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Article by DailyStocks_admin    (05-12-08 09:48 AM)

MICROS Systems Inc. CEO ATHANASIOS L GIANNOPOULOS bought 50,000 shares on 5-6-2008 at $30.18.

BUSINESS OVERVIEW

INTRODUCTION
MICROS Systems, Inc. is a leading worldwide designer, manufacturer, marketer, and servicer of enterprise information solutions for the global hospitality and specialty retail industries. MICROS Systems, Inc. was incorporated in the State of Maryland in 1977 as Picos Manufacturing, Inc. and, in 1978, changed its name to MICROS Systems, Inc.
References to “MICROS,” the “Company,” “we,” “us,” and “our” herein include the operations of MICROS Systems, Inc. and also our subsidiaries on a consolidated basis. Also, our fiscal year runs from July 1 through June 30, and so throughout this report on Form 10-K, references to a fiscal year mean the 12-month period ending June 30 of that year; i.e., fiscal year 2007 means the 12-month period ending June 30, 2007.
We operate in two reportable segments for financial reporting purposes: U.S. and international. You can find financial information for each reportable segment, as well as certain financial information about geographic areas, in Note 17 , “Segment Information” in our Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. In each of these two reportable segments, we have developed an infrastructure through which we license and sell all of our products and services. While the products and services that are sold must be customized for each segment to address local issues, laws, tax requirements and customer preferences, the products and services are substantively similar worldwide.
The hospitality industry comprises numerous defined market areas, including lodging (e.g., individual hotel sites, hotel chains and franchise groups, and centrally deployed systems, such as hotel central reservation systems), table service restaurants, quick service restaurants, entertainment venues (e.g., stadiums and arenas), business foodservice operations, casinos, transportation foodservice, government operations, and cruise ships. The specialty retail industry consists of retail operations selling directly to consumers, including retailers of clothing, shoes, food, hardware, jewelry, and other specialty items.
Our enterprise solutions comprise three major areas: (1) hotel information systems; (2) restaurant information systems; and (3) specialty retail information systems. In addition to our software enterprise solutions and hardware products, we offer an extensive array of services and other products for our hotel, restaurant and retail information systems. The hotel information systems consist mainly of software, encompassing property based management systems (“PMS”), related property-specific modules and applications, and central systems, including central reservation systems (“CRS”). The restaurant information systems consist of hardware and software for point-of-sale (“POS”) and operational applications, a suite of back office applications, including inventory, labor, and financial management, and certain centrally hosted enterprise applications. The specialty retail systems consist of software encompassing POS, loss prevention, business analytics, customer gift cards, and enterprise applications.
Our hotel PMS applications are installed worldwide in leading hotel chains, including Accor (France), Best Western, Camino Real (Mexico), Carlson Hotels, Dusit Thani (Thailand), Extended Stay America, Fairmont, Federal (Malaysia), Four Seasons, Hilton International, Hyatt Global, InterContinental Hotels Group, Kempinski (Germany), MGM Mirage, Marriott International, Mövenpick (Switzerland), Peninsula (Hong Kong), Shangri-La International (Hong Kong), Société du Louvre (France), Solare (Japan), Starwood International, Steigenberger, Thistle (United Kingdom), Wyndham Worldwide, and Wynn Resorts. Globally, there are approximately 21,000 MICROS PMS applications installed (most of which are accompanied by other property-specific modules and applications.)
The MICROS CRS is installed in numerous hotel chains, including Boscolo (Italy), Constellation (Australia), Equatorial (Malaysia), Fairmont, Four Seasons, Great Wolf Resorts, Loews Hotels, MacDonalds (United Kingdom), MGM Mirage, Oberoi (India), Pan Pacific (Singapore), Red Lion, Rydges (Australia), Shangri-La, Société du Louvre, Sokos (Finland), Starhotels (Italy), Sun International (South Africa), Thistle, Westmark, Wyndham Worldwide, and Wynn Resorts. Globally, over 65 hotel chains have installed MICROS CRS applications.
Our restaurant POS systems are installed worldwide. Major table service restaurant chain customers include Bertucci’s, Chevy’s, Corporación Mexicana de Restaurantes (Mexico), Cracker Barrel, Denny’s, Eat ‘n Park, El Torito, ESPN Zone, Fazer Amica (Finland), Friendly’s, Groupe Le Duff (France), Hard Rock Café, HMS Host, Hooters, International House of Pancakes, Johnny Carinos, La Madeleine, Lone Star, Marie Callender’s, Metromedia Restaurant Group, Mitchells and Butlers (U.K.), Perkins, Rainforest Cafe, Ruby Tuesday’s, T.G.I. Friday’s, VIPS (Spain), and Whitbread PLC (United Kingdom). Major quick service chain restaurant (“QSR”) customers include numerous franchisees of Atlanta Bread, Arby’s, Baja Fresh, Ben & Jerry’s, Burger King, Checkers, El Pollo Loco, Fazoli’s, Fuddruckers, Grandy’s, Krispy Kreme, Pollo Campero (Guatemala), Panera Bread, Popeye’s, Red Rooster (Australia), Retail Brand Group, Starbucks (mainly international sites), Subway, Tropical Smoothie Café, Wendy’s, and various franchisees of Yum! Brands (Pizza Hut, KFC International, and Taco Bell).
Our restaurant POS systems are also installed in hotel restaurants in chains, including Boyd Gaming, Camino Real, Fairmont, Four Seasons, Hilton International, Hilton, Hyatt, InterContinental Hotels, Kempinski, Mandarin Oriental, Marriott International, Omni, Pan Pacific, Radisson, Starwood, and Wyndham International. Additional significant markets for our POS systems include complex foodservice environments, such as casinos, cruise ships, sports arenas, airport concourses, theme parks, recreational centers, institutional food service organizations, and specialty retail shops. Users include Aramark, Anton’s, Compass, Delaware North, HMS Host, and various government entities. We have installed large POS systems in the Foxwoods Hotel and Casino (Ledyard, CT), Grand Casino (Australia), Atlantis (Bahamas), Mandalay Resorts Group, Sun City (South Africa), Harrah’s Casinos, Luxor Hotel and Casino, The Venetian and Wynn Resorts. We supply and service POS systems for users in the complex foodservice environments identified above both directly and through distribution channels, including through specialty reseller relationships with Blackboard Inc. and The CBORD Group Inc.

