UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2004

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission file number 0-5734

AGILYSYS, INC.

Registrant’s telephone number, including area code: (440) 720-8500

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 reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No o

The number of shares of the registrant’s common stock outstanding as of February 4, 2005 was 28,759,799.

AGILYSYS, INC.

Index

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

AGILYSYS, INC.

See accompanying notes to the unaudited condensed consolidated financial statements.

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AGILYSYS, INC.

See accompanying notes to the unaudited condensed consolidated financial statements.

4

AGILYSYS, INC.

See accompanying notes to the unaudited condensed consolidated financial statements.

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AGILYSYS, INC.

1. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Agilysys, Inc. and its subsidiaries (the “Company”). Investments in affiliated companies are accounted for by the equity or cost method, as appropriate. All inter-company accounts have been eliminated.

The unaudited interim financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the instructions for Form 10-Q under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Article 10 of Regulation S-X under the Exchange Act. Certain information and footnote disclosures required to be included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements.

The condensed consolidated balance sheet as of December 31, 2004, as well as the condensed consolidated statements of operations and condensed consolidated statements of cash flows for the three and nine-months ended December 31, 2004 and 2003 have been prepared by the Company without audit. The financial statements have been prepared on the same basis as those in the audited annual financial statements. In the opinion of management, all adjustments necessary to fairly present the results of operations, financial position, and cash flows have been made. Such adjustments were of a normal recurring nature. The results of operations for the three and nine-months ended December 31, 2004 are not necessarily indicative of the operating results for the full fiscal year or any future period.

Significant Accounting Policies

A detailed description of the Company’s significant accounting policies can be found in the audited financial statements for the fiscal year ended March 31, 2004, included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission. There have been no material changes in the Company’s significant accounting policies from those disclosed therein.

Stock-Based Compensation

The Company applies the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, to account for employee stock compensation costs, which is referred to as the intrinsic value method. Since the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation cost is recognized for the Company’s stock option plans. The Company has adopted the disclosure provisions of the Financial Accounting Standard Board (“FASB”) Statement No. 123, Accounting for Stock-Based Compensation, as amended by Statement 148, Accounting for Stock-Based Compensation – Transition and Disclosure.

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1. Basis of Presentation and Significant Accounting Policies – continued

The following table shows the effects on net income and earnings per share had compensation cost been measured on the fair value method pursuant to Statement 123:

Reclassifications

Certain prior year amounts have been reclassified to conform to the current presentation.

2. Recently Issued Accounting Pronouncement

On December 16, 2004, the FASB issued Statement 123 (revised 2004), Share Based Payment, which is a revision of Statement 123. Statement 123(R) supersedes APB Opinion No. 25 and amends Statement 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in operating results based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) will be effective for the Company at the beginning of the first interim period beginning after June 15, 2005, or the beginning of the Company’s second quarter of fiscal 2006.

Statement 123(R) permits public companies to adopt its requirements using one of two methods: (1) a “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date, or (2) a “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. The Company has not yet determined which of the two methods it will use to adopt the provisions of Statement 123(R).

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2. Recently Issued Accounting Pronouncement – continued

As permitted by Statement 123, the Company currently accounts for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method will have an impact on the Company’s operating results. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted Statement 123(R) in prior periods, the impact would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 1. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions have not been significant.

3. Recent Acquisitions

In accordance with FASB Statement 141, Business Combinations, the Company allocates the purchase price of its acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. The excess purchase price over the fair values of the net assets acquired is recorded as goodwill. In fiscal 2004, the Company acquired two businesses, Kyrus Corporation (“Kyrus”) and Inter-American Data, Inc. (“IAD”).

Kyrus Corporation

Kyrus was acquired on September 30, 2003. The results of Kyrus’ operations have been included in the Company’s consolidated financial statements since that date. Kyrus was an IBM Master Distributor and Premier Business Partner in retail sales solutions. The acquisition expands the Company’s operations to include a wide range of services and solutions, including hardware and software products and extensive professional services to customers in the retail industry. The purchase price was $29.6 million, offset by approximately $0.9 million of cash acquired, with approximately $26.6 million assigned to goodwill in fiscal 2004 based on the estimated fair vales of the net assets acquired.

