UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2006

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-25040

APPLIX, INC.

(Exact name of registrant as specified in its charter)

MASSACHUSETTS	04-2781676
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

289 Turnpike Road, Westborough, Massachusetts 01581
(Address of principal executive offices)

(508) 870-0300
(Registrant’s telephone number)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o            Accelerated filer o            Non-accelerated filer þ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No þ

     As of November 1, 2006, the Registrant had 15,621,071 outstanding shares of common stock.

APPLIX, INC.

Form 10-Q

For the Quarterly Period Ended September 30, 2006

Table of Contents

	Page
	No.
Part I — Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005		3
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2006 and 2005		4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3. Quantitative and Qualitative Disclosures About Market Risk		21
Item 4. Controls and Procedures		22
Part II — Other Information
Item 1A. Risk Factors		22
Item 6. Exhibits		27
Signature		28
Ex-31.1 Certification of CEO
Ex-31.2 Certification of CFO
Ex-32.1 Certification of CEO pursuant to Section 906
Ex-32.2 Certification of CFO pursuant to Section 906

     Applix and TM1 are registered trademarks of Applix, Inc. TM1 Integra, Applix Interactive Planning, and TM1 Web are trademarks of Applix, Inc. All other trademarks and company names mentioned are the property of their respective owners. All rights reserved.

     Certain information contained in this Quarterly Report on Form 10-Q is forward-looking in nature. All statements included in this Quarterly Report on Form 10-Q or made by management of Applix, Inc. (“Applix” or the “Company”) and its subsidiaries, other than statements of historical facts, are forward-looking statements. Examples of forward-looking statements include statements regarding Applix’s future financial results, operating results, business strategies, projected costs, products, competitive positions and plans and objectives of management for future operations. In some cases, forward-looking statements can be identified by terminology such as “may”, “will”, “should”, “would”, “expect”, “plan”, “anticipates”, “intend”, “believes”, “estimates”, “predicts”, “potential”, “continue”, or the negative of these terms or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in Part II, Item 1A, “Risk Factors”. These and many other factors could affect Applix’s future financial and operating results, and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Applix or on its behalf. Applix does not undertake an obligation to update its forward-looking statements to reflect future events or circumstances.

2

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Applix, Inc.

Condensed Consolidated Balance Sheets
(In thousands, except share and par value amounts)

	September 30,			December 31,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	23,106		$	20,740
Short-term investments		4,082			4,198
Accounts receivable, less allowance for doubtful accounts of $239 and $231, respectively		10,334			8,066
Other current assets		1,721			1,295
Deferred tax assets		229			164
Total current assets		39,472			34,463
Restricted cash		400			500
Property and equipment, net		1,330			953
Other assets		648			712
Intangible assets, net of accumulated amortization of $1,599 and $1,188, respectively		5,731			312
Goodwill		13,367			1,158
TOTAL ASSETS	$	60,948		$	38,098
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,533		$	1,504
Accrued expenses		7,888			5,460
Accrued restructuring expenses, current portion		48			44
Current portion of debt		2,167			—
Deferred revenues		11,110			9,143
Total current liabilities		23,746			16,151
Accrued restructuring expenses, long-term portion		167			186
Long-term debt		4,333			—
Other long-term liabilities		1,915			133
Total liabilities		30,161			16,470
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued and outstanding Common stock, $0.0025 par value; 30,000,000 shares authorized; 15,604,406 and 14,923,894 shares issued and outstanding, respectively		39			37
Additional paid-in capital		62,548			57,178
Accumulated deficit		(30,364	)		(33,935	)
Accumulated other comprehensive loss		(1,436	)		(1,652	)
Total stockholders’ equity		30,787			21,628
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	60,948		$	38,098

See accompanying Notes to Condensed Consolidated Financial Statements.

3

Applix, Inc.

Condensed Consolidated Statements of Income
(In thousands, except per share amounts)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Revenues:
Software license	$	7,857		$	4,373		$	20,476		$	12,846
Professional services and maintenance		5,968			4,441			15,662			13,048
Total revenues		13,825			8,814			36,138			25,894
Cost of revenues:
Software license		71			5			246			61
Professional services and maintenance		1,231			993			3,396			2,939
Amortization of an acquired intangible asset		108			—			108			—
Total cost of revenues		1,410			998			3,750			3,000
Gross margin		12,415			7,816			32,388			22,894
Operating expenses:
Sales and marketing		6,577			3,695			16,857			11,005
Product development		1,976			1,308			5,283			3,753
General and administrative		2,306			1,101			6,235			3,868
Amortization of acquired intangible assets		179			63			304			188
Total operating expenses		11,038			6,167			28,679			18,814
Operating income		1,377			1,649			3,709			4,080
Non-operating income (expense):
Interest income		237			159			742			376
Interest expense		(178	)		(14	)		(230	)		(42	)
Other expense, net		(59	)		(61	)		(37	)		(156	)
Income before income taxes		1,377			1,733			4,184			4,258
Provision (benefit) for income taxes		204			(240	)		539			(74	)
Income from continuing operations		1,173			1,973			3,645			4,332
Discontinued operations:
Loss from discontinued operations		(26	)		(20	)		(74	)		(70	)
Net income	$	1,147		$	1,953		$	3,571		$	4,262
Net income (loss) per share, basic and diluted:
Continuing operations, basic	$	0.08		$	0.13		$	0.24		$	0.30
Continuing operations, diluted	$	0.07		$	0.12		$	0.22		$	0.26
Discontinued operations, basic and diluted	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.00	)
Net income per share, basic	$	0.07		$	0.13		$	0.23		$	0.29
Net income per share, diluted	$	0.07		$	0.12		$	0.21		$	0.26
Weighted average number of shares outstanding:
Basic		15,563			14,744			15,256			14,610
Diluted		17,073			16,534			16,748			16,370

See accompanying Notes to Condensed Consolidated Financial Statements.

4

Applix, Inc.

Condensed Consolidated Statements of Cash Flows

	Nine Months Ended
	September 30,
	2006			2005
	(in thousands)
Cash flows from operating activities:
Net income	$	3,571		$	4,262
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		413			228
Amortization		412			188
Stock-based compensation expense		1,639			45
Deferred income taxes		95			—
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable		(449	)		1,586
Increase in prepaid and other current assets		(173	)		(71	)
Decrease (increase) in other assets		151			(5	)
Increase in accounts payable		378			197
Increase (decrease) in accrued expenses		594			(458	)
Decrease in accrued restructuring expenses		(35	)		(125	)
Decrease in other liabilities		(28	)		(80	)
Increase in deferred revenues		431			154
Cash provided by operating activities		6,999			5,921
Cash flows from investing activities:
Acquisition, net of cash acquired		(12,246	)		—
Property and equipment expenditures		(510	)		(339	)
Decrease (increase) in restricted cash		100			(100	)
Maturities of short-term investments		7,730			3,950
Purchases of short-term investments		(7,615	)		(8,650	)
Cash used in investing activities		(12,541	)		(5,139	)
Cash flows from financing activities:
Proceeds from issuance of common stock under stock plans		1,191			1,425
Proceeds from long-term debt, net of issuance costs		6,451			—
Proceeds from notes receivable		—			892
Cash provided by financing activities		7,642			2,317
Effect of exchange rate changes on cash		266			(323	)
Increase in cash and cash equivalents		2,366			2,776
Cash and cash equivalents at beginning of period		20,740			15,924
Cash and cash equivalents at end of period	$	23,106		$	18,700
Supplemental disclosure of cash flow information
Cash paid for income taxes	$	332		$	325
Cash paid for interest	$	185		$	8
Supplemental disclosure of non-cash financing activity
In June 2006, the Company issued 330,252 shares of common stock valued at approximately $2.5 million in connection with the acquisition of Temtec International B.V. (Note 3).

See accompanying Notes to Condensed Consolidated Financial Statements.

5

APPLIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. The Company

     Applix, Inc. (the “Company”) is a global provider of Business Performance Management (“BPM”) and Business Intelligence (“BI”) applications based on Applix’s TM1 that enables continuous strategic planning, management and monitoring of performance across the financial and operational functions within the enterprise. The Company’s products represent one principal business segment, which the Company reports as its continuing operations.

2. Summary of Significant Accounting Policies

Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) including instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring entries) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Use of Estimates

     The preparation of financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions in these financial statements relate to, among other items, the useful lives of property and equipment and intangible assets, goodwill, domestic and foreign income tax liabilities, valuation of deferred tax assets, stock-based compensation, the allowance for doubtful accounts and accrued liabilities.

