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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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)

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 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 April 30, 2004 was 33,147,625.

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

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

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ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

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

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ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

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

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ADVENT SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

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

We have prepared the condensed consolidated financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. Certain information and footnote disclosures included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in these interim statements pursuant to such SEC rules and regulations. We recommend that these interim financial statements be read in conjunction with the audited financial statements and related notes included in our 2003 Annual Report on Form 10-K filed with the SEC. Interim results are not necessarily indicative of the results to be expected for the full year, and we make no representation thereto.

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

2. Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46 expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes in which either (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).

We adopted the provisions of FIN 46 in the first quarter of 2004. In conjunction with the adoption of FIN 46, we determined that our independent European distributor, Advent Europe Holding BV (“Advent Europe”) is a variable interest entity, but that we are not the primary beneficiary. In accordance with FIN 46, we are not required to consolidate this distributor. We established our relationship with Advent Europe in 1998. Advent Europe and its subsidiaries have had the exclusive right to sell our software products, excluding Geneva, in certain locations in Europe and the Middle East. From 2001 through 2003, we purchased five of Advent Europe’s subsidiaries. As discussed in Note 12, we signed a definitive agreement on April 28, 2004 to purchase the remaining independent distributor businesses of Advent Europe in the United Kingdom and Switzerland, as well as certain assets of Advent Europe, for initial consideration of $3.2 million and additional potential consideration of approximately $6.0 million. We currently have no other exposure to loss as a result of our involvement with Advent Europe.

3. Stock-Based Compensation

We use the intrinsic value-based method as prescribed in the Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) to account for all of our stock-based employee compensation plans and have adopted the disclosure-only alternative of SFAS No. 123 “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”. We are required to disclose the pro forma effects on operating results as if we had elected to use the fair value approach to account for all our stock-based employee compensation plans. Stock-based compensation for non-employees is based on the fair value of the related stock or options.

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

If compensation had been determined based on the fair value at the grant date for awards in the three month periods ended March 31, 2004 and 2003, respectively, consistent with the provisions of SFAS No. 123, our net loss and net loss per share would have been as follows:

The weighted-average grant-date fair value of options granted were $19.68 and $8.25 per option for the three months ended March 31, 2004 and 2003, respectively. The estimated weighted-average grant-date fair value of the Employee Stock Purchase Plan (“ESPP”) rights were $15.21 and $18.79 per option for the three months ended March 31, 2004 and 2003, respectively. The ESPP plan periods begin every six months in the second and fourth quarter of each year.

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

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4. Net Loss Per Share

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

As the Company incurred net losses in the three month periods ended March 31, 2004 and 2003, options to purchase 5.9 million and 4.2 million shares, respectively, of the Company’s common stock were excluded from the computation of diluted net loss per share, as the effect would have been anti-dilutive.

5. Goodwill

The changes in the carrying value of goodwill for the three months ended March 31, 2004 were as follows:

Additions to goodwill for the three months ended March 31, 2004 consisted of $811,000 for the achievement of certain earn-out provisions of the Advent Outsource Data Management acquisition agreement and consideration of $185,000 paid to the former shareholders of Techfi Corporation which had been held in escrow for protection against undisclosed liabilities. Other adjustments represented translation adjustments between the European currencies and the U.S. dollar in the first quarter of 2004.

6. Other Intangibles

The following is a summary of other intangibles as of March 31, 2004:

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The following is a summary of other intangibles as of December 31, 2003:

The changes in the carrying value of other intangibles for the three months ended March 31, 2004 were as follows:

Amortization expense totaled $3.4 million for the three months ended March 31, 2004 and 2003. Other adjustments for the three month period ended March 31, 2004 represented translation adjustments between the European currencies and the U.S. dollar.

Based on the carrying amount of the other intangibles as of March 31, 2004, the estimated future amortization is as follows (in thousands):

7. Balance Sheet Detail

The following is a summary of other assets, net:

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Long-term investments include equity investments in several privately held companies, most of which can still be considered in the start-up or development stages. In 2002, we acquired approximately 15% of the outstanding stock of LatentZero Limited (“LatentZero”), a privately-held company located in the United Kingdom, for $7 million. Our investment is accounted for under the equity method of accounting because our Chief Executive Officer is a member of LatentZero’s board of directors.