As of September 30, 2004, the Company finalized its purchase price allocation and made several adjustments to the fair value assigned to the net assets acquired. First, the Company recorded an additional $26,700 of costs that were directly associated with the Kyrus acquisition, resulting in an increase to goodwill. Second, the Company lowered the estimated fair value of certain liabilities assumed by approximately $0.3 million, resulting in a decrease to goodwill. Third, the Company recorded a liability of $1.2 million relating to state tax uncertainties existing at the date of acquisition, which increased goodwill. The Company may have to record additional amounts for similar tax uncertainties in the future; however such amounts cannot be estimated at this time. Any additional amounts recorded by the Company for state tax uncertainties that existed at the date of acquisition will result in a change to goodwill.

In addition to the above, the Company also recorded approximately $1.9 million of intangible assets acquired, and simultaneously reduced goodwill. Of the intangible assets acquired, $1.7 million was assigned to customer relationships, which is being amortized over five years using an accelerated method; $210,000 was assigned to non-competition agreements, which is being amortized over six years using the straight-line method; and $30,000 was assigned to developed technology, which is being amortized over

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3. Recent Acquisitions – continued

eight years using the straight-line method. It is not anticipated that such assets will have significant residual values.

Inter-American Data, Inc.

IAD was acquired on February 17, 2004. The results of IAD’s operations have been included in the Company’s consolidated financial statements since that date. IAD was a leading developer and provider of software and services to hotel casinos and major resorts in the United States. The acquisition provides significant opportunities for growth in the hospitality industry. The purchase price was $38.0 million, with approximately $35.7 million assigned to goodwill in fiscal 2004 based on the estimated fair values of assets acquired and liabilities assumed. During the first quarter of fiscal 2005, the Company recorded an additional liability of $151,000 assumed in the acquisition, with a corresponding increase to goodwill. The liability related to one-time involuntary termination costs for employees of IAD whose job functions were terminated during the integration of IAD. Termination benefits are expected to continue through the current fiscal year. During the current quarter, the Company lowered the estimated fair value of certain assets acquired by $1.2 million, resulting in an increase to goodwill.

During the current quarter, the Company also recorded $6.7 million of intangible assets acquired, and simultaneously reduced goodwill. Of the intangible assets acquired, $3.6 million was assigned to customer relationships, which is being amortized over five years using an accelerated method; $1.4 million was assigned to developed technology, which is being amortized over six years using the straight-line method; $700,000 was assigned to non-competition agreements, which are being amortized over seven to eight years using the straight-line method; $80,000 was assigned to patented technology, which is being amortized over three years using the straight-line method; and $900,000 was assigned to trade names, which have been assigned indefinite useful lives and will be tested for impairment at least annually. It is not anticipated that such assets will have significant residual values.

4. Discontinued Operations

During fiscal 2003, the Company sold substantially all of the assets and liabilities of its Industrial Electronics Division (“IED”), which distributed semiconductors, interconnect, passive and electromechanical components, power supplies and embedded computer products in North America and Germany. In connection with the sale of IED, the Company discontinued the operations of Aprisa, Inc. (“Aprisa”), which was an internet-based start up corporation that created customized software for the electronic components market. The disposition of IED and discontinuance of Aprisa represented a disposal of a component of an entity as defined by FASB Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company continues to incur certain costs related to IED and Aprisa, which are reported in the condensed consolidated statement of operations as loss from discontinued operations.

For the three-months ended December 31, 2004 and 2003, the Company realized a loss from discontinued operations of $229,353 (net of $141,050 in income taxes) and $458,238 (net of $219,789 in income taxes), respectively. For the nine-months ended December 31, 2004 and 2003, the Company realized a loss from discontinued operations of $489,284 (net of $307,725 in income taxes) and $1.5 million (net of $0.8 million in income taxes), respectively.

The loss from discontinued operations for the nine-months ended December 31, 2004 includes the sale of a distribution facility and adjacent land. Proceeds from the sale of the distribution facility and land were approximately $3.3 million, resulting in a loss on sale of $0.3 million.

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5. Restructuring Charges

Continuing Operations

In the fourth quarter of fiscal 2003, concurrent with the sale of IED, the Company announced it would restructure its remaining enterprise computer solutions business and facilities to reduce overhead and eliminate assets that were inconsistent with the Company’s strategic plan and were no longer required. In connection with this reorganization, the Company recorded restructuring charges totaling $20.7 million for the impairment of facilities and other assets no longer required as well as severance, incentives, and other employee benefit costs for personnel whose employment was involuntarily terminated. The charges were classified as restructuring charges in the consolidated statement of operations.

