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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003.

or

Commission file number: 0-26994

ADVENT SOFTWARE, INC.

(Exact name of registrant as specified in its charter)

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.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 12, 2004 are incorporated by reference into Part III of this Form 10-K Report to the extent stated herein.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

You should read the following discussion in conjunction with our consolidated financial statements and related notes. The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Forward-looking statements can be identified by the use of terminology such as “may”, “will”, “should”, “expect”, “plan” “anticipate”, “believe”, “estimate”, “predict”, “potential”, “continue” or other similar terms and the negative of such terms and include statements about our products and expected financial performance. Such forward-looking statements are based on our current plans and expectations and involve known and unknown risks and uncertainties which may cause our actual results or performance to be materially different from any results or performance expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the “Risk Factors” set forth below as well as other risks identified from time to time in other SEC reports. You should not place undue reliance on our forward-looking statements, as they are not guarantees of future results, levels of activity or performance and represent our expectations only as of the date they are made.

PART I

Item 1. Business

Overview

Advent Software, Inc. (“Advent”, the “Company”, or “we”) was founded and incorporated in 1983 in California and reincorporated in Delaware in November 1995. We offer integrated software solutions for automating and integrating data and work flows across the investment management organization, as well as the information flows between the investment management organization and external parties. Our products are intended to increase operational efficiency, improve the accuracy of client information and enable better decision-making. Each solution focuses on specific mission-critical functions of the investment management organization and is tailored to meet the needs of the particular client, as determined by size, assets under management and complexity of the investment environment.

We also have a wholly-owned subsidiary, Second Street Securities, which is an SEC-registered broker/dealer that provides independent research and brokerage services to institutional investors and registered investment advisors on a fully-disclosed basis. Second Street Securities offers our customers the ability to pay for Advent products and services through brokerage commissions and to “soft dollar” third-party products and services.

Our principal executive offices are located at 301 Brannan Street, San Francisco, California 94107, and our telephone number is (415) 543-7696. Our Internet address is www.advent.com. On our Investor Relations web site, which is accessible through www.advent.com, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports. All such filings on our Investor Relations web site are available free of charge. Information contained or referenced on our website is not incorporated by reference in and does not form a part of this Annual Report on Form 10-K. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

In March 2003, Graham V. Smith was appointed our Chief Financial Officer. In December 2003, Stephanie G. DiMarco was appointed our Chief Executive Officer, a position she had been holding on an interim basis since May, 2003. In conjunction with her appointment as Chief Executive Officer, Advent Board member, John H. Scully was named Chairman of the Board of Directors.

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Advent’s stock symbol is ADVS. Advent’s common stock has traded on the NASDAQ National Market since its initial public offering on November 15, 1995.

Industry Background and Our Clients

Our clients include a range of organizations that manage or advise on financial assets. They include firms such as asset managers, investment advisors, prime brokers, hedge funds, family offices, banks and trusts. Our clients also include corporations, public funds, foundations, universities and non-profit organizations that perform similar portfolio management functions. In 2003, 2002 and 2001, no one customer accounted for more than 10% of our total revenues. Our international revenue accounted for 12% of our net revenues for the year ended December 31, 2003 and less than 8% for each of the years ended December 31, 2002 and 2001.

The investment management industry has experienced periods of both significant growth and contraction, which has led to varying levels of demand for software products that automate and integrate functions within investment management organizations. Nevertheless, investment managers continue to be faced with complex portfolio accounting and management requirements, as well as extensive and evolving industry standards and government regulations, with which they have to comply.

These trends have increased the volume and complexity of information and data flows within investment management organizations and between these organizations and third parties, such as brokerage firms, clients, custodians, banks, pricing services and other data providers. Consequently, in order to operate efficiently, investment management organizations must automate and integrate their mission-critical and labor-intensive functions, including (i) investment decision support; (ii) trade order management and compliance; (iii) portfolio accounting, performance measurement and report generation; and (iv) client relationship management. Investment management organizations historically have relied on internally developed systems, outsourced services or spreadsheet-based systems to manage these information flows. Due to limitations in each of these types of systems, investment management organizations are demanding highly functional, easy-to-use, scalable, flexible and cost-effective software applications that automate and integrate their mission-critical business functions.

Strategy

Prior to 2001, our business strategy was based on being the market leader in portfolio accounting and trade order management for asset managers. From 2001 through the middle of 2003, our strategy focused on growth through the acquisition of additional complementary businesses. During these years, we made five major acquisitions and also acquired all of the common stock of five of our European distributor’s subsidiaries. These acquisitions resulted in substantial duplication and excess capacity in our infrastructure, as well as certain product and service redundancies.

As we pursued this strategy, we were simultaneously engaged in serving asset managers, retail broker/dealers and high net worth individual investors through both in-house and outsourced applications. Because our strategic intent had broadened, our resources became stretched, our expenses increased, and we were forced to focus on managing business models and resolving integration issues outside of our traditional core competencies.

The incremental costs and lower than expected revenues that resulted from pursuing these new markets and from the acquisitions, combined with the weak economic conditions, resulted in losses being incurred in the last three quarters of 2002 and continuing into 2003. Accordingly, in May 2003, we changed our strategy.

Our strategy now consists of the following three phases:

Phase One—May-December 2003. Stabilization and restructuring. We have reduced the cost structure through rationalizing our different businesses, and established a sound business plan based on our established core products.

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Phase One included changes in our executive management. We had hired a new Chief Financial Officer, Graham Smith, and Advent’s founder, Stephanie DiMarco, returned as Chief Executive Officer. In addition, we reorganized several functions within Advent and made personnel changes in key positions.

We restructured the business to bring costs more closely in line with revenues. We consolidated office space in the New York City area and closed offices in Melbourne, Australia; Concord, California; and Denver, Colorado. We reduced our workforce from 980 on December 31, 2002 to 764 on December 31, 2003.

In view of the lower than expected revenue outlook for the businesses acquired in 2002, we have lowered costs in all of those businesses. We have significantly reduced our investment in the broker/dealer market by halting development of Techfi’s AdvisorMart Institutional 3.0 product. We have discontinued our Advent Outsource service and replaced it with Advent BackOffice, a service that is more automated and focused on a narrower target market. We have also simplified our consolidated wealth reporting business, Advent Wealth Service, by standardizing on a single technology platform. To support the development of a sound business strategy based on our core products, we re-emphasized “market validation” reviews for key products and services with our customers and prospects as a part of our ongoing business process.

We have completed Phase One, and we have reduced operating costs from a high in the second quarter of 2003 of $32.2 million to $27.4 million in the fourth quarter of 2003.

Phase Two—Early to mid-2004. Foundation building. Our goals are to plan the enhancements to our products and services as a result of the ongoing market validation work, to focus on strong execution, to streamline our internal processes through automation and to ensure that our customers enjoy a high quality relationship with Advent.

Phase Three—Late 2004 onward. Growth and profitability. We will focus on three major revenue sources: (a) Enterprise software; (b) Straight Through Processing and Market Data; and (c) Professional Services and Support.

Enterprise Software. Our goal is to significantly enhance our core portfolio accounting and trade order management applications through continued investment in product development.

STP and Market Data. Our goal is to grow our addressable market by delivering new solutions for investment managers, custodian notifications, and trade order connectivity. We will also improve quality and functionality of existing solutions, leveraging third-party partners, where appropriate.

Professional Services and Support. Our goal is to continuously improve our Professional Services and Support revenue and profitability and, at the same time, build competitive advantage by delivering high quality services that ensure our customers’ total satisfaction and success.

In addition, we continually assess various parts of our business to ensure that they fit with our current strategy, which could result in future divestitures.

