In "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A"), management explains the general financial condition and results of operations for Agilysys and subsidiaries including:

- what factors affect our business;

- what our earnings and costs were;

- why those earnings and costs were different from the year before;

- where the earnings came from;

- how our financial condition was affected; and

- where the cash will come from to fund future operations.

The MD&A analyzes changes in specific line items in the Consolidated Statements of Operations and Consolidated Statements of Cash Flows and provides information that management believes is important to assessing and understanding our consolidated financial condition and results of operations. The discussion should be read in conjunction with the Consolidated Financial Statements and related Notes that appear in Item 15 of this Annual Report titled, "Financial Statements and Supplementary Data." Information provided in the MD&A may include forward-looking statements that involve risks and uncertainties. Many factors could cause actual results to be materially different from those contained in the forward-looking statements. See "Forward-Looking Information" on page 3 and Item 1A "Risk Factors" in Part I of this Annual Report for additional information concerning these items. Management believes that this information, discussion, and disclosure is important in making decisions about investing in Agilysys.

Overview

Agilysys is a leading provider of innovative technology solutions for the hospitality and retail markets. Our intuitive solutions include property and lodging management, inventory and procurement, point-of-sale (POS), document management, mobile, wireless and other types of guest-engagement software. We also provide support, maintenance, resold hardware products and software hosting services. Our customers include retailers, casinos, resorts, restaurants and other customer-facing service providers, and a significant portion of our consolidated revenue is derived from contract support, maintenance agreements and professional services.

We operate extensively throughout North America, with additional sales and support offices in the United Kingdom and Asia. We have two operating segments:
Hospitality Solutions Group (HSG) and Retail Solutions Group (RSG).

Our top priority is increasing shareholder value by improving operating and financial performance and profitability growing the business through superior products and services. To that end, we expect to invest a certain portion of our cash on hand to develop and market new software products, to fund enhancements to existing software products, to expand our customer breadth, both geographically and vertically, and to make select acquisitions.

The primary objective of our ongoing strategic planning process is to create shareholder value by exploiting growth opportunities and strengthening our competitive position within the specific technology solutions and in the end markets we service. The plan builds on our existing strengths and targets industry leading growth and peer beating financial and operating results driven by new technology trends and market opportunities. Industry leading growth and peer beating financial and operational results will be achieved through tighter coupling and management of operating expenses of the business and sharpening the focus of our investments to concentrate on growth opportunities with the highest return by seeking the highest margin revenue opportunities in the markets in which we compete.

Our strategic plan specifically focuses on:

• Strong customer focus, with clear and realistic service commitments.

• Growing sales of our proprietary offerings: products, support, maintenance and subscription services and professional services.

• Diversifying our customer base across geographies and industries.

• Capitalizing on our intellectual property and emerging technology trends.

Revenue - Defined

As required by the SEC, we separately present revenue earned as either products revenue, support, maintenance and subscription services revenue or professional services revenue in our Consolidated Statements of Operations. In addition to the SEC requirements, we may, at times, also refer to revenue as defined below. The terminology, definitions, and applications of terms we use to describe our revenue may be different from those used by other companies and caution should be used when comparing these financial measures to those of other companies. We use the following terms to describe revenue:

• Revenue - We present revenue net of sales returns and allowances.

• Support, maintenance and subscription services revenue - Revenue earned from the sale of proprietary and remarketed ongoing support, maintenance and subscription or hosting services.

• Professional services revenue - Revenue earned from the delivery of implementation, integration and installation services for proprietary and remarketed products.

Matters Affecting Comparability

On August 1, 2011, we completed the sale of our Technology Solutions Group ("TSG") business to OnX Enterprise Solutions Limited and its subsidiary OnX Acquisition LLC (together "OnX"). For financial reporting purposes, TSG's operating results for fiscal 2012 through the completion of the sale and for the fiscal 2011 and fiscal 2010 periods presented were classified within discontinued operations. Accordingly, the discussion and analysis presented below, including comparisons to prior year periods, reflects the continuing business of Agilysys.

