10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Fiscal Year Ended December 31, 2005
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 0-22935

Pegasus Solutions, Inc.

(Exact name of Registrant as specified in its charter)

Delaware	75-2605174
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Campbell Centre I, 8350 North Central Expressway, Suite 1900 Dallas, Texas 75206

(Address of principal executive office)

(Zip Code)

Registrant’s telephone number, including area code:

(214)234-4000

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share

Rights to purchase Series A Preferred Stock

(Title of class)

      Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     YES o          NO þ

      Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     YES o          NO þ

      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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  o Accelerated filer  þ Non-accelerated filer  o

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).          YES o          NO þ

      The aggregate market value of the registrant’s voting stock held by non-affiliates on June 30, 2005, based on the closing price of the registrant’s common stock on such date as reported on the NASDAQ national market, was $132,105,211.

      The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of March 9, 2006 was 20,804,229.

TABLE OF CONTENTS

			Page
PART I
	Item 1.	Business		2
	Item 1A.	Risk factors		7
	Item 1B.	Unresolved staff comments		15
	Item 2.	Properties		15
	Item 3.	Legal proceedings		15
	Item 4.	Submission of matters to a vote of security holders		15
PART II
	Item 5.	Market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities		15
	Item 6.	Selected financial data		16
	Item 7.	Management’s discussion and analysis of financial condition and results of operations		17
	Item 7A	Quantitative and qualitative disclosures about market Risk		34
	Item 8.	Financial statements and supplementary data		35
	Item 9.	Changes in and disagreements with accountants on accounting and financial disclosure		68
	Item 9A	Controls and procedures		68
	Item 9B	Other information		69
PART III
	Item 10.	Directors and executive officers of the registrant		69
	Item 11.	Executive compensation		71
	Item 12.	Security ownership of certain beneficial owners and management and related stockholder matters		79
	Item 13.	Certain relationships and related transactions		82
	Item 14.	Principal accounting fees and services		82
PART IV
	Item 15.	Exhibits and financial statement schedules		83
Signatures				88
Employment Agreement - Michael Kistner
First Amendment to Office Lease
First Amendment to Office Lease
Second Amendment to Office Lease
Third Amendment to Office Lease
Fourth Amendment to Office Lease
Subsidiaries of the Company
Consent of Independent Registered Public Accounting Firm
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO and CFO, Pursuant to Section 906

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PART I

Item 1. Business

      Except where expressly indicated or the context otherwise requires, the “Company,” “Pegasus,” “we,” “our” or “us” when used in this Annual Report refers to Pegasus Solutions, Inc., a Delaware corporation, and its predecessors and consolidated subsidiaries. This report contains forward looking statements within the meaning of the federal securities laws, including statements using terminology such as “may,” “will,” “expects,” “plans,” “initiatives,” “intends,” “anticipates,” “believes,” “estimates,” or “potential,” or a similar negative phrase or other comparable terminology regarding beliefs, hopes, plans, expectations or intentions for the future. Forward looking statements involve various risks and uncertainties. Our ability to predict results or the actual future effect of plans, initiatives or strategies is inherently uncertain and the actual results and timing of certain events could differ materially from our current expectations. Factors that could cause or contribute to such a difference include, but are not limited to, the failure of the Company to complete the transaction as contemplated by the Agreement and Plan of Merger dated December 19, 2005 among Perseus Holding Corp., 406 Acquisition Corp., and the Company (the “Merger Agreement”) (See Item 7 of the Annual Report on Form 10-K under the caption “The Merger Agreement” for more information) or delays with respect to the Merger Agreement, changes in general economic conditions, variation in demand for our products and services and in the timing of our sales, changes in product and price competition for existing and new competitors, changes in our level of operating expenditures, delays in developing, marketing and deploying new products and services, terrorist activities, action by U.S. or other military forces, regional or global health epidemics, changes in hotel room rates, capacity adjustments by airlines, negative trends in the overall demand for travel, other adverse changes in general market conditions for business and leisure travel, the inability of the Company to sell the balance of its property management systems, or PMS business, as well as other risks and uncertainties, including those appearing in Item 1A of the Annual Report on Form 10-K under the caption “Risk Factors.”