Software Products

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

Advent offers solutions for customers in the following markets:

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These solutions are comprised of various combinations of software products, data integration tools and professional services all aimed at solving our clients’ critical business needs.

Advent Office Products

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Global Portfolio Accounting Solutions

Grantmaking Community and Non-profit Organizations

Advent’s wholly-owned subsidiary, MicroEdge, a leading provider of information technology solutions to the grantmaking community, provides the following products:

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Data and Data Integration Services

Outsourced Solutions

Support and Maintenance Services

Due to the mission-critical nature of our products, most clients purchase annual support and maintenance, which entitles them to technical support through our Client Services group and product upgrades as they become available. We continually upgrade and enhance our products to respond to changing market needs, evolving regulatory requirements and new technologies.

Professional Services

Professional services consist of consulting, project management, implementation, integration, custom report writing, and training. Many of our clients purchase consulting services from us to support their implementations, assist in the conversion of their historical data and provide ongoing training and education. Consulting services may be required for as little as two days or for up to several months for large implementations. We believe that consulting services facilitate a client’s early success with our products, strengthen the relationship with the client and generate valuable feedback for our product development group.

Alliance Program

Our Alliance Program is designed to benefit both our clients and our partners. The program provides a formal process through which partners can develop, promote, and sell their products, services, and solutions in conjunction with our solutions. Our Alliance Program was created to further extend our product and service offerings.

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Sales and Marketing

We primarily license and sell our products and services through a direct sales organization comprised of both field sales and telesales representatives. Our sales force is organized by product and customer type as follows:

We have sales offices in San Francisco, California; New York, New York; Cambridge, Massachusetts; Oslo, Norway; Stockholm, Sweden; Copenhagen, Denmark; Brussels, Belgium; Amsterdam, the Netherlands; Luxembourg; and Athens, Greece. In addition, we use Advent Europe, an independent distributor, to sell our products in certain parts of Europe and the Middle East. See “Distributor Relationship” for additional information regarding our relationship with Advent Europe.

Our marketing organization is responsible for assessing market opportunities, collaborating with our product development organization on product planning and management, and providing support to the sales organization through lead generation activities, sales training, and the provision of marketing events, such as seminars, and marketing materials. Our marketing organization also coordinates our market validation process, through which we interview existing clients and sales prospects, and gather information to define the scope, features and functionality of new products and product upgrades.

Product Development

Our product development organization builds product enhancements and new products, incorporates new technologies into exisiting products and sustains the quality of our current products. In 2003, 2002, and 2001 our product development expenditures were $34.9 million, $40.4 million, and $28.2 million, respectively. Our product development activities include the identification and validation of product specifications as well as engineering, quality assurance and documentation.

Our new products and product upgrades require varying degrees of development time, depending upon the complexity of the accounting requirements and securities regulations which they are intended to address, as well as the number and type of features incorporated. To date, we have primarily relied upon the internal development of our products. We have in the past acquired, and may again in the future acquire, additional technologies or products from third parties. We intend to continue to support industry standard operating environments, client/server architectures and network protocols. To date, all product development costs have been expensed as incurred, other than purchased technology.

Competition

The market for investment management software is characterized by the relative size of the organizations that manage and advise on investment portfolios. The market is intensely competitive and highly fragmented, subject to rapid change and is sensitive to new product introductions and marketing efforts by industry participants. Our competitors include providers of software and related services as well as providers of

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outsourced services. Competitors vary in size, scope of services offered and platforms supported. Our largest single source of competition is our existing and potential clients, many of whom develop their own software for their particular needs and therefore may be reluctant to license software products offered by independent vendors such as Advent. In addition, we compete with the following vendors: Beauchamp, Charles River Development, CheckFree Corporation, Divisions of Sunguard, Eagle, a subsidiary of Mellon Financial Corporation, Eze Castle Software, Financial Models Company, Inc., FT Integretorsia, Indata, Linedata, Macgregor Financial Technologies, Schwab Performance Technologies, SS&C Technologies, Inc., and the Portia Division of Thomson Financial. We believe that the most predominant competitive differentiators are product performance and functionality, ease of use, scalability, the ability to integrate external data sources, product and company reputation, client service and price.

Intellectual Property and Other Proprietary Rights

Our success depends significantly upon our proprietary technology. We currently rely on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. We have registered trademarks for many of our products and services and will continue to evaluate the registration of additional trademarks as appropriate. We generally enter into confidentiality agreements with our employees and with our resellers and customers. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. Despite these efforts, it may be possible for unauthorized third parties to copy certain portions of our products or to reverse engineer or otherwise obtain and use our proprietary information. We do not have any patents, and existing copyright laws afford only limited protection. In addition, we cannot be certain that others will not develop substantially equivalent or superseding proprietary technology, or that equivalent products will not be marketed in competition with our products, thereby substantially reducing the value of our proprietary rights. We cannot be sure that we will develop proprietary products or technologies that are patentable, that any patent, if issued, would provide us with any competitive advantages or would not be challenged by third parties, or that the patents of others will not adversely affect our ability to do business. Litigation may be necessary to protect our proprietary technology. This litigation may be time-consuming and expensive. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States. We cannot be sure that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology, duplicate our products or design around any patent that may be issued to us or other intellectual property rights of ours.

Employees

As of December 31, 2003, we had 764 employees, including 79 in sales, 132 in professional services, 35 in marketing, 215 in product development, 165 in client services and support and 138 in finance, administration, operations and general management. Of these employees, 741 were located in the United States and 23 were based in Europe. We endeavor to maintain competitive compensation, benefits, equity participation and work environment policies in order to attract and retain qualified personnel. Our success depends to a significant extent upon the continued contributions of our senior management and other key personnel, many of whom would be difficult to replace. The loss of the service of one or more senior managers, or other employees could have a material adverse effect upon our business, operating results and financial condition. None of our employees are represented by a labor union. We have not experienced any work stoppages and we believe our employee relations are good.

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Executive Officers of Registrant

The following sets forth certain information regarding the executive officers of Advent as of February 29, 2004:

Ms. DiMarco founded Advent in June 1983. She served as Chairman of the Board from November 1995 until December 2003. Ms. DiMarco currently serves as Chief Executive Officer and President since her permanent appointment to the position in December 2003 after serving on an interim basis from May 2003. Previously, she had served as President since founding Advent until April 1997 and as Chief Executive Officer until November 1999. She is a member of the Board of Trustees of the UC Berkeley Foundation, serves on the Advisory Board of the College of Engineering at the University of California, Berkeley, and is a San Francisco Foundation board member and a member of its Investment and Audit committees. Ms. DiMarco holds a B.S. in Business Administration from the University of California at Berkeley.

Ms. Chang joined Advent in May 1993 as Vice President, Technology. In April 1997, Ms. Chang was promoted to Executive Vice President, Technology and was also named Chief Technology Officer. From July 1989 to May 1993, Ms. Chang held various positions, including Vice President, Strategic Accounts and Vice President of Oracle Financial Applications, with Oracle Corporation, a software licensing and services business. Ms. Chang holds a B.S. in Biochemistry from Taiwan University.

Mr. Geraci joined Advent Software in April 2001 and in August 2001 became an Executive Vice President. Mr. Geraci has 21 years of experience in the applications software industry. Prior to joining Advent, Mr. Geraci spent three and one-half years with IMI Software as President of IMI Americas and Chief Operating Officer. IMI specialized in complex, mission critical order management software. Additionally, Mr. Geraci was Senior Vice President of Western Europe for MSA Software as well as President of Information Associates. Prior to his business experience, Mr. Geraci spent six years in the United States Army. He received a Bachelors degree from the US Military Academy at West Point and an Executive M.B.A. from Emory University.