We also market restaurant POS systems through our Hospitality Solutions International (“HSI”) division. The HSI restaurant POS product is a Windows ® based software product. Additionally, we market a POS product through our Indatec GmbH (“Indatec”) subsidiary. The Indatec product is a proprietary POS hardware system with embedded software. The Indatec product is sold exclusively in Europe and is targeted to small restaurants.
Through our JTECH Communications, Inc. (“JTECH”) subsidiary, we market a range of on-premises paging and alert solutions for restaurants, retail, and medical environments.
Our specialty retail solutions are provided through our subsidiaries Datavantage Corporation (“Datavantage”), CommercialWare Inc. (“CommercialWare), and RedSky (discussed below). In our marketing, we sometimes refer to this group of subsidiaries as the “MICROS Retail” group.
Datavantage is a software application developer and system integrator specializing in the specialty and apparel retail market, and has over 225 retail company customers. The Datavantage software solutions include retail POS, loss prevention, business analytics, and enterprise applications. Its customers include Abercrombie & Fitch, Adidas AG (Germany and Adidas USA, Armani Exchange, Barney’s New York, Books-A-Million, Blue Spirit (Italy), Brazin Ltd. (Australia), CSK Auto, Guitar Center, Hugo Boss AG (Germany), Jos. A. Banks Clothiers, Limited Too, Michael’s Arts and Crafts, Polo Ralph Lauren, Reebok Retail, Ritz Camera, Roots Canada Ltd., S & K Famous Brands, Se ñ or Frogs (Mexico), Shaw’s Markets, Steve Madden Retail, Talbots, Urban Brands, and Zales.
CommercialWare offers cross-channel retail solutions (described more fully below), consisting of software and services that support retailers with a variety of field management solutions, including store systems, business analytics, marketing applications and order processing via phone, mail order and the internet. CommercialWare has over 90 customers including the following: Abercrombie & Fitch, Garnet Hill, Home Depot Canada, J. Jill Group, Jos. A. Banks Clothiers, Ritz Camera, Starbucks and the US Mint. CommercialWare and Datavantage share several common customers.
In January 2007, we acquired certain subsidiaries of RedSky IT of the United Kingdom (collectively, “RedSky”). We paid a total of approximately $29.8 million, net of cash acquired, for the stock of the acquired companies. These companies provide software products and services for the hotel and travel industries and for the food and retail marketplace. Each of the acquired companies has been integrated with the appropriate MICROS business and geographical units.
In June 2007, MICROS purchased a majority interest in eOneGroup of Omaha, Nebraska. eOneGroup is a developer and marketer of web site and portal services for retailers. eOneGroup operates as a majority owned subsidiary under the “MICROS Retail” group. It has over 30 customers including Lord & Taylor, Omaha Steaks, Electrolux, Paragon Sporting Goods, and Tommy Hilfiger.

Hotel Information Systems
For the hotel and resort industry, we develop, distribute, and support a complete line of hotel software products and services. The hotel information systems include PMS, sales and catering systems (“S&C”), CRS, customer information systems (“CIS”), revenue management systems (“RMS”), and an Internet/Global Distribution System based hotel reservation service called myfidelio.net. We also provide installation and end-user training services, and support services (including help desk) for our various software products.
Globally, there are approximately 21,000 active MICROS PMS installations, which includes some sites using PMS products for which MICROS has ceased ongoing development (although in many instances we continue to provide limited support services to those sites). Most of the hotels with MICROS PMS have also installed other property-specific modules and applications; additionally, there are over 2,000 hotels running various MICROS property-specific modules and applications without a MICROS PMS.

The PMS software provides for check-in and check out, reservations, guest accounting, travel agent accounting, engineering management, and interfaces to central reservation systems, to on-line travel services (a/k/a alternative distribution services, e.g., Expedia), and to global distribution systems (e.g., Sabre, Galileo, Amadeus and WorldSpan). The S&C software enables hotel sales staff to evaluate, reserve and invoice meetings, banquets and related events for a property. The CRS software enables hotels to coordinate, process, track, and analyze hotel room reservations at a central facility for electronic distribution to the appropriate lodging site. The CIS software enables hotels to efficiently capture and track relevant guest information. The RMS software enables hotels to manage room rates, occupancy, and the mix of business between corporate and transient customers. We also offer an Internet-based hotel reservation service via our myfidelio.net service. This service enables corporations, tourist representation services, and consumers to reserve rooms and manage reservations directly with designated hotels. This service also enables those hotel properties without internal reservation capabilities to outsource to us the maintenance of their connectivity to the global distribution systems, and to certain alternative distribution systems.
We market a comprehensive suite of hotel software products under the OPERA brand name. OPERA includes modules for property management, central reservations, customer information systems, sales and catering, revenue management, sales support, data mining, financial statements, condominium reservations and accounting, golf reservations, spa management, and quality management. We also offer a module that enables guest check in and check out, and other interactive features, via kiosk.
In addition to industry standard PCs, the OPERA platform will also run on large PC servers. OPERA can be run on two operating systems: Microsoft Windows ® (Server and XP) and IBM AIX ® , and uses an Oracle ® database.
The OPERA software suite is deemed an important product line for our continued growth in the hotel information systems market, because we believe it reflects the future direction of PMS technology for us and the industry, and is a material driver of revenue growth for our business with the hotel industry. Over 60 hotel chains have implemented OPERA, many of which are in the midst of multi-year rollouts.
We also offer a version of the OPERA property management system called OPERAXpress. This product enables smaller properties to deploy the OPERA PMS at a lower price with a limited number of product features. As of June 30, 2007, over 7,300 hotel sites have installed either Opera or OPERAXpress PMS.
OPERA’s software architecture enables the product to be deployed either on-premises or hosted in an off-site location. We offer hosting services for hotel customers in various data centers around the world (Ashburn and Manassas, Virginia; Buenos Aires, Argentina; Frankfurt, Germany, and Singapore) with the application accessed via Internet or similar high speed connections. Currently, there are approximately 1,400 hotels running Opera PMS or Opera Xpress PMS in a hosted environment.
In addition, we market a suite of hotel software products (PMS and other modules) under the Fidelio Version 7.0 brand name. Fidelio Version 7.0 uses the Microsoft Windows ® graphical user interface and runs on an Oracle ® database. There are over 4,600 hotels using Version 7.0, as of June 30, 2007.
Through RedSky, we offer a comprehensive portfolio of integrated, highly functional hotel PMS software solutions under the tradename ImagInn, which is targeted toward the limited-service, independent and economy hotel market. There are more than 3,000 sites using ImagInn.
Furthermore, in Europe we market a PMS product under the brand name Fidelio Version 8. This product contains certain Internet-based features and uses the Windows ® operating system with an Oracle ® database. The product is designed to meet the needs of independent hotel operators and smaller chains based in Europe. The product is installed in over 1,300 hotel sites as of June 30, 2007.
Additionally, we market a specialized version of our PMS product to the cruise industry via our Fidelio Cruise subsidiary. The Fidelio Cruise PMS enables cruise ships to manage their reservations and on-board operational needs including check-in and check-out, point-of-sale, passenger and crew administration, invoicing, maintenance tracking and passport document management. Fidelio Cruise software is installed in over 170 cruise ships. Customers include Carnival Cruise Lines, Cunard Line, Holland America, Norwegian Cruise Lines, P. & O. Cruises, Princess Cruises, Radisson Seven Seas Cruises, Star Cruises, Royal Caribbean International, and the U.S. Navy, among many others.
We also have a marketing alliance with Systems Union Group Plc, headquartered in London. This alliance involves the joint product development and marketing of application software based on Systems Union’s back office accounting and business intelligence applications. This alliance enables us to offer a hotel customer a complete suite of integrated software solutions that addresses operational needs, business intelligence and analysis, and provides back office accounting and reporting. As part of this alliance, we serve as a preferred reseller of Systems Union’s software and business solutions to the hospitality industry.

Restaurant Information Systems
Our restaurant systems include full-featured point of sale applications, hardware, and support services. Most of the products are designed to operate on industry standard PCs, with the order entry terminals being either industry standard PCs or proprietary terminals with additional functionality and design appropriate for foodservice environments, including two types of proprietary intelligent terminals developed and designed by us.

Hardware
The workstations we have designed, and that we currently market and sell, are the Workstation 4, Workstation 4-LX and the Workstation 2010. We also integrate other hardware devices (e.g., printers, cash drawers, handheld order entry terminals, and pole displays) into our complete product offerings.
The Workstation 4 is a thin-client POS terminal, using Microsoft’s Windows ® CE operating system, with standalone resiliency. This capability means that even if the system server malfunctions, the POS terminal can continue to function and store data until the server is operational. The Workstation 4 is manufactured by GES Singapore Pte. Ltd. of Singapore (“GES”), a third party contract manufacturing company. Workstation 4-LX is a newer version of Workstation 4. The product has a faster microprocessor and other improvements in memory management and data recovery. The product is scheduled for release in early fiscal year 2008.


