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 and 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, 2007 as filed with the Securities and Exchange Commission on March 17, 2008.

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, 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 ("RIA") that 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 the 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, consulting and training.

Our total revenues for the third quarter of fiscal year 2008 were $33.7 million, a 3% decrease from levels reported in the third quarter of fiscal year 2007. Our license revenues decreased by approximately 25% or $3.4 million, primarily due to unfavorable economic conditions that began in late fiscal 2007 and continue to adversely impact the financial services industry; a key component of Actuate's customer portfolio. This decrease in license revenue was partially offset by an 11% increase in services revenues. This increase was primarily driven by maintenance and support revenues that continue to grow as our installed base increases and the recording of two significant transactions in the third quarter of fiscal year 2008 with customers who had lapsed in renewing their maintenance agreements and accordingly paid back maintenance. Back maintenance revenue from these two customers comprised approximately 6% of total services revenue in the third quarter of fiscal 2008. Historically, in each period, we have transactions that include back maintenance. For the third quarter of fiscal year 2008, we reported net income of $3.1 million or $0.05 per diluted share compared to net income of $4.6 million or $0.07 per diluted share in the third quarter of fiscal year 2007. This decrease in net income was driven primarily by lower license revenues and higher provision for income taxes over the same period last year. Our total headcount at the end of the third quarter of fiscal year 2008 was 548 compared to 574 employees at the end of third quarter of last year.

We currently anticipate that our total revenues in fiscal year 2008 will range between $131 million to $135 million, with license revenues of approximately between $38 million to $43 million.

During the remainder of fiscal year 2008, we expect three additional trends to have significant impact on the results of our operations. We currently believe that corporate IT budgets will grow only slightly if at all in fiscal 2008 particularly among financial services companies in the United States. Second, corporations are reluctant to buy software from new vendors and we continue to witness corporations consolidating their Business Intelligence, 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 continued 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 the remainder of fiscal 2008, we will pursue the following strategic initiatives:

• 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 to our operating results in fiscal 2008 as a consequence of the ongoing credit crunch on the financial services sector in 2008. 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 intend to combine Actuate Performancesoft Performance Management applications and Actuate's RIA-ready information platform to provide capabilities for distributing accountability throughout the enterprise.

As of September 30, 2008, we held approximately $16.5 million in auction rate securities "ARS" at par value. ARS are investments with contractual maturities of up to 40 years. Our ARS are in the form of municipal bonds, secured by a pool of student loans or collateralized debt obligations whose interest rates are subject to reset through an auction process. At the end of each reset period, investors can sell or continue to hold the securities at par. The ARS held by us are primarily backed by highly rated municipal issuers and are substantially guaranteed by the Federal Government. During the first nine months of fiscal 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. We do not believe these failures are related to a credit issue, but rather are caused by a lack of liquidity. In the event we need to access the funds associated with failed auctions, such funds are not expected to be accessible until a successful auction occurs, the issuer redeems the issue, a buyer is found outside of the auction process or the underlying securities have matured.

At September 30, 2008, our entire ARS investment balance is classified as non-current investments in our condensed consolidated balance sheet because of our inability to determine when our investments in ARS will settle. Typically the fair value of ARS investments approximates par value due to frequent interest rate resets through the auction process. While we continue to earn interest on our ARS investments at the maximum contractual rate, these investments are not currently trading and therefore do not currently have a readily determinable market value. Accordingly, the estimated fair value of ARS no longer approximates par value. We have used a discounted cash flow model to determine the estimated fair value of our investment in ARS as of September 30, 2008. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, timing and amount of cash flows and expected holding periods of the ARS. Based on this assessment of fair value, as of September 30, 2008 we determined there was a decline in the fair value of our ARS investments of $1.3 million. We determined that 100% of this impairment was temporary and therefore the loss is reflected in the other comprehensive income section of stockholders' equity. As of September 30, 2008, the estimated fair value of our investments in ARS totaled $15.2 million. For further discussion on ARS investments please refer to Note 3 and Note 12 of the Notes to Condensed Consolidated Financial Statements.

If the global credit and financial markets continue to deteriorate, our investment portfolio may be impacted and we could record further impairment in the fair value of our ARS or other investments, or determine that additional investments are other-than-temporarily impaired. This could materially adversely impact our results of operations and financial condition.

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 likely 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.

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.

Our critical accounting policies are described under Item 7 to the annual consolidated financial statements as of and for the year ended December 31, 2007, as filed on March 17, 2008 with the SEC on Form 10-K.