Mr. Nye joined Advent in April 2002 as Executive Vice President. He is responsible for Marketing and Client Services. From 1995 to 2001, Mr. Nye worked at software maker Intuit where he held various management positions including Vice President and General Manager of the Small Business Division, Vice President and General Manager of the International Division, and Director of Marketing for Small Business Products. From 1994 to 1995 Mr. Nye served in the Corporate Marketing Group at Intel Corporation and held various brand management roles at Proctor and Gamble between 1988 and 1992. Mr. Nye received an M.B.A. from Harvard Business School and a B.A. from Hamilton College.

Mr. Smith joined Advent in January of 2003 as Executive Vice President, Treasurer and Chief Financial Officer designate. Mr. Smith was appointed Chief Financial Officer and Secretary in March 2003. From 2002 to 2003 Mr. Smith served as Chief Financial Officer of Vitria Technology, an enterprise application integration software company. From 1998 to 2002 Mr. Smith served as Chief Financial Officer of Nuance Communications, a voice recognition software company. From 1987 to 1998 Mr. Smith worked for the Oracle Corporation in a various senior finance roles, most recently as Vice President of Finance for worldwide operations. Mr. Smith holds a B.Sc. from Bristol University in England and is a member of the Institute of Chartered Accountants in England and Wales.

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Item 2. Properties

Our principal executive offices are located in San Francisco, California. The table below summarizes the properties that we leased as of December 31, 2003:

We continue to assess our needs with respect to office space and and may in the future vacate additional facilities.

Item 3. Legal Proceedings

From time to time we are involved in litigation incidental to the conduct of our business. We are not party to any lawsuit or proceeding that, in our opinion, is likely to seriously harm our business.

Item 4. Submission of Matters to a Vote of Stockholders

None.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholders Matters

Our common stock is listed on the NASDAQ National Market under the symbol “ADVS”. The table below shows the range of high and low reported sale prices on the NASDAQ National Market for our common stock for the periods indicated.

As of February 20, 2004, there were 72 holders of record of our common stock. Brokers and other institutions hold many of such shares on behalf of stockholders. We estimate the total number of stockholders represented by these record holders to be approximately 7,200.

We have never declared or paid any cash dividends on our common stock. We currently anticipate that we will retain future earnings to fund development and growth of our business and do not anticipate paying cash dividends in the foreseeable future.

Item 6. Selected Financial Data

The following selected financial data are derived from our consolidated financial statements. This data should be read in conjunction with the consolidated financial statements and notes thereto, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

You should read the following discussion in conjunction with our consolidated financial statements and related notes. The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Forward-looking statements can be identified by the use of terminology such as “may”, “will”, “should”, “expect”, “plan” “anticipate”, “believe”, “estimate”, “predict”, “potential”, “continue” or other similar terms and the negative of such terms and include statements about our products and expected financial performance. Such forward-looking statements are based on our current plans and expectations and involve known and unknown risks and uncertainties which may cause our actual results or performance to be materially different from any results or performance expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the “Risk Factors” set forth below as well as other risks identified from time to time in other SEC reports. You should not place undue reliance on our forward-looking statements, as they are not guarantees of future results, levels of activity or performance and represent our expectations only as of the date they are made.

Overview

During 2003, we made a number of changes in our senior management team and Board, including the appointment of Graham Smith as Chief Financial Officer in March 2003, the appointment of Stephanie DiMarco, who founded Advent in 1983, initially as interim Chief Executive Officer and President in May 2003 and then as permanent Chief Executive Officer and President in December 2003. John H. Scully was appointed to our Board in October 2003 and subsequently appointed Chairman in December 2003.

Since May, our priorities have been to scale our business to appropriate expense levels and to build a sound business plan based on our established core products, which will lead to sustainable growth and profitability. This “back-to-basics” model is a significant change from our strategy in 2001 and 2002, when we focused on growth by acquisition and broadening product and service offerings, many of which were outside of our core product or service offerings.

Scaling our business to appropriate expense levels

During 2003, we have been restructuring our operations in order to bring costs more into line with estimated revenues. We consolidated office space in the New York City area and closed offices in Melbourne, Australia; Concord, California; and Denver, Colorado. We have also relocated certain employees from three buildings in San Francisco, California, to two buildings. We reduced our workforce from 980 on December 31, 2002 to 764 on December 31, 2003. We lowered costs in our other recently acquired businesses: we ceased investing in

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certain products for the institutional broker/dealer market; we narrowed our customer focus and automated processes in outsourcing services; and we standardized on a single technology platform in our consolidated wealth reporting business. Further cost reduction measures were implemented across all functions. Consequently, quarterly operating expenses were reduced from a high in second quarter 2003 of $32.2 million to $27.4 million in the fourth quarter 2003.

We generated net losses in each quarter of 2003. Under applicable accounting principles, based on our history of consecutive losses since the second quarter of 2002, we determined that it was more likely than not that we would not realize any value for our net deferred tax assets, and we established a valuation allowance equal to 100% of the amount of these assets. Accordingly, we recorded a provision for income taxes in 2003 of $59.4 million. Income tax expense recorded in the future will be reduced to the extent sufficient positive evidence materializes to support a reversal of, or decrease in, the valuation allowance.

As a result of the restructuring and cost-reduction activities, we had $7.2 million of positive cash flow from operations in the fourth quarter of 2003 and had positive cash flow from operations of $7.0 million for 2003.

Focus on core business

In 2001 and 2002, we acquired six new businesses: Rex Partners, L.P., NPO Solutions, ManagerLink.com, Kinexus, Techfi, and Outsource Data Management, LLC. In the same periods, we also acquired our Scandinavian and Greek distributors’ operations. The result of this acquisition strategy was that management increasingly was focused on issues associated with integrating a broad set of new businesses which in turn distracted senior management’s attention from Advent’s well-established core business.

During this period, adverse economic conditions and potential new regulations affected our customers and prospects in the financial services sector. These conditions resulted in longer and less predictable sales cycles and caused existing and potential clients to decrease or delay their purchases of our software and related products and services.

In response to these conditions, we are re-focusing the company on our well-established core business, by reducing expenditures in our recently acquired businesses, realigning our sales organization, changing the priorities of our product development organization, and taking a more disciplined approach to execution.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements as of and for the year ended December 31, 2003. We believe our most critical accounting policies and estimates include the following:

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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 on our Consolidated Statements of Operations.

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

Software license and development fees. We recognize revenue from the licensing of software when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed 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 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. However, we expect term licenses to increase as a proportion of total licenses in the future.

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.

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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 product, 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 for renewals of annual maintenance in subsequent years. We offer other recurring revenue services that are either subscription-based or transaction-based, and primarily include the provision of software interfaces to, and the capability to download securities information from, third party data providers. Fair value for maintenance is based upon renewal rates stated in the contracts or, in limited cases, separate sales of renewals to other customers. We recognize revenue for maintenance ratably over the contract term. We recognize revenue from recurring revenue transactions either ratably over the subscription period or as the transactions occur.

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

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

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 whether or not we will realize a benefit from net deferred tax assets on an ongoing basis. A valuation allowance is recorded to reduce the net deferred tax assets to an amount that will more likely than not be realized. Significant factors considered by management in assessing the need for a valuation allowance include the following:

In considering whether or not we will realize a benefit from net deferred tax assets, recent losses must be given substantially more weight than any projections of future profitability. In the fourth quarter of 2003, we determined that, under applicable accounting principles, based on our history of consecutive losses since the second quarter of 2002, it was more likely than not that we would not realize any value for our net deferred tax assets. Accordingly, we established a valuation allowance equal to 100% of the amount of these assets. Income

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tax expense recorded in the future will be reduced to the extent sufficient positive evidence materializes to support a reversal of, or decrease in, the valuation allowance.