The 2010 Workstation is a high-performance POS terminal designed to run our restaurant applications and other third party PC-based software applications. The product uses an Intel ® Pentium chip architecture. It can be configured to accommodate various memory and storage requirements. The product supports various Microsoft operating systems and Linux. The 2010 Workstation is manufactured by GES.
We also distribute a product named the Keyboard Workstation, which GES also manufactures for us. This product enables orders to be entered into the MICROS 9700 HMS (a software product that is described below) via a lower cost, durable workstation with a keyboard interface in lieu of a touchscreen. The Keyboard Workstation is primarily used in institutional foodservice environments, convention centers, and sports complexes.
Through our JTECH subsidiary, we offer pagers, wireless systems, alert software, and related products (all manufactured for us by third party contract manufacturers) for use in restaurants, retail, medical, and other environments.
Additionally, we resell various other hardware products, including personal computers, servers, printers, network cards, and other related computer equipment. We maintain a global, non-exclusive preferred provider agreement with Hewlett Packard Corporation. This relationship enables us to resell Hewlett Packard personal computers, printers, and networking equipment on a global basis.

Software
Our main restaurant POS software systems are the 9700 Hospitality Management System (“HMS”), the 3700 POS system, HSI POS, Indatec, the e7 Series, and Tangent POS. We have also recently introduced Simphony, a centrally hosted POS product. These systems provide transaction control for table service, quick service and large foodservice and entertainment venues.

Leisure and Entertainment Restaurants
The 9700 HMS is designed for larger leisure and entertainment venues, which include resorts, casinos, airport and other travel-related food service concessions, stadiums/arenas, theme parks, table service and quick service restaurants in hotels, and larger stand-alone restaurants. The 9700 HMS product has an open systems architecture running on Microsoft’s Windows ® 2000 operating system. The product can be deployed on site in a client-server configuration or on a multi-property configuration where a remote server can run multiple restaurants. The product uses either an Oracle database or a proprietary database.
We also recently released Simphony, a centrally-hosted POS product designed for leisure and entertainment venues. Simphony runs on either Microsoft SQL Server or Oracle databases.
The Tangent POS includes POS and related functions, and is designed for sport and entertainment facilities. Tangent POS is currently installed in more than 200 stadiums, arenas, and other large facilities in North America.

Table Service and Quick Service Restaurants
The 3700 POS is designed for table service and quick service restaurants. It has an open systems architecture using Microsoft’s Windows ® 2000 operating system, a Sybase ® relational database, and can run on standard PCs or proprietary workstations. It uses a color touch screen with a Microsoft Windows ® based graphical user interface.
We have developed and we market a suite of back office and operation focused software solutions that extend beyond POS. The suite is called the Restaurant Enterprise Series (“RES”). The software solutions include point-of-sale transaction control, restaurant operations, data analysis, and communications. The POS software comprises the front-end application for the RES system. The restaurant operations modules include inventory, product forecasting, labor management, financial management, gift cards, and enterprise data management. One of those modules is the Kitchen Display System (“KDS”), which displays food orders and offers additional reporting capabilities on restaurant service. Another recently released component is RES Kiosk, which enables customer information and self-ordering on third-party kiosks or other hardware. These modules are designed to operate at a restaurant site.
For management of multiple restaurants, RES includes a suite of software products called Enterprise Management. This suite enables data to be transmitted to a remote site (e.g., the headquarters of a restaurant chain) for data collection and analysis. Additionally, pricing and menu changes can be made from a remote site and downloaded to specified restaurant locations. RES is an important component of our strategy to fully integrate point-of-sale transaction processing with other restaurant operational and management functions.
We market a POS system called e7 for smaller restaurants. This product runs on the Workstation 4 and uses the Microsoft Windows ® CE Operating system.
Through our HSI division, we market the HSI POS product primarily to table service restaurant customers in North America. The product contains a wide array of POS features.
The Indatec POS product is marketed only in Europe and primarily to smaller table service restaurants and small hotels with restaurants that do not require the higher-level functionality of other MICROS POS products. The Indatec POS is designed to serve smaller restaurants seeking a lower cost product in terms of purchase and installation expense.

Ancillary Applications
Our design architecture enables existing users of many MICROS POS products to access new technologies and third party software applications in conjunction with their existing MICROS POS systems. In addition, many MICROS products interface with various back office accounting and property management systems, including our hotel PMS products.

We also have developed and market an Internet-based portal product called “mymicros.net.” Mymicros.net posts store transaction POS detail to a centralized data warehouse in near real time. This product enables the customer to view reports and charts for a single store, a group, or the entire enterprise from any location that has an Internet connection. The mymicros.net software product can either be purchased via a perpetual use license or by an annual or multi-year “software as a service” subscription contract. The HSI division also markets a portal called “myhsi.net.” The product’s functionality is similar to the mymicros.net portal, but is designed for use with the HSI POS product.
We currently operate a data center in our Columbia, Maryland headquarters to host the mymicros.net and myhsi.net software for customers; during fiscal year 2008 we plan to relocate this hosting facility to a third party data center to improve operations and security capabilities and to enhance capacity. As of June 30, 2007, we are hosting our various applications for over 500 customers, representing over 3,600 sites.

Retail Information Systems
Through our retail subsidiaries Datavantage and CommercialWare we market retail store software automation systems and business intelligence applications. The Datavantage retail store systems are called Store21 Store Management System (“Store21”), Tradewind Store Management System (“Tradewind”) and Xstore Store Management System (“Xstore”). Store21 is a POS product designed for smaller retail operations, while Tradewind is a POS product targeted at larger format stores and at high transaction volume stores. The products operate on Microsoft’s Windows ® NT and 2000 operating systems and use Sybase ® as the database. Both products can be integrated with the retailer’s back office systems, and Datavantage also offers additional certain back office, communications, and reporting modules for use with Tradewind and Store21.
Xstore is Datavantage’s next generation POS software system. It runs on the Sun Microsystems ® Java ® operating system, and its architecture enables it to be integrated to both Windows and Linux-based back office systems. Like Store21 and Tradewind, its predecessor products, Xstore is a front-end POS software system that may be integrated with the retailer’s back office systems. Xstore is highly customizable by the customer, and is designed to respond to the trend among large retailers to move to Linux-based systems. Xstore is designed to be able to be run in a Windows or a Linux environment, while Store21 and Tradewind, as currently designed, can only operate in a Windows ® environment.
Datavantage also offers the Proact Home Office Business Intelligence Suite (“Proact”) for retail stores, which includes loss prevention, customer relationship management, gift cards, and audit control.
All of Datavantage’s software systems run on both industry standard PCs and specially designed PC-based POS terminals manufactured by IBM, MICROS, Dell, and NCR.
CommercialWare’s offerings consist of software and services that enable a retailer to manage customer purchase transactions across multiple touch-points. Specifically, CommercialWare’s software enables a merchant to efficiently handle customer transactions from a store, the Internet, catalog phone-in orders, call centers, kiosk, and wireless devices. The solutions enable the merchant to provide the customer with full transparency through the purchasing process, from research from one channel, purchasing from a second channel and implementing a return or exchange through a third channel.
RedSky’s food and retail software, called Creations, is a fully integrated lifecycle management and supply chain traceability product. Lifecycle management refers to the ability to track and manage inventory from the manufacturer through the point of distribution. Creations is currently licensed to the four largest grocers located in the United Kingdom.
The eOneGroup offers web site development and portal management for retail customers. These solutions allow a retailer to have eOneGroup develop and manage a customer’s web site for ordering, sales promotion, and marketing.

