Micros Systems 10Q 2006 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2006

Commission file number 0-9993

MICROS SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

MARYLAND		52-1101488

(State of incorporation)		(I.R.S. Employer Identification Number)

7031 Columbia Gateway Drive, Columbia, Maryland		21046-2289

(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code: 443-285-6000

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days.

YES x

NO o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘accelerated filer and large accelerated filer’ in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o

NO x

As of April 30, 2006, there were issued and outstanding 38,870,541 shares of Registrant’s Common Stock at $0.0125 par value.

MICROS SYSTEMS, INC. AND SUBSIDIARIES
Form 10-Q
For the three months and nine months ended March 31, 2006

Part I - Financial Information

Item 1. Financial Statements

General

The information contained in this report is furnished for the Registrant, MICROS Systems, Inc., and its subsidiaries (referred to collectively herein as “MICROS” or the “Company”). In the opinion of management, the information in this report contains all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the results for the interim periods presented. The financial information presented herein should be read in conjunction with the financial statements included in the Registrant’s Annual Report filed on Form 10-K for the fiscal year ended June 30, 2005, as filed with the Securities and Exchange Commission.

MICROS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per share data)

	March 31, 2006		June 30, 2005

ASSETS
Current Assets:
Cash and cash equivalents	$	182,998	$	153,521
Accounts receivable, net of allowance for doubtful accounts of $19,960 at March 31, 2006 and $16,202 at June 30, 2005		150,077		131,423
Inventory, net		45,153		42,664
Deferred income taxes		13,111		10,883
Prepaid expenses and other current assets		27,074		28,934

Total current assets		418,413		367,425
Property, plant and equipment, net of accumulated depreciation and amortization of $71,264 at March 31, 2006 and $64,725 at June 30, 2005		23,382		21,308
Deferred income taxes, non-current		13,679		18,195
Goodwill		104,680		86,781
Intangible assets, net of accumulated amortization of $3,087 at March 31, 2006 and $2,315 at June 30, 2005		10,764		10,958
Purchased and internally developed software costs, net of accumulated amortization of $40,417 at March 31, 2006 and $36,062 at June 30, 2005		37,071		40,160
Other assets		2,525		2,401

Total assets	$	610,514	$	547,228

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Bank lines of credit	$	1,728	$	2,387
Accounts payable		37,433		38,253
Accrued expenses and other current liabilities		81,256		74,543
Current portion of capital lease obligations		142		162
Income taxes payable		7,991		3,260
Deferred income taxes		362		362
Deferred service revenue		74,070		58,022

Total current liabilities		202,982		176,989
Capital lease obligations, net of current portion		361		251
Deferred income taxes, non-current		14,648		16,105
Other non-current liabilities		7,907		5,905
Commitments and contingencies (Note 13)
Minority interests		3,010		2,807
Shareholders’ Equity:
Common stock, $0.0125 par; authorized 50,000 shares; issued and outstanding 38,830 at March 31, 2006 and 38,645 at June 30, 2005		485		482
Capital in excess of par		94,401		99,990
Retained earnings		281,470		239,320
Accumulated other comprehensive income		5,250		5,379

Total shareholders’ equity		381,606		345,171

Total liabilities and shareholders’ equity	$	610,514	$	547,228

The accompanying notes are an integral part of the consolidated financial statements.

MICROS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)

	Three Months Ended March 31,						Nine Months Ended March 31,

	2006			2005			2006			2005

Revenue:
Hardware	$	56,087		$	49,871		$	152,585		$	131,804
Software		28,788			28,762			85,045			75,183
Service		86,266			74,719			249,493			218,257

Total revenue		171,141			153,352			487,123			425,244

Cost of sales:
Hardware		38,234			32,628			103,371			88,220
Software		6,051			6,704			18,458			17,965
Service		41,773			36,226			119,978			105,040

Total cost of sales		86,058			75,558			241,807			211,225

Gross margin		85,083			77,794			245,316			214,019
Selling, general and administrative expenses		54,163			48,540			157,851			134,397
Research and development expenses		6,548			7,201			19,305			20,864
Depreciation and amortization		2,450			2,681			7,557			7,627

Total operating expenses		63,161			58,422			184,713			162,888

Income from operations		21,922			19,372			60,603			51,131
Non-operating income (expense):
Interest income		1,289			616			3,276			1,547
Interest expense		(32	)		(946	)		(107	)		(1,177	)
Other (expense) income, net		173			76			(561	)		711

Total non-operating income (expense), net		1,430			(254	)		2,608			1,081

Income before taxes, minority interests and equity in net earnings of affiliates		23,352			19,118			63,211			52,212
Income tax provision		7,589			4,777			20,544			16,029

Income before minority interests and equity in net earnings of affiliates		15,763			14,341			42,667			36,183
Minority interests and equity in net earnings of affiliates		(169	)		(163	)		(517	)		(591	)

Net income (1)	$	15,594		$	14,178		$	42,150		$	35,592

Net income per common share (1):
Basic	$	0.40		$	0.37		$	1.09		$	0.96
Diluted	$	0.38		$	0.35		$	1.04		$	0.90
Weighted-average number of shares outstanding:
Basic		38,914			37,885			38,619			37,255
Diluted		40,730			40,038			40,648			39,503


(1) See Note 3, “Share-based Compensation” in Notes to Consolidated Financial Statements.

The accompanying notes are an integral part of the consolidated financial statements.

MICROS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Condensed and unaudited, in thousands)

	Nine Months Ended March 31,

	2006			2005

Net cash flows provided by operating activities:	$	67,931		$	49,140
Cash flows from investing activities:
Purchases of short-term investments		—			(156,200	)
Proceeds from sales of short-term investments		—			142,200
Net cash paid for acquisitions		(13,200	)		(13,863	)
Purchases of property, plant and equipment		(8,281	)		(7,382	)
Internally developed software		(3,410	)		(4,421	)
Purchases of other intangible assets		(575	)		—
Disposal of property, plant and equipment		101			—

Net cash flows used in investing activities		(25,365	)		(39,666	)

Cash flows from financing activities:
Repurchases of stock		(40,205	)		(21,600	)
Proceeds from issuance of stock		15,897			23,029
Windfall tax benefits from stock option exercises		12,195			—
Principal payments on line of credit		(628	)		(31	)
Dividends to minority owners		(262	)		(319	)
Net decrease in capital lease obligations		(70	)		(94	)
Proceeds from lines of credit		—			34

Net cash flows (used in) provided by financing activities		(13,073	)		1,019

Effect of exchange rate changes on cash and cash equivalents		(16	)		(19	)

Net increase in cash and cash equivalents		29,477			10,474
Cash and cash equivalents at beginning of period		153,521			83,451

Cash and cash equivalents at end of period	$	182,998		$	93,925

The accompanying notes are an integral part of the consolidated financial statements.

MICROS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
For the Nine Months Ended March 31, 2006
(Unaudited, in thousands)

												Accumulated Other Comprehensive Income
	Common Stock						Capital in Excess of Par
										Retained Earnings
	Shares			Amount						Retained Earnings					Total

Balance, June 30, 2005		38,645		$	482		$	99,990		$	239,320	$	5,379		$	345,171
Comprehensive income:
Net income											42,150					42,150
Foreign currency translation adjustments													(129	)		(129	)

Total comprehensive income																42,021
Share-based compensation								6,527								6,527
Stock issued upon exercise of options		1,106			14			15,883								15,897
Repurchases of stock		(921	)		(11	)		(40,194	)							(40,205	)
Income tax benefit from options exercised								12,195								12,195

Balance, March 31, 2006		38,830		$	485		$	94,401		$	281,470	$	5,250		$	381,606

The accompanying notes are an integral part of the consolidated financial statements.

MICROS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months and nine months ended March 31, 2006

1. Basis of presentation

The accompanying consolidated financial statements of MICROS Systems, Inc. and its subsidiaries (collectively, the “Company”) have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2005.

Certain information and footnote disclosures that are normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations. The information reflects all normal and recurring adjustments that, in the opinion of management, are necessary for a fair statement of the financial position of the Company and its results of operations for the interim periods set forth herein. The results for the three months and nine months ended March 31, 2006 are not necessarily indicative of the results to be expected for the full year or any future periods.

2. Acquisition of CommercialWare, Inc.

On February 1, 2006, the Company completed its acquisition of CommercialWare, Inc. (“CommercialWare”) by acquiring all of the issued and outstanding stock of CommercialWare. The acquisition, for a total cash purchase of $13.2 million, net of cash acquired, does not include CommercialWare’s subsidiary OrderMotion. Headquartered in Natick, Massachusetts, CommercialWare is a provider of cross-channel retail solutions and is operating as a division of Datavantage, a wholly-owned subsidiary of the Company. The purchase price allocation is not finalized and is subject to adjustments. The pro forma operating results as a result of the acquisition of CommercialWare is not material to the financial statements presented herein.

3. Share-based compensation

The Company has incentive and non-qualified stock options outstanding that were granted to directors, officers, and other employees pursuant to authorization by the Board of Directors. Currently, options are not granted to directors who are not employees of or consultants to the Company. The exercise price of all options equals the market value on the date of the grant. Substantially all of the options granted are exercisable pursuant to a three-year vesting schedule whereby one-third of the options vest upon the first anniversary of the grant, the second third of the options vest upon the second anniversary of the grant, and the final third of the options vest upon the third anniversary of the grant. All outstanding options expire ten years from the date of grant. The Company has authorized approximately 15.8 million shares for awards of options, of which approximately 1.7 million shares are available for future grants as of March 31, 2006.