Impairment of long-lived assets. We review our goodwill 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. We are required to test our goodwill for impairment at the reporting unit level. We have determined that we have only one reporting unit. The test for goodwill impairment is a two-step process:

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.

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

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

We hold minority interests in several privately held companies having operations or technology in areas within our strategic focus. Most of these investments can be considered in the start-up or developing stages and are classified as other assets on our balance sheet. One of these investments is accounted for under the equity method of accounting. Our portion of net income and losses for this investment has not been significant to date. We record an investment write-down when we believe an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future. We estimate an investment’s carrying value based primarily on its revenue and implied valuation based on revenue multiples for similar public companies, supplemented by any recent valuation events, such as an equity financing.

Restructuring expenses and related accruals. During 2003, we developed and implemented formalized plans for restructuring our business to better align our resources to market conditions and recorded significant charges. In connection with these plans, we recorded estimated expenses for severance and benefits, lease cancellations, asset write-offs and other restructuring costs. Given the significance of, and the timing of the

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execution of such activities, this process is complex and involves periodic reassessments of estimates made at the time the original decisions were made, including evaluating real estate market conditions for expected vacancy periods and sub-lease rents. We continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. Although we believe that these estimates accurately reflect the costs of our restructuring plans, actual results may differ, thereby requiring us to record additional provisions or reverse a portion of such provisions.

Acquisitions

In May 2003, we purchased all of the common stock of Advent Netherlands BV from our independent European distributor, Advent Europe, 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:

In 2002, we acquired Kinexus Corporation, Techfi Corporation, Advent Hellas, and Advent Outsource Data Management, LLC for a total purchase price of $75.8 million.

In 2001, we acquired Rex Development Partners, L.P., NPO Solutions, Managerlink.com and European distributors in Denmark, Norway and Sweden for a total purchase price of $33.9 million.

For additional information regarding these acquisitions, see Note 3 of the Notes to Consolidated Financial Statements.

Distributor Relationship

We rely on a number of alliances to help us achieve market acceptance of our products and to leverage our development, sales, and marketing resources. In 1998 we established one such relationship with a company in Scandinavia to distribute our products throughout Scandinavia. In the third quarter of 1999, this distributor formed Advent Europe. Advent Europe and its subsidiaries have the exclusive right to distribute our software

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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. Incorporated in the Netherlands, Advent Europe is an independent entity and is not financially backed by us and is entirely capitalized by independent third party investors. It makes tax and language modifications to our software products to fit the various needs of the local jurisdictions and then markets and licenses the products and related services. All transactions between Advent Europe and us are at arms-length. Our revenues from this distributor in each of the three years ended December 31, 2003, 2002 and 2001 were less than 4% of our total net revenue.

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 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.

Common Stock Repurchases

In the first quarter of 2003, we repurchased and retired 1,000,000 shares of our Common Stock at an average price of $14.31 per share.

In May and June 2002, our Board of Directors authorized the repurchase of 1,000,000 and 2,000,000 shares, respectively. During 2002, we repurchased and retired 2,355,000 shares of our Common Stock for which we paid $49.7 million at an average price of $21.09 per share.

In September and October 2001 we repurchased and retired 430,000 shares of our own Common Stock under a program approved by our Board of Directors in March 2001 to repurchase up to 1,000,000 shares from time to time. We paid $14.8 million at an average price of $34.44 per share.

We periodically consider whether to repurchase shares of our common stock. However, we do not expect to repurchase shares of our common stock in the first quarter of 2004.

Employee Stock Option Exchange Program

In November 2002, we 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 this 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 old options of the 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 who elected to

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participate in the 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 options is $18.88, 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. The exchange program did not result in additional compensation charges.

Reclassifications

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

Revenues. We had previously classified all “soft dollar” fees from our broker/dealer subsidiary as license and development fees. These “soft dollar” fees reflect transactions relating to licenses of Advent’s products and services as well as “soft dollar” fees relating to third party products and services. Because “soft dollar” fees from third party products and services have been increasing as a percentage of total “soft dollar” fees, and license and development revenues have declined from previous levels, we believe it is more appropriate to exclude “soft dollar” fees related to third party products and services from license and development fees revenue, and we began presenting these amounts as professional services and other revenue. The amounts reclassified were $5.7 million and $5.3 million for 2002 and 2001, respectively. “Soft dollar” revenues relating to Advent products and services remain in license and development fees revenue and accounted for less than 7% of total license and development fees revenue for all periods presented.

Revenue from our project management team had previously been classified in maintenance and other recurring revenue. We have determined this revenue is better classified as professional services revenue, because the project management and consulting teams often work closely together and the nature of the projects is now typically non-recurring. The amounts reclassified were $3.1 million and $3.5 million for 2002 and 2001, respectively.

Expenses. We reclassified the expenses relating to “soft dollar” fees for third party products from cost of license to cost of professional services and other. In addition, other reclassifications were made to cost of revenues and operating expenses. In the past, employees in product development, maintenance and professional services were typically called on to assist in the sales process. As a result, a certain proportion of these expenses were allocated to sales and marketing. As our organizational structure matured, the functional groups became more distinct. Our current view of the business is based on a stricter delineation between the functional groups. Overall, cost of revenues increased and operating expenses decreased as a result of these reclassifications by $ 6.0 million and $6.9 million in 2002 and 2001, respectively.

In addition to our revenue and expense reclassifications described above, reclassifications were also made on our balance sheets and statements of cash flows.

Amortization of Developed Technology. In the fourth quarter of 2003, we began presenting amortization of developed technology within cost of revenues. Through our various acquisitions, we have purchased technologies which are either licensed directly to our customers or used internally to provide services to our customers for which we derive revenue. As a result of our acquisitions from 2001 through the middle of 2003, the amortization related to purchased technology has increased. We believe that presenting this amortization within cost of revenues more accurately presents our total cost of revenues and gross margin. We have reclassified $6.6 million and $4.8 million for 2002 and 2001, respectively, which were previously included in amortization of other intangibles within operating expenses, to amortization of developed technology within cost of revenues.

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Results Of Operations For The Years Ended December 31, 2003, 2002 and 2001

The following table sets forth, for the periods indicated, certain financial information as a percentage of total net revenues:

REVENUES

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

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Net revenues in 2003 continued to be impacted by adverse economic conditions, resulting in reduced information technology spending by some of our customers and reduced demand for many of our products and services. The decrease in net revenues in 2003 reflected declines in license and development fees and professional services and other, respectively, partially offset by an increase in maintenance and other recurring revenues, as well as increased revenue from international sales. Net revenues in 2002 also declined due to adverse economic conditions and the significant downturn in the financial markets, resulting in reduced spending by our customers and delayed purchases of our products. In 2002, license and development fees declined significantly, partially offset by a strong increase in maintenance and other recurring revenues as well as a slight increase in professional services and other. The same economic factors impacted revenues across the industry in these two years, resulting in longer sales cycles, deferral and delay of information technology projects and generally reduced expenditures for software related services. During the second half of 2003, the trend in spending by our customers began to stabilize and we experienced higher levels of revenues. Going forward, we expect normal seasonal weakness to result in lower revenues in the first quarter of 2004 as compared to the fourth quarter of 2003, followed by some stabilization and growth as the year progresses. However, we continue to expect a difficult business environment and limited visibility.

International sales represented 12% of our net revenues in 2003, compared to less than 8% in 2002 and 2001. The revenues from customers in any single country did not exceed 10% of total revenues.