      Pegasus is a global leader in providing technology and services to hotels and travel distributors. Founded in 1989, our customers include a majority of the world’s travel agencies and more than 60,000 hotel properties around the globe. Our services include central reservation systems, electronic distribution services, commission processing and payment services, and marketing representation services, including the consumer Web site hotelbook.com™. Our representation services, including Utell by Pegasus™ and Unirez by Pegasus™, are used by more than 7,000 hotels in more than 130 countries, making Pegasus the hotel industry’s largest third-party marketing and reservations provider. We have 17 offices in 12 countries, including regional hubs in London, Scottsdale and Singapore.

Strategy

      Our vision is to be the world leader in providing comprehensive and innovative solutions designed to transform critical business processes for hotels and travel distributors. Key elements of our strategy include the following:

•  Pursue Complete, Integrated Technology Solutions. We strive to bring together all of the reservation, distribution and commission processing technology needs of our customers instead of just a specific application. This includes providing services ranging from Web site integration to complete information technology outsourcing.

•  Develop Leading Technologies and Expedite the Time to Market for New Products. We strive to develop new technologies, services and solutions to meet the changing needs of our current and prospective customers. During 2005, we defined service line strategies and related technology needs. We have also continued to implement new software development processes with a focus on expediting the time to market of new products and reducing development costs.

•  Capitalize on Our Extensive and Diverse Portfolio of Independent Hotels and Small Hotel Groups. We believe consumers’ demand for a unique hotel experience, combined with lower cost distribution channels such as the Internet, will increase the presence of independent hotels and small hotel groups

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	internationally and in the United States. With more than 7,000 hotels using our representation services, we have an opportunity to grow revenues by cross-selling our other services and by launching consumer channels to market our member hotels directly to consumers.
•	Pursue Emerging Hospitality Markets. We believe emerging markets such as Asia — in particular, China — Eastern Europe, and Latin America present a significant opportunity for revenue growth. We plan to utilize business partners, including sales agent partners, to expedite penetration in emerging markets in a cost effective manner.
•	Build Strategic Alliances and Partnerships. We seek to build strategic alliances and partnerships, particularly related to sales distribution and product packaging. We believe that these relationships will broaden the brand recognition and market presence of our services and help to expand our customer base. We may also seek to partner or acquire assets, technology and businesses that provide complementary services to our existing customers or access to other new travel-related markets and customers.
•	Provide Outstanding Customer Service. In 2005, we continued our company-wide campaign to embrace customer satisfaction as part of our corporate culture. To emphasize the importance of customer satisfaction, a portion of our employees’ compensation is tied to customer satisfaction benchmarks.

Services

      Through our comprehensive and integrated service offerings we can provide one or more of the following services to hotels and travel distributors worldwide:

      Reservation Services. Our award winning Central Reservation Services (“CRS”) utilize our RezView^® application at its core. Hotel chains and hotel representation companies use a CRS to store information about all of their properties in a central database and then use that information to make and modify reservations and to generate various operational, management and marketing reports.

      Offered under the application service provider (“ASP”) model, our CRS service is a cost effective option for those hotel chains and hotel representation companies that neither have, nor want, the overhead associated with developing, implementing and maintaining the systems infrastructure inherent to CRS ownership.

      We provide CRS services on an ASP basis to approximately 7,000 hotel properties, representing approximately 850,000 hotel rooms worldwide (including properties in our Utell by Pegasus representation portfolio). We also offer call center services to these clients. During 2005, we began offering our call center services on a stand-alone basis to clients requiring an outsourced solution for the entire operation or to support expansion into select, strategic geographic regions.

