IFUL Insightful Corp (MM)

INSIGHTFUL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

September 30, 2007

(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

(a) Description of Business

Insightful Corporation and its subsidiaries (collectively, the “Company”) provide enterprises with data analysis products and services designed to drive better decisions faster by revealing patterns, trends and relationships. The Company is a developer and supplier of software and services for the statistical data mining, business analytics, knowledge management, and information retrieval industry segments, enabling customers to gain intelligence from data. The Company’s solutions include its S-PLUS ^® product family for data analysis and, until August 2, 2007, its InFact ^® product for text analysis, as well as customized software and consulting services and training for the design, development and deployment of customized analytics solutions. The Company has customers in a broad range of industries, with a concentration in life sciences and financial services. Headquartered in Seattle, Washington, the Company also has offices in New York, North Carolina, France, Switzerland, and the United Kingdom, with distributors around the world.

On August 2, 2007, the Company sold its InFact-related technology and associated intellectual property rights. See Note 10.

(b) Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to accounting principles generally accepted in the United States and the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The balance sheet at December 31, 2006 has been derived from audited financial statements at that date, but does not include all disclosures required by generally accepted accounting principles for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2006 included in the Company’s Annual Report on Form 10-KSB. The accompanying condensed consolidated financial statements reflect all adjustments (consisting solely of normal, recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of results for the interim periods presented. The results of operations for the three and nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for the entire fiscal year or future periods.

(2) SIGNIFICANT ACCOUNTING POLICIES

(a) Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

(b) Revenue Recognition

The Company offers a variety of software solutions, maintenance contracts, training and consulting services to its customers. The Company records revenue in accordance with Statement of Position No. 97-2, Software Revenue Recognition , as amended by SOP No. 98-9, Software Revenue Recognition with Respect to Certain Transactions (“SOP 98-9”), as well as related interpretations including Technical Practice Aids.

Software license revenues consist principally of fees generated from granting rights to use the Company’s software products under perpetual and fixed-term (also known as subscription-based) license agreements.

Perpetual software license fees are generally recognized upon delivery of the software after receipt of a purchase order, if collection of the resulting receivable is probable, the fee is fixed or determinable, and vendor-specific objective evidence (“VSOE”) of fair value exists for all undelivered elements if sold in a bundled arrangement. VSOE is based on the price charged when an element is sold separately or, in case of an element not yet sold separately, the price established by authorized management, if it is probable that the price, once established, will not materially change before separate introduction into the marketplace.

Revenues under arrangements that include several different software products and services sold together are allocated based on the residual method in accordance with SOP No. 98-9. Under the residual method, the fair value, as determined by VSOE, of the undelivered non-essential elements is deferred and subsequently recognized when earned.

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The Company has established VSOE of fair value for professional services and training services. In addition, the Company has established VSOE for software maintenance related to most of its software products. For software products sold with maintenance where VSOE for the maintenance element has not been established, such as the InFact text analysis product formerly sold by the Company, all revenue under the arrangement is recognized over the initial maintenance term, provided all other revenue recognition criteria have been met.

Maintenance revenues are recognized ratably over the term of the related maintenance contracts, which generally span one year or less. The initial one-year maintenance contract is bundled into the license fees for most of the Company’s products. Maintenance services, which include unspecified product updates on a when-and-if available basis, are generally priced based on a percentage of the current list price, or net license fees paid, of the licensed software products. Maintenance renewals are optional.

Consulting revenues typically include providing customers assistance in developing complex software models and/or data analysis techniques, and developing consultant-configured, vertical-specific products that are designed to enable the Company to sell the same, or similar, solutions to multiple customers with reduced incremental consulting efforts incurred by the Company. In addition, consulting revenues include deployment assistance, project management, integration with existing customer applications, training services, and related services generally performed on a time-and-materials basis under separate service arrangements. Training consists of fee-based courses offered on a per-attendee or a per-group rate. Revenues from consulting and training services are generally recognized as services are performed.

