Advent Software 10-K/A 2003 FY Annual report (amended)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

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

For the fiscal year ended December 31, 2003.

or

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

Commission file number: 0-26994

ADVENT SOFTWARE, INC.

(Exact name of registrant as specified in its charter)

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

301 Brannan Street, San Francisco, California 94107

(Address of principal executive offices and zip code)

(415) 543-7696

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Acts: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 par value

(Title of Class)

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  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

The number of shares of the Registrant’s Common Stock outstanding as of June 30, 2003 was 32,329,925. The aggregate market value of the Registrant’s Common Stock held by non-affiliates, based upon the closing price on June 30, 2003, as reported on the NASDAQ National Market System, was approximately $522 million. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of February 20, 2004, there were 33,083,734 shares of the Registrant’s Common Stock outstanding.

TABLE OF CONTENTS

PART II
	Item 8.	Financial Statements and Supplementary Data	3
PART IV
	Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	38

INTRODUCTORY NOTE

This Form 10-K/A is being filed solely for the purpose of amending the Company’s consolidated financial statements related to:

• correction of an accounting error in the allocation of the purchase price in Advent’s common stock repurchases in 2001, 2002 and 2003 affecting the additional paid-in capital and retained earnings amounts in the consolidated balance sheets and statements of stockholders’ equity in Item 8; and

• correcting errors in Advent’s stock option activity in 2001, 2002 and 2003 affecting the “options available for grant” table in Note 11 of Item 8.

This amendment corrects information regarding additional paid-in capital and retained earnings on the consolidated balance sheets and statements of stockholders’ equity. Advent’s income statement, cash and cash equivalents, total stockholders’ equity and shares of common stock outstanding are unaffected by these adjustments for all periods. The amendment also corrects the options available for grant table in Note 11. This Form 10-K/A does not reflect events occurring after the filing of the original Form 10-K, or modify or update the disclosures therein in any way other than as required to reflect the amendment set forth below.

2

PART II

Item 8. Financial Statements and Supplementary Data

ADVENT SOFTWARE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

	December 31,
	2003			2002
ASSETS
Current assets:
Cash and cash equivalents	$	83,334		$	78,906
Marketable securities		76,738			94,923
Accounts receivable, net of allowance for doubtful accounts of $641 and $1,410		15,891			20,218
Prepaid expenses and other		11,526			11,373
Income taxes receivable		1,639			6,289
Deferred income taxes		—			4,714
Total current assets		189,128			216,423
Property and equipment, net		23,381			28,001
Goodwill		86,504			67,349
Other intangibles, net		30,495			41,157
Other assets, net		15,438			80,980
Total assets	$	344,946		$	433,910
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,320		$	2,637
Accrued liabilities		17,245			14,704
Deferred revenues		34,566			31,918
Income taxes payable		8,206			5,817
Total current liabilities		61,337			55,076
Deferred income taxes		2,812			—
Other long-term liabilities		2,338			5,479
Total liabilities		66,487			60,555
Commitments and contingencies (See Note 8)
Stockholders’ equity:
Preferred stock; $0.01 par value: 2,000 shares authorized; none issued		—			—
Common stock; $0.01 par value: 120,000 shares authorized; 32,938 and 32,853 shares issued and outstanding		329			329
Additional paid-in capital(restated)		340,394			339,622
Retained earnings (accumulated deficit)(restated)		(71,093	)		30,412
Accumulated other comprehensive income		8,829			2,992
Total stockholders’ equity		278,459			373,355
Total liabilities and stockholders’ equity	$	344,946		$	433,910

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

3

ADVENT SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Year Ended December 31,
	2003			2002			2001
Net revenues:
License and development fees	$	29,386		$	46,260		$	78,257
Maintenance and other recurring		86,483			83,359			64,187
Professional services and other		21,290			29,817			27,771
Total net revenues		137,159			159,436			170,215
Cost of revenues:
License and development fees		2,460			1,877			2,909
Maintenance and other recurring		30,396			25,141			18,432
Professional services and other		17,601			17,807			15,169
Amortization of developed technology		6,567			4,847			1,868
Total cost of revenues		57,024			49,672			38,378
Gross margin		80,135			109,764			131,837
Operating expenses:
Sales and marketing		44,754			56,577			44,540
Product development		34,857			40,352			28,247
General and administrative		23,217			20,903			14,824
Amortization of other intangibles		7,854			6,015			2,826
Purchased in-process research and development		—			1,450			—
Restructuring charges		9,112			—			—
Total operating expenses		119,794			125,297			90,437
Income (loss) from operations		(39,659	)		(15,533	)		41,400
Interest income and other expense, net		3,526			5,854			8,273
Loss on investments		(1,998	)		(13,521	)		(2,000	)
Income (loss) before income taxes		(38,131	)		(23,200	)		47,673
Provision for (benefit from) income taxes		59,412			(3,964	)		16,208
Net income (loss)	$	(97,543	)	$	(19,236	)	$	31,465
Basic net income (loss) per share	$	(3.00	)	$	(0.57	)	$	0.98
Diluted net income (loss) per share	$	(3.00	)	$	(0.57	)	$	0.89
Weighted average shares:
Basic		32,473			33,659			32,148
Diluted		32,473			33,659			35,383

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

4

ADVENT SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the years ended December 31, 2003, 2002 and 2001

(in thousands)

	Common Stock					Additional Paid-in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Shares		Amount
Balances, December 31, 2000	30,498		$	305		$	154,070		$	55,156		$	70		$	209,601
Exercise of stock options	1,356			13			15,408									15,421
Tax benefit from exercise of stock options							16,807									16,807
Common stock issued under employee stock purchase plan	69			2			2,907									2,909
Stock-based compensation							148									148
Common stock issued in secondary offering, net	2,550			26			138,014									138,040
Common stock repurchased and retired(restated)	(430	)		(4	)		(3,907	)		(10,899	)					(14,810	)
Warrant							5,000									5,000
Net income										31,465						31,465
Unrealized loss on marketable securities, net of tax													(196	)		(196	)
Foreign currency translation adjustments													4			4
Comprehensive income																31,273
Balances, December 31, 2001(restated)	34,043			342			328,447			75,722			(122	)		404,389
Exercise of stock options	836			8			12,210									12,218
Tax benefit from exercise of stock options							8,948									8,948
Common stock issued under employee stock purchase plan	164			1			3,306									3,307
Common stock issued in connection with an acquisition							1,782									1,782
Stock-based compensation							(2	)								(2	)
Common stock repurchased and retired(restated)	(2,355	)		(24	)		(23,569	)		(26,074	)					(49,667	)
Warrant	165			2			8,500									8,502
Net loss										(19,236	)					(19,236	)
Unrealized loss on marketable securities, net of tax													(17	)		(17	)
Foreign currency translation adjustments													3,131			3,131
Comprehensive loss																(16,122	)
Balances, December 31, 2002(restated)	32,853			329			339,622			30,412			2,992			373,355
Exercise of stock options	874			8			7,800									7,808
Common stock repurchased and retired (restated)	(1,000	)		(10	)		(10,337	)		(3,962	)					(14,309	)
Common stock issued under employee stock purchase plan	211			2			2,781									2,783
Stock-based compensation							501									501
Tax benefit from exercise of stock options							27									27
Net loss										(97,543	)					(97,543	)
Unrealized loss on marketable securities, net of tax													(33	)		(33	)
Foreign currency translation adjustments													5,870			5,870
Comprehensive loss																(91,706	)
Balances, December 31, 2003 (restated)	32,938		$	329		$	340,394		$	(71,093	)	$	8,829		$	278,459

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

5

ADVENT SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Year Ended December 31,
	2003			2002			2001
Cash flows from operating activities:
Net income (loss)	$	(97,543	)	$	(19,236	)	$	31,465
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Tax benefit from exercise of stock options		27			8,948			16,807
Non-cash stock compensation		411			(2	)		148
Depreciation and amortization		23,160			19,142			10,434
Purchased in-process research and development		—			1,450			—
Provision for (reduction of) doubtful accounts		(683	)		2,407			3,105
Other than temporary loss on investments		1,998			13,816			2,000
Non-cash restructuring charges and impairment loss		2,739			—			—
(Gain) loss on investments		(35	)		368			—
Deferred income taxes		61,598			(7,713	)		(6,009	)
Other		66			(191	)		476
Changes in operating assets and liabilities:
Accounts receivable		5,151			22,609			(17,670	)
Prepaid and other assets		3,817			3,257			(5,569	)
Income taxes receivable		4,650			(6,289	)		—
Accounts payable		(2,325	)		(1,150	)		(432	)
Accrued liabilities		(935	)		(5,124	)		886
Deferred revenues		2,581			(457	)		4,559
Income taxes payable		2,372			(1,878	)		2,799
Net cash provided by operating activities		7,049			29,957			42,999
Cash flows from investing activities:
Net cash used in acquisitions		(9,877	)		(89,010	)		(30,113	)
Purchases of property and equipment		(6,803	)		(6,708	)		(9,109	)
Purchases of other investments		—			(10,060	)		(13,992	)
Proceeds from sales of other investments		—			1,967			—
Purchases of marketable securities		(155,833	)		(145,191	)		(198,779	)
Sales and maturities of marketable securities		173,083			171,425			132,264
Deposits and other		—			(6,079	)		—
Net cash provided by (used in) investing activities		570			(83,656	)		(119,729	)
Cash flows from financing activities:
Proceeds from exercises of stock options		7,808			12,218			15,421
Proceeds from issuance and exercise of warrants		—			2			5,000
Common stock repurchased		(14,309	)		(49,667	)		(14,810	)
Proceeds from issuance of common stock		—			—			145,630
Costs from issuance of common stock		—			—			(7,590	)
Proceeds from common stock issued under the employee stock purchase plan		2,783			3,307			2,909
Repayment of capital leases		(141	)		(134	)		—
Net cash provided by (used in) financing activities		(3,859	)		(34,274	)		146,560
Effect of exchange rate changes on cash and cash equivalents		668			85			(23	)
Net increase (decrease) in cash and cash equivalents		4,428			(87,888	)		69,807
Cash and cash equivalents at beginning of period		78,906			166,794			96,987
Cash and cash equivalents at end of period	$	83,334		$	78,906		$	166,794
Supplemental disclosure of cash flow information:
Cash paid for income taxes, net of refunds	$	(3,318	)	$	5,378		$	1,988
Cash paid for interest	$	70		$	12		$	4

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

6

ADVENT SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Business description: We provide stand-alone and client/server software products, data and data interfaces and related maintenance and services that automate, integrate and support certain mission-critical functions of the front, middle and back offices of investment management organizations. Our clients vary significantly in size and assets under management and include investment advisors, brokerage firms, banks, hedge funds, corporations, public funds, foundations, universities and non-profit organizations.

