end of the third quarter, this indicator still showed a cumulative loss suggesting that we have not yet fully recovered from the period of quarterly losses in 2003 and 2004. If we were to reverse all or some part of our valuation allowance and recognize all or some part of our deferred tax assets, our condensed consolidated financial statements would reflect an increase in assets on our balance sheet and a corresponding tax benefit to our statement of operations in the amount of the reversal. Once we have removed our valuation allowance, we will resume providing for income taxes at the statutory rate. Despite this potential increase in our effective tax rate, our cash payments for income taxes will continue to be nominal in the near term as we have significant net operating losses, capital losses and credit carryforwards to utilize against current income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Our aggregate cash, cash equivalents and marketable securities were $60.9 million at September 30, 2006, compared with $163.4 million at December 31, 2005, primarily as a result of the repurchase of our common stock. 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
	2006			2005

Net cash provided by operating activities	$	31,752		$	24,451
Net cash provided by investing activities	$	46,938		$	49,087
Net cash used in financing activities	$	(117,088	)	$	(39,080	)

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 during the nine months ended September 30, 2006 of $31.8 million was primarily the result of our net income adjusted for non-cash charges including stock-based compensation, depreciation and amortization. Other sources of cash during the nine months ended September 30, 2006 included increases in deferred rent and deferred revenue. The increase in deferred rent resulted from the entry into a material definitive lease agreement on January 2006 for our new headquarters facility located at 600 Townsend Street in San Francisco. The increase in deferred revenue primarily reflected our continued transition to a term license model. Under the term model, we generally bill and collect for a term arrangement in equal installments in advance of each annual period. These amounts are deferred at billing and recognized over the annual term period. This has the effect of increasing deferred revenue when compared with a perpetual license model where no license revenue is deferred. See further discussion of the effects of our transition to a term model in the “Overview” section. Uses of our operating cash included a reduction of our sales reserves, an increase in our prepaid and other assets and decreases in accrued liabilities and income taxes payable. The increase in prepaid and other assets primarily reflected a receivable established for the tenant improvement allowance associated with our 600 Townsend lease agreement, which was partially offset by cash payments by the lessor during the nine months ended September 30, 2006. The decreases in accrued liabilities reflected cash payments for December 31, 2005 liabilities including year-end payables and bonuses, commissions, payroll taxes, settlement of claims of certain former members and employees of Advent Outsource Data Management, and legal costs associated with the discovery phase of the Kinexus earnout litigation. The decrease in income taxes payable during the nine months ended September 30, 2006 reflected cash payments related to state income taxes and reductions in other projected tax liabilities.

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 adjusted for 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 revenues 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.

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 $46.9 million for the nine months ended September 30, 2006, consisted primarily of net sales and maturities of marketable securities of $64.5 million. During the nine months ended September 30, 2006, we liquidated investments to provide the cash required to repurchase our common stock. These cash proceeds were offset by capital expenditures of $15.5 million, a change in restricted cash of $1.3 million to secure a bank line of credit associated with the lease of our new headquarter facilities, and capitalized software development costs of $0.8 million.

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.

Cash Flows from Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2006 of $117.1 million reflected the repurchase of 4.1 million shares of our common stock for $127.9 million, partially offset by proceeds received from the issuance of common stock of $10.8 million.

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.

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 programs approved by our Board. As of September 30, 2006, approximately 0.9 million shares were available to be repurchased under the share repurchase plan that was approved by the Board and publicly announced in July 2006.

At September 30, 2006, we had $14.1 million in working capital. We currently have no significant capital commitments other than commitments under our operating leases, which increased from $21.9 million at December 31, 2005 to $50.6 million at September 30, 2006, primarily as a result of our entry into lease agreements in January and October 2006 for our facilities located at 600 Townsend Street in San Francisco, California and 619 West 54th Street in New York, New York, respectively.