Severance, incentives, and other employee benefit costs were to be paid to approximately 110 personnel. Facilities costs represent the present value of qualifying exit costs, offset by an estimate for future sublease income for a vacant warehouse that represents excess capacity as a result of the sale of IED.

Following is a reconciliation of the beginning and ending balances of the restructuring liability:

Of the remaining $5.5 million liability at December 31, 2004, approximately $0.2 million is expected to be paid during the remainder of fiscal 2005 for facilities obligations. Facilities obligations are expected to continue until 2017.

Discontinued Operations

In connection with the sale of IED in fiscal 2003, the Company recognized a restructuring charge of $28.7 million. The significant components of the charge were as follows: $5.9 million related to severance and other employee benefit costs to be paid to approximately 525 employees previously employed by IED and not hired by the acquiring company; $5.0 million related to facilities costs for approximately 30 vacated locations no longer required as a result of the sale that were determined as the present value of qualifying exit costs offset by an estimate for future sublease income; and $17.4 million related to the write down of assets to fair value that were abandoned or classified as “held for sale,” as a result of the disposition and discontinuance of IED and Aprisa, respectively.

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5. Restructuring Charges – continued

Following is a reconciliation of the beginning and ending balances of the restructuring liability related to discontinued operations:

Of the remaining $2.2 million reserve at December 31, 2004, approximately $0.2 million is expected to be paid during the remainder of fiscal 2005 for facilities obligations. Facilities obligations are expected to continue until 2010.

6. Goodwill and Intangible Assets

Goodwill

Changes in the carrying amount of goodwill during the nine-months ended December 31, 2004 are summarized in the following table:

In accordance with FASB Statement 142, Goodwill and Other Intangible Assets, the Company does not amortize goodwill; rather, goodwill is tested for impairment on an annual basis, or more often if conditions exist which indicate potential impairment. The Company uses a measurement date of February 1 for its annual impairment test of goodwill. As of February 1, 2004, which was the latest annual impairment test performed, the Company concluded that the fair value of its reporting unit exceeded its carrying value, including goodwill. As such, step two of the goodwill impairment test was not necessary and no impairment loss was recognized. As of December 31, 2004, the Company was not aware of any circumstances or events requiring an interim impairment test of goodwill.

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6. Goodwill and Intangible Assets – continued

Intangible Assets

Following is a summary of the Company’s intangible assets at December 31, 2004:

Amortization expense for the three and nine-months ended December 31, 2004 was $1.7 million and $2.3 million, respectively. Estimated amortization expense for the entire fiscal year is approximately $2.9 million.

7. Mandatorily Redeemable Convertible Trust Preferred Securities

In 1998, Pioneer-Standard Financial Trust (the “Pioneer-Standard Trust”) issued 2,875,000 shares relating to $143.7 million of 6.75% Mandatorily Redeemable Convertible Trust Preferred Securities (the “Trust Preferred Securities”). The Pioneer-Standard Trust, a statutory business trust, is a wholly-owned consolidated subsidiary of the Company, with its sole asset being $148.2 million aggregate principal amount of 6.75% Junior Convertible Subordinated Debentures of Agilysys, Inc. due March 31, 2028 (the “Trust Debentures”). The Company has executed a guarantee with regard to the Trust Preferred Securities. The guarantee, when taken together with the Company’s obligations under the Trust Debentures, the indenture pursuant to which the Trust Debentures were issued and the applicable trust document, provide a full and unconditional guarantee of the Pioneer-Standard Trust’s obligations under the Trust Preferred Securities. The Trust Preferred Securities are non-voting (except in limited circumstances), pay quarterly distributions at an annual rate of 6.75%, carry a liquidation value of $50 per share and are convertible at the option of the holder into the Company’s Common Shares at any time prior to the close of business on March 31, 2028. As of March 31, 2004, the Trust Preferred Securities were redeemable at the option of the Company for a redemption price of 102.7% of par reduced annually by 0.675% to a minimum of $50 per Trust Preferred Security. The redemption price will be reduced to 100% of par by March 31, 2008.

During the three and nine-months ended December 31, 2004, 2,000 Trust Preferred Securities were converted into 6,349 of the Company’s Common Shares. The conversion reduced the carrying value of the Trust Preferred Securities to $125.3 million.

During the nine-months ended December 31, 2003, the Company repurchased 365,000 Trust Preferred Securities for a cash purchase price of approximately $17.0 million. The repurchased securities had a face value of approximately $18.3 million. The difference between the face value and cash paid, offset by the expensing of related deferred financing fees, resulted in a net gain of $0.7 million.

