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 - the people behind BIRT (Business Intelligence and Reporting Tools) - founded and continues to co-lead the Eclipse BIRT open source project. BIRT is the premier development environment for Rich Information Applications that presents data in compelling and interactive ways via the web on any device. Actuate and its people are dedicated to making BIRT the best environment for our customers to develop Web 2.0/Rich Internet Applications (RIAs) that drive revenue through higher customer satisfaction/loyalty and improved operational performance. The people of Actuate continually participate in and provide resources for the vibrant open source community that has emerged around BIRT. Actuate offers value-add BIRT products and services that speed the development process and bring additional functionality, interactivity and enterprise scalability to BIRT-based Rich Information Applications. 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 for the remainder of 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 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 September 30,
                                                           (in thousands except per share data)
                                                   2009            2008          $ Change         % Change
Financial summary
Total revenues                                   $ 29,351        $ 33,681        $  (4,330 )           (13 )%

Total operating expenses                           25,065          30,238           (5,173 )           (17 )%

Income from operations                              4,286           3,443              843              25 %
Operating margins                                      15 %            10 %              5 %            50 %

Net income                                       $  3,139        $  3,105        $      34               1 %

Diluted net income per share                     $   0.06        $   0.05        $    0.01              20 %

Shares used in diluted per share calculation       50,484          65,397          (14,913 )           (23 )%

The overall decrease in total revenues was mainly driven by lower license sales which decreased by 14% or approximately $1.4 million over the same period last year as we continue facing a challenging macro-economic environment, especially in the international markets. These negative conditions have forced customers to either delay purchases or find solutions to increase optimal efficiencies using exiting infrastructure server environments. During the third quarter of fiscal 2009, we experienced a 57% or approximately $1.9 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. We implemented a second restructuring in the third quarter of 2009 which resulted in the elimination of 12 positions held by Actuate employees primarily in North America and Europe. These cost cutting measures combined with operational discipline have primarily been the force behind the 17% or $5.2 million reductions in operating expenses in the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008. Consequently, our operating margins have improved from 10% in the third quarter of fiscal 2008 to 15% in the third quarter of fiscal 2009. The increase in the fully diluted earnings per share in the third quarter of 2009 over the same period last year was primarily attributed to the reductions in our operating expenses as discussed above and the 23% decrease in our share count. This decrease in share count was mainly due to the tender offer completed in December of 2008 resulting in the repurchase of approximately 17.1 million shares, and approximately 1.8 million additional shares repurchased in the third quarter of fiscal 2009.

As a result of fluctuations in foreign currency exchange rates, our total revenues for the third quarter of this year compared to the third quarter of last year were negatively impacted by approximately $300,000 while our operating expenses were positively impacted by approximately $230,000.

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 nine months of fiscal 2009. If this trend continues, 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 these markets 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. 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 Rich Information Application 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.

As of September 30, 2009, the Company had approximately $16.4 million in ARS at par value. Since February 2008, substantially all auctions for ARS have "failed" as a result of the negative overall capital market conditions, meaning that there is not enough demand to sell the securities at auction. While the Company continues to earn interest on its ARS investments at the maximum contractual rate, these investments are not currently trading and therefore do not currently have a readily determinable market value. 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"). Readers should refer to Note 3 of these consolidated financial statements for additional information related to the Company's ARS investments and the rights offering by UBS.

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             Nine Months Ended
                                                   September 30,                  September 30,
                                               2009             2008           2009            2008
Revenues:
License fees                                       29 %             30 %           29 %          31 %
Maintenance                                        66               60             65            58
Professional services and training                  5               10              6            11

Total revenues                                    100              100            100           100

Costs and expenses:
Cost of license fees                                1                1              1             1
Cost of services                                   14               16             15            18
Sales and marketing                                35               39             36            41
Research and development                           17               16             17            17
General and administrative                         17               15             17            15
Amortization of other purchased
intangibles                                         1                1              1             1
Restructuring charges                              -                 2             -              1

Total costs and expenses                           85               90             87            94

Income from operations                             15               10             13             6
Interest income and other
income/(expense), net                              (2 )              2             -              1
Interest expense                                   (1 )             -              (1 )          -

Income before income taxes                         12               12             12             7
Provision (benefit) for income taxes                1                3              2            (2 )

Net income                                         11 %              9 %           10 %           9 %