In the three months ended March 31, 2003, we recorded write-downs of $500,000 on various long-term equity investments, as a result of other-than-temporary declines in the estimated fair value of such investments. In the three months ended March 31, 2004 and 2003, we recorded a loss of $271,000 and income of $11,000, respectively, as our pro rata share of net loss and net income on our equity method investment. These amounts are included in interest income and other expenses, net on our Condensed Consolidated Statements of Operations.

The following is a summary of accrued liabilities:

Other accrued liabilities includes the accrual for restructuring charges (see Note 9).

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

8. Comprehensive Income (Loss)

The components of comprehensive loss were as follows:

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The components of accumulated other comprehensive income were as follows:

9. Restructuring Charges (Benefit)

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

The restructuring charges (benefit) recorded for the three month periods ended March 31, 2004 and 2003 were:

For the three months ended March 31, 2004, we recorded a net restructuring benefit of $43,000 consisting of a $163,000 adjustment related to entering into a final sub-lease agreement on one of our vacated facilities in New York and a $16,000 adjustment to non-cash severance. These adjustments were partially offset by a restructuring charge of $136,000 related to the termination of nine employees, located primarily in New York.

For the three months ended March 31, 2003, we recorded restructuring charges of $3.5 million. These charges consisted of $2.1 million related to the closing and consolidating of excess office space, primarily in New York and Australia; $1.0 million of severance and benefits related to the termination of 39 employees; and $410,000 related to the abandonment and write-off of certain equipment, furniture and leasehold improvements.

The following table sets forth an analysis of the components of the restructuring charges and the payments and non-cash charges made against the accrual as of March 31, 2004:

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As of March 31, 2004, the remaining excess facility costs are stated at estimated fair value, net of estimated sublease income of approximately $780,000. We expect to pay remaining obligations in connection with vacated facilities no later than over the remaining lease terms, which expire on various dates through 2008. We expect to pay the remaining severance and benefits in 2004.

10. Common Stock Repurchase

During 2001 and 2002, Advent’s Board of Directors (the “Board”) authorized the repurchase of up to four million shares of outstanding common stock. No shares of common stock were repurchased during the first quarter of 2004. In the first quarter of 2003, we repurchased and retired 1.0 million shares of our common stock at a cost of $14.3 million. As of March 31, 2004, we have repurchased and retired 3.8 million shares of common stock since inception of the stock repurchase program at a total cost of $78.8 million. The stock repurchase program has been suspended by the Board and therefore, any further stock repurchases are subject to Board approval.

11. Commitments and Contingencies

We lease office space and equipment under non-cancelable operating lease agreements, which expire at various dates through May 2012. As of March 31, 2004, our remaining operating lease commitments through 2012 are approximately $43.9 million. Future minimum rentals to be received under non-cancelable sub-leases total $0.9 million.

We have contingent liabilities related to our acquisitions of Advent Netherlands BV and Advent Outsource Data Management in the form of potential earn-out distributions. These earn-outs are recorded as additional goodwill, if earned. Under the terms of the purchase agreement of Advent Netherlands BV, the earn-out provision is based on a formula equal to 50% of any operating margins which exceed 20% for the year ending December 31, 2004. As of March 31, 2004, no additional consideration was earned based on this formula. Under the terms of the purchase agreement of Advent Outsource Data Management, there is an earn-out provision of up to $5 million under a formula based on revenue results through December 31, 2004. Through March 31, 2004, $811,000 had been earned and recorded as additional goodwill under this provision (see Note 5). Additional consideration earned under these earn-out provisions will be paid in 2005.

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

12. Subsequent Event

On April 28, 2004, we signed a definitive agreement to purchase the remaining independent distributor businesses of Advent Europe in the United Kingdom and Switzerland, as well as certain assets of Advent Europe. The initial consideration of $3.2 million consists of $380,000 in cash and $2.8 million of assumed liabilities, with additional potential consideration of approximately $6.0 million. The initial $380,000 cash consideration was paid and liabilities of $2.8 million assumed at the close of transaction on May 3, 2004. An additional $2.4 million is due upon the satisfaction of two post-closing conditions associated with the business transaction. The balance of the consideration is contingent on the achievement of certain revenue goals in 2004.