The following table summarizes our contractual cash obligations, including those related to the 619 West 54th Street facility, as of September 30, 2006 (in thousands):

	Three Months Ended
	December 31		Year Ended December 31
	2006		2007		2008		2009		2010		Thereafter		Total
Operating lease obligations, net of sub-lease income	$	1,701	$	5,944	$	7,156	$	5,090	$	4,779	$	25,887	$	50,557

At September 30, 2006 and December 31, 2005, 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 expect that for the foreseeable future, our operating expenses and stock repurchases 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, and investment requirements for at least the next twelve months. If we continue to repurchase our stock in amounts in excess of our operating cash flows, we may be required to restrict our investing activities or obtain additional liquidity through debt or other financing activities. There can be no assurance that debt or other financing activities will be available to us at that time.

Off-Balance Sheet Arrangements and Contractual Obligations

Our off-balance sheet arrangements as of September 30, 2006 consist primarily of obligations under operating leases. See Note 11, “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.

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 Netherlands, and 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. We do not believe that a

hypothetical 10% change in foreign currency exchange rates would have a material 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 $27.0 million in cash equivalents and $28.2 million in marketable securities as of September 30, 2006. 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, 2006 and December 31, 2005 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 0.12% ($67,000), 0.24% ($135,000) and 0.49% ($270,000), respectively, in the market value of our investment portfolio as of September 30, 2006.

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, 2006 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 weaknesses in internal control over financial reporting which were 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, 2005 (“2005 10-K”) have not yet both been remediated, our disclosure controls and procedures were ineffective as of September 30, 2006 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, 2006 that have materially affected, or are reasonably likely to materially affect, Advent’s internal control over financial reporting.

Management has implemented the following remedial actions during 2006 to address the material weakness relating to the accounting and disclosure of stock-based employee compensation expense identified in our 2005 10-K:

· Established a communication process for identifying stock compensation agreements with non-standard vesting terms or performance vesting conditions between the Compensation Committee of the Board of Directors, human resources, and finance departments.

· Upgraded and enhanced our Equity Edge stock administration software.

· Improved the skills, knowledge and experience available to the Company through attendance of stock administration training and conferences.

· Utilized external consultants to validate our process for the calculation of stock-based compensation expense. Specifically, the Company used these additional resources to ensure that the calculation of stock-based compensation

expense is adequately prepared. In addition, the Company has made available external consultants to provide equity compensation guidance to the Company’s management, when necessary.

· Improved the level of expertise in the calculation and review of: i) option grant agreements, including stock compensation agreements with non-standard vesting terms or performance vesting conditions, and ii) preparation of our stock-based employee compensation expense recognized in the Company’s financial statements effective with the adoption of SFAS 123R in the first quarter of 2006 through the hiring of a stock administration manager and allocation of additional finance personnel to these areas.

· Improved the documentation of the calculation and accounting procedures for equity compensation.

Based upon the remedial actions taken to date, management believes the above changes will result in remediation of the material weakness relating to the accounting and disclosure of stock-based employee compensation expense. However, to date, management has not completed its testing of the internal controls over the accounting and disclosure of stock-based employee compensation. Additionally, our independent registered public accounting firm has not yet performed their evaluation of management’s assessment and their own audit of the Company’s internal control over financial reporting.

Management continues to work on and believes that it has made progress towards remediating the material weakness in accounting for income taxes identified in our 2005 10-K. We have implemented quarterly controls to include the benefit from the reversal of the deferred tax liability associated with the amortization of intangible assets of our European subsidiaries. However, a significant amount of accounting for income taxes occurs during the fourth quarter of each year and therefore the remediation cannot be considered tested or complete until the end of the fiscal year. Advent intends to complete the remediation of this material weakness during the fourth quarter of 2006.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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.

In September 2003, NetJets Aviation, Inc. (formerly known as Executive Jet Aviation, Inc.) filed suit against B. Douglas Morriss, Rueben Morriss and Barbara Morriss in the Circuit Court of the County of Saint Louis, Missouri for their alleged failure to pay for their use of private jet aircraft leased and managed by plaintiffs. In April 2005, plaintiffs amended their complaint to join approximately 15 additional entities allegedly controlled by B. Morriss as defendants in the suit, including Kinexus Corporation, which was acquired by Advent after the alleged conduct in plaintiffs’ lawsuit. The complaint alleges breach of contract and seeks approximately $1.1 million in damages, as well as interest and attorneys’ fees. At mediation amongst the parties on October 10, 2006, the parties agreed to settle the case and Kinexus agreed to pay $10,000.