Each of the major revenue categories has historically varied as a percentage of net revenues and we expect this variability to continue in future periods. This variability is partially due to the timing of the introduction of new products, the relative size and timing of individual licenses, as well as the size of the implementation, the resulting proportion of the maintenance and professional services components of these license transactions and the amount of client use of pricing and related data.

License Revenue and Development Fees

The decline in license and development fees revenue in 2003 primarily reflected the continuing adverse economic and industry conditions resulting in reduced capital spending by some of our customers. The decrease primarily reflected lower license fees from certain strategic relationships and lower revenues from sales of Axys, Partner, Moxy, Qube, and other associated products, particularly with larger customers. The decline in 2002 primarily reflected adverse economic conditions and economic uncertainty. The corresponding downturn in financial markets resulted in some of our customers reducing and postponing orders. The decrease in license and development fees revenue in 2002 was due primarily to decreased sales of Geneva and the Advent Office suite of products. These declines in revenues in 2003 and 2002 reflected a decline in both size and volume of our software sales. The reluctance of some of our customers to commit to new software purchases also resulted in the significant decline in license and development fees revenue as a percentage of net revenues in 2003 and 2002. License and development fees revenue stabilized and then increased in the second half of 2003. We expect seasonal weakness to impact license and development fees revenue in the first quarter of 2004. We expect license and development fees revenues to increase moderately for the full year. For each of the periods presented, the Advent Office suite of products, including Axys, Moxy, Partner and Qube, accounted for the majority of license revenue.

We typically license our products on a per server, per user basis with the price per customer varying based on the selection of the products licensed, the number of site installations, the number of authorized users and the customer’s line of business. Our pricing can vary in different market segments to maintain our competitive position. We earn development fees when we provide product solutions that are not part of our standard product

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offering but that will be incorporated into our future releases. For the year ended December 31, 2003, 2002 and 2001, revenue from development fees has been less than 5% of total license and development fees revenue.

For each year ended December 31, 2003, 2002 and 2001, revenues generated from Advent product and services paid for through “soft dollar” transactions represented less than 7% of total license and development fees revenue.

Maintenance and Other Recurring Revenues

Maintenance and other recurring revenues increased in 2003, reflecting continuing maintenance revenues from our established customer base, as well as a full year of recurring revenue from our outsourcing services following the acquisitions of Kinexus, Techfi and Advent Outsource in 2002, and a decrease in our Advent Wealth Services revenues offset by increased demand for our data services. The increase in 2002 was due primarily to the growth in our customer base and increased revenue from our Advent Custodial Data services as well as our other data feed revenue sources. Revenue associated with our acquisitions of Kinexus in February 2002, Techfi in July 2002 and Advent Outsource in November 2002 and increased demand for pricing data and other data services associated with our Wealth Management Solutions also contributed to increased maintenance and other recurring revenues in 2002. We expect that maintenance and recurring revenues will be reasonably flat in the first quarter of 2004, with slight increases each quarter for the remainder of 2004.

Professional Services and Other Revenues

The decline in professional services and other revenues in 2003 partially reflected lower consulting revenues as a result of lower new license sales, reduced demand for our other professional services such as training and custom work, as well as a decline in revenues earned from third party products paid for through soft dollar transactions. Our consulting revenues are generally proportional to sales of our software products, which declined in 2003. The increase in professional services and other revenue in 2002 was primarily due to higher revenues earned from third party products paid for through soft dollar transactions, partially offset by a decrease in general consulting revenues as a result of the decrease in license revenues. We expect that professional services and other revenue will decrease in the first quarter of 2004, followed by slight increases, in proportion to license revenue, in the subsequent quarters of 2004. Increases or decreases in consulting revenues generally lag corresponding increases or decreases in license revenues by one to two quarters.

COST OF REVENUES

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

Cost of License and Development Fees

Cost of license and development fees consist primarily of royalties and other fees paid to third parties, the fixed direct labor involved in producing and distributing our software, labor costs associated with generating development fees and cost of product media including duplication, manuals and packaging materials. The increase in 2003 primarily reflected an increase in royalty payments and commissions to third parties associated with our Data Warehouse, MoxyFIX and Geneva products. The decrease in 2002 was primarily related to reduced royalties as the product mix in license and development fees revenues changed. The increase as a percentage of license revenues in 2003 is primarily due to the decrease of revenues compared to fixed costs associated with our product distribution, and to a lesser extent, product mix. We expect cost of license and development fees in 2004 to be flat compared with 2003.

Cost of Maintenance and Other Recurring

Cost of maintenance and other recurring revenues is primarily comprised of the direct costs of providing technical support and other services for recurring revenues and royalties paid to third party subscription-based and transaction-based vendors. The increase in 2003 primarily reflected a full year of revenue and related costs following the acquisitions of Techfi, Kinexus and Advent Outsource in 2002 and a write-off of $1.8 million related to internally developed software that we abandoned. The increase in 2002 was primarily related to the inclusion of expenses following the acquisition of Kinexus. We expect cost of maintenance and other recurring revenues in 2004 to be flat to slightly down compared with 2003.

Cost of Professional Services and Other

Cost of professional services revenues primarily consists of personnel related costs associated with providing consulting, custom report writing and training. Also included are direct costs associated with contractors, travel expenses and “soft dollar” transactions for third party products. The slight decrease in 2003 resulted primarily from a decline in costs associated with third party soft-dollar products and services and

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headcount reductions, in our consulting organization, offset by an increase in contractor costs. The increase in 2002 was primarily related to growth in costs of third party products and services paid for through “soft dollars.” The increase as a percentage of related revenues in 2003 was primarily due to a 28% decrease in revenues over relatively flat expenses. We expect cost of professional services and other revenues in 2004 to be flat to slightly down compared with 2003.

Amortization of developed technology

Amortization of developed technology represents amortization of acquisition-related intangible assets. The increase in amortization in 2003 reflects a full year of amortization following the acquisitions of Advent Outsource, Techfi and Kinexus in 2002, as well as the write-off of $887,000 of developed technology acquired as part of the acquisition of certain assets of ManagerLink.com. When we acquired Kinexus in 2002, we acquired certain technology which made the ManagerLink technology redundant. In 2003, we transferred business operations off the ManagerLink platform and abandoned those assets. The increase in amortization in 2002 reflects the acquisitions made during 2002, as well as a full year of amortization of intangible assets acquired following the acquisitions of Rex Development Partners, L. P., NPO Solutions, ManagerLink.com and our Scandinavian distributors in Denmark, Norway and Sweden in 2001. We expect amortization of developed technology to be approximately $5.2 million in 2004.

OPERATING EXPENSES

Sales and Marketing

Sales and marketing expenses consist primarily of the costs of personnel involved in the sales and marketing process, sales commissions, advertising and promotional materials, sales facilities expense, trade shows, and seminars. The decrease in expenses in 2003 was due primarily to lower headcount as a result of our restructuring activities implemented during 2003, and to a lesser extent, a decline in strategic marketing programs. The increase in expense in 2002 was due to an increase in sales and marketing personnel primarily related to our acquisitions of Kinexus, Techfi, Advent Outsource and Advent Hellas, and increased marketing programs targeting our core markets and our wealth management initiatives such as Advent Wealth Service and Wealthline. We expect sales and marketing expenses in 2004 to be flat to slightly down compared with 2003.

Product Development

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Product development expenses consist primarily of salary and benefits for our development staff as well as contractors’ fees and other costs associated with the enhancements of existing products and development of new products. The decrease in expenses in 2003 was due primarily to a decline in headcount as a result of our restructuring activities and lower costs for contractors. The increase in expenses in 2002 was due primarily to growth in personnel as we increased our product development efforts to accelerate the rate of product enhancements and new product introductions, such as Geneva, and our wealth management initiatives related to Advent Wealth Service and Wealthline in connection with our acquisitions of Kinexus and Techfi. We expect product development expenses in 2004 to be flat to slightly down compared with 2003.

