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Article by DailyStocks_admin    (12-02-08 06:06 AM)

Filed with the SEC from Nov 20 to Nov 26:

Epicor Software (EPIC)
Hedge fund Elliott Associates, which has terminated its $447 million bid to buy Epicor, may nominate one or more directors to the company's board. Elliott also may recommence a tender offer or discuss with other parties any proposals involving Epicor. Elliott and its affiliates hold 7,902,581 shares (12.8%).

BUSINESS OVERVIEW

Forward Looking Statements – Safe Harbor

Certain statements in this Annual Report on Form 10-K are forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, that involve risks and uncertainties. Any statements contained herein (including without limitation statements to the effect that the Company or Management “estimates,” “expects,” “anticipates,” “plans,” “believes,” “projects,” “continues,” “should,” “may,” or “will” or statements concerning “potential” or “opportunity” or variations thereof or comparable terminology or the negative thereof) that are not statements of historical fact should be construed as forward-looking statements including statements about (i) the Company’s future financial results, (ii) the impact of new accounting pronouncements, (iii) the Company's product development plans, (iv) the Company’s capital spending, (v) the Company’s future cash flow from operations, (vi) sufficient sources of financing to continue operations for next twelve months and to satisfy contractual obligations and commercial commitments, (vii) the effect of current legal proceedings, (viii) future cash tax payments and net operating loss carry forwards, (ix) the future use of forward or other hedging contracts, (x) the future impact of recent acquisitions on the Company, (xi) future investments in product development, (xii) schedule of amortization of intangible assets and (xiii) future impact of valuation allowance review. Actual results could differ materially and adversely from those anticipated in such forward looking statements as a result of certain factors, including the factors listed at pages 25 to 33. Because these factors may affect the Company’s operating results, past performance should not be considered an indicator of future performance and investors should not use historical results to anticipate results or trends in future periods. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. Investors should carefully review the risk factors described below and in other documents the Company files from time to time with the Securities and Exchange Commission.

Introduction

Epicor Software Corporation (Epicor or the Company) designs, develops, markets and supports enterprise application software solutions and services primarily for use by mid-sized companies and the divisions and subsidiaries of Global 1000 enterprises, which generally consist of companies with annual revenues between $10 million and $1 billion, and emerging enterprises, which generally consist of rapidly growing businesses with annual revenues under $25 million. Epicor’s solutions are designed to help companies focus on their customers, suppliers, partners and employees through enterprise-wide management of resources and information. This collaborative focus distinguishes the Company from conventional enterprise resource planning (ERP) vendors, whose primary focus is improving internal business processes and efficiencies. The Company believes that by automating and integrating information and critical business processes across their entire value chain, enterprises can improve not just their bottom line, but also their top line, allowing them to compete more effectively in today’s increasingly global economy.

The Company’s products include back office applications for production management, supply chain management (SCM), retail management and financial accounting, as well as front office customer relationship management (CRM) and service management. Epicor also provides industry-specific solutions to the manufacturing, distribution, services and retail and hospitality industry sectors, as well as to a range of industries and vertical markets within these sectors including financial services, professional services, industrial machinery, consumer goods, automotive, hotels and specialty retail. Epicor’s solutions also focus on the need for increased supply chain visibility and transparency and offer e-commerce and collaborative portal capabilities that allow companies to further extend beyond the traditional “four walls” of their enterprise and further integrate their operations with those of their customers, suppliers and partners.

The Company’s products are increasingly developed on and use a service-oriented architecture (SOA), which can help manufacturers, distributors, retailers and services organizations more quickly and efficiently respond to changing business requirements and practices. SOA is a modular, standards-based approach to software development and its deployment is designed to provide a more agile and adaptable application foundation, which can help companies more effectively align their IT resources and enterprise software with their overall business objectives.

The Company offers solutions targeted to the following industries:

Manufacturing —Epicor’s manufacturing solutions provide integrated ERP solutions for discrete and mixed-mode manufacturers. The Company’s solutions are designed to meet the challenges of today’s agile manufacturing environment typified by short product lifecycles, continual process improvement, mass customization and lean manufacturing initiatives. The Company’s products have been designed for specific types of manufacturers – from a small local job shop to a large regional manufacturer. The key industries on which Epicor focuses its manufacturing solutions include metal fabrication, industrial machinery, automotive, electronics, consumer goods and aerospace.

Distribution —Epicor’s distribution solutions are designed to meet the expanding requirement to support a demand-driven supply network (DDSN) by increasing focus on the customer and providing a more seamless order to shipment cycle, as well as inventory and warehouse management, sales and order processing (S&OP), financials, CRM and planning and forecasting solutions. The Company’s distribution solution is designed to automate a business, from customer acquisition and order management to warehouse fulfillment, accounting and customer service. The distribution suite offers an end-to-end solution set tailored for wholesale distributors including third-party logistics providers.

Retail and Hospitality —Epicor provides solutions tailored for the retail, hospitality and entertainment industries. The Company’s retail solutions can support both smaller, single PC-based point-of-sale (POS) retail outlet scenarios, as well as larger scale, distributed POS environments in specialty, general merchandise retailing and large specialty store chains that require more comprehensive POS, loyalty management and merchandising capabilities. Epicor provides both “best-of-breed” retail solutions for large Tier-One retailers, as well as complete “post-to-host” solutions which can integrate all elements of the retail supply chain from the store register through to the enterprise merchandising, planning, selling and financial applications. The Company’s hospitality solutions, designed for food service, hotel, sports and recreation and other entertainment companies, can manage and streamline virtually every aspect of a hospitality organization — from point-of-sale or property management system integration, to cash and sales management, food costing, core financials and business intelligence — all within a single solution.

Services —Epicor’s solutions for services companies is focused on delivering a complete, end-to-end enterprise solution designed to meet the critical business requirements of mid-sized to larger distributed service organizations, providing service organizations with the tools to improve staff utilization, maximize billing and revenue recognition, optimize resources and increase cash flow. The services suite includes opportunity and bid management, CRM, resource and engagement management, project accounting, portfolio and performance management and collaborative commerce applications tailored for specific industries including financial services, audit and accountancy, architectural, engineering and construction, commercial research, not-for-profit organizations, software and computer services, professional services and management consulting.

Beyond the targeted enterprise-wide solutions described above, Epicor also offers the following point solutions:

Supply Chain Management (SCM) —Epicor’s supply chain management solutions enable companies to extend and optimize their enterprises and more effectively collaborate with their customers, suppliers and partners. From business-to-business e-commerce applications to advanced planning and scheduling to advanced warehouse management, forecasting and fulfillment, Epicor offers solutions that can improve operational performance, while strengthening relationships across the supply chain to increase customer value.

Supplier Relationship Management (SRM) —Epicor’s supplier relationship management solutions include applications for strategic sourcing, procurement and spending analytics. These solutions are designed to enable an organization to reduce costs by driving inefficiencies out of the procurement process. They provide a complete web-based, buy-side commerce solution that can rapidly be deployed standalone or as part of an integrated enterprise solution.

Customer Relationship Management (CRM) —Epicor’s award-winning customer relationship management solution is designed to enable small and midsize enterprises to manage their entire customer lifecycle. Epicor’s collaborative CRM solution enables businesses to gather, organize, track and share prospect, customer, competitor and product information, to boost revenues and increase customer satisfaction.

Accounting and Finance —Epicor’s award-winning financial and accounting solutions provide a foundation for good fiscal governance and accurate financial performance through a combination of core ledger, cash and asset management, deferred revenue accounting and contract renewal and electronic payment facilities.

IT Service Management (ITSM) —Epicor ITSM provides a robust set of service management features that support key IT processes as outlined by the Information Technology Infrastructure Library (ITIL) version 2 (ITIL v2) and version 3 (ITIL v3) and has been certified by Pink Elephant as ITIL Compatible in five key service management areas: incident management, problem management, change management, configuration management and service level management.

The Company’s software products incorporate a significant number of features localized to address international market opportunities, including support for multiple languages, multiple currencies and accounting for global taxation methods.

The Company offers consulting, training and support services to supplement the use of its software products by its customers. Midmarket companies require cost effective systems that have broad functionality, yet are rapidly implemented, easily adapted and highly configurable to their unique business requirements.

The Company was incorporated in Delaware in November 1987, under the name Platinum Holdings Corporation. In September 1992, the Company changed its name to Platinum Software Corporation. In April 1999, the Company changed its name to Epicor Software Corporation. The Company has thirteen active operating subsidiaries worldwide.

As part of its business strategy, the Company has pursued acquisitions to expand its customer base, global product offering and geographic footprint. The acquisition of NSB Retail Systems PLC (NSB) (announced in December 2007 and completed in February 2008), CRS Retail Technology Group, Inc. (CRS) in 2005, Scala Business Solutions N.V. (Scala) in 2004 and ROI Systems, Inc. (ROI) in 2003 are typical of this ongoing strategy.

NSB

On December 17, 2007, the Company announced that the Epicor and NSB Boards of Directors reached agreement on the terms of the recommended acquisition of NSB by Epicor pursuant to a scheme of arrangement under section 425 of the United Kingdom Companies Act 1985. On February 7, 2008, Epicor completed the acquisition of NSB and shareholders of NSB received £0.38 in cash per NSB ordinary share. The terms of the transaction valued the fully diluted share capital of NSB at approximately £160 million (approximately $322 million USD, based on the US$:£ exchange rate on December 14, 2007). As of June 30, 2007, NSB had cash and equivalents balance of $34.6 million and no debt. NSB Group designs, develops, markets and supports store and merchandising solutions to leading retailers of apparel, footwear, and specialty merchandise. The acquisition of NSB provides an expanded portfolio of products and services for large specialty retailers and department stores, as well as a fully hosted, managed service offering designed for smaller and mid-sized retailers who are interested in rapid implementation via an on-demand versus on-premise offering. NSB products are developed on the Microsoft .NET platform and are highly complementary to the Company’s retail products.

CRS

In December 2005, pursuant to a stock purchase agreement, the Company acquired CRS, a privately held company. CRS designs, develops, markets and supports software, hardware and services that assist general merchandise and specialty retail companies in increasing sales, improving customer service and reducing operating costs. CRS applications leverage Microsoft ® and Java technologies and have over 50,000 in-store systems installed in 32 countries and 10 languages. The CRS acquisition provides existing customers new, complementary product offerings and creates expanded opportunities in the hospitality and retail vertical, particularly in key international markets through increased marketing, improved sales execution, enhanced viability and worldwide sales and support infrastructure. The Company recorded the acquisition of CRS as a purchase in 2005, and the results of CRS’s operations are included in the Company’s Consolidated Statements of Operations from the date of acquisition.

Scala

In June 2004, Epicor acquired Scala, a publicly held software company headquartered in Amsterdam, the Netherlands, by means of an exchange offer made for all of the outstanding ordinary shares of Scala. Scala designs, develops, markets and supports collaborative ERP software ( iScala ) that is used by the small- and medium-size divisions and subsidiaries of large multinational corporations, as well as by independent stand-alone companies in developed and emerging markets. Scala’s solutions are based on a Web services platform and utilize Microsoft ® technologies. Scala’s software and services support local currencies and accounting regulations, are available in more than 30 languages and are used by customers in over 140 countries. In addition to complementary product offerings, the Scala acquisition provided the Company with a significantly expanded worldwide presence. The Company recorded the acquisition of Scala as a purchase in 2004, and the results of Scala’s operations are included in the Company’s Consolidated Statements of Operations from the date of acquisition.