Results of Operations

Fiscal 2012 Compared with Fiscal 2011

Net Revenue and Operating Loss

The following table presents our consolidated revenue and operating results for
the fiscal years ended March 31, 2012 and 2011:



                                                     Year ended March 31,             Increase (decrease)

(Dollars in thousands)                                  2012            2011               $               %
Net revenue:
Products                                          $  105,141       $ 104,769       $     372            0.4%
Support, maintenance and subscription services        73,171          70,729           2,442            3.5%
Professional services                                 30,577          27,183           3,394           12.5%
Total                                                208,889         202,681           6,208            3.1%
Cost of goods sold:
Products                                              83,550          80,090           3,460            4.3%
Support, maintenance and subscription services        25,706          25,507             199            0.8%
Professional services                                 19,797          21,445          (1,648 )        (7.7)%
Total                                                129,053         127,042           2,011            1.6%
Gross profit                                          79,836          75,639           4,197            5.5%
Gross profit margin                                    38.2%           37.3%
Operating expenses:
Product development                                   30,309          27,531           2,778           10.1%
Sales and marketing                                   24,006          22,212           1,794            8.1%
General and administrative                            32,889          37,121          (4,232 )       (11.4)%
Depreciation of fixed assets                           4,602           3,914             688           17.6%
Amortization of intangibles                            3,686           5,122          (1,436 )       (28.0)%
Asset impairments and related charges                  9,681             959           8,722              nm
Restructuring and related charges                     15,853             405          15,448              nm
Operating loss                                    $  (41,190 )     $ (21,625 )     $ (19,565 )         90.5%
Operating loss percentage                            (19.7)%         (10.7)%

nm - not meaningful.

                                                        Year ended March 31,

                                                            2012           2011
     Net revenue:
     Products                                              50.3%          51.7%
     Support, maintenance and subscription services         35.0           34.9
     Professional services                                  14.7           13.4
     Total net revenue                                     100.0          100.0
     Cost of goods sold:
     Products                                               40.0           39.5
     Support, maintenance and subscription services         12.3           12.6
     Professional services                                   9.5           10.6
     Total cost of goods sold                               61.8           62.7
     Gross profit                                           38.2           37.3
     Operating expenses:
     Product development                                    14.5           13.6
     Sales and marketing                                    11.5           11.0
     General and administrative                             15.7           18.3
     Depreciation of fixed assets                            2.2            1.9
     Amortization of intangibles                             1.8            2.5
     Asset impairments and related charges                   4.6            0.5
     Restructuring and related charges                       7.6            0.2
     Operating loss                                        (19.7 )        (10.7 )

                                                     Year ended March 31,             Increase (decrease)

(Dollars in thousands)                                  2012            2011               $                %
Hospitality (HSG)
Revenue from external customers:
Products                                          $   25,148       $  35,306       $ (10,158 )        (28.8)%
Support, maintenance and subscription services        48,072          45,053           3,019             6.7%
Professional services                                 13,155          13,650            (495 )         (3.6)%
Total revenue from external customers                 86,375          94,009          (7,634 )         (8.1)%
Gross profit                                      $   55,354       $  54,669       $     685             1.3%
Gross profit margin                                    64.1%           58.2%
Operating (loss) income                           $   (6,552 )     $   5,836       $ (12,388 )       (212.3)%
Retail (RSG)
Revenue from external customers:
Products                                          $   79,993       $  69,463       $  10,530            15.2%
Support, maintenance and subscription services        25,099          25,676            (577 )         (2.2)%
Professional services                                 17,422          13,533           3,889            28.7%
Total revenue from external customers                122,514         108,672          13,842            12.7%
Gross profit                                      $   24,482       $  20,970       $   3,512            16.7%
Gross profit margin                                    20.0%           19.3%
Operating income                                  $    5,481       $   3,164       $   2,317            73.2%
Total reportable business segments
Total revenue from external customers             $  208,889       $ 202,681       $   6,208             3.1%
Gross profit                                      $   79,836       $  75,639       $   4,197             5.5%
Gross profit margin                                    38.2%           37.3%
Operating (loss) income                           $   (1,071 )     $   9,000       $ (10,071 )       (111.9)%
Corporate/Other
Gross profit                                      $        -       $       -       $       -
Operating loss                                    $  (40,119 )     $ (30,625 )     $  (9,494 )        (31.0)%
Total Company
Total revenue from external customers             $  208,889       $ 202,681       $   6,208             3.1%
Gross profit                                      $   79,836       $  75,639       $   4,197             5.5%
Gross profit margin                                    38.2%           37.3%
Operating loss                                    $  (41,190 )     $ (21,625 )     $ (19,565 )          90.5%