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

You should read the following discussion in conjunction with our condensed consolidated financial statements and related notes. The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. 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

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.

During the first quarter of 2004, we continued to focus on growing and strengthening our core business and related services. Our software revenues came from activity in our core products: Axys, Moxy, Partner, Geneva, as well as MicroEdge’s Foundation Power. Our growth in software license revenues primarily came from sales of these core products in medium-sized accounts, particularly to our existing clients. We were also able to sell our Geneva product into the larger enterprise market.

We have also focused on bringing enhanced functionality and new products to the market. In the first quarter of 2004, we released two new versions of our products: Geneva 5.2 and Moxy 4.2.

Geneva 5.2 features even more comprehensive security types and transaction coverage. We view alternative asset investments as a high growth area, and Geneva is positioned to meet the needs of firms whose business models include alternative assets. Version 5.2 includes functionality to process revolving debt, term loans, distressed debt and inflation protection bonds. Our challenge is to continue to add functionality that anticipates the market’s needs and provides a sophisticated platform to meet complex business requirements.

Moxy 4.2 is a version of our trade order management solution that was designed to be used “stand alone”, independent from Axys, our mid-market portfolio accounting solution. This new version of Moxy is designed for banks and trusts that traditionally use a bank industry-specific trust accounting system as their system of record. One of our partners, SEI Investments Management Corporation (“SEI”), is distributing this product. The success of this product will depend in large part on being able to seamlessly integrate Moxy into our customer’s portfolio processing and accounting systems. Outside of the SEI hosted environment, we will also license this version of Moxy to banks and trusts, as it features integration with all the major trust accounting systems.

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We have also been aligning our cost structure so that it is more in line with current revenue levels. Our total expenses of $38.1 million in the first quarter of 2004 are down from $44.7 million in the same period last year. The current cost structure reflects the restructuring activities from the prior year and continued cost-cutting initiatives. While restructuring charges were minimal this quarter, we do expect to record restructuring charges of approximately $5.0 million associated with building abandonment in the second quarter of 2004.

In the second quarter of 2004, we purchased the remaining independent distributor businesses of Advent Europe Holding BV (“Advent Europe”) in the United Kingdom and Switzerland. We now control all of our European operations. Over the last nine months, we have added significant customers in Europe, and we see this as an increasingly important market for us in the future. Our challenge will be to successfully integrate the new European entities and continue growth in the international markets.

Going forward, our goal is to return to profitability. Our ability to achieve this target will depend upon our ability to license software and sell services to new and existing customers and to renew maintenance contracts at similar levels to what we achieved in the first quarter of 2004. Our cost structure, excluding the impact of our acquisitions of the remaining distributor businesses of Advent Europe in the United Kingdom and Switzerland, must remain approximately flat with current levels of expenditure or decrease in order to reach profitability. In the second quarter of 2004, we will begin recording additional revenues and expenses associated with these recent acquisitions. We expect these incremental revenues and expenses to be relatively small and not have a material impact on our results of operations in the second quarter of 2004. We expect total net revenues to be flat to slightly higher in the second quarter of 2004. While recent experience indicates that our customers and prospects are willing to make capital investments, there is still uncertainty as to our ability to achieve the amount of revenue growth required for profitability.

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. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, valuation of long-lived assets, intangible assets and goodwill and income taxes. 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.

We believe our most critical accounting policies and estimates include the following:

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.

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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, other available information and pertinent country risk if the customer is located outside 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 general product offerings in the future. Revenues for license development projects are recognized primarily using the percentage-of-completion method of accounting, based on costs incurred to date compared with the estimated cost of completion.

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

Our standard practice is to enforce our contract terms and not allow our customers to return software. We have, however, on limited occasions allowed customers to return software and have recorded sales returns reserves as offsets to revenue in the period the sales return becomes probable.