Fees from licenses sold together with consulting are generally recognized upon shipment of the software, provided that the above residual method criteria are met, payment of the license fees are not dependent upon the performance of the services, and the consulting services are not essential to the functionality of the licensed software. If the services are essential to the functionality of the software, or payment of the license fees is dependent upon the performance of the services, both the software license and consulting fees are recognized under the percentage of completion method of contract accounting.

If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer. If an acceptance period is required, revenues are recognized upon the earlier of customer acceptance or the expiration of the acceptance period. An evaluation of the probability of collection is generally based upon the assessment of the customer’s financial condition. For existing customers, this evaluation generally relies on a customer’s prior payment history.

The Company has an unconditional 30-day return policy on standard software license purchases, and therefore provides for estimated returns at the time of sale based on historical experience.

Cash payments received or accounts receivable due in advance of revenue recognition are recorded as deferred revenue on the accompanying consolidated balance sheets.

(c) Stock-Based Compensation and Stockholders’ Equity

Stock-Based Compensation Expense

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”). SFAS 123R requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options granted under the Company’s stock plans and employee stock purchases made under the Company’s 2003 Employee Stock Purchase Plan (the “ESPP”), based on estimated fair values. SFAS 123R supersedes the Company’s previous accounting under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), for periods beginning in fiscal 2006. In its adoption of SFAS 123R, the Company has applied the provisions of the SEC’s Staff Accounting Bulletin No. 107, Share-Based Payment (“SAB 107”).

The Company adopted SFAS 123R as of January 1, 2006, using the modified prospective transition method. The Company’s consolidated financial statements as of and for the three and nine months ended September 30, 2007 and 2006 reflect the impact of SFAS 123R.

SFAS 123R requires the Company to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s statement of operations. The Company uses the straight-line single-option method to recognize the value of stock-based compensation expense for all share-based payment awards. Stock-based compensation expense recognized in the statement of operations for the three and nine months ended September 30, 2007 and 2006 has been reduced for estimated forfeitures, as it is based on awards ultimately expected to vest. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

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The following table summarizes stock-based compensation expense under SFAS 123R related to employee stock options and the ESPP purchases for the three and nine months ended September 30, 2007 and 2006, which was allocated as follows (in thousands):

The weighted average fair value of employee stock options granted in the nine months ended September 30, 2007 and 2006 was $1.24 and $1.54, respectively. As of September 30, 2007, the total remaining unrecognized compensation cost related to unvested stock options amounted to $1.3 million, which will be amortized over the weighted-average remaining requisite service period of 2.3 years.

The weighted-average estimated fair value of employee stock options granted during the periods presented below was estimated at the date of grant using the Black-Scholes option-pricing model, with the following weighted average assumptions:

The risk-free interest rate used in the Black-Scholes valuation method is based on the implied yield currently available in U.S. Treasury securities at maturity with an equivalent term. The Company has not declared or paid any dividends and does not currently expect to do so in the future. The expected term of options represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical weighted average holding periods and projected holding periods for the remaining unexercised shares. Consideration was given to the contractual terms of the Company’s stock-based awards, vesting schedules and expectations of future employee behavior. Expected volatility is based on the annualized daily historical volatility plus implied volatility of the Company’s stock price, including consideration of the implied volatility and market prices of traded options for comparable entities within the Company’s industry.

The variables used in the determination of stock price volatility and option lives require the application of management’s best estimates. Both of these variables impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the life of the option. SFAS 123R also requires that the Company recognize compensation expense for only the portion of options expected to vest. Therefore, the Company applied an estimated forfeiture rate that the Company derived from historical employee termination behavior. If the actual number of forfeitures differs from the Company’s estimates, adjustments to compensation expense may be required in future periods.

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Stockholders’ Equity and Stock Option Plans

Under the Company’s 2001 Stock Option and Incentive Plan (the “2001 Plan”), the Board of Directors may grant incentive stock options, nonqualified stock options, awards of common stock and stock appreciation rights to eligible employees and others defined in the 2001 Plan.