Goodwill

     The Company tests its goodwill for impairment annually or more frequently upon occurrence of certain events or circumstances. Goodwill is tested for impairment annually using a two-step process. First, the Company determines if the fair value of its “reporting unit” exceeds the carrying amount of the reporting unit. If the fair value does not exceed the carrying amount, goodwill of the reporting unit is potentially impaired, and the Company must then measure the impairment loss by comparing the “implied fair value” of the goodwill, as defined by Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”), to its carrying amount. At September 30, 2006 and 2005, the Company evaluated its goodwill and determined that the fair value had not decreased below the carrying value. The fair value of the reporting unit at September 30, 2006 and 2005 was estimated using the Market Value Approach. To date, no impairment adjustments have been recorded.

New Accounting Pronouncements

     In July 2006, the Financial Accounting Standards Board issued Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes,” which is effective January 1, 2007. The purpose of FIN 48 is to clarify and set forth consistent rules for accounting for uncertain tax positions in accordance with SFAS 109, “Accounting for Income Taxes” by requiring the application of a “more likely than not” threshold for the recognition and derecognition of tax positions. The Company is currently assessing what impact, if any, the adoption of this statement will have on its consolidated financial statements.

6

3. Acquisition

     On June 15, 2006, the Company completed the acquisition of Temtec International B.V. (“Temtec”), a privately-held Netherlands company that is a leading provider of self-service analytic software that empowers non-technical business users to analyze and report on business-critical information in real time. The acquisition of Temtec enables the Company to provide companies with a more powerful solution set for creating, managing and delivering compelling operational performance management applications throughout the enterprise. The total purchase price for Temtec was approximately $15,266,000 and was comprised of the following (in thousands, except share amounts):

Cash	$	11,455
Common stock (330,252 shares)		2,538
Direct acquisition costs		1,273
Total	$	15,266

     The fair value of Applix common stock issued in connection with the acquisition of Temtec was estimated at $7.68 per share, which represented the average closing price of the Company’s common stock for five trading days, comprised of June 15, 2006 (the day that the terms of the acquisition were agreed to and announced), the two trading days before and the two trading days after June 15, 2006. Direct acquisition costs include the estimated investment banking fees, legal and accounting fees and other external costs directly related to the acquisition.

     On June 15, 2006, the Company deposited $1 million of the cash consideration and $2 million, or 264,200 shares, of the Company’s common stock into an escrow account for a total escrow amount of $3 million to secure certain indemnification, warranty and claim obligations of the Company to the former stockholders of Temtec. Subject to the provisions of the escrow agreement, one-third of the escrow amount, for which the form of consideration will be determined at the sole discretion of the sellers, will be released within 30 days after the filing of the Company’s 2006 annual financial statements, but in any event no later than May 31, 2007. Also, subject to the provisions of the escrow agreement, the remaining amount of escrow in cash and shares will be released within 30 days after the filing of the Company’s 2007 annual financial statements, but in any event no later than May 31, 2008.

     The Company accounted for the Temtec acquisition as a purchase, and accordingly, will include the assets purchased and liabilities assumed in the consolidated balance sheet at the purchase date based upon their estimated fair values when the Company completes the allocation process. The results of operations of Temtec are included in the consolidated financial statements beginning June 15, 2006.

     The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions and other information compiled by management, including an independent valuation that utilized established valuation techniques. Goodwill recorded as a result of this acquisition is not deductible for tax purposes.

     The total purchase price has been allocated as follows (in thousands):

	At
	June 15,
	2006
Cash and cash equivalents	$	317
Accounts receivable		1,440
Prepaid and other current assets		243
Deferred tax assets		191
Property and equipment		175
Accounts payable		(536	)
Accrued expenses		(1,026	)
Deferred revenue		(1,196	)
Assumed Temtec payroll-related liability		(545	)
Deferred tax liabilities		(1,836	)
Amortizable intangible assets:
Existing technology		1,850
Customer relationships		3,980
Total amortizable intangible assets		5,830
Goodwill		12,209
Total purchase price	$	15,266

7

     The purchase price and related allocations are preliminary and may be revised as a result of adjustments made to the purchase price, additional information regarding liabilities assumed, including contingent liabilities, and revisions of preliminary estimates of fair values made on the date of purchase.

     Intangible assets include amounts related to the fair value of existing technology and customer relationships, which have estimated useful lives of 5 and 10 years, respectively. The future estimated amortization expense of these intangible assets as of September 30, 2006 through 2011 is as follows:

	(In thousands)
Remainder of 2006	$	192
2007		768
2008		768
2009		768
2010		768
2011		568

     In connection with the acquisition, the Company assumed a lease obligation for certain of its office space located in the Netherlands, which is owned by two employees of Temtec. The rent expense relating to this office space is approximately €25,000 annually through the remaining term of the lease, May 1, 2010.

     The following pro forma financial information presents the combined results of operations of Applix and Temtec as if the acquisition had occurred as of the beginning of the periods presented below. Adjustments to reflect the dilutive effect of the shares of common stock issued, interest expense incurred relating to the debt issued in connection with the acquisition and amortization of acquired intangible assets have been made to the combined results of operations for the three and nine months periods ended September 30, 2006 and 2005. The pro forma financial information is not intended to represent or be indicative of the Company’s consolidated results of operations or financial condition that would have been reported had the acquisition been completed as of the dates presented, and should not be taken as representative of the Company’s future consolidated results of operations or financial condition.

8

	Three months		Three months		Nine months		Nine months
	ended		ended		ended		ended
(In thousands, except per share amounts)	September 30, 2006		September 30, 2005		September 30, 2006		September 30, 2005
Revenues	$	13,825	$	10,357	$	38,821	$	30,240
Net income	$	1,147	$	1,524	$	2,875	$	3,097
Net income per share, basic	$	0.07	$	0.10	$	0.19	$	0.21
Net income per share, diluted	$	0.07	$	0.09	$	0.17	$	0.19

4. Long-term Debt and Credit Facility

     In June 2006, the Company amended its existing loan and security agreement with Silicon Valley Bank (“SVB”) in connection with the acquisition of Temtec, to provide for a term loan (the “Term Loan”) in the principal amount of $6.5 million, which the Company used to partially finance the acquisition. Debt issuance costs relating to the Term Loan totaled approximately $49,000. The Term Loan is payable in thirty-six equal monthly installments of principal commencing on October 1, 2006 through September 1, 2009, plus monthly payments of accrued interest. The Term Loan bears interest at a rate of prime plus 0.75% and is guaranteed by Applix Securities Corp., a wholly-owned subsidiary of the Company. There are no penalties or fees in the event that the Company prepays the Term Loan prior to its scheduled maturity date. This amendment also extended the maturity date of the Company’s credit facility with SVB from March 18, 2007 to June 18, 2007. The credit facility is a domestic working capital line of credit with an interest rate equal to the prime interest rate and under which the Company may borrow the aggregate principal amount of up to the lesser of: (i) $3,000,000; or (ii) an amount based upon a percentage the Company’s qualifying domestic accounts receivable. The availability of borrowings under the Company’s credit facility as well as the Term Loan is subject to the maintenance of certain financial covenants and the borrowing limits described above. As of September 30, 2006 and December 31, 2005, there were no amounts outstanding under the credit facility.

     The scheduled principal payments for the Term Loan as of September 30, 2006 were as follows:

	(In thousands)
2006	$	541
2007		2,167
2008		2,167
2009		1,625
Total	$	6,500

5. Stock-based Compensation

     The Company grants stock options and issues common stock to its employees and directors and also provides employees the right to purchase stock pursuant to stockholder approved stock option and employee stock purchase plans. Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standard No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). Prior to January 1, 2006, the Company followed Accounting Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its employee stock-based compensation.

     Under the provisions of SFAS 123R, the Company recognizes as compensation expense the fair value of share-based payment awards on a straight-line basis over the requisite service period of the individual award, which generally equals the vesting period. All of the Company’s share-based payment awards are accounted for as equity instruments, as there have been no liability awards granted.

     The Company elected the modified prospective transition method for adopting SFAS 123R. Under this method, the provisions of SFAS 123R apply to all awards granted or modified after the date of adoption, while prior period amounts are not restated. The unrecognized expense of awards not yet vested at the date of adoption shall be recognized in the statements of income in the periods after the date of adoption using the same valuation method (i.e. Black-Scholes) and assumptions determined under the original provisions of SFAS 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”) as disclosed in previous filings. Under the provisions of SFAS 123R, the Company recorded $594,000 and $1,639,000 of stock-based compensation in its condensed consolidated statements of income for the three and nine months ended September 30, 2006, respectively, which had the effect of reducing net income by $0.03 and $0.10 per diluted share, respectively. Stock-based compensation expense was included in the following expense categories (in thousands):

9

	Three Months		Nine Months
	Ended		Ended
	September 30,		September 30,
	2006		2006
Cost of revenues	$	17	$	52
Sales and marketing		225		594
Product development		166		428
General and administrative		186		565
Total	$	594	$	1,639

     There was no income tax benefit recognized in the Company’s condensed consolidated statements of income for the three and nine months ended September 30, 2006 for stock-based payments. At September 30, 2006, total unrecognized stock-based compensation expense related to unvested stock options, expected to be recognized over a weighted average period of 1.4 years, amounted to approximately $4,042,000. Total unrecognized stock-based compensation expense will be adjusted for any future changes in estimated forfeitures, if any.