Principles of consolidation: The consolidated financial statements include the accounts of Advent and its wholly-owned subsidiaries. All intercompany transactions and amounts have been eliminated.

Foreign currency translation: The functional currency of our foreign subsidiaries is their local currencies. All assets and liabilities denominated in foreign currency are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues, costs and expenses are translated at the average rate of exchange during the period.

Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements. Actual results could differ from those estimates.

Fair value of financial instruments: The amounts reported for cash equivalents, marketable securities, receivables, and accounts payable are considered to approximate their market values based on comparable market information available at the respective balance sheet dates and their short-term nature.

Cash and cash equivalents: Cash equivalents are comprised of highly liquid investments purchased with an original or remaining maturity of 90 days or less. These securities are maintained with major financial institutions.

Marketable securities: All of our marketable securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of any related tax effect, reported in accumulated comprehensive income in stockholders’ equity in the accompanying consolidated financial statements. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in interest income and other expense, net.

Investments: Investments are included in other assets and consist of non-marketable investments in privately held companies, most of which can be considered in the start-up or development stages. One of these investments is accounted for under the equity method of accounting because our Chief Executive Officer is a member of the investee’s board of directors. Our portion of net income or loss for this investment has not been significant to date and is included in interest income and other expense, net in our statement of operations. The remaining investments are carried at the lower of cost or fair value. Our investments in privately held companies are considered impaired when a review of the investee’s operations indicates that the decline in value of the investment is other than temporary. Such indicators include, but are not limited to, limited capital resources, limited prospects of receiving additional financing, and prospects for liquidity of the related securities. Impaired investments in privately held companies are written down to estimated fair value.

Product development: Product development expenses consist primarily of salary, benefits, and contractors’ fees for our development and technical support staff, and other costs associated with the enhancements of

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ADVENT SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

existing products and services and development of new products and services. Costs incurred for software development prior to technological feasibility are expensed as product development costs in the period incurred. Once the point of technological feasibility is reached, development costs are capitalized until the product is available for general release. Capitalized costs are then amortized on a straight-line basis over the estimated useful life or on the ratio of current revenue to the total projected product revenue, whichever is greater. To date, the period between achieving technology feasibility, which we define as the establishment of a working model and which typically occurs when beta testing commences, and the general availability of such software has been short. As such, software development costs qualifying for capitalization have been insignificant and therefore no costs have been capitalized to date.

Capitalization of internal use software: Costs incurred for web site design, creation and maintenance of content, graphics and user interface are expensed as incurred. Costs for development of internal use software are capitalized and amortized over their estimated useful lives ranging from two to five years. Costs of $734,000, $414,000 and $836,000 related to development of internal use software were capitalized in 2003, 2002 and 2001, respectively.

Property and equipment: Property and equipment are stated at cost, less accumulated depreciation and amortization. We calculate depreciation and amortization using the straight-line method over the assets’ estimated useful lives. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the estimated useful life of the assets or the remaining lease term. The cost and related accumulated depreciation applicable to property and equipment sold or no longer in service are eliminated from the accounts and any gains or losses are included in interest income and other expense, net. Useful lives by principal classifications are as follows:

Office equipment	5 to 6 years
Computers and software	3 to 6 years
Leasehold improvements	3 to 11 years

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

Goodwill: Goodwill represents the excess of the purchase price of an acquired enterprise or assets over the fair values of the identifiable assets acquired and liabilities assumed. On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS 142), “Goodwill and Other Intangible Assets”, which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. We complete our annual impairment test in the fourth quarter of each year. In accordance with SFAS 142, the Company continued to amortize goodwill related to acquisitions completed prior to July 1, 2001, through December 31, 2001. The goodwill balances associated with acquisitions completed prior to July 1, 2001 were amortized over four to seven years years using the straight-line method. Consistent with SFAS 142, the Company has not amortized goodwill related to acquisitions completed subsequent to June 30, 2001, but instead test the balance for impairment annually.

In accordance with SFAS 142, the Company tests for impairment whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable, or at least once a year. These tests are performed at the reporting unit level using a two-step, fair-value based approach. Advent has determined that it has only one reporting unit. The first step compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, the second step, used to measure the amount of impairment loss, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds

8

ADVENT SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. During the fourth quarter of 2003, as part of our annual impairment test, we completed the first step which did not indicate impairment. Therefore, the second step of the impairment test was not necessary.

Accounting for long-lived assets: We review property and equipment and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors we consider important which could trigger an impairment review include the following (1) significant underperformance relative to expected historical or projected future operating results; (2) significant changes in the manner of our use of the acquired assets or the strategy for our overall business; (3) significant negative industry or economic trends; (4) significant decline in our stock price for a sustained period; and (5) our market capitalization relative to net book value. Recoverability is measured by comparison of the assets’ carrying amount to their expected future undiscounted net cash flows. If such assets are considered to be impaired, the impairment loss to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value.

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

Completed technology	3 to 7 years
Agreements	5 to 7 years
Customer base and trade names	3 to 7 years

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

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 and determinable and collection of the resulting receivable is reasonably assured. We use a signed license agreement as evidence of an arrangement. Sales through our distributors, primarily Advent Europe Holdings, our European distributor, are evidenced by a master agreement governing the relationship together with binding order forms and signed contracts from the distributor’s customers. Revenue is recognized upon shipment to the distributor’s customer and when all other revenue recognition criteria have been met. Delivery occurs when product is delivered to a common carrier F.O.B shipping point. While many of our arrangements generally do not include acceptance provisions, certain complex deals may involve acceptance criteria. If acceptance provisions are provided, delivery is deemed to occur upon acceptance. We assess whether the fee is fixed and 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, and other available information and pertinent country risk if the customer is located outside of the United States. Software licenses are sold with

9

ADVENT SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

maintenance and, frequently, professional services. We allocate revenue to delivered components, normally the license component of the arrangement, using the residual value method, based on objective evidence of the fair value of the undelivered elements, which is specific to us. We offer term licenses as an alternative to perpetual licenses and recognize revenue for term licenses ratably over the period of the contract term. To date, revenue from term licenses has not been material.

Development fees are derived from contracts that we have entered into with other companies, including customers and development partners. Agreements for which we receive development fees generally provide for the development of technologies and products that are expected to become part of our 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.

If a customer chooses to enter into a “soft dollar” arrangement through our in-house broker/dealer subsidiary, Second Street Securities, the “soft dollar” arrangement does not change or modify the original fixed or determinable fee in the written contract. The customer is required to pay the original fee 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, on limited occasions allowed customers to return software and have recorded sales returns reserves as offsets to revenue in the period the sales return becomes probable.

We do have three situations where we provide a contractual limited right of return to end-user customers only: in shrink-wrap license agreements for Advent products, our MicroEdge product and our NPO product. The shrink-wrap license agreement for Advent product provides for a right of return within seven days of delivery of the software. The MicroEdge software license agreements allow for a thirty-day money back guarantee. The NPO license agreement allows for a seven-day right of return. We recognize revenue on delivery since the fee is fixed and determinable, the buyer is obligated to pay, the risk of loss passes to the customer, and we have the ability to estimate returns. Our ability to estimate returns is based on a long history of experience with relatively homogenous transactions and the fact that the return period is short. We have recorded a sales returns reserve (contra revenue account) to account for these situations based on our historical experience.

Maintenance and other recurring revenues: We offer annual maintenance programs that provide for technical support and updates to our software products. Maintenance fees are charged in the initial licensing year and at renewals of annual maintenance in subsequent years. We offer other recurring revenue services that are either subscription-based or transaction-based, and primarily include the provision of software interfaces with, and the capability to download securities information from, third party data providers. Fair value for maintenance is based upon renewal rates stated in the contracts or, in limited cases, separate sales of renewals to other customers. We recognize revenue for maintenance ratably over the contract term. We recognize revenue from recurring revenue transactions either ratably over the subscription period or as the transactions occur.

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

Professional services and other revenues: We offer a variety of professional services that include project management, implementation, data conversion, integration, custom report writing and training. Fair value for

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ADVENT SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 revenues also include revenue from our semi-annual user conferences. We recognize revenues as these professional services are performed.

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

Allowance for doubtful accounts and sales returns: We analyze specific accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. We also analyze customer demand and acceptance of our product and historical returns when evaluating the adequacy of the allowance for sales returns, which are not generally provided to our customers. Allowances for sales returns are accounted for as deductions of net revenues and increases to reserves within deferred revenues.

Advertising costs:We expense advertising costs as incurred. Total advertising expenses were $78,000, $85,000, and $73,000 for the years ended December 31, 2003, 2002, and 2001, respectively.