Services
We provide a wide range of services to our customers. Our services include system installation, operator and manager training, on-site hardware maintenance, customized software development, application software support, credit card software support, systems configuration, network support and professional consulting. We also offer software-hosting capabilities, which enable customers to use the software without investing in hardware and a network.
We provide field hardware and software maintenance via a combination of direct and indirect channels - authorized U.S. dealers and international distributors. The field hardware maintenance is provided mainly to customers using MICROS POS hardware and software systems. Depot field maintenance is also provided. We sometimes contract with PC manufacturers to provide either first or second line support for PC servers for both hotel and restaurant customers.
We operate several help desks around the world. There is a 24 hours per day, seven days a week (24/7) help desk in our Columbia, Maryland headquarters. We also maintain other 24/7 regional and product specific help desks in the following locations:
Galway, Ireland – primarily for customers in Europe, Africa, and the Middle East
Buenos Aires, Argentina – primarily for customers in Latin America
Singapore – primarily for customers in the Asia-Pacific region
Cleveland, Ohio – for Datavantage products
Scottsdale, Arizona – for HSI products
We also operate other more limited help desk operations, including the myfidelio.net and Fidelio Cruise support desks in Hamburg, Germany, the Fidelio Cruise support desk in Fort Lauderdale, Florida, the JTECH help desk in Boca Raton, Florida, casino software related support in Las Vegas, the CommercialWare help desk in Westborough, Massachusetts and eOneGroup web site service support in Omaha, Nebraska.

CEO BACKGROUND

T. Paul Armstrong , 49, is currently the Company’s Executive Vice President, Chief Technology Officer, and has held that position since April 2006. From June 2000 through April 2006, he was Executive Vice President, New Technologies. Before that, Mr. Armstrong served the Company in various capacities. He first joined the Company in July 1981. Mr. Armstrong holds a masters degree from Cambridge University, England.
A. L. Giannopoulos , 67, is currently a Director, a position he has held since March 1992, President and Chief Executive Officer of the Company, a position he has held since May 1993, and Chairman of the Board, a position he has held since April 2001. Before 1992, Mr. Giannopoulos served in a variety of positions for Westinghouse, most recently as General Manager of the Westinghouse Information and Security Systems Divisions. Mr. Giannopoulos is a graduate of Lamar University with a Bachelor of Science degree in Electrical Engineering.
Daniel G. Interlandi , 54, has been the Company’s Executive Vice President, North American Sales, since January 2001. From 1980, when he first joined the Company, until January 2001, he held key sales and management positions with the Company involving districts operations, distributors, major accounts, customer service, research and development, and marketing.
Bernard Jammet , 49, is currently the Company’s Executive Vice President, Latin American Group, and has held that position since January 2001. From October 1998 through January 2001, he served as Executive Vice President, Product Development. Before that, Mr. Jammet served the Company in various capacities. He first joined the Company in July 1984. Before joining the Company, Mr. Jammet was employed with the former MICROS distributor for France. Mr. Jammet is a graduate of the Hotel School of Lausanne, Switzerland, with a Masters degree in Hotel Administration.
Gary C. Kaufman , 57, is currently the Company’s Executive Vice President, Finance and Administration and Chief Financial Officer, and has held that position since September 1999. Mr. Kaufman served as a Director of the Company from January 1991 until May 1994 when he was appointed to Vice President, Finance and Administration and Chief Financial Officer. From June 1996 until September 1999, he served as Senior Vice President, Finance and Administration and Chief Financial Officer. Before 1991, Mr. Kaufman was Division Controller for Westinghouse Security and Network Services Divisions, having been with Westinghouse for 20 years in various financial positions. Mr. Kaufman is a graduate of the University of Dayton with a Bachelor of Science degree in Accounting and is also a Certified Public Accountant.
Jennifer Kurdle , 40, is currently the Company’s Executive Vice President, Leisure & Entertainment, and has held that position since November 2005. Previously, she served the Company in various capacities. Ms. Kurdle first joined the Company in 1990. Ms. Kurdle graduated from Fairmont State University in 1989.
Thomas L. Patz , 47, is currently the Company’s Executive Vice President, Strategic Initiatives, and General Counsel, and has held that position since January 2000. Previously, Mr. Patz served the Company in various legal capacities. Mr. Patz first joined the Company in August 1995. Mr. Patz is a 1982 graduate of Brown University, and a 1985 graduate of the University of Virginia School of Law with a degree of Juris Doctor. Mr. Patz is a member of the Maryland State Bar.
Cynthia A. Russo , 37, is currently a Vice President and the Corporate Controller for the Company, a position she has held since May 2001. Ms. Russo previously served the Company in various capacities, and she first joined the Company in January 1996. Ms. Russo holds a Bachelor of Science degree in Accounting from James Madison University. She is a Certified Public Accountant and a Certified Internal Auditor.

COMPENSATION

FISCAL YEAR 2007 COMPENSATION

As described below, the principal elements of fiscal year 2007 compensation for our named executive officers were base salary, annual bonus, and long-term incentives in the form of stock options.

Base Salary

We determine salary increases for our executive officers, including our named executive officers, through trying to satisfy three discrete objectives: rewarding individual performance, protecting against inflation, and retaining our executive officers. Accordingly, the Compensation Committee considers overall corporate performance and, for those executives with management responsibility for particular business units, the financial results for those business units. The Compensation Committee also generally considers the impact of increases in the cost of living. The Compensation Committee does not use a mathematical formula to determine increases, but makes a qualitative assessment in consultation with Mr. Giannopoulos. Mr. Giannopoulos’ salary is mandated by the terms of his employment agreement.

Bonus

We pay incentive bonuses to the named executive officers. The objective of the incentive bonuses is to provide additional motivation to the named executive officers to enhance performance on a company-wide or business-unit-wide basis, as appropriate, thereby enhancing the prospects for improved shareholder return.

Before the commencement of each fiscal year, the Compensation Committee establishes target bonuses for each of the named executive officers (other than for Mr. Giannopoulos, whose $700,000 target bonus was stipulated in his employment agreement), based on the named executive officer’s position and responsibilities. In fiscal year 2007, the target bonuses were 50 percent of the base salary of the named executive officers. The Compensation Committee did not determine the amount of the target bonuses on the basis of any arithmetic formula.

As described more fully below, the annual incentive bonuses for Messrs. Giannopoulos, Kaufman and Patz were based on the extent to which our actual fiscal year 2007 revenues and income before taxes exceeded our budget. We selected revenues as a performance measure for our incentive bonuses because we believe revenue growth is a principal indicator of our ability to compete effectively, gain additional market share and penetration, and realize economies of scale that can enhance margins. We selected income before taxes as the other performance measure because we believe that it provides a fundamental, “bottom line” indication of executive performance. We use income before taxes, rather than after-tax income, because tax rate fluctuations often are related to factors that are out of control of management, and we believe that bonus awards should not be affected positively or negatively by these fluctuations. Our budgeted revenue and income before taxes amounts were $778,000,000 and $127,692,000, respectively.