Three months and nine months ended March 31, 2006:

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 123(R), “Share-Based Payment,” a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” and superseding Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” This statement became effective July 1, 2005 for the Company and requires the Company to expense the fair value of grants made under the stock option program over the vesting period of each individual option agreement. The Company adopted the “Modified Prospective Application” transition method, which does not result in restatement of previously issued financial statements. Awards that are granted after the effective date of SFAS No. 123(R) were measured and non-cash share-based compensation expenses were recognized in the consolidated statements of operations in accordance with SFAS No. 123(R). In addition, non-vested awards that were granted before the effective date of SFAS No. 123(R) also result in recognition of non-cash share-based compensation expense. The Company recognizes non-cash share-based compensation expense ratably over the vesting period of options, adjusted for forfeiture rate.

MICROS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months and nine months ended March 31, 2006

For the three months and nine months ended March 31, 2006, in accordance with SFAS No. 123(R), the Company recognized non-cash share-based compensation expense of approximately $2.4 million and approximately $6.5 million, respectively. The expense was included in the consolidated statements of operations as follows:

(in thousands)	Three Months Ended March 31, 2006		Nine Months Ended March 31, 2006

Cost of sales	$	25	$	25
Selling, general and administrative		2,329		6,359
Research and development		73		143

Non-cash share-based compensation expense	$	2,427	$	6,527

For the three months and nine months ended March 31, 2006, the total income tax benefits recognized in the consolidated statements of operations for share-based compensation, recorded in accordance with SFAS No. 123(R), were approximately $0.2 million and approximately $1.5 million, respectively. No compensation expense has been capitalized because no stock options have been granted to employees whose labor is capitalized.

The Company values 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. In determining the expected term, the Company separates groups of employees that have historically exhibited similar behavior with regard to option exercises and post-vesting cancellations. The option-pricing model requires the input of highly subjective assumptions, such as those listed below. The volatility rates are based on historical stock prices. The expected life of options granted are based on historical data, which, as of March 31, 2006 is a partial option life cycle, adjusted for the remaining option life cycle by assuming ratable exercise of any unexercised vested options over the remaining term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The total expense to be recorded in future periods will depend on several variables, including the number of share-based awards that vest, pre-vesting cancellations, and the fair value of those vested awards.

The fair values of options granted were estimated on the date of grant using the following assumptions:

	Three Months Ended March 31, 2006			Nine Months Ended March 31, 2006

Weighted-average expected volatility		36	%		42	%
Expected volatility		36	%		34% - 46	%
Expected life		4.8 years			4.0 - 5.7 years
Expected dividend yield		0	%		0	%
Risk-free interest rate		4.5	%		3.9% - 4.5	%

The following is a summary of option activity:

(in thousands, except per share data and number of years)	Number of Shares			Weighted- Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value

Outstanding at June 30, 2005		5,228		$	19.28
Granted		790		$	46.90
Exercised		(1,106	)	$	14.38
Forfeited or expired		(18	)	$	23.97

Outstanding at March 31, 2006		4,894		$	24.82		6.5	$	101,457

Exercisable at March 31, 2006		3,392		$	18.82		5.3	$	90,669

MICROS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months and nine months ended March 31, 2006

The weighted-average grant-date fair value of options granted during the nine months ended March 31, 2006 was $20.83. The total intrinsic value, the difference between the exercise price and the market price on the date of exercise, of options exercised during the nine months ended March 31, 2006, was approximately $33.8 million.

The following is a summary of the status of, and changes in, non-vested shares:

(in thousands, except per share data)	Number of Shares			Weighted average Grant-date Fair Value

Non-vested at June 30, 2005		1,536		$	11.94
Granted		790		$	20.83
Vested		(807	)	$	10.24
Cancelled		(16	)	$	9.61

Non-vested at March 31, 2006		1,503		$	17.15

As of March 31, 2006, there was approximately $22.3 million in non-cash share-based compensation cost related to non-vested awards not yet recognized in the Company’s consolidated statements of operations. This cost is expected to be recognized over a weighted-average period of 2.3 years. The total fair value of shares vested during the nine months ended March 31, 2006 was approximately $8.3 million.

Cash received from options exercised during the nine months ended March 31, 2006 was approximately $15.9 million.

Three months and nine months ended March 31, 2005:

For the three months and nine months ended March 31, 2005, the Company applied the intrinsic value based method of accounting prescribed by APB No. 25, “Accounting for Stock Issued to Employees,” in accounting for the stock option awards. The Company had not recognized any related compensation expense in its consolidated statements of operations because the fair value of the stock underlying the options granted did not exceed the exercise price of the options on the date of grant. If compensation expense had been determined based on the weighted-average estimate of the fair value of each option granted consistent with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, the Company’s net income would have been reduced to pro forma amounts as follows:

(in thousands, except per share data)	Three Months Ended March 31, 2005			Nine Months Ended March 31, 2005

Net income – as reported	$	14,178		$	35,592
Deduct: total stock-based employee compensation expense determined under the fair value method, net of tax		(1,594	)		(4,210	)

Net income – pro forma	$	12,584		$	31,382

Basic net income per share:
As reported	$	0.37		$	0.96
Pro forma	$	0.33		$	0.84
Diluted net income per share:
As reported	$	0.35		$	0.90
Pro forma	$	0.31		$	0.79

MICROS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months and nine months ended March 31, 2006

The Company valued 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. The option-pricing models require the input of highly subjective assumptions, such as those listed below.

The fair values of options granted were estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Three Months Ended March 31, 2005			Nine Months Ended March 31, 2005

Expected volatility		46	%		46	%
Expected life		6.0 years			6.0 years
Expected dividend yield		0	%		0	%
Risk-free interest rate		4.1	%		3.8	%

The weighted-average fair values of each option granted during the three months and nine months ended March 31, 2005 were $16.26 and $16.14, respectively.

4. Inventory:

The components of inventory are as follows:

(in thousands)	March 31, 2006		June 30, 2005

Raw materials	$	8,701	$	7,360
Work-in-process		46		29
Finished goods		36,406		35,275

	$	45,153	$	42,664

The Company maintains a reserve for obsolescence for inventory of approximately $9.2 million at March 31, 2006 compared to approximately $7.4 million at June 30, 2005. The Company reserved approximately $2.9 million and approximately $1.8 million during the nine months ended March 31, 2006 and 2005, respectively, all related to older products. Inventory balance was increased by foreign currency translation adjustments of approximately $0.5 million.

5. Capitalized software costs

The Company wrote off approximately $1.3 million in capitalized software costs during second quarter of fiscal year 2006 related to a product for which no future revenue was projected.

6. Accumulated other comprehensive income

The components of comprehensive income, net of tax, were as follows:

	Three Months Ended March 31,					Nine Months Ended March 31,

(in thousands)	2006		2005			2006			2005

Net income	$	15,594	$	14,178		$	42,150		$	35,592
Other comprehensive income (loss):
Change in cumulative translation adjustment, net of tax		3,175		(5,605	)		(129	)		5,963

Total comprehensive income	$	18,769	$	8,573		$	42,021		$	41,555

MICROS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months and nine months ended March 31, 2006

7. Line of credit

Prior to July 29, 2005, the Company maintained two credit agreements (the “Former Credit Agreements”) that, in the aggregate, offered a $65.0 million multi-currency committed line of credit, which expired on July 31, 2005. The lenders (the “Lenders”) under the Former Credit Agreements were Bank of America, N.A., Wachovia Bank, N.A., and US Bank. The Former Credit Agreements were secured by all inventory and receivables located in the United States and the stock of certain of the Company’s subsidiaries.

The interest rate under the Former Credit Agreements for U.S. dollar advances was at the Bank of America prime rate, plus an additional 25 to 150 basis points, depending upon the Company’s consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the immediately preceding four calendar quarters. The interest rate for foreign currency advances was at the LIBOR rate for the applicable denominated currency, plus an additional 150 to 250 basis points, depending upon the Company’s consolidated EBITDA for the immediately preceding four calendar quarters. The Former Credit Agreements required that the Company pay insignificant commitment fees on the unused portion of the line of credit to the Lenders. In addition, the Former Credit Agreements contained certain financial covenants and restrictions on the Company’s ability to assume additional debt and pay cash dividends.

Effective July 29, 2005, the Company (and its subsidiaries) entered into two new credit agreements (the “New Credit Agreements”) that, in the aggregate, offer a four-year $65.0 million multi-currency committed line of credit, expiring on July 31, 2009. The Lenders under the New Credit Agreements are Bank of America, N.A., Wachovia Bank, N.A., and US Bank. The facilities are secured by 65% of the capital stock of the Company’s Ireland subsidiary and 100% of the capital stock of all other subsidiaries as well as all inventory and receivables located in the United States.

The interest rate under the New Credit Agreements is at the LIBOR rate plus 125 to 200 basis points, depending upon the Company’s consolidated EBITDA for the immediately preceding four calendar quarters. Under the terms of the New Credit Agreements, the Company paid certain upfront fees and arrangement fees totaling approximately $0.2 million. Additionally, the Company is required to pay insignificant commitment fees on the unused portion of the line of credit to the Lenders. The New Credit Agreements also contain certain financial covenants and restrictions on the Company’s ability to assume additional debt, repurchase stock, sell subsidiaries, or acquire companies. In case of an event of default, as defined in the New Credit Agreements, that is not cured within the applicable cure period (with respect to those defaults for which the New Credit Agreements provide a cure period), the Lenders’ remedies include their ability to declare all outstanding loans, plus interest and other related amounts owed, to be immediately due and payable in full, and to pursue all rights and remedies available to them under the New Credit Agreements or under applicable law. As of March 31, 2006, approximately $1.7 million is outstanding on the lines of credit and had approximately $63.3 million available for future borrowings.