     Prior to the adoption of SFAS 123R, the Company presented all excess tax benefits related to stock-based compensation as cash flows from operating activities in the Company’s statement of cash flows. SFAS 123R requires the cash flows resulting from these tax benefits to be classified as cash flows from financing activities. For the nine months ended September 30, 2006, there was no net tax benefit from the exercise of stock options.

     The Company has a number of stock award plans, which provide for the grant or issuance of options, restricted common stock, and unrestricted common stock. These plans are administered by the compensation committee of the Board of Directors, and allow for grants to employees, directors of the Company, and non-employees. Option grants can be in the form of either incentive stock options or non-qualified options. Exercise prices are set on the date of grant and are required to be at fair value, in the case of incentive stock options, or at the discretion of the compensation committee, in the case of non-qualified stock options. Options granted to non-employee directors must have an exercise price equal to the fair value of the common stock on the date of grant.

     Options generally vest in equal installments over a four year period. There are generally no performance conditions attached to employee awards, other than continued employment by the Company. Options have a contractual life of 7 years.

     On May 27, 2004, the stockholders approved the 2004 Equity Incentive Plan (the “2004 Plan”) previously adopted by the Board of Directors in the first quarter of 2004. Under the 2004 Plan, up to 1,000,000 shares of common stock (subject to adjustment in the event of stock splits and other similar events) may be issued pursuant to awards granted under the 2004 Plan. On June 9, 2005, the stockholders approved an amendment to the 2004 Plan to increase the number of shares of common stock authorized for issuance thereunder from 1,000,000 to 2,000,000 shares of common stock.

     In 2003, the Board of Directors adopted, and the stockholders approved, the 2003 Director Equity Plan (the “2003 Director Plan”). The 2003 Director Plan provides for the grant of non-statutory options not intended to meet the requirements of the Section 422 of the Internal Revenue Code of 1986, as amended. Only directors of the Company who are not full-time employees (“Non-Employee Directors”) of the Company or any subsidiary of the Company are eligible to be granted awards under the Plan. A total of 300,000 shares of the Company’s common stock may be issued under the 2003 Director Plan. Any shares subject to options granted pursuant to the 2003 Director Plan, which terminate or expire unexercised will be available for future grants under the 2003 Director Plan. The 2003 Director Plan is administered by the compensation committee of the Board of Directors of the Company. Under the 2003 Director Plan, the stock options must be granted with an exercise price of no less than the fair market value of the stock on the date of grant.

     Pursuant to the 2003 Director Plan, each non-employee Director receives an automatic grant of common stock and an option for the purchase of common stock on January 1 of each year. The amount of common stock is determined taking into account whether the Director serves on a Board committee. Except for Election Grants (as defined below), both the grant of shares and options are contingent upon attendance by the non-employee Director at least 75% of the meetings of the Board of Directors and any committees on which he or she served in the preceding year. Each new non-employee Director receives an option to purchase 10,000 shares of common stock upon such director’s initial election to the Board of Directors (an “Election Grant”). Each option will become exercisable (or “vest”), with respect to Election Grants, in two equal annual installments on the first and second anniversary of the date of grant, and with respect to all other options, on the first anniversary of the date of grant, provided in each case that the optionee continues to serve as a director on such date. The Board of Directors may suspend, discontinue or amend the 2003 Director Plan.

     Information with respect to stock option activity under the various stock plans is as shown below:

10

				Average
	Number			Exercise Price
Options outstanding at January 1, 2006		3,467,812		$	3.46
Options granted		784,000		$	6.39
Options exercised		(130,784	)	$	2.65
Options cancelled		(65,713	)	$	7.95
Options outstanding at March 31, 2006		4,055,315		$	3.98
Options granted		110,000		$	7.59
Options exercised		(83,890	)	$	2.30
Options cancelled		(15,463	)	$	5.08
Options outstanding at June 30, 2006		4,065,962		$	4.11
Options granted		29,000		$	7.78
Options exercised		(52,565	)	$	3.50
Options cancelled		(13,439	)	$	4.86
Options outstanding at September 30, 2006		4,028,958		$	4.14
Options exercisable at September 30, 2006		2,233,296		$	3.14

     The weighted average remaining contractual term and the aggregate intrinsic value for options outstanding at September 30, 2006 were 4.4 years and $16.7 million, respectively. The weighted average remaining contractual term and the aggregate intrinsic value for options exercisable at September 30, 2006 were 3.6 years and $7.0 million, respectively. The intrinsic value of options exercised during the three and nine months ended September 30, 2006 was approximately $231,000 and $1,276,000, respectively.

     On February 26, 2001, the Board of Directors adopted, and on May 4, 2001, the stockholders approved the Company’s Employee Stock Purchase Plan (“2001 Plan”), which authorized the issuance of up to 800,000 shares of common stock, allowing eligible employees to purchase common stock, in a series of offerings, through payroll deductions of up to 10% of their total compensation. The purchase price in each offering is 85% of the fair market value of the stock on either (i) the offering commencement date or (ii) the offering termination date (six months after commencement date), whichever is lower. On May 27, 2004, the stockholders approved an amendment to the 2001 Employee Stock Purchase Plan, previously adopted by the Board of Directors in the first quarter of 2004, increasing the total number of shares reserved for issuance by an additional 500,000 shares of common stock to an aggregate of 1,300,000 shares of common stock.

     The Company utilizes the Black-Scholes valuation model for estimating the fair value of the stock-based compensation granted after the adoption of SFAS 123R. The weighted-average fair values of the options granted under the stock option plans and shares subject to purchase under the employee stock purchase plan were $3.94 and $2.49, respectively, for the three months ended September 30, 2006, assuming no dividends and using the following assumptions:

	Stock Option			Purchase
	Plans			Plan
Expected life (years)		4.6			.5
Expected stock price volatility		54.9	%		60.9	%
Risk free interest rate		4.91	%		5.18	%

     Expected volatility is based on the historical volatility of the Company’s common stock. The risk-free interest rate is based on the U.S. Treasury rates on the date of grant for a term equivalent to the expected life of the options. The expected life was calculated using the method outlined in SEC Staff Accounting Bulletin Topic 14.D.2, “Expected Term,” as the Company’s historical experience does not provide a reasonable basis for the expected term of the option.

     Based on the Company’s historical employee turnover and stock option forfeitures rates, an annualized estimated forfeiture rate of 8.5% has been used in calculating the cost for stock options. Under the true-up provisions of SFAS 123R, additional expense will be recorded if the actual forfeiture rate is lower than estimated, and a recovery of prior expense will be recorded if the actual forfeiture is higher than estimated.

     SFAS 123R requires the presentation of pro forma information for the comparative period prior to the adoption as if all of the Company’s stock options had been accounted for under the fair value method of the original SFAS 123. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation to the prior-year periods (in thousands, except per share data).

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	Three Months			Nine Months
	Ended			Ended
	September 30, 2005			September 30, 2005
Net income as reported	$	1,953		$	4,262
Add: Total stock-based employee compensation expense included in reported net income		15			45
Deduct: Total stock-based employee compensation expense not included in reported net income, determined under fair value based method for all awards		(419	)		(1,235	)
Pro forma net income	$	1,549		$	3,072
Net income per share:
Basic — as reported	$	0.13		$	0.29
Diluted — as reported	$	0.12		$	0.26
Basic — pro forma	$	0.11		$	0.21
Diluted — pro forma	$	0.10		$	0.19
Weighted average number of shares outstanding:
Basic		14,744			14,610
Diluted		16,044			15,832

     The fair value for stock option awards during the three months ended September 30, 2005 was estimated at the date of the grant, using a Black-Scholes option-pricing model, assuming no dividends and based on actual forfeiture rates and the following assumptions:

	2005
Expected life (years)		4
Expected stock price volatility		86.1	%
Risk free interest rate		4.02	%

6. Earnings Per Share

     Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Dilutive net income per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect, if any, of potential incremental common shares, determined through the application of the treasury stock method under SFAS No. 128, “Earnings Per Share”, to the stock options outstanding during the period.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
	(In thousands, except per share data)
Numerator:
Income from continuing operations	$	1,173		$	1,973		$	3,645		$	4,332
Loss from discontinued operations		(26	)		(20	)		(74	)		(70	)
Net income	$	1,147		$	1,953		$	3,571		$	4,262
Denominator:
Denominator for basic net income per share — Weighted shares outstanding		15,563			14,744			15,256			14,610
Dilutive effect of assumed exercise of stock options		1,510			1,790			1,492			1,760
Denominator for diluted net income (loss) per share		17,073			16,534			16,748			16,370
Basic net income (loss) per share
Continuing operations	$	0.08		$	0.13		$	0.24		$	0.30
Discontinued operations	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.00	)
Total net income per share	$	0.07		$	0.13		$	0.23		$	0.29
Diluted net income (loss) per share
Continuing operations	$	0.07		$	0.12		$	0.22		$	0.26
Discontinued operations	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.00	)
Total net income per share	$	0.07		$	0.12		$	0.21		$	0.26

     Common stock equivalents (stock options) of 235,200 and 115,825 were excluded from the calculation of diluted earnings per share for the three months ended September 30, 2006 and 2005, respectively, and 345,450 and 161,325 were excluded from the calculation of diluted earnings per share for the nine months ended September 30, 2006 and 2005, respectively, because these options were anti-dilutive as the stock option exercise price exceeded the average market price for the respective periods. However, these

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     options could be dilutive in the future.

