Forward Looking Statements - Safe Harbor

Certain statements in this Quarterly Report on Form 10-Q are forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, that involve risks and uncertainties. Any statements contained herein (including without limitation statements to the effect that the Company or Management "estimates," "expects," "anticipates," "plans," "believes," "projects," "continues," "should," "may," or "will" or statements concerning "potential" or "opportunity" or variations thereof or comparable terminology or the negative thereof) that are not statements of historical fact should be construed as forward-looking statements including statements about (i) the Company's future financial results, (ii) the impact of new accounting pronouncements, (iii) the Company's product development plans, (iv) the Company's capital spending,
(v) the Company's future cash flow from operations, (vi) sufficient sources of financing to continue operations for next twelve months and to satisfy contractual obligations and commercial commitments, (vii) the effect of current legal proceedings, (viii) payment of obligations related to the Company's restructurings, (ix) the future use of forward or other hedging contracts,
(x) the future impact of recent acquisitions on the Company, (xi) future investments in product development, (xii) schedule of amortization of intangible assets, (xiii) future impact of valuation allowance review and (xiv) future expense levels. Actual results could differ materially and adversely from those anticipated in such forward looking statements as a result of certain factors, including the factors listed at pages 38 to 46. Because these factors may affect the Company's operating results, past performance should not be considered an indicator of future performance and investors should not use historical results to anticipate results or trends in future periods. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. Investors should carefully review the risk factors described below and in other documents the Company files from time to time with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K.

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto.

Overview

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

The financial market crisis at the end of 2008 and early 2009 has continued to disrupt credit and equity markets worldwide and has led to weakness in the global economic environment. The effect of the weakness of the global economy is expected to continue to challenge Epicor's ability to sell software licenses and may negatively impact demand for our consulting services and retail hardware systems. The adverse economic environment has also increased the difficulty of forecasting revenues, as a decrease in license revenue may lead to a decrease in consulting revenue in the same or subsequent quarters. Lower license revenue may also decrease maintenance revenue since maintenance fees for new product licenses are directly related to software license sales. In response to this difficult economic environment, Epicor took steps in November 2008 to reduce its headcount and lower expenses and continues to do so in 2009 on a more limited basis in targeted areas. The Company continues to monitor the economic situation, the business environment and the Company's outlook.

Total revenues for the three months ended September 30, 2009, decreased 27.4% to $98.6 million, compared to $135.8 million for the three months ended September 30, 2008. License revenue decreased by 38.7% to $13.7 million for the three months ended September 30, 2009, when compared to license revenue of $22.4 million for the three months ended September 30, 2008. Consulting revenue decreased by 23.7% to $31.7 million for the three months ended September 30, 2009, when compared to consulting revenue of $41.6 million for the three months ended September 30, 2008. Maintenance revenue for the three months ended September 30, 2009, was $48.2

Total revenues for the nine months ended September 30, 2009, decreased 18.6% to $297.7 million, compared to $365.9 million for the nine months ended September 30, 2008. License revenue decreased by 31.9% to $44.5 million for the nine months ended September 30, 2009, when compared to license revenue of $65.3 million for the nine months ended September 30, 2008. Consulting revenue decreased by 16.5% to $95.2 million for the nine months ended September 30, 2009, when compared to consulting revenue of $114.0 million for the nine months ended September 30, 2008. Maintenance revenue for the nine months ended September 30, 2009, was $142.4 million, which was flat when compared to maintenance revenue of $145.0 million for the nine months ended September 30, 2008. Hardware and other revenue for the nine months ended September 30, 2009, was $15.6 million, representing a decrease of 62.4 % compared to hardware and other revenue of $41.6 million for the nine months ended September 30, 2008. See discussion in Results of Operations for more detailed information.

Overall gross margin was 49.6% for the three months ended September 30, 2009, compared to 43.5% during the same period in 2008, and 47.4% for the nine months ended September 30, 2009, compared to 42.5% during the same period in 2008, up primarily due to decreased cost of sales, primarily in consulting and maintenance as a result of cost cutting efforts made by the Company, as well as lower hardware revenues, which have significantly lower gross margins.

Cash flows from operating activities were $32.9 million during the nine months ended September 30, 2009, compared to 2008 cash flows from operating activities of $49.6 million. Cash flows from operating activities decreased due primarily to an increase in net loss and less cash received on accounts receivable and for deferred revenue during 2009, as compared to 2008.