Stock-based compensation:We use the intrinsic value method to account for all of our stock-based employee compensation plans and have adopted the disclosure-only alternative of Statement of Financial Accounting Standards (SFAS) No. 123 “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148,“Accounting for Stock-Based Compensation”. We are required to disclose the pro forma effects on operating results as if we had elected to use the fair value approach to account for all our stock-based employee compensation plans. Stock-based compensation for non-employees is based on the fair value of the related stock or options.

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

If compensation had been determined based on the fair value at the grant date for awards in 2003, 2002 and 2001, consistent with the provisions of SFAS No. 123, our net income (loss) and net income (loss) per share for the year ended December 31, 2003, 2002 and 2001, respectively, would have been as follows:

	Year Ended December 31,
	2003			2002			2001
	(in thousands, except per share data)
Net income (loss)—as reported	$	(97,543	)	$	(19,236	)	$	31,465
Stock-based employee compensation expense (credit) included in reported net income (loss), net of related tax effects		501			(2	)		148
Total stock-based employee compensation expense determined under fair value based method for all awards granted since 1996, net of related tax effects		(12,101	)		(14,113	)		(12,825	)
Net income (loss)—pro forma	$	(109,143	)	$	(33,351	)	$	18,788
PER SHARE DATA
Basic
Net income (loss)—as reported	$	(3.00	)	$	(0.57	)	$	0.98
Net income (loss)—pro forma	$	(3.36	)	$	(0.99	)	$	0.58
Diluted
Net income (loss)—as reported	$	(3.00	)	$	(0.57	)	$	0.89
Net income (loss)—pro forma	$	(3.36	)	$	(0.99	)	$	0.53

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Such pro forma disclosures may not be representative of future compensation costs because options vest over several years and additional grants are made each year.

The weighted-average grant-date fair value of options granted were $17.86, $39.85 and $26.32 per option for the years ended December 31, 2003, 2002, and 2001, respectively. The weighted-average grant-date fair value of the Employee Stock Purchase Plan rights were $13.75, $15.73 and $19.56 per option for the years ended December 31, 2003, 2002, and 2001, respectively.

The fair value of each option grant and the Employee Stock Purchase Plan rights were estimated on the date of grant using the Black-Scholes valuation model with the following weighted average assumptions:

	Year Ended December 31,
	2003		2002		2001
Stock Options
Risk-free interest rate	2.67	%	3.80	%	4.50	%
Volatility	71.3	%	71.8	%	65.9	%
Expected life	5 years		5 years		5 years
Expected dividends	None		None		None
Employee Stock Purchase Plan
Risk-free interest rate	1.10	%	1.60	%	3.70	%
Volatility	71.8	%	71.8	%	65.9	%
Expected life	6 months		6 months		6 months
Expected dividends	None		None		None

Income taxes: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 be recognized as deferred tax assets and liabilities. Generally accepted accounting principles require us to evaluate the realizability of our 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 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 future benefit from net deferred tax assets, recent losses must be given substantially more weight than any projections of future profitability.

Net income (loss) per share: Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for that period. Diluted net income per share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential shares consist of incremental common shares issuable upon exercise of stock options and warrants and conversion of preferred stock (none outstanding) for all periods.

Comprehensive income (loss): Comprehensive income (loss) consists of net income (loss), net unrealized foreign currency translation adjustment and net unrealized gains or losses on available-for-sale marketable securities and is presented in the consolidated statements of stockholders’ equity.

Segment information:We have determined that we have a single reportable segment consisting of the development, marketing and sale of stand-alone and client/server software products, data interfaces and related maintenance and services that automate, integrate and support certain mission critical functions of investment management organizations. International sales represented 12% of our net revenues for the year ended

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December 31, 2003, and less than 10% for the years ended December 31, 2002 and 2001. No one customer accounted for more than 10% of our net revenues for the years ended December 31, 2003, 2002, and 2001.

Certain risks and concentrations:Our product revenues are concentrated in the computer software industry, which is highly competitive and rapidly changing. Significant technological changes in the industry or customer requirements, or the emergence of competitive products with new capabilities or technologies could adversely affect operating results. Additionally, we derive a majority of our revenues from licensing our Axys application and its ancillary products and services, and therefore its market acceptance is essential to our success.

Financial instruments that potentially subject us to concentrations of credit risks comprise, principally, cash, short-term marketable securities, and trade accounts receivable. We invest excess cash through banks, mutual funds, and brokerage houses primarily in highly liquid securities and have investment policies and procedures that are reviewed periodically to minimize credit risk. Our marketable securities consist of diversified investment grade securities traded in the United States of America. We believe no significant concentration of credit risk exists with respect to these securities.

With respect to accounts receivable, we perform ongoing credit evaluations of our customers and generally do not require collateral. We maintain reserves for potential credit losses on customer accounts when deemed necessary. At December 31 2003, 2002 and 2001 no customer accounted for more than 10% of accounts receivable or 10% of revenues for the years then ended.

Reclassifications:Certain prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications had no effect on results of operations or stockholders’ equity.

Recent Accounting Pronouncement: In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”),“Consolidation of Variable Interest Entities.” FIN 46 expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes where (a) the equity investors in the entity do not have the characteristics of a controlling financial interest or (b) the equity investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both (primary beneficiary). The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period ending after March 15, 2004. Disclosure requirements apply to any financial statements issued after January 31, 2003. We continue to evaluate the provisions of FIN 46 with respect to our independent European distributor to determine whether this distributor is a variable interest entity and, if so, if we are the primary beneficiary. It is reasonably possible that we would have to consolidate this distributor, but we do not believe it will have a material impact on our financial results.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Marketable Securities

At December 31, 2003, marketable securities were summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Aggregate Fair Value
	(in thousands)
Corporate debt securities and commercial paper	$	132,968	$	72	$	(98	)	$	132,942
U.S. government debt securities		14,032		3		(1	)		14,034
Municipal debt securities		700		—		—			700
Corporate equity securities		667		—		(77	)		590
Total	$	148,367	$	75	$	(176	)	$	148,266
Reported as:
Cash and cash equivalents								$	71,528
Short-term marketable securities									76,738
Total								$	148,266

The following table summarizes the maturities of marketable securities at December 31, 2003:

	Amortized Cost		Aggregate Fair Value
	(in thousands)
Less than one year	$	90,625	$	90,531
Due after one or more years		57,742		57,735
Total	$	148,367	$	148,266

All our marketable securities are classified as available-for-sale. Management has the ability and intent, if necessary, to liquidate any of these investments in order to meet our liquidity needs within the normal operating cycle. Accordingly, all marketable securities are classified as current assets. Marketable debt securities totaling $71.5 million have maturities less than three months and are classified as cash and cash equivalents. The remaining is included in short-term marketable securities. Gross realized gains on sales of marketable debt securities were $139,000, $560,000, $587,000 in 2003, 2002 and 2001, respectively.

At December 31, 2002, marketable securities were summarized as follows:

	Amortized Cost		Unrealized Gains		Unrealized Losses			Aggregate Fair Value
	(in thousands)
Corporate debt securities and commercial paper	$	85,956	$	78	$	—		$	86,034
U.S. government debt securities		26,602		79		(1	)		26,680
Municipal debt securities		34,366		120		—			34,486
Corporate equity securities		662		—		(327	)		335
Total	$	147,586	$	277	$	(328	)	$	147,535
Reported as:
Cash and cash equivalents								$	52,612
Short-term marketable securities									94,923
Total								$	147,535

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3. Acquisitions

Advent Netherlands BV

In May 2003, we purchased all of the common stock of Advent Netherlands BV from our independent European distributor for cash consideration of $9.5 million and $69,000 in acquisition costs. There is also a potential earn-out distribution to the selling members of up to $1.6 million through December 31, 2003 under a formula based on revenue results for the eight months ended December 31, 2003 plus 50% of any operating margins which exceed 20% for the year ending December 31, 2004. The earn-out distribution will be allocated to goodwill, if earned. Through December 31, 2003, no additional consideration had been earned or paid.

The acquisition was accounted for as a purchase transaction and accordingly, the tangible assets and liabilities acquired were recorded at their fair value at the date of acquisition. The amounts allocated to identifiable intangibles were determined based upon management’s estimates using established valuation techniques. The results of operations of Advent Netherlands BV were included in our consolidated financial statements subsequent to the acquisition date.

The allocation of the Advent Netherlands BV purchase price was as follows:

	Estimated Remaining Useful Life	Purchase Price Allocation
		(in thousands)
Goodwill		$	8,908
Customer relationships	5 Years		347
Sub-licensing agreement	5 Years		1,875
Non-compete agreements	1 Year		70
Tangible assets			1,809
Current liabilities			(2,600	)
Deferred tax liabilities			(800	)
Total purchase price		$	9,609

Goodwill is not expected to be deductible for tax purposes under Internal Revenue Code 197.

Advent Outsource Data Management, LLC.

In November 2002, we purchased all of the outstanding membership interests of Advent Outsource Data Management, LLC. (“Advent Outsource”), formerly Outsource Data Management, LLC. for $947,000, including $184,000 in acquisition costs. Advent Outsource is an outsource solution provider of portfolio reconciliation and reporting services via the internet. This acquisition was consistent with our strategy to add products and services that meet the needs of a wide variety of sectors in the financial services industry by adding outsourcing capabilities to the solutions we offer our clients, particularly in the financial planning and independent broker/dealer areas.

In addition to the initial cash consideration, there is also a potential earn-out distribution to the selling members of up to $5 million through December 31, 2004 under a formula based on revenue results for the years ending December 31, 2003 and 2004, which, if paid, will result in an increase to goodwill. Through December 31, 2003 no additional consideration had been earned or paid.

The acquisition was accounted for as a purchase transaction and accordingly, the tangible assets and liabilities acquired were recorded at their fair value at the date of the acquisition. The amounts allocated to

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ADVENT SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

identifiable intangibles were determined based upon management’s estimates using established valuation techniques. The results of operations of Advent Outsource were included in our consolidated financial statements subsequent to the acquisition date.