Background

Epicor designs its products and services primarily for midmarket companies and the divisions and subsidiaries of Global 1000 enterprises, which generally consist of companies with annual revenues between $10 million and $1 billion, and emerging enterprises, which generally consist of rapidly growing businesses with annual revenues under $25 million. In the past, midmarket companies were underserved by smaller “best-of-breed” applications or traditional financial and ERP systems that had originally been designed for larger corporations. These large enterprise systems, though highly functional, were also extremely complex and expensive to purchase, install, integrate and maintain. Further, the complexity of the infrastructure and ongoing maintenance to support these systems often required a centralized deployment model. This limited access to critical data to the organization's information technology (IT) department, which then limited timely availability of information to decision makers, managers and key employees. Moreover, these mostly proprietary systems provided little flexibility or adaptability to the constantly evolving requirements of midmarket companies.

Beginning in the early 1990s, as Global 1000 companies aggressively invested in information technology to help them streamline and integrate disparate business processes, they created a tremendous demand in their operating subsidiaries and the small to mid-size enterprise (SME) market for enterprise-wide software applications that integrated business processes and information. Initially, only larger organizations had the technological expertise, budget and ability to support the lengthy implementations typified by the early solutions.

While SMEs understood the business value of enterprise applications, they lacked the extensive resources required to implement and support such first-generation solutions. In their quest to boost productivity and profits as well as to gain a competitive advantage, mid-sized companies have increasingly turned to integrated application software to automate and link their business processes. The Company believes that due to the midmarket's unique business constraints of limited budgets and rapid implementation timeframes, “best-of-breed” solutions and after-market application integrations are far too complex and costly to offer an effective enterprise solution.

As a group, mid-sized companies face tremendous global competitive pressures as they compete for business against larger corporations, other mid-sized competitors and smaller start-ups. They generally understand the need to remain close to their customers and suppliers, while making the most effective use of relatively limited resources. Mid-sized companies frequently demand a quick return on technology investments and require that solutions be affordable – not only to acquire and implement, but also to maintain and support – throughout their entire operational life span.

Epicor’s experience has been that mid-sized companies are practical consumers with respect to technology, typically selecting affordable, proven solutions. The dramatic decrease in information technology costs over the past decade, coupled with a simultaneous increase in computing power, has made key new technologies accessible to this cost-conscious market. Microsoft Corporation took advantage of increased computing capabilities to develop Microsoft BackOffice ® (now the Microsoft Windows Server family), a robust network operating system and scalable relational database that provides smaller businesses with a sophisticated technology infrastructure previously accessible only to Global 1000 corporations. Microsoft has quickly become the fastest growing technology platform and is particularly attracting midmarket companies with its features, familiarity and ease-of-use.

The recent development of more cost-effective, adaptable and agile infrastructures, such as the emergence of SOA and technologies like Microsoft .NET and Web services, is also driving mid-sized companies to increase their investment in enterprise applications. Unlike monolithic, tightly-coupled systems of the past, SOA and Web services provide the ability to create highly functional applications through the assembly or collection of loosely-coupled, self-describing business services. This standards-based design approach provides a secure, scalable, unified design framework that allows both developers and information workers to more easily access, combine and reuse software application functionality. With an SOA, businesses have the ability to more easily and efficiently align their information systems and technology resources, allowing them the ability to respond more quickly to continually changing business requirements.

Epicor’s early adoption of Microsoft .NET and Web services technology allows its product offerings, development and services to leverage the benefits of SOA and provide growing mid-sized businesses with increased flexibility, inter-operability and cross-platform capability. These capabilities are extremely important as the market for Enterprise Applications continues to grow worldwide.

Industry Analyst Market Growth Projections

According to the press release “AMR Research Releases Enterprise Applications Market Sizing Reports,” dated July 11, 2007, “ERP vendor revenue across all segments is expected to grow from $28.8B in 2006 to $47.7B by 2011.” In addition, “The Midsize Enterprise ERP Spending Report, 2007-2008,” published December 10, 2007 by AMR Research states that “midsize enterprises will increase ERP budgets by 5.1% in 2008… by 2010, 43% of companies would like to employ a single, global financial and shared services ERP system.”

Industry Segments and Geographic Information

Epicor’s reportable operating segments include license fees, consulting, maintenance and other. For the purposes of Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” a breakout of the Company’s sales by segment is provided in Note 13 of the “Notes to Consolidated Financial Statements” under Item 8, “Financial Statements and Supplementary Data.” A summary of the Company’s sales by geographic region is incorporated herein by reference to Note 13 of the “Notes to Consolidated Financial Statements” under Item 8, “Financial Statements and Supplementary Data.”

Technology Strategy

The Company's technology strategy is to develop leading enterprise software applications using industry-standard tools where possible, and to take advantage of leading third-party, industry-standard technologies for database management systems, operating systems, user interfaces, infrastructure and connectivity (including internet, intranet and extranet access). As the Company continues to deliver enterprise application solutions, it is increasingly focused on leveraging new technology platforms and standards, like Web services, which support the integration of computing and communication paradigms as one across multiple devices. For businesses to compete in today’s increasingly real-time world, they need to adopt an infrastructure that can integrate the internet, wireless, mobile, voice response and personal digital assistants (PDA) to support business “anytime, anywhere.” Computing platforms, like Microsoft .NET, allow Epicor enterprise solutions to adopt SOA, and support commerce in a distributed computing world.

The Company will continue to focus on leveraging emerging and industry-standard technologies to provide rapid return on investment and lower overall total cost of ownership for the Company’s customers. Today, the Company's core product architecture incorporates the following:

Architecture

The Company’s product architecture is designed to help its customers and partners economically deploy, tailor and integrate highly functional industry applications to suit their specific business processes and requirements. A key focus of the architecture strategy is the development and enhancement of client frameworks that allows both companies and individuals to optimize labor-intensive data management tasks. The Company also continues to enhance its SOA strategy across its product lines, which enables enterprises to incorporate new and existing software applications more seamlessly, better leverage their existing IT assets and implement new industry processes and best practices more fully. The Company also invests in software tools, architectures and frameworks focused on consistent, high quality code and developer productivity across its world-wide development organization.

Service-Oriented Architecture (SOA)

The Company has built its SOA around three pillars: application programming interface (API), orchestration and business process management (BPM). APIs are essentially the building blocks of the system, as they are the conventions, protocols and semantics that define how a software service, function, process or application is invoked or accessed. APIs provide consistency and flexibility by ensuring that all programs using a common API will have similar interfaces. The Company’s API’s are highly granular in nature and comply with Web services standards to promote inter-operability and ease of integration. The Company believes providing both wide functionality coverage and open standards in its API is a significant benefit to customers. Orchestration is the process of coordinating work between systems inside and outside the enterprise and is central to electronic commerce and other distributed computing scenarios. The Company’s orchestration product is Epicor Service Connect for its Enterprise, Epicor for Service Enterprises, iScala, Clientele, Vantage and Vista products. Business process management (BPM) capabilities, which allow enterprises to redirect application logic without customizing the application code, have a dual purpose. The first is to define relevant business events and establish notifications to users, other applications and (importantly) workflow management systems. The second is to define business constraints that either warn or inhibit applications from processing transactions under specific conditions. The Company’s Epicor for Service Enterprises, iScala, Clientele, Vantage and Vista include BPM solutions.

Web Services

The Company is increasingly using Web services to enable its solutions to be integrated with other applications more easily and to support the increased need for collaboration in today’s Internet-based world. Web services are self-describing software components that allow the creation of applications that can be programmed and published over the Web. Since Web services are portable and interoperable and because they are not vendor specific, they are rapidly becoming a standard for integrating disparate systems and applications. Epicor has standardized its Web services development on the Microsoft .NET Framework. The Company’s Clientele CRM.NET , CRS RetailStore, Epicor for Service Enterprises , iScala, Vantage and Vista product suites have been architected for Web services. The Epicor Enterprise, iScala, Vantage and Vista product suites further leverage Web services to more easily integrate and securely share information throughout the enterprise and with customers and suppliers.

Open Database Technology

The Company utilizes open database technology to provide extremely flexible, integrated, enterprise business applications. This open database orientation is based on widely accepted database management systems. The Company’s Clientele, CRS, Enterprise , Epicor for Service Enterprises, iScala, Vantage and Vista product suites use the Microsoft SQL Server relational database management system (RDBMS). The Company has focused the development of its Enterprise and iScala product lines using Microsoft’s industry-standard SQL language as the fundamental database access methodology for both transaction processing and analytics. The Company designs Vantage and Vista for either the Microsoft SQL Server platform or Progress Software Corporation’s Progress RDBMS. The Company’s Clientele suite leverages both the Microsoft Access and Microsoft SQL Server databases. The Company’s Avanté, CRS Merchandising and Manage 2000 products leverage open database technology from IBM Corporation. The Company has chosen these open databases in order to maximize the throughput of its customers’ transactions, to provide realistic models of business data and to maximize price performance under the budget and resource constraints typical of its primary market sector.

Industry Standard User Interfaces

The Company has incorporated numerous features into its user interfaces to simplify the operation of, and access to, its products. All of the Company’s product lines incorporate the popular Microsoft Windows graphical user interface (GUI). The Company's GUI tools include industry-standard field controls, pull-down menus, tool bars and tab menus that facilitate the use of the software. The Company's products incorporate many of the latest and most advanced GUI features such as process wizards, cue cards, advanced on-line help and on-line documentation. As the model for distributed computing continues to evolve through the advent of Internet technologies, the Company offers additional client deployment models, including thin-client, smart-client, browser-based and mobile client access.

Powerful Application Development Tools

The Company provides comprehensive application development, extension and customization capabilities for its Enterprise, Epicor for Service Enterprises, iScala, Clientele, Vantage, Vista, Avanté and Manage 2000 product lines. To accomplish this, the Company provides extensive, integrated application development environments for these product lines. These customization tools deliver a complete development environment, enabling a user to make changes ranging from a simple field name change to building an integrated custom application. Although significant customization can be supported, the Company attempts to minimize customization of its products by delivering high functionality, industry focused templates and best practices coupled with application tailoring capabilities and SOA which provides for significant flexibility in the look and feel, business process, reporting and workflow of the application.

Enterprise Platform Strategy

The Company’s technology direction currently embraces the Microsoft.NET Framework for XML-based Web services, networking architecture and graphical user interface components. Through .NET, the Company provides comprehensive support for Web services deployment and Enterprise Application Integration (EAI). With .NET and the XML standard for data exchange, Epicor provides increased access to information both within and between organizations – no matter where their offices or employees are located. This technology strategy can enable the Company’s development teams to leverage Microsoft technology, while allowing each product family to continue to utilize the individual databases and development tools appropriate to the requirements of each product’s target market. As a Microsoft Gold Certified Partner and an early adopter of the .NET platform, and most recently Windows Vista, Epicor is able to leverage its expertise with Microsoft technology to benefit their customers worldwide.

