The following information should be read in conjunction with the historical financial information and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q, the consolidated financial statements and notes thereto and the related Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on March 12, 2009.

The statements contained in this Form 10-Q that are not purely historical are forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, including statements regarding Actuate's expectations, beliefs, hopes, intentions, plans or strategies regarding the future. All forward-looking statements in this Form 10-Q are based upon information available to Actuate as of the date hereof, and Actuate assumes no obligation to update any such forward-looking statements. Actual results could differ materially from Actuate's current expectations. Factors that could cause or contribute to such differences include, but are not limited to, the risks discussed in Part II, Item 1A-Risk Factors of this Form 10-Q, Part I, Item 1A-Risk Factors in our Annual Report for the year ended December 31, 2008 and in other filings made by the Company with the Securities and Exchange Commission.

Overview

Actuate Corporation ("We", "Actuate" or the "Company") was incorporated in November 1993 in the State of California and reincorporated in the State of Delaware in July 1998. Actuate provides software and services to develop and deploy Rich Internet Applications ("RIAs") Without Limits™. These RIAs deliver rich interactive content that improve customer loyalty and corporate performance. Applications built on Actuate's open source-based platform provide all stakeholders inside and outside the firewall, including employees, customers, partners and citizens, with information that they can easily access and understand to maximize revenue, cut costs, improve customer satisfaction, streamline operations, create competitive advantage and make better decisions. Our goal is to ensure that all users can use decision-making information in their day-to-day activities, opening up completely new avenues for improving corporate performance. Actuate's principal executive offices are located at 2207 Bridgepointe Parkway, San Mateo, California. Actuate's telephone number is 650-645-3000. Actuate maintains a Web site at www.actuate.com. The information posted on our Web site is not incorporated into this Annual Report.

We began shipping our first product in January 1996. We sell software products through two primary means: (i) directly to end-user customers through our direct sales force and (ii) through indirect channel partners such as OEMs, resellers and system integrators. OEMs generally integrate our products with their applications and either provide hosting services or resell them with their products. Our other indirect channel partners resell our software products to end-user customers. Our total revenues are derived from license fees for software products and fees for services relating to such products, including software maintenance and support, professional services and training.

The software industry is currently experiencing significant challenges, primarily due to a deteriorating macro-economic environment, which is primarily characterized by diminished product demand. As a result of this downturn, some of our customers may face financial challenges in fiscal 2009. It is unclear when the macro-economic environment may improve. We are seeing increasing pressures on our customers' Information Technology budgets, and therefore our customers are looking for more flexibility in the timing of purchases. Facing uncertainty and cost pressures in their own businesses, some of our customers are waiting to purchase our products and are increasingly seeking purchasing terms and conditions that are less favorable to us. This trend partially contributed to lower license revenues for fiscal 2008 and the first half of fiscal 2009, and this trend may continue for the remainder of fiscal 2009. We have also seen a similar impact on our consulting business in the recent quarters.

Our customers may also experience adverse changes in their business and, as a result, may delay or default on their payment obligations, file for bankruptcy or modify or cancel plans to license our products. If our customers are not successful in generating sufficient revenue or are precluded from securing financing, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us, although these obligations are generally not cancelable. Though we have not yet experienced any unusual levels of defaults, any material payment default by our customers or significant reductions in existing contractual commitments could have a material adverse effect on our financial condition and operating results.

                                                              Three Months Ended Jun 30,
                                                         (in thousands except per share data)
                                                  2009           2008         $ Change        % Change
Financial summary
Total revenues                                  $ 29,541       $ 34,600       $  (5,059 )          (15 )%

Total operating expenses                          25,526         31,304          (5,778 )          (18 )%

Income from operations                             4,015          3,296             719             22 %
Operating margins                                     14 %           10 %             4 %           40 %

Net income                                      $  2,800       $  2,895       $     (95 )           (3 )%

Diluted net income per share                    $   0.06       $   0.04       $    0.02             50 %

Shares used in diluted per share calculation      49,235         65,485         (16,250 )          (25 )%

The overall decrease in total revenues was mainly driven by lower license sales which decreased by 31% or approximately $3.8 million over the same period last year as we continue facing a challenging macro-economic environment, especially in the international markets. Our maintenance and support revenues in the second quarter of fiscal 2009 increased by approximately 3% or $530,000 over the same period last year as we continue to experience a steady growth in our installed base of customers under maintenance plans and increased focus on customers who were out of compliance with their maintenance agreements and accordingly were required to pay back maintenance. These increases were more than offset by approximately 50% or a $1.8 million decrease in professional services revenues. The decrease in professional services revenues was mainly due to a weak macro-economic environment which is causing some customers to either delay their projects or cancel their engagements. We believe some customers are opting to use in-house resources to complete previously outsourced projects. Another factor contributing to the decrease in the professional services revenues is the increase in the adoption of BIRT-based projects by our customers which do not require professional service to the same extent as the Company's traditional designer products.