In September 2006, the FASB issued SFAS No. 157 ("SFAS 157"), "Fair Value Measurement". SFAS 157 defines fair value, establishes a framework for measuring fair value, and also expands disclosures about fair value measurements. SFAS 157 is effective for periods beginning after November 15, 2007. The Company adopted this standard with respect to its financial assets effective January 1, 2008. In February 2008, the FASB adopted FASB Staff Position SFAS No. 157-2 - "Effective Date of FASB Statement No. 157" delaying the effective date of SFAS 157 for one year for all non financial assets and non financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). See Footnote 3 of the Notes to the Condensed Consolidated Financial Statements for further details regarding the impact of our adoption of SFAS 157 for financial assets. During the first nine months of fiscal 2008, we changed our critical accounting policies as a result of the implementation of SFAS 157.

For further information about our critical accounting policies, see the discussion under Item 7 to the annual consolidated financial statements as of and for the year ended December 31, 2007, as filed with the SEC on Form 10-K on March 17, 2008.

Results of Operations

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



                                                  Three Months Ended             Nine Months Ended
                                                     September 30,                 September 30,
                                                  2008           2007           2008           2007
Revenues:
License fees                                          30 %           39 %           31 %           39 %
Maintenance                                           60             49             58             49
Professional services and training                    10             12             11             12

Total revenues                                       100            100            100            100

Costs and expenses:
Cost of license fees                                   1              1              1              1
Cost of services                                      16             18             18             18
Sales and marketing                                   39             39             41             41
Research and development                              16             15             17             16
General and administrative                            15             12             15             13
Amortization of other purchased intangibles            1              1              1              1
Restructuring charges                                  2              3              1              1

Total costs and expenses                              90             89             94             91

Income from operations                                10             11              6              9
Interest and other income, net                         2              2              1              2

Income before income taxes                            12             13              7             11
Provision (benefit) for income taxes                   3             -              (1 )            2

Net income                                             9 %           13 %            8 %            9 %

Revenues



                                             Three Months Ended                                     Nine Months Ended
                                               (In thousands)                                        (In thousands)
                                  September 30,         Variance      Variance          September 30,          Variance      Variance
                                2008         2007          $'s           %            2008         2007           $'s           %
Revenues
License fees                  $ 10,021     $ 13,438     $  (3,417 )        (25 )%   $ 29,920     $  39,524     $  (9,604 )        (24 )%
Services                        23,660       21,301         2,359           11 %      67,882        61,890         5,992           10 %

Total Revenues                $ 33,681     $ 34,739     $  (1,058 )         (3 )%   $ 97,802     $ 101,414     $  (3,612 )         (4 )%

% of Revenue
License fees                        30 %         39 %                                     31 %          39 %
Services                            70 %         61 %                                     69 %          61 %

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. Our total revenues of $33.7 million for the quarter ended September 30, 2008 were lower by approximately 3% from the corresponding quarter in the prior year. Our license revenues decreased by approximately 25% or $3.4 million primarily due to unfavorable economic conditions that began in late fiscal 2007 and continue to adversely impact the financial services industry; a key component of Actuate's customer portfolio. Despite this decrease in license revenues, we continue to experience double digit growth in our maintenance and support revenue which increased by 19% or $3.2 million over the same period last year. We recorded revenue on two significant transactions with customers who had lapsed in renewing their maintenance agreements and accordingly paid back maintenance during the third quarter of fiscal 2008. Back maintenance revenue from these two customers comprised approximately 6% of total services revenue in the third quarter of fiscal 2008. Historically, in each period, we have transactions that include back maintenance. This increase was partially offset by a 20% or approximately $800,000 decrease in our consulting services revenues.

Sales outside of North America were $8.7 million or 26% of total revenues for the third quarter of fiscal year 2008, compared to $10.3 million, or 30% of total revenues for the third quarter of fiscal year 2007. There was minimal impact of exchange rate fluctuations on total revenues in the third quarter of fiscal 2008 compared with a favorable impact of approximately $640,000 in the third quarter of fiscal 2007.

For the first nine months of fiscal year 2008, total revenues were $97.8 million, a 4% or approximately $3.6 million decrease over the same period last year. This decrease was primarily due to slowing license revenue growth in North America and Europe caused by weak macro economic conditions. This decrease in license revenues was partially offset by a 10% or $6.0 million increase in services revenues, primarily maintenance and support revenues which increased by 13% or $6.7 million over the same period last year. Of this increase in maintenance and support revenues, the majority was attributable to normal growth in support for our installed base. We also recorded revenue on several transactions with customers who had lapsed in renewing their maintenance agreement and accordingly paid back maintenance during the first nine months of fiscal 2008. Historically, in each period we typically have transactions that include back maintenance. However, the amount recorded in the nine months of fiscal 2008 was higher than that seen in the prior year.

Total revenues derived from international regions totaled $28.2 million in the first nine months of fiscal year 2008 compared to approximately $26.9 million in the first nine months of fiscal year 2007. For the first nine months of fiscal year 2008, we derived 29% of our total revenues from sales outside of North America versus 27% in the same period last year. Of these total international revenues, approximately $800,000 or 3% were due to the favorable impact of exchange rate fluctuations, primarily on Euro-based and British Pound-based transactions compared with a $1.8 million favorable impact or 7% reported during the same period last year. The Company's revenues from license fees resulting from sales through indirect channel partners were approximately 32% and 29% of total revenues from license fees for the first nine months of fiscal years 2008 and 2007, respectively.