Industry Strategy

Epicor industry solutions provide focused software, services and industry knowledge designed specifically for the unique requirements of target industry sectors and vertical markets. Historically, large enterprise application vendors have created vertical industry applications and practices designed for the Global 1000 in industries such as automotive, retail, government and healthcare. However, for midmarket companies in these industries, these vertical offerings are often too expensive and overly complex for their requirements. More importantly, many midmarket companies are not necessarily part of a traditional vertical market, but rather have specific processes, best practices and highly specialized functionality that are critical to their success.

Epicor industry solutions enable customers to leverage a solution tailored to the unique needs of their market, as well as focused industry expertise through the Company’s professional services organization. Epicor industry solutions are additionally complemented by strategic relationships with key partners to provide product extensions and domain expertise as part of an integrated, end-to-end solution. Customers can benefit through solutions that are easier to implement, easier to use and require less customization than a horizontal solution. Epicor industry solutions target Manufacturing, Distribution, Retail and Hospitality, and Services sectors and industries and verticals within each sector.

Epicor industry solutions includes Epicor for Service Enterprises , a Microsoft .NET Web services-based ERP for Services solution for global midmarket and enterprise service firms. Epicor for Service Enterprises is designed expressly for midmarket service organizations to streamline business processes, empower them to expand their value chain, grow revenue and drive efficiency benefits to the bottom line. Whether it is a professional services organization (PSO), embedded service organization (ESO) or internal services organizations (ISO), the Company believes that Epicor for Service Enterprises provides a comprehensive ERP for Services solution that is designed to offer strategic value with a quick return on investment. Epicor for Service Enterprises offers packaged vertical options for the professional services industry in areas such as audit and accountancy; architecture, engineering, and construction; software and computer services; management consulting; and marketing, advertising and communications.

Epicor industry solutions includes Epicor Senior Living Solution ( Epicor SLS ), which is specifically designed for providers of aged care services to clients either in their own home, at a specialized aged care facilities or senior retirement villages. Epicor SLS manages the process from enquiry, entry into care, ongoing management and departure.

Products

The Company designs, develops, markets and supports enterprise software applications that provide mid-sized organizations and divisions of Global 1000 companies with industry specific, highly functional, technically advanced business solutions. The Company’s products are aligned according to the markets that they serve – Distribution and Services ( Enterprise ), Industrial ( iScala ), Manufacturing and Supply Chain ( Vantage, Vista, Avanté and Manage 2000 ), Retail ( CRS and NSB ) and Customer Relationship Management and ITSM ( Clientele ).

Distribution and Services - Epicor Enterprise

Epicor Enterprise (incorporates products formerly named e by Epicor, Platinum ERA and Clientele ) , an integrated, customer-centric suite of client/server and Web-based ERP software applications, is designed to meet the unique business needs of midsized companies worldwide (including divisions and subsidiaries of larger corporations). Epicor Enterprise is typically targeted to either distribution or service-based businesses with revenues between $25 million and $1 billion annually. These organizations require the functional depth and sophistication of traditional high-end enterprise business applications, but desire a rapid and cost-effective product implementation.

Epicor Enterprise is optimized for use with the Microsoft Windows operating system and the Microsoft SQL Server relational database. Epicor Enterprise leverages XML Web services to enable more robust integration with other applications within and external to the enterprise. In addition to the availability of XML Web services, Epicor Enterprise supports various industry standard technologies, including Microsoft Message Queue Services (MSMQ), Transaction Services and COM+ architecture, which along with XML documents, improves componentization and support reliable message-based integration between applications and distributed servers. Microsoft Visual Basic for Applications (VBA) is also included to enhance client customization and to facilitate integration with third-party applications. In addition, the Financials Suite and SCM Suite utilizes a 32-bit client that has been optimized for the Microsoft SQL Server database (running in either 32-bit or native 64-bit mode) in order to leverage the capabilities of the client/server model of computing. This implementation results in a substantial reduction in network traffic as compared to other client/server approaches and provides scalable high performance. Project Suite was developed in the Company’s Internet Component Environment (ICE) , a SOA built with Microsoft .NET and Web service technology. ICE is also available to customers to create customizations and extensions using ubiquitous tools like Visual Studio .NET.

Epicor Enterprise includes the following application suites: CRM Suite , Financials Suite , Supply Chain Management Suite, Portal Suite , Business Intelligence Suite, Project Suite , Payroll/Human Resources and industry-specific solutions delivered for a variety of markets .


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CRM Suite (Sales Force Automation, Marketing Automation, Customer Service and Support, IT Service Management) provides integrated CRM capabilities that are tightly integrated with the Financials Suite and SCM Suite. This integrated approach to CRM enables companies to have a 360-degree view of their customer relationships. The CRM Suite is the integrated version of the Company’s Clientele product suite and includes Sales and Marketing, Case Management, Customer Service and Support and Self-Service, empowering organizations to focus on the right opportunities while providing access to timely information. Sales and Marketing provides contact, lead, opportunity and account management in one package. Support manages the support requirements of an organization’s external customers and provides call management, product tracking, RMA tracking, call queuing/follow-up and problem resolution.


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Financials Suite (General Ledger and Financial Reporting, Accounts Receivable, Credit and Collections, Lockbox, Accounts Payable, Electronic Funds Transfer, Cash Management, Automated AP Matching, Sales Tax Management and Asset Management) comprises an integrated accounting solution that enables a company to automate the financial aspects of their business. Presently the following back office financial applications are generally available in version 7.3.6: System Manager, General Ledger, Average Daily Balances, Accounts Receivable, Accounts Payable, Cash Management, Multi-Currency Manager, Asset Management, Import Manager, Credit and Collections, Lockbox, Electronic Funds Transfer (EFT), Advanced Allocations, Automated AP Matching, Sales Tax Management and Customization Workbench.


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SCM Suite (Distribution, Procurement, Sourcing, Storefront, Warehouse Management, Assembly) is a comprehensive solution designed to improve the efficiency and responsiveness of a company’s operations. It enables companies to effectively manage their distribution operations, including purchasing, quality control, inventory, logistics and the order management cycle. The customer-centric focus of Epicor Enterprise enables companies to respond quickly to customer demands and improve customer service. The integration of Financials Suite and SCM Suite with the rest of the Epicor Enterprise products helps to ensure that a company’s entire enterprise is synchronized — from the customer to the warehouse to the supplier. Presently the following distribution applications are generally available in version 7.3.6: Sales Order Processing, Inventory Management, Purchasing, Distribution, Assembly, Royalties, Promotions and Rebates.


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Supply Chain Execution ( Warehouse Management System and Data Collection Suite), extends the distribution functionality for the SCM Suite to supply chain execution processes. These applications are tightly integrated with SCM Suite so that information is available in real-time. Data Collection Suite (DCS) provide s wireless shop floor data collection, radio frequency identification (RFID) and the use of bar code technology to track inventory from the time it enters a facility until it is shipped to a customer, as well as additional warehouse management capabilities. Warehouse Management System (WMS) enables a company to streamline order fulfillment, closely track inventory, manage third-party logistics (3PL) and prioritize resources on the shop floor.


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SCM Suite also includes the Supplier Relationship Management (SRM) Suite which consists of Sourcing, Procurement and Spend Analysis . Sourcing provides a comprehensive solution for strategic control of sourcing, purchasing and selling activities from complex auctioning and dynamic pricing to optimizing trading partners, terms, goods and services. Sourcing provides a highly configurable framework with the

flexibility to rapidly deploy collaborative RFP/RFI/RFQ (RFx) and comprehensive forward and reverse auction capabilities. Sourcing is designed to streamline manual processes to rapidly locate, source and transact with qualified suppliers and eliminate the inefficiencies in the RFx process for direct, indirect and spot purchasing. Procurement enables the streamlined integration of the entire procurement process. It provides employee-direct requisitioning and purchasing, catalog management, supplier management and policy enforcement. This integrated e-commerce application enables organizations to gain and improve control of operational resources by leveraging the Internet to connect large populations of frontline employees, management and suppliers. Procurement provides a complete planning, execution and analysis system, designed to reduce costs, increase agility, and perform predictably. Procurement facilitates a trading network, allowing buyers and suppliers to maintain control over their trading relationships and provides a virtual bridge between buyers and suppliers. Procurement also includes an integrated budget and commitment tracking feature that gives requisitioners and approvers a comprehensive view of their commitments inside and outside of procurement relative to approved budgets.


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Storefront enables Epicor’s customers to sell products and services over the Web, providing consumers and trading partners a convenient 24/7 order entry mechanism for making purchases. By supporting both B2B and B2C activity, Storefront is a versatile engine that can handle many requirements of a company. Through Storefront , companies can rapidly and cost-effectively introduce new products, enter new markets or simply provide electronic access to a catalog of standard products, which can free up salespeople to focus on more complex transactions. The business data entered over the Internet is captured and used by the other Epicor applications.


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Project Suite , a component of the Epicor for Service Enterprises industry solution, offers comprehensive project and portfolio management and delivery management capabilities to support the planning and execution of service engagements. Engagements can be structured through user-definable work breakdown structures, and an organization-wide resource service can be called upon as needed to match the right personnel to the right task at the right time—anywhere across the enterprise. Project Suite leverages XML technologies to support bidirectional integration to Microsoft Enterprise Project Management as part of an end-to-end project management solution. Project Suite includes Resource Management, Engagement Management, Project Accounting, Contract Management and Performance Management.


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Portal Suite is a Web-based enterprise information portal (EIP) offering a self-service solution designed to help customers, suppliers and employees access relevant information from both within the enterprise (such as account information and support activities) and from external sources (industry information, news feeds, weather, etc). Portal Suite consists of a Portal framework based on Microsoft SharePoint products and technologies, which is enriched by role-based access and content-specific information packs (e.g. customer content, supplier content and employee content). Portal Suite provides a gateway to the information users require to carry out their jobs more effectively, while assisting them with decision support. Portal Suite makes use of the popular SharePoint personalization paradigm to allow each user’s experience to be tailored and filtered to their specific function or role to minimize “information overload.”


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Epicor Enterprise also includes several tools that help customers maintain, audit and extend their Epicor system, while reducing total cost of ownership. These tools are Service Connect , DBAudit, Customization Workbench, Import Manager and Epicor Integration Hub. Epicor Service Connect enables collaboration between applications, suppliers and customers. DBAudit provides the ability to detect database changes and report on who made the addition, modification and/or deletion and when. Customization Workbench provides a toolset for creating custom forms, database objects and logic to meet specialized customer requirements. Import Manager and Epicor Integration Hub provide the ability to exchange data between Epicor Enterprise and other systems via SQL and XML while adhering to the data validation and business rules defined in Epicor Enterprise .


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Business Intelligence Suite is an integrated decision support suite offering a complete set of tools that allows a company to strategically analyze the data available throughout Epicor Enterprise . Business Intelligence Suite comprises the following components: DecisionStore (data warehousing), Explorer AI and BI Web Parts (OLAP visualization and packaged key performance indicators that drive strategic insights), Active Planner (active, continuous planning and forecasting, and enterprise performance management), Microsoft FRx (financial reporting), transaction reporting, ad hoc queries and agents/alerts.