We do have three situations where we provide a contractual limited right of return to end-user customers only: in shrink-wrap license agreements for Advent products, our MicroEdge product and our NPO product. The shrink-wrap license agreement for Advent product provides for a right of return within seven days of delivery of the software. The MicroEdge software license agreement allows for a thirty-day money back guarantee. The NPO license agreement allows for a seven-day right of return. We recognize revenue on delivery since the fee is fixed 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

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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 generally recognize revenue as these professional services are performed. Certain professional services arrangements involve acceptance criteria. In these cases, revenue is recognized upon acceptance.

Commission revenues received from “soft dollar” transactions for products and services not related to Advent products and services are recorded as other revenues. 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 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 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:

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

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

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During the fourth quarter of 2003, we completed our annual impairment test which indicated there was no impairment. There were no events or changes in circumstances during the first quarter of 2004 which triggered an impairment review.

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

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

We hold minority interests in several privately held companies having operations or technology in areas within our strategic focus. Most of these investments can be considered as early stage investment opportunities and are classified as other assets on our balance sheet. One of these investments is accounted for under the equity method of accounting. 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 charges and related accruals. Beginning in 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 execution of such activities, this process is complex and involves periodic reassessments of estimates made at the time the original decisions were made, including evaluating real estate market conditions for expected vacancy periods and sub-lease rents. We continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. Although we believe that these estimates accurately reflect the costs of our restructuring plans, actual results may differ, thereby requiring us to record additional provisions or reverse a portion of such provisions.

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46 expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes in which either (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).

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We adopted the provisions of FIN 46 in the first quarter of 2004. In conjunction with the adoption of FIN 46, we determined that our independent European distributor, Advent Europe, is a variable interest entity, but that we are not the primary beneficiary. In accordance with FIN 46, we are not required to consolidate this distributor. On April 28, 2004, we signed a definitive agreement to purchase the remaining independent distributor businesses of Advent Europe in the United Kingdom and Switzerland, as well as certain assets of Advent Europe, for initial consideration of $3.2 million and additional potential consideration of approximately $6.0 million. We currently have no other exposure to loss as a result of our involvement with Advent Europe. See “Distributor Relationship” below for additional information regarding our relationship with Advent Europe.

Reclassifications

Certain prior period amounts, as detailed below, have been reclassified to conform to the current period presentation to better reflect our view of the current business. These reclassifications do not affect total net revenues, net income 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 amount reclassified was approximately $1.4 million for the three month period ended March 31, 2003. “Soft dollar” revenues relating to Advent products and services remain in license and development fees revenue and accounted for less than 5% 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 amount reclassified was $734,000 for the first quarter of 2003.

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 approximately $1.5 million for the three month period ended March 31, 2003.

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 approximately $1.4 million for the first quarter of 2003, which was previously included in amortization of other intangibles within operating expenses, to amortization of developed technology within cost of revenues.

Accounts Receivable and Deferred Revenues. In the first quarter of 2004, we have discontinued netting down specific revenue reserves which were included in deferred revenues against their corresponding receivables. The result is an increase in our accounts receivable balance with a corresponding increase in deferred revenues. We have determined that for presentation purposes, the discontinuation of the net-down for the reserves gives more visibility to our receivables and deferred revenue accounts. We have reclassified $1.6 million for the fourth quarter of 2003 resulting in corresponding increases in both accounts receivable and deferred revenue.

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

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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 had the exclusive right to distribute our software products, excluding Geneva, in certain locations in Europe and the Middle East. Incorporated in the Netherlands, Advent Europe is an independent entity, 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 month periods ended March 31, 2004 and 2003 were less than 3% of our total net revenue.

Advent Europe has had the contingent “put” right to require us to purchase any one or any group of its subsidiaries. Our requirement to purchase was contingent upon the distributor achieving specified operating margins in excess of 20% and specified customer satisfaction criteria. The purchase price was 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 could be varied by mutual agreement. In addition, we have had the “call” right to purchase any one or any group of Advent Europe’s subsidiaries under certain conditions. From 2001 through 2003, in accordance with the provisions described above, we purchased five of Advent Europe’s subsidiaries. We adopted the provisions of FIN 46 in the first quarter of 2004 and determined that Advent Europe is a variable interest entity because, among other reasons, it was thinly capitalized and the third party investors did not have sufficient equity at risk. However, we did not consolidate Advent Europe because we are not the primary beneficiary as we are not obligated to absorb the majority of the entity’s expected losses and we have not received a majority of the entity’s returns.