The purchase price allocation was as follows:

	Estimated Remaining Useful Life	Purchase Price Allocation
		(in thousands)
Goodwill		$	1,700
Licensing agreements	7 years		3,700
Existing technologies	2 years		400
Tangible assets			230
Current liabilities			(1,383	)
Long-term liabilities			(3,700	)
Total purchase price		$	947

Goodwill was determined to be deductible for tax purposes under Internal Revenue Code 197.

Advent Hellas

In September 2002, we acquired all of the common stock of our Greek distributor, Advent Hellas, for a total purchase price of $6.6 million in cash. We acquired our Greek distributor’s operations to expand our direct ownership of European channels for our products and services. In addition, in connection with this acquisition, we are required to pay 50% of Advent Hellas operating margins that exceed 20% for the two years after the acquisition, which, if paid, will be recorded as additional goodwill. Through December 31, 2003, no payments had been earned or paid.

The acquisition was accounted for as a purchase transaction and accordingly, the tangible assets and liabilities acquired were recorded at their fair value at the date of the acquisition. The amounts allocated to identifiable intangibles were determined based upon management’s estimates using established valuation techniques. The results of operations of Advent Hellas were included in our consolidated financial statements subsequent to the acquisition date.

In the quarter ended December 31, 2002, we adjusted our initial allocation of the purchase price for a re-evaluation of the intangibles and an adjustment to deferred tax liabilities resulting in an increase to goodwill of $379,000.

The final allocation of the Advent Hellas purchase price was as follows:

	Estimated Remaining Useful Life	Purchase Price Allocation
		(in thousands)
Goodwill		$	5,800
Customer relationship	6 years		1,600
Tangible assets			840
Deferred tax liabilities			(600	)
Current liabilities			(1,000	)
Total purchase price		$	6,640

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Goodwill was determined not to be deductible for tax purposes under Internal Revenue Code 197.

Techfi Corporation

In July 2002, we acquired Techfi Corporation, a privately held company. Techfi provides software, technology and services to the financial intermediary market. This acquisition was consistent with our strategy to add products and services for meeting the needs of a wide variety of sectors in the financial services industry, particularly in the financial planning and independent broker/dealer areas of Techfi’s strengths.

The total purchase price of $22.8 million included cash of $20.2 million, acquisition related expenses of approximately $800,000 and options to purchase 70,000 shares of our Common Stock valued at $1.8 million. The options were valued using the Black-Scholes method to determine fair value, have an exercise price of $17.39 per share, vest over five years, and expire in August 2012.

The acquisition was accounted for as a purchase transaction and accordingly, the tangible assets and liabilities acquired were recorded at their fair value at the date of the acquisition. The amounts allocated to identifiable intangibles were determined based upon management’s estimates using established valuation techniques. The results of operations of Techfi Corporation were included in our consolidated financial statements subsequent to the acquisition date.

At the time of the acquisition, there was $2.3 million of additional contingent consideration held in escrow for 14 months for protection against undisclosed liabilities. In 2003, we paid $2.0 million of the contingent consideration held in escrow and recorded an increase to goodwill. Further we paid an additional $185,000 of the contingent consideration in January 2004.

At the acquisition date, Techfi’s primary purchased in-process research and development (“IPR&D”) projects involved the development of a web-enabled system for portfolio management, performance reporting and contact management; distributable macro language to automate operational tasks such as downloading, importing and report printing; and enhancements to their currently offered AdvisorMart service.

Purchased IPR&D for Techfi represents the present value of the estimated after-tax cash flows expected to be generated by the purchased technology, which, at the acquisition date, had not yet reached technological feasibility. The cash flow projections for revenues were based on estimated projected revenue and expenses beyond 2003 and expected industry benchmarks. Revenue estimates also include an estimated annual attrition percentage to account for the fact that, as time passes, the portion of projected revenue attributable to purchased IPR&D technologies will become less as newer technology replaces the capabilities and functionality of the purchased IPR&D technologies. Estimated operating expenses and income taxes were deducted from estimated revenue projections to arrive at after-tax cash flows. Projected operating expenses included costs of goods sold, research and development, sales and marketing expenses and general and administrative expenses, including estimated costs to maintain the products once they have been introduced into the market and are generating revenue. The rates utilized to discount projected cash flows were 20% to 35% for in-process technologies and were based primarily on rates of return and the overall level of market acceptance and the amount of time each respective technology has been in the marketplace. The projects were completed in 2002 within budgeted guidelines.

As of the date of acquisition, we concluded that the purchased in-process technology had no alternative future use after taking into consideration the potential use of the technology in different products, the stage of development and life cycle of each project and resale of the software. Therefore, we immediately expensed the value of the purchased IPR&D of $1.5 million upon acquisition.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In the fourth quarter of 2002, we updated our initial allocation of the Techfi purchase price for adjustments related to intangibles, assumed liabilities and deferred tax liabilities resulting in a net increase to goodwill of $300,000.

The final allocation of the Techfi purchase price was as follows:

	Estimated Remaining Useful Life	Purchase Price Allocation
		(in thousands)
Goodwill		$	17,087
Existing technologies	3.5 Years		2,060
Core technologies	4 Years		490
Trade name/trademarks	6 Years		200
Maintenance contracts	7 Years		590
Non-compete agreements	5 Years		3,150
Tangible assets			1,259
Deferred tax liabilities			(211	)
Purchased in-process research and development			1,450
Liabilities assumed			(3,289	)
Total purchase price		$	22,786

Goodwill was determined not to be deductible for tax purposes under Internal Revenue Code 197.

Kinexus Corporation

In February 2002, we acquired, Kinexus Corporation, a privately held company located in New York. Kinexus provides internal account aggregation and manual data management services. The purchase provides us core technologies for use in Advent Wealth Service.

The total purchase price of $45.5 million included cash of $34 million, closing costs of $3 million and a warrant to purchase 165,176 shares of our Common Stock valued at $8.5 million. The fair value of the warrant was calculated using the Black-Scholes method using the following assumptions: fair value of common stock of $51.34 per share, interest rate of 3%, volatility of 65.9% and a dividend rate of zero. The warrant had an exercise price of $0.01 per share and was exercised in February 2002.

The acquisition was accounted for as a purchase transaction and accordingly, the tangible assets and liabilities acquired were recorded at their fair value at the date of the acquisition. The amounts allocated to identifiable intangibles were determined based upon management’s estimates using established valuation techniques. The results of operations of Kinexus Corporation were included in our consolidated financial statements subsequent to the acquisition date.

During 2002, we adjusted Kinexus goodwill and liabilities assumed, decreasing both by $4.9 million. The adjustment primarily related to a reduction of the estimated liability assumed in connection with a vacant Kinexus facility located in downtown Manhattan within a few blocks of the World Trade Center site and was based on additional analysis of the local commercial rental market.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The final allocation of the Kinexus purchase price was as follows:

	Estimated Remaining Useful Life	Purchase Price Allocation
		(in thousands)
Goodwill		$	24,513
Existing technologies	3 Years		3,900
Existing technologies—internal	2 Years		498
Core technologies	3 Years		2,100
Trade name/trademarks	3 Years		600
Contracts and customer relationships	3 Years		9,400
Tangible assets			3,593
Net deferred tax assets			39,758
Liabilities assumed			(38,824	)
Total purchase price		$	45,538

Goodwill was determined not to be deductible for tax purposes under Internal Revenue Code 197.

At the time of the acquisition, there was a $3.8 million of additional contingent consideration held in escrow for 14 months for protection against undisclosed liabilities. In 2003, we paid $3.4 of the contingent consideration held in escrow and recorded an increase to goodwill. The remaining $400,000 of contingent consideration was returned to reimburse us for undisclosed liabilities. There is a potential earn-out distribution to shareholders of up to $115 million in cash or stock at the option of Advent under a formula based on revenues and expenses. Through December 31, 2003, no payments were made under this earn-out provision as the performance criteria were not met.

Scandinavian Distributors

In November 2001, we acquired all of the common stock of our Scandinavian distributors’ operations located in Norway, Sweden, and Denmark. We acquired our Scandinavian distributors’ operations to expand control over European channels for our products and services.

Including an adjustment to the purchase price in June 2002 and closing costs, we paid a total of $14.2 million in cash and closing costs. In addition, we are required to pay 50% of operating margins that exceed 20% for the two years after the acquisition. Through December 31, 2003, no additional potential consideration had been earned or paid.

The acquisition was accounted for as a purchase transaction and accordingly, the tangible assets and liabilities acquired were recorded at their fair value at the date of the acquisition. The amounts allocated to identifiable intangibles were determined based upon management’s estimates using established valuation techniques. The results of operations of the Scandinavian distributors were included in our consolidated financial statements subsequent to the acquisition date.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The final allocation of the purchase price was as follows:

	Estimated Remaining Useful Life	Purchase Price Allocation
		(in thousands)
Goodwill		$	10,700
Customer relationships	5 years		7,850
Existing technology	3 years		250
Tangible assets			2,290
Deferred tax liabilities			(2,400	)
Current liabilities			(4,500	)
Total purchase price		$	14,190

Goodwill was determined not to be deductible for tax purposes under Internal Revenue Code 197.

ManagerLink.com

In November 2001, we acquired certain assets of ManagerLink.com for a total purchase price of $2.9 million, consisting of $1.5 million in cash as well as $1.4 in net liabilities assumed, and acquisition related expenses. ManagerLink.com provides consolidated portfolio reporting tools to CPA’s, family offices, and other firms. We acquired ManagerLink.com to further increase our deployment of Advent Wealth Service.