There was no customer that accounted for more than of 10% of our total revenues for the quarter ended September 30, 2007.

During the first nine months of fiscal 2007, we booked an out of period adjustment related to deferred revenue that should have been recognized in the third quarter of fiscal 2006. As a result of this out of period adjustment, total revenues for the first nine months of fiscal 2007 were positively impacted by approximately $250,000 while net income was increased by approximately $147,000. This out of period adjustment had no impact to our basic and diluted per share results for the first nine months of 2007.

License fees. The 25% decrease in license revenues for the third quarter of fiscal year 2008 over the same period in the prior year was primarily due to weak macro economic conditions that began in late fiscal 2007 and continue to adversely impact the financial services industry; a key component of Actuate's customer portfolio. We experienced most of this weakness in Europe where software sales declined by 68% or approximately $3.1 million during the third quarter of 2008 when compared to the same period last year. Globally, we managed to close over 60 transactions in excess of $100,000. In addition, we recognized license revenue of $1.0 million or more on two transactions during the third quarter of fiscal 2008. This compared to over 70 transactions in excess of $100,000 and three sales transactions individually greater than $1.0 million in the same period last year. 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 our license revenues by region (in thousands):

                                                Three Months Ended                                    Nine Months Ended
                                                  (In thousands)                                        (In thousands)
                                     September 30,         Variance      Variance          September 30,         Variance      Variance
                                   2008         2007          $'s           %            2008         2007          $'s           %
License fees
North America                    $  8,201     $  8,505     $    (304 )         (4 )%   $ 21,735     $ 28,124     $  (6,389 )        (23 )%
Europe                              1,486        4,629        (3,143 )        (68 )%      6,710       10,489        (3,779 )        (36 )%
APAC                                  334          304            30          (10 )%      1,475          911           564           62 %

Total License Fees               $ 10,021     $ 13,438     $  (3,417 )        (25 )%   $ 29,920     $ 39,524     $  (9,604 )        (24 )%

% of total revenue                     30 %         39 %                                     31 %         39 %

The sharp decrease in the third quarter 2008 license revenues in Europe was primarily caused by the weak economic environment. In addition, license revenues recognized in the third quarter of fiscal 2007 were historically amongst one of the highest realized for this region as we closed several large deals, including one order greater than $1.0 million during the third quarter of fiscal 2007. By region, North America accounted for approximately 82% of the total license revenue while Europe and Asia Pacific regions combined accounted for 18% of the total license revenues for the third quarter of fiscal 2008. For the same period last year, North America accounted for approximately 63% of the total license revenue while the Europe and Asia Pacific regions combined accounted for 37% of the total license revenues.

The 24% decrease in license revenues for the nine months ended September 30, 2008 was primarily attributed to weak macro economic conditions in North America and Europe. As a result, our license sales declined by 24% or approximately $9.6 million over the same period last year.

                                                    Three Months Ended                                      Nine Months Ended
                                                      (In thousands)                                         (In thousands)
                                         September 30,          Variance      Variance          September 30,          Variance      Variance
                                       2008         2007          $'s            %            2008         2007          $'s            %
Services Revenues
Professional services and training   $  3,254     $  4,087     $     (833 )        (20 )%   $ 11,091     $ 11,783     $     (692 )         (6 )%
Maintenance                            20,406       17,214          3,192           19 %      56,791       50,107          6,684           13 %

Total Services                       $ 23,660     $ 21,301     $    2,359           11 %    $ 67,882     $ 61,890     $    5,992           10 %

% of Services Revenue
Professional services and training         14 %         19 %                                      16 %         19 %
Maintenance                                86 %         81 %                                      84 %         81 %

Total Services                            100 %        100 %                                     100 %        100 %

Services. The 11% increase in services revenues was driven by the growth in our maintenance and support revenues, which continued to increase in the third quarter of fiscal year 2008. This growth was also partially due to the fact that we recorded revenue on two significant transactions with customers who had lapsed in renewing their maintenance agreement and accordingly paid back maintenance. Back maintenance revenue from these two customers comprised approximately 6% of total services revenue in the third quarter of fiscal 2008. Historically, in each period, we have transactions that include back maintenance. The decrease in professional services revenues was primarily the result of the increase in the adoption of BIRT-based projects by our customers which do not result in professional service

revenues to the same extent as the Company's traditional designer products. As a result, we experienced a 21% decrease in our services headcount in the third quarter of fiscal 2008 versus the same period last year. The success of the Company's BIRT initiative therefore results in a downward trend in the Company's revenue from professional services, as seen during the last several fiscal quarters.

The continued growth in services revenues for the nine months ended September 30, 2008 was primarily attributed to the increase in our maintenance . . .