General and Administrative

General and administrative expenses consist primarily of personnel costs for finance, administration, operations and general management, as well as legal and accounting expenses. The increase in 2003 was primarily due to severance costs for a senior executive and settlement of litigation, partially offset by our restructuring activities and reduction in headcount. The increase in 2002 was due to increased personnel hired early in the year in expectation of continued growth of the business, an increase in personnel related to the acquisitions of Kinexus and Techfi and an increase in legal fees due to certain litigation matters. We expect general and administrative expenses to be approximately $1 million higher in the first quarter of 2004 than in the fourth quarter of 2003 as a result of a litigation settlement for which we recorded a benefit of $0.8 million in the fourth quarter of 2003, but to remain flat to slightly down for the full year of 2004 compared with 2003.

Amortization of Other Intangibles

Amortization of other intangibles represents amortization of non-technology related intangible assets, as well as goodwill amortization in 2001. On January 1, 2002, we adopted 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. In accordance with Statement of Financial Accounting Standard (SFAS) No. 142, we continued to amortize goodwill related to acquisitions completed prior to July 1, 2001, through December 31, 2001. The increases in amortization in 2003 and 2002 reflected the acquisitions of Advent Outsource, Techfi, Kinexus, ManagerLink.com, NPO Solutions and our European subsidiaries in the Netherlands, Greece, Denmark, Norway and Sweden. We expect amortization of other intangibles to be approximately $8.1 million in 2004.

Purchased in-process research and development: Purchased in-process research and development (“IPR&D”) of $1.5 million was incurred in the third quarter of 2002 in conjunction with our acquisition of Techfi. This amount represented 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 included an estimated annual attrition percentage to

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account for the fact that, as time passed, the portion of projected revenue attributable to purchased IPR&D technologies would become less as newer technology replaced 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, general and administrative expenses, including estimated costs to maintain the products once they had been introduced into the market and were 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 had been in the marketplace. The project was completed in 2002 within the budgeted guidelines.

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 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. 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.

As of December 31, 2003 the remaining excess facility costs of $2.2 million 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. As a result of our restructuring activities implemented during 2003, we have reduced our total expenses by approximately $20 million on an annual basis.

In 2004, we expect to incur additional restructuring charges of approximately $2 million to $5 million as we identify opportunities to further reduce costs, particularly those associated with our real estate leases.

Interest income and other expense, net: Interest income and other expense, net consists of interest income, realized gains and losses on short-term investments and foreign currency gains and losses. Interest income and other expense, net was $3.5 million, $5.9 million and $8.3 million in 2003, 2002, and 2001, respectively. The decreases in interest income and other expense, net for 2003 and 2002 reflected lower average cash and short-term investment balances and lower average interest rates.

Loss on investments: Loss on investments includes other-than-temporary losses on our investments in privately held companies. We recorded write-downs of $2 million, $13.5 million and $2 million in 2003, 2002 and 2001, respectively, on these investments. The loss on investments in 2002 consisted primarily of a write-off

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of $9 million of our investment in Encompys and a $2 million write-off of our investment in myCFO, Inc. We do not anticipate any loss on investments in 2004; however, we will continue to evaluate our investments in accordance with generally accepted accounting principles and our internal policies.

Provision for income taxes: 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 a result, the provision for income taxes was $59.4 million in 2003 as compared to a benefit from income taxes of $4 million in 2002 and a provision for income taxes of $16.2 million in 2001, with an effective tax rate of 155.8% (provision) in 2003, 17.1% (benefit) in 2002, and 34% (provision) in 2001. 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.

Liquidity and Capital Resources

Our cash and cash equivalents, and marketable securities at December 31, 2003 were $160.1 million, compared with $173.8 million at December 31, 2002 and $288.6 million at December 31, 2001.

Cash flows from Operating Activities

Our cash flows from operating activities represent the most significant source of funding for our operations. Operating activities provided $7 million, $30 million and $43 million in 2003, 2002 and 2001, respectively. Our cash provided by operating activities has followed the trend in our net revenues, declining in each of the past two years. Our net loss in 2003 was significantly offset by non-cash charges, while our net loss in 2002 was more than offset by these charges. Non-cash charges include deferred income taxes, depreciation, amortization, other-than-temporary losses from investments, and non-cash restructuring charges.

Collections on our accounts receivable represent the major source of our operating cash. Our accounts receivable balance decreased $5 million and $22.6 million in 2003 and 2002, respectively, representing lower levels of revenue and improved collection efforts. Accounts receivable increased $17.7 million in 2001 representing increased revenue compared with the prior year.

The major use of our operating cash is to fund obligations which flow through our accounts payable and accrued liabilities, such as funding of payroll and related benefits, rent, facilities costs, insurance, professional fees and other costs incurred in our normal operations.

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

Cash Flows from Investing Activities

Net cash provided by investing activities in 2003 of $0.6 million consisted of net sales and maturities of marketable securities of $17.3 million, partially offset by $9.9 million used for the acquisition of Advent Netherlands BV and purchases of property and equipment of $6.8 million.

Net cash used in investing activities in 2002 of $83.7 million consisted of $89 million used in connection with our acquisitions of Kinexus, Techfi, Advent Hellas, Advent Outsource and earn-outs related to the acquisition of NPO Solutions, net purchases of non-marketable investments of $8.1 million, purchases of property and equipment of $6.7 million and $6.1 million used for deposits, partially offset by net sales and maturities of marketable securities of $26.2 million.

Net cash used in investing activities in 2001 of $119.7 million consisted of $44.1 million to acquire or make investments in complementary businesses and technologies, net purchases of marketable securities of $66.5 million and purchases of property and equipment of $9.1 million.

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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. See Note 12 of the Notes to Consolidated Financial Statements for additional information. Going forward, we may consider acquiring additional businesses from time to time. We do not expect a significant change in our expenditures for property and equipment in 2004.

Cash Flows from Financing Activities

Net cash used in financing activities in 2003 of $3.9 million reflected the repurchase of one million shares of our common stock for $14.3 million and principal payments on capital leases of $0.1 million, partially offset by stock issued through employee stock purchase and stock option plans of $10.6 million.

Net cash used in financing activities in 2002 of $34.3 million reflected the repurchase of 2.4 million shares of our common stock for $49.7 million and principal payments on capital leases of $0.1 million, partially offset by stock issued through employee stock purchase and stock option plans of $15.5 million.

Net cash provided by financing activities in 2001 of $146.6 million reflected net proceeds from a secondary offering of our common stock of $138 million, stock issued through employee stock purchase and stock option plans of $18.3 million and proceeds from the issuance of warrants of $5 million, partially offset by the repurchase of our common stock of $14.8 million.

We periodically consider whether to repurchase shares of our common stock. However, we do not expect to repurchase shares of our common stock during the first quarter of 2004.

At December 31, 2003, we had $127.8 million in working capital, down from $161.3 million at December 31, 2002. We currently have no significant capital commitments other than commitments under our operating leases, which declined from $64.4 million at December 31, 2002 to $46.2 million at December 31, 2003, as a result of exiting various facilities as part of our restructuring activities.

The following table summarizes our contractual cash obligations:

At December 31, 2003 and 2002, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

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

Based upon our past performance and current expectations, we believe that our cash and cash equivalents, marketable securities and cash generated from operations will be sufficient to satisfy our working capital needs, capital expenditures, investment requirements and financing activities for at least the next twelve months.