nm - not meaningful

HSG's revenue decreased $7.6 million or 8.1% in fiscal 2012 compared to fiscal 2011. The decrease in products revenue of approximately $10.1 million was driven by lower volumes in our remarketed products as well as a decline in perpetual software licenses with a shift in strategy to focus on selling subscription based services revenue which is typically recognized over a five year period. In addition, products revenue was negatively impacted by the errors identified in the manner in which we recognized revenue for certain software license and professional services arrangements in prior periods. The out of period impact for errors accumulated prior to fiscal 2012 was approximately $1.0 million (see Note 2, Summary of Significant Accounting Policies, in the Consolidated Financial Statements). The $3.0 million or 6.7% increase in support, maintenance and subscription services in fiscal 2012 was the result of growth in both subscription based revenue and ongoing support from traditional proprietary products.

RSG's revenue increased $13.8 million or 12.7 % in fiscal 2012 compared to fiscal 2011. The increase in products and professional services revenue of approximately $10.5 million or 15.2 % and $3.9 million or 28.7%, respectively, are the result of higher volumes associated with several multi-location, multi-year contracts for remarketed products. We experienced a decline in support, maintenance and subscription services revenue of approximately $0.6 million or 2.2 % as a result of not renewing certain support contracts that were less accretive to gross profit than desired.

Gross profit and gross profit margin. Our total gross profit increased $4.2 million or 5.5% for fiscal 2012 and total gross profit margin increased 90 basis points. Products gross profit decreased $3.1 million and gross profit margin decreased 300 basis points. Support, maintenance and subscription services gross profit increased $2.2 million and gross margin percentage increased 90 basis points. Professional services gross margin increased $5.0 million and gross profit margin increased 1,410 basis points.

HSG's gross profit increased $0.7 million or 1.3% for fiscal 2012 and gross profit margin improved 590 basis points to 64.1% in fiscal 2012 from 58.2% in fiscal 2011. This is primarily due to professional services gross profit margin improvement of 2,070 basis points as a result of efficient management of project labor within implementation services. In addition, products gross profit margin improved 80 basis points as a result of selling higher margin opportunities. The support, maintenance and subscription services gross profit margin declined less than 100 basis points as a result of additional labor resources being dedicated to product enhancement.

RSG's gross profit increased $3.5 million or 16.7% for fiscal 2012 and gross profit margin increased 70 basis points to 20.0% in fiscal 2012 compared with 19.3% in fiscal 2011. This is primarily due to higher professional service margins yielding an improvement of 1,040 basis points as a result of improved labor efficiencies. The support gross profit margins increased approximately 130 basis points in line with our continued strategic initiatives focused on more profitable revenue streams. Products gross profit margin declined less than 100 basis points consistent with price compression associated with remarketed products in the market.

Operating expenses

Operating expenses, excluding the one-time charges for asset impairments and related charges and restructuring and related charges, decreased $0.4 million or 0.4% in fiscal 2012 compared with fiscal 2011. On a segment basis, HSG and RSG increased $2.1 million and $0.6 million, respectively, and Corporate decreased $3.1 million.

