We are a leading worldwide designer, manufacturer, marketer, and servicer of enterprise information solutions for the global hospitality and specialty retail industries. Our enterprise solutions comprise three major areas: hotel information systems, restaurant information systems, and specialty retail information systems. We also offer a wide range of related services. We distribute our products and services directly and through a network of independent dealers and distributors.

We are organized and operate in four operating segments: U.S., Europe, the Pacific Rim, and Latin America regions. We have identified our U.S. operating segment as a separate reportable segment and we have aggregated our three international operating segments into one reportable segment, international, as the three international operating segments share many similar economic characteristics. Our management views the U.S. and international segments separately in operating our business, although the products and services are similar for each segment.

We have been and continue to be adversely affected by the current global recession. We believe that weakened consumer spending, coupled with difficulties in obtaining credit (including the cost of credit) have negatively affected our customers' abilities to acquire or open new hospitality and retail venues, and also limit their willingness and ability to make significant capital expenditures on new systems and system upgrades. In light of these very challenging and uncertain conditions, we continue to implement actions to enhance our liquidity and maintain a solid balance sheet. These actions include:
(i) reducing certain discretionary expenses; (ii) reducing certain rates for third party contractors; (iii) implementing headcount reductions in certain departments; and (iv) implementing hiring freezes in certain departments.

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. Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are 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 involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of specified factors, including those set forth in the section titled "Business and Investment Risks; Information Relating to Forward-Looking Statements," in Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the Fiscal Year ended June 30, 2009 and in Part II, Item 1A, "Risk Factors" in this report.

Examples of such forward-looking statements include:
· our statements about the growth of and conditions in the hospitality and retail industries generally, and our analysis of the growth and direction of various sectors within those industries;

· our expectation that product and service margins may decline in response to the competitive nature of our market;

· our statements regarding the effects of foreign currency rate fluctuations (in particular, the Euro and British pound sterling) on our financial performance;

· our expectations that the 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;

· our statements regarding the impact on financial results in future periods if we determine that the financial condition of customers has deteriorated;

· our statements regarding the impact on financial results in future periods if we misjudge the remaining economic life of a product;

· our statements concerning the fluctuations in the market price of our common stock, whether as a result of variations in our quarterly operating results or other factors;

· our belief that any existing legal claims or proceedings will not have a material adverse effect on our results of operations or financial position;

· our beliefs about our competitive strengths;

· our expectations regarding effective tax rates in future periods;

· our expectations regarding the impact or lack of impact on our financial position and results of operations of the application of recent accounting standards;

· our expectations about the adequacy of our cash flows and our available lines of credit to meet our working capital needs, and our ability to raise additional funds if and when needed;

· our expectations about our capital expenditures for future periods;

· our expectations that our exposure to interest rate risk will not materially change in the future;

· our expectation that we will evaluate our need to invest in instruments to protect against interest rate fluctuations and our exposure to such interest rate risk;

· our statements about the effects on our revenue recognition of changes in customers' delivery requirements or a product's completion;

· our statements regarding our ability to increase sales of our higher margin products;

· our expected costs associated with modifying our products to comply with applicable legal rules, regulations, and guidelines, including the credit card associations' security and data protection rules, and

· our expectations regarding valuation and liquidity of auction rate securities in which we have invested.

RESULTS OF OPERATIONS

Revenue:

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

                                           Three Months Ended September 30,
                             U.S.                    International                   Total
   (in thousands)        2009          2008          2009          2008          2009          2008
   Hardware         $  20,964     $  32,243     $  22,815     $  31,450     $  43,779     $  63,693
   Software             9,336        13,940        15,590        23,636        24,926        37,576
   Service             70,032        67,404        73,736        75,396       143,768       142,800
   Total Revenue    $ 100,332     $ 113,587     $ 112,141     $ 130,482     $ 212,473     $ 244,069

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

                                          Three Months Ended
                                             September 30,
                       (in thousands)         2009         2008
                       Hardware               20.6 %       26.1 %
                       Software               11.7 %       15.4 %
                       Service                67.7 %       58.5 %
                       Total                 100.0 %      100.0 %

For the three months ended September 30, 2009, total revenue was approximately $212.5 million, a decrease of approximately $31.6 million, or 12.9% compared to the same period last year due to the following:

· Hardware and software revenue decreased by 31.3% and 33.7%, respectively, compared to the same period last year. Service revenue increased by 0.7% compared to the same period last year. We believe these changes were primarily due to a slow down in demand from our customers as a result of the adverse global economic conditions.
· The % changes above also reflect the unfavorable foreign currency exchange rate fluctuations, for substantially all foreign currencies against the U.S. dollar, which negatively impacted total revenue by approximately $5.4 million.
· The service revenue also reflects additional service revenue generated by Fry, a company which we acquired in August 2008.