The acquisition was accounted for as a purchase transaction and accordingly, the tangible assets and liabilities acquired were recorded at their fair value at the date of the acquisition. The amounts allocated to identifiable intangibles were determined based upon management’s estimates using established valuation techniques. The results of operations of ManagerLink.com were included in our consolidated financial statements subsequent to the acquisition date.

The final allocation of the purchase price for ManagerLink.com was as follows:

	Estimated Remaining Useful Life	Purchase Price Allocation
		(in thousands)
Goodwill		$	1,500
Existing technology	5 years		1,300
Trade name	1 year		100
Tangible assets			178
Current liabilities			(1,600	)
Net liabilities assumed			1,400
Total purchase price		$	2,878

Goodwill was determined to be deductible for tax purposes under Internal Revenue Code 197.

NPO Solutions, Inc

In April 2001, we acquired all of the outstanding common stock of NPO Solutions, Inc. (NPO), a privately held provider of integrated computer software solutions for nonprofit organizations, located in London, New Hampshire, through our wholly-owned subsidiary MicroEdge, Inc. The total purchase price was $8.1 million, with an additional $1.5 million potentially to be distributed to NPO stockholders if NPO meets certain

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ADVENT SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

milestones. The purchase price consisted of the cash of $6.8 million, $1.3 million in net liabilities assumed and acquisition related expenses.

The acquisition was accounted for as a purchase transaction and accordingly, the tangible assets and liabilities acquired were recorded at their fair value at the date of the acquisition. The amounts allocated to identifiable intangibles were determined based upon management’s estimates using established valuation techniques. The results of operations of NPO Solutions were included in our consolidated financial statements subsequent to the acquisition date.

The allocation of the purchase price was as follows:

	Estimated Remaining Useful Life	Purchase Price Allocation
		(in thousands)
Goodwill		$	2,800
Customer relationship	7 years		2,900
Existing technology	5 years		1,600
License agreement	1 year		800
Tangible assets			860
Current liabilities			(2,200	)
Net liabilities assumed			1,300
Total purchase price		$	8,060

Goodwill was determined to be deductible for tax purposes under Internal Revenue Code 197.

For the years ended December 31, 2003 and 2002, we paid earn-outs of $250,000 and $500,000, respectively and recorded increases to goodwill.

Rex Development Partners, L.P.

In January 2001, we acquired all outstanding equity of Rex Development Partners, L.P., a limited partnership, for $8.7 million in cash and acquisition costs. Rex Development Partners, L.P. was formed to accelerate the development of technology incorporated in our Rex service. This purchase provides us with core technologies for use in Advent TrustedNetwork.

The acquisition was accounted for as a purchase transaction and accordingly, the tangible assets and liabilities acquired were recorded at their fair value at the date of the acquisition. The amounts allocated to identifiable intangibles were determined based upon management’s estimates using established valuation techniques. The results of operations of Rex Development Partners, L.P. were included in our consolidated financial statements subsequent to the acquisition date.

The final allocation of the purchase price was as follows:

	Estimated Remaining Useful Life	Purchase Price Allocation
		(in thousands)
Existing technologies	5 years	$	8,500
Tangible assets			1,100
Current liabilities			(900	)
Total purchase price		$	8,700

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Pro forma Information

The following supplemental pro forma information presents selected financial information as though the purchases Kinexus, Techfi and Advent Outsource, acquired in 2002, had been completed at the beginning of the earliest period presented after giving effect to purchase accounting adjustments. The pro forma information results of operations for all other acquisitions have been excluded because the impact was not material. The pro forma consolidated net income (loss) amounts include certain pro forma adjustments, primarily the amortization of identifiable intangible assets, tax provision (benefit) adjustments on pro forma pre-tax income (loss) at a statutory tax rate of 41% and the elimination of interest income on cash used in the acquisition:

	Year Ended December 31,
	2002			2001
	(in thousands, except per share data)
Revenue	$	163,087		$	180,379
Net Loss		(20,961	)		(7,383	)
Basic net loss per share		(0.62	)		(0.23	)
Diluted net loss per share		(0.62	)		(0.23	)

4. Balance Sheet Detail

The following is a summary of property and equipment:

	December 31, 2003			December 31, 2002
	(in thousands)
Computer equipment	$	32,471		$	30,520
Leasehold improvements		20,854			19,092
Furniture and fixtures		2,857			2,847
Telephone system		1,851			1,854
Internet infrastructure		890			2,126
		58,923			56,439
Accumulated depreciation and amortization		(35,542	)		(28,438	)
Property and equipment, net	$	23,381		$	28,001

Depreciation and amortization expense was $8.7 million, $8.3 million and $5.7 million for the years ended December 31, 2003, 2002 and 2001, respectively. During 2003, we wrote off $1.8 million of software developed for internal use, which we no longer intend to use. Software developed for internal use is included in internet infrastructure under property and equipment.

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ADVENT SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following is a summary of intangibles:

	Average Amortization Period (Years)	Gross		Amortization			Net
	(in thousands, except average amortization period)
As of December 31, 2003
Purchased technologies	4.20	$	19,784	$	(11,024	)	$	8,760
Customer relationships	4.90		31,444		(12,840	)		18,604
Other intangibles	5.00		6,405		(3,274	)		3,131
		$	57,633	$	(27,138	)	$	30,495
As of December 31, 2002
Purchased technologies	4.39	$	22,192	$	(6,949	)	$	15,243
Customer relationships	5.08		28,019		(6,372	)		21,647
Other intangibles	5.10		6,526		(2,259	)		4,267
		$	56,737	$	(15,580	)	$	41,157

The changes in the carrying value of goodwill and intangible assets for the years ended December 31, 2003, 2002 and 2001 were as follows :

				Intangibles
	Goodwill			Gross			Accumulated Amortization			Net
	(in thousands)
Balance at December 31, 2000	$	3,280		$	2,020		$	(1,077	)	$	943
Additions		10,897			24,373			—			24,373
Amortization		(1,527	)		—			(3,641	)		(3,641	)
Balance at December 31, 2001		12,650			26,393			(4,718	)		21,675
Additions		53,226			28,740			—			28,740
Amortization		—			—			(10,862	)		(10,862	)
Other adjustments		1,473			1,604			—			1,604
Balance at December 31, 2002		67,349			56,737			(15,580	)		41,157
Additions		14,592			2,292			—			2,292
Amortization		—			—			(14,421	)		(14,421	)
Other adjustments		4,563			(1,396	)		2,863			1,467
Balance at December 31, 2003	$	86,504		$	57,633		$	(27,138	)	$	30,495

Amortization expense totaled $14.4, million $10.9 million and $4.7 million for the years ended December 31, 2003, 2002 and 2001, respectively.

Additions to goodwill of $14.6 million in 2003 consisted of $8.9 million related to the acquisition of Advent Netherlands BV, and $3.4 million, $2.0 million and $0.3 million contingent consideration paid to the former stockholders of Kinexus Corporation, TechFi Corporation and NPO Solutions, Inc, respectively (See Note 3). Other adjustments of $4.6 million primarily represented translation adjustments as the U.S. Dollar weakened against European currencies during 2003.

Additions to intangible assets of $2.3 million in 2003 were related to the acquisition of Advent Netherlands BV (See Note 3). Other adjustments consisted of a $1.4 million write-off of developed technology acquired as part of our 2001 acquisition of Managerlink, and translation adjustments.

23

ADVENT SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2003, estimated intangible amortization expense for each calendar year ended December 31 is: $13.3 million for 2004; $8.3 million for 2005; $4.9 million for 2006; $2.3 million for 2007; $1.2 million for 2008, and the remaining balance of $0.5 million in 2009.

Net income (loss) on a pro forma basis, excluding goodwill amortization expense, would have been as follows:

	Year Ended December 31, 2003
	2003			2002			2001
	(in thousands, except per share data)
Net income (loss)
Reported net income (loss)	$	(97,543	)	$	(19,236	)	$	31,465
Add: goodwill amortization, net of tax		—			—			1,253
Adjusted net income (loss)	$	(97,543	)	$	(19,236	)	$	32,718
Basic income (loss) per share
Reported net income (loss)	$	(3.00	)	$	(0.57	)	$	0.98
Goodwill amortization		—			—			0.04
Adjusted net income (loss)	$	(3.00	)	$	(0.57	)	$	1.02
Shares used in per share calculation		32,473			33,659			32,148
Diluted income (loss) per share
Reported net income (loss)	$	(3.00	)	$	(0.57	)	$	0.89
Goodwill amortization		—			—			0.04
Adjusted net income (loss)	$	(3.00	)	$	(0.57	)	$	0.93
Shares used in per share calculation		32,473			33,659			35,383

The following is a summary of other assets, net:

	December 31, 2003		December 31, 2002
	(in thousands)
Deferred income taxes	$	—	$	55,313
Long-term investments		8,903		11,005
Long-term prepaid		5,096		7,115
Cash held in escrow		312		6,079
Deposits		1,127		1,468
Total other assets, net	$	15,438	$	80,980

Long-term investments include equity investments in several privately held companies, most of which can still be considered in the start-up or development stages. In 2002, we acquired approximately 15% of the outstanding stock of LatentZero Limited (“LatentZero”), a privately-held company located in England, for $7 million. Our investment is accounted for under the equity method of accounting because our Chief Executive Officer is a member of LatentZero’s board of directors. Our portion of net income or loss for this investment has not been significant to date.

We recorded write-downs of $2.0 million, $13.5 million and $2 million in 2003, 2002 and 2001, respectively, on various long-term equity investments, as a result of other-than-temporary declines in the estimated fair market value of such investments.