In computing the bonus payout, we multiply one-half of the target bonus by the percentage of budgeted revenues represented by actual revenues, and the remaining one-half of the target bonus by the percentage of budgeted income before taxes represented by actual income before taxes, in each case only if the percentage is at least 100 percent. In fiscal year 2007, our actual revenues were 100.99 percent of budgeted revenues, and our actual income before taxes was 106.23 percent of budgeted income before taxes. Accordingly, the incentive bonus amounts payable to Messrs. Giannopoulos, Kaufman and Patz equaled 103.61 percent of their respective target bonuses.

For Messrs. Jammet and Interlandi, we used a similar methodology, but applied the revenues and income before taxes measures to their respective business units: for Mr. Jammet, the Latin America region, and for Mr. Interlandi, North American dealers and district offices. The reasons for selecting these measures for Messrs. Jammet’s and Interlandi’s respective business units were essentially similar to those described above with respect to Messrs. Giannopoulos, Kaufman and Patz.

The Compensation Committee has the discretion to reduce the incentive bonuses calculated pursuant to the above formulae, but did not exercise this discretion in fiscal 2007.

We sometimes supplement the amounts payable in accordance with the above with additional discretionary bonuses. For fiscal year 2007, the Compensation Committee awarded each of the named executive officers additional discretionary bonuses in recognition of our strong performance for the 2007 fiscal year, noting particularly that our operating profit on a consolidated basis after accrual of all discretionary bonuses exceeded our internally-set expectations. The Compensation Committee also considered worldwide growth rates and new customer contract signings as part of its analysis of bonuses to be awarded for fiscal year 2007.

Stock Options

S tock options are directly linked to shareholder value, since the value of stock options is dependent on increases in the market price of our stock. Therefore, the principal objective of our stock option grants is to align the interests of our executives to our shareholders. In addition, our stock option awards are designed to serve as an incentive to continued employment, since they typically vest over a period of three years.

The Compensation Committee’s grant of stock options in fiscal year 2007 was not based on objective criteria. Mr. Giannopoulos recommended to the Committee the number of shares underlying stock options to be granted to employees, including the named executive officers. Mr. Giannopoulos has declined to accept any stock options since November 2004. He recommended that the other named executive officers with company-wide authority, namely Messrs. Kaufman and Patz, each be granted options to purchase 65,000 shares and that Messrs. Interlandi and Jammet, who have responsibility over particular business units each receive a grant of 15,000 shares. The principal factors underlying the recommendations included the company’s overall financial performance, the responsibilities and personal performance of each named executive officer, and an evaluation of the strategic assignments on which the named executive actively works. For fiscal year 2007, the Compensation Committee approved the recommendations made by Mr. Giannopoulos.

The number of shares underlying stock options granted to the named executive officers are set forth below in the Grants of Plan Based Awards table under the column heading, “All Other Option Awards: Number of Securities Underlying Options.” For additional information regarding stock option terms, see the narrative accompanying the Grants of Plan Based Awards table. The dollar amounts shown in the Summary Compensation Table generally reflect the dollar amounts recognized for financial statement purposes. Therefore, it includes amounts with respect to only a portion of the stock options granted in fiscal year 2007, while also including amounts from earlier option grants. See the footnotes to the Summary Compensation Table for further information.

Other

We do not provide perquisites or personal benefits to the named executive officers other than standard health benefits available to all employees. We do not offer to the named executive officers any reimbursement for financial services, air travel (other than reimbursement for business travel), country club memberships, or car allowances.

STOCK OPTION GRANT PRACTICES

While the Compensation Committee generally makes decisions regarding the grant of options throughout the year, it limits the effective dates of any grant to the next succeeding “authorized grant date.” There are five authorized grant dates each year: (i) the day of the annual meeting of stockholders; (ii) the third business day after the public release of the quarterly earnings for the quarter ending March 31; (iii) the third business day after the public release of the annual earnings for the fiscal year ending June 30; (iv) the third business day after the public release of the quarterly earnings for the quarter ending September 30; and (v) the third business day after the public release of the quarterly earnings for the quarter ending December 31. We believe that our stock option grant practices are appropriate and eliminate any questions regarding “timing” of grants in anticipation of material events.

RETIREMENT AND OTHER POST-EMPLOYMENT PLANS AND AGREEMENTS

We have several plans and agreements that enable our named executive officers to accrue retirement benefits as the executives continue to work for us or that provide severance benefits upon certain types of employment termination events. These plans and agreements have been adopted and amended at various times over the past 12 years and have been designed to be a part of a competitive compensation package.

The MICROS Systems Inc. 401(k) Retirement Plan - This plan is a tax-qualified defined contribution plan available to our employees. All of the named executive officers participate in this plan. Under the plan, an employee may contribute, subject to Internal Revenue Code limitations (which, among other things, limited annual contributions in 2007 to $15,500), up to a maximum of 100 percent of his or her eligible compensation on a pre-tax basis. The plan does not permit after-tax contributions. We provide matching contributions targeted at 50 percent of the first 5 percent of eligible compensation contributed by the employee. Amounts credited to an employee’s account in the plan may be invested among a number of funds. MICROS Systems, Inc. common stock is not currently offered as an investment. A participant’s account is adjusted to reflect the rate of return, positive or negative, of the investment.

Supplemental Executive Retirement Plan (“SERP”) - Our SERP is a defined benefit plan that provides ten annual payments, each equal to a percentage of the participant’s annual salary, at the time of the participant’s retirement or earlier death. All of the named executive officers participate in the SERP. The percentage of salary subject to the annual payment ranges from 18 percent to 30 percent depending on the age of the participant at the time of retirement or death. No payment is made if the participant terminates employment for a reason other than death prior to the participant’s 62nd birthday. See the narrative accompanying the Nonqualified Deferred Compensation table for further information.

Change of Control and Severance Provisions in Employment Agreements with Messrs. Giannopoulos, Kaufman and Patz - Our employment agreements with Messrs. Giannopoulos, Kaufman and Patz each provide for payments upon termination by the company other than for “good cause” and upon a termination by the executive for “good reason” or following a “change of control”. Mr. Giannopoulos’ agreement differs from Messrs. Kaufman’s and Patz’s with respect to the scope of the payments and the definition of “change of control”. See “Severance Payments” below for additional information. We included the change of control payment provisions to provide some financial security to the executives; this should enhance management stability during a period where there may be uncertainty associated with a change of control. These change of control arrangements also are designed to assure that the covered executives consider fully and support, if appropriate, any proposed corporate transactions involving a change of control that may be in the best interests of our shareholders. The termination payment provisions also provide financial security and clear statements of the rights of the executive officers, and protect against a change in employment and other terms that would be unfavorable to the executive officer.

MANAGEMENT DISCUSSION FROM LATEST 10K

OVERVIEW

We are a leading worldwide designer, manufacturer, marketer, and servicer of enterprise information solutions for the global hospitality and specialty retail industries. As detailed elsewhere in this report on Form 10-K, our enterprise solutions comprise three major areas: hotel information systems, restaurant information systems, and specialty retail information systems. We also offer a wide range of related services. We distribute our products and services directly and through a network of independent dealers and distributors.
The markets in which we operate are highly competitive. We compete on various bases, including product functionality, service capabilities, price, and geography. We believe that our competitive strengths include our established global distribution and service network, our ability to offer a broad array of hardware, software and service products to the hospitality and retail industry and our corporate focus on providing specialized information systems solutions.
We are organized and operate in four operating segments: U.S., Europe, the Pacific Rim and Latin America regions. As the products and services for all new business acquisitions are all similar to those ours, the new business acquisitions have been incorporated into the existing four operating segments based on their respective geographical locations, and operated and managed as a part of that operating segment.
For the purposes of applying SFAS No. 131, we have identified U.S. as a separate reportable segment and has aggregated our three international operating segments into one reportable segment, international, as the three international operating segments share many similar economical characteristics. The management views the U.S. and international segments separately in operating its business, although the products and services are similar for each segment.
We continue to see overall growth in the hospitality and retail industries; slower growth in some sectors has historically tended to be offset by faster growth in other areas. We have seen particular growth in our quick service restaurant business, including that generated by sales to various quick service restaurant chains with whom we have announced alliances.