Product development. Product development includes all costs associated with research and development. Product development increased $2.8 million or 10.1% in fiscal 2012 compared with fiscal 2011. Product development expenses increased $2.0 million in HSG and $0.8 million in RSG in fiscal 2012 compared to fiscal 2011. This increase at both segments is driven by the continued investment in internal resources to enhance the existing products and develop our future platforms as well as at RSG by the incremental costs associated with employee incentives due to over-achievement of operating unit targets.

Sales and marketing. Sales and marketing increased $1.8 million or 8.1% in fiscal 2012 compared with fiscal 2011. Sales and marketing expenses increased $1.1 million in HSG and $0.7 million in RSG in fiscal 2012 compared to fiscal 2011. This increase in HSG is a result of investment in domestic and international sales resources as well, as a one-time specific bad debt expense of $0.4 million. The increase in RSG is associated with employee incentives due to over-achievement of operating unit targets.

General and administrative. General and administrative decreased $4.2 million or 11.4% in fiscal 2012 compared to fiscal 2011. General and administrative expenses decreased $1.1 million in HSG, $1.2 million in RSG and $1.9 million in Corporate. HSG and RSG expenses decreased as a result of lower employee related costs created by efficiencies in back-office processes. The Corporate savings are a result of the restructuring and moving the corporate services from Solon, Ohio to Alpharetta, Georgia as well as certain one-time professional fees incurred in 2011 that did not repeat in fiscal 2012 associated with the post-implementation efforts of the Oracle ERP system.

Amortization of intangibles. Amortization of intangibles decreased $1.4 million or 28.0% in fiscal 2012. This decrease is due to certain internal use software reaching their useful lives in fiscal 2011.

Asset impairments and related charges. We recorded asset impairments and related charges of $9.7 million and $1.0 million in fiscal 2012 and fiscal 2011, respectively. During the fourth quarter of 2012, it was determined that certain developed technologies would no longer be offered for sale. As a result, we have impaired the entire remaining assets of $8.6 million, and the accrued estimated costs associated with a transition plan for all of the existing customers off of this platform of $1.1 million. In fiscal 2011, we concluded that certain internally developed software within HSG was no longer being sold. As a result, we recorded an impairment charge of $0.1 million. Also in fiscal 2011, we concluded that we were no longer using certain indefinite-lived intangible assets related to HSG trade names. Accordingly, we recorded an impairment charge of $0.9 million.

Restructuring and related charges. We recorded restructuring and related charges of $15.9 million and $0.4 million during fiscal 2012 and 2011, respectively. Under the fiscal 2012 restructuring plan we recorded restructuring charges comprised of primarily $3.5 million of lease termination and related facility closing costs and $8.0 million of severance and related benefits in each segment. In addition, we incurred accelerated depreciation of $4.4 million of property and equipment that was due to the relocation of our previous corporate services in Solon, Ohio to Alpharetta, Georgia, and closing our facilities in Emeryville, California and Frederick, Maryland in the fourth quarter of fiscal 2012. Our restructuring actions are discussed further in the subsection of this MD&A titled, Restructuring and Related Charges and in Note 4 to the Consolidated Financial Statements titled, Restructuring and Related Charges.

The restructuring charges recorded in fiscal 2011 consist of settlement costs of $0.4 million related to the payment of an obligation under Agilysys' nonqualified executive retirement defined benefit pension plan for an executive officer (the "SERP") who was part of the fiscal 2009 restructuring actions.