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UltiPro Workforce Management (a Payroll/HRMS solution offered via a reseller relationship with Ultimate Software) provides a complete workforce management solution. This solution is designed to allow a company to streamline human resource and payroll processes, report on and analyze key business metrics and provide Web-based self-service to empower its employees. Business intelligence tools, such as UltiPro Workforce Management , enable strategic analysis of key business trends for better planning and informed decision-making. Ultimate Software’s UltiPro Workforce Management solution is available as a common component with the following Epicor product families: Epicor Enterprise and Avanté .

Industrial - iScala

iScala is an integrated ERP, CRM and SCM solution targeting the divisions and subsidiaries of Global 1000 corporations and large local and regional companies worldwide. iScala’s collaborative functionality, country-specific localizations and multi-language capabilities are designed to support global, multi-company deployments with significant cross-border trading requirements. iScala is targeted to meet the unique needs of companies in industry segments including: Pharmaceutical, Chemical and Allied Products, Industrial Machinery, Light Engineering, Automotive Components, Consumer Goods and Hospitality.

iScala enables Global 1000 enterprises to standardize their plants and operating divisions on a single system, while supporting country specific localizations and languages at each site. This allows a corporate headquarters consistent visibility of plant information and operations, as well as the ability to support the implementation of consistent procedures, practices and controls worldwide.

iScala is optimized for use with the Microsoft Windows 2000/2003 operating system and the Microsoft SQL Server 2000/2005 relational database. iScala leverages XML Web services to enable integration with other applications within and external to the enterprise. In addition to the availability of XML Web services, iScala supports various industry standard technologies, including Microsoft Message Queue Services, Transaction Services and COM+ architecture, which, along with XML documents, improves componentization and support reliable message-based integration between applications and distributed servers.

iScala can be configured as an Enterprise Server version targeted at multi-site operations or as a Business Server version targeted at single-site operations. Each server version consists of the following optional suites and components: Financials (General Ledger, Sales Ledger, Purchase Ledger, Promissory Notes, Cash Flow Forecasting), Asset Management, CRM, Sales Order Management, SCM (Material Management, Warehouse Management, Manufacturing, Purchase Management, Requisition Management, Supply Chain Tools, Warehouse Data Collection), Service Contract Management, Purchase Contract Management, Sales Contract Management, Project Management, Service Management and Payroll. In addition to these application components, Epicor Service Connect enables collaboration between applications, suppliers and customers, and the iScala Business Intelligence Server offers a suite of analytical and reporting tools designed to convert data into information that can be presented by the web, portals, Windows or Office 2003 documents.


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iScala’s global functionality and numerous country-specific localizations provide the ability to deliver a solution for over 140 countries with the local requirements for tax management, currency handling, language capabilities, statutory reporting, banking interfaces and asset depreciation rules.


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Local and distributed multi-company capabilities enable customers to manage complex business infrastructures. Multiple companies on a single server or on a server farm (multiple local servers) can be consolidated across differing charts of accounts and differing currencies, as well as enabling inquiring or reporting across companies or sharing Accounts Receivable and Accounts Payable. Global calendar management enables the system to manage companies, customers, suppliers, engineers, warehouses and any other resources across multiple time-zones. Global Administration provides central IT staff with the ability to manage distributed iScala system assets anywhere in the world as if they were local, including system updates, user roles and security, menu configuration and databases.


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iScala’s customization and personalization capabilities provide the ability to enhance the application through parameterized set-up, tailored documents, reports and user defined database fields. Users may have their own customized menus and screens in their own language, as well as their own queries, reports and business intelligence analytics. Microsoft Visual Basic for Applications (VBA) is also included to enhance client customization and facilitate integration with third-party applications.


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iScala’s implementation of Epicor Service Connect provides collaboration and integration between subsidiaries and their corporate headquarters, and to customers and suppliers to support integrated supply chain trading. Collaboration provides visibility through a web-based portal, transaction exchange and system-to-system connectivity. Workflow management is designed to maximize the automation of standard processes with events and alerts to handle exceptions.


CEO BACKGROUND

L. George Klaus George Klaus has been a director of the Company since February 1996, and has been Chairman of the Board since September 1996. Mr. Klaus served as Chief Executive Officer of the Company from February 1996 through February 19, 2008. Mr. Klaus also served as President of the Company from February 1996 through November 1999 and from June 2001 to July 2005. Mr. Klaus is also a member of the Information and Computer Science CEO Advisory Board for the University of California, Irvine. Mr. Klaus received his Bachelor of Science in Mathematics from California State University, Northridge in 1963, and in 1964 studied at the graduate level in business and math.



Michael Kelly Michael Kelly joined Epicor’s Board of Directors in September 2005. Since October 2005, Mr. Kelly has served as Chairman and CEO of Kinsale Associates, a merchant bank. From July 2005 to October 2005, Mr. Kelly served as CEO of Cape Semiconductor Inc., a fabless semiconductor company providing analog and mixed signal solutions to a variety of industries. Prior to that, from 1994 to 2005, Mr. Kelly was vice-chairman and senior managing director of Broadview International, LLC, an international technology investment banking firm and a division of Jefferies Inc. Mr. Kelly currently serves on the board of directors of Adept Technology, Inc. (NASDAQ: ADEP). Mr. Kelly holds a Bachelor of Arts degree in accounting from Western Illinois University, a Master of Business Administration from St. Louis University and is a certified public accountant.


Thomas F. Kelly Thomas Kelly has been a director of the Company since January 2000 and on February 19, 2008 he became the Company’s President and Chief Executive Officer. Immediately prior to February 19, 2008, Mr. Kelly was the Chairman and CEO of Monte Vista Software, a provider of Linux operating systems and tools for electronic systems and devices. Prior to that, from September 2004 through December 2005, Mr. Kelly was associated with Trident Capital as an EIR (Entrepreneur in Residence). During the period from March 2005 through September 2005, Mr. Kelly also held the title of Chief Executive Officer and member of the Board of Directors of Transware Limited and its holding company parent, Eastchase Limited. Prior to that, he was Chairman and Chief Executive Officer of BlueStar Solutions, Inc., an enterprise resource planning software hosting company, from January 2001 to September 2004, at which time BlueStar was acquired by ACS, Inc. Mr. Kelly remains the chairman of Monte Vista Software and is also a director of FEI Company (NASDAQ: FEIC), a manufacturer of particle and ion beam imaging and analysis solutions for the semiconductor and science markets and a director of Sendmail, Inc., a private email security company. Mr. Kelly received his Bachelor of Science in Economics from Santa Clara University.



Harold D. Copperman Harold Copperman has been a director of the Company since July 2001. For the past five years, Mr. Copperman has been the President and CEO of HDC Ventures, Inc., a management and investment group focusing on enterprise systems, software and services. Prior to that, from 1993 through 1999, he served as Sr. Vice President and Group Executive of the Products Division at Digital Equipment Corporation. Mr. Copperman currently sits on the Board of Avocent Corporation (NASDAQ: AVCT), AXS-One Inc., (AMEX:AXO) and a number of other private companies in the information technology business. From 1989-1993 he sat on the Board of Directors of America Online, Inc. Mr. Copperman received his Bachelors of Science in Mechanical Engineering from Rutgers University in 1967 and served as a Captain in the U.S. Army. Mr. Copperman is not standing for re-election at the 2008 Annual Meeting of Stockholders.



Robert H. Smith Mr. Smith has been a director of the Company since May 2003. From 1996 through 2002, Mr. Smith was the CFO and Executive VP of finance and administration for Novellus Systems, Inc. Mr. Smith also served on the board of directors of Novellus until his retirement in 2002. Mr. Smith is a member of the board of directors of Cirrus Logic, Inc. (NASDAQ: CRUS). Mr. Smith is also on the board of directors of PLX Technology (NASDAQ: PLXT), Virage Logic (NASDAQ: VIRL) and ON Semiconductor (NASDAQ: ONNN). Mr. Smith holds a Bachelors degree in Business Administration from Oklahoma City University.

Michael L. Hackworth The Board of Directors appointed Mr. Hackworth to serve as a director of the Company in November 2007. From June 2002 to April 2007, Mr. Hackworth served as chairman and CEO of Tymphany Corporation, a private audio transducer manufacturing company that he co-founded. He continues as chairman of Tymphany and also currently serves as “ Advisor to Entrepreneurs ,” assisting early stage management teams with strategy and financing, a role he has played since 1999. Mr. Hackworth also currently Chairs the board of publicly traded Cirrus Logic Inc. (NASDAQ: CRUS) and serves on the board of publicly traded Virage Logic Corp. (NASDAQ: VIRL). Prior to becoming chairman in April 1999, Mr. Hackworth served as President and CEO of Cirrus Logic since its founding in January 1985. Prior to that, Mr. Hackworth spent 18 years serving in positions of ever-increasing responsibility with Signetics Corp., a subsidiary of N.V. Philips, Motorola and Fairchild Semiconductor. Mr. Hackworth holds a Bachelor of Science degree in engineering from Santa Clara University.


MANAGEMENT DISCUSSION FROM LATEST 10K


Overview

The Company designs, develops, markets and supports computer software applications, which assist mid-sized companies as well as the divisions and subsidiaries of larger corporations in the planning, management and operation of their businesses. The Company is focused on the mid-market, which generally includes companies or divisions with annual revenues between $10 million and $1 billion. The Company’s software products and related consulting and support services are designed to help these companies automate key aspects of their business operations, processes and procedures – from customer relations, ordering, purchasing and planning, to production, distribution, accounting and financial reporting. By automating these processes, companies may gain faster access to more accurate information, which can improve operating efficiency, reduce cost and allow companies to be more responsive to their customers, ultimately leading to increased revenues. The Company also offers support, consulting and education services in support of its customers’ use of its software products. The Company’s products and services are sold worldwide by its direct sales force and an authorized network of value added resellers (VARs), distributors and authorized consultants.

Total revenues for the year ended December 31, 2007, increased 11.9% to $429.8 million, compared to $384.1 million for the year ended December 31, 2006. Net license revenue increased by 10.0% to $109.4 million for the year ended December 31, 2007, compared to $99.5 million for the year ended December 31, 2006. Consulting revenue was $134.7 million for the year ended December 31, 2007, an increase of 25.3%, when compared to consulting revenues of $107.5 million for the year ended December 31, 2006. Maintenance revenue for the year ended December 31, 2007 was $160.3 million, an increase of 6.8% compared to maintenance revenues of $150.1 million for the year ended December 31, 2006. Hardware and other revenue for the year ended December 31, 2007 was $25.4 million, down from $27.0 million for the year ended December 31, 2006.

Overall gross margin was 51.3% for the year ended December 31, 2007, compared to 52.5% during the same period in 2006, primarily due to a higher mix during 2007 of consulting revenues, which have relatively lower gross margins than software and maintenance revenues.

Cash flows from operations were $65.3 million during the year ended December 31, 2007, a 39.6% increase over 2006 cash flows from operations of $46.8 million.