As of December 31, 2004, a total of 368,500 Trust Preferred Securities have been redeemed or converted by the Company.

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8. Subscribed-for Shares

In July 1996, the Company entered into a Share Subscription Agreement and Trust (the “Trust”) with Wachovia Bank of North Carolina. The Trust had subscribed for 5,000,000 common shares of the Company which were to be paid for over the 15 year term of the Trust. Proceeds from the sale of the common shares were to be used to fund Company obligations under various employee benefit plans, to pay cash bonuses and other similar employee related Company obligations. The subscribed-for common shares were deemed to be issued and outstanding for voting and dividend purposes, but were not fully paid and non-assessable until payment for such common shares was received as provided in the Trust. In accordance with generally accepted accounting principles, none of the subscribed-for shares were deemed outstanding for purposes of calculating earnings per share until payment was received for the common shares as provided in the Trust.

In December 2004, the Company terminated the Trust. Upon termination, the remaining 3.6 million common shares subject to the Trust were dissolved with the related common shares cancelled and retired. This activity reduced the stated value of common shares by $1.1 million, capital in excess of stated value by $41.6 million and unearned employee benefits by $42.7 million.

9. Contingencies

The Company is the subject of various threatened or pending legal actions and contingencies in the normal course of conducting its business. The Company provides for costs related to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on the Company’s future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount or timing of the resolution of such matters. While it is not possible to predict with certainty, management believes that the ultimate resolution of such matters will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

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10. Comprehensive Income

The components of comprehensive income, net of tax, for the three and nine-months ended December 31, 2004 and 2003 are as follows:

11. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

Diluted earnings per share is computed by sequencing each series of issues of potential common shares from the most dilutive to the least dilutive. Diluted earnings per share is determined as the lowest earnings per incremental share in the sequence of potential common shares.

For the three-months ended December 31, 2004 and 2003, options on zero and 2.7 million shares of common stock, respectively, were not included in computing diluted earnings per share because their effects were antidilutive.

For the nine-months ended December 31, 2004 and 2003, options on 0.9 million and 3.0 million shares of common stock, respectively, were not included in computing diluted earnings per share nor were zero and 8.0 million shares, respectively, issuable upon conversion of the Trust Preferred Securities because their effects were antidilutive.

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

AGILYSYS, INC.

Management’s Discussion and Analysis of
Results of Operations and Financial Condition

The following discussion should be read in conjunction with the condensed consolidated financial statements and the related notes that appear elsewhere in this document as well as the Company’s Annual Report on Form 10-K for the year ended March 31, 2004.

Overview

Agilysys, Inc. (the “Company”) is one of the foremost distributors and premier resellers of enterprise computer technology solutions. The Company sells complex servers, software, storage and services to resellers and corporate customers across a diverse set of industries. The Company also provides customer-centric software applications and services focused on the retail and hospitality markets. As an integrator of server, storage, software and services needs, the Company is able to partner with its customers to become a single solutions provider for enterprise computing requirements.

Net sales grew by 12.3% and 22.8% for the three and nine-months ended December 31, 2004, respectively, compared with the same periods last year. Information technology spending continued to be strong during the fiscal third quarter. In addition, the two business acquisitions made in fiscal 2004 have positively contributed to the overall increase in sales.

Net income increased to $14.2 million and $21.8 million for the three and nine-months ended December 31, 2004, respectively, compared with net income of $8.7 million and $3.8 million for the comparable periods last year. In addition to the impact of the sales increases noted above, several other factors contributed to the improvement in net income. Selling, general and administrative expenses decreased to 7.7% and 9.3% of sales for the three and nine-months ended December 31, 2004, respectively, compared with 8.4% and 9.9% of sales for the same periods last year. Net income also benefited from lower levels of restructuring charges and lower interest expense in the current quarter and year-to-date versus the comparable periods last year.

During the nine months ended December 31, 2004, the Company’s operating activities generated cash of $60 million. The favorable operating results experienced during the year have improved the Company’s financial flexibility to fund organic growth and to make acquisitions. Such results provide the ability to expand the number of customers and markets the Company serves, as well as the breadth of solutions offerings.

The following discussion of the Company’s results of operations and financial condition is intended to provide information that will assist in understanding the Company’s financial statements, including key changes in financial statement components and the primary factors that accounted for those changes.