During the second half of fiscal 2008 and in response to the weak macro economic conditions, we implemented a restructuring plan which resulted in the elimination of 46 positions held by Actuate employees primarily in North America, the consolidation of facilities, and the write-off of fixed assets located at facilities that had been vacated. These cost cutting measures combined with operational discipline have primarily been the force behind the 18% or $5.7 million decrease in operating expenses in the second quarter of fiscal 2009 compared to the second quarter of fiscal 2008. Consequently, our operating margins have improved from 10% in the second quarter of fiscal 2008 to 14% in the second quarter of fiscal 2009. The increase in the fully diluted earnings per share in the second quarter of 2009 over the same period last year was primarily attributed to the reductions in our operating expenses as discussed above and the 25% decrease in our share count, which was mainly due to the tender offer completed in December of 2008 that resulted in the repurchase of approximately 17.1 million shares.

As a result of fluctuations in foreign currency exchange rates, our revenues for the second quarter of this year were negatively impacted by approximately $570,000 while our operating expenses were positively impacted by approximately $630,000.

A significant portion of our revenues have historically been derived from customers in the financial services industry. The Company expects that it will continue to derive a significant portion of its revenues from these financial services customers for the foreseeable future. Unfavorable economic conditions have adversely impacted the financial services industry throughout fiscal 2008 and the first half of fiscal 2009. If this trend continues further into 2009, it will likely have a material adverse effect on the Company's business, financial condition and results of operations.

For the remainder of fiscal year 2009, we expect three trends to continue that would have a significant impact on the results of our operations. We currently believe that corporate IT budgets will grow only modestly if at all for the remainder of fiscal year 2009, particularly among financial services companies in the United States and Europe. Second, corporations are reluctant to buy software from new vendors and we continue to witness corporations consolidating their Business Intelligence, Rich Internet Applications (RIA) and Performance Management software purchases into fewer suppliers. Finally, we expect to experience vigorous competition in the RIA market. Several of our competitors have released products that are marketed to be directly competitive with our RIA offerings. The existence of these competitive products may require additional sales and marketing efforts to differentiate our products, which could result in extended sales cycles. We believe that competition in the RIA market will be vigorous in the near future.

For remainder of fiscal year 2009, we will continue to pursue the strategic initiatives to improve revenue and earnings growth that we began in fiscal year 2004 as well as an initiative related to Performance Management, which we introduced in fiscal 2008. These initiatives are as follows:

• Selling to IT Management-We are re-focusing our sales efforts on selling our products to IT managers who we believe generally recognize the technical advantages of our products. We hope this initiative will result in increased license revenue in the short term.

• Solution Selling to Line-of-Business Management-We are creating Performance Management applications and software solutions to market to line-of-business managers. These offerings are in the areas of performance management and customer self service reporting. We hope these initiatives will result in increased license revenue over the medium-to-long term.

• Investing in BIRT-We are continuing to make a significant investment in creating a new open source business intelligence and reporting tool, known as BIRT. We hope that BIRT will eventually become widely adopted by Java developers and will create demand for our other commercially available products. The BIRT project is a long-term initiative.

• Selling to Global 9000 Corporations in the Financial Services Sector-We are continuing to focus on selling our products to Global 9000 financial services companies in an effort to increase our substantive market share in this sector. We anticipate a negative impact of the ongoing credit crunch on the Financial Services sector in 2009. However, we believe that once the short term issues in Financial Services are resolved, the industry will once again lead in the adoption of RIA both inside and outside the firewall.

• Delivering a Highly Differentiated Performance Management Offering-We have integrated Actuate Performancesoft Performance Management applications, BIRT and Actuate's RIA-ready information platform to provide capabilities for distributing accountability throughout the enterprise.

We have a limited ability to forecast future revenues and expenses, thus the prediction of future operating results is difficult. In addition, historical growth rates in our revenues and earnings should not be considered indicative of future revenue or earnings growth rates or operating results. There can be no assurance that any of our business strategies will be successful or that we will be able to achieve and maintain profitability on a quarterly or annual basis. It is possible that in some future quarter our operating results will be below the expectations of public market analysts and investors, and in such event the price of our common stock could decline.