Critical Accounting Policies

The consolidated financial statements are prepared in conformity with United States of America generally accepted accounting principles (GAAP). As such, management is required to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The significant accounting policies which are most critical to aid in fully understanding and evaluating reported financial results include the following:

Revenue Recognition

The Company enters into contractual arrangements with end-users that may include licensing of the Company’s software products, product support and maintenance services, consulting services, resale of third-party hardware or various combinations thereof, including the sale of such products or services separately. The Company’s accounting policies regarding the recognition of revenue for these contractual arrangements is fully described in Note 1 of Notes to Consolidated Financial Statements.

The Company considers many factors when applying accounting principles generally accepted in the United States of America related to revenue recognition. These factors include, but are not limited to:


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The actual contractual terms, such as payment terms, delivery dates and pricing of the various product and service elements of a contract;


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Availability of products to be delivered;


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Time period over which services are to be performed;

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Creditworthiness of the customer;


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The complexity of customizations and integrations to the Company’s software required by service contracts;


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The sales channel through which the sale is made (direct, VAR, distributor, etc.);


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Discounts given for each element of a contract;


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Any commitments made as to installation or implementation “go live” dates and


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Whether vendor specific objective evidence of the fair value of undelivered elements exists.

Each of the relevant factors is analyzed to determine its impact, individually and collectively with other factors, on the revenue to be recognized for any particular contract with a customer. Management is required to make judgments regarding the significance of each factor in applying the revenue recognition standards, as well as whether or not each factor complies with such standards. Any misjudgment or error by management in its evaluation of the factors and the application of the standards, especially with respect to complex or new types of transactions, could have a material adverse affect on the Company’s future revenues and operating results.

Allowance for Doubtful Accounts

The Company’s accounts receivable go through a collection process that is based on the age of the invoice and requires attempted contacts with customers at specified intervals and assistance from other personnel within the Company who have a relationship with the customer. The Company writes-off accounts to its allowance when the Company has determined that collection is not likely. The Company believes no significant concentrations of credit risk existed at December 31, 2007. Receivables from customers are generally unsecured.

The Company maintains an allowance for doubtful accounts based on historical collections performance and specific collection issues. If actual bad debts differ from the reserves calculated, the Company records an adjustment to bad debt expense in the period in which the difference occurs. Such adjustment could result in additional charges to the Company’s results of operations.

Intangible Assets

The Company’s intangible assets were recorded as a result of the Company’s acquisitions and represent acquired technology, customer base and trademarks. These intangible assets are amortized on a straight-line basis over the estimated economic life of the asset. The Company periodically evaluates the recoverability of the intangible assets and considers any events or changes in circumstances that would indicate that the carrying amount of an asset may not be recoverable. Any material changes in circumstances, such as large decreases in revenue or the discontinuation of a particular product line, could require future write-downs in the Company’s intangibles assets and could have a material adverse impact on the Company’s operating results for the periods in which such write-downs occur.

Goodwill

The Company’s goodwill was recorded as a result of the Company’s acquisitions. In accordance with SFAS No. 141, “Business Combinations,” the Company has recorded these acquisitions using the purchase method of accounting. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company performed an impairment review of its recorded goodwill in 2007 and determined that no impairment of goodwill existed because the estimated fair value of each reporting unit exceeded its carrying amount. The Company tests its recorded goodwill for impairment on an annual basis, or more often if indicators of potential impairment exist, by determining if the carrying value of each reporting unit exceeds its estimated fair value. Factors that could trigger an impairment include, but are not limited to, underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the Company’s overall business and significant negative industry or economic trends. Future impairment reviews may require write-downs in the Company’s goodwill and could have a material adverse impact on the Company’s operating results for the periods in which such write-downs occur.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123-R). The Company adopted the provisions of SFAS 123-R in the first quarter of 2006. Under the fair value recognition provisions of this statement, stock-based compensation expense is measured at the grant date based on the value of the award and is expensed ratably over the vesting period. Determining the fair value of stock options at the grant date requires judgment, including estimating expected dividends, volatility, terms and estimating the amount of share-based awards that are expected to be forfeited. If actual forfeiture rates differ significantly from the estimate, stock-based compensation expense and the Company’s results of operations could be materially impacted. Beginning in 2006, the Company changed its previous practice by no longer granting stock options to employees, and granting restricted stock as an alternative. Compensation expense for restricted stock is based on the fair market value of the restricted stock on its grant date, and is expensed ratably over the vesting period.

Income Taxes

Income taxes are determined under guidelines prescribed by SFAS No. 109, " Accounting for Income Taxes " ("SFAS 109"). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company regularly reviews the deferred tax assets for recoverability and has established a valuation allowance when it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The Company assesses the recoverability of the deferred tax assets and the need for a valuation allowance on an ongoing basis. In making this assessment, the Company is required to consider all available positive and negative evidence to determine whether, based on such evidence, it is more likely than not that some portion, or all, of the net deferred assets will be realized in future periods.

During the year ended December 31, 2007, the Company determined, primarily based on operating income during recent years and anticipated operating income and cash flows for future periods that it is more likely than not that certain foreign deferred tax assets will be realized in the future and accordingly, it was appropriate to release the valuation allowance recorded against those deferred tax assets. As a result, the Company released a portion of the valuation allowance related to certain foreign jurisdictions, resulting in a non-cash income tax benefit to net income, as well as a credit to goodwill as some of the deferred tax assets existed at the date of Scala’s acquisition. The Company intends to maintain a valuation allowance for the remaining foreign deferred tax assets until sufficient positive evidence exists to support its reversal. The remaining valuation allowance will continue to be evaluated over future quarters. If it is determined that it is more likely than not that all or a portion of these remaining foreign deferred tax assets will be utilized to offset future taxable income, the valuation allowance could be decreased or eliminated altogether which will result primarily in a decrease to goodwill.

Future releases of the valuation allowance related to these assets will be accounted for as a reduction of goodwill rather than a reduction of income tax expense if the valuation allowance decrease occurs prior to the effective date of SFAS No. 141 (revised 2007), “Business Combinations,” or SFAS No. 141(R). Effective January 1, 2009, SFAS 141(R) provides that any reduction to the valuation allowance established in purchase accounting is to be accounted for as a reduction in income tax expense.

The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Effective January 1, 2007, the Company adopted Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

Although the Company believes it has adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. The Company adjusts these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.

During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. As a result, the Company recognizes tax liabilities based on estimates of whether additional taxes and interest will be due. These tax liabilities are recognized when, despite the Company’s belief that its tax return positions are supportable, the Company believes that certain positions may not be fully sustained upon review by tax authorities. The Company believes that its accruals for tax liabilities are adequate for all open audit years based on its assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact income tax expense in the period in which such determination is made.

U.S. income taxes were not provided for on undistributed earnings from certain non-U.S. subsidiaries. Those earnings are considered to be permanently reinvested in accordance with Accounting Principles Board (APB) Opinion 23.

New Accounting Pronouncements

For new accounting pronouncements see Note 1 in Notes to the Consolidated Financial Statements.

Acquisitions

NSB Retail Systems

On February 7, 2008, the Company completed its acquisition of NSB Retail Systems PLC (NSB). Pursuant to the terms of the acquisition agreement, shareholders of NSB received ÂŁ0.38 in cash for each NSB ordinary share. NSB designs, develops, markets and supports store, merchandising and solutions to retailers of apparel, footwear, and specialty merchandise. The acquisition of NSB provides an expanded portfolio of products and services for large specialty retailers and department stores, as well as a fully hosted, managed service offering designed for smaller and mid-sized retailers who are interested in rapid implementation via an on-demand versus on-premise offering.

The value of the fully diluted share capital of NSB was approximately $311.8 million, not including transaction costs, based on the exchange rates in effect at the time the U.S. dollars were converted to pounds sterling for purposes of the transaction. The consideration payable under the agreement was funded by the Company with approximately $161.3 million in existing cash balances, which includes the $161.0 million included in “cash designated for acquisition” in the accompanying Consolidated Balance Sheets, as well as interest earned, with the balance of the consideration funded by drawing from the Company’s credit facility pursuant to the Credit Agreement, as amended (see Note 6 in Notes to the Consolidated Financial Statements).

Professional Advantage

On May 16, 2007, the Company acquired the assets of a division of Professional Advantage Pty Limited (PA), a privately held reseller located in Australia. The primary purpose of this acquisition was to increase the Company’s presence and direct customer base in the territories covered by PA.

Debt Offering

On May 8, 2007, the Company closed an offering of $230 million aggregate principal amount of 2.375% convertible senior notes due in 2027. The notes are unsecured and pay interest semiannually at a rate of 2.375% per annum until May 15, 2027. The notes are convertible into cash or, at the Company’s option, cash and shares of the Company’s common stock, at an initial conversion rate of 55.2608 shares of common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $18.10 per share. Pursuant to the terms of the notes, the principal amount of the notes is settleable in cash and only the amount of conversion value, as defined, in excess of the principal amount of the notes is settleable in cash or shares. The initial conversion price represents a 30% premium over the last reported sale price of the Company’s common stock prior to the offering on May 2, 2007, which was $13.92 per share. The conversion rate will be adjusted upon the occurrence of certain events defined in the indenture. The notes do not contain any restrictive financial covenants.

The net proceeds of the offering were $222.0 million after deducting the underwriters’ discounts and commissions and offering expenses. On May 8, 2007, the Company used approximately $94 million of the proceeds to pay in full its term loan outstanding under the 2006 credit facility.

In July 2007, the FASB issued a proposed Staff Position (FSP APB 14-a) that applies to convertible debt instruments, including the Company's 2.375% convertible senior notes, that may be settled in whole or in part with cash upon conversion. The proposed FSP APB 14-a would require the Company to allocate a portion of the proceeds of the notes to the embedded conversion feature, based on the estimated fair value of the conversion feature. The conversion feature would be accounted for as a discount on the notes and amortized as non-cash interest expense over the expected term of the notes, resulting in an increase to the Company’s reported interest expense. If the proposed FSP APB 14-a is issued in its current form, the Company would be required to adopt it as of January 1, 2008, retroactively applied to the May 2007 issuance date of the notes, with the cumulative effect charged to retained earnings. The proposed FSP could materially impact the Company’s results of operations and earnings per share, but would have no impact on the Company’s cash flows.

Results of Operations

Comparison of the Year Ended December 31, 2007 to the Year Ended December 31, 2006

The increase in license fee revenues during the year ended December 31, 2007, compared to the same period in 2006, is due primarily to higher average selling prices for the Company’s products, both domestically and internationally as well as an increase in sales of the Company’s Vantage and Scala products. License fee revenues for the year ended December 31, 2007 included ten sales greater than $0.5 million, of which three were greater than $1.0 million. One of the sales greater than $1.0 million was related to the sale of a non-strategic asset (see “Sale of Non-Strategic Asset”). License fee revenues for the year ended December 31, 2006 included eleven sales greater than $0.5 million, of which none were greater than $1.0 million.

The increase in consulting revenues during the year ended December 31, 2007, compared to the same period in 2006, is primarily due to contracts for larger consulting engagements and the Company’s strategic objective of providing an expanded offering of professional services, such as managed services and hosting. As the Company’s average selling price for software increases, the Company has experienced a corresponding increase in the average size of its consulting engagements for implementing new systems for customers. In order to meet the demand for this additional consulting work, the Company hired additional consulting personnel. Consulting headcount also increased due to the acquisition of PA in May of 2007. Total consulting headcount increased by 9% from December 31, 2006 to December 31, 2007.