8. Recent accounting standards

FASB Staff Position No. 123(R)-3

In November 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 123(R)-3 (“FSP FAS 123(R)-3”), “Transition Election to Accounting for Tax Effects of Share-Based Payment Awards,” which provides a practical transition election related to accounting for the tax effects of share-based payments awards to employees of either the transition guidance for the additional-paid-in-capital pool as prescribed in SFAS No. 123(R), or the alternative transition method as described in the FSP. An entity that adopts SFAS No. 123(R) using the modified prospective application may make a one-time election to adopt the transition method described in the FSP. An entity may take up to one year from the latter of its initial adoption of SFAS No. 123(R) or the effective date of this FSP to evaluate its available transition alternative and make its one-time election. The FSP FAS 123(R)-3 became effective in November 2005. At this time, the Company is evaluating the potential effects of FSP FAS 123(R)-3 on the Company’s consolidated financial position and results of operations and whether to elect the transition alternative available under FSP FAS 123(R)-3.

MICROS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months and nine months ended March 31, 2006

SFAS No. 154

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” This statement replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle and requires retrospective application to prior periods’ consolidated financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This statement also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. SFAS No. 154 is not expected to have a material effect on the Company’s consolidated financial statements.

9. Net income per share

Basic net income per common share is computed by dividing net income by the weighted-average number of shares outstanding. Diluted net income per share includes the dilutive effect of stock options. A reconciliation of the weighted-average number of common shares outstanding assuming dilution is as follows:

	Three Months Ended March 31,				Nine Months Ended March 31,

(in thousands, except per share data)	2006		2005		2006		2005

Net income	$	15,594	$	14,178	$	42,150	$	35,592

Average common shares outstanding		38,914		37,885		38,619		37,255
Dilutive effect of outstanding stock options		1,816		2,153		2,029		2,248

Average common shares outstanding assuming dilution		40,730		40,038		40,648		39,503

Basic net income per share	$	0.40	$	0.37	$	1.09	$	0.96

Diluted net income per share	$	0.38	$	0.35	$	1.04	$	0.90

Anti-dilutive weighted shares excluded from reconciliation		776		—		418		342

10. Segment reporting data

The Company develops, manufactures, sells, and services point-of-sale computer systems, property management systems, central reservation and central information systems products for the hospitality industry and information technology solutions for the specialty and general merchandise retail industry. The Company is organized and operates in two reportable segments: U.S. and International. The International segment is primarily in Europe, the Pacific Rim and Latin America. For purposes of applying SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company views the U.S. and International segments separately in operating its business, although the products and services are similar for each segment.

MICROS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months and nine months ended March 31, 2006

A summary of the Company’s reportable segments is as follows:

	Three Months Ended March 31,						Nine Months Ended March 31,

(in thousands)	2006			2005			2006			2005

Revenue⁽¹⁾:
U.S.	$	90,422		$	85,836		$	261,436		$	244,736
International		106,487			85,139			311,091			232,692
Intersegment eliminations		(25,768	)		(17,623	)		(85,404	)		(52,184	)

Total revenue	$	171,141		$	153,352		$	487,123		$	425,244

Income before taxes, minority interests and equity in net earnings of affiliates⁽¹⁾:
U.S.	$	8,191		$	8,648		$	18,634		$	22,300
International		36,168			24,526			113,264			71,446
Intersegment eliminations		(21,007	)		(14,056	)		(68,687	)		(41,534	)

Total income before taxes, minority interests and equity in net earnings of affiliates	$	23,352		$	19,118		$	63,211		$	52,212

(in thousands)	March 31, 2006		June 30, 2005

Identifiable assets ⁽²⁾:
U.S.	$	359,599	$	353,121
International		250,915		194,107

Total identifiable assets	$	610,514	$	547,228


(1)	Amounts based on the location of the customer.
(2)	Amounts based on the physical location of the asset.

11. Shareholders’ equity

In fiscal year 2002, the Board of Directors authorized the purchase of up to two million shares of the Company’s common stock. During fiscal 2005, the Company purchased all remaining shares authorized under that plan. In fiscal year 2005, the Board of Directors authorized the purchase of up to two million additional shares of the Company’s common stock. Since the inception of the repurchase programs, the Company has incurred less than $0.1 million in fees related to the programs.

A summary of the cumulative number of shares purchased and retired under both plans through March 31, 2006, is as follows:

(in thousands except per share data)	Number of Shares		Average Purchase Price Per Share		Total Purchase Value

Total shares purchased as of June 30, 2005		2,497	$	21.30	$	53,180
1^st Quarter (July 2005 – September 2005)		568	$	42.74		24,277
2^nd Quarter (October 2005 – December 2005)		44	$	43.81		1,928
3^rd Quarter (January 2006 – March 2006)		309	$	45.31		14,000

Total shares purchased as of March 31, 2006		3,418	$	27.32	$	93,385

MICROS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months and nine months ended March 31, 2006

12. Pension benefits

On November 19, 2004, the Company’s Board of Directors (with Messrs. A.L. Giannopoulos and Louis M. Brown, Jr. abstaining) authorized the establishment of a Supplemental Executive Retirement Plan (the “SERP Plan”), to provide designated officers and executives of the Company with benefits upon retirement effective as of August 25, 2004. On April 27, 2005, the Company’s Board of Directors (with A.L. Giannopoulos and Louis M. Brown, Jr. abstaining as a result of their participation in this plan) amended the SERP Plan, to provide for vesting of benefits upon a participant’s death. The SERP Plan is accounted for in accordance with SFAS 87, “Employers Accounting for Pensions.”

The Board of Directors of the Company, in its sole discretion, selects the participants in the SERP Plan. The Board may remove participants, or modify benefit accrual levels for any participant who is not vested. As of March 31, 2006, there were 15 participants in the SERP Plan, including one new participant added during the three months ended March 31, 2006. Under the terms of the SERP Plan, participants who are vested (or their designated beneficiaries upon death) will receive 10 annual payments over nine years commencing 6 months after the earlier of death or retirement on or after age 62. Participants become vested after completing eight years of service with the Company and: (i) the participant attains age 62 (provided the person is employed by the Company on his or her 62^nd birthday); or (ii) there is a change in control of the Company (which is defined in the SERP Plan to include, generally, the acquisition of 50% or more of the outstanding shares of common stock or the combined voting power of the securities of the Company entitled to vote generally in the election of directors, and other corporate transactions immediately after which persons who hold 50% of the outstanding voting securities entitled to vote generally in the election of directors of the surviving entity did not hold common stock of the Company before the transaction); or (iii) the participant dies before attaining age 62. However, the value of benefits under the SERP Plan is not based on years of service. The payment amount is determined based on the participant’s age at retirement or death and the base salary received by the participant during the 12 months immediately preceding his or her retirement or death. The annual payment amounts are as follows: 18% of final pay if the participant retires after his 62^nd birthday but before his 63^rd birthday; 21% of final pay if the participant retires after his 63^rd birthday but before his 64^th birthday; 24% of final pay if the participant retires after his 64^th birthday but before his 65^th birthday; and 30% of final pay if the participant retires after his 65^th birthday.

Commencing in July 2005, the Company has funded the benefits under the plan with corporate owned life insurance policies, whose assets are subject to the claims of creditors of the Company.

Total components of net period pension cost for the three months and nine months ended March 31, 2006 and 2005 include the following:

	Three Months Ended March 31,				Nine Months Ended March 31,

(in thousands)	2006		2005		2006		2005

Service cost	$	127	$	432	$	381	$	1,095
Interest cost		124		18		373		55
Amortization of prior service cost		124		—		371		—

Net periodic pension cost	$	375	$	450	$	1,125	$	1,150

13. Contingencies

The Company is and has been involved in legal proceedings arising in the normal course of business. The Company is of the opinion, based upon information available as of May 10, 2006, and the advice of counsel concerning pertinent legal matters, that any resulting liability should not have a material adverse effect on the Company’s results of operations or financial position.

MICROS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months and nine months ended March 31, 2006

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking statements

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. The discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from those anticipated in these forward-looking statements and other forward-looking statements made in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2005 and elsewhere in this Quarterly Report on Form 10-Q as a result of specified factors, including those set forth under the caption “Factors that May Affect Future Results” and under Part II, Item 1A “Risk Factors.” Examples of such forward-looking statements include (i) our expectation that product and service margins may decline in response to the competitive nature of our market, (ii) our statements regarding the adverse effects of Euro fluctuations on our financial performance and our estimates relating to the effects of currency fluctuations on our financial performance, (iii) our expectations that the list of customers with whom we do the largest amount of business will fluctuate from year to year, and our statements about the effects of large customer orders on our quarterly earnings, revenues, and total revenues, (iv) our statements concerning the fluctuations in the market price of our common stock as a result of variations in our quarterly operating results and other factors, (v) our belief that our technology in connection with credit card transaction processes does not infringe any third party patents, (vi) our belief that any existing legal claims or proceedings will not have a material adverse effect on our results of operations or financial position, (vii) our statements as to the effects the adoption of SFAS No. 123(R) will have on our consolidated statement of operations and our recognition of non-cash share-based compensation expense and the manner in which we will recognize such expense; (viii) our beliefs about our competitive strengths; (ix) our expectations regarding effective tax rates in future periods; (x) our beliefs about the utility of a Non-GAAP presentation to illustrate the effects of SFAS No. 123(R) on selected financial information; (xi) our expectations about the adequacy of our cash flows and our available lines of credit to meet our working capital needs; (xii) our expectations about the increases in our capital expenditures for FY2006; (xiii) our expectations that our exposure to interest rate risk will not materially change in the future nor how we manage such exposure; (xiv) our beliefs about the fair value of our debt; (xv) our plans to evaluate our need to invest in instruments to protect against interest rate fluctuations and our exposure to such interest rate risk; (xvi) our statements about the effects on our revenue recognition as a result of changes to a customers’ delivery requirements or a products’ completion; (xvii) our statements regarding the effects on our services, products, and manufacturing relationship from manufacturing, supply, service, or labor disruptions; (xviii) our statements regarding our ability to increase sales of our higher margin products; (xix) our statements regarding the ability of our competitors to develop products and services with features similar to our products and services; and (xx) our expected costs associated with modifying our products to comply with rules, regulations, and guidelines of credit card associations, including their security and data protection rules.