At June 30, 2009, we held $16.4 million (par value) of ARS investments. ARS are variable-rate debt securities and have a long-term maturity with the interest rate being reset through Dutch auctions that are typically held every 28 days. Prior to February 2008, the securities had historically traded at par and are callable at par at the option of the issuer. Interest is typically paid at the end of each auction period or semiannually. At June 30, 2009, all of the ARS we held were AAA/Aaa rated, with most collateralized by student loans guaranteed by the U.S. government under the Federal Family Education Loan Program.

Until fiscal 2008, the auction rate securities market was highly liquid. During fiscal year 2008, a substantial number of auctions "failed," meaning that there was not enough demand to sell the entire issue of the securities that holders desired to sell at auction. The immediate effect of a failed auction is that certain holders cannot sell the securities at auction and the interest or dividend rate on the security generally resets to a maximum auction rate. In the case of a failed auction, with respect to the ARS held by us, the ARS is deemed not currently liquid. In the case of funds invested by us in ARS which are the subject of a failed auction, we may not be able to access the funds prior to maturity without a loss of principal, unless a future auction on these investments is successful or the issuer calls the security pursuant to a mandatory tender or redemption.

In November 2008, the Company elected to participate in a rights offering by UBS, the Company's investment broker, which provides Actuate with rights (the "Put Option") to sell UBS its ARS portfolio at the $16.4 million par value, at any time during a two-year sale period beginning June 30, 2010. By electing to participate in the rights offering, the Company granted UBS the right, exercisable at any time prior to June 30, 2010 or during the two-year sale period, to purchase or cause the sale of our ARS (the "Call Right"). UBS has stated that it will only exercise the Call Right for the purpose of restructurings, dispositions or other solutions that will provide their clients with par value for their ARS. UBS has agreed to pay their clients the par value of their ARS within one day of settlement of any Call Right transaction. Notwithstanding the Call Right, the Company is permitted to sell ARS to parties other than UBS, in which case the Put Option attached to the ARS that are sold would be extinguished. At June 30, 2009 the Company has valued the Put Option at the approximate present value of the difference between the fair market value and the par value of the ARS.

At June 30, 2009, the Company has classified the ARS and the related Put Option as current investments on its Consolidated Balance Sheet. This classification was based on the intent and ability of the Company to sell the ARS back to UBS as soon as the Put Option allows, which is currently expected to be June 30, 2010. In prior quarters, the ARS were classified as long-term investments because of the Company's inability to determine when its investments in the ARS would settle, and the fact that the exercisability date of the Put Option exceeded 365 days.

The Company has no reason to believe that any of the underlying issuers of its ARS are presently at risk of default. Through June 30, 2009, the Company has continued to receive interest payments on the ARS in accordance with their terms. Currently, interest is being earned at the maximum contractual rate, which may not exceed the one year trailing average rate on the three month Treasury Bill plus 120 basis points. The Company believes that it will ultimately be able to liquidate its ARS related investments without significant loss primarily due to the collateral securing the ARS and the legal settlement it has entered into with UBS. However, it could take until final maturity of the ARS (up to 38 years) to realize the investments' par value.

Critical Accounting Policies and Estimates

The 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 generally accepted accounting principles in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

For further information about our significant accounting policies, see the discussion under Item 7 to the annual consolidated financial statements as of and for the year ended December 31, 2008, as filed with the SEC on Form 10-K on March 12, 2009.

Results of Operations

The following table sets forth certain consolidated statement of operations data
as a percentage of total revenues for the periods indicated.



                                                   Three Months Ended             Six Months Ended
                                                        June 30,                      June 30,
                                                 2009             2008           2009           2008
Revenues:
License fees                                         29 %             36 %          29 %           31 %
Maintenance                                          65               54            64             57
Professional services and training                    6               10             7             12

Total revenues                                      100              100           100            100


Costs and expenses:
Cost of license fees                                  1                1             1              1
Cost of services                                     16               18            16             19
Sales and marketing                                  35               39            36             41
Research and development                             18               17            17             18
General and administrative                           15               13            16             15
Amortization of other purchased intangibles           1                1             1              1
Restructuring charges                                -                 1            -               1

Total costs and expenses                             86               90            87             96

Income from operations                               14               10            13              4
Interest and other income, net                       -                 1             1             -
Interest expense                                     (1 )             -             (1 )           -

Income before income taxes                           13               11            13              4
Provision (benefit) for income taxes                  3                3             3             (5 )

Net income                                           10 %              8 %          10 %            9 %

Revenues

The following table represents a breakdown of our total revenues by type of
revenue (in thousands):