The international segment revenue for the three months ended September 30, 2009 decreased by approximately $18.3 million, a decrease of 14.1% compared to the same period last year due to the following:

· Hardware, software and service revenue decreased by 27.5%, 34.0% and 2.2%, respectively, compared to the same period last year. We believe these decreases were primarily due to a slow down in demand from our customers as a result of the adverse global economic conditions.
· The % decreases above also reflect the unfavorable foreign currency exchange rate fluctuations, for substantially all foreign currencies against the U.S. dollar, which negatively impacted revenue by approximately $5.4 million.

U.S. segment revenue for the three months ended September 30, 2009 decreased approximately $13.3 million, a decrease of 11.7% compared to the same period last year due to the following:

· Hardware and software revenue decreased by 35.0% and 33.0%, respectively, compared to the same period last year. Service revenue increased by 3.9% compared to the same period last year. We believe these changes were primarily due to a slow down in demand from our customers as a result of the adverse global economic conditions.
· The service revenue also reflects additional service revenue generated by Fry, a company which we acquired in August 2008.

Cost of Sales:

An analysis of the cost of sales was as follows:

                                         Three Months Ended September 30,
                                       2009                             2008
                             Cost         % of Related        Cost         % of Related
     (in thousands)        of Sales         Revenue         of Sales         Revenue
     Hardware              $  28,273               64.6 %   $  43,059               67.6 %
     Software                  5,550               22.3 %       7,300               19.4 %
     Service                  62,138               43.2 %      67,766               47.5 %
     Total Cost of Sales   $  95,961               45.2 %   $ 118,125               48.4 %

For the three months ended September 30, 2009 and 2008, cost of sales as a percent of revenue were 45.2% and 48.4%, respectively. Hardware cost of sales as a percent of related revenue for the three months ended September 30, 2009 decreased 3.0% compared to the same period last year primarily as a result of an overall improvement in margins on substantially all hardware product sales, including a decrease in freight costs.

Software cost of sales as a percent of related revenue increased approximately 2.9% compared to the same period last year. This increase was primarily as a result of an increase in capitalized software amortization expense as a percent of software revenue due to a decrease in software revenue.

Service costs as a percent of related revenue decreased approximately 4.3% compared to the same period last year due to lower overall labor and travel costs.

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

SG&A expenses, as a percentage of revenue, for the three months ended September 30, 2009, were 30.7%, a decrease of 0.8% compared to the same period last year despite a decrease in total revenue. This decrease was due to our ability to manage our variable costs, especially our non-billable travel costs. Additionally, we were able to reduce our compensation related expenses by approximately $4.1 million for the three months ended September 30, 2009 compared to the same period last year.

Research and Development ("R&D") Expenses:

R&D expenses consisted primarily of labor costs less capitalized software development costs. An analysis of R&D activities is as follows:

                                                      Three Months Ended
                                                         September 30,
           (in thousands)                                 2009         2008
           R&D labor and other costs                $   11,216     $ 10,596
           Capitalized software development costs         (200 )       (125 )
           Total R&D expenses                       $   11,016     $ 10,471
           % of Revenue                                    5.2 %        4.3 %

The increase in R&D expenses as a percentage of revenue is primarily due to the 12.9% decrease in revenue compared to the same period last year.

Depreciation and Amortization Expenses:

Depreciation and amortization expenses for the three months ended September 30, 2009 decreased approximately $0.2 million to approximately $3.8 million compared to the same period last year.