Overview

We are a leading worldwide designer, manufacturer, marketer and servicer of enterprise information solutions for the global hospitality and specialty retail industries. The information solutions consist of application-specific software and hardware systems, supplemented by a wide range of services. Our enterprise solutions comprise three major areas:

Hotel information systems:

	•	consist of software encompassing property management systems, sales and catering systems, central reservation systems, and customer information systems; and

	•	provided to more than 20,000 hotels worldwide.

Restaurant information systems:

	•	consist of hardware and software for point-of-sale and operational applications, a suite of back office applications, including inventory, labor, and financial management, and certain centrally hosted enterprise applications; and

	•	installed over 200,000 systems in table and quick service restaurants, hotels, motels, casinos, leisure and entertainment, and retail operations in more than 140 countries and on all seven continents.

Specialty retail information systems:

	•	consist of software encompassing point-of-sale, loss prevention, business analytics, customer gift cards, and enterprise applications; and

	•	provided to more than 50,000 specialty retail stores worldwide.

In addition to our software enterprise solutions and hardware products, we offer a wide range of support services to our customers. These services include installation, operator and manager training, on-site hardware maintenance, customized software development, application software support, credit card software support, help desk, systems configuration, network support and consulting. We distribute our products and services directly and through our district and subsidiary offices, as well as through a network of independent dealers and distributors. We operate in two segments for financial reporting purposes: U.S. and International.

The markets in which we operate are highly competitive. We compete on various bases, including product functionality, service capabilities, price and geography. There are at least 40 competitors worldwide that offer some form of sophisticated restaurant point-of-sale system, over 100 hotel systems competitors and over 50 retail systems competitors. 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.

Results of Operations

(All prior period share data, including income per share, are presented on a stock split-adjusted basis)

We acquired JTECH Communications, Inc. (“JTECH”) in January 2005 and CommercialWare, Inc. (“CommercialWare”) in February 2006. Accordingly, our results for the three months and nine months ended March 31, 2006 and 2005 include JTECH and CommercialWare activities since their respective acquisition dates.

Revenue:

An analysis of the sales mix by reportable segments is as follows (amounts are net of intersegment eliminations, based on location of the selling entity, and include export sales):

	Three Months Ended March 31,

	U.S.				International				Total

(in thousands)	2006		2005		2006		2005		2006		2005

Hardware	$	32,109	$	30,195	$	23,978	$	19,676	$	56,087	$	49,871
Software		12,049		15,497		16,739		13,265		28,788		28,762
Service		43,430		37,347		42,836		37,372		86,266		74,719

Total Revenue	$	87,588	$	83,039	$	83,553	$	70,313	$	171,141	$	153,352

	Nine Months Ended March 31,

	U.S.				International				Total

(in thousands)	2006		2005		2006		2005		2006		2005

Hardware	$	90,338	$	77,786	$	62,247	$	54,018	$	152,585	$	131,804
Software		37,294		36,845		47,751		38,338		85,045		75,183
Service		126,546		108,714		122,947		109,543		249,493		218,257

Total Revenue	$	254,178	$	223,345	$	232,945	$	201,899	$	487,123	$	425,244

An analysis of the total sales mix as a percent of total revenue is as follows:

	Three Months Ended March 31,						Nine Months Ended March 31,

	2006			2005			2006			2005

Hardware		32.8	%		32.5	%		31.3	%		31.0	%
Software		16.8	%		18.8	%		17.5	%		17.7	%
Service		50.4	%		48.7	%		51.2	%		51.3	%

Total		100.0	%		100.0	%		100.0	%		100.0	%

Three Months Ended March 31, 2006:

For the three months ended March 31, 2006, total revenue increased approximately $17.8 million, or 11.6% to approximately $171.1 million compared to the same period last year. This increase is primarily due to an increase in service revenues coupled with increase from our hardware revenues. The increase in our service revenues resulted from expansion of our customer base and increases in the volume of our support services that resulted in increased recurring support revenue from existing customers. The increase in recurring support revenue contributed 50.7% and the increase in installation revenue contributed 25.6% of the service revenue increase. The hardware revenue increased due to an overall sales volume increase.

The International segment sales for the three months ended March 31, 2006 increased approximately $13.2 million. The increase was a result of the following (illustrated below by percent of the total change for the period):

	•	41% - continued increases in service revenues from expansion of our customer base coupled with recurring support revenue from existing customers;

	•	33% - increase in hardware sales due to an overall sales volume increase; and

	•	26% - increase in software sales due to an overall sales volume increase, particularly improved sales of our OPERA suite of products.

U.S. segment sales increased approximately $4.5 million for the three months ended March 31, 2006 compared to the same period last year. The increase was primarily the result of an increase in service revenue from expansion of our customer base coupled with recurring support revenue from existing customers.

Nine Months Ended March 31, 2006:

For the nine months ended March 31, 2006, revenue increased approximately $61.9 million, or 14.6% compared to the same period last year. This increase is primarily due to increases in service revenues coupled with increases in our hardware revenue. The increase in our service revenue resulted from expansion of our customer base and increase in the volume of our support services that resulted in increased recurring support revenue from existing customers. The increase in recurring support revenue contributed 51.3% and the increase in installation revenue contributed 30.1% of the service revenue increase. Hardware revenue increased primarily due to an increase in hardware sales due to the acquisition of JTECH.

The International segment sales for the nine months ended March 31, 2006 increased approximately $31.0 million, while the U.S. segment sales increased approximately $30.8 million compared to the same period last year. The increase in the International segment sales was a result of the following (illustrated below by percent of the total change for the period):

	•	43% - continued increases in service revenues from expansion of our customer base coupled with recurring support revenue from existing customers;

	•	30% - increase in software sales due to an overall sales volume increase, particularly improved sales of our OPERA suite of products; and

	•	27% - increase in hardware sales due to an overall sales volume increase.

The increase in the U.S. sales for the nine months ended March 31, 2006 was a result of the following (illustrated below by percent of the total change for the period):

	•	53% - continued increases in service revenues from expansion of our customer base coupled with recurring support revenue from existing customers; and

	•	The remaining increase is primarily due to increase in hardware sales due primarily to acquisition of JTECH in January 2005.

Cost of Sales:

Three Months Ended March 31, 2006:

An analysis of the cost of sales is as follows:

	Three Months Ended March 31,

	2006					2005

(in thousands)	Cost of Sales		% of Related Revenue			Costs of Sales		% of Related Revenue

Hardware	$	38,234		68.2	%	$	32,628		65.4	%
Software		6,051		21.0	%		6,704		23.3	%
Service		41,773		48.4	%		36,226		48.5	%

Total Cost of Sales	$	86,058		50.3	%	$	75,558		49.3	%

For the three months ended March 31, 2006, cost of sales as a percent of revenue increased 100 basis points to 50.3% compared to the same period last year. Hardware cost of sales as a percent of related revenue increased approximately 280 basis points compared to the same period last year primarily as a result of a significant increase in third party hardware sales which generate lower margins than other hardware sales.

Software cost of sales as a percent of related revenue decreased approximately 230 basis points compared to the same period last year primarily as a result of higher than average third party software sales for the three months ended March 31, 2005, which generate much lower margin than internally developed software sales. Service costs as a percent of related revenue decreased approximately 10 basis points compared to the same period last year.

Nine Months Ended March 31, 2006:

An analysis of the cost of sales is as follows:

	Nine Months Ended March 31,

	2006					2005

(in thousands)	Cost of Sales		% of Related Revenue			Cost of Sales		% of Related Revenue

Hardware	$	103,371		67.7	%	$	88,220		66.9	%
Software		18,458		21.7	%		17,965		23.9	%
Service		119,978		48.1	%		105,040		48.1	%

Total Cost of Sales	$	241,807		49.6	%	$	211,225		49.7	%

For the nine months ended March 31, 2006, cost of sales as a percent of revenue decreased 10 basis points to 49.6% compared to the same period last year. Hardware cost of sales as a percent of related revenue increased approximately 80 basis points compared to the same period last year primarily as a result of a significant increase in third party hardware sales that generate lower margins than other hardware. This increase was partially offset by JTech sales of hardware, which generate higher margin.

Software cost of sales as a percent of related revenue decreased approximately 220 basis points compared to the same period last year. This decrease was primarily due to increased sales of our OPERA suite of products, which generate higher margins than our third party software. This decrease was partially offset by approximately $1.3 million in capitalized software write-offs included in software cost of sales during second quarter of fiscal year 2006. There was no change in service costs as a percent of related revenue compared to the same period last year.

Selling, General and Administrative (“SG&A”) Expenses:

Three Months Ended March 31, 2006:

SG&A expenses, as a percent of revenue, decreased 10 basis points to 31.6% compared to 31.7% in the same period last year. This decrease is primarily due to the following:

	•	Overall decreases in SG&A expenses as a percent of total revenue, primarily due to our ability to leverage our costs with the increase in total revenue;

	•	The overall decreases in SG&A expenses were partially offset by approximately $2.3 million (or 1.3% of total revenue) of non-cash share-based compensation expense recorded as a component of SG&A expenses in accordance with SFAS No. 123(R) (see “Share-Based Compensation Expense” below for further discussion).