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Results of Operations

Three Months Ended December 31, 2004 Compared with December 31, 2003

Net Sales and Operating Income

Net Sales

The $56.3 million increase in net sales was attributed to the following changes in net sales by major product category compared with the same period last year: hardware sales increased by $63.3 million, software sales decreased by $10.2 million, service and other revenue increased by $3.2 million.

The increase in hardware sales is attributable to higher server and storage sales volume to medium sized corporate end-users primarily through the Company’s distribution business. Software sales in the current year, although down from last year’s fiscal third quarter, were very strong and represent the second highest quarterly sales level in the Company’s history. The improvement in services and other sales results primarily from incremental solutions offerings from the Company’s two recent business acquisitions.

The incremental sales generated from the Company’s acquisition of IAD contributed $9.2 million, or 16.3% of the total increase in net sales. IAD was acquired on February 17, 2004; thus, did not impact prior year results.

The Company anticipates net sales for the full year to increase approximately 20% compared with the prior fiscal year. In addition, the Company experiences a seasonal increase in sales during its fiscal third quarter ending in December. Accordingly, the results of operations for the three-months ended December 31, 2004 are not necessarily indicative of the operating results for the full fiscal year 2005.

Gross Margin

The $6.4 million increase in gross margin is primarily a result of higher sales compared with last year, as gross margin percentage was comparable with prior year results. Improvements in gross margin attributed to the Company’s two acquisitions were principally offset by a decline in gross margin realized by the Company’s base business. The decline in base business gross margin is largely due to the competitive pricing environment and the mix of sales being more heavily weighted to the Company’s distribution business.

A significant component of the Company’s gross margin is the realization and timing of incentive payments from its suppliers. Incentive programs are principally designed to reward sales performance

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and on average tend to rise as a percent of sales as the Company’s fiscal year progresses and it achieves predefined sales goals. The Company anticipates gross margin to be approximately 13% of net sales for the entire fiscal year 2005.

Operating Expenses

The Company experienced a $0.5 million increase in operating expenses, which includes selling, general, and administrative (“SG&A”) expenses and restructuring expenses, compared with last year. The Company’s acquisition of IAD added approximately $4.5 million of SG&A during the current quarter. These incremental costs were principally offset by a series of improvements and benefits realized in operating costs during the current quarter, as discussed below.

During the current quarter, the Company recognized a $1.5 million recovery of bad debts that were previously written off. The Company also realized lower restructuring costs of approximately $0.8 million, as most of the Company’s restructuring efforts were in prior years. Ongoing restructuring costs relate to lease obligations. Other miscellaneous improvements and benefits in operating costs increased $1.7 million during the current quarter compared with last year.

Overall, management’s concerted efforts to control operating costs while increasing sales has resulted in a reduction of SG&A expenses as a percentage of net sales to 7.7% in the current quarter from 8.4% in the third-quarter last year. SG&A expenses are expected to be approximately 9.5% of net sales for the entire fiscal year.

Other (Income) Expense

The 67.9% decrease in interest expense, net is primarily attributable to lower average debt levels in the current quarter compared with prior year, as the interest rates applicable to the Company’s long-term debt are fixed. The Company’s average long-term debt was $59.7 million in the current quarter versus $97.6 million last year. In addition, interest income increased approximately $0.5 million during the current quarter compared with the same period last year. The increase in interest income reflects higher yields earned on the Company’s short term investments due to a rising interest rate environment experienced this year. For financial statement presentation purposes, interest expense and interest income are combined to arrive at interest expense, net.

The Company repurchased $10.2 million of 9.5% Senior Notes in the third quarter of fiscal 2004 for approximately $11 million. The premium paid in the repurchase, along with the write-off of deferred financing costs, resulted in the $0.7 million loss on the retirement of debt reported in the three-months ended December 31, 2003. No such repurchase occurred during the three-months ended December 31, 2004.

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Income Tax Expense

The effective tax rate for continuing operations for the three-months ended December 31 2004 was 37.8% versus 40.0% for the comparable quarter in the prior year. The decrease in the effective tax rate primarily reflects the recognition of state net operating loss carryforwards.

Nine Months Ended December 31, 2004 Compared with December 31, 2003

Net Sales and Operating Income

Net Sales

The $235.1 million increase in net sales was attributed to the following changes in net sales by major product category compared with the same period last year: hardware sales increased by $201.7 million, software sales increased by $16.4 million, service and other revenue increased by $17.0 million.