7. Comprehensive Income

     Components of comprehensive income (loss) include net income and certain transactions that have generally been reported in the consolidated statements of stockholders’ equity. Other comprehensive income (loss) includes gains and losses from foreign currency translation adjustments and unrealized gains and losses on short-term investments.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006		2005
	(In thousands)						(In thousands)
Net income	$	1,147		$	1,953		$	3,571	$	4,262
Other comprehensive income (loss) items:
Foreign currency translation adjustments		(5	)		(52	)		216		(303	)
Unrealized loss on short-term investments		2			1					(1	)
Other comprehensive income (loss)		(3	)		(51	)		216		(304	)
Total comprehensive income	$	1,144		$	1,902		$	3,787	$	3,958

8. Income Taxes

     The provision for income taxes represents the Company’s federal and state income tax obligations as well as foreign tax provisions. The Company’s provision (benefit) for income taxes was $204,000 and $539,000 for the three and nine months ended September 30, 2006, respectively, and ($240,000) and ($74,000) for the three and nine months ended September 30, 2005, respectively. During the quarter ended September 30, 2005, the Company benefited from the favorable resolution of a matter with tax authorities in the United Kingdom relating to transfer pricing effected in prior years. The reversal of the related tax contingency reserve resulted in a tax benefit of approximately $320,000.

     The effective tax rates during the three and nine months ended September 30, 2006 and 2005 were significantly less than the U.S. federal statutory rate primarily as a result of the utilization of domestic net operating loss carryforwards, which resulted in the adjustment to the corresponding portion of the previously established valuation allowance. As of September 30, 2006, the domestic deferred tax assets remained fully reserved by the valuation allowance.

9. Commitments and Contingencies

Contingencies

     On January 4, 2006, the Company reached a settlement with the Securities and Exchange Commission concerning the SEC’s investigation, which commenced in 2003, relating to the restatement of the Company’s financial statements for fiscal years 2001 and 2002. The settlement did not require the Company to pay a monetary penalty. As part of the settlement, the Company consented to a cease and desist order requiring future compliance with Federal securities laws and regulations, and retained a consultant to assist the Company in reviewing its compliance procedures.

     In connection with this investigation, the Company is subject to indemnification obligations to certain former executives in accordance with the Company’s Restated Articles of Organization. Since the Company is unable to estimate the future indemnification obligations, expenses related to these obligations are recorded as they become known. Under these indemnification agreements, the Company incurred legal expenses of $207,000 and $1,000 during the three months ended September 30, 2006 and 2005, respectively, and $452,000 and $18,000 during the nine months ended September 30, 2006 and 2005, respectively. The Company had obligations of approximately $137,000 and $26,000 recorded in accrued liabilities as of September 30, 2006 and December 31, 2005, respectively. If it is ultimately determined that such executives do not satisfy the criteria for indemnification set forth in the Company’s Restated Articles of Organization, such executives would be obligated to repay the Company any amounts advanced by the Company to cover legal fees or other expenses of defending such investigation.

     From time to time, the Company is subject to routine litigation and proceedings in the ordinary course of business. The Company is not aware of any pending litigation to which the Company is or may become a party, that the Company believes could have a material adverse impact on its consolidated results of operations or financial condition.

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10. Restructuring Expenses

     In the second quarter of 2004, the Company adopted a plan of restructuring to reduce operating costs. Under this plan, the Company made the determination that it had no future use of or benefit from, certain space pertaining to its UK office lease. In June 2004, the Company entered into a sublease agreement with a subtenant for a portion of the Company’s UK office lease. In July 2004, upon exiting the space, the Company recorded a restructuring charge of approximately $604,000. The restructuring charge was primarily comprised of the difference between the Company’s contractual lease rate for the subleased space and the anticipated sublease rate to be realized over the remaining term of the original lease, discounted by a credit adjusted risk rate of 8%. The restructuring charge also consisted of other related professional services, including legal fees, broker fees and certain build-out costs, incurred in connection with the exiting of the facility.

     Restructuring charges accrued and unpaid at September 30, 2006, including current and long term portions of $48,000 and $167,000, respectively, were as follows:

								Foreign
	Balance at							Currency		Balance at
	December 31,		Restructuring					Translation		September 30,
	2005		Expenses		Payments			Adjustments		2006
Facility exit costs	$	230,000		—	$	(35,000	)	$	20,000	$	215,000
Total	$	230,000		—	$	(35,000	)	$	20,000	$	215,000

11. Discontinued Operations

     On March 31, 2001, the Company completed the sale of the VistaSource business, including all of its domestic and foreign operations. The Company’s results of operations for the three months ended September 30, 2006 and 2005 included costs of $26,000 and $20,000, respectively, and for the nine months ended September 30, 2006 and 2005 included costs of $74,000 and $70,000, respectively. These costs primarily relate to legal and accounting costs associated with the dissolution of the VistaSource business in Europe.

12. Related Party Transaction

     In September 2006, the Company licensed its product to a customer whose chief financial officer serves on the Company’s Board of Directors. The amount paid by this customer was approximately $50,000, which also included first year’s maintenance.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW OF THE COMPANY’S OPERATIONS

     The Company is a global provider of Business Performance Management (“BPM”) and Business Intelligence (“BI”) applications based on Applix’s TM1 that enable continuous strategic planning, management and monitoring of performance across the financial and operational functions within the enterprise.

     On June 15, 2006, the Company completed the acquisition of Temtec International B.V. (“Temtec”), a privately-held Netherlands company that is a leading provider of self-service analytic software that empowers non-technical business users to analyze and report on business-critical information in real time. The acquisition of Temtec enables the Company to provide companies with a more powerful solution set for creating, managing and delivering compelling operational performance management applications throughout the enterprise. The Company accounted for the Temtec acquisition as a purchase, and accordingly, included the assets purchased and liabilities assumed in the consolidated balance sheet at the purchase date based upon their estimated fair values. The results of operations of Temtec are included in the consolidated financial statements from the acquisition date, June 15, 2006.

     The Company sells its products through both a direct sales force and an expanding network of partners, both domestically and internationally. These partners provide additional implementation resources, domain expertise and complementary applications using the Company’s software products. The Company continues to focus its efforts selling and marketing the licensing and maintenance of its products while increasing the engagement of partners to provide consulting services on the implementation and integration of its product.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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     This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and assumptions on expected or known trends or events, historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     Management believes the following additional critical accounting policies, among others, involve the more significant judgments and estimates used in the preparation of its consolidated financial statements.

• Stock-based Compensation

• Revenue Recognition

• Allowance for Doubtful Accounts

• Goodwill and Other Intangible Assets and Related Impairment

• Restructuring

• Income Taxes

     For more information on the critical accounting policies relating to stock-based compensation, the Company refers the reader to the discussion in Item 2 under the heading “Critical Accounting Policies and Estimates” of the Company’s previously filed Quarterly Report of Form 10-Q for the quarter ended June 30, 2006 and to Note 5 to the unaudited condensed consolidated financial statements for the quarter ended June 30, 2006 contained in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006. Other policies are unchanged from those used to prepare the 2005 annual consolidated financial statements. For more information regarding the Company’s critical accounting policies, the Company refers the reader to the discussion contained in Item 7 under the heading “Critical Accounting Policies and Estimates” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, to Note 2 to the consolidated financial statements for the year ended December 31, 2005, contained within the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, and to Note 2 to the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q.