Nine Months Ended March 31, 2006:

SG&A expenses, as a percent of revenue, increased 80 basis points to 32.4% compared to 31.6% in the same period last year. This increase is primarily due to the following:

	•	Approximately $6.4 million (or 1.3% of total revenue) of non-cash share-based compensation expense was recorded as a component of SG&A expenses in accordance with SFAS No. 123(R) (see “Share-Based Compensation Expense” below for further discussion); and

	•	The above increase in SG&A expenses was substantially offset by overall decreases in 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”):

R&D expenses consist primarily of labor costs less capitalized software development costs. Non-cash share-based compensation expenses allocated to R&D [in accordance with SFAS No. 123(R)] were not capitalized as software development costs during the three months and nine months ended March 31, 2006 because no stock options have been granted to employees whose labor is capitalized. An analysis of R&D activities is as follows:

	Three Months Ended March 31,						Nine Months Ended March 31,

	2006			2005			2006			2005

Total R&D	$	7,638		$	8,749		$	22,715		$	25,285
Capitalized software development costs		(1,090	)		(1,548	)		(3,410	)		(4,421	)

Total R&D expenses	$	6,548		$	7,201		$	19,305		$	20,864

% of Revenue		3.8	%		4.7	%		4.0	%		4.9	%

The decreases in R&D expenses, as a percent of revenue, are primarily due to the release of Datavantage’s two capitalized software products in June and December of 2005 and also due to certain R&D staff being reassigned to perform billable professional services.

Depreciation and Amortization Expenses:

Depreciation and amortization expenses for the three months ended March 31, 2006 decreased approximately $0.2 million to approximately $2.5 million compared to the same period last year. For the nine months ended March 31, 2006, depreciation and amortization expense decreased approximately $0.1 million to approximately $7.6 million compared to the same period last year.

Share-Based Compensation Expenses:

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 123(R), “Share-Based Payment,” a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” and superseding Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” This statement became effective July 1, 2005 and required us to expense the fair value of grants made under the stock option program over the vesting period of the plans. We adopted the “Modified Prospective Application” transition method, which does not result in restatement of previously issued financial statements. Awards that were granted after the effective date of SFAS No. 123(R) are measured and non-cash share-based compensation expense recognized in the consolidated statements of operations in accordance with SFAS No. 123(R). In addition, we also recognize non-cash share-based compensation expense on non-vested awards that were granted before the effective date of SFAS No. 123(R). We recognize non-cash share-based compensation expense ratably over the vesting period of options, adjusted for the forfeiture rate.

In accordance with SFAS No. 123(R), we recognized non-cash share-based compensation expenses of approximately $2.4 million or 1.4% of total revenue, and approximately $6.5 million or 1.3% of total revenue, for the three months and nine months ended March 31, 2006, respectively. The non-cash share-based compensation expenses for the three months and nine months ended March 31, 2006 were based on the fair values of 215,500 shares and 790,000 shares of options granted during the periods, respectively, in addition to the fair value of approximately 1.5 million shares of options granted before the effective date of SFAS No. 123(R) that were unvested as of the effective date. The cost of sales, SG&A expenses and R&D expenses discussed above include the following allocations of non-cash share-based compensation expense:


(in thousands)	Three Months Ended March 31, 2006		Nine Months Ended March 31, 2006

Cost of sales	$	25	$	25
SG&A		2,329		6,359
R&D		73		143

Non-cash share-based compensation expense	$	2,427	$	6,527

Income from Operations:

Income from operations for the three months ended March 31, 2006 increased approximately $2.6 million or 13.2%, to approximately $21.9 million, compared to the same period last year. The increase is mainly due to an overall increase in sales volume, partially offset by approximately $2.4 million in non-cash share-based compensation expense recorded in accordance with SFAS No. 123(R) .

For the nine months ended March 31, 2006, income from operations increased approximately $9.5 million, or 18.5%, to approximately $60.6 million, compared to the same period last year. The increase is mainly due to an overall increase in sales volume. This increase was partially offset by approximately $6.5 million in non-cash share-based compensation expense recorded in accordance with SFAS No. 123(R)

Net non-operating income for the three months ended March 31, 2006 was approximately $1.4 million compared to net non-operating expense of approximately $0.3 million for the three months ended March 31, 2005. The increase of approximately $1.7 million is primarily due to:

•	A decrease in interest expense of approximately $0.9 million compared to same period last year because the interest expense for the three months ended March 31, 2005 included additional interest expense associated with prior years’ amended federal income tax returns; and

•	An increase in interest income of approximately $0.7 million due to an overall higher cash and cash equivalents and overall higher interest rates.

•

The above increases in net non-operating income were partially offset by foreign exchange losses of approximately $0.2 million for the three months ended March 31, 2006 compared to a gain of approximately $0.2 million due to the strengthening of US dollar against the value of the Euro for the three months ended March 31, 2005.

For the nine months ended March 31, 2006 and 2005, net non-operating income was approximately $2.6 million and approximately $1.1 million, respectively. The increase of approximately $1.5 million is primarily due to:

•	An increase in interest income of approximately $1.7 million due to an overall higher cash and cash equivalents and an overall higher interest rates; and

•	A decrease in interest expense of approximately $1.1 million compared to the same period last year because the interest expense for the nine months ended March 31, 2005 included additional interest expense associated with prior years’ amended federal income tax returns.

•	The above increases in net non-operating income were partially offset by foreign exchange losses of approximately $0.6 million for the nine months ended March 31, 2006 compared to a gain of approximately $0.5 million due to the strengthening of US dollar against the value of the Euro for the nine months ended March 31, 2005.

The effective tax rates for the three months ended March 31, 2006 and 2005 were 32.5% and 25.0%, respectively. For the nine months ended March 31, 2006 and 2005, the effective tax rates were 32.5% and 30.7%, respectively. The changes in tax rates for the periods as compared to the comparable periods prior year were primarily attributable to the fact that the Company adjusted the tax provision in the three months ended March 31, 2005 for the cumulative effect of the projected tax rate change from 34.0% to 30.7%. Based on currently available information, we estimate that the 2006 fiscal year tax rate will be approximately 32.5% compare to 2005 fiscal year tax rate of 33.0%.

Non-GAAP Disclosure (Excluding Share-based Compensation Expense):

To supplement the consolidated financial statements presented in accordance with GAAP, we are including a non-GAAP presentation of selected financial information, excluding approximately $2.4 million and approximately $6.5 million of the non-cash share-based compensation expenses recorded in accordance with SFAS No. 123(R) during the three months and nine months ended March 31, 2006, respectively. As discussed above under “Share-Based Compensation Expense,” SFAS No. 123(R) required us to expense the fair value of grants made under our stock option program over the vesting period of the plan. We adopted the “Modified Prospective Application” transition method, which does not result in restatement of previously issued financial statements. Prior to July 1, 2005, we applied the intrinsic value based method of accounting prescribed by APB No. 25 in accounting for stock option awards. We had not recognized any related compensation expense in our consolidated statements of operations because the fair value of the stock underlying the options granted did not exceed the exercise price of the options on the date of grant. This non-GAAP presentation is provided to enhance the understanding of our historical financial performance and the comparability between periods. Our financial statements for the three months and nine months ended March 31, 2006 include non-cash share-based compensation expense of approximately $2.4 million and approximately $6.5 million, respectively, while our financial statements for the same periods last year do not reflect a comparable expense as a result of the change in accounting rules.

	Three Months Ended March 31,

	2006									2005

(in thousands except per share data)	GAAP, as reported			Effect of SFAS No. 123(R)			Non-GAAP, without the application of SFAS No. 123(R)			GAAP, as reported			% Increase

Revenue	$	171,141		$	—		$	171,141		$	153,352
Cost of sales		86,058			(25	)		86,033			75,558

Gross margin		85,083			25			85,108			77,794
SG&A		54,163			(2,329	)		51,834			48,540
R&D		6,548			(73	)		6,475			7,201
Depreciation and amortization		2,450			—			2,450			2,681

Total operating expenses		63,161			(2,402	)		60,759			58,422

Income from operations		21,922			2,427			24,349			19,372			25.7	%
Non-operating income, net		1,430			—			1,430			(254	)

Income before taxes, minority interests and equity in net earnings of affiliates		23,352			2,427			25,779			19,118			34.8	%
Income tax provision		7,589			227			7,816			4,777

Income before minority interests and equity in net earnings of affiliates		15,763			2,200			17,963			14,341			25.3	%
Minority interests and equity in net earnings of affiliates		(169	)		—			(169	)		(163	)

Net income	$	15,594		$	2,200		$	17,794		$	14,178			25.5	%

Net income per share-diluted (1)	$	0.38		$	0.05		$	0.44		$	0.35			25.7	%

(1) Net income per diluted share, excluding SFAS No. 123(R), does not equal the sum of net income per diluted share as reported plus the effect of SFAS No. 123(R) due to a rounding difference.