      Distribution Services. Distribution services provides the connections and interfaces that enable hotels to distribute their rates and inventory to — and receive reservations from — the four global distribution systems (“GDSs”) used by travel agencies worldwide, a growing number of tour operators, wholesalers, and a wide variety of Powered by Pegasus^® Internet sites. During 2005, distribution services processed approximately 29 million transactions. Distribution services include:

•  GDS distribution — GDS distribution is offered to hotel customers. Our GDS distribution service offering automates hotel reservations through traditional GDS channels. The offering consists of connectivity to the four major GDSs (Sabre, Galileo, Amadeus and Worldspan) for reservation-related transactions, support of GDS maintenance activities, such as availability status and rate update functions, and standard reporting on transactional activity.

•  Third-party Internet sites — We provide travel-related Internet sites access to our hotel information database containing content and images on more than 60,000 properties and on-line hotel reservation capability. We provide this service to several of the leading travel Internet sites such as Expedia.com, Orbitz.com, and our own hotelbook.com and Utell.com.

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•  Hotel Internet sites — A component of the online distribution environment, NetBooker^® is a Pegasus developed and hosted online Internet booking engine available to hoteliers and travel portal companies who want a private label Internet site with integrated, seamless availability and booking engine but without the responsibilities and overhead of internal design, development and hosting. Hotel Internet sites that are “Powered by Pegasus” offer brand-loyal Internet shoppers real-time rates, availability and booking capabilities.

•  PegsTour™ — This new product provides a direct link between tour operators and travel suppliers that is a new alternative to the traditional facsimile method tour operators have used to book reservations.

      Representation Services. We offer a variety of hotel representation services to independent hotels and small hotel groups. Pegasus represents more than 7,000 independent and small hotel group properties around the world.

      To market and sell their rooms, many independent hotels and small hotel groups associate themselves with our representation services and use our systems and infrastructure to offer and accept reservations for their rooms. Hotels typically utilize our representation services to obtain a presence in the primary electronic distribution channels (GDSs and the Internet) through our CRSs and global voice reservation capability.

      Our Unirez by Pegasus service provides a connection to all GDSs and thousands of linked third-party Internet sites through a leading Web-based CRS. Our advanced technology offers a user-friendly interface that allows hotel customers to upload or modify hotel data, including room rates, availability and descriptions, at any time.

      In addition to the distribution connectivity and CRS service, our Utell by Pegasus offering includes marketing programs, sales representation, a voice reservation call center network covering over 40 countries, and enhanced revenue management support. Hotels using our Utell^® offering benefit from the enhanced market image created by affiliation with Utell by Pegasus, a well-known name in hotel distribution, as well as worldwide sales and marketing support.

      Utell representation customers also have the option to utilize our financial services capabilities under the names Paytell™ and TravelCom^®. In some international markets, it is customary for travelers to prepay for hotel rooms and other travel arrangements. Paytell is a service that allows travelers to prepay for reservations, with Pegasus remitting amounts to hotels when the guest stay occurs. TravelCom is an Internet-based proprietary system that allows member hotels to expedite commission payments to travel agents.

      During 2005, we launched hotelbook.com™, which creates another way for independent hoteliers to compete online with the major hotel brand Web sites. Hotelbook.com is our website for independent hotels that participate in our representation service. Hotelbook.com presents travelers with a unique lodging option in today’s increasingly complex online travel arena. Hotelbook.com strives to provide travelers with a place to find something different in a hotel. With approximately 5,000 independent hotels in approximately 1,900 cities around the globe, hotelbook.com enables a user to research independent hotels worldwide, make commissionable bookings, get instant confirmations, check commissions and check out the latest promotions.

      Also during 2005, we opened an office in Beijing to expand our presence in the emerging China market.

      Financial Services. Financial services provides comprehensive commission processing and payment solutions to hotels, other travel suppliers and travel agencies in more than 200 countries. Key services include: commission processing; commission reconciliation and tracking for member agencies; and global commission solutions for participating hotels.