Critical Accounting Policies

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

Revenue Recognition

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

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

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

• Availability of products to be delivered;

• Time period over which services are to be performed;

• Creditworthiness of the customer;

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

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

• Discounts given for each element of a contract;

• Any commitments made as to installation or implementation "go live" dates and

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

Allowance for Doubtful Accounts

The Company's accounts receivable go through a collection process that is based on the age of the invoice and requires attempted contacts with customers at specified intervals and assistance from other personnel within the Company who have a relationship with the customer. The Company writes off accounts to its allowance when the Company has determined that collection is not likely. The Company believes no significant concentrations of credit risk existed at September 30, 2009. Receivables from customers are generally unsecured.

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

Intangible Assets

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

Goodwill

The Company's goodwill was recorded as a result of the Company's acquisitions. The Company has recorded these acquisitions using the purchase method of accounting. The Company annually performs an impairment review of its recorded goodwill, and in 2008 determined that no impairment of goodwill existed because the estimated fair value of each reporting unit exceeded its carrying amount. The Company tests its recorded goodwill for impairment on an annual basis, or more often if indicators of potential impairment exist, by determining if the carrying value of each reporting unit exceeds its estimated fair value. Factors that could trigger an interim impairment test include, but are not limited to, underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the Company's overall business, significant negative industry or economic trends and a sustained period where market capitalization, plus an appropriate control premium, is less than stockholders' equity. Future impairment reviews may require write-downs in the Company's goodwill and could have a material adverse impact on the Company's operating results for the periods in which such write-downs occur.

Stock-Based Compensation

Under the fair value recognition provisions, stock-based compensation expense is measured at the grant date based on the value of the award and is expensed ratably over the vesting period. Determining the fair value of stock options at the grant date requires judgment, including estimating expected dividends, volatility, terms and estimating the amount of share-based awards that are expected to be forfeited. If actual forfeiture rates differ significantly from the estimate, stock-based compensation expense and the Company's results of operations could be materially impacted. Beginning in 2006, the Company changed its previous practice of predominantly granting stock options to employees, and began granting primarily restricted stock as an alternative. Compensation expense for restricted stock is based on the fair market value of the restricted stock on its grant date, and is expensed ratably over the vesting period.

The Company provides for income taxes in interim periods based on the estimated effective income tax rate for the complete fiscal year. The income tax provision is computed on the pretax income of the consolidated entities located within each taxing jurisdiction based on current tax law. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

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

During the year ended December 31, 2007, the Company determined, primarily based on operating income during recent years and anticipated operating income and cash flows for future periods, that it is more likely than not that certain foreign deferred tax assets will be realized in the future and accordingly, it was appropriate to release the valuation allowance recorded against those deferred tax assets. As a result, the Company released certain valuation allowances related to the United Kingdom, the Netherlands, Germany, Canada, Singapore, Hong Kong, and other foreign jurisdictions resulting in a non-cash income tax benefit to net income, as well as a credit to goodwill as some of the deferred tax assets existed at the date of Scala's acquisition. The Company intends to maintain a valuation allowance for the remaining foreign deferred tax assets until sufficient positive evidence exists to support its reversal. The remaining valuation allowance will continue to be evaluated over future quarters.

Future releases of the valuation allowance related to the Scala and NSB acquisitions will be accounted for as a reduction in income tax expense. Effective January 1, 2009, any reduction to the valuation allowance established in purchase accounting is to be accounted for as a reduction in income tax expense.

The Company is subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. The Company applies a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

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

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

New Accounting Pronouncements

For new accounting pronouncements see Note 13 in Notes to Unaudited Condensed Consolidated Financial Statements.

Acquisition

NSB Retail Systems PLC

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

Pursuant to the terms of the acquisition agreement, shareholders of NSB received £0.38 in cash for each NSB ordinary share. The value of the fully diluted share capital of NSB was approximately $311.8 million, not including transaction costs, based on the exchange rates in effect at the time the United States dollars were converted to pounds sterling for purposes of the transaction. The consideration payable under the agreement was funded by the Company with approximately $161.0 million in existing cash balances, with the balance of the consideration being funded by drawing from funds available pursuant to the 2007 credit facility (Note 8 in Notes to Consolidated Financial Statements).