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RESULTS OF OPERATIONS

Three and Nine Months Ended September 30, 2006 and 2005

Revenues

	(In thousands, except percentages)
	Three Months Ended September 30,										Nine Months Ended September 30,
			Percent					Percent					Percent					Percent
			of					of					of					of
	2006		Revenue			2005		Revenue			2006		Revenue			2005		Revenue
Software License Revenues	$	7,857		57	%	$	4,373		50	%	$	20,476		57	%	$	12,846		50	%
Professional Services Revenues		633		4	%		513		6	%		1,656		4	%		1,523		6	%
Maintenance Revenues		5,335		39	%		3,928		44	%		14,006		39	%		11,525		44	%
Total Professional Services and Maintenance Revenues		5,968		43	%		4,441		50	%		15,662		43	%		13,048		50	%
Total Revenues	$	13,825		100	%	$	8,814		100	%	$	36,138		100	%	$	25,894		100	%

     Total revenues for the three months ended September 30, 2006 were $13,825,000, compared to $8,814,000 for the three months ended September 30, 2005. The increase in total revenues from the prior year period was comprised of increases of $3,484,000 in software license revenues and $1,527,000 in professional services and maintenance revenues. Included in the third quarter of 2006 revenues is approximately $559,000 of license revenue and $1,215,000 of total revenue from Temtec. Total revenues for the nine months ended September 30, 2006 were $36,138,000, compared to $25,894,000 for the nine months ended September 30, 2005. Included in revenues for the nine months ended September 30, 2006 is approximately $827,000 of license revenue and $1,616,000 of total revenue from Temtec. Total revenues for the three and nine months ended September 30, 2006 increased 57% and 40%, respectively, from the same periods in the prior year.

Software License Revenues

     Software license revenues increased by $3,484,000 to $7,857,000, or 57% of total revenues, for the three months ended September 30, 2006, from $4,373,000, or 50% of total revenues, for the three months ended September 30, 2005. For the nine months ended September 30, 2006, software license revenues increased by $7,630,000 to $20,476,000, or 57% of total revenues, from $12,846,000, or 50% of total revenues, for the same period of 2005. The increase in software license revenues was largely due to the Company expanding its customer base, domestically and internationally, and successfully competing in broader and higher value deals resulting from the strengthening of the Company’s worldwide field operations as well as the continued development and enhancements to the Company’s product offerings. The increase in deal size is reflected in the number of transactions resulting in software license revenue in excess of $100,000 which more than doubled to 18 in the third quarter of 2006 from 8 in the third quarter of 2005. Also, this significant increase in software license revenue contributed to a shift in the revenue mix between software licenses and professional services and maintenance. The sales of software licenses accounted for 57% of total revenues for the three and nine months ended September 30, 2006, compared to 50% of total revenues for the three and nine months ended September 30, 2005.

     Domestic license revenues increased by $1,526,000 to $3,342,000 for the three months ended September 30, 2006 from $1,816,000 for the three months ended September 30, 2005. International license revenues increased by $1,958,000 to $4,515,000 for the three months ended September 30, 2006 from $2,557,000 for the three months ended September 30, 2005. For the nine months ended September 30, 2006, domestic license revenues increased by $3,803,000 to $8,623,000 from $4,820,000 for the same period in 2005. International license revenues increased by $3,827,000 to $11,853,000 for the nine months ended September 30, 2006 from $8,026,000 for the nine months ended September 30, 2005.

     The Company markets its products through its direct sales force and indirect partners. The Company continues to focus on complementing its direct sales force with indirect channel partners, which consist of value added resellers (“VARs”), independent distributor and sales agents and original equipment manufacturers (“OEMs”).

Professional Services and Maintenance

     Professional services and maintenance revenues increased by 34% to $5,968,000 for the three months ended September 30, 2006 as compared to $4,441,000 for the three months ended September 30, 2005. During the three months ended September 30, 2006, maintenance revenues increased $1,407,000 to $5,335,000, compared to $3,928,000 for the three months ended September 30, 2005, and professional services revenues increased to $633,000 for the three months ended September 30, 2006 from $513,000 for the three months ended September 30, 2005. For the nine months ended September 30, 2006, professional services and maintenance revenues increased by 20% to $15,662,000 compared to $13,048,000 for the nine months ended September 30, 2005. Maintenance revenues increased by $2,481,000 to $14,006,000 for the nine months ended September 30, 2006, compared to $11,525,000 for the nine months ended September 30, 2005, and professional services revenues increased slightly to $1,656,000 for the nine months ended September

16

30, 2006 from $1,523,000 for the nine months ended September 30, 2005. The increase in maintenance revenue was primarily attributable to the increase in the customer installed base from the sale of software licenses to new customers coupled with high rates of renewals of annual maintenance contracts. The increases in professional services revenue for the three and nine months ended September 30, 2006 were due to increased training and consulting revenues resulting from increased license revenues. The Company will continue to rely primarily on its partners to provide consulting services, including BPM/BI product implementations, as the Company focuses on maintenance services, which include telephonic support, unspecified product upgrades, as well as bug fixes and patches. The Company expects maintenance revenues to continue to increase due to strong customer maintenance renewal rates as well as from providing maintenance services under the contract obligations assumed in connection with the acquisition of Temtec.

Cost of Revenues

	(In thousands, except percentages)
	Three Months Ended September 30,								Nine Months Ended September 30,
	2006				2005				2006				2005
Cost of Software License Revenues	$	71			$	5			$	246			$	61
Cost of Professional Services Revenues and Maintenance Revenues:
Cost of Professional Services Revenues		557				424				1,442				1,213
Cost of Maintenance Revenues		674				569				1,954				1,726
Total		1,231				993				3,396				2,939
Amortization of an Acquired Intangible Asset		108				—				108				—
Total Cost of Revenues	$	1,410			$	998			$	3,750			$	3,000
Gross Margin:			(A	)			(A	)			(A	)			(A	)
Software License	$	7,786	99	%	$	4,368	100	%	$	20,230	99	%	$	12,785	100	%
Professional Services and Maintenance:
Professional Services		76	12	%		89	17	%		214	13	%		310	20	%
Maintenance		4,661	87	%		3,359	86	%		12,052	86	%		9,799	85	%
Total		4,737	79	%		3,448	78	%		12,266	78	%		10,109	77	%
Total Gross Margin	$	12,415	90	%	$	7,816	89	%	$	32,388	90	%	$	22,894	88	%

(A) Gross margins calculated as a percentage of related revenues.

Cost of Software License Revenues

     Cost of software license revenues consists primarily of third-party software royalties and the cost of product packaging and documentation material. Cost of software license revenues as a percentage of software license revenues was 1% for the three and nine months ended September 30, 2006, respectively, and less than 1% for the three and nine months ended September 30, 2005. The increase in the cost of license revenues was primarily due an increase in third-party royalties associated with the sales of certain products.

Cost of Professional Services and Maintenance Revenues

     The cost of professional services and maintenance revenues consists primarily of personnel salaries and benefits, third-party consultants, facilities and information system costs incurred to provide consulting, training and customer support, and payments to indirect channel partners to provide first level support to end-user customers. These payments to indirect channel partners to provide first level support are generally amortized over the 12-month maintenance support period of the underlying contract with the end-user customer. Cost of professional services and maintenance revenues increased by $238,000 to $1,231,000 for the three months ended September 30, 2006 from $993,000 for the three months ended September 30, 2005. For the nine months ended September 30, 2006, the cost of professional services and maintenance revenues increased by $457,000 to $3,396,000 from $2,939,000 for the same period of 2005. The increase in the cost of professional services and maintenance revenues was primarily due to an increase in customer support and professional services employees, including employees gained from the Company’s acquisition of Temtec, and approximately $17,000 and $52,000 of stock-based compensation expense for the three and nine months ended September 30, 2006, respectively, due to the adoption of SFAS 123R on January 1, 2006.

Amortization of an Acquired Intangible Asset

17

     Amortization expense for the acquired intangible asset, existing technology, associated with the Temtec acquisition in June 2006, was $108,000 for the three and nine months ended September 30, 2006. The amortization expense relating to the existing technology relating to the Temtec acquisition will continue to be ratably amortized through the second quarter of 2011.

Operating Expenses

	(In thousands, except percentages)
	Three Months Ended September 30,										Nine Months Ended September 30,
			Percent of					Percent of					Percent of					Percent of
	2006		Revenues			2005		Revenues			2006		Revenues			2005		Revenues
Sales and marketing	$	6,577		48	%	$	3,695		42	%	$	16,857		47	%	$	11,005		43	%
Product development		1,976		14	%		1,308		15	%		5,283		15	%		3,753		14	%
General and administrative		2,306		17	%		1,101		12	%		6,235		17	%		3,868		15	%
Amortization of acquired intangible assets		179		1	%		63		1	%		304		1	%		188		1	%
Total operating expenses	$	11,038		80	%	$	6,167		70	%	$	28,679		79	%	$	18,814		73	%

Sales and Marketing Expenses

     Sales and marketing expenses consist primarily of salaries and benefits, commissions and bonuses for the Company’s sales and marketing personnel, field office expenses, travel and entertainment, promotional and advertising expenses, as well as the cost of the Company’s international sales operations. Sales and marketing expenses increased $2,882,000 to $6,577,000 for the three months ended September 30, 2006 from $3,695,000 for the three months ended September 30, 2005. Sales and marketing expenses as a percentage of total revenues were 48% and 42% for the three months ended September 30, 2006 and 2005, respectively. For the nine months ended September 30, 2006, sales and marketing expenses increased $5,852,000 to $16,857,000, or 47% of total revenue, from $11,005,000, or 43% of total revenue, for the comparable period of 2005. The increase in sales and marketing expenses was primarily due to an increase in staffing in sales and marketing personnel, including the additional employees gained from the acquisition of Temtec in the second quarter of 2006. This increase in staffing specifically included an increase in headcount from 46 at September 30, 2005 to 62 at September 30, 2006 in the Company’s direct sales force and presales technical staff. In addition, the Company increased its investment in marketing programs, advertising and lead generation activities by $385,000 and $852,000 for the three and nine months ended September 30, 2006, respectively, compared to the same periods in 2005. The increase was also attributable to higher sales commission expense based on increased revenues as well as approximately $225,000 and $594,000 of stock-based compensation expense for the three and nine months ended September 30, 2006, respectively, due to the adoption of SFAS 123R on January 1, 2006.