                                                     Three Months Ended                                        Six Months Ended
                                                       (In thousands)                                           (In thousands)
                                            June 30,                                                 June 30,
                                                                 Variance       Variance                                  Variance       Variance
                                       2009          2008           $'s            %            2009          2008           $'s            %
Revenues
License fees                         $  8,534      $ 12,289      $  (3,755 )         (31 )%   $ 17,287      $ 19,899      $  (2,612 )         (13 )%
Maintenance                            19,178        18,648            530             3 %      37,549        36,386          1,163             3 %
Professional services and training      1,829         3,663         (1,834 )         (50 )%      3,961         7,836         (3,875 )         (49 )%

Total Revenues                       $ 29,541      $ 34,600      $  (5,059 )         (15 )%   $ 58,797      $ 64,121      $  (5,324 )          (8 )%

% of Revenue
License fees                               29 %          36 %                                       29 %          31 %
Maintenance                                65 %          54 %                                       64 %          57 %
Professional services and training          6 %          10 %                                        7 %          12 %

Total Revenues                            100 %         100 %                                      100 %         100 %

Our revenues are derived from software license fees and services, which include software maintenance and support, consulting and training. The decrease in our license revenues was primarily due to unfavorable macro-economic conditions that continue to adversely impact the financial services industry; a key component of Actuate's customer portfolio. We also experienced a similar deterioration in revenues attributed to our professional services business, which decreased during the second quarter of fiscal 2009 compared to the same period last year. This decrease was mainly due to a weak macro-economic environment which is causing some customers to either delay their projects or cancel their engagements. We believe some customers are opting to use in-house resources to complete previously outsourced projects. Another factor contributing to the decrease in the professional services revenues is the increase in the adoption of BIRT-based projects by our customers which do not require professional service to the same extent as the Company's traditional designer products. Partially offsetting these negative trends in revenues was the increase in our maintenance and support revenues during the second quarter of 2009 which is the result of continued growth in our installed base of customers under maintenance plans. Sales outside of North America decreased by 31% from $9.5 million in the second quarter of fiscal year 2008 to approximately $6.6 million in the second quarter of fiscal year 2009. These international revenues represented 22% of our total revenues versus 27% in the same period last year. Approximately $570,000 of the decrease in international revenues was due to the unfavorable impact of exchange rate fluctuations on revenue transactions denominated in foreign currencies.

For the first half of fiscal year 2009, the changes and the underlying reasons for those changes in the various components of our revenues were similar to those experienced during the quarter as noted above. Revenues outside of North America decreased by 32% from $19.5 million in the first half of fiscal year 2008 to approximately $13.2 million in the first half of fiscal year 2009 while North America revenues showed a modest increase of 2% or approximately $940,000. The increase in North America revenues was primarily due to growth in the Company's installed base of customers under maintenance plans and increased focus on customers who were out of compliance with their maintenance agreements and accordingly were required to pay back maintenance. The international revenues represented 23% of our total revenues versus 30% in the same period last year. Approximately $1.5 million of the decrease in international revenues was due to the unfavorable impact of exchange rate fluctuations on revenue transactions denominated in foreign currencies.

The following table represents our license revenues by region (in thousands):

                                                    Three Months Ended                                        Six Months Ended
                                                      (In thousands)                                           (In thousands)
                                          June 30,                                                  June 30,
                                                               Variance       Variance                                   Variance       Variance
                                     2009          2008           $'s            %             2009          2008           $'s            %
License Revenues
North America                       $ 6,746      $  8,915      $  (2,169 )         (24 )%    $ 13,688      $ 13,534      $     154             1 %
Europe                                1,576         3,267         (1,691 )         (52 )%       3,265         5,224         (1,959 )         (38 )%
APAC                                    212           107            105            98 %          334         1,141           (807 )         (71 )%

Total License                       $ 8,534      $ 12,289      $  (3,755 )         (31 )%    $ 17,287      $ 19,899      $  (2,612 )         (13 )%

% of total revenue                       29 %          36 %                                        29 %          31 %

License fees. The 31% decrease in license revenues for the second quarter of fiscal year 2009 over the same period in the prior year was primarily due to weak macro economic conditions that continue to adversely impact the financial services industry; a key component of Actuate's customer portfolio. We experienced most of this weakness in our international regions where software sales declined by 47% or approximately $1.6 million during the second quarter of 2009 when compared to the second quarter of fiscal 2008. During the second quarter of fiscal 2009, we closed 57 transactions in excess of $100,000 and one transaction in excess of $1.0 million. This compared to 72 transactions in excess of $100,000 and one transaction in excess of $1.0 million in the second quarter of fiscal 2008. One of these transactions accounted for over 10% of our total reported software sales for the second quarter of 2008. The number of orders greater than $1.0 million has historically ranged from none to three per quarter. We do not expect to rely on any one customer for our future business.

The following table represents a breakdown of our service revenues by type of . . .