Revenue recognition
Revenue is generated from software licenses, hardware and service and support. Revenue is recognized in accordance with American Institute of Certified Public Accountants Statement of Position 97-2 (“SOP 97-2”), “Software Revenue Recognition,” as modified by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions and the Securities and Exchange Commission Staff Accounting bulletin No. 104, “Revenue Recognition in Financial Statements. Revenue under multiple element arrangements, which typically include hardware, software licenses, and maintenance agreements sold together, are allocated to each element in the arrangement using the residual method prescribed by SOP 98-9, based on vendor specific objective evidence (“VSOE”) of the fair value of any undelivered elements of the arrangement, i.e., an allocated portion of revenue is deferred from the arrangement, equivalent to the fair value of undelivered elements.
Revenue from software license, hardware and service and support are generally recognized when the four basic criteria of SOP 97-2 are met as follows:



Persuasive evidence of an arrangement exists: We require a contract signed by both parties to the agreement or a purchase order received from the customer as persuasive evidence of an arrangement.



Delivery has occurred or services have been rendered: Delivery occurs at FOB shipping point when provided to a common carrier, if the risk of ownership has passed to the buyer or in the case of electronic delivery, delivery occurs when the customer is given access to the licensed programs. If the risk of ownership has not passed to the buyer when provided to the common carrier, delivery occurs when the risk has passed to the buyer.



Fixed or determinable fee: We consider the license fee to be fixed or determinable if the fee is not subject to refund or adjustment and is payable within twelve months of delivery with generally no more than 20% of the contract price due at the end of the payment term. If the arrangement fee is not fixed or determinable, we recognize the revenue as amounts become due and payable. We consider service fees to be fixed or determinable if the service fee or rates for time and material contracts are not subject to refund or adjustment.



Collection is probable: We perform a credit review for significant transactions at the time the arrangement is executed to determine the credit-worthiness of the customer. Collection is deemed probable if we expect that the customer will be able to pay amounts under the arrangement as they become due. If we determine from the outset of an arrangement that collection is not probable, revenue is recognized as collection occurs.
Costs related to shipping and handling and billable travel expenses are included in cost of sales. The revenue is reduced for estimated customer returns and allowances.

Since our revenue deferral for undelivered elements under multiple element arrangements is based on VSOE of the fair value of any undelivered elements of the arrangement, our financial results for current fiscal year and future periods could be significantly different if our estimates of the VSOE of the fair values of undelivered elements change. Additionally, significant differences in the actual customer returns and allowances to our estimates could also significantly affect our financial results.

Share-based compensation
We account for our option awards granted under the stock option program in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 123(R), “Share-Based Payment,” which became effective July 1, 2005 for us. We adopted the “Modified Prospective Application” transition method, which did not result in restatement of previously issued financial statements. In accordance with SFAS No. 123(R), the estimated fair value of awards granted after the effective date of SFAS No. 123(R) are measured, and non-cash share-based compensation expense adjusted for expected pre-vesting forfeitures are recognized ratably over the requisite service period of options in the consolidated statement of operations. In addition, non-cash share-based compensation expense adjusted for expected pre-vesting forfeitures is recognized for the non-vested portion of awards that were granted before the effective date of SFAS No. 123(R) as those options become incrementally vested.

As we value stock options using the Black-Scholes option pricing model, which was developed for use in estimating the fair value of traded options that are fully transferable and have no vesting restrictions, we are required to input highly subjective assumptions about volatility rates, expected term of options, and applicable interest rates in the option pricing model. Expected volatility is based on historical stock prices. The expected term of options granted is based on historical option activities, adjusted for the remaining option life cycle by assuming ratable exercise of any unexercised vested options over the remaining term. For this, we separate groups of employees that have historically exhibited similar behavior with regard to option exercises and post-vesting cancellations. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Total expense recorded in any period can be significantly different depending on several variables, including any changes to these assumptions, especially the number of share-based awards that vest, pre-vesting cancellations, and the estimated fair value of those vested awards.

Inventory
Inventory is stated at the lower of standard cost, which approximates cost, or market. Standard cost is determined principally by the first-in, first-out pricing method. We maintain a reserve for obsolescence for inventory in the amount of approximately $9.9 million as of June 30, 2007 and 2006.

Allowance for doubtful accounts
We maintain allowance for doubtful accounts for estimated losses that may result from the inability of our customers to make required payments and for limited circumstances when the customer disputes the amounts due to us. Our methodology for determining this allowance requires estimates and is based on the age of the receivable, customer payment practices and history, inquiries, credit reports from third parties and other financial information. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowance may be required which could affect our financial results in future periods. As of June 30, 2007 and 2006, accounts receivable totaled approximately $180.2 million and $141.2 million, net of an allowance for doubtful accounts of approximately $23.1 million and $20.3 million, respectively. Additionally, bad debt expenses for the fiscal years 2007, 2006 and 2005 were approximately $3.4 million, $5.4 million and $5.7 million, respectively.

Capitalized software development costs
Costs incurred in the research and development of new software products to be licensed to others, costs primarily consisting of salaries, employee benefits and administrative costs, are expensed as incurred and included in research and development expenses until technological feasibility is established. The capitalization of software development costs on a product-by-product basis starts when a product’s technological feasibility has been established and the capitalization stops when the product is available for general release to customers, at which time amortization begins. Technological feasibility is established when the product reaches the working model stage. The cost of purchased software is also capitalized.
Annual amortization of capitalized software development costs are charged to software cost of sales, and is the greater of (1) the amount computed using the ratio that each capitalized software product’s current fiscal year gross revenue is to the total of current fiscal year and anticipated future gross revenues for that product, or (2) the amortization based on straight-line method over the remaining estimated economic life of the product. If we incorrectly estimate the remaining economic life of a product or the anticipated future gross revenues of a product, our future financial results could be materially affected if the unamortized costs are written off or if the amortization is accelerated. Amortization expense for the fiscal years 2007, 2006 and 2005 were approximately $8.4 million, $7.0 million and $7.5 million, respectively. Additionally, during the fiscal year 2006, we wrote off approximately $1.6 million in capitalized software costs related to products for which no future revenue was projected.

Long-lived assets including finite-lived purchased intangible assets
We evaluate long-lived assets, including finite-lived purchased intangible assets, for impairment whenever events and changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” When indicators of impairment are present, we compare the fair value of the assets, based on the undiscounted cash flows the assets are expected to generate, to the book value of the assets. If the fair value is less than book value, the asset is impaired and we recognize an impairment loss. The impairment loss represents the excess of book value over fair value based on a discounted cash flow approach or market values, if available.