Product Development Expenses

     Product development expenses include costs associated with the development of new products, enhancements of existing products and quality assurance activities, and consist primarily of employee salaries and benefits, consulting costs, as well as the cost of software development tools. Product development expenses increased $668,000 to $1,976,000 for the three months ended September 30, 2006 from $1,308,000 for the three months ended September 30, 2005. These expenses represent 14% of total revenues for the three months ended September 30, 2006, as compared to 15% of total revenues for the three months ended September 30, 2005. For the nine months ended September 30, 2006, product development expenses increased $1,530,000 to $5,283,000, or 15% of total revenue, from $3,753,000, or 14% of total revenue, for the nine months ended September 30, 2005. The increase in product development expenses was primarily due to an increase in headcount from 33 at September 30, 2005 to 53 at September 30, 2006, including employees gained from the Company’s acquisition of Temtec in the second quarter of 2006. Also, the increase was partially due to approximately $166,000 and $428,000 of stock-based compensation expense for the three and nine months ended September 30, 2006, respectively, due to the adoption of SFAS 123R on January 1, 2006. The Company anticipates that it will continue to devote substantial resources to the development of new products and new versions of its existing products, including Applix TM1 and related applications.

General and Administrative Expenses

     General and administrative expenses consist primarily of salaries, benefits and occupancy costs for executive, administrative, finance, information technology, and human resource personnel, as well as accounting and legal costs. General and administrative expenses also include legal costs incurred under indemnification obligations to former executives associated with the investigation by the Securities and Exchange Commission (“SEC”) related to the Company’s financial restatements for the fiscal years 2001 and 2002. General and administrative expenses increased $1,205,000 to $2,306,000, or 17% of total revenues, for the three months ended

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September 30, 2006 from $1,101,000, or 12% of total revenues, for the three months ended September 30, 2005. For the nine months ended September 30, 2006, general and administrative expenses increased $2,367,000 to $6,235,000, or 17% of total revenue, compared to $3,868,000, or 15% of total revenue, for the same period of 2005. The increase was partially due to higher legal fees, including those expenses related to the indemnification obligations to former executives, and consulting fees associated with the previously announced SEC investigation that was settled with respect to the Company in January 2006. These costs totaled approximately $255,000 and $663,000 for the three and nine months ended September 30, 2006, respectively, as compared to approximately $4,000 and $99,000 for the three and nine months ended September 30, 2005, respectively. The increase in professional services fees incurred in connection with the Company’s preparation for its upcoming management report and auditor attestation relating to its internal controls over financial reporting also contributed to the higher general and administrative expenses during the three and nine months ended September 30, 2006 compared to the same periods of 2005. In addition, the increase was attributable in part to approximately $186,000 and $565,000 of stock-based compensation expense for the three and nine months ended September 30, 2006, respectively, due to the adoption of SFAS 123R on January 1, 2006, compared to $15,000 and $45,000 of stock-based compensation expense for the three and nine months ended September 30, 2005, respectively. Finally, the increase of general and administrative expenses was also due to additional costs incurred related to the acquisition of Temtec in June 2006. The Company will continue to closely monitor general and administrative costs.

Amortization of Acquired Intangible Assets

     Amortization expense for the acquired intangible asset, customer relationships, associated with the Dynamic Decisions acquisition in March 2001, was $63,000 and $188,000 for the three and nine months ended September 30, 2006 and 2005, respectively. The amortization expense relating to the Dynamic Decisions acquisition will continue to be ratably amortized through the first quarter of 2007.

     Amortization expense for the acquired intangible asset, customer relationships, associated with the Temtec acquisition in June 2006 was $116,000 for the three and nine months ended September 30, 2006. The amortization of this intangible asset will continue ratably through 2016.

Non-operating Income (Expense)

	(In thousands, except percentages)
	Three Months Ended September 30,												Nine Months Ended September 30,
				Percent of						Percent of						Percent of						Percent of
	2006			Revenues			2005			Revenues			2006			Revenues			2005			Revenues
Interest income	$	237			2	%	$	159			2	%	$	742			2	%	$	376			2	%
Interest expense		(178	)		(1	%)		(14	)		—	%		(230	)		(1	%)		(42	)		—	%
Other (expense) income, net		(59	)		(1	%)		(61	)		(1	%)		(37	)		—	%		(156	)		(1	%)
Total	$	—			—	%	$	84			1	%	$	475			1	%	$	178			1	%

Interest Income

     Interest income increased to $237,000 for the three months ended September 30, 2006 from $159,000 from the three months ended September 30, 2005. For the nine months ended September 30, 2006, interest income increased by $366,000 to $742,000 from $376,000 for the same period of 2005. The increase in interest income was due to higher interest rates earned on higher average cash and short-term investments balances as compared to the same periods in 2005.

Interest Expense

     Interest expense increased to $178,000 for the three months ended September 30, 2006 from $14,000 from the three months ended September 30, 2005. For the nine months ended September 30, 2006, interest expense increased by $188,000 to $230,000 from $42,000 for the same period of 2005. The increase was primarily due to the increase in interest expense resulting from the $6.5 million term loan entered into in June 2006 in connection with the Temtec acquisition.

Other Expense, Net

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     Other expense, net represents other non-operating income and expense items, primarily consisting of gains and losses on foreign currency exchange fluctuations. Other expense, net decreased slightly to $59,000 for the three months ended September 30, 2006 from $61,000 from the three months ended September 30, 2005. For the nine months ended September 30, 2006, other expense, net decreased by $119,000 to $37,000 from $156,000 for the same period of 2005. The decrease in other expense, net for the nine month period was primarily due to the net favorable impact of foreign exchange rate fluctuations primarily involving the Australian dollar, the British pound and the Euro compared to the prior year.

Provision for Income Taxes

     The provision for income taxes represents the Company’s federal and state income tax obligations as well as foreign tax provisions. The Company’s provision for income taxes was $204,000 and $539,000 for the three and nine months ended September 30, 2006, respectively, compared to the Company’s income tax benefit of $240,000 and $74,000 for the three and nine months ended September 30, 2005, respectively. The effective tax rates during the three and nine months ended September 30, 2006 and 2005 were significantly less than the U.S. federal statutory rate primarily as a result of the utilization of domestic net operating loss carryforwards, which resulted in the adjustment to the corresponding portion of the previously established valuation allowance. Also, during the quarter ended September 30, 2005, the Company benefited from the favorable resolution of a matter with tax authorities in the United Kingdom relating to transfer pricing effected in prior years. The reversal of the related tax contingency reserve resulted in a tax benefit of approximately $320,000.

Discontinued Operations

     On March 31, 2001, the Company completed the sale of the VistaSource business, including all of its domestic and foreign operations. The Company’s results of operations for the three months ended September 30, 2006 and 2005 included costs of $26,000 and $20,000, respectively, and $74,000 and $70,000 for the nine months ended September 30, 2006 and 2005, respectively. These costs primarily relate to legal and accounting costs associated with the dissolution of the VistaSource business in Europe.

LIQUIDITY AND CAPITAL RESOURCES

     The Company currently derives its liquidity and capital resources primarily from the Company’s cash flow from operations. The Company’s cash and cash equivalents balances were $23,106,000 and $20,740,000 as of September 30, 2006 and December 31, 2005, respectively, which excludes restricted cash of $400,000 and $500,000 as of each respective date. The Company’s days sales outstanding (“DSO”) in accounts receivable was 67 days as of September 30, 2006, compared with 65 days as of December 31, 2005.

     Cash provided by the Company’s operating activities was $6,999,000 for the nine months ended September 30, 2006, compared to cash provided by operating activities of $5,921,000 for the nine months ended September 30, 2005. Cash provided by operating activities was primarily due to net income of $3,571,000 for the nine months ended September 30, 2006, coupled with non-cash stock-based compensation expense of $1,639,000.