The improvement in hardware sales continues to be attributable to higher server and storage sales volume to medium sized corporate end-users primarily through the Company’s distribution business. The increase in software sales was largely due to software offerings from IAD, which was acquired in the fourth quarter last year. The improvement in services and other sales results primarily from incremental solutions offerings from the Company’s two recent business acquisitions.

The incremental sales generated from the Company’s acquisition of IAD contributed $25.5 million, or 10.8% of the total increase in net sales. IAD was acquired on February 17, 2004; thus, did not impact prior year results. In addition, the Company realized nine months of sales activity in the current year from its acquisition of Kyrus; whereas Kyrus only contributed three months of sales activity last year as the business was acquired on September 30, 2003. As a result, net sales attributed to the Kyrus business during the nine-months ended December 31, 2004 were $62.3 million higher versus the comparable period last year.

The Company anticipates net sales for the full year to increase approximately 20% compared with prior fiscal year. In addition, the Company experiences a seasonal increase in sales during its fiscal third quarter ending in December. Accordingly, the results of operations for the nine-months ended December 31, 2004 are not necessarily indicative of the operating results for the full fiscal year 2005.

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Gross Margin

The $33.7 million increase in gross margin is largely due to higher sales activity and the impact of the Company’s two recent acquisitions. Higher sales activity compared with last year contributed $18.4 million of the increase. The two business acquisitions contributed $24.4 million to the increase. These improvements were offset by a $9.1 million decrease in gross margin resulting from lower pricing in the Company’s distribution business, due primarily to continued competition in the marketplace and the mix of sales being more heavily weighted to the Company’s distribution business.

A significant component of the Company’s gross margin is the realization and timing of incentive payments from its suppliers. Incentive programs are principally designed to reward sales performance and on average tend to rise as a percent of sales as the Company’s fiscal year progresses and it achieves predefined sales goals. The Company anticipates gross margin to be approximately 13% of net sales for the entire fiscal year 2005.

Operating Expenses

The Company experienced a $14.3 million, or 13.8%, increase in operating expenses, which includes selling, general, and administrative (“SG&A”) expenses and restructuring charges. The increase was related to the two recent acquisitions, which increased SG&A expenses by $18.2 million. These costs were offset by a reduction in operating costs of the base business, as discussed below.

The Company recognized a decrease in restructuring costs of $1.6 million compared with the same period last year. The current year restructuring costs represent the accretion of lease obligations previously recorded under the Company’s prior restructuring efforts. In addition, the Company recognized a $1.5 million recovery of bad debts that were previously written off. Other miscellaneous improvements and benefits in operating costs increased $0.8 million during the current quarter compared with last year.

Consistent with quarterly results, management has been able to control SG&A expenses while increasing sales, which has lowered SG&A expenses as a percentage of net sales to 9.3% during the current year from 9.9% during the same nine-month period last year. SG&A expenses are expected to be approximately 9.5% of net sales for the entire fiscal year.

Other Income (Expense)

The 58.8% decrease in interest expense, net is primarily attributable to lower average debt levels in the nine-months ended December 31, 2004 compared to prior year, as the interest rates applicable to the Company’s long-term debt are fixed. The Company’s average long-term debt was $59.6 million in the current year versus $111.8 million last year. The increase in interest income during the nine-months ended December 31, 2004 was not a significant component of the change in interest expense, net when compared with the same period last year.

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For financial statement presentation purposes, interest expense and interest income are combined to arrive at interest expense, net.

The Company repurchased $44.2 million of its 9.5% Senior Notes and $17 million of its Convertible Preferred Securities during the nine-months ended December 31, 2003. The Senior Note repurchase resulted in a loss of $4.0 million and the repurchase of Convertible Preferred Securities resulted in a gain of $0.7 million, aggregating to a $3.3 million loss on retirement of debt reported for the nine-months ended December 31, 2003. No such repurchases occurred during the nine-months ended December 31, 2004.

Income Tax Expense

The effective tax rate for continuing operations for the nine-months ended December 31, 2004 was 37.5% versus 40.0% for the comparable period in the prior year. The decrease in the effective tax rate primarily reflects the recognition of state net operating loss carryforwards.

Liquidity and Capital Resources

Overview

The Company’s operating cash requirements consist primarily of working capital requirements, scheduled payments of principal and interest on indebtedness outstanding and capital expenditures. The Company believes that cash flow from operating activities, cash on hand, available borrowings under its credit facility, and access to capital markets will provide adequate funds to meet its short and long-term liquidity requirements.