Other (Income) Expenses



                                              Year ended March 31,           (Unfavorable) favorable

(Dollars in thousands)                            2012           2011                $                %
Other (income) expenses
Interest income                             $     (103 )     $    (73 )    $        30            41.1%
Interest expense                                   978          1,297              319            24.6%
Other expense (income), net                        181         (2,294 )         (2,475 )       (107.9)%
Total other expenses (income), net          $    1,056       $ (1,070 )    $    (2,126 )       (198.7)%

Interest income. Interest income increased slightly during fiscal 2012 compared to fiscal 2011 as a result of interest earned from the investment in treasury notes with the cash proceeds from the sale of TSG during the third quarter of fiscal 2012.

Interest expense. Interest expense consists of costs associated with our Credit Facility, the amortization of deferred financing fees, loans on corporate-owned life insurance policies, and capital leases. Interest expense decreased $0.3 million in fiscal 2012 compared to fiscal 2011 due to the termination of the Credit Facility. We terminated the Credit Facility in July 2011 and immediately expensed approximately $0.4 million in unamortized deferred financing fees related to the former Credit Facility.

Other (income) expenses, net. In fiscal 2012, the $0.2 million of other expense primarily consists of losses recognized as a result of movements in foreign currencies relative to the U.S. dollar. In fiscal 2011, the $2.3 million in other income primarily included a gain of $2.1 million recorded on the $2.2 million in proceeds received as a death benefit from certain corporate-owned life insurance policies.

The following table compares our income tax (benefit) expense and effective tax rates for the fiscal years ended March 31, 2012 and 2011:

(Dollars in thousands) 2012 2011 $ % Income tax (benefit) expense $ (8,007 ) $ 2,420 $ 10,427 nm Effective tax rate (19.0)% (11.8)%

nm - not meaningful

We recorded an effective tax rate benefit from continuing operations of 19.0% in fiscal 2012 compared with an effective tax rate expense of 11.8% in fiscal 2011.

For the years ended March 31, 2012 and 2011, the effective tax rate was different than the statutory rate due primarily to the intra-period tax allocation rules associated with the discontinued operations and recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance. Other items effecting the rate in the fiscal 2012 include foreign and state taxes, a decrease in unrecognized tax benefits attributable to expiration of statute of limitations, and other U.S. permanent book to tax differences. In fiscal 2011, an increase in the valuation allowance was recorded due to the correction of an error, as more fully described in Note 2 to the Consolidated Financial Statements titled, Summary of Significant Accounting Policies. Other items effecting the rate in fiscal 2011 include non-taxable life insurance proceeds, a decrease in unrecognized tax benefits attributable to the expiration of statute of limitations, and other U.S. permanent book to tax differences.

Although the timing and outcome of tax settlements are uncertain, it is reasonably possible that during the next 12 months a reduction in unrecognized tax benefits may occur in the range of zero to $0.2 million based on the outcome of tax examinations and as a result of the expiration of various statutes of limitations. We are routinely audited; due to the ongoing nature of current examinations in multiple jurisdictions, other changes could occur in the amount of gross unrecognized tax benefits during the next 12 months which cannot be estimated at this time.

Fiscal 2011 Compared with Fiscal 2010

Net Revenue and Operating Loss

The following table presents our consolidated revenue and operating results for
the fiscal years ended March 31, 2011 and 2010:



                                                     Year ended March 31,             (Decrease) increase

(Dollars in thousands)                                  2011            2010                $              %
Net revenue:
Products                                          $  104,769       $ 103,501       $    1,268           1.2%
Support, maintenance and subscription services        70,729          63,218            7,511          11.9%
Professional services                                 27,183          26,787              396           1.5%
Total                                                202,681         193,506            9,175           4.7%
Cost of goods sold:
Products                                              80,090          80,825             (735 )       (0.9)%
Support, maintenance and subscription services        25,507          23,148            2,359          10.2%
Professional services                                 21,445          15,525            5,920          38.1%
Total                                                127,042         119,498            7,544           6.3%
Gross profit                                          75,639          74,008            1,631           2.2%
Gross profit margin                                    37.3%           38.2%
Operating expenses:
Product development                                   27,531          28,241             (710 )       (2.5)%
. . .