     Cash used in investing activities totaled $12,541,000 for the nine months ended September 30, 2006 compared to cash used in investing activities of $5,139,000 for the nine months ended September 30, 2005. Cash used in investing activities consisted primarily of $12,246,000 of net cash used in connection with the acquisition of Temtec, including direct acquisition costs.

     Cash provided by financing activities totaled $7,642,000 for the nine months ended September 30, 2006, which consisted of proceeds of $6,500,000 from a term loan, net of approximately $49,000 of debt issuance costs, used to partially finance the acquisition of Temtec as well as proceeds of $1,191,000 received from the issuance of stock under the Company’s stock plans. Cash provided by financing activities totaled $2,317,000 for the nine months ended September 30, 2005, which consisted of $1,425,000 of proceeds received from the issuance of stock under the Company’s stock plans and $892,000 of proceeds from the repayment of notes receivable.

     Cash paid for income taxes by the Company was $332,000 and $325,000 for the nine months ended September 30, 2006 and 2005, respectively.

     In June 2006, the Company amended its existing loan and security agreement with Silicon Valley Bank (“SVB”) in connection with the acquisition of Temtec, to provide for a term loan (the “Term Loan”) in the principal amount of $6.5 million, which the Company used to partially finance the acquisition. Debt issuance costs relating to the Term Loan totaled approximately $49,000. The

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Term Loan is payable in thirty-six equal monthly installments of principal commencing on October 1, 2006 through September 1, 2009, plus monthly payments of accrued interest. The Term Loan bears interest at a rate of prime plus 0.75% and is guaranteed by Applix Securities Corp., a wholly-owned subsidiary of the Company. There are no penalties or fees in the event that the Company prepays the Term Loan prior to its scheduled maturity date. This amendment also extended the maturity date of our credit facility with SVB from March 18, 2007 to June 18, 2007. The credit facility is a domestic working capital line of credit with an interest rate equal to the prime interest rate and under which the Company may borrow the aggregate principal amount of up to the lesser of: (i) $3,000,000; or (ii) an amount based upon a percentage the Company’s qualifying domestic accounts receivable. The availability of borrowings under the Company’s credit facility as well as the Term Loan is subject to the maintenance of certain financial covenants and the borrowing limits described above.

     In July 2006, the Company entered into an amendment to its lease agreement for its headquarters located at 289 Turnpike Road in Westborough, Massachusetts for an additional 2,927 square feet of office space, which commenced August 1, 2006 and will expire on January 31, 2011, which is co-terminus with the existing leased space of 24,376 square feet. The additional space will result in increased annual rent expense of approximately $42,000 through the remaining term of the lease.

     The Company has future cash commitments pertaining to its contractual obligations under its non-cancelable leases and term loan with SVB. The Company’s future minimum operating and capital lease and payments for its office facilities and certain equipment as well as scheduled principal payments for the term loan as of September 30, 2006 are:

			Less Than						After
	Total		1 Year		1-3 Years		4-5 Years		5 Years
Non-cancelable operating leases	$	4,655,000	$	1,304,000	$	2,264,000	$	1,087,000	$	—
Non-cancelable capital leases		44,000		21,000		23,000		—		—
Long-term debt		6,500,000		2,166,667		4,333,333		—		—
Total contractual cash obligations	$	11,199,000	$	3,491,667	$	6,620,333	$	1,087,000	$	—

     The Company does not have any off-balance sheet financing or unconsolidated special purpose entities.

     The Company currently expects that the principal sources of funding for its operating expenses, capital expenditures and other liquidity needs will be a combination of its available cash and short-term investment balances, funds expected to be generated from operations, and funding available under the SVB credit facility. The Term Loan and availability of borrowings under the Company’s credit facility are subject to the maintenance of certain financial covenants and the borrowing limits described above. The Company believes that the sources of funds currently available will be sufficient to fund its operations for at least the next 12 months. However, there are a number of factors that may negatively impact the Company’s available sources of funds. The amount of cash generated from or used by operations will be dependent primarily upon the successful execution of the Company’s business plan, including increasing revenues and reinvesting into its sales and marketing and product development. If the Company does not meet its plans to generate sufficient revenue or positive cash flows, it may need to raise additional capital or reduce spending.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     As a multinational corporation, the Company is exposed to market risk, primarily from changes in foreign currency exchange rates, in particular the British pound, the Euro and the Australian dollar. These exposures may change over time and could have a material adverse impact on the Company’s financial results. Most of the Company’s international sales through its subsidiaries are denominated in foreign currencies. Although foreign currency exchange rates have fluctuated significantly in recent years, the Company’s exposure to changes in net income, due to foreign currency exchange rates fluctuations, in the Company’s foreign subsidiaries is mitigated to some extent by expenses incurred by the foreign subsidiary in the same currency. The Company’s primary foreign currency exposures relate to its short-term intercompany balances with its foreign subsidiaries, primarily the Australian dollar. The Company’s foreign subsidiaries have functional currencies denominated in the Euro, Australian dollar, British pound and Swiss franc. Intercompany transactions denominated in these currencies are remeasured at each period end with any exchange gains or losses recorded in the Company’s consolidated statements of income. For the three and nine months ended September 30, 2006, the Company reported a net loss on foreign exchange of approximately $59,000 and $14,000, respectively, in its Condensed Consolidated Statements of Income, reflecting the net unfavorable impact of foreign exchange rate fluctuations primarily involving the Australian dollar, the British pound and the Euro. Based on foreign currency exposures existing at September 30, 2006, a 10% unfavorable movement in foreign exchange rates related to the British pound, Euro, Australian dollar, and Swiss franc would result in an approximately $953,000 reduction to earnings. The Company has not engaged in activities to hedge these exposures.

     At September 30, 2006, the Company held $23,106,000 in cash and cash equivalents, excluding $400,000 of restricted cash, consisting primarily of money market funds and $4,082,000 in short-term investments. Cash equivalents are classified as available for

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sale and carried at fair value, which approximates cost. Short-term investments are classified as available for sale and carried at amortized cost, which approximates their fair value. A hypothetical 10% increase in interest rates would not have a material impact on the fair market value of these instruments due to their short maturity and the Company’s intention that all the securities will be sold within one year.

ITEM 4. CONTROLS AND PROCEDURES

     The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2006. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of September 30, 2006, the Company’s chief executive officer and chief financial officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

     No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2006, except for certain internal controls placed in operation relating to the accounting for the acquisition of Temtec, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Because we acquired Temtec on June 15, 2006, we have not yet fully integrated Temtec into our internal control over financial reporting, and therefore will be excluding Temtec from our December 31, 2006 evaluation of internal controls. Temtec will be included in our December 31, 2007 evaluation of internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

     Investors should carefully consider the risks described below before making an investment decision with respect to the common stock of the Company. The following risk factors have been updated to reflect developments subsequent to the filing of our Annual Report on Form 10-K for the year ended December 31, 2005 and we have denoted with an asterisk (*) in the following discussion those risk factors that are new or materially revised.

OUR STOCK PRICE MAY BE ADVERSELY AFFECTED BY SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY RESULTS.

     We may experience significant fluctuations in our future results of operations due to a variety of factors, many of which are outside of our control, including:

• demand for and market acceptance of our products and services;

• the size and timing of customer orders, particularly large orders;

• introduction of products and services or enhancements by us and our competitors;

• competitive factors that affect our pricing;

• the mix of products and services we sell;

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• the hiring and retention of key personnel;

• our expansion into international markets;

• the timing and magnitude of our capital expenditures, including costs relating to the expansion of our operations;

• the acquisition and retention of key partners;

• changes in generally accepted accounting policies, especially those related to the recognition of software revenue and the accounting for stock-based compensation; and

• new government legislation or regulation.

     We typically receive a majority of our orders in the last month of each fiscal quarter because our customers often delay purchases of products until the end of the quarter as our sales organization and our individual sales representatives strive to meet quarterly sales targets. As a result, any delay in anticipated sales is likely to result in the deferral of the associated revenue beyond the end of a particular quarter, which would have a significant effect on our operating results for that quarter. In addition, most of our operating expenses do not vary directly with net sales and are difficult to adjust in the short term. As a result, if net sales for a particular quarter were below expectations, we could not proportionately reduce operating expenses for that quarter, and, therefore, that revenue shortfall would have a disproportionate adverse effect on our operating results for that quarter. If our operating results are below the expectations of public market analysts and investors, the price of our common stock may fall significantly.

* WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE TEMTEC INTO OUR BUSINESS AND OPERATIONS.

     The integration of the business and operations of Temtec International B.V., which we acquired in June 2006, into our business and operations is a complex, time-consuming and expensive process. Before any acquisition, each company has its own business, culture, customers, employees and systems. After the acquisition, we must ensure that the companies operate as a combined organization using common communications systems, operating procedures, financial controls and human resources practices. In order to successfully integrate Temtec, we must, among other things, successfully:

• retain key Temtec personnel;

• integrate, both from an engineering and a sales and marketing perspective, Temtec’s products and services into our suite of product and service offerings;

• coordinate research and development efforts;

• train and integrate sales forces;

• integrate our business processes and systems; and

• eliminate redundant costs and consolidate redundant facilities.