The increase in maintenance revenues during the year ended December 31, 2007, compared to the same period in 2006, is due to continued high renewal rates in the Company’s customer base, continued higher license sales and related maintenance contracts sold with new licenses and an increase in existing customers whose maintenance agreements had previously lapsed, but who have now renewed their maintenance agreements.

Hardware and other revenues consist primarily of the resale of third-party hardware. The decrease in hardware and other revenue for the year ended December 31, 2007, as compared to the same period in 2006, is due to the timing of customer hardware orders, which vary based on the customers’ hardware roll-out schedules, resulting in a high degree of variability in the Company’s hardware revenues.

International revenues were $170.9 million and $141.2 million for the years ended December 31, 2007 and 2006, representing 39.8% and 36.8%, respectively, of total revenues. The 2007 increase of international revenue in both absolute dollars and as a percentage of revenue is primarily due to successful sales of larger international consulting engagements and the Company’s strategic objective of providing an expanded offering of professional services. Foreign currency exchange rate fluctuations resulted in foreign currency-based revenues during the year ended December 31, 2007 being reported $11.9 million, or 3.1%, higher than these revenues would have been if they had been translated at 2006 foreign currency exchange rates. The Company expects international revenues to decrease as a percentage of total revenues as a result of the NSB acquisition as NSB has historically had very little international revenue.

Cost of Revenues and Gross Margins

Cost of license fee revenues consists primarily of software royalties paid for third-party software incorporated into the Company’s products, referral fees paid to VARs, costs associated with product packaging and documentation and software duplication. For the year ended December 31, 2007, compared to the same period in 2006, gross profit decreased as a percentage of revenue, as costs increased primarily due to the mix of products.

Cost of consulting revenues consists primarily of salaries, benefits, commissions, bonus, other headcount-related expenses and travel for the Company’s consulting organization, which provides consulting services to customers in the implementation and integration of the Company’s software products, as well as education, training and other consulting and programming services. These costs increased in absolute dollars and as a percentage of revenue during the year ended December 31, 2007, compared to the same period in 2006, due primarily to a 9% increase in consulting headcount. In order to support the market demand for services, the Company has continued to hire consulting resources, and whenever practicable, does so in lower cost geographies. Consulting services margins were slightly negatively impacted as new hires were being trained for their scheduled deployment on revenue generating activities.

Cost of maintenance revenues consists primarily of maintenance royalties on third-party software incorporated into the Company’s products, as well as salaries, benefits and other headcount-related expenses for the Company’s support organization. For the year ended December 31, 2007, compared to the same period of 2006, cost of maintenance revenues increased in absolute dollars due primarily to an increase in headcount. Maintenance gross profit increased during the year ended December 31, 2007, compared to the same period in 2006, due to higher maintenance revenue, as well as the lower headcount costs associated Company’s continued resource investment in lower cost geographies to help support additional demand for the Company’s maintenance services.

Cost of hardware and other revenues decreased in absolute dollars due to the timing of customer hardware orders, which vary based on the customers’ hardware roll-out schedules and can result in a high degree of variability in our hardware gross profit margins. Gross profit for hardware and other revenues was relatively consistent for the year ended December 31, 2007, compared to the same period in 2006.

Amortization of Intangible Assets

Amortization of intangible assets consists of amortization of capitalized acquired technology, customer base and trademarks that were recorded as a result of acquisitions. The Company’s intangible assets are amortized over the estimated economic lives of the assets. For the years ended December 31, 2007 and 2006, the Company recorded amortization expense, included in cost of revenues, related to intangible assets of $17.4 million and $17.0 million, respectively. Amortization of acquired technology and trademarks will be complete in 2013 and amortization of the customer base will be complete in 2014.

Sales and Marketing

Sales and marketing expenses consist primarily of salaries, commissions, travel, advertising and promotional expenses. The increase in these costs in absolute dollars and as a percentage of revenue for the year ended December 31, 2007, compared to the same period in 2006, is primarily due to increased headcount of approximately 15%. In addition, stock-based compensation expense increased $1.1 million for the year ended December 31, 2007, compared to the same period in 2006, due primarily to additional grants of shares in the performance-based restricted stock plan for existing employees and new hires.

Software Development

Software development costs consist primarily of compensation of development personnel, related overhead incurred to develop new products and upgrade and enhance the Company’s current products and fees paid to outside consultants. The majority of these expenses have been incurred by the Company in the United States, Mexico, Eastern Europe and Russia, where the Company operates development centers.

Software development expenses increased in absolute dollars for the year ended December 31, 2007, compared to the same period in 2006. The increase in these costs is due primarily to an increase in headcount of approximately 12%, primarily to focus on translation and localization of its products for various international markets. Software development expenses for the year ended December 31, 2007 decreased as a percentage of total revenue, compared to the same period in 2006 due to the Company’s investment in new resources in lower cost geographies.

General and Administrative Expense

General and administrative expenses consist primarily of costs associated with the Company’s executive, financial, legal, human resources and information services functions. General and administrative expenses increased in total dollars but remained consistent as a percentage of total revenues during the year ended December 31, 2007, compared to the same period in 2006. This increase is primarily attributable to increases in personnel-related costs and provision for doubtful accounts. The increase in personnel-related costs included $0.8 million related to stock-based compensation due primarily to additional grants of shares in the performance-based restricted stock plan for both existing employees and new hires during the year.

Stock-Based Compensation Expense

Stock-based compensation expense includes compensation expense from stock options granted prior to 2006 and restricted stock issued by the Company. For the year ended December 31, 2007 and 2006, stock-based compensation expense was $11.7 million and $9.5 million, respectively.

At December 31, 2007, there was approximately $8.6 million and $2.7 million of unrecognized compensation cost related to performance-based restricted stock and other restricted stock grants, respectively. These costs are expected to be recognized over weighted average periods of approximately one year and two years, respectively. The compensation cost related to the performance-based restricted stock depends on the estimated number of shares that will vest based on the probable outcome of the performance conditions. Therefore, the recognized compensation could vary significantly, depending on the outcome of those conditions. The Company is required at each reporting date to assess whether achievement of any performance condition is probable. Quarterly compensation expense may include a cumulative adjustment resulting from changes in the estimated number of shares expected to be earned during that plan year. Based on the Company’s final achievement for the 2007 plan year, the Company recorded stock compensation expense related to performance-based grants of $8.0 million for the year ended December 31, 2007.

At December 31, 2007, there was approximately $0.3 million of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of approximately one year.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview

The Company designs, develops, markets and supports computer software applications, which assist mid-sized companies, as well as the divisions and subsidiaries of larger corporations in the planning, management and operation of their businesses. The Company is focused on the mid-market, which generally includes companies or divisions with annual revenues between $10 million and $1 billion. The Company’s software products and related consulting and support services are designed to help these companies automate key aspects of their business operations, processes and procedures – from customer relations, ordering, purchasing and planning, to production, distribution, accounting and financial reporting. By automating these processes, companies may gain faster access to more accurate information, which can improve operating efficiency, reduce cost and allow companies to be more responsive to their customers, ultimately leading to increased revenues. The Company also offers support, consulting and education services in support of its customers’ use of its software products. The Company’s products and services are sold worldwide by its direct sales force and an authorized network of value added resellers (VARs), distributors and authorized consultants.

Total revenues for the three months ended September 30, 2008, increased 31.7% to $135.8 million, compared to $103.1 million for the three months ended September 30, 2007. This included total revenue from the NSB acquisition of $21.6 million, of which $3.4 million was related to hardware. Net license revenue decreased by 7.0% to $22.4 million for the three months ended September 30, 2008, when compared to net license revenue of $24.1 million for the three months ended September 30, 2007. Consulting revenue was $41.6 million for the three months ended September 30, 2008, an increase of 27.1% compared to consulting revenue of $32.8 million for the three months ended September 30, 2007. Maintenance revenue for the three months ended September 30, 2008 was $50.1 million, an increase of 24.8% compared to maintenance revenue of $40.1 million for the three months ended September 30, 2007. Hardware and other revenue for the three months ended September 30, 2008 was $21.6 million, an increase of 254.1% compared to hardware and other revenue of $6.1 million for the three months ended September 30, 2007. See discussion in Results of Operations for more detailed information.

Total revenues for the nine months ended September 30, 2008, increased 18% to $365.9 million, compared to $310.1 million for the nine months ended September 30, 2007. This included total revenue from the NSB acquisition of $48.8 million, of which $5.5 million was related to hardware and other. Net license revenue decreased by 8.4% to $65.3 million for the nine months ended September 30, 2008, compared to $71.2 million for the nine months ended September 30, 2007. Consulting revenue was $114.0 million for the nine months ended September 30, 2008, an increase of 14.5% compared to consulting revenues of $99.6 million for the nine months ended September 30, 2007. Maintenance revenue for the nine months ended September 30, 2008 was $145.0 million, an increase of 21.9% compared to maintenance revenues of $118.9 million for the nine months ended September 30, 2007. Hardware and other revenue for the nine months ended September 30, 2008 was $41.6 million, an increase of 103.8% compared to hardware and other revenue of $20.4 million for the nine months ended September 30, 2007. See discussion in Results of Operations for more detailed information.

Overall gross margin was 43.5% for the three months ended September 30, 2008, compared to 50.8% during the same period in 2007, down primarily due to higher amortization related to the NSB intangible assets, as well as the addition of NSB maintenance revenues, which have relatively lower gross margins than the Company has historically reported. Overall gross margin was 42.5% for the nine months ended September 30, 2008, compared to 50.2% during the same period in 2007, down primarily due to lower consulting margins, the higher amortization related to the NSB acquisition, as well as the addition of NSB maintenance revenues, which have relatively lower gross margins than the Company has historically achieved.

Cash flows from operations were $49.6 million during the nine months ended September 30, 2008, compared to 2007 cash flows from operations of $43.0 million. The increase in operating cash flows is primarily due to an increase in cash collections from accounts receivable, compared to the same period in 2007, as well as additional cash flow from the acquisition of NSB.

Critical Accounting Policies

The consolidated financial statements are prepared in conformity with United States of America generally accepted accounting principles (GAAP). As such, management is required to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The significant accounting policies which are most critical to aid in fully understanding and evaluating reported financial results include the following:

Revenue Recognition

The Company enters into contractual arrangements with end-users that may include licensing of the Company’s software products, product support and maintenance services, consulting services, resale of third-party hardware or various combinations thereof, including the sale of such products or services separately. The Company’s accounting policies regarding the recognition of revenue for these contractual arrangements is fully described in Note 7 of Notes to Unaudited Condensed Consolidated Financial Statements.

The Company considers many factors when applying accounting principles generally accepted in the United States of America related to revenue recognition. These factors include, but are not limited to:


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The actual contractual terms, such as payment terms, delivery dates and pricing of the various product and service elements of a contract;


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Availability of products to be delivered;


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Time period over which services are to be performed;


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Creditworthiness of the customer;


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The complexity of customizations and integrations to the Company’s software required by service contracts;


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The sales channel through which the sale is made (direct, VAR, distributor, etc.);


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Discounts given for each element of a contract;


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Any commitments made as to installation or implementation “go live” dates and


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Whether vendor specific objective evidence of the fair value of undelivered elements exists.