The 2001 Plan provides for the automatic increase in the number of shares reserved for issuance of stock options under the 2001 Plan on the first day of each fiscal year, in an amount equal to the lesser of (a) 1,000,000 shares, (b) 7% of the outstanding shares in the last day of the prior fiscal year, or (c) an amount determined by the board of directors. Accordingly, 884,601 additional option shares were made available for future grant under the 2001 Plan on January 1, 2006 and 905,405 additional option shares were made available for future grant on January 1, 2007. As of September 30, 2007, 2,048,224 option shares were available for future grant under the 2001 Plan. Option grants under the 2001 Plan are typically made at fair market value at the time of grant and vest over a four-year period. Each option expires 10 years from the date of grant, subject to earlier termination if the optionee ceases to provide services to the Company, and is not transferable.

Under the Company’s 2001 Non-Employee Director Stock Option Plan (the “2001 Directors’ Plan”), non-employee directors are eligible to receive annual grants of options to purchase shares of Company common stock. As of September 30, 2007, 514,333 option shares were available for future grant under the 2001 Directors’ Plan. All grants under the 2001 Directors’ Plan are made at fair market value at the time of grant and, for grants prior to March 16, 2007, were fully vested upon grant. On March 16, 2007, the 2001 Directors’ Plan was amended to provide for a one-year vesting period for all future grants made under the plan. Each option expires 10 years from the date of grant, subject to earlier termination if the optionee ceases to provide services to the Company, and is not transferable.

Under the Company’s Non-Qualified, Non-Officer Stock Option Plan (the “1996 Non-Officer Plan”), Company employees and consultants were eligible to receive nonqualified options to purchase shares of Company common stock. Option grants under the 1996 Non-Officer Plan were typically made at fair market value at the time of grant, with vesting schedules determined at the date of grant. Each option expires 10 years from the date of grant, subject to earlier termination if the optionee ceases to serve the Company other than by reason of death or disability, and is not transferable. This plan expired in November 2006, and as a result no option shares are available for future grant under the 1996 Non-Officer Plan.

(d) Cash and Cash Equivalents

Cash equivalents consist of highly liquid investments with original maturities of less than three months at the time of purchase. As of September 30, 2007 and December 31, 2006, cash and cash equivalents amounted to $8.5 million and $7.3 million, respectively. At September 30, 2007 and December 31, 2006, marketable securities classified as cash equivalents amounted to $5.5 million and $4.1 million, respectively.

(e) Marketable Securities

The Company’s marketable securities are accounted for under the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”). Under SFAS 115, all of the Company’s marketable securities are defined as available-for-sale securities and, accordingly, are accounted for at fair value with any unrealized gains and losses reported in stockholders’ equity as other comprehensive income. Realized net gains and losses on sales and maturities of marketable securities are included in the consolidated statement of income as other income. Marketable securities having maturities of 90 days or less are classified as cash and cash equivalents, those having maturities greater than 90 days and less than or equal to one year are classified as short-term investments, and those with maturities exceeding one year are classified as long-term investments. As of September 30, 2007, the Company’s total marketable securities were $9.8 million, of which $5.5 million were classified as cash equivalents, $1.9 million were classified as short-term investments and $2.4 million were classified as long-term investments.

As of September 30, 2007, the total $9.8 million in marketable securities consisted of $7.8 million in corporate debt securities and $2.0 million in government and agency obligations, which are classified within cash and cash equivalents and short- and long-term investments. As of September 30, 2007, unrealized and realized gains and losses on marketable securities were less than $2,000.

(f) Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation and amortization. Equipment and furniture is depreciated using the straight-line method over estimated useful lives ranging from three to five years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life.

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(g) Research and Development

The Company accounts for its software research and development costs in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed . Accordingly, all such costs incurred up to the point of ‘technological feasibility’ (defined as a working model) are to be expensed as incurred, and those costs incurred up to the point when the software is available for general release to customers, are to be capitalized. During the nine months ended September 30, 2007 and 2006, the costs incurred from the date of ‘technological feasibility’ to the general release date were not material, and as such, the Company expensed all research and development costs.