On April 28, 2004, we signed a definitive agreement to purchase the remaining independent distributor businesses of Advent Europe in the United Kingdom and Switzerland, as well as certain assets of Advent Europe, for initial consideration of $3.2 million and additional potential consideration of approximately $6.0 million. See Note 12 of the Notes to Condensed Consolidated Financial Statements for additional information regarding the purchase.

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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003

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

NET 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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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 software licenses, as well as the size of the implementation, the resulting proportion of the maintenance and professional services components of these license transactions and the amount of client use of pricing and related data. We expect a small amount of incremental revenues in the second quarter of 2004 as a result of our acquisition of the remaining distributor businesses of Advent Europe in the United Kingdom and Switzerland. We expect total net revenues to be flat to slightly higher in the second quarter of 2004.

License Revenue and Development Fees

The increase in license revenue and development fees reflected two main factors. First, we believe that the overall economic outlook and conditions within the financial services industry improved, which contributed to increases in capital expenditures by our customers. Second, our focus on selling our core products resulted in higher sales, particularly in our Advent Office products. Revenues from Axys, Moxy, and Partner comprised almost half of license sales in the first quarter of 2004. In addition, we had significant growth in revenue from our Foundation Power product as well as our Qube product. The increases in the Advent Office products were slightly offset by a decrease in Geneva license revenue compared with the first quarter of 2003. Our Geneva deals are generally complex transactions and may include acceptance criteria which can result in deferral of revenue. We expect license and development fee revenue to be relatively flat in the second quarter of 2004 with modest growth year over year.

We typically license our products on a per server, per user basis with the price per customer varying based on the selection of the products licensed, the number of site installations and the number of authorized users. We earn development fees when we provide product solutions which are not part of our standard product offering but will be incorporated into our future releases. For the three months ended March 31, 2004 and 2003, revenue from development fees has been less than 6% of total license and development fees revenue. For the three months ended March 31, 2004 and 2003, soft dollar revenues generated from Advent product and services paid for through soft dollar transactions have represented less than 5% of total license and development revenues.

Maintenance and Other Recurring Revenues

Maintenance and other recurring revenues increased slightly from the first quarter of 2003, reflecting continuing maintenance revenues from our established customer base. The maintenance renewal rate was within the 82% to 88% range that we have experienced over the last few quarters. Recurring revenue increased slightly as a result of our receiving a revenue share from transaction charges generated by a new partner program. We expect that maintenance and recurring revenues will increase slightly each quarter in 2004, reflecting additions to the customer base.

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Professional Services and Other Revenues

Professional services and other revenues include consulting, project management, custom integration, custom work, and training. Professional services related to Advent Office products generally can be completed and accepted in a relatively short time period while services related to Geneva products may require a six to nine month implementation period. Therefore, the revenues associated with professional services reflect a mix of services related to current quarter license revenue as well as transactions from prior quarters. Generally, our consulting revenues lag our license revenues by one or two quarters.

In the first quarter of 2004, increases in our custom integration and custom work associated with Advent Office and Geneva implementations were partially offset by decreases in consulting and project management. We also had a slight increase in revenues earned from third party products paid for through soft dollar transactions. We expect that revenues from Professional Services will be relatively flat in the second quarter of 2004.

COST OF REVENUES

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 consists primarily of royalties and other fees paid to third parties, the fixed direct labor involved in producing and distributing our software, labor costs associated with generating development fees and cost of product media including duplication, manuals and packaging materials. The increase in the first quarter of 2004 primarily reflected an increase in the cost of product media including duplication, manuals and packaging materials associated with the release of Geneva 5.2 and Moxy 4.2. We expect cost of license and development fees to remain relatively flat for the remainder of 2004.

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Cost of Maintenance and Other Recurring