Each of the relevant factors is analyzed to determine its impact, individually and collectively with other factors, on the revenue to be recognized for any particular contract with a customer. Management is required to make judgments regarding the significance of each factor in applying the revenue recognition standards, as well as whether or not each factor complies with such standards. Any misjudgment or error by management in its evaluation of the factors and the application of the standards, especially with respect to complex or new types of transactions, could have a material adverse affect on the Company’s future revenues and operating results.

Allowance for Doubtful Accounts

The Company’s accounts receivable go through a collection process that is based on the age of the invoice and requires attempted contacts with customers at specified intervals and assistance from other personnel within the Company who have a relationship with the customer. The Company writes-off accounts to its allowance when the Company has determined that collection is not likely. The Company believes no significant concentrations of credit risk existed at September 30, 2008. Receivables from customers are generally unsecured.

The Company maintains an allowance for doubtful accounts based on historical collections performance and specific collection issues. If actual bad debts differ from the reserves calculated, the Company records an adjustment to bad debt expense in the period in which the difference occurs. Such adjustment could result in additional charges to the Company’s results of operations.

Intangible Assets

The Company’s intangible assets were recorded as a result of the Company’s acquisitions and represent acquired technology, customer base and trademarks. These intangible assets are amortized over the estimated economic life of the asset. The Company periodically evaluates the recoverability of the intangible assets and considers any events or changes in circumstances that would indicate that the carrying amount of an asset may not be recoverable. Any material changes in circumstances, such as large decreases in revenue or the discontinuation of a particular product line, could require future write-downs in the Company’s intangibles assets and could have a material adverse impact on the Company’s operating results for the periods in which such write-downs occur.

Goodwill

The Company’s goodwill was recorded as a result of the Company’s acquisitions. In accordance with SFAS No. 141, “Business Combinations,” the Company has recorded these acquisitions using the purchase method of accounting. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company performed an impairment review of its recorded goodwill in 2007 and determined that no impairment of goodwill existed because the estimated fair value of each reporting unit exceeded its carrying amount. The Company tests its recorded goodwill for impairment on an annual basis, or more often if indicators of potential impairment exist, by determining if the carrying value of each reporting unit exceeds its estimated fair value. Factors that could trigger an impairment include, but are not limited to, underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the Company’s overall business and significant negative industry or economic trends. Future impairment reviews may require write-downs in the Company’s goodwill and could have a material adverse impact on the Company’s operating results for the periods in which such write-downs occur.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123-R). The Company adopted the provisions of SFAS 123-R in the first quarter of 2006. Under the fair value recognition provisions of this statement, stock-based compensation expense is measured at the grant date based on the value of the award and is expensed ratably over the vesting period. Determining the fair value of stock options at the grant date requires judgment, including estimating expected dividends, volatility, terms and estimating the amount of share-based awards that are expected to be forfeited. If actual forfeiture rates differ significantly from the estimate, stock-based compensation expense and the Company’s results of operations could be materially impacted. Beginning in 2006, the Company changed its previous practice of predominantly granting stock options to employees, and began granting restricted stock as an alternative. Compensation expense for restricted stock is based on the fair market value of the restricted stock on its grant date, and is expensed ratably over the vesting period.

Income Taxes

Income taxes are determined under guidelines prescribed by SFAS No. 109, “Accounting for Income Taxes” (SFAS 109). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company regularly reviews the deferred tax assets for recoverability and has established a valuation allowance when it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The Company assesses the recoverability of the deferred tax assets and the need for a valuation allowance on an ongoing basis. In making this assessment, the Company is required to consider all available positive and negative evidence to determine whether, based on such evidence, it is more likely than not that some portion, or all, of the net deferred assets will be realized in future periods.

During the year ended December 31, 2007, the Company determined, primarily based on operating income during recent years and anticipated operating income and cash flows for future periods that it is more likely than not that certain foreign deferred tax assets will be realized in the future and accordingly, it was appropriate to release the valuation allowance recorded against those deferred tax assets. As a result, the Company released a portion of the valuation allowance related to certain foreign jurisdictions, resulting in a non-cash income tax benefit to net income, as well as a credit to goodwill as some of the deferred tax assets existed at the date of Scala’s acquisition. The Company intends to maintain a valuation allowance for the remaining foreign deferred tax assets until sufficient positive evidence exists to support its reversal. The remaining valuation allowance will continue to be evaluated over future quarters. If it is determined that it is more likely than not that all or a portion of these remaining foreign deferred tax assets will be utilized to offset future taxable income, the valuation allowance could be decreased or eliminated altogether which will result primarily in a decrease to goodwill.

Future releases of the valuation allowance related to these assets will be accounted for as a reduction of goodwill rather than a reduction of income tax expense if the valuation allowance decrease occurs prior to the effective date of SFAS No. 141 (revised 2007), “Business Combinations,” or SFAS No. 141(R). Effective January 1, 2009, SFAS 141(R) provides that any reduction to the valuation allowance established in purchase accounting is to be accounted for as a reduction in income tax expense.

The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Effective January 1, 2007, the Company adopted Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

Although the Company believes it has adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. The Company adjusts these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.

During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. As a result, the Company recognizes tax liabilities based on estimates of whether additional taxes and interest will be due. These tax liabilities are recognized when, despite the Company’s belief that its tax return positions are supportable, the Company believes that certain positions may not be fully sustained upon review by tax authorities. The Company believes that its accruals for tax liabilities are adequate for all open audit years based on its assessment of many factors including past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact income tax expense in the period in which such determination is made.

U.S. income taxes were not provided for on undistributed earnings from certain non-U.S. subsidiaries. Those earnings are considered to be permanently reinvested in accordance with Accounting Principles Board (APB) Opinion 23.

New Accounting Pronouncements

For new accounting pronouncements see Note 14 in Notes to Unaudited Condensed Consolidated Financial Statements.

Acquisitions

NSB Retail Systems PLC

On February 7, 2008, the Company completed its acquisition of NSB Retail Systems PLC (NSB). NSB designs, develops, markets and supports store and merchandising solutions to retailers of apparel, footwear and specialty merchandise. The acquisition of NSB provides an expanded portfolio of products and services for large and mid-sized specialty retailers and department stores, as well as a fully hosted, managed service offering designed for smaller retailers who are interested in rapid implementation via an on-demand versus on-premise offering.

Pursuant to the terms of the acquisition agreement, shareholders of NSB received ÂŁ0.38 in cash for each NSB ordinary share. The value of the fully diluted share capital of NSB was approximately $311.8 million, not including transaction costs, based on the exchange rates in effect at the time the U.S. dollars were converted to pounds sterling for purposes of the transaction. The consideration payable under the agreement was funded by the Company with approximately $161.0 million in existing cash balances, with the balance of the consideration being funded by drawing from funds available pursuant to the 2007 credit facility (Note 8 in Notes to Unaudited Condensed Consolidated Financial Statements). In addition, on February 11, 2008, the Company sold the NSB acquisition British pound sterling call options with a fair value at December 31, 2007 of $1.8 million back to the issuing institutions for $0.2 million, resulting in net foreign currency transaction loss of $1.6 million. The loss resulted from depreciation of pounds sterling against the U.S. dollar. The net loss is included in Interest and other income (expense), net, in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the nine months ended September 30, 2008.


CONF CALL

Damon Wright

Thank you, Anthony, and good afternoon to everyone. We appreciate you taking the time to join us on this call. We issued a press release this afternoon detailing our results and you may access that from our Web site at www.epicor.com under the Investor section.

Joining us on today’s call are Tom Kelly, Epicor’s President and CEO; and Russ Clark, Senior Vice President, Finance and our Principal Accounting Officer. Tom will begin the call with a few comments, followed by Russ, who will discuss certain financial results in more detail.

Prior to beginning, I would appreciate your patience as I review our Safe Harbor statement. The discussions on today’s call will include forward-looking statements. These forward-looking statements include statements regarding the company’s expected revenue, earnings and other financial results, as well as expected new product releases including Epicor 9, and other statements that are not historical facts. Actual results may differ materially from those expressed or implied in the forward-looking statements. For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in our forward-looking statements, please see our Annual Report on Form 10-K for the period ended December 31, 2007 and our Form 10-Q for the period ended June 30, 2008. Today’s comments will also include a discussion of certain non-GAAP financial measures, such as adjusted EBITDA, free cash flow, and non-GAAP revenue and non-GAAP earnings, which exclude amortization of prior intangible assets, stock-based compensation expense, restructuring and other charges. The most directly comparable GAAP financial measures and information reconciling the company’s non-GAAP and GAAP results are included in our earnings release and in the Form 8-K to be filed with the SEC.

With that I would now like to turn the call over to Tom.

Tom Kelly

Thank you, Damon. Yesterday afternoon Epicor’s Board of Directors unanimously rejected the unsolicited tender offer from Elliott Associates and recommended that stockholders not tender their shares into this highly conditional offer. We issued a press release and filed a 14D-9 with the SEC providing a very detailed explanation regarding the Board’s recommendation. Today’s call is to discuss our third quarter financial results, our operational focus and some of the exciting things ahead for this company. Everything we can discuss regarding the Board’s recommendation relative to the Elliott Associates tender offer is in the documents we filed.

Now turning to the third quarter, we all know that the third quarter turned out to be one of the most challenging periods that the markets have seen in years. This was especially true during the last few days of September when massive swings in the financial markets and a great debate around the credit crisis created uncertainty in the mind of some of our customers around the world. As you also know, a lot of business generally gets done in the last few days for any application software company. We did have deals slide across the board at the end of the quarter however because of the flexibility of our business model, we hit the revenue and earnings per share expectations we provided back in July albeit with a different revenue mix. The core fundamentals at Epicor remained strong and these were underscored by our third quarter results. These results reflect our focus on operations, execution, and our ability to match our business model to the economic conditions present.

Revenues hit an all-time record for Epicor and we continue to benefit from our large stable customer base with growing, recurring maintenance revenues helping to generate $18.7 million in free cash flow during the third quarter. This customer base is expected to drive free cash flow of $52 million to $62 million for the year. Customer retention rates remained at near all-time highs at 94% and we brought back to annual maintenance contracts for 142 customers who had previously gone off maintenance. Win-backs, these customers we bring back are in an important addition to our recurring maintenance revenue streams and these contracts represent an incremental $3.1 million in recurring annual maintenance revenues. The reasons behind our industry leading retention rates are clear as we continue to support and meet the needs of our existing customers throughout the world with more than 65 products and product enhancements coming out during the first three quarters of 2008 and we are only weeks away from the general availability of Epicor 9 putting our customers and our company on the cusp of beginning to realize the benefits of more than four years of investment and the latest example of Epicor’s cohesive forward-looking product strategy.