     There can be no assurance that we will be able to successfully integrate Temtec, and a failure to do so may materially impact our results of operations.

WE MAY NOT SUSTAIN PROFITABILITY OR BE ABLE TO FULFILL ANY FUTURE CAPITAL NEEDS.

     We could incur operating losses and negative cash flows in the future because of costs and expenses relating to brand development, marketing and other promotional activities, continued development of our information technology infrastructure, expansion of product offerings and development of relationships with other businesses. There can be no assurance that we will continue to achieve a profitable level of operations in the future.

     We believe, based upon our current business plan, that our current cash, cash equivalents and short-term investments, funds expected to be generated from operations and our available credit line should be sufficient to fund our operations as planned for at least the next twelve months. However, we may need additional funds sooner than anticipated if our performance deviates significantly from our current business plan or if there are significant changes in competitive or other market factors. If we elect to

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raise additional operating funds, such funds, whether from equity or debt financing or other sources, may not be available, or available on terms acceptable to us.

IF WE DO NOT INTRODUCE NEW PRODUCTS AND SERVICES IN A TIMELY MANNER, OUR PRODUCTS AND SERVICES WILL BECOME OBSOLETE, AND OUR OPERATING RESULTS WILL SUFFER.

     The BPM and BI markets, including interactive planning, budgeting and analytics are characterized by rapid technological change, frequent new product enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards. Our products could be rendered obsolete if products based on new technologies are introduced or new industry standards emerge.

     Enterprise computing environments are inherently complex. As a result, we cannot accurately estimate the life cycles of our products. New products and product enhancements can require long development and testing periods, which requires us to hire and retain technically competent personnel. Significant delays in new product releases or significant problems in installing or implementing new products could seriously damage our business. We have, on occasion, experienced delays in the scheduled introduction of new and enhanced products and may experience similar delays in the future.

     Our future success depends upon our ability to enhance existing products, develop and introduce new products, satisfy customer requirements and achieve market acceptance. We may not successfully identify new product opportunities and develop and bring new products to market in a timely and cost-effective manner.

ATTEMPTS TO EXPAND BY MEANS OF BUSINESS COMBINATIONS AND ACQUISITIONS MAY NOT BE SUCCESSFUL AND MAY DISRUPT OUR OPERATIONS OR HARM OUR REVENUES.

     We have in the past, and may in the future, buy businesses, products or technologies. In the event of any future purchases, we will face additional financial and operational risks, including:

• difficulty in assimilating the operations, technology and personnel of acquired companies;

• disruption in our business because of the allocation of resources to consummate these transactions and the diversion of management’s attention from our core business;

• difficulty in retaining key technical and managerial personnel from acquired companies;

• dilution of our stockholders, if we issue equity to fund these transactions;

• assumption of increased expenses and liabilities;

• our relationships with existing employees, customers and business partners may be weakened or terminated as a result of these transactions; and

• additional ongoing expenses associated with write-downs of goodwill and other purchased intangible assets.

WE RELY HEAVILY ON KEY PERSONNEL.

     We rely heavily on key personnel throughout the organization. The loss of any of our members of management, or any of our staff of sales and development professionals, could prevent us from successfully executing our business strategies. Any such loss of technical knowledge and industry expertise could negatively impact our success. Moreover, the loss of any critical employees or a group thereof, particularly to a competing organization, could cause us to lose market share, and the Applix brand could be diminished.

WE MAY NOT BE ABLE TO MEET THE OPERATIONAL AND FINANCIAL CHALLENGES THAT WE ENCOUNTER IN OUR INTERNATIONAL OPERATIONS.

     Due to the Company’s significant international operations, we face a number of additional challenges associated with the conduct of business overseas. For example:

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• we may have difficulty managing and administering a globally-dispersed business;

• fluctuations in exchange rates may negatively affect our operating results;

• we may not be able to repatriate the earnings of our foreign operations;

• we have to comply with a wide variety of foreign laws;

• we may not be able to adequately protect our trademarks overseas due to the uncertainty of laws and enforcement in certain countries relating to the protection of intellectual property rights;

• reductions in business activity during the summer months in Europe and certain other parts of the world could negatively impact the operating results of our foreign operations;

• export controls could prevent us from shipping our products into and from some markets;

• multiple and possibly overlapping tax structures could significantly reduce the financial performance of our foreign operations;

• changes in import/export duties and quotas could affect the competitive pricing of our products and services and reduce our market share in some countries; and

• economic or political instability in some international markets could result in the forfeiture of some foreign assets and the loss of sums spent developing and marketing those assets.

BECAUSE THE BUSINESS PERFORMANCE MANAGEMENT AND BUSINESS INTELLIGENCE MARKETS ARE HIGHLY COMPETITIVE, WE MAY NOT BE ABLE TO SUCCEED.

     If we fail to compete successfully in the highly competitive and rapidly changing business performance management and business intelligence markets, we may not be able to succeed. We face competition primarily from business intelligence firms. We also face competition from large enterprise application software vendors, independent systems integrators, consulting firms and in-house IT departments. Because barriers to entry into the software market are relatively low, we expect to face additional competition in the future.

     Many of our competitors can devote significantly more resources to the development, promotion and sale of products than we can, and many of them can respond to new technologies and changes in customer preferences more quickly than we can. Further, other companies with resources greater than ours may attempt to gain market share in the customer analytics and business planning markets by acquiring or forming strategic alliances with our competitors.

BECAUSE WE DEPEND IN PART ON THIRD-PARTY SYSTEMS INTEGRATORS TO PROMOTE, SELL AND IMPLEMENT OUR PRODUCTS, OUR OPERATING RESULTS WILL LIKELY SUFFER IF WE DO NOT DEVELOP AND MAINTAIN THESE RELATIONSHIPS.

     We rely in part on systems integrators to promote, sell and implement our solutions. If we fail to maintain and develop relationships with systems integrators, our operating results will likely suffer. In addition, if we are unable to rely on systems integrators to install and implement our products, we will likely have to provide these services ourselves, resulting in increased costs. As a result, our results of operations may be harmed. In addition, systems integrators may develop, market or recommend products that compete with our products. Further, if these systems integrators fail to implement our products successfully, our reputation may be harmed.

BECAUSE THE SALES CYCLE FOR OUR PRODUCTS CAN BE LENGTHY, IT IS DIFFICULT FOR US TO PREDICT WHEN OR WHETHER A SALE WILL BE MADE.

     The timing of our revenue is difficult to predict in large part due to the length and variability of the sales cycle for our products. Companies often view the purchase of our products as a significant and strategic decision. As a result, companies tend to take significant time and effort evaluating our products. The amount of time and effort depends in part on the size and the complexity of

25

the deployment. This evaluation process frequently results in a lengthy sales cycle, typically ranging from three to six months. During this time we may incur substantial sales and marketing expenses and expend significant management efforts. We do not recoup these investments if the prospective customer does not ultimately license our product.

OUR BUSINESS WILL BE HARMED IF WE ARE UNABLE TO PROTECT OUR TRADEMARKS FROM MISUSE BY THIRD PARTIES.

     Our collection of trademarks is important to our business. The protective steps we take or have taken may be inadequate to deter misappropriation of our trademark rights. We have filed applications for registration of some of our trademarks in the United States. Effective trademark protection may not be available in every country in which we offer or intend to offer our products and services. Failure to protect our trademark rights adequately could damage our brand identity and impair our ability to compete effectively. Furthermore, defending or enforcing our trademark rights could result in the expenditure of significant financial and managerial resources.

OUR PRODUCTS MAY CONTAIN DEFECTS THAT MAY BE COSTLY TO CORRECT, DELAY MARKET ACCEPTANCE OF OUR PRODUCTS AND EXPOSE US TO LITIGATION.

     Despite testing by Applix and our customers, errors may be found in our products after commencement of commercial shipments. If errors are discovered, we may have to make significant expenditures of capital to eliminate them and yet may not be able to successfully correct them in a timely manner or at all. Errors and failures in our products could result in a loss of, or delay in, market acceptance of our products and could damage our reputation and our ability to convince commercial users of the benefits of our products.

     In addition, failures in our products could cause system failures for our customers who may assert warranty and other claims for substantial damages against us. Although our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims, it is possible that these provisions may not be effective or enforceable under the laws of some jurisdictions. Our insurance policies may not adequately limit our exposure to this type of claim. These claims, even if unsuccessful, could be costly and time-consuming to defend.

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ITEM 6. EXHIBITS

(a) Exhibits

Exhibit
Number	Description
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

	APPLIX, INC.
Date: November 14, 2006	/s/ Milton A. Alpern
	Milton A. Alpern
	Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit
Number	Description
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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