(h) Funded Research

The Company has a funded research group that receives funding from U.S. federal agencies for research work performed under government grants. Research projects are and have been focused primarily on extending the frontiers of data analysis for numeric, textual, signal, and image data. In most cases, research projects are performed under cost reimbursement arrangements, which provide funding on a time-and-materials basis based on agency-approved labor, overhead and profit rates, subject to a cap on total fees allowable under the applicable grant. In some cases, grant contracts are paid on a fixed fee (payment) basis, regardless of the number of hours and costs incurred. Grant contracts generally require the submission of periodic progress and final finding reports. Funding is generally received through cash requests or installment payments. Grant fees are generally recognized as the work is performed and/or the fees become billable. Because the grants received are generally aligned with the Company’s existing research activities, commercial initiatives, and product lines, the amounts earned from grants are recorded as an offset against total research and development costs. Receivables resulting from this activity are included in other receivables on the balance sheets. Funding received under these grants is subject to audits for several years after the funding is received and, depending on the results of those audits, the Company could be obligated to repay a portion of the funding. A liability for such potential repayment has not been recorded.

(i) Foreign Currency Accounting

The functional currency of the Company’s foreign subsidiaries is the local currency in the country in which the subsidiary is located. Assets and liabilities of foreign locations are translated to U.S. dollars using the exchange rate at each balance sheet date. Income and expense accounts are translated using an average rate of exchange during the period. Foreign currency translation adjustments are accumulated as a separate component of stockholders’ equity. The Company is subject to transaction gains and losses from period to period due to exchange rate fluctuations. The effect of aggregate foreign currency transaction gains and losses is included in other income. For the three-month periods ended September 30, 2007 and 2006, the aggregate foreign currency transaction gains and (losses) were ($71,000) and $18,000, respectively. For the nine-month periods ended September 30, 2007 and 2006, the aggregate foreign currency transaction gains and (losses) were ($28,000) and $31,000, respectively.

(j) Goodwill and Other Long-Lived Assets

Goodwill represents the excess of the purchase price over the fair value of net assets obtained in business acquisitions accounted for under the purchase method of accounting. The Company currently distinguishes three reporting units that have goodwill, as follows: U.S. Data Analysis, Insightful United Kingdom, and Insightful Switzerland.

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), goodwill and other indefinite-lived intangibles are tested for impairment at least annually and written down and charged to results of operations only in periods in which the recorded value of those assets exceeds their fair value. SFAS 142 prescribes the use of the two-phase approach for testing goodwill for impairment. The first phase screens for potential impairment, while the second phase (if necessary) measures the amount of impairment, if any. Current technology and other separable intangible assets that do not have indefinite lives are continued to be amortized over their useful lives.

The Company performs a goodwill impairment test annually, using a measurement basis date of October 1. Additional tests are performed when events occur or circumstances change that would give reason to suspect or indicate that such events will more likely than not reduce the fair value of a reporting unit below its carrying amount. No impairment was determined in the annual impairment test for 2006, nor did any such events occur or circumstances exist during the nine months ended September 30, 2007 that would indicate that impairment existed as of September 30, 2007.

(k) Long-Lived Assets

Other intangibles with definite lives are stated at cost less accumulated amortization and are amortized on a straight-line basis over a time frame that approximates the pattern in which the economic benefits of the intangible asset are consumed. The Company’s purchased technology was ratably amortized to expense over three years ending January 31, 2007. See Note 3.

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In accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets , the Company considers the existence of facts or circumstances, both internal and external, that may suggest that the carrying amount of long-lived assets may not be recoverable. If such facts and circumstances were to exist, recoverability of assets held and used would be measured by comparing the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount were higher, the impairment loss would be measured by the amount, if any, by which the carrying amount of the assets exceeds their fair value based on the present value of estimated expected future cash flows.