Revenues

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



                                                     Three Months Ended                                         Nine Months Ended
                                                       (In thousands)                                            (In thousands)
                                         September 30,                                             September 30,
                                                                 Variance       Variance                                   Variance       Variance
                                       2009          2008           $'s            %             2009          2008           $'s            %
Revenues
License fees                         $  8,620      $ 10,021      $  (1,401 )         (14 )%    $ 25,907      $ 29,920      $  (4,013 )         (13 )%
Maintenance                            19,340        20,406         (1,066 )          (5 )%      56,889        56,791             98            -  %
Professional services and training      1,391         3,254         (1,863 )         (57 )%       5,352        11,091         (5,739 )         (52 )%

Total Revenues                       $ 29,351      $ 33,681      $  (4,330 )         (13 )%    $ 88,148      $ 97,802      $  (9,654 )         (10 )%

% of Revenue
License fees                               29 %          30 %                                        29 %          31 %
Maintenance                                66 %          60 %                                        65 %          58 %
Professional services and training          5 %          10 %                                         6 %          11 %

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 third 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. Our maintenance and support revenues have also declined from the prior year quarter. This decrease is primarily driven by our European entities, where a one-time back maintenance billing in the third quarter of fiscal 2008 coupled with declines in license revenues have consequently resulted in a corresponding decrease in maintenance revenues.

Revenues outside of North America decreased by 31% from $8.7 million in the third quarter of fiscal year 2008 to approximately $6.0 million in the third quarter of fiscal year 2009. These international revenues represented 21% of our total revenues versus 26% in the same period last year. This decrease in international revenues as a percentage of total revenues in the third quarter of fiscal 2009 compared to the same period last year was primarily due to challenging macro-economic environments in Europe and Asia. Approximately $300,000 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 nine months 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 $28.2 million in the first nine months of fiscal year 2008 to approximately $19.2 million in the first nine months of fiscal year 2009. The international revenues represented 22% of our total revenues versus 29% in the same period last year. Approximately $1.8 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                                        Nine Months Ended
                                                      (In thousands)                                           (In thousands)
                                        September 30,                                            September 30,
                                                               Variance       Variance                                   Variance       Variance
                                     2009          2008           $'s            %             2009          2008           $'s            %
License Revenues
North America                       $ 7,424      $  8,201      $    (777 )         (10 )%    $ 21,112      $ 21,735      $    (623 )          (3 )%
Europe                                1,028         1,486           (458 )         (31 )%       4,293         6,710         (2,417 )         (36 )%
Asia Pacific                            168           334           (166 )         (50 )%         502         1,475           (973 )         (66 )%

Total License                       $ 8,620      $ 10,021      $  (1,401 )         (14 )%    $ 25,907      $ 29,920      $  (4,013 )         (13 )%

% of total revenue                       29 %          30 %                                        29 %          31 %

License fees. The 14% decrease in license revenues for the third 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 revenues declined by 34% or approximately $600,000 during the third quarter of 2009 when compared to the third quarter of fiscal 2008. During the third quarter of fiscal 2009, we closed 55 transactions in excess of $100,000 and two transactions in excess of $1.0 million. This compared to 60 transactions in excess of $100,000 and two transactions in excess of $1.0 million in the third quarter of fiscal 2008. One of these transactions accounted for over 10% of our total reported license revenues for the third quarter of fiscal 2009. 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 13% decrease in license revenues for the nine months ended September 30, 2009 was primarily attributed to weak macro economic conditions in North America and Europe. As a result, our license sales declined by approximately $4.0 million over the same period last year.

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

                                                   Three Months Ended                                         Nine Months Ended
                                                     (In thousands)                                            (In thousands)
                                       September 30,                                             September 30,
                                                               Variance       Variance                                   Variance       Variance
                                     2009          2008           $'s            %             2009          2008           $'s            %
Services Revenues
Maintenance and support            $ 19,340      $ 20,406      $  (1,066 )          (5 )%    $ 56,889      $ 56,791      $      98            -  %
Professional services                 1,391         3,254         (1,863 )         (57 )%       5,352        11,091         (5,739 )         (52 )%

Total Services                     $ 20,731      $ 23,660      $  (2,929 )         (12 )%    $ 62,241      $ 67,882      $  (5,641 )          (8 )%

% of Services Revenue
Maintenance and support                  93 %          86 %                                        91 %          84 %
Professional services                     7 %          14 %                                         9 %          16 %

Total Services                          100 %         100 %                                       100 %         100 %

Services. Services revenue is comprised of maintenance and support, professional services, and training. The 12% decrease in services revenues for the quarter versus the prior year was driven primarily by a 57% decrease in our professional services and consulting revenues. Our professional services revenues continue to decline mostly 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 . . .