The total purchase price for NSB is shown below (in thousands):

                         Cash                   $  311,845
                         Transaction costs           6,449

                         Total purchase price   $  318,294

The acquisition of NSB is accounted for as a purchase business combination. Under the purchase method of accounting, the purchase price was allocated to NSB's tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of February 7, 2008, with any excess being ascribed to goodwill. Management is primarily responsible for determining the fair values of these assets. The fair value of the assets acquired and liabilities assumed represent management's estimate of fair values. The Company adjusted goodwill by $14.2 million since the original allocation on February 7, 2008, primarily related to finalizing the fair value of land and buildings which resulted in an increase in property and equipment of $4.1 million, and a reduction to deferred taxes of $16.6 million. See Note 4 in Notes to the Consolidated Financial Statements for a discussion of goodwill and intangibles acquired.

Fair value of tangible assets acquired:

            Cash and cash equivalents                      $  33,181
            Accounts receivable                               18,274
            Inventory                                          1,196
            Property and equipment                            16,038
            Prepaid and other assets                           4,720
            Deferred tax assets                                2,047

            Total tangible assets acquired                    75,456
            Acquired technology                               58,700
            Acquired in-process research and development         200
            Customer base                                     39,300
            Trade name                                         3,500
            Goodwill                                         198,240
            Accounts payable and accrued expenses            (24,221 )
            Deferred revenue                                 (17,328 )
            Other long-term liabilities                       (2,264 )
            Deferred tax liabilities                         (13,289 )

            Net assets acquired                            $ 318,294

In connection with the acquisition, the Company formulated a restructuring plan for the NSB operations. As a result, the Company recorded a liability of $4.5 million for the costs related to involuntary employee terminations. This liability was included in the allocation of the purchase, as was appropriate under United States GAAP at the time of the acquisition. Execution of the restructuring plan was completed as of December 31, 2008.

Included in the Company's operating results for the nine months ended September 30, 2008 is a charge of $0.2 million for the acquired in-process research and development projects related to the NSB acquisition. The in-process research and development projects arose from new products that were under development at the date of the acquisition and were expected to eventually lead to new products but had not yet established technological feasibility and for which no future alternative use was identified. The valuation of the in-process research and development projects was based upon the discounted expected future cash flows of the products over the products' expected life, reflecting the estimated stage of completion of the projects and the estimate of the costs to complete the projects.

Results of Operations

The following table summarizes certain aspects of the Company's results of
operations for the three and nine months ended September 30, 2009, compared to
the three and nine months ended September 30, 2008 (in millions, except
percentages):



                                                  Three Months Ended September 30,                      Nine Months Ended September 30,
                                                                      Change       Change                                   Change       Change
                                            2009         2008            $           %           2009          2008            $           %
Revenues
License                                    $  13.8      $  22.4       $  (8.6 )     (38.7 %)    $  44.5       $  65.3       $ (20.8 )     (31.9 %)
Consulting                                    31.7         41.6          (9.9 )     (23.7 %)       95.2         114.0         (18.8 )     (16.5 %)
Maintenance                                   48.2         50.1          (1.9 )      (3.9 %)      142.4         145.0          (2.6 )      (1.8 %)
Hardware and other                             4.9         21.6         (16.7 )     (77.2 %)       15.6          41.6         (26.0 )     (62.4 %)

Total revenues                                98.6        135.7         (37.1 )     (27.4 %)      297.7         365.9         (68.2 )     (18.6 %)
Gross profit % excluding amortization
License                                       81.8 %       80.8 %                                  80.3 %        79.1 %
Consulting                                    20.9 %       21.7 %                                  18.5 %        14.6 %
Maintenance                                   77.7 %       75.0 %                                  77.0 %        74.2 %
Hardware and other                            14.3 %       13.3 %                                  12.7 %         9.5 %
Amortization of intangible assets          $   7.0      $   8.5       $  (1.5 )     (17.2 %)    $  23.7       $  24.5       $  (0.8 )      (3.4 %)
% of total revenues                            7.1 %        6.3 %                                   8.0 %         6.7 %
Gross profit                               $  48.9      $  59.1       $ (10.2 )     (17.2 %)    $ 141.3       $ 155.4       $ (14.1 )      (9.1 %)
% of revenues                                 49.6 %       43.5 %                                  47.4 %        42.5 %
Sales and marketing                        $  18.2      $  20.5       $  (2.3 )     (11.4 %)    $  54.4       $  63.1       $  (8.7 )     (13.8 %)
. . .