The Company’s total debt consists of Senior Notes, Convertible Securities, and Capital lease obligations. Total debt at December 31, 2004 was $185.3 million, compared with $185.2 million at March 31, 2004. The minor increase in the Company’s total debt reflects software and equipment acquisitions through capital leases made in the current year, offset by ongoing payment of capital lease obligations. Total debt was also reduced by the conversion of $0.1 million of the Company’s Convertible Preferred Securities to 6,349 common shares of the Company during the third-quarter of the current year. The Company did not voluntarily repurchase Senior Notes or Convertible Preferred Securities during the nine-months ended December 31, 2004. The Senior Notes and Convertible Preferred Securities are due in August 2006 and March 2028, respectively. In addition, there were no borrowings outstanding under the Company’s revolving credit facility at December 31, 2004, with unused availability of $100 million as of December 31, 2004. The Company was compliant with all quarterly financial covenants contained in its revolving credit facility and anticipates that it will continue to comply with such covenants in the foreseeable future.

Senior Notes

The principal amount of Senior Notes outstanding at December 31, 2004 was $59.4 million. The Senior Notes pay interest semi-annually on February 1 and August 1 at an annual rate of 9.5%. Interest accrued on the Senior Notes as of December 31, 2004 was approximately $2.4 million. The indenture under which the Senior Notes were issued limits the creation of liens, sale and leaseback transactions, consolidations, mergers and transfers of all or substantially all of the Company’s assets, and indebtedness of the Company’s restricted subsidiaries. The Senior Notes are subject to mandatory repurchase by the Company at the option of the holders in the event of a change in control of the Company.

Convertible Preferred Securities

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The carrying value of Convertible Preferred Securities at December 31, 2004 was $125.3 million. The Convertible Preferred Securities are non-voting (except in limited circumstances), pay quarterly distributions at an annual rate of 6.75%, carry a liquidation value of $50 per share and are convertible into the Company’s common shares at the option of the holder at any time prior to the close of business on March 31, 2028. The Convertible Preferred Securities are convertible into common shares at the rate of 3.1746 common shares for each Convertible Preferred Security (equivalent to a conversion price of $15.75 per common share). As described above, $0.1 million of the Convertible Preferred Securities debt was converted to 6,349 common shares of the Company during the quarter ended December 31, 2004.

Revolving Credit Facility

The Company maintains a revolving credit agreement (“Revolver”), which provides the ability to borrow up to $100 million, limited to certain borrowing base calculations, and allows for increases under certain conditions up to $150 million during the life of the facility. Advances on the Revolver bear interest at various levels over LIBOR, and a facility fee is required, both of which are determined based on the Company’s leverage ratio. The Revolver does not contain a pre-payment penalty. There were no amounts outstanding under the Revolver at December 31, 2004.

Cash Flow

The following table presents cash flow results from operating activities, investing activities, and financing activities for the nine-months ended December 31, 2004 and 2003:

Cash Flow from Operating Activities

Cash provided by operating activities improved $141.7 million during the nine-months ended December 31, 2004 as compared to the corresponding period last year. Several factors contributed to the improvement. First, earnings improved $16.9 million, or 315.7%, compared with the same period last year. The improvement had a direct impact on operating cash flow. Second, improved customer payment patterns generated higher levels of cash flow as compared with prior year. Despite a 22.8% increase in sales year-over-year, the increase in accounts receivable during the nine-months ended December 31, 2004 was 43.9% less than the same period last year. Third, the timing of payments of accounts payable resulted in a larger impact on working capital compared with the same period last year. The change in accounts payable during the current year was 20.9% higher than last year. Finally, the increase in the Company’s income tax payable compared with the same period last year improved operating cash flow. This increase is largely a function of higher pre-tax income earned by the Company in the current year.

Cash Flow used for Investing Activities

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Cash used for investing activities for the nine-months ended December 31, 2004 was for capital expenditures primarily related to information technology infrastructure and facility construction costs. In the comparable period last year, cash used for investing activities included the acquisition of Kyrus Corporation for approximately $28.7 million (net of cash acquired) in addition to cash payments for capital expenditures. These cash outflows in fiscal 2004 were partially offset by proceeds of $3.3 million from the sale of the Company’s investment in Eurodis Electron PLC (“Eurodis”). The Company recognized a gain of approximately $1.0 million from the sale of its investment in Eurodis.

The estimated capital expenditures for the full 2005 fiscal year are expected to be approximately $2.0 million and primarily relate to information systems and facility projects.