The process of evaluating the potential impairment of long-lived assets including finite-lived purchased intangible assets is highly subjective and requires significant judgment at many points during the analysis. In estimating the fair value of the assets for the purposes of our analyses, we make estimates and judgments about the future cash flows of these assets. The cash flow forecasts are based on assumptions that are consistent with the plans and estimates used to manage the Company. A determination that assets are impaired could result in a significant charge in future periods.

Goodwill and indefinite-lived purchased intangible assets

SFAS No. 142, “Goodwill and Other Intangible Assets,” prohibits the amortization of goodwill and indefinite-lived purchased intangible assets. We assess whether goodwill and our only indefinite-lived purchased intangible assets, trademarks, are impaired in accordance with SFAS No. 142 on an annual basis, during the first quarter of each fiscal year. Goodwill is evaluated for impairment by comparing the fair value of each reporting unit (the Company’s four operating segments consisting of U.S., Europe, the Pacific Rim and Latin America) to its book value. The fair value of each reporting unit is determined based on a weighting of the income approach (i.e., discounted future income flow) and market approach (i.e., evaluating against the purchase and sale of comparable assets in the relevant industry) to value. If the fair value of the reporting unit exceeds the book value of the net assets assigned to that unit, goodwill is not impaired. If goodwill is impaired, we recognize an impairment loss based on the amount by which the book value of goodwill exceeds its implied fair value. The implied fair value of goodwill is determined by deducting the fair value of a reporting unit’s identifiable assets and liabilities from the fair value of the reporting unit as a whole, as if that reporting unit had just been acquired and the purchase price were being initially allocated.

Trademarks are evaluated for impairment by comparing their fair value to book value. We estimate the fair value of trademarks using an income approach to value, and recognize an impairment loss if the estimated fair value of a trademark is less than its book value.
Additional impairment assessments may be performed on an interim basis if we encounter events or changes in circumstances that would indicate that, more likely than not, the book value of goodwill and/or trademarks has been impaired.
The process of evaluating the potential impairment of goodwill and/or trademarks is highly subjective and requires significant judgment at many points during the analysis. In estimating the fair value of the reporting units with recognized goodwill for the purposes of our annual or periodic analyses, we make estimates and judgments about the future cash flows of these businesses. The cash flow forecasts are based on assumptions that are consistent with the plans and estimates used to manage the underlying reporting units. We also consider our market capitalization on the date the analysis is performed. A determination that goodwill or intangible assets are impaired could result in a significant charge in future periods.

Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on the deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized. If we determine that we will not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period in which the determination is made.

RESULTS OF OPERATIONS
During the three fiscal years ending June 30, 2007, we acquired several companies and accordingly, our results include activities from these acquisitions since their respective acquisition dates. See Note 3, “Acquisitions” in the Notes to Consolidated Financial Statements for further detail on acquisitions.

Comparison of Fiscal Year 2007 to Fiscal Year 2006

Revenue

Revenue increased approximately $106.8 million, or 15.7% to approximately $785.7 million for fiscal year 2007 compared to fiscal year 2006 primarily due to the following:



An approximately $75.8 million or 22.1% increase in services revenue is primarily due to additional revenue generated as a result of various acquisitions and the continued expansion of our customer base coupled with increased support revenue from existing customers (primarily through additional services). We acquired the RedSky IT Hospitality, Travel and Retail subsidiaries of RedSky IT in January 2007 and we acquired various MICROS distributors during fiscal year 2007. Additionally, we acquired CommercialWare, Inc. in February 2006;




An approximately $18.3 million or 8.5% increase in hardware revenue is primarily due to the foreign currency translation mainly between the Euro and U.S. dollar and additional revenue generated as a result of the acquisitions, as discussed above; and,



An approximately $12.7 million or 10.6% increase in software revenue is primarily due to additional revenue generated as a result of the acquisitions and foreign currency translation, both as discussed above. In total, the recurring support revenue contributed approximately 54.4% and the installation revenue contributed approximately 22.5% of the service revenue increase in fiscal year 2007 compared to fiscal year 2006.
The international segment revenue for fiscal year 2007 increased approximately $97.8 million which was a result of the following:



An approximately $62.3 million or 36.6% increase in services revenue is due to the continued expansion of our customer base coupled with increased recurring support revenue from existing customers (primarily through additional services), additional revenue generated through the acquisitions and foreign currency translation, as discussed above;



An approximately $19.2 million or 21.8% increase in hardware revenue is primarily due to increased sales volume and the foreign currency translation, as discussed above; and,



An approximately $16.3 million or 24.9% increase in software revenue is due to foreign currency translation, increased sales volume and additional revenue generated from the acquisitions, as discussed above.
The U.S. segment revenue increased approximately $9.0 million for fiscal year 2007 primarily resulting from additional revenue generated through the acquisitions, as discussed above, and an increase in services revenue due to the continued expansion of our customer base coupled with increased recurring support revenue from existing customers (primarily through additional services).

Cost of Sales

For fiscal year 2007, cost of sales as a percent of revenue decreased 1.5% to 47.6% compared to fiscal year 2006. Hardware cost of sales as a percent of related revenue decreased primarily as a result of an improvement in Workstation 4 margin percentage, coupled with an increase in Workstation 4 revenue compared to fiscal year 2006. Workstation 4 generates higher margin than other hardware products. Software cost of sales as a percent of related revenue increased primarily due to a decrease in the third party software margin percentage compared to fiscal year 2006. Additionally, the revenue from the OPERA suite of products was comparable to fiscal year 2006, but represented a lower percentage of total software revenue. Because the OPERA suite of products generates much higher margins than our third party software, this product mix change had the impact of increasing the overall software cost of sales as a percent of related revenue.
Service cost of sales as a percent of related revenue decreased primarily due to a decrease in travel expenses and maintenance service part costs. The decreases in travel expenses and parts costs were partially offset by an increase in overall service labor costs resulting mainly from higher than average service labor costs associated with some of our newly acquired subsidiaries.

Selling, General and Administrative (“SG&A”) Expenses
SG&A expenses, as a percent of revenue, increased 0.5% to 32.4% compared to 31.9% in fiscal year 2006. This increase is primarily due to the following:



Higher SG&A expenses as a percent of related revenue for the newly acquired subsidiaries described under Revenue; and,



Increase in non-cash share-based compensation expense of approximately $4.4 million recorded as a component of SG&A expenses for the fiscal year 2007 compared to the fiscal year 2006. The non-cash share-based compensation expenses for fiscal year 2007 include a one-time charge of approximately $0.7 million resulting from accelerated vesting of unvested options due to the death of an officer of the Company. See “Share-Based Compensation Expense” below for further discussion.



The above increases in SG&A expenses were partially offset by overall decreases in remaining SG&A expenses as a percent of total revenue, primarily due to our ability to leverage our costs with the increase in total revenue.

Research and Development (“R&D”)

The increases in total R&D incurred of approximately $5.2 million and total R&D expenses of approximately $6.8 million are primarily due to additional expenses incurred by some of our newly acquired subsidiaries, an increase in R&D labor costs due to an increase in the number of R&D employees and an approximately $0.5 million increase in non-cash share-based compensation expenses allocated to R&D. The decrease in total capitalized software development costs is primarily due to the release of our capitalized retail software product in December of 2005.

For fiscal year 2007, non-cash share-based compensation expenses allocated to R&D were not capitalized because stock options were not granted to employees whose labor costs were capitalized as software development costs. For fiscal year 2006, less than $0.1 million in non-cash share-based compensation expenses allocated to R&D had been capitalized because stock options were granted to employees whose labor is capitalized.