	Nine Months Ended March 31,

	2006									2005

(in thousands except per share data)	GAAP, as reported			Effect of SFAS No. 123(R)			Non-GAAP, without the application of SFAS No. 123(R)			GAAP, as reported			% Increase

Revenue	$	487,123		$	—		$	487,123		$	425,244
Cost of sales		241,807			(25	)		241,782			211,225

Gross margin		245,316			25			245,341			214,019
SG&A		157,851			(6,359	)		151,492			134,397
R&D		19,305			(143	)		19,162			20,864
Depreciation and amortization		7,557			—			7,557			7,627

Total operating expenses		184,713			(6,502	)		178,211			162,888

Income from operations		60,603			6,527			67,130			51,131			31.3	%
Non-operating income, net		2,608			—			2,608			1,081

Income before taxes, minority interests and equity in net earnings of affiliates		63,211			6,527			69,738			52,212			33.6	%
Income tax provision		20,544			1,472			22,016			16,029

Income before minority interests and equity in net earnings of affiliates		42,667			5,055			47,722			36,183			31.9	%
Minority interests and equity in net earnings of affiliates		(517	)		—			(517	)		(591	)

Net income	$	42,150		$	5,055		$	47,205		$	35,592			32.6	%

Net income per share-diluted	$	1.04		$	0.12		$	1.16		$	0.90			28.9	%

Income from operations for the three months ended March 31, 2006, excluding non-cash share-based compensation expense recorded in accordance with SFAS No. 123(R), increased approximately $5.0 million or 25.7%, to approximately $24.3 million compared to the same period last year. The increase is mainly due to an overall increase in sales volume coupled with SG&A items discussed above.

For the nine months ended March 31, 2006, income from operations, excluding non-cash share-based compensation expense recorded in accordance with SFAS No. 123(R) during the period, increased approximately $16.0 million, or 31.3%, to approximately $67.1 million compared to the same period last year. The increase is mainly due to an overall increase in sales volume coupled with cost of sales and SG&A items discussed above.

Net income for the three months ended March 31, 2006, excluding non-cash share-based compensation expense recorded in accordance with SFAS No. 123(R) during the period, increased approximately $3.6 million, or 25.5%, to approximately $17.8 million. Diluted net income per share, excluding non-cash share-based compensation expense recorded in accordance with SFAS No. 123(R) during the period, increased $0.09 per share, or 25.7%, to $0.44 per share.

For the nine months ended March 31, 2006, net income, excluding non-cash share-based compensation expense recorded in accordance with SFAS No. 123(R), increased approximately $11.6 million, or 32.6%, to approximately $47.2 million. Diluted net income per share, excluding non-cash share-based compensation expense recorded in accordance with SFAS No. 123(R), increased $0.26 per share, or 28.9%, to $1.16 per share.

Critical accounting policies

The accompanying discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe that the following accounting policies are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and relate to the more significant areas involving our judgments and estimates:

	•	Non-cash share-based compensation - In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” and superseding APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This statement became effective July 1, 2005, and requires us to expense the fair value of grants made under the stock option program over the vesting period of the plans. We adopted the “Modified Prospective Application” transition method, which does not result in restatement of previously issued financial statements. Awards granted after the effective date of SFAS No. 123(R) are measured and non-cash share-based compensation expense was recognized in the consolidated statement of operations in accordance with SFAS No. 123(R). In addition, non-vested awards that were granted before the effective date of SFAS No. 123(R) also result in recognition of non-cash share-based compensation expense. We recognize non-cash share-based compensation expense ratably over the vesting period of options, adjusted for forfeiture rate;

	•	Revenue recognition and deferred revenue;

	•	Allowance for doubtful accounts;

	•	Capitalized software development costs;

	•	Valuation of long-lived assets, including intangible assets and impairment review of goodwill;

	•	Contingencies and litigation;

	•	Income taxes; and

	•	Foreign currency translation.

We have reviewed our critical accounting policies, critical accounting estimates and the related disclosures with our Audit Committee. These policies and procedures related to the policies are described further in our Annual Report on Form 10-K for the year ended June 30, 2005 in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies.”

Liquidity and capital resources

Prior to July 29, 2005, we maintained two credit agreements (the “Former Credit Agreements”) that in the aggregate provided a $65.0 million multi-currency committed line of credit, which expired on July 31, 2005. The lenders (the “Lenders”) under the Former Credit Agreements were Bank of America, N.A., Wachovia Bank, N.A., and US Bank. The Former Credit Agreements were secured by all inventory and receivables located in the United States and the stock of certain of our subsidiaries.

The interest rate under the Former Credit Agreements for U.S. dollar advances was at the Bank of America prime rate, plus an additional 25 to 150 basis points, depending upon our consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the immediately preceding four calendar quarters. The interest rate for foreign currency advances was at the LIBOR rate for the applicable denominated currency, plus an additional 150 to 250 basis points, depending upon our consolidated EBITDA for the immediately preceding four calendar quarters. The Former Credit Agreements required that we pay insignificant commitment fees on the unused portion of the line of credit to the Lenders. In addition, the Former Credit Agreements contained certain financial covenants and restrictions on our ability to assume additional debt and pay cash dividends.

Effective July 29, 2005, we (and our subsidiaries) entered into two new credit agreements (the “New Credit Agreements”) that in the aggregate offer a four-year $65.0 million multi-currency committed line of credit, expiring on July 31, 2009. The Lenders under the New Credit Agreements are Bank of America, N.A., Wachovia Bank, N.A., and US Bank. The facilities are secured by 65% of the capital stock of our Ireland subsidiary and 100% of the capital stock of all other subsidiaries as well as all inventory and receivables located in the United States.

The interest rate under the New Credit Agreements is at the LIBOR rate plus 125 to 200 basis points, depending upon our consolidated EBITDA for the immediately preceding four calendar quarters. Under the terms of the New Credit Agreements, we paid certain upfront fees and arrangement fees, totaling approximately $0.2 million. Additionally, we are required to pay insignificant commitment fees on the unused portion of the line of credit to the Lenders. The New Credit Agreements also contain certain financial covenants and restrictions on our ability to assume additional debt, repurchase stock, sell subsidiaries, or acquire companies. In case of an event of default, as defined in the New Credit Agreements, that is not cured within the applicable cure period (with respect to those defaults for which the New Credit Agreements provide a cure period), the Lenders’ remedies include their ability to declare all outstanding loans, plus interest and other related amounts owed, to be immediately due and payable in full, and to pursue all rights and remedies available to them under the New Credit Agreements or under applicable law.

We also have a credit relationship with a European bank of EUR 1.0 million (approximately $1.2 million at the March 31, 2006 exchange rate). Under the terms of this facility, we may borrow in the form of either a line of credit or term debt. The amount available to borrow is reduced by approximately EUR 0.2 million (approximately $0.2 million at the March 31, 2006 exchange rate) for German guarantees. As we have significant international operations, our Euro-denominated borrowings do not represent a significant foreign exchange risk. On an overall basis, we monitor our cash and debt positions in each currency in an effort to reduce our foreign exchange risk.

As of March 31, 2006, approximately $1.7 million was outstanding on the lines of credit, consisting of the following:

	•	SEK (Swedish Krona) - 7.5 million (approximately $0.9 million at the March 31, 2006 exchange rate), and

	•	JPY (Japanese Yen) - 90 million (approximately $0.8 million at the March 31, 2006 exchange rate).

As of March 31, 2006, we had approximately $64.3 million borrowing capacity under the New Credit Agreements and Euro-denominated facility. The amount available to borrow was reduced by approximately $0.2 million for German guarantees. The weighted-average interest rate on the outstanding balances under the lines of credit as of March 31, 2006 was 2.5%.

As discussed above, under “Share-Based Compensation Expenses,” in December 2004 the FASB issued SFAS No. 123(R). The statement became effective July 1, 2005, and requires the windfall tax benefits from stock option exercises to be classified as cash outflows from operating activities, with the corresponding amount also classified as cash inflows from financing activities, and also requires us to expense the fair value of grants made under the stock option program. As a result, net cash flows provided by operating activities for the nine months ended March 31, 2006 and 2005 of approximately $67.9 million and approximately $49.1 million, respectively, are not comparable because for the nine months ended March 31, 2006, approximately $12.2 million in tax benefits from stock option exercises is classified as cash inflows from financing activities, compared to the nine months ended March 31, 2005 for which the tax benefits from stock option exercises are classified as a component of cash provided by operations.

Net cash provided by operating activities for the nine months ended March 31, 2006 was approximately $67.9 million. Net cash provided by operating activities for the nine months ended March 31, 2005 was approximately $49.1 million. We used approximately $25.4 million for investing activities, of which approximately $13.2 million was used to acquire CommercialWare in February 2006, approximately $8.3 million was used to purchase property, plant, and equipment, and approximately $3.4 million was used to internally develop software. We also used approximately $13.1 million for financing activities, of which approximately $40.2 million was used to repurchase our common stock, partially offset by proceeds of approximately $15.9 million from the issuance of our common stock for stock option exercises and approximately $12.2 million in windfall tax benefits from the stock option exercises. All cash is being retained for the operation and expansion of the business and the repurchase of our common stock.

We anticipate that our cash and cash equivalents, cash generated from operations along with our available lines of credit are sufficient to provide our working capital needs for the next 12 months. We also believe that our cash and cash equivalents, cash generated from operations along with our available lines of credit will be sufficient to provide our working capital needs for the foreseeable future. However, if for any reason, we need to raise additional funds, we believe we will be able to raise additional funds either thru the issuance of our common stock or by entering into additional financing agreements. We currently anticipate that our property, plant and equipment expenditures for fiscal year 2006 will be approximately $1.0 million higher than in fiscal year 2005.

Off-balance sheet arrangements

We do not have any material off-balance sheet arrangements (as defined in the applicable regulations) that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Contractual obligations

During the third quarter of fiscal year 2006, we entered into a third amendment to our lease for our headquarters facility in Columbia, Maryland, pursuant to which the term of the lease was extended to February 28, 2016. As a result of this amendment, our operating lease obligations have increased by approximately $25.5 million, primarily in the more than 5 years time frame.