Cash Flow from Financing Activities

During the nine-months ended December 31, 2004, the Company paid dividends of approximately $2.5 million. Dividend payments were offset primarily by proceeds from the issuance of common stock under the Company’s stock-based compensation plans, which were approximately $2.8 million and are included in the “Other” category on the condensed consolidated statement of cash flows. Proceeds from the issuance of common stock were offset by $0.3 million principal payments under the Company’s capital lease obligations, which are also classified within the “Other” category.

During the nine-months ended December 31, 2003, cash used for financing activities was mainly used for the repurchase of Convertible Preferred Securities for approximately $17.0 million, the repurchase of Senior Notes for approximately $44.2 million, and dividend payments of approximately $2.6 million.

Cancellation of Subscribed-for Shares

In July 1996, the Company entered into a Share Subscription Agreement and Trust (the “Trust”) with Wachovia Bank of North Carolina. The Trust had subscribed for 5,000,000 common shares of the Company which were to be paid for over the 15 year term of the Trust. Proceeds from the sale of the common shares were to be used to fund Company obligations under various employee benefit plans, to pay cash bonuses and other similar employee related Company obligations. The Company’s Board of Directors and its various Committees carefully reconsidered the role of the Trust in connection with the Company and its compensation and benefit programs and concluded that the Trust no longer served its intended purpose for the Company and its shareholders. As a result, the Trust was terminated in December 2004. Upon termination, the remaining 3.6 million common shares subject to the Trust were dissolved with the related common shares cancelled and retired. This activity reduced the stated value of common shares by $1.1 million, capital in excess of stated value by $41.6 million and unearned employee benefits by $42.7 million; thus having no net impact on shareholders’ equity.

Contractual Obligations

The Company has contractual obligations for long-term debt, capital leases and operating leases that were summarized in a table of contractual obligations in the Company’s Annual Report on Form 10-K for the year ended March 31, 2004 (“Annual Report”). There have been no material changes to the contractual obligations summarized in the table included in the Annual Report outside the ordinary course of business.

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Off-Balance Sheet Arrangements

The Company has not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies and Recent Accounting Standards

A detailed description of the Company’s critical accounting policies as well as a description of recent accounting standards can be found in the Company’s Annual Report.

Forward-Looking Information

Portions of this report contain current management expectations, which may constitute forward-looking information. When used in this Management’s Discussion and Analysis of Results of Operations and Financial Condition and elsewhere throughout this Form 10-Q, the words “believes,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect management’s current opinions and are subject to certain risks and uncertainties that could cause actual results to differ materially from those stated or implied.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Risks and uncertainties include, but are not limited to: competition, dependence on the IT market, softening in the computer network and platform market, rapidly changing technology and inventory obsolescence, dependence on key suppliers and supplier programs, risks and uncertainties involving acquisitions, instability in world financial markets, downward pressure on gross margins, the ability to meet financing obligations based on the impact of previously described factors and uneven patterns of quarterly sales.

The Company experiences a disproportionate percentage of quarterly sales in the last month of the fiscal quarters. This uneven sales pattern makes the prediction of revenues, earnings and working capital for each quarterly financial period difficult and increases the risk of unanticipated variations in quarterly results and financial condition. The Company believes that this sales pattern is industry-wide. Although the Company is unable to predict whether this uneven sales pattern will continue over the long term, the Company anticipates that this trend will remain the same in the foreseeable future.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk affecting the Company, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of the Company’s Annual Report. There have been no material changes in the Company’s market risk exposures since March 31, 2004.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, these officers have concluded that the Company’s disclosure controls and procedures are effective for the purpose of ensuring that material information required to be in this quarterly report is made known to them by others on a timely basis.

Changes in Internal Controls

There has been no change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

          None.

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

          None.

Item 3. Defaults Upon Senior Securities

          None.

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

          None.

Item 5. Other Information

          None.

Item 6. Exhibits and Reports on Form 8-K

          (a) Exhibits

	31.1	Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
	31.2	Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
	32.1	Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

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     32.2  Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

          (b) Reports on Form 8-K

     On November 2, 2004, the Company filed a Current Report on Form 8-K announcing its second quarter results.

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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.

	AGILYSYS, INC.
Date: February 9, 2005	/s/ Arthur Rhein
	Arthur Rhein
	Chairman, President and Chief Executive Officer (Principal Executive Officer)

Date: February 9, 2005	/s/ Steven M. Billick
	Steven M. Billick
	Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer)

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