      Each week, or on a monthly basis depending on the participating hotel’s preference, Pegasus consolidates, distributes, reconciles, tracks and reports millions of dollars in commission payments to travel agency locations worldwide on behalf of more than 35,000 participating hotel properties. Traditionally, the process of reconciling and paying hotel commissions to travel agencies was based on transaction-specific hotel data and consisted of a number of relatively small payments to travel agencies, often including payments in multiple currencies. Our value-added commission consolidation and reporting service benefits both hotel and travel agency participants by providing a single, monthly commission payment to member travel agencies from

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participating hotels in their choice of currency. Our commission processing service processed approximately $479 million in hotel commissions in 2005.

      Other Services. Pegasus regularly seeks to develop other new or enhanced technologies, services and solutions to meet the changing needs of our current and prospective customers. Pegasus has not received a material amount of revenue from these services, and there can be no assurance that any of these services will produce a material amount of revenue in the future.

Competition

      Our service offerings face competition from within their respective markets. Principal factors affecting our customers’ purchasing decisions for our services include pricing, product functionality, product performance and the breadth of service offerings. To compete successfully, we must meet our customers’ expectations and develop new technological solutions to meet the changing needs of the hospitality industry. We cannot assure you that any of our services will compete successfully. Please see the Risk Factors section below which further discusses competitive pressures.

      Reservation Services. Our reservation services compete with hotel companies that develop and host their own CRSs and third parties that provide CRS and related services under a license agreement or as an ASP. Our reservation service competitors include TRUST International (subsidiary of Cendant Corporation), SynXis Corporation (subsidiary of Sabre Holdings Corporation), TravelCLICK Inc. and MICROS Systems, Inc.

      Distribution Services. Pegasus’ distribution services support a variety of distribution channels, each with its own competition. For example:

•  GDS connectivity — Our GDS connectivity service competes primarily with WizCom International, Ltd. (subsidiary of Cendant Corporation). Customers may change their electronic reservation interface to WizCom or to another similar service. Also, some hotels have established a direct connection to one or more GDSs rather than through an intermediary, such as Pegasus or WizCom. Other hotels may choose to take the same action. If hotels establish this direct connection, they would bypass our intermediary position and eliminate the need to pay our fees. However, the cost to maintain a separate connection to each GDS is typically more costly than maintaining a single connection to Pegasus.

•  Third-party and hotel Internet sites — Our online distribution services face competition in the online hotel room reservation business from GDSs, middleware providers and Internet sites establishing direct connections to a hotel chain’s CRS. Middleware provider competitors are Internet site development companies that could develop an interface directly between a hotel’s property system and a travel Internet site or an interface between a hotel company’s CRS and a travel Internet site. Hotels have been increasingly promoting the use of their own Internet sites. The cost of entry into the Internet hotel room reservation business is relatively low. However, the cost to maintain a separate connection to each Internet site is typically more costly than maintaining a single connection to Pegasus.

•  PegsTour™ — Our PegsTour service faces competition primarily from tour operators who continue to maintain their current manual processes to manage this business versus the automated approach we offer with PegsTour. Cendant Corporation also offers a similar service.

      Representation Services. Our hotel representation services compete with other providers of distribution, sales and marketing services, including hotel groups, franchisors, reservation companies and other travel or hotel representation companies. Our primary competitors offering hotel representation services are Vantis/ TravelCLICK Inc., SHS-WorldHotels, Supranational Hotels, SynXis Corporation, Sceptre Hospitality Resources, and TransHotel. Hotelbook.com competes primarily with proprietary websites for independent hotel groups.

      Financial Services. Our commission processing service faces competition principally from Perot Systems, Inc. In addition, current or prospective hotel customers can decide to process commission payments on their own.