24

ADVENT SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following is a summary of accrued liabilities:

	December 31, 2003		December 31, 2002
	(in thousands)
Salaries and benefits payables	$	7,479	$	8,151
Other		9,766		6,553
	$	17,245	$	14,704

The following is a summary of other long-term liabilities:

	December 31, 2003		December 31, 2002
	(in thousands)
Long-term portion of loss on lease	$	—	$	3,194
Deferred rent		2,156		2,285
Other		182		—
	$	2,338	$	5,479

5. Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income were as follows:

	December 31, 2003			December 31, 2002
	(in thousands)
Accumulated net unrealized loss on marketable securities, net of tax	$	(67	)	$	(34	)
Accumulated foreign currency translation adjustments		8,896			3,026
	$	8,829		$	2,992

6. Restructuring Charges

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

For the year ended December 31, 2003, we recorded total restructuring charges of $9.1 million consisting of $5 million for severance and benefits associated with a workforce reduction of 176 employees, $3.2 million for costs to exit leased facilities, and $0.9 million for the write-off of property and equipment.

The workforce reduction of 176 employees consisted of 39 employees in client services and support, 25 employees in professional services, 46 employees in product development, 42 employees in sales and marketing and 24 employees in general and administrative functions. These employees were located in San Francisco, California; New York, New York; Denver, Colorado; Concord, California; and Melbourne, Australia. Included in the charge is $90,000 for non-cash severance associated with modification to a former employee’s stock options. The Company also incurred charges associated with consolidating office space in the New York City area and vacating facilities in Melbourne, Australia; Concord, California; and Denver, Colorado. The Company estimated the cost of exiting and terminating the facility leases based on the contractual terms of the agreements and real estate market conditions.

25

ADVENT SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amounts related to the lease expense, net of anticipated sublease proceeds, will be paid over the respective lease terms through 2008. The write-off of property and equipment consisted primarily of leasehold improvements, computer equipment and related software, and office equipment, furniture and fixtures which were abandoned as a result of vacating various 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 as of December 31, 2003:

	Severance and Benefits			Facility Lease Exit Cost			Property & Equipment Abandoned			Total
	(in thousands)
Restructuring expense	$	5,004		$	3,247		$	861		$	9,112
Reversal of deferred rent related to facilities exited		—			194			—			194
Cash paid		(4,750	)		(1,257	)		—			(6,007	)
Non-cash charges		(90	)		(3	)		(861	)		(954	)
Accrued restructuring at December 31, 2003	$	164		$	2,181		$	—		$	2,345

As of December 31, 2003 the remaining excess facility costs are stated at estimated fair value, net of estimated sublease income of $1.1 million. We expect to pay the remaining obligations in connection with vacated facilities over the remaining lease terms, which will expire on various dates through 2008. We expect to pay the remaining severance and benefits of $164,000 in the first two quarters of 2004.

7. Income Taxes

The components of income (loss) before income taxes were as follows:

	Year Ended December 31,
	2003			2002			2001
	(in thousands)
US	$	(34,455	)	$	(21,729	)	$	46,456
Foreign		(3,676	)		(1,471	)		1,217
Total	$	(38,131	)	$	(23,200	)	$	47,673

The components of the income tax provision (benefit) included:

	Year Ended December 31,
	2003			2002			2001
	(in thousands)
Current
Federal	$	(1,639	)	$	3,607		$	16,497
State		535			656			5,736
Foreign		525			135			(16	)
Deferred
Federal		53,648			(6,395	)		(2,135	)
State		7,200			(1,414	)		(3,874	)
Foreign		(857	)		(553	)		—
Total	$	59,412		$	(3,964	)	$	16,208

26

ADVENT SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

	Year Ended December 31,
	2003		2002		2001
Statutory federal rate	(35.0	)%	(35.0	)%	35.0	%
State taxes	19.8		(2.1	)	2.5
Research and development tax credits	(1.9	)	(10.0	)	(2.3	)
In-process research and development	—		2.2		—
Change in valuation allowance	170.6		22.4		—
Foreign taxes	2.5		6.5		—
Other (net)	(0.2	)	(1.1	)	(1.2	)
Total	155.8	%	(17.1	)%	34.0	%

During 2003, we established a full valuation allowance against our deferred tax assets in the United States because we determined it is more likely than not that these deferred tax assets will not be realized in the foreseeable future. As of December 31, 2003, we made no provision for a cumulative total of $5 million of undistributed earnings for certain non-U.S. subsidiaries, which have been or are intended to be permanently reinvested.

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities were as follows:

	December 31, 2003			December 31, 2002
	(in thousands)
Current deferred tax assets:
Deferred revenue	$	418		$	1,497
Other accrued liabilities and reserves		3,526			3,375
State taxes		(5	)		21
Other		14			17
Valuation allowance		(3,953	)		(196	)
Total current		—			4,714
Non-current deferred tax assets:
Depreciation and amortization		12,892			16,238
Net operating losses, capital losses and credit carry forwards		71,972			49,057
Other		899			2,761
Valuation allowance		(88,575	)		(12,743	)
Total non-current		(2,812	)		55,313
Net deferred tax assets (liabilities)	$	(2,812	)	$	60,027

At December 31, 2003, the valuation allowance was increased to reduce the net deferred income tax assets in the United States due to the uncertainty surrounding the realization of the favorable tax attributes in future tax returns. At such time that it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be reduced.

Deferred tax assets of $55.3 million were included in other assets, net at December 31, 2002, against which a valuation allowance was established at December 31, 2002 for the deferred tax asset related to the capital loss

27

ADVENT SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

carry forward and unrealized capital losses of $6 million, and the remaining valuation allowance of $6.9 million was primarily attributable to pre-acquisition net operating loss carry forwards from acquired companies.

At December 31, 2003, we had federal and state net operating loss carry forwards of $56.5 million that are attributable to acquired companies. Utilization of these loss carry forwards is subject to certain limitations under the federal income tax laws. In addition, we had $61.8 million of federal and state net operating loss carry forwards not subject to these limitations. The carry forward period for the U.S. Federal and State net operating loss carry forwards expires between 2020 and 2023. The capital loss carry forwards expire in 2007.

8. Commitments and Contingencies

We lease office space and equipment under non-cancelable operating lease agreements, which expire at various dates through May 2012. Some operating leases contain escalation provisions for adjustments in the consumer price index. We are responsible for maintenance, insurance, and property taxes. Future minimum payments under the non-cancelable operating leases consisted of the following at December 31, 2003:

	Future Lease Payments		Future Sublease Income
	(in thousands)
2004	$	8,640	$	221
2005		8,629		221
2006		8,166		221
2007		6,645		221
2008		6,251		165
Thereafter		7,829		—
Total	$	46,160	$	1,049

Rent expense for 2003, 2002, and 2001, was $8.5 million, $7.7 million and $6.4 million, respectively, net of sub-rental income of $183,000, $159,000 and $133,000 in 2003, 2002 and 2001, respectively. For the majority of our primary lease contracts we have five-year extension options.

An independent European distributor, Advent Europe, and its subsidiaries that operate in certain European locations have the exclusive right to sell our software products, excluding Geneva, in certain locations in Europe and the Middle East. This right expires on a territory-specific basis, the earliest of which is July 1, 2004 and the latest is October 31, 2005, subject to achieving certain revenue levels. Through October 31, 2005, Advent Europe has the contingent “put” right to require us to purchase any one or any group of its subsidiaries. Our requirement to purchase is contingent upon the distributor achieving specified operating margins in excess of 20% and specified customer satisfaction criteria. The purchase price is equal to two times the preceding twelve months total revenue of the purchased subsidiary, plus potential additional consideration equal to 50% of operating margins that exceed 20%, achieved in the two years subsequent to the acquisition. This purchase price may be varied by mutual agreement. In addition, we have the “call” right to purchase any one or any group of Advent Europe’s subsidiaries under certain conditions. In the event these rights are exercised by us or Advent Europe, the purchase of these subsidiaries would principally result in an increase in intangible assets, goodwill and amortization of intangible assets. In November 2001, we acquired three of Advent Europe’s companies located in Norway, Sweden, and Denmark. In September 2002, we acquired their Greek subsidiary and in May 2003 we acquired their Dutch subsidiary, Advent Netherlands. In March 2004, our Board approved a letter of intent to purchase certain subsidiaries and assets of Advent Europe for approximately $2.5 million in cash with additional potential consideration of approximately $6.2 million. See Note 12 of the Notes to Consolidated Financial Statements for additional information.

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ADVENT SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

From time to time we are subject to various other legal proceedings, claims and litigation arising in the ordinary course of business. We do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

9. Employee Benefit Plans

401(K) Plan

We have a 401(k) deferred savings plan covering substantially all employees. Employee contributions, limited to 15% of compensation up to $12,000, $10,500 and $10,500 are matched 50% by us, up to 6% of employee compensation for the years ended December 31, 2003, 2002 and 2001, respectively. Matching contributions by the Company in 2003, 2002, and 2001, were $990,000, $1,273,000 and $923,000, respectively. In addition to the employer matching contribution, we may make profit sharing contributions at the discretion of the Board of Directors. We made no profit sharing contributions in 2003 and 2002, and contributed $472,000 in 2001.

1995 Employee Stock Purchase Plan

All individuals employed by Advent are eligible to participate in the Employee Stock Purchase Plan (Purchase Plan) if Advent employs them for at least 20 hours per week and at least five months per year. The Purchase Plan permits eligible employees to purchase our Common Stock through payroll deductions at a price equal to 85% of the lower of the closing sale price for our 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. In the second quarter of 2003, Advent’s shareholders approved an amendment to the Purchase Plan to increase the number of shares of Common Stock reserved for issuance by 600,000. As of December 31, 2003, approximately 1,007,000 shares have been issued out of a total of 1,500,000 shares of Common Stock reserved for issuance under the Purchase Plan. The Company issued approximately 211,000, 164,000, and 69,000 shares under the Purchase Plan at weighted average prices of $13.75, $20.11, and $42.09 in 2003, 2002 and 2001, respectively.