(l) Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates used in preparing the financial statements relate to areas that include, but are not limited to, (i) revenue recognition, (ii) allowance for doubtful accounts, (iii) useful lives for property and equipment and intangibles, (iv) fair values and impairment analysis of goodwill and intangible assets with definite lives, (v) tax assets and liabilities and other tax exposure items, and (vi) valuation of stock options using the Black-Scholes option pricing model.

(m) Financial Instruments

At September 30, 2007, the Company had the following financial instruments: cash and cash equivalents, short and long-term investments, accounts receivable, other receivables, accounts payable, and accrued liabilities. The carrying value of cash and cash equivalents, short-term investments, receivables, payables and accrued liabilities approximates fair value based on the liquidity of these financial instruments or based on their short-term nature.

(n) Taxes

Income Taxes

The Company follows the asset and liability method of accounting for income taxes as set forth by SFAS No. 109, Accounting for Income Taxes (“SFAS 109”), and the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”) . FIN 48 clarifies the accounting and disclosure for uncertainty in income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting for interim periods, disclosure and transition, and clearly scopes income taxes out of FASB Statement No. 5, Accounting for Contingencies .

Under SFAS 109 and FIN 48, certain assumptions are made that represent significant estimates. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis, net of operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. FIN 48 requires a company to recognize the impact of a tax position in its financial statements if that position is more likely than not to be sustained upon audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 31, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The adoption of FIN 48 did not have a material effect on the Company’s results of operations or financial condition.

Historically, the Company has not incurred any interest or penalties associated with income tax matters and no interest or penalties were recognized during the nine months ended September 30, 2007. However, the Company has adopted a policy of classifying amounts related to interest and penalties associated with income tax matters as general and administrative expense when incurred.

The Company has incurred net operating losses. The Company continues to maintain a valuation allowance for the full amount of the net deferred tax asset balance associated with its net operating losses because sufficient uncertainty exists regarding its ability to realize such tax assets in the future. There were no unrecognized tax benefits as of January 1, 2007 or September 30, 2007.

Tax years 2003, 2004, 2005, and 2006 are still subject to potential examination under the applicable federal and state statutes of limitations. In addition, tax years 1993 to 2002 may be subject to examination in the event that the Company utilizes the net operating loss carryforwards from those years in its current or future year tax returns. The Company is not currently under income tax examination by any tax jurisdiction.

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Sales Taxes

During the ordinary course of business, there are many transactions for which the ultimate sales tax determination is uncertain. If necessary, the Company establishes accruals for sales tax-related uncertainties based on estimates of whether, and to the extent which, additional sales taxes, interest, and penalties will be due. These accruals are adjusted in light of changing facts and circumstances, such as the closing of a sales tax audit, a change in the determination of whether the Company has nexus in a particular state, or the expiration of a relevant statute of limitations.

The Company sells to customers in almost every state in the United States. There is a great variation in the tax rules from state to state, including the rules that determine whether a company has a sufficient presence in a particular jurisdiction such that it is required to register and collect and pay taxes in that jurisdiction. The Company is registered in multiple states and local jurisdictions and the Company remits required state and local taxes on related business operations in those states.

In addition to the Company’s judgments and use of estimates, there are inherent uncertainties surrounding taxes that could result in actual amounts that differ materially from the Company’s estimates. Accordingly, the Company’s actual sales tax obligation may exceed the estimate established at any point in time. Any changes in circumstances related to these contingencies could have a material effect on the Company’s financial condition, results of operations and cash flows.

(o) Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities to choose, at specified election dates, to measure eligible items at fair value and to report in earnings unrealized gains and losses on those items for which the fair value option has been elected. SFAS 159 also requires entities to display the fair value of those assets and liabilities on the face of the balance sheet. SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS 157 (described below). The Company is currently evaluating the impact of SFAS 159 on its financial condition and results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company does not anticipate that SFAS 157 will have a material effect on its financial condition or results of operations.