Depreciation and Amortization Expenses
Depreciation and amortization expenses for fiscal year 2007 increased approximately $2.3 million to approximately $12.7 million compared to fiscal year 2006. The increase is primarily due to additional expense incurred as a result of the newly acquired subsidiaries as discussed above. Additionally, foreign currency fluctuation increased depreciation and amortization expenses for the fiscal year 2007 by approximately $0.5 million.

Share-Based Compensation Expenses
We account for our option awards granted under the stock option program in accordance with SFAS No. 123(R), “Share-Based Payment.” The estimated fair value of awards granted after the effective date of SFAS 123(R) are measured and non-cash share-based compensation expenses adjusted for expected pre-vesting forfeitures are recognized ratably over the requisite service period of options in the consolidated statements of operations. In addition, non-cash share-based compensation expense adjusted for expected pre-vesting forfeitures is recognized for the non-vested portion of awards that were granted before the effective date of SFAS No. 123(R) as those options become incrementally vested.
For fiscal year 2007, we recognized non-cash share-based compensation expenses adjusted for expected pre-vesting forfeitures of approximately $14.0 million based on the estimated fair values of the vested portions of (1) approximately 0.7 million shares of underlying options granted during the fiscal year; (2) approximately 0.9 million shares granted during fiscal year 2006; and, (3) approximately 0.7 million shares of underlying options granted before the effective date of SFAS No. 123(R) that were unvested as of the effective date. For fiscal year 2006, the non-cash share-based compensation expenses of approximately $9.1 million was based on the estimated fair values of the vested portions of (1) approximately 0.9 million shares of underlying options granted during fiscal year 2006 and (2) approximately 1.5 million shares of underlying options granted before the effective date of SFAS No. 123(R) that were unvested as of the effective date.

The non-cash share-based compensation expenses allocated to SG&A for fiscal year ended June 30, 2007 include a one-time charge of approximately $0.7 million resulting from an accelerated vesting of unvested options due to the death of an officer of the Company. Under our stock option plan, options immediately vest upon death.
As of June 30, 2007, there was approximately $21.9 million in non-cash share-based compensation cost related to non-vested awards not yet recognized in our consolidated statements of operations. This cost is expected to be recognized over a weighted-average period of 2.0 years.

Income from Operations
Income from operations for fiscal year 2007 increased approximately $19.3 million, or 21.2%, to approximately $110.6 million, compared to fiscal year 2006. The increase is mainly due to an overall increase in sales volume coupled with lower cost of sales as a percent of revenue. This increase was partially offset by an increase in expenses as a percent of revenue and approximately $4.9 million increase in non-cash share-based compensation expense all of which are explained above in more detail.

Non-operating Income (Expense)
Net non-operating income for fiscal year 2007 was approximately $11.1 million compared to approximately $4.4 million for fiscal year 2006. The increase of approximately $6.7 million is primarily due to:



An increase in interest income of approximately $5.3 million due to overall higher cash and cash equivalents and short-term investment balances and overall higher interest rates earned on these balances;



Approximately $1.3 million in one-time income due to a death benefit received on corporate owned life insurance policy following the death of a covered officer of the Company; and,



A decrease in the foreign exchange transaction losses of approximately $0.5 million to a loss of approximately $0.4 million for fiscal year 2007 compared to a loss of approximately $0.9 million for fiscal year 2006.

Income Tax Expense
The effective tax rates for fiscal year 2007 and 2006 were 33.5% and 32.9%, respectively. The increase in tax rate was primarily attributable to the negative impact of the changes in legislation related to extra-territorial income exclusions as well as the non-deductible nature of certain non-cash share-based compensation items and other non-deductible compensation items. These negative factors were partially offset by the benefit recognized from certain activities where the mix of earnings were subject to a lower statutory tax rate than that recognized in the U.S., renewal of research and development tax credit and the phase-in of the deduction for domestic production activities.

Net Income and Diluted Net Income per Common Share
Net income for fiscal year 2007 increased approximately $16.5 million, or 25.9%, to approximately $80.0 million, compared to fiscal year 2006. The increase is mainly due to an overall increase in sales volume coupled with lower cost of sales as a percent of revenue and an increase in interest income of approximately $5.3 million. These increases were partially offset by an increase in operating expenses as a percent of revenue and approximately $4.9 million increase in non-cash share-based compensation expense, all of which are explained above in more detail.
Diluted net income per share for fiscal year 2007 increased $0.38 per share, or 24.4%, to $1.94 per share, compared to fiscal year 2006. Diluted net income for fiscal year 2007 was negatively impacted by $0.27 per diluted share for non-cash share-based compensation expense compared to $0.18 per diluted share for fiscal year 2006.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

All references to share data in this Item 2 have been adjusted to reflect the two-for-one stock split effected on February 5, 2008.

Revenue:

Three Months Ended March 31, 2008:

For the three months ended March 31, 2008, total revenue was approximately $237.2 million, an increase of approximately $36.6 million, or 18.3% compared to the same period last year, of which approximately $12.9 million was a result of favorable foreign currency exchange rate fluctuation, mainly between the Euro and the U.S. dollar. The increase in total revenue is due primarily to an increase in service revenue. The increase in our service revenue primarily resulted from expansion of our customer base and increases in the volume of our support services that reflects increased recurring support revenue from existing customers. The increase in recurring support revenue contributed 56.3% and the increase in installation revenue relating to the expansion of our customer base contributed 30.8% of the service revenue increase. Additionally, approximately $7.5 million of the increase in our service revenue was due to the favorable foreign currency exchange rate fluctuation. The increase in hardware revenue reflects an overall sales volume increase and approximately $3.2 million due to favorable foreign currency exchange rate fluctuation. We released Workstation 5, our latest point of sale hardware, in October 2007.

The International segment sales for the three months ended March 31, 2008 increased approximately $22.2 million as a result of the following:




An approximately $16.3 million or 27.2% increase in services revenue, of which approximately $7.5 million was due to favorable foreign currency exchange rate fluctuation;



An approximately $3.8 million or 13.3% increase in hardware sales, of which approximately $3.2 million was due to favorable foreign currency exchange rate fluctuation; and



An approximately $2.1 million or 9.7% increase in software sales, of which approximately $2.2 million was due to favorable foreign currency exchange rate fluctuation .

The above increases were due to continued expansion of our customer base coupled with increased recurring support revenue from existing customers, approximately $12.9 million in additional revenue generated from favorable foreign currency exchange rate fluctuation, mainly between Euro and U.S. dollar and additional revenue generated from various acquisitions that were completed after March 31, 2007.

U.S. segment sales increased approximately $14.5 million for the three months ended March 31, 2008 compared to the same period last year. The increase was primarily the result of an increase in service revenues from expansion of our customer base coupled with recurring support revenue from existing customers.

Cost of Sales:

Three Months Ended March 31, 2008:

For the three months ended March 31, 2008 and 2007, cost of sales as a percent of revenue were 47.6%. Hardware cost of sales as a percent of related revenue increased 1.2% compared to the same period last year primarily as a result of an increase in freight costs, partially offset by a favorable change in product mix. The sale of Workstation 4 and Workstation 5 (released in October 2007) generate higher margin than third party hardware sales.

Software cost of sales as a percent of related revenue decreased approximately 2.1% compared to the same period last year. The decrease was a result of an overall decrease in substantially all software costs and a favorable change in product mix between internally developed software versus software purchased from third party suppliers. Service costs as a percent of related revenue increased approximately 0.1% compared to the same period last year due to increased travel costs, substantially offset by lower labor costs.

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