On July 11, 2006, a former independent consultant filed suit against the Company in the Supreme Court of the State of New York. The complaint alleges that Advent failed to pay plaintiff commissions due for his services as a consultant to Advent. The plaintiff is seeking approximately $101,000 in commissions and $2.0 million in unspecified consequential damages, as well as interest and attorney’s fees. We dispute the plaintiffs’ claims and believe that we have meritorious defenses and intend to vigorously defend this action. Management believes that any potential loss associated with this litigation is neither probably 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. 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 1A. Risk Factors

Investors should carefully consider the risks described below before making an investment decision. The trading price of our common stock could decline due to any of, but are not limited to, these risks. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q filed with the SEC, including our consolidated financial statements and related notes thereto.

Our Operating Results May Fluctuate Significantly.

Although we are transitioning to a predominantly term license model, perpetual licenses still constituted approximately 41% of our third quarter of 2006 software license revenues, while declining significantly from the third quarter of 2005. Until we substantially complete our transition to a term license model, our license revenues will be negatively impacted by the continued reduction in perpetual license revenue and by the relatively slower revenue recognition associated with the term license model, which is typically three to five years. During the nine months ended September 30, 2006, we recognized 46% of license revenue from term licenses as compared to approximately 24% of license revenue from term licenses in fiscal 2005, 11% in 2004 and 4% in 2003. Term license contracts are comprised of both software licenses and maintenance services and we typically allocate 55% of the term revenue to license and 45% of the term revenue to maintenance, based on the relative economic value of these two elements. Individual 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 perpetual 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 transition to term license revenue recognition and 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. However, over the long-term, we expect that increases in deferred license revenue associated with the term license model 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 in the long term.

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 and the Timing of Specific Implementations.

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 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 was exacerbated by the adverse and uncertain economic conditions in 2002 and 2003 that 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 since then, 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. 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. When a customer purchases a term license together with implementation services we do not recognize any revenue under the contract until the implementation services are substantially complete. If we are not able to complete an implementation project for a term license in a quarter, it will cause us to defer all of the contract revenues to a subsequent quarter. Because our expenses are relatively fixed in the near term, any shortfall from anticipated revenues could result in a significant variation in our operating results from quarter to quarter.

We Depend Heavily on Our Products, Axys® and APX.

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 next several years a majority of our net revenues will depend upon continued market acceptance of Axys, as well as initial acceptance of APX and 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;

· our ability to upgrade those firms to our new product, APX; and

· our ability to introduce APX to new customers.

Uncertain Economic and Financial Market 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 and poor performance of major 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 economy and 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 gave 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, and that future uncertainty about financial markets and the financial services sector could have a material adverse effect on our revenues.

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 the following vendors: the APL subsidiary of CheckFree Corporation, Blackbaud, BNY ConvergEx Group (formerly “Eze Castle Software”), Charles River Development, DST International, the Eagle subsidiary of Mellon Financial Corporation, FT Interactive Data, IBSI, Indata, Kintera, LatentZero, Linedata, the Macgregor subsidiary of Investment Technology Group, Schwab Performance Technologies, Simcorp A/S, SS&C Technologies (“SS&C”), SunGard Data Systems, 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. In addition, consolidation has occurred among some of the competitors in our markets. In 2005, three of Advent’s competitors were acquired with the possibility

of forming even larger companies through additional acquisitions of companies and technologies. In April 2005, Financial Models Company, Inc. was acquired by SS&C. Sunshine Acquisition Corporation, a private equity firm affiliated with the Carlyle Group, later acquired SS&C in November 2005. SunGard was taken private after being acquired by a consortium of private equity investment firms in August 2005 and merged into Solar Capital Corporation. Any further consolidations among our competitors may result in stronger competitors in our markets and may therefore either result in a loss of market share or harm our results of operations. 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, such as our APX product, or product enhancements, that address the future needs of our target markets and to respond to their changing standards and practices. We may not be successful in developing, introducing, marketing and licensing our 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. 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.

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. 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 reporting significant compensation costs.