New 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

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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.

RISK FACTORS AND OTHER TRENDS AND UNCERTAINTIES AFFECTING FUTURE OPERATIONS

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

Our Operating Results May Fluctuate Significantly.

Licenses into multi-user networked environments have varied both in individual size and number, and the timing and size of individual license transactions are important factors in quarterly operating results. The sales and contracting cycles for these transactions are often lengthy and unpredictable. We may not be successful in closing large license transactions such as these on a timely basis or at all. Accordingly, because revenues from large licenses may vary as a portion of our net revenues, the timing of such licenses causes additional variability in our quarterly operating results. Software product backlog at the beginning of any quarter typically represents an immaterial portion of that quarter’s expected revenues. Our expense levels are based in significant part on our expectations of future revenues and therefore are relatively fixed in the short term. Due to the fixed nature of these expenses combined with the relatively high gross margin historically achieved on products, an unanticipated decline in net revenues in any particular quarter may adversely affect our operating results. We have often recognized a substantial portion of each quarter’s license revenues in the last month, weeks or even days of the quarter. As a result, the magnitude of quarterly fluctuations in revenue or earnings may not be evident until late in or after the close of a particular quarter and a disruption late in the quarter may have a disproportionately large negative impact on our quarterly results. These factors have impacted and may continue to impact our results.

In addition, we experience seasonality in our license revenue. The fourth quarter of the year typically has the highest license revenue, followed by lower revenue in the first quarter of the succeeding year. We believe that this seasonality results primarily from customer budgeting cycles. We expect this seasonality to continue in the future.

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

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

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

We Depend upon Financial Markets.

The target clients for our products include a range of financial services organizations that manage investment portfolios, including asset managers, investment advisors, brokerage firms, banks, family offices, hedge funds and others. In addition, we target corporations, public funds, universities and non-profit organizations, which also manage investment portfolios and have many of the same needs. The success of many of our clients is intrinsically linked to the health of the financial markets. We believe that demand for our solutions has been, and could continue to be, disproportionately affected by fluctuations, disruptions, instability or downturns in the financial services industry which may cause clients and potential clients to exit the industry or delay, cancel or reduce any planned expenditures for investment management systems and software products. Also, recent investigative efforts into various Mutual Fund industry practices could impact our business if that industry experiences a decline in its business. In addition, a slowdown in the formation of new investment firms or a decline in the growth of assets under management would cause a decline in demand for our solutions. We believe that the downturn in the financial services industry and the decline in information technology spending continued to negatively impact the demand for our products in the past two years, and that continuing uncertainty about financial markets and the financial services sector could have a material adverse effect on our business and results of operations.

We Depend Heavily on Our Product, Axys.

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

Adverse Economic Conditions May Reduce Our Revenues.

We believe that the market for large investment management software systems may be negatively impacted by a number of factors, including reductions in capital expenditures by large customers, poor performance of

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major financial markets, and increasing competition. Those factors may, in turn, give rise to a number of market trends which we have experienced in the past two years that have slowed revenue growth across the industry, including longer sales and contracting cycles, deferral or delay of information technology projects and generally reduced expenditures for software and related services. If the downturn in the financial services industry and information technology spending continues, the presence of these factors in the market for large investment management solutions will likely materially adversely affect our business and results of operations.

We Face Intense Competition.

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

Our competitors vary in size, scope of services offered and platforms supported. Many of our competitors have longer operating histories and greater financial, technical, sales and marketing resources than we do. In addition, we also face competition from potential new entrants into our market that may develop innovative technologies or business models. We cannot guarantee that we will be able to compete successfully against current and future competitors or that competitive pressures will not result in price reductions, reduced operating margins or loss of market share, any one of which could seriously harm our business.

We Must Continue to Introduce New Products and Product Enhancements.

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

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We Must Retain Key Employees and Recruit Qualified Technical and Sales Personnel.

We believe that our success will depend on the continued employment of our senior management and other key personnel. Additionally, our continued success depends, in part, on our ability to identify, attract, motivate and retain qualified technical, sales and other personnel. Because our future success is dependent on our ability to continue to enhance and introduce new products, we are particularly dependent on our ability to identify, attract, motivate and retain qualified engineers with the requisite education, backgrounds and industry experience. The loss of the services of a significant number of our engineers or sales people could be disruptive to our development efforts or business relationships and could seriously harm our business. We may also be required to create additional performance and retention incentives in order to retain our employees, including the granting of additional stock options to employees at current prices or issuing incentive cash bonuses. Such incentives may either dilute our existing stockholder base or result in unforeseen operating expenses, which may cause our stock price to fall.

Difficulties in Integrating Our Acquisitions Have Impacted and Could Continue to Adversely Impact Our Business and We Face Risks Associated With Potential Acquisitions, Investments or Divestitures.

In May of 2003 we purchased our Dutch distributor, Advent Netherlands BV. In 2002, we completed the acquisition of Kinexus Corporation, Techfi Corporation, Advent Outsource Data Management, LLC and our Greek distributor Advent Hellas. In 2001, we acquired Rex Development Partners, L.P., NPO Solutions, Inc., and our Scandinavian distributor’s operations in Norway, Sweden and Denmark.

The complex process of integrating our acquisitions has required and will continue to require significant resources, particularly in light of our relative inexperience in integrating acquisitions. Integrating these acquisitions has been and will continue to be time-consuming, expensive and disruptive to our business. This integration process has strained our managerial resources, and has resulted in the diversion of these resources from our core business objectives. Failure to achieve the anticipated benefits of these acquisitions or to successfully integrate the operations of these entities has harmed and could continue to harm our business, results of operations and cash flows. We may not realize the benefits we anticipate from these acquisitions because of the following significant challenges:

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

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

Difficulties We May Encounter Managing Changes in the Size of Our Business Could Adversely Affect Our Operating Results.

Our business has experienced years of rapid growth through both internal expansion and acquisitions, followed by reduced revenues in 2002 and 2003, and significant downsizing during 2003. These changes have caused and may continue to cause a significant strain on our infrastructure, internal systems and managerial resources. During the past year, we took steps to better align our resources with our operating requirements in order to increase our efficiency. Through these steps, we reduced our headcount, closed selected offices and incurred charges for employee severance and excess facilities capacity. While we believe that these steps help us achieve greater operating efficiency, we have limited history with such measures and the results of these measures are less than predictable. Additional restructuring efforts may be required. To manage our business effectively, we must continue to improve our infrastructure, including operating and administrative systems and controls, and continue managing headcount, capital and processes in an efficient manner. Our productivity and the quality of our products may be adversely affected if we do not integrate and train our employees quickly and effectively and coordinate among our executive, engineering, finance, marketing, sales, operations and customer support organizations, all of which add to the complexity of our organization. We believe workforce reductions, management changes and facility consolidation create anxiety and uncertainty and may adversely affect employee morale. These measures could adversely affect our employees that we wish to retain and may also adversely affect our ability to hire new personnel. They may also affect customers. In addition, our revenues may not grow in alignment with our headcount.

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We Face Risks Related to Our New Business Areas.

During 2001 and 2002 we expanded into a number of new business areas, for example international operations, strategic alliances, acquisitions such as Advent Wealth Service, Techfi and Advent BackOffice and offerings such as Wealthline. These areas are still relatively new to our product development and sales personnel. Some of these new business areas have required significant management time and resources without generating significant revenues, and have diverted and may continue to divert management from our core business. While our traditional offerings are marketed to investment managers and advisors, Advent Wealth Service and Wealthline are also targeted for use by our clients’ customers. We have had difficulty and may continue to have difficulty creating demand from our client’s customers as we market to them indirectly, through our clients. Revenue growth has suffered and may continue to suffer if we cannot create demand among our clients’ customers.