Recent accounting standards

FASB Staff Position No. 123(R)-3

In November 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 123(R)-3 (“FSP FAS 123(R)-3”), “Transition Election to Accounting for Tax Effects of Share-Based Payment Awards,” which provides a practical transition election related to accounting for the tax effects of share-based payments awards to employees of either the transition guidance for the additional-paid-in-capital pool as prescribed in SFAS No. 123(R), or the alternative transition method as described in the FSP. An entity that adopts SFAS No. 123(R) using the modified prospective application may make a one-time election to adopt the transition method described in the FSP. An entity may take up to one year from the latter of its initial adoption of SFAS No. 123(R) or the effective date of this FSP to evaluate its available transition alternative and make its one-time election. The FSP FAS 123(R)-3 became effective in November 2005. At this time, we are evaluating the potential effects of FSP FAS 123(R)-3 on our consolidated financial position and results of operations and whether to elect the transition alternative available under FSP FAS 123(R)-3.

SFAS No. 154

�� In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” This statement replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle and requires retrospective application to prior periods’ consolidated financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This statement also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. SFAS No. 154 is not expected to have a material effect on our consolidated financial statements.

Factors that may affect future results

In light of current market conditions, and world political and economic uncertainty, it is difficult to determine whether we can continue to achieve revenue and profitability growth in the next year. This is especially true since the primary industries we serve, the hospitality, travel, restaurant, and retail industries, are highly sensitive to economic, political and environmental disturbances, all of which are not only outside of our control, but also extraordinarily difficult to predict with any accuracy. Accordingly, there can be no assurance that any particular level of growth is reasonable or can be achieved. In addition, due to the competitive nature of the market, we continue to experience gross margin pressure on our products (both hardware and software) and service offerings, and we expect product and service margins to decline. There can be no assurance that we will be able to increase sufficiently the sales of our higher margin products, including software, to prevent future declines in our overall gross margin. Additionally, given the fact that we conduct business in many different currencies, currency fluctuations directly affect our financial results. As we conduct significant business in Europe, a weakening or strengthening Euro could significantly affect our financial performance.

Moreover, our quarterly financial results are dependent upon the timing and size of customer orders and the shipment of products for large orders. Large software orders from customers may account for more than an insignificant portion of earnings in any quarter. We expect the list of customers with whom we do the largest amount of business to vary from year to year as a result of the timing of the rollout of each customer’s system. Further, if a customer delays or accelerates its delivery requirements, or if a product’s completion is delayed or accelerated, revenues that we may have expected in a given quarter could be deferred or accelerated into subsequent or earlier quarters, respectively.

The market price of our common stock is volatile, and may be subject to significant fluctuations in response to variations in our quarterly operating results and other factors, such as announcements of technological developments or new products by us, customer rollouts, technological advances and new products announced by existing and new competitors, and general market conditions in the hospitality and retail industries. In addition, conditions in the stock market in general and shares of technology companies in particular have experienced significant price and volume fluctuations, which have, at times, been unrelated to the operating performance of the companies.

Past performance is not necessarily a strong or reliable indicator of future performance. Actual results could differ materially from past results, estimates, or projections, or forward-looking statements made by, or on behalf of us. Some of our risks and uncertainties are listed in Part II, Item 1A Risk Factors, contained in this Form 10-Q. These are in addition to those other risks and uncertainties disclosed in our periodic press releases and SEC filings, including in the section titled “Business and Investment Risks; Information Relating to Forward-Looking Statements,” in our Annual Report on Form 10-K for the Fiscal Year ended June 30, 2005.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company recorded foreign sales, including exports from the United States, of approximately $232.9 million and approximately $201.9 million during the nine months ended March 31, 2006 and 2005, respectively, to customers located primarily in Europe, Africa, the Middle East, Australia, Asia, Latin America and Canada.

The Company’s significant international business and presence expose the Company to certain market risks, such as currency fluctuation, interest rate changes, and political risks. With respect to currency risk, the Company transacts business in different currencies through its foreign subsidiaries. The fluctuation of currencies affects sales and profitability. Frequently, sales and the costs associated with those sales are not denominated in the same currency.

In the nine months ended March 31, 2006 and 2005, the Company transacted business in 27 currencies and 22 currencies, respectively.

The relative currency mix for the three months and nine months ended March 31, 2006 and 2005 were as follows:

	% of Reported Revenue

	Three Months Ended March 31,						Nine Months Ended March 31,						Exchange Rates March 31,

	2006			2005			2006			2005			2006		2005

Revenues by currency (1):
United States Dollar		57	%		59	%		59	%		58	%		1.0000		1.0000
European Euro		23	%		21	%		21	%		21	%		1.2121		1.2961
British Pound Sterling		5	%		6	%		5	%		7	%		1.7366		1.8906
Australian Dollar		2	%		2	%		2	%		1	%		0.7167		0.7734
Mexican Peso		2	%		1	%		1	%		1	%		0.0918		0.0896
All Other Currencies (2), (3)		11	%		11	%		12	%		12	%		0.0274		0.0265

Total		100	%		100	%		100	%		100	%

(1) Calculated using average exchange rates for the period.

(2) The “% of Reported Revenue,” represents the average weighted three months and nine months exchange rates for all other currencies.

(3) The “Exchange Rates as of March 31,” represents the average weighted March 31 exchange rates for all other currencies based on the nine month revenue.

The Company has evaluated the effect of a 10% change, both upward and downward, of the Euro in relation to the U.S. dollar. A 10% increase in the value of the Euro in relation to the U.S. dollar versus the Euro in the three months and nine months ended March 31, 2006, would have increased total revenues by approximately $3.9 million, or 2.3%, and approximately $10.1 million, or 2.1%, respectively. A 10% decline in the value of the Euro in relation to the U.S. dollar in the three months and nine months ended March 31, 2006, would have reduced total revenues by approximately $3.9 million, or 2.3%, and approximately $10.1 million, or 2.1%, respectively. The sensitivity analysis assumes a weighted average 10% change in the exchange rate during the respective periods with all other variables being held constant. This sensitivity analysis does not consider the effect of exchange rate changes on either cost of sales, operating expenses, or income taxes, and accordingly, is not necessarily an indicator of the effect of potential exchange rate changes on the Company’s net income.

The Company is also subject to interest rate fluctuations in foreign countries to the extent that the Company elects to borrow in the local foreign currency. In the past, this has not been an issue of concern as the Company has the capacity to elect to borrow in other currencies with more favorable interest rates. While the Company has not invested in financial instruments designed to protect against interest rate fluctuations, the Company will continue to evaluate the need to do so in the future.

The Company had a 3.0 million South African Rand forward contract to hedge the South African Rand note receivable that was recorded on the consolidated balance sheet. The note receivable was collected and the related forward contract was paid off in March 2006. Also, the Company’s committed lines of credit bear interest at a floating rate, which exposes the Company to interest rate risks. The Company manages its exposure to this risk by minimizing, to the extent feasible, overall borrowing and monitoring available financing alternatives.

The Company’s interest rate risk has not changed materially from June 30, 2005, and the Company does not expect any significant changes in exposure or in how it manages this exposure in the near future. The Company uses borrowings under the lines of credit, which expire in July 2009, for general corporate purposes. The Company’s lines of credit bear interest at LIBOR plus 125 to 200 basis points, depending on the Company’s consolidated financial performance. At March 31, 2006, the Company had total borrowings of approximately $1.7 million, and had not entered into any instruments to hedge the resulting exposure to interest-rate risk. Management believes that the fair value of the debt equals its carrying value at March 31, 2006. The Company’s exposure to fluctuations in interest rates will increase or decrease in the future with increases or decreases in the outstanding amount under the line of credit.

To minimize the Company’s exposure to credit risk associated with financial instruments, the Company places its cash equivalents with high-credit-quality institutions.

Finally, the Company is subject to political risk, including as a result of instability in the Middle East and the worldwide threat of terrorism, and especially in developing countries with uncertain or unstable political structures or regimes. Contributing to this risk factor is the adverse effect that political instability has on the travel and tourism industries. The Company is also subject to the effects of, and changes in, laws and regulations, and other activities of governments, agencies and similar regulatory organizations. To be able to offer commercially viable and competitive products, the Company must also comply with the rules and regulations of the credit card associations, including their security and data protection rules. As these guidelines are subject to change, the Company could and most likely will have ongoing costs associated with modifying products to remain compliant with these rules.

Item 4. Controls and Procedures

As of the end of the period covered by this quarterly report, the Company has conducted an evaluation of the effectiveness of the design and operation of the Company’s “Disclosure Controls and Procedures” (as defined in Rules 13a-15 and 15d-15 under the Exchange Act). This evaluation was carried out under the supervision of the Company’s management, including A.L. Giannopoulos, Chairman, Chief Executive Officer and President, and Gary C. Kaufman, Executive Vice President and Chief Financial Officer. The Company’s Disclosure Controls and Procedures are designed with the objective of ensuring that information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 (“Exchange Act”), such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The Company’s Disclosure Controls and Procedures are also designed with the objective of ensuring that the information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

The Company does not expect that its Disclosure Controls and Procedures will prevent all error and all fraud. Despite its level of sophistication, detail and thoroughness, a disclosure system can provide only reasonable, not absolute, assurance that the objectives of the control system are satisfied. Because of the inherent limitations in all control systems, no evaluation of internal control over financial reporting may prevent or detect all misstatements or instances of fraud, if any. Also, any evaluation of effectiveness as to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company has evaluated and will continue periodically to evaluate its Disclosure Controls and Procedures. Based on its most recent evaluations, Messrs. Giannopoulos and Kaufman (the Company’s principal executive officer and principal financial officer, respectively) have concluded that, as of the end of the period covered by this quarterly report, the Company’s Disclosure Controls and Procedures in place at the end of the quarter are effective at a reasonable assurance level discussed above.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-l5(f) under the Exchange Act) during the three months ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

MICROS SYSTEMS, INC. AND SUBSIDIARIES
Form 10-Q
For the Three months and Nine months ended March 31, 2006

Part II - Other Information

Item 1. Legal Proceedings

Item 1A. Risk Factors.