We may also choose to create additional performance and retention incentives in order to retain our employees, including the granting of additional stock options, restricted stock, restricted stock units, stock appreciation rights, performance shares or performance units 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 GmbH, an independent distributor of our products in selected European markets. In November 2001, we acquired the Norwegian, Swedish, and Danish subsidiaries of this independent distributor. In September 2002, we purchased their Greek subsidiary (“Advent Hellas”), which we subsequently sold in the fourth quarter of 2005; 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 such as in the case of Advent Hellas. 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 and similarly in the fourth quarter of 2005, we disposed of our Advent Hellas subsidiary because of less than satisfactory profitability. 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. We have incurred 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. Furthermore, we may face other unanticipated costs with our acquisitions, such as the disputes involving earnout and incentive compensation amounts we have experienced with our Kinexus and Advent Outsource acquisitions.

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.

Impairment of Investments Could Harm Our Results of Operations.

We have made and may make future investments in privately held companies, many of which are considered in the start-up or development stages. These investments, which we classify as other assets on our consolidated balance sheets, are inherently

risky, as the market for the technologies or products these companies have under development is typically in the early stages and may never materialize. The value of the investment in these companies 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-down of our investments of $2.0 million in fiscal 2003. Furthermore, we cannot be sure that future investment, license, fixed asset or other asset write-downs will not occur. 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 May Fluctuate 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 trading commissions (“soft dollar arrangements”) to pay for software products and services, both through our broker/dealer subsidiary, Second Street Securities, and through other independent broker/dealers. During fiscal 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”.

In October 2005, the SEC invited comments from interested parties on its proposed interpretation of the regulations relating to soft dollars and bundled commissions in response to the findings of the task force, and on July 18, 2006, the SEC issued its interpretative release, which may affect our clients ability to use soft dollar arrangements to pay for Advent products and services, in which case our revenues could decrease. The Company is in the process of continuing to evaluate the impact, if any, of this release.

During the third quarter of 2006, we continued the wind down of the “soft dollar” component of our SEC-registered broker/dealer subsidiary, Second Street Securities, as it no longer fits with our corporate strategy. Second Street Securities offered our customers the ability to pay for Advent products and other third party products and services through brokerage commissions and other fee-based arrangements.

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 and we do not have any patents. 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. 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 and Uncertain Political Conditions 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. Further, such disruptions could cause instability in the financial markets upon which we depend.

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

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, such as our APX product, 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.

Changes in Securities Laws and Regulations May Increase Our Costs.

The Sarbanes-Oxley Act (“the Act”) of 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 and 2005, we incurred approximately $2.1 million and $1.8 million, respectively, in Sarbanes-Oxley related expenses consisting of external consulting costs and auditor fees, and the Company anticipates spending a similar amount for its 2006 compliance activities. In addition, such developments may make retention and recruitment of qualified persons to serve on our board of directors, or as executive officers 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.

Changes in, or Interpretations of, Accounting Principles Could Result in Unfavorable Accounting Charges

We prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. These principles are subject to interpretation by us, the SEC and various bodies formed to interpret and create accounting principles. A change in these principles or a change in the interpretations of these principles, can have a significant effect on our reported results and may even retroactively affect previously reported transactions. Our accounting principles that recently have been or may be affected include:

· Software revenue recognition

· Accounting for stock-based compensation

· Accounting for income taxes

· Accounting for business combinations and related goodwill

In particular, the FASB recently issued SFAS 123R which requires the measurement of all stock-based compensation to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our condensed consolidated statements of income. We were required to adopt SFAS 123R in the first quarter of fiscal 2006. The adoption of SFAS 123R had a significant adverse effect on our reported financial results. It will continue to significantly adversely affect our reported financial results and may impact the way in which we conduct our business.

If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods or if we decide to use a different valuation model, the future periods may differ significantly from what we have recorded in the current period and could materially affect our operating income, net income and net income per share.

We currently use the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan shares. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics not present in our option grants and employee stock purchase plan shares. Existing valuation models, including the Black-Scholes and lattice binomial models, may not provide reliable measures of the fair values of our stock-based compensation. Consequently, there is a risk that our estimates of the fair values of our stock-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those stock-based payments in the future. Certain stock-based payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly higher than the fair values originally estimated on the grant date and reported in our financial statements. There currently is no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values.