Epicor remains uniquely positioned as the leading provider of business software solutions that help our customers save money and drive productivity throughout their businesses. We differentiate ourselves from the competition by offering a low total cost of ownership and clearly articulating a near-term return on investment. Our distinct market positioning and commitment to providing a clear product road map becomes even more important in light of the current economic challenges. The benefits Epicor offers are clear and led to the addition during the quarter of 155 new names to our growing installed base of more than 20,000 customers.

Now, I just returned from our 16 Annual Customer Conference where despite the times, we had approximately 2000 attendees from around the world. This comes on the heels of record attendance of more than 300 at our Retail Customer Conference in the third week of September. These customers paved their own way to come learn more about the tools Epicor offers to run their business more productively. They were also eager to learn about Epicor’s future product road map and what we are doing to ensure that their future needs will be met as they grow their business or adjust to meet the market challenges and opportunities.

I want to spend some more time covering some of the near and longer term growth drivers that are emerging as part of the product road map we shared with our customers. We believe that it is an exciting time for these drivers, we believe that they are coming on exactly at the right time for Epicor and will give us a great boost as we go into 2009. I will also provide some details on our plans to keep our business model nimble and flexible to help ensure we can continue to respond to rapidly changing market conditions and the opportunities that are presented. First though, I am going to ask Russ Clark our Senior Vice President of Finance and Principal Accounting Officer to briefly highlight some of the financial results from the quarter. Russ?

Russ Clark

Thanks Tom. We provide a fair amount of information in our press release and tables. So, I will provide some additional color around a few areas of our third quarter results and referring to the release for the remainder of the information. GAAP revenue for Q3 of $135.8 million was $1.9 million lower than non-GAAP revenue of $137.7 million due to the impact of NSB purchase accounting deferred revenue haircuts of $1.8 million in maintenance and $140,000 in consulting. You can see the breakout of our Q3 revenue by segment in the statement of operations.

Turning to gross margin details, maintenance gross margins were 75.9% up sequentially by 1.7 percentage points due primarily to our focus on margin improvement for our retail products which have relatively lower gross margins in the rest of our business. Maintenance margins were down year over year as expected due to the addition of a larger mix of retail maintenance revenues in the current year. Our focus on improving services utilization rates continued to pay off with further improvement in our consultant gross margins which came in at 21.9 for the quarter. This is up sequentially by 1.5 percentage points and also up from Q3 ’07 by four percentage points. Hardware margins came in at 13.3% up sequentially from 9.5% in Q2. We continued to see some variability in both our hardware revenues and margins due to the timing of customer orders and product mix. License gross margins were strong at 80.8%, increasing sequentially by 4.5 percentage points and increasing year over year by 3.9 percentage points. The sequential and annual increases are due primarily to a lower mix of third-party products. Total non-GAAP and GAAP gross margins excluding amortization were 50.5% and 49.8% respectively, down year over year due to revenue mix which had a significantly higher percentage of lower margin retail revenues as well as hardware revenues versus the year-ago quarter.

Q3 GAAP net income was $3.8 million or $0.06 per diluted share, non-GAAP net income was $11.3 million or $0.19 per diluted share. Despite a more challenging environment, GAAP and non-GAAP net income continued to improve for the year. Adjusted EBITDA margins also continued to improve for the year coming in at 17.5%, up 2.5 percentage points from Q2 though down slightly by 10 basis points from the same period last year due primarily to the mix of revenues. Looking at our third quarter income taxes, our GAAP tax rate was 25% with the year-to-date benefit of 52%. The variability in our Q3 tax rate resulted from updates to our full-year pre-tax income estimates in order to provide a more normalized tax rate as comparable to other periods we have used the 38% tax rate in our non-GAAP earnings per share calculations.

Moving on, while we do not have control over the economic conditions we face, we do have the ability to adjust our expense structure to appropriately respond to those conditions. During the third quarter, we continued to proactively respond to the developing market conditions by managing operating expenses. As a percentage of total revenue, Q3 operating expenses were down more than 4% from a year ago. Each line item other than R&D was lower as a percentage of revenue than Q3 last year. R&D was up as expected as we approached the general availability of Epicor 9.

Moving on to additional quarterly metrics, our mix of America’s and international software license revenues for the quarter was split approximately 70% Americas and 30% international consistent with our expectations. 2008 third quarter total revenue and costs were almost equally impacted by foreign currency fluctuations. Once again, we had strong collections of approximately $143 million during the quarter and free cash flow continued to improve throughout the year, up sequentially over Q2 by nearly $6 million to $18.7 million. We took advantage of our strong cash generation to pay down our credit facility by a total of $46.8 million during the quarter bringing our outstanding balance down to $109.3 million. This pay down is expected to lower our interest rate to LIBOR plus 2.25%.

As of September 30, 2008 the balance sheet included $95.7 million in cash and equivalents, our total debt balance at the end of the quarter was $339.8 million consisting primarily of the $230 million of 2.38% [ph] convertible bonds and our credit facility balance.

I would now like to turn the call back over to Tom.

Tom Kelly

Thank you, Russ. In this economic environment, Epicor is focused on three primary goals, supporting and growing our customer base by providing high value products that focus on the lowest total cost of ownership for our customers, continuing to target investment to the highest priority opportunities and very specifically and including the successful launch of Epicor 9, and then last continuing to focus on expense management while increasing our focus on driving efficiencies across the business. So as key points, keeping our products coming, lower total cost of ownership, focus on investment Epicor 9 and the roll out of our retail products, and continue to focusing on our expense management and driving efficiencies in the model.

I believe our customer base is our most valuable asset here and customer satisfaction is priority one in Epicor. It is evidenced by our 94% retention rate. We do not sunset products nor do we force customers to move on to new platforms. In fact, we continue to add features and functionality to all our product lines and are constantly bringing to market numerous new product releases all of which are directly targeted to meeting the needs of the customer base. This formula is what results in that high retention rate and that high recurring maintenance and revenue stream that we have as well as providing growth for the future, supporting our customers and ensuring we are addressing their current and future requirements through our product road map is directly linked to our investment and the upcoming release of Epicor 9, which is the latest example of our clearly articulated customer centric product strategy. Now this strategy is a critical element for maintaining our leading customer retention rates as I have mentioned and also of course core to our maintenance revenues. We have invested hundreds of thousands of employee hours and millions of dollars into what we believe will be a top, if not the top ERP solution of choice for every one of the focused vertical markets we are in. We believe Epicor 9 is a game changer for the mid market ERP and will for the first time provide a tier one ERP solution specifically for the mid market. We believe that this product will allow us to take competitive advantage across the board in our markets. We are very excited about it.

I want to remind everyone that this is an important release with significant features and functionality as well. Epicor 9 is the only enterprise application that fuses ERP with Web 2.0 and Enterprise 2.0 capabilities on a proven 100% SOA platform. It connects into Knowledge Worker, it connects in Outlook, it connects in SharePoint, it connects into people that are doing business without directly touching the underlying ERP data. Now they can take the underlying ERP data and through the business intelligence tools that we provide them turn that into real time decision making engine. We think this is a great strategic advantage for our customers and a very big competitive advantage for ourselves into the marketplace. Supporting our customers and ensuring we are addressing their current and future requirements through our product road map is directly linked to our investment in the upcoming releases of Epicor 9.

Now let me talk about a few of our growth drivers as we go forward here that are all welded on the Epicor 9 platform and the retail markets that we are playing in. These growth drivers will include penetrating new markets with the best in class products first and foremost Epicor 9. We believe it is an opportunity to take market share, we think it adds tremendous international opportunity for us and we believe it allows us to move into some emerging markets. We think it allows us to attack new verticals, we also see new term opportunity in addressing unreserved markets as well as driving incremental growth with enhanced distribution and financial product suites. The financial modules incorporate not only multi-language and multi-currency for numerous jurisdictions around the world but also multi-book localization and reporting tools. This is expected to reopen markets for Epicor that we have been unable to effectively address for several years. Epicor 9 will also open up multiple ad news for migrations and upgrades. While we expect that there will be near term interest to migrate or upgrade from specific customer sets, we view this at a longer term opportunity for later 2009 and 2010. The tools will allow us to drive migrations and upgrades from our own installed base of more than 20,000 customers will also be the base tools that we can eventually use to migrate the broader competitive environment. Epicor 9 is just one of the exciting near-term catalysts for Epicor and we have several other growth drivers. In our retail markets we have just begun to leverage Epicor’s existing global reach to penetrate international markets. More and more retailers have or want a global footprint with a reach that spans more than 140 countries, Epicor is well positioned to be the solution provider of choice for those retailers.

Additionally we continue to have near-term cross-selling opportunities into the former CRS and NSB customer bases especially where we can demonstrate a near term ROI. The products that most likely will fall into that category are the enterprise selling and sales audit products that we have in our retail suite of products. The longer term growth drivers in the retail space include expanded retail offers that customers are asking for us. These include the mobile solutions and multi channel retailing as the economy stabilizes we expect to realize the additional tremendous benefits from our February 2008 acquisition of NSB as Epicor is able to more fully leverage its position as a clear market share leader in the specialty retail space. Complementary in adjacent markets to those we currently serve are also expected to drive growth for Epicor. We recently introduced into the US a product funded in cooperation with the Australian Government Epicor’s senior living solution targeting the assisted living aged care and retirement markets. This is a market with growth potentials that are significant are we are already adding customers in the US. We have a very solid customer base in the Australian market with this product already. Given the growth drivers I have just covered, I am confident that Epicor can continue to play a strong offensive game and I believe that times of market turmoil often can create an opportunity to take market share. We are well positioned with an exciting array of fresh new product offerings that are addressing the current and future needs of our improving target markets. We have the products that enable our customers to make buying decisions and we listen to our customers and have responded with solutions they want. Having a strong offense in terms of an excellent slate of products with defined growth opportunities is an important part of our game plan but it does not mean we will ignore our defense. A solid defense is critical to any winning strategy and highly successful teams consistently to demonstrate them on both sides of the field.

It is important that operational focus remains on the forefront of our mindset and in the third quarter we demonstrated that we can effectively adapt our business model to market conditions. We made some adjustments to our model with minor headcount reductions and in aligning our cost structures with our anticipated sales opportunities driving efficiencies across our organization will remain a top priority and we will continue to prudently tune our model to ensure it is properly aligned with the challenges and opportunities we face. We intend to pursue our growth drivers and be opportunistic and exacting incremental growth in today’s challenging environment, in addition we will continue to implement a wide range of cost initiatives throughout our organization to help ensure that we match our business operations and execution to our sales expectations. We will be diligent in managing expenses, driving improvements in our gross margin and operating lines and understanding the demand environment for our customers and markets. We remain highly focused on striking a balance between driving near term improvements to earnings and cash flow and supporting our upcoming product road map to drive an acceleration of long term revenues and earnings growth.

Epicor has a 25-year history of managing through all varieties of economic scenarios and we are well positioned to respond to any market condition or opportunity. Our core fundamentals remain strong, they are a large stable customer base, a strong growing recurring revenue stream, a well developed SOA technology platform based on leading Microsoft technology, and established leadership position in multiple high-growth markets and having proven leading-edge products with near long-term growth drivers in all markets including our Epicor 9 launch right now. We are confident in our business model and our ability to adapt it to match market conditions both good and bad and we will invest for the future while managing conservatively through the near term.

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