We Face Challenges in Expanding Our International Operations.

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

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

Writing Off Investments Could Harm Our Results of Operations.

We have made investments in privately held companies, which we classify as other assets on our balance sheet. The value of these investments is influenced by many factors, including the operating effectiveness of

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these companies, the overall health of these companies’ industries, the strength of the private equity markets and general market conditions. Due to these and other factors, we have previously determined, and may in the future determine, that the value of these investments is impaired, which has caused and would cause us to write down the carrying value of these investments such as the write-off of our investments in Encompys and MyCFO during 2002. Furthermore, we cannot be sure that future investment, license, fixed asset or other asset write-downs will not happen, particularly if the downturn in the financial services industry and the decline in information technology spending continues. If future write-downs do occur, they could harm our business and results of operations.

Information We Provide to Investors is Accurate Only as of the Date We Disseminate it.

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

Our Stock Price has Fluctuated Significantly.

Like many companies in the technology and emerging growth sector, our stock price may be subject to wide fluctuations, particularly during times of high market volatility. If net revenues or earnings in any quarter fail to meet the investment community’s expectations, our stock price is likely to decline. In addition, our stock price is affected by trends in the financial services sector and by broader market trends unrelated to our performance.

If Our Relationship with Interactive Data Corporation Is Terminated, Our Business May Be Harmed.

Many of our clients use our proprietary interface to electronically retrieve pricing and other data from Interactive Data Corporation (IDC). IDC pays us a commission based on their revenues from providing this data to our clients. Our software products have been customized to be compatible with their system and this software would need to be redesigned if their services were unavailable for any reason. Termination of our agreement with IDC would require at least two years notice by either us or them, or 90 days in the case of material breach. Our revenue could be adversely impacted if our relationship with IDC were terminated or their services were unavailable to our clients for any reason.

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

Our success depends significantly upon our proprietary technology. We currently rely on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. We have registered trademarks for many of our products and services and will continue to evaluate the registration of additional trademarks as appropriate. We generally enter into confidentiality agreements with our employees and with our resellers and customers. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. Despite these efforts, it may be possible for unauthorized third parties to copy certain portions of our products or to reverse engineer or otherwise obtain and use our proprietary information. We do not have any patents, and existing copyright laws afford only limited protection. In addition, we cannot be certain that others will not develop substantially equivalent or superseding proprietary technology, or that equivalent products will not be marketed in competition with our products, thereby substantially reducing the value of our proprietary rights. We cannot be sure that we will develop proprietary products or technologies that are patentable, that any patent, if issued, would provide us with any competitive advantages or would not be challenged by third parties, or that the patents of others will not adversely affect our ability to do business. Litigation may be necessary to protect our proprietary technology. This litigation may be time-consuming and expensive. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect

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proprietary rights to as great an extent as do the laws of the United States. We cannot be sure that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology, duplicate our products or design around any patent that may be issued to us or other intellectual property rights of ours.

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

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

Business Interruptions Could Adversely Affect Our Business.

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

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

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

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

The Sarbanes-Oxley Act (“the Act”) of 2002, which became law in July 2002, requires changes in some of our corporate governance and securities disclosure and/or compliance practices. As part of the Act’s requirements, the Securities and Exchange Commission has been promulgating new rules on a variety of subjects, in addition to other rule proposals, and the NASDAQ Stock Market has enacted new corporate governance listing requirements. We believe these developments will increase our accounting and legal compliance costs and could also expose us to additional liability. In addition, such developments may make retention and recruitment of qualified persons to serve on our board of directors or executive management more

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difficult. We are presently evaluating and monitoring regulatory and legislative developments and cannot reliably estimate the timing or magnitude of additional cost we will incur as a result of the Act or other related legislation or regulation.

If We Account for Employee Stock Option and Employee Stock Purchase Plans Using the Fair Value Method, it Could Adversely Affect Our Results of Operations.

There has been ongoing public debate whether employee stock option and employee stock purchase plans shares should be treated as a compensation expense and, if so, how to properly value such charges. If we elected or were required to record an expense for our stock-based compensation plans using the fair value method, we could have significant accounting charges. For example, in 2003, had we accounted for stock-based compensation plans using the fair-value method prescribed in FASB Statement No. 123 as amended by Statement 148, our net loss would have increased by $11.6 million. Although we are not currently required to record any compensation expense using the fair value method in connection with option grants that have an exercise price at or above fair market value at the grant date and for shares issued under our employee stock purchase plan, it is possible that future laws or regulations will require us to treat all stock-based compensation as an expense using the fair value method.

Security Risks and Concerns May Deter the Use of the Internet for Conducting Business.

A significant barrier to commerce and communications over public networks is the secure transmission of confidential information. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments could result in compromises or breaches of our security systems or those of other web sites to protect proprietary information. If any well-publicized compromises of security were to occur, it could have the effect of substantially reducing the use of the internet for commerce and communications. Anyone who circumvents our security measures could misappropriate proprietary information or cause interruptions in our services or operations. The internet is a public network, and data is sent over this network from many sources. In the past, computer viruses, software programs that disable or impair computers, have been distributed and have rapidly spread over the internet. Computer viruses could be introduced into our systems or those of our customers or other third parties, which could disrupt or make it inaccessible to customers. We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by breaches. To the extent that our activities may involve the storage and transmission of proprietary information, security breaches could expose us to a risk of loss or litigation and possible liability. Our security measures may be inadequate to prevent security breaches, and our business would be harmed if our security were breached.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial market risks, including changes in foreign currency exchange rates and interest rates. Historically, much of our revenues and capital spending was transacted in U.S. dollars. However, since the acquisitions of Advent Denmark, Advent Norway, Advent Sweden, Advent Hellas and Advent Netherlands, whose revenues, with the exception of Geneva transactions and capital spending, are transacted in local country currencies, we have greater exposure to foreign currency fluctuations. The results of operations from these territories are not material to our operating results; therefore, we believe that foreign currency exchange rates should not materially adversely affect our overall financial position, results of operations or cash flows.

Our interest rate risk relates primarily to our investment portfolio, which consisted of $71.5 million in cash equivalents and $76.7 million in marketable securities as of December 31, 2003. An immediate sharp increase in interest rates could have a material adverse affect on the fair value of our investment portfolio. Conversely, immediate sharp declines in interest rates could seriously harm interest earnings of our investment portfolio. We do not currently use derivative financial instruments in our investment portfolio, nor hedge for these interest rate exposures.

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By policy, we limit our exposure to longer-term investments, and a majority of our investment portfolio at the end of 2003 and 2002 had maturities of less than one year. As a result of the relatively short duration of our portfolio, an immediate hypothetical parallel shift to the yield curve of plus 25 basis points (BPS), 50 BPS and 100 BPS would result in a reduction of 0.17%, 0.34% and 0.68%, respectively, in the market value of our investment portfolio as of December 31, 2003.

We have also invested in several privately-held companies, most of which can still be considered in the start-up or development stages. These non-marketable investments are classified as other assets on our balance sheet. Our investments in privately-held companies could be affected by an adverse movement in the financial markets for publicly-traded equity securities, although the impact cannot be directly quantified. These investments are inherently risky as the market for the technologies or products these privately-held companies have under development are typically in the early stages and may never materialize. The value of these investments is also influenced by factors including the operating effectiveness of these companies, the overall health of the companies’ industries and the strength of the private equity markets. We could lose our entire investment in these companies. At December 31, 2003 our net investments in privately-held companies totaled $8.9 million.

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Item 8. Financial Statements and Supplementary Data

ADVENT SOFTWARE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)