Refer to Note 3, “Stock-Based Compensation”, for further information regarding the adoption of SFAS 123R.

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, 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 cannot 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, 2005, the Company did not maintain effective controls over the accounting for income taxes, including the determination of deferred income tax liabilities and the related income tax provision. Specifically, the Company did not have adequate controls to (i) include the benefit from the reversal of the deferred tax liability associated with the amortization of intangible assets of its European subsidiaries, or (ii) properly estimate the reduction in the valuation allowance associated with the deferred tax assets in the United States, in the calculation of its income tax provision for the quarters ending March 31, 2004 and 2005, September 30, 2004 and 2005 and September 30, 2004 and 2005. This control deficiency resulted in adjustments to the fourth quarter of 2004 and 2005 financial statements and a restatement of the Company’s financial statements for each of the first three quarters of fiscal 2004 and 2005. Additionally, this control deficiency could result in a misstatement to the deferred income tax liabilities and income tax provision accounts that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected.

The Company also did not maintain effective controls over the accuracy, presentation and disclosure of the pro forma stock-based compensation expense in conformity with generally accepted accounting principles as of December 31, 2005. Specifically, the Company did not maintain effective controls to ensure that pro forma stock-based compensation expense from non-routine stock compensation arrangements, including those with non-standard vesting terms or performance vesting provisions, were expensed over the proper attribution period. As a result of this control deficiency, the Company’s disclosure of stock-based compensation expense for fiscal 2003 and 2004 and first three quarters of 2004 and 2005 have been revised. Additionally, this control deficiency could result in a misstatement of stock-based compensation expense that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected.

Management has determined that these control deficiencies constituted material weaknesses as of December 31, 2005. Consequently, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2005 based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.

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.

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

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

Our current expectation is that our fiscal 2006 pre-tax income will range from breakeven to a modest amount, due primarily to the impact of expensing for stock options under SFAS 123R, which we implemented on January 1, 2006. One element of our quantitative analysis of any control deficiency is its actual or potential financial impact, and any impact that is

greater than 5% of our pre-tax income (loss) in any quarter may be more likely to result in that deficiency being determined to be a significant deficiency or a material weakness. Accordingly, our projection of fiscal 2006 pre-tax income at a breakeven level to a modest profit will make it statistically less likely for us and our independent registered public accounting firm to determine that a control deficiency is not a material weakness.

In addition, if management or our independent registered public accountants identify errors in our interim or annual financial statements during 2006, it is statistically more likely that such errors may meet the quantitative threshold established under Staff Accounting Bulletin No. 99, “Materiality”, that could, depending upon the complete qualitative and quantitative analysis, result in our having to restate previously issued financial statements.

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

Issuer Purchases of Equity Securities

In May 2004, the Board authorized the repurchase of 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. In March 2006, Advent completed this common stock repurchase program. During the first quarter of 2006, Advent repurchased 1.2 million shares of common stock under this repurchase program at a total cost of $33.7 million and an average price of $27.60 per share. Since the inception of this program in May 2004 through March 2006, Advent repurchased 4.8 million shares for a total cost of $98.2 million and an average price of $20.43 per share.

In April and July 2006, Advent’s Board authorized the repurchase of an additional 2.3 million and 1.5 million shares, respectively, of the Company’s outstanding common stock. See Note 10, “Common Stock Repurchase Programs”, to the condensed consolidated financial statements for further information. During the third quarter of 2006, Advent repurchased 1.3 million shares of common stock under this repurchase program at a total cash outlay of $41.4 million and an average price of $31.49 per share.

The following table provides a month-to-month summary of the repurchase activity during the three months ended September 30, 2006 under the stock repurchase programs approved by the Board in April and July 2006:

				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 2006	705	$	31.53	1,500
August 2006	612	$	31.44	888
September 2006	—	$	—	888

Total	1,317	$	31.49	888

(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, 2006	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-Q2006 Q3 Quarterly report

Content analysis

Note 11—Commitments and Contingencies

OPERATING EXPENSES

Operating Income by Segment