10. Net Income (Loss) Per Share

The following table sets forth the computation of basic and diluted net income (loss) per share:

	Year Ended December 31,
	2003			2002			2001
	(in thousands, except per share data)
Numerator for basic and diluted net income (loss) per share—net income (loss) available to common stockholders	$	(97,543	)	$	(19,236	)	$	31,465
Denominator for basic net income (loss) per share—weighted average shares		32,473			33,659			32,148
Dilutive effect of stock options and warrants		—			—			3,235
Denominator for diluted net income (loss) per share—weighted average shares assuming dilution		32,473			33,659			35,383
Basic net income (loss) per share	$	(3.00	)	$	(0.57	)	$	0.98
Diluted net income (loss) per share	$	(3.00	)	$	(0.57	)	$	0.89

29

ADVENT SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As the Company incurred net losses in fiscal 2003 and 2002, options to purchase 5.2 million and 4.3 million shares, respectively, of the Company’s common stock were excluded from the computation of diluted net loss per share, as the effect would have been antidilutive. Options to purchase 0.9 million shares of the Company’s common stock were excluded from the computation of diluted net income per share for fiscal 2001 as the options’ exercise price was greater than the average market price of the common stock and, therefore, the effect would have been antidilutive.

11. Stockholders’ Equity

Secondary Offering

In August 2001, we completed a secondary public offering of 2,750,000 shares of common stock at $57.11 per share, excluding offering costs. Of the 2,750,000 shares offered, 200,000 were sold by a selling stockholder. The net proceeds of the offering to us were $138 million.

Common Stock Repurchase

In 2001, Advent’s Board of Directors authorized the repurchase of up to one million shares of outstanding common stock. A total of 430,000 shares were repurchased in 2001. The Company paid $14.8 million at an average price of $34.44 per share. In May and June 2002, our Board of Directors authorized the repurchase of an additional 1,000,000 and 2,000,000 shares, respectively. During 2002, we repurchased and retired a total of 2,355,000 shares for which we paid $49.7 million at an average price of $21.09 per share. In the first quarter of 2003, we repurchased and retired an additional 1,000,000 shares of our Common Stock at an average price of $14.31 per share.

Warrants

In March 2001 we issued a fully vested non-forfeitable stock purchase warrant to purchase a total of 191,644 shares of our Common Stock to a customer from whom we had revenue of $56,000, $3.4 million and $7.1 million in 2003, 2002 and 2001, respectively. The warrant was issued for cash consideration of $5 million, which was the estimated Black-Scholes fair value. The warrant has an exercise price of $45.375 per share, is immediately exercisable, and expires in March 2006.

In February 2002, we acquired Kinexus Corporation, a privately held company located in New York. The total purchase price of $45.5 million included cash of $34 million, closing costs of $3 million and a warrant to purchase 165,176 shares of our Common Stock valued at $8.5 million. The fair value of the warrant was calculated using the Black-Scholes method using the following assumptions: fair value of common stock of $51.34 per share, interest rate of 3%, volatility of 65.9% and a dividend rate of zero. The warrant had an exercise price of $0.01 per share and was exercised in February 2002.

Stock Option Exchange

In November 2002, the Company commenced a voluntary stock option exchange program made available to certain eligible employees of the Company. The Chairman of the Board, Chief Executive Officer, Chief Financial Officer, Chief Technology Officer and Executive Vice President of Corporate Development were specifically excluded from participating in the exchange program. Under the program, eligible employees were given the option to cancel each outstanding stock option granted to them at an exercise price greater than or equal to $20 per share, in exchange for a new option to buy 0.8 shares of the Company’s Common Stock to be granted on June 5, 2003, six months and one day from December 4, 2002, the expiration date of the offer, and the date the

30

ADVENT SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

old options of participating employees were cancelled. Additionally, options granted in the six months prior to this exchange offer, irrespective of their exercise prices, were cancelled for all employees that elected to participate in this exchange program. There was no credit given for option vesting during the period between cancellation of the outstanding option and the grant of the new option. The exercise price of the new option is equal to the fair market value of the Company’s Common Stock on the date of grant. In total, 3,336,504 option shares were eligible to participate in this program and 2,462,102 options were surrendered for cancellation ranging in exercise price from $17.39 to $60.375 with a weighted average exercise price of $47.33 per share. In the second quarter of 2003, in connection with this voluntary stock option exchange program, we granted 1,770,786 replacement options to employees at an exercise price equal to the fair market value of the stock on the date of grant, which was $18.88 per share. The exchange program did not result in additional compensation charges or variable option plan accounting.

Stock Options

We have three stock option plans, the 2002 Stock Plan (Plan), 1998 Non-statutory Stock Option Plan (Non-statutory Plan) and 1995 Director Option Plan (Director Plan).

The Plan    In February and May 2002, the Board of Directors and the stockholders, respectively, approved the 2002 Stock Plan. Under our 2002 Stock Plan (Plan) we may grant options to purchase Common Stock to employees and consultants. 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. Unvested options on termination of employment are canceled and returned to the Plan. The 2002 Stock Plan has an “evergreen” provision which adds an annual increase to the plan on the last day of the Company’s fiscal year beginning in 2002 equal to the lesser of (i) 1,000,000 shares, (ii) 2% of the Company’s outstanding shares on such date, or (iii) a lesser number of shares determined by the Board of Directors. All remaining options from the expired 1992 Stock Plan have rolled over to the 2002 Stock Plan. The terms of the 1992 Stock Plan were substantively the same as the terms of the new 2002 Stock Plan.

In July 2002, we acquired Techfi Corporation, a privately held company. The total purchase price of $22.8 million includes cash of $20.2 million, acquisition related expenses of $800,000 and options to purchase 70,000 shares of our Common Stock valued at $1.8 million. The options were issued under the 1992 Stock Plan and were valued using the Black-Scholes method to determine fair value, have an exercise price of $17.39 per share, vest over five years, and expire in August 2012.

In 2001, we granted 25,000 stock options to certain employees of a distributor that have an exercise price of $40, vest over 5 years and have a term of 10 years. The options are subject to variable plan accounting, which requires us to re-measure compensation cost for outstanding options each reporting period based on changes in the market value of the underlying common stock until the time the options are exercised, are forfeited or expire unexercised. With respect to these stock options, we recorded stock compensation expense of $240,000, stock-based credits of $2,000 and stock compensation expense of $148,000 for 2003, 2002 and 2001, respectively.

During 2003, we also recorded stock compensation expense of $261,000 related to the extension of vesting schedules on the outstanding stock options held by employees affected by the work-force reductions.

Non-Statutory Plan    In November 1998, the Board of Directors approved the 1998 Non-statutory Stock Option Plan (Non-statutory Plan) and reserved 300,000 shares of Common Stock for issuance thereunder. Under our 1998 Non-statutory Plan, we may grant options to purchase Common Stock to employees and consultants,

31

ADVENT SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 of Directors. 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    Our 1995 Director Option Plan (Director Plan) provides for the grant of non-statutory stock options to our non-employee directors (“outside directors”). Under the Director Plan, each outside director is granted a non-qualified option to purchase 30,000 shares on the latter of the date of effectiveness of the Director Plan or the date upon which such person first becomes a director. The exercise price of each option is equal to the fair market value of our Common Stock as of the date of the grant. In subsequent years, each outside director is automatically granted an option to purchase 6,000 shares on December 1 with an exercise price equal to the fair value of our Common Stock on that date. Initial options granted under the Director Plan vest one-fifth of the shares on the first anniversary date of grant and the remaining shares vest ratably each month over the ensuing four years. Subsequent option grants begin to vest on the fourth anniversary of the date of grant and vest ratably each month over the next 12-month period. All Director Plan options have a ten-year term.

A summary of the status of the Company’s stock option plans as of December 31, 2003, 2002 and 2001 and changes during the years ended on those dates is presented below.

	2003				2002				2001
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
	(in thousands)				(in thousands)				(in thousands)
Outstanding at beginning of year	4,265		$	19.03	6,930		$	26.67	7,193		$	19.95
Options granted	2,977		$	17.86	923		$	39.67	1,455		$	44.70
Options exercised	(875	)	$	8.93	(833	)	$	14.67	(1,357	)	$	11.37
Options canceled	(1,162	)	$	25.94	(2,755	)	$	46.46	(361	)	$	22.94
Outstanding at end of year	5,205		$	18.51	4,265		$	19.03	6,930		$	26.67
Exercisable at end of year	3,027		$	17.98	2,963		$	16.13	3,013		$	18.17

The options and warrants outstanding and currently exercisable by exercise price at December 31, 2003 were as follows:

	Options Outstanding				Options Exercisable
Exercise Price	Number Outstanding	Weighted Average Remaining Contractual Life in years	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
	(in thousands)				(in thousands)
$  1.67 - $  9.46	1,043	3.68	$	8.81	1,041	$	8.81
$  9.58 - $16.55	1,122	7.97	$	14.83	333	$	13.03
$17.13 - $18.70	303	9.59	$	17.42	90	$	17.17
$18.88 - $18.88	1,486	7.26	$	18.88	661	$	18.88
$18.96 - $39.13	941	6.3	$	24.02	667	$	24.02
$40.00 - $60.38	310	7.26	$	47.15	235	$	46.31
	5,205	6.66	$	18.51	3,027	$	17.98

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ADVENT SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The options available for grant at December 31, 2003 were as follows:

	2003		2002		2001
	(in thousands)
Beginning balance(restated)	3,892		1,403		1,476
Authorized	659		657		1,021
Options granted	(2,977	)	(923	)	(1,455	)
Options canceled	1,162		2,755		361
Ending balance(restated)	2,736		3,892		1,403

12. Subsequent Events

In February 2004, we reached a settlement involving a claim with a former employee. As a result of this settlement, Advent has recorded a receivable of $775,000. This amount was included in Advent’s results of operations for 2003.