In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 , which clarifies the accounting for uncertainty in tax positions. FIN 48 requires a company to recognize the impact of a tax position in its financial statements if that position is more likely than not to be sustained upon audit, based on the technical merits of the position. The provisions of FIN 48 are effective for fiscal years beginning after December 31, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company’s adoption of FIN 48 did not have a material impact on its financial condition or results of operations.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140 (“SFAS 156”). SFAS 156 requires a company to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in specific situations. The servicing asset or servicing liability must be initially measured at fair value, but an entity may elect the “amortization method” or “fair value method” for subsequent balance sheet reporting periods. SFAS 156 is effective for fiscal years beginning after September 15, 2006. The Company’s adoption of SFAS 156 did not have a material impact on its financial condition or results of operations.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140 (“SFAS 155”). SFAS 155 simplifies accounting for certain hybrid instruments currently governed by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), by allowing fair value remeasurement of hybrid instruments that contain an embedded derivative that otherwise would require bifurcation. SFAS 155 also eliminates the guidance in SFAS 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets , which provides that such beneficial interests are not subject to SFAS 133. SFAS 155 amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a Replacement of FASB Statement No. 125 , by eliminating the restriction on passive derivative instruments that a qualifying special-purpose entity may hold. SFAS 155 is effective for all financial instruments acquired, issued, or subject to a remeasurement (new basis) event occurring in fiscal years beginning after September 15, 2006. The Company’s adoption of SFAS 155 did not have a material impact on its financial condition or results of operations.

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(3) PURCHASED TECHNOLOGY

In January 2004, the Company acquired title to the software code underlying the S programming language from Lucent Technologies Inc. The $2.0 million purchase price included settlement in full for all royalties owed by the Company to Lucent at the date of the acquisition, in the amount of $235,000. Under the agreement, $1.5 million of the purchase price was paid in the first quarter of 2004 and the remaining $0.5 million was paid in the first quarter of 2005.

As a result of this transaction, the Company capitalized $1,765,000 as purchased technology. This amount was ratably amortized to software-related cost of revenues over a three-year estimated life. Accordingly, the Company recorded $49,000 and $441,000 in amortization expense related to this technology in the nine months ended September 30, 2007 and 2006, respectively. The remaining balance of the capitalized asset was fully amortized as of January 31, 2007.

(4) FINANCING ARRANGEMENTS

In May 2007, the Company renewed a working capital revolving line of credit and security agreement with Silicon Valley Bank. The terms provide for up to $3.0 million in borrowing availability through May 30, 2008. This facility is secured by the Company’s accounts receivable and allows the Company to borrow up to the lesser of 75% of its eligible accounts receivable or $3.0 million. Borrowings under the facility bear interest at the prime rate. No amounts were outstanding at September 30, 2007 under this line of credit facility or the Company’s previous line of credit facility with Silicon Valley Bank.

In May 2007, the Company entered into a new equipment loan facility with Silicon Valley Bank. This facility allows a maximum of $750,000 to be borrowed through December 31, 2007, with the loan secured by the underlying assets. The Company is entitled to take up to six advances through December 31, 2007 for qualifying equipment purchased in the 90 days preceding the advance request (or 180 days for the initial advance), with each advance having a minimum borrowing amount of $75,000. Each borrowing under the equipment loan will bear interest at the prime rate plus 0.25% and will be repaid over a 36-month payment period beginning 30 days after the applicable advance. The final maturity date will be no later than December 31, 2010. No amounts were outstanding at September 30, 2007 under this equipment loan facility or the Company’s previous equipment loan facility with Silicon Valley Bank.

The prime rate was 7.75% at September 30, 2007. These credit facilities contain covenants that limit the Company’s net losses and require certain minimum liquidity. In addition, the Company is prohibited under these facilities from paying dividends.