Some of our risks and uncertainties are listed below. These are in addition to those other risks and uncertainties disclosed in our periodic press releases and SEC filings, including in the section titled “Business and Investment Risks; Information Relating to Forward-Looking Statements,” in our Annual Report on Form 10-K for the Fiscal Year ended June 30, 2005.

•	Weakness in the hospitality and tourism industries as a result of the ever-present threat of terrorist attacks and the uncertain political situation in the Middle East and parts of Asia;

•	Environmental and health disasters, including for example, the tsunami disaster in Asia, and Hurricanes Katrina, Rita and Wilma. There is also the widespread coverage of certain diseases and viruses, including for example, the avian flu, the fear of which suppresses travel. Environmental and health crises have a material and adverse effect on our business, as not only is there a material reduction in tourism for the pendency of the crises, but there is a mid-term adverse effect on the buying patterns of our customers located in the affected areas. Environmental disasters can also directly adversely affect MICROS’s operations in the affected areas; for example, Hurricane Wilma caused some temporary disruption to: (i) JTECH, whose main office is in Boca Raton, Florida; (ii) MICROS’s regional sales and service office in Deerfield Beach, Florida; and (iii) MICROS’s hotel software development office in Naples, Florida;

•	Potentially unfavorable adverse economic conditions arising from the U.S. involvement in Iraq and the “war on terrorism” (this is especially true in the hospitality and tourism industry, where geo-political instability has a material adverse effect), and the impact of higher oil prices worldwide. Given the adverse effects on the travel and hospitality industry as a result of the Iraqi situation, we have experienced delays in certain purchases. There can be no guarantee that this slow down will be only short-term;

•	Our actions in connection with the continued and increasing price and product competition in many product areas, principally hardware (both proprietary hardware and hardware that we resell), and the pressure on profit margins for those items;

•	Fluctuations or adverse declines of gross margins due to product mix that cannot be accurately predicted quarter to quarter;

•	Difficulties or delays in the development, production, testing, and marketing of products, including the failure to deliver new products and technologies when scheduled, announced, or generally anticipated; the failure of customers to accept products or technologies when planned; any defects in products; our inability to differentiate our products; and a failure of manufacturing efforts, whether internal or through our third party manufacturing entities;

•	The inherent difficulties in accurately predicting buying patterns, especially since more than an insignificant portion of the business is not major account business and, accordingly, is much harder to forecast, and appropriately staffing and preparing for fluctuations in buying demand;

•	Because large orders from customers may account for more than an insignificant portion of earnings in any particular quarter or year, the commencement and the completion of deployments, and changes in planned roll-outs (whether delays or accelerations) can significantly affect revenues and revenue forecasts;

•	Consolidations, acquisitions, and mergers of our customers in the hospitality and retail industries can delay or eliminate sales and ongoing revenue opportunities;

•	Implementation and operation of a cost-effective service structure capable of servicing increasingly complex software systems in more remote locations; additional costs and expenses associated with servicing and supporting open systems, which generally incorporate third party software products (the support and service of which may be more difficult and costly); difficulty in implementing, operating, and maintaining and supporting centrally hosted systems, such as central reservation systems, and centrally-hosted property management systems and reporting systems;

•	Unanticipated manufacturing, supply, service or labor difficulties experienced by our vendors, including those that may result in a disruption or discontinuation of the services or products provided to us, or difficulties in the manufacturing relationship (certain of the facilities where our products are manufactured may have union workers who may participate in work slow-downs or stoppages);

•	Unanticipated quality or production difficulties at GES, our supplier of our Workstation 4 hardware point-of-sale terminal, and the recently released 2010 hardware platform;

•	The technological risks of large customer rollouts, especially where the deployments involve newer technology or third party software; and installations where the customer contracts with us to provide;

•	The ability to respond quickly and cost-effectively to the introduction of new technologies, including Java and Internet-based technologies;

•	Because almost half of our sales are outside the U.S., our results could be significantly affected by weak economic conditions in countries in which we do business, and emerging markets in which there tend to be significant growth, and by changes in foreign currency exchange rates affecting those countries;

•	Adverse fluctuations in foreign currencies – in particular, the Euro and Pound, each of which constitutes a currency in which material amounts of business are transacted;

•	Conditions in the stock market in general and shares of technology companies in particular have experienced significant price and volume fluctuations, which have, at times, been unrelated to the operating performance of the companies;

•	Ongoing economic and political turmoil and instability in countries where we maintain a direct sales and service presence, including, for example, Argentina and Brazil;

•	Our ability to recruit and retain qualified accounting and auditing staff, the failure of which could result in excessive third party accounting and auditing costs and expenses in connection with Sarbanes-Oxley Act compliance (in particular, with section 404 of the Act);

•	Our ability to recruit and retain engineers and other highly skilled personnel;

•	Although we attempt to protect our proprietary technology through a combination of trade secrets, copyright, trademark law, nondisclosure agreements and technical measures, these protections will not preclude competitors from developing products with features similar to our products;

•	The costs and other effects of legal and administrative cases and proceedings, settlements and investigations, claims, and changes in those items, and developments or assertions by or against us relating to intellectual property rights and intellectual property licenses;

•	Costs and liabilities associated with actual or perceived security vulnerabilities in the software products we license to our customer base, or software products that third parties license to MICROS;

•	Costs and liabilities associated with complying with new and ever-evolving credit card association security initiatives and regulations;

•	The effects of, and changes in, laws, regulations, and other activities of governments, agencies and similar organizations, in particular insofar as legislative changes can affect local operations, service obligations, and the features that may have to be incorporated into our software and other products;

•	Managing expenses, including those over which we exercise little or no control, such as health care costs and compliance with new legislation;

•	Unanticipated taxation issues, including the imposition of tariffs by the WTO and other governing bodies in an effort to deter or penalize U.S. imports.

Finally, there are ongoing legal risks to which we are subject, some of which are difficult to predict, expect or assess. Two such legal risks are as follows:

	1. Alleged Patent Infringement: On occasion, we will receive unsolicited letters from entities offering a license to patents; some of these letters will suggest or assert that we are or may be infringing the patent. In those instances, we will assess the validity of the claims and the purported patent, and determine whether a license is appropriate or necessary. If we conclude that a license is not necessary, there is a risk that we could be subject to legal action. Currently, there is no such pending legal action. Additionally, we face the risk of indirect liability as a result of infringement claims brought against our customers. For example, hundreds of merchants throughout the country, some of which license software products from MICROS and Datavantage, recently have received patent licensing letters from an alleged patent holder in connection with credit card transaction processes. The alleged patent holder has pursued litigation against several of these merchants, one of which, to our knowledge, is a customer of ours. While we strongly believe that our technology does not infringe the purported patents, and that there may be other defenses available to those claims, there can be no guarantees that we will not become involved in these or other infringement claim matters, and we could as a result incur both legal expenses and damages.

	2. Credit Card Compliance. Credit card issuers have promulgated credit card security guidelines as part of their ongoing effort to battle identity theft and credit card fraud. We continue to work with credit card issuers to assure that our products comply with these rules. There can be no assurances, however, that our products are invulnerable to unauthorized access or hacking. Additionally, there can be no guarantee that our customers will implement all of the credit card security features that we introduce, or the procedures required by the credit card issuers, or that our customer maintains appropriate levels of firewall protection and other security measures. When there is unauthorized access to credit card data that results in financial loss, there is the potential that parties could seek damages from us. Currently, there is no litigation in which damages have been sought from us in connection with credit card fraud.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

	Issuer Purchases of Equity Securities

	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs

Period⁽¹⁾
1^st Quarter (Jul-Sep 2005)		567,710	$	42.74		567,710		935,628
2^nd Quarter (Oct-Dec 2005)		44,060	$	43.81		44,060		891,568
3^rd Quarter:
January 2006		97,500	$	47.99		97,500		794,068
February 2006		186,400	$	44.30		186,400		607,668
March 2006		25,000	$	42.55		25,000		582,668

3^rd Quarter (Jan-Mar 2006)		308,900	$	45.31		308,900		582,668

Fiscal Year-to-Date Total		920,670	$	43.67		920,670		582,668


	(1)	On November 23, 2004, the Company announced that the Board of Directors authorized the purchase of up to two million shares of the Company’s common stock on the open market. All purchases during the periods presented in the table above were made under this authorized plan. As of March 31, 2006, the Company has purchased an aggregate of 1.4 million shares in the open market under this authorized plan from the date the plan was authorized.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

During the third quarter of fiscal year 2006, the Company entered into a third amendment to its lease for its headquarters facility in Columbia, Maryland, pursuant to which the term of the lease was extended to February 28, 2016.

Item 6. Exhibits

10		Third Amendment to Lease Agreement

31(i).1		Certification by CEO pursuant to Rule 13A-14 or 15D of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31(i).2		Certification by CFO pursuant to Rule 13A-14 or 15D of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MICROS SYSTEMS, INC.

	(Registrant)


Date: May 10, 2006	/s/ Gary C. Kaufman

	Gary C. Kaufman
	Executive Vice President,
	Finance and Administration/
	Chief Financial Officer


Date: May 10, 2006	/s/ Cynthia A. Russo

	Cynthia A. Russo
	Vice President and Corporate Controller

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	8th grade Avg

Micros Systems (MCRS) Inactive 10-Q2006 Q3 Quarterly report

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