Share-Based Compensation Expenses:

For the three months ended September 30, 2009 and 2008, we recognized non-cash share-based compensation expense of approximately $3.1 million and $3.7 million, respectively. The SG&A and R&D expenses discussed above include the following allocations of non-cash share-based compensation expenses:

                                                                  Three Months Ended
                                                                     September 30,
(in thousands)                                                       2009           2008
SG&A                                                           $    2,904      $   3,525
R&D                                                                   147            208
Total non-cash share-based compensation expense                     3,051          3,733
Income tax benefit                                                   (942 )         (841 )
Total non-cash share-based compensation expense, net of tax
benefit                                                        $    2,109      $   2,892
Impact on diluted net income per share                         $     0.03      $    0.04

As of September 30, 2009, there was approximately $10.9 million in non-cash share-based compensation cost related to non-vested awards not yet recognized in our consolidated statements of operations. This cost is expected to be recognized over a weighted-average period of 1.5 years.

Non-operating Income:

Net non-operating income for the three months ended September 30, 2009, was approximately $0.7 million compared to approximately $3.8 million for the same period last year. The decrease of approximately $3.1 million reflects:

· A decrease in interest income of approximately $2.2 million due to overall lower interest earned on cash and cash equivalents and investment (short-term and long-term) balances;

· The credit based other-than-temporary impairment losses of approximately $0.4 million for investments in auction rate securities for the three months ended September 30, 2009; and,

· Foreign currency exchange loss of less than $0.1 million for the three months ended September 30, 2009 compared to foreign currency exchange gain of approximately $0.5 million for the same period last year.

Income Tax Provisions:

The effective tax rate for the three months ended September 30, 2009 and 2008 was 32.5% and 34.0%, respectively. The decrease in tax rate for the three months ended September 30, 2009 compared to the same period last year was primarily attributable to a decrease in foreign interest income included in our U.S. tax base and a decrease in non-deductible non-cash share-based compensation. These decreases to the tax rate were partially offset by adverse changes in the mix of estimated earnings from jurisdictions that have a low statutory tax rate.

Based on currently available information, we estimate that the fiscal year 2010 effective tax rate will be approximately 33%. We believe that due to changes in the mix of earnings among jurisdictions, the fluctuation of earnings, and the impact of certain discrete items recognized during the interim reporting periods, there may be some degree of adjustment to the effective tax rate on a quarterly basis.

RECENT ACCOUNTING STANDARDS

Recently Adopted Accounting Pronouncements

On July 1, 2009, we adopted the authoritative guidance issued by the FASB on business combinations. The guidance establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired business. This statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and disclosing information to enable users of the financial statements to evaluate the nature and financial effects of the business combination. As we did not complete any business combinations since July 1, 2009, the adoption of this new guidance did not have an impact on our consolidated financial statements.

On July 1, 2009, we adopted the authoritative guidance issued by the FASB that changes the accounting and reporting for non-controlling interests. This statement requires that non-controlling interests be reported as a component of equity, changes in a parent's ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and any retained noncontrolling equity investment upon the deconsolidation of a subsidiary initially be measured at fair value. The adoption of this new guidance did not have a material impact on our consolidated financial statements.

On July 1, 2009, we adopted the authoritative guidance issued by the FASB which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This statement is intended to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset and other U.S. generally accepted accounting principles. The adoption of this new guidance did not have a material impact on our consolidated financial statements.

On July 1, 2009, we adopted the authoritative guidance on fair value measurement for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of this new guidance did not have a material impact on our consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In October 2009, the FASB issued the authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor-specific objective evidence or third-party evidence of selling price is not available, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance also significantly expands related disclosure requirements. This standard is effective for us beginning July 1, 2010, with earlier adoption permitted. We are continuing to evaluate the impact that the adoption of this statement will have on our consolidated financial statements.

In October 2009, the FASB also issued the authoritative guidance on revenue recognition on arrangements that include software elements. Under the new guidance, tangible products containing software components and non-software components that function together to deliver the tangible product's essential functionality are excluded from the scope of software revenue recognition guidance and will be subject to other relevant revenue recognition guidance. This guidance will become effective for us beginning July 1, 2010, with earlier adoption permitted. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

CRITICAL ACCOUNTING ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

The following comprise the critical accounting estimates that we used in the preparation of our condensed consolidated financial statements:
· Revenue recognition;
· Allowance for doubtful accounts;
· Inventory;
· Financial instruments and fair value measurements;
· Capitalized software development costs;
· Valuation of long-lived assets and intangible assets
· Goodwill and indefinite-lived intangible assets;
· Share-based compensation;
· Income taxes.

We have reviewed our critical accounting estimates and the related disclosures with our Audit Committee. Critical accounting estimates are described further in our Annual Report on Form 10-K for the year ended June 30, 2009 in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading "Critical Accounting Estimates."