In March 2004, our Board approved a letter of intent to purchase certain subsidiaries and assets of our independent European distributor, Advent Europe, for approximately $2.5 million in cash, with additional potential consideration of approximately $6.2 million. The initial $2.5 million purchase consideration is due upon execution of the agreement, and $2.5 million is due when Advent Europe meets certain non-financial goals associated with the business transaction. The balance of the consideration is contingent on Advent Europe achieving certain revenue goals in 2004. We expect the transaction to close in the second quarter of 2004.

13. Restatement of Stock Repurchase Accounting and Options Available for Grant

In July 2004 the Company determined that it would restate its financial statements for fiscal years 2001, 2002 and 2003. The Company has reviewed its stock repurchases in 2001, 2002 and 2003 and determined that its allocation of the entire cash paid in excess of par value for these repurchases to additional paid-in capital was not the correct accounting treatment. The correct accounting treatment is to calculate the average additional paid-in capital per outstanding share at the beginning of each period in which stock was repurchased, and then allocate the difference between the repurchase price per share and the sum of the par value and average additional paid-in capital per share as a reduction to retained earnings.

33

ADVENT SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company has restated its financial statements for these periods to reflect the proper allocation, resulting in additional paid-in capital increasing by a cumulative amount of approximately $41 million and retained earnings decreasing by the same amount. The Company’s income statement, cash and cash equivalents, total stockholders’ equity and shares of common stock outstanding are unaffected by these adjustments for all periods. Supplemental comparative disclosures of the previously reported and restated consolidated balance sheets as of December 31, 2003 and 2002 are presented below (in thousands):

	December 31, 2003						December 31, 2002
	(Restated)			(As Previously Reported)			(Restated)		(As Previously Reported)
ASSETS
Current assets:
Cash and cash equivalents	$	83,334		$	83,334		$	78,906	$	78,906
Marketable securities		76,738			76,738			94,923		94,923
Accounts receivable, net of allowance for doubtful accounts of $641 and $1,410		15,891			15,891			20,218		20,218
Prepaid expenses and other		11,526			11,526			11,373		11,373
Income taxes receivable		1,639			1,639			6,289		6,289
Deferred income taxes		—			—			4,714		4,714
Total current assets		189,128			189,128			216,423		216,423
Property and equipment, net		23,381			23,381			28,001		28,001
Goodwill		86,504			86,504			67,349		67,349
Intangibles, net		30,495			30,495			41,157		41,157
Other assets, net		15,438			15,438			80,980		80,980
Total assets	$	344,946		$	344,946		$	433,910	$	433,910
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,320		$	1,320		$	2,637	$	2,637
Accrued liabilities		17,245			17,245			14,704		14,704
Deferred revenues		34,566			34,566			31,918		31,918
Income taxes payable		8,206			8,206			5,817		5,817
Total current liabilities		61,337			61,337			55,076		55,076
Deferred income taxes		2,812			2,812			—		—
Other long-term liabilities		2,338			2,338			5,479		5,479
Total liabilities		66,487			66,487			60,555		60,555
Commitments and contingencies (See note 8)
Stockholders’ equity:
Preferred stock; $0.01 par value: 2,000 share authorized; none issued		—			—			—		—
Common stock; $0.01 par value: 120,000 shares authorized; 32,938 and 32,853 shares issued and outstanding		329			329			329		329
Additional paid-in capital		340,394			299,459			339,622		302,649
Retained earnings (accumulated deficit)		(71,093	)		(30,158	)		30,412		67,385
Accumulated other comprehensive income		8,829			8,829			2,992		2,992
Total stockholders’ equity		278,459			278,459			373,355		373,355
Total liabilities and stockholders’ equity	$	344,946		$	344,946		$	433,910	$	433,910

34

ADVENT SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Supplemental comparative disclosures of the previously reported and restated ending balances of the consolidated statements of stockholders’ equity as of December 31, 2003, 2002 and 2001 are presented below (in thousands):

	Common Stock			Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Shares	Amount
Balances, December 31, 2001 as previously reported	34,043	$	342	$	317,548	$	86,621		$	(122	)	$	404,389
Restatement adjustment	—		—		10,899		(10,899	)		—			—
Balances, December 31, 2001 as restated	34,043		342		328,447		75,722			(122	)		404,389
Balances, December 31, 2002 as previously reported	32,853		329		302,649		67,385			2,992			373,355
Restatement adjustment	—		—		36,973		(36,973	)		—			—
Balances, December 31, 2002 as restated	32,853		329		339,622		30,412			2,992			373,355
Balances, December 31, 2003 as previously reported	32,938		329		299,459		(30,158	)		8,829			278,459
Restatement adjustment	—		—		40,935		(40,935	)		—			—
Balances, December 31, 2003 as restated	32,938	$	329	$	340,394	$	(71,093	)	$	8,829		$	278,459

In addition, the Company has corrected errors in its options activity in 2001, 2002 and 2003, affecting the “options available for grant” table in Note 11. Supplemental comparative disclosures of the previously reported and restated “options available for grant” table for fiscal 2003, 2002 and 2001 are presented below (in thousands):

	2003		2002		2001		2003		2002		2001
	(Restated)						(As Previously Reported)
Beginning balance	3,892		1,403		1,476		5,164		6,298		6,371
Authorized	659		657		1,021		659		657		1,021
Options granted	(2,977	)	(923	)	(1,455	)	(2,977	)	(923	)	(1,455	)
Options canceled	1,162		2,755		361		1,162		2,756		361
Expired	—		—		—		(773	)	(3,624	)	—
Ending balance	2,736		3,892		1,403		3,235		5,164		6,298

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Advent Software, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Advent Software, Inc. and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

As discussed in Note 13 to the accompanying consolidated financial statements, the Company has restated its consolidated financial statements for the fiscal years 2001, 2002 and 2003.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

San Jose, California

March 11, 2004, except for Note 13, as to which the date is July 30, 2004.

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Supplementary Quarterly Financial Data (Unaudited)

	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
	(in thousands, except per share data)
2003
Net revenues	$	33,044		$	32,758		$	34,484		$	36,873
Gross margin		19,869			18,217			19,975			22,074
Loss from operations		(11,679	)		(13,977	)		(8,652	)		(5,351	)
Net loss		(7,480	)		(9,596	)		(5,449	)		(75,018	)
Basic net loss per share		(0.23	)		(0.30	)		(0.17	)		(2.29	)
Diluted net loss per share		(0.23	)		(0.30	)		(0.17	)		(2.29	)
2002
Net revenues	$	49,197		$	38,868		$	35,110		$	36,261
Gross margin		37,939			26,494			22,342			22,989
Income (loss) from operations		9,413			(4,678	)		(10,644	)		(9,624	)
Net income (loss)		7,309			(12,112	)		(8,328	)		(6,105	)
Basic net income (loss) per share		0.21			(0.35	)		(0.25	)		(0.19	)
Diluted net income (loss) per share		0.20			(0.35	)		(0.25	)		(0.19	)

(1) Subsequent to our press release in January 2004, we reached a settlement involving a claim with a former employee in February 2004. As a result of this settlement, we recorded a receivable of $775,000 and a corresponding reduction in general and administrative expenses in the fourth quarter of 2003.

(2) In the fourth quarter of 2003, we began presenting amortization of developed technology within cost of revenues. All prior periods have been reclassified to conform to the current presentation. See “Reclassifications” within Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information on this reclassification.

(3) The fourth quarter of 2003 included a provision for income taxes of $70.5 million as a result of recording a full valuation allowance against our deferred tax assets in the United States.

(4) In the second quarter of 2003, we changed our classification of certain revenues, cost of revenues and operating expense items. In addition, we changed our classification of related amounts on the balance sheet between accounts receivable, prepaid expenses and accrued liabilities. All prior period amounts have been reclassified to conform to the current presentation. See “Reclassifications” within Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information on these reclassifications.

(5) In the second quarter of 2002, we recorded a write-down of $9 million for an other-than-temporary decline in the estimated fair market value of a privately-held investment.

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PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

3. Exhibits

The following exhibits are filed as part of, or incorporated by reference into this Form 10-K/A:

Exhibit Number	Description of Document
23.1	Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm
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

38

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 on Form 10-K/A to be signed on its behalf by the undersigned thereunto duly authorized, on this 30th day of July, 2004.

ADVENT SOFTWARE, INC.
By:	/s/    GRAHAM V. SMITH
	Graham V. Smith Executive Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Amendment No. 1 on Form 10-K/A has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/    STEPHANIE G. DIMARCO         Stephanie G. DiMarco	Chief Executive Officer and President (Principal Executive Officer)	July 30, 2004
/s/    GRAHAM V. SMITH         Graham V. Smith	Executive Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)	July 30, 2004
*  TERRY H. CARLITZ     Terry H. Carlitz	Director	July 30, 2004
/s/    JAMES ROEMER         James Roemer	Director	July 30, 2004
*  JOHN H. SCULLY     John H. Scully	Chairman of the Board	July 30, 2004
*  WENDELL G. VAN AUKEN     Wendell G. Van Auken	Director	July 30, 2004
/s/    WILLIAM F. ZUENDT         William F. Zuendt	Director	July 30, 2004

*By:	/s/    GRAHAM V. SMITH
	Graham V. Smith Attorney-in-Fact

39

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints GRAHAM V. SMITH his attorney-in-fact, with full power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K/A and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

Signature	Title	Date
/S/    JAMES ROEMER         James Roemer	Director	July 30, 2004
/s/    WILLIAM F. ZUENDT         William F. Zuendt	Director	July 30, 2004

40