The dilutive effect of the Company’s stock options is calculated using the treasury stock method, based on the average share price of the Company’s common stock. Under the treasury stock method, the proceeds that would be hypothetically received from the exercise of all stock options with exercise prices below the average share price of the Company’s common stock are assumed to be used to repurchase shares of the Company’s common stock.

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The following common stock equivalents are also excluded from the earnings per share computation because the exercise prices of the stock options and rights were greater than or equal to the average price of the common shares, and therefore their inclusion would have been anti-dilutive (in thousands):

(6) OTHER COMPREHENSIVE INCOME (LOSS)

SFAS No. 130, Reporting Comprehensive Income , establishes standards for reporting and display of comprehensive income and loss and its components in the financial statements. Comprehensive income (loss) consists of net income (loss), foreign currency translation adjustments, and unrealized gains (losses) on short-term investments in marketable securities. Total comprehensive income (loss) for the three and nine months ended September 30, 2007 and 2006 was as follows (in thousands):

As of September 30, 2007 and 2006, total cumulative translation loss amounted to ($336,000) and ($284,000), and total cumulative unrealized gain on investments was $2,000 and $5,000.

(7) SEGMENT REPORTING

FAS No. 131, Disclosures About Segments of an Enterprise and Related Information , establishes standards for reporting information about operating segments in annual financial statements. It also establishes standards for related disclosures about products, services, geographical areas and major customers. The Company has two business segments: Domestic and International. The Company measures segment performance based on revenues and contribution margin, which is a measure of profitability that allocates only direct and controllable costs to a segment. Assets are not allocated to segments for internal reporting presentations. Intercompany transactions have been eliminated from the segment information. Non-operating income and expenses are not tracked by segment. Segment information is provided below (in thousands):

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Prior to January 1, 2007, the Company reported results in three segments: North American Data Analysis, International Data Analysis, and Text Analysis (InFact). Beginning in the first quarter of 2007, the Company ceased treating Text Analysis as a separate business segment. On August 2, 2007, the Company sold its InFact-related technology and associated intellectual property rights. See Note 10.

(8) REVENUE CONCENTRATION

One customer accounted for more than 10% of the Company’s total consolidated revenues for the three and nine months ended September 30, 2007. This customer accounted for 15% ($0.8 million) and 13% ($0.7 million) of total revenues for the three months ended September 30, 2007 and 2006, respectively. This same customer accounted for 16% ($2.7 million) and 10% ($1.6 million) of total revenues for the nine months ended September 30, 2007 and 2006, respectively.

This same customer accounted for 13% of the Company’s total consolidated accounts receivable balance as of September 30, 2007, and less than 10% of the Company’s total consolidated accounts receivable balance as of September 30, 2006.

(9) COMMITMENTS AND CONTINGENCIES

In certain of its licensing agreements, the Company provides intellectual property infringement indemnifications. These indemnifications are excluded from the initial recognition and measurement requirements of FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees. Including Indirect Guarantees of Indebtedness of Others. The Company’s policy is to record any obligation under such indemnification when a required payment under such indemnification is probable and the amount of the future loss is estimable. At September 30, 2007, there were no such indemnifications for which a required payment was deemed to be probable or estimable; therefore, no accrual has been made for potential losses associated with these indemnifications.

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(10) GAIN ON SALE OF INTANGIBLE ASSET

At the beginning of 2007, the Company integrated its text analysis (InFact) business more closely with its data analysis business, no longer treating Text Analysis as a separate business segment. On August 2, 2007, the Company sold its InFact search technology and associated intellectual property rights to Hypertext Solutions Inc. (Hypertext) for $3.7 million in cash. The Company recorded a gain of $3.5 million, which represented the difference between the proceeds from the sale of the net intangible assets and the net transaction costs of $0.2 million.

The Company retained a limited support license to the InFact technology as part of the transaction to allow it to continue to support its current InFact customers for up to three years. The Company will not be licensing the InFact product to new customers. Also as part of the agreement with Hypertext, Hypertext employed certain Company employees who were members of the Company’s InFact team.