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Cash

Our condensed consolidated statement of cash flows summary is as follows:

                                                   Three Months Ended
                                                     September 30,
              (in thousands)                         2009           2008
              Net cash provided by (used in):
              Operating activities              $  41,849     $   29,658
              Investing activities                  8,113       (111,953 )
              Financing activities                (23,419 )      (27,510 )

Operating activities:

Net cash provided by operating activities for the three months ended September 30, 2009 increased approximately $12.2 million compared to the three months ended September 30, 2008. This increase was primarily due to an improvement in collections related to deferred revenue for the three months ended September 30, 2009 as compared to the same period last year.

Investing activities:

Net cash flows from investing activities for the three months ended September 30, 2009 was approximately $8.1 million reflecting approximately $10.0 million we received from the sale of investments, net of cash used to purchase investments. This amount was partially offset by approximately $1.9 million we used to purchase property, plant and equipment, and also internally developed software to be licensed to others.

Financing activities:

Net cash used in financing activities for the three months ended September 30, 2009 was approximately $23.4 million, principally reflecting stock repurchases of approximately $30.3 million. This amount was partially offset by proceeds from stock option exercises of approximately $4.9 million and realized tax benefits from stock option exercises of approximately $2.2 million.

Capital Resources

During the three months ended September 30, 2009, the favorable foreign exchange rate fluctuations for substantially all foreign currencies against the U.S. dollar positively affected our cash and cash equivalents' balance by approximately $7.5 million. Our cash and cash equivalents' balance of approximately $326.3 million at September 30, 2009 is an increase of approximately $34.0 million from the June 30, 2009 balance and an increase of approximately $82.3 million from the September 30, 2008 balance. All cash and cash equivalents were being retained for the operation and expansion of the business, as well as for the repurchase of our common stock.

We have two credit agreements (the "Credit Agreements") that in the aggregate provide a $65.0 million multi-currency committed line of credit. As of September 30, 2009, we had approximately $1.2 million outstanding under the Credit Agreements and had applied approximately an additional $0.4 million to guarantees. We also have a credit relationship with a European bank in the amount of EUR 1.0 million (approximately $1.5 million at the September 30, 2009 exchange rate). As of September 30, 2009, there were no balances outstanding on this credit facility, but approximately EUR 0.4 million (approximately $0.6 million at the September 30, 2009 exchange rate) of the credit facility has been used for guarantees. As of September 30, 2009, we had approximately $64.2 million borrowing capacity under all of the credit facilities described above. The weighted-average interest rate on the outstanding balances under the Credit Agreements as of September 30, 2008 was 1.5%. See Note 5 "Line of Credit," in the Notes to the Condensed Consolidated Financial Statements included in this report for further information about our credit facilities.

We do not currently invest in financial instruments designed to protect against interest rate fluctuations, although we will continue to evaluate the need to do so in the future.

We believe that our cash and cash equivalents, short-term investments, cash generated from operations and our available lines of credit are sufficient to provide our working capital needs for the foreseeable future. In light of current economic conditions generally and in light of the overall performance of the stock market beginning in 2008, we cannot assure that funds would be available from other sources if required in connection with acquisitions or any unanticipated and substantial cash needs. We currently anticipate that our property, plant and equipment expenditures for fiscal year 2010 will be approximately $13 million.

Financial indicators of our liquidity and capital resources as of September 30, 2009 and June 30, 2009, were as follows:

                                                                September 30,      June 30,
(in thousands, except ratios)                                       2009             2009
Cash and cash equivalents and short-term investments (1)       $       467,560     $ 438,936
Available credit facilities                                    $        66,463     $  66,403
Outstanding credit facilities                                           (1,170 )      (1,090 )
Outstanding guarantees                                                  (1,083 )        (778 )
Unused credit facilities                                       $        64,210     $  64,535
Working capital (2)                                            $       442,451     $ 421,016
MICROS Systems, Inc.'s shareholders' equity                    $       744,062     $ 723,447
Current ratio (3)                                                         2.55          2.60

(1) Does not include approximately $57.6 million and $57.8 million invested in auction rate securities, classified as long-term investments in our condensed consolidated balance sheet as of September 30, 2009 and June 30, 2009, respectively.

(2) Current assets less current liabilities.

. . .