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Seasonality

      Our business, particularly our representation services, is sensitive to seasonal changes in the demand for hotel rooms. The demand for business and leisure travel is typically lower in the first and fourth quarters of the year; therefore, these quarters have historically generated lower revenue than the second and third quarters. Because the majority of our operating expenses are fixed, fluctuations in revenue from quarter to quarter may have a material effect on operating income for the respective quarters.

International Operations

      We derive approximately 44 percent of our revenue from customers located outside the United States, primarily in the United Kingdom. Fluctuations in the value of foreign currencies relative to the U.S. dollar directly impact our revenues and expenses. More information regarding specific risks associated with our foreign operations and our exposure to movements in foreign currency exchange rates is available under the heading “Risk Factors” and “Item 7A. Quantitative and Qualitative Disclosures about Market Risk.” See enterprise-wide disclosures in Note 17 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

Intellectual Property

      We are continually developing new technology and enhancing existing proprietary technology. Currently, one United States patent has been issued to us, and a second United States patent has been allowed and we expect that it will issue in the second half of 2006. In addition, we have filed a total of six patent applications in Australia, Canada and the European Union. One patent application in China has been allowed but has not yet issued, and the remainder are in various stages of the application process. We primarily rely on a combination of trademark, copyright, trade secrets, confidentiality procedures and contractual provisions to protect our technology and other intellectual property rights. Despite these protections, it may be possible for unauthorized parties to copy, obtain or use certain portions of our proprietary technology. Any misappropriation of our intellectual property could have a material adverse effect on our competitive position.

Research and Development

      Our research and development activities primarily consist of software development, development of enhanced communication protocols and custom user interfaces, and database design and enhancement. Our total research and development expense related to continuing operations was $3.4 million, $3.7 million and $4.5 million for 2005, 2004, and 2003, respectively.

Employees

      At February 28, 2006, we had 1,049 employees, 671 of whom are located in the United States. We had 150 people performing information technology functions, 759 people performing sales and marketing, customer relations and business development functions, and the remainder performing corporate functions, such as finance, legal, human resources and administrative. We have no unionized employees. We believe that our employee relations are satisfactory.

Available Information

      The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-732-0330. As an electronic filer, Pegasus’ reports, proxy and information statements, and other information is available at the SEC’s Internet site, http://www.sec.gov.

      Our Internet address is www.pegs.com. Select company SEC reports, including reports on Form 10-K, Form 10-Q and Form 8-K (and amendments to those reports), are available free of charge on our Web site as soon as reasonably practicable after electronic filing or furnishing with the SEC. Our Code of Ethics for Senior Financial Officers, amendments thereto and waivers thereof are published and maintained on our Web site.

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Once published, any waiver will be posted for at least twelve months after it is granted. We disclaim incorporation by reference of information contained on any Internet site.

Item 1A. Risk Factors

      The following risk factors should be carefully considered in conjunction with the other information included or incorporated by reference in this report. If any of these risks occur, our business, financial condition, operating results, cash flows and securities’ market prices could be materially adversely affected. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business, financial condition or trading price of our securities.

Risks related to our industry

As nearly all of our revenues are derived from the hotel industry, a downturn in the hotel industry would likely adversely affect our business.

      Nearly all of our revenues are directly or indirectly dependent on the hotel industry, which is highly sensitive to any change in the general economic climate as well as economic conditions affecting business and leisure travel in particular. The hotel industry is susceptible to rapid and unexpected downturns, as experienced after the events of September 11, 2001, the war in Iraq, and the SARS health crisis. In the event of any future downturn in the hotel industry, we would likely experience significantly reduced revenues, as the use of our services and the demand for our future services and solutions would decline. A continued downturn in the hotel industry or any reduction in hotel reservation volume, average daily room rates, or the demand for travel generally, would negatively impact our business, operating results and financial condition.

      Many factors affect the hotel industry, most of which are beyond our control. The hotel industry and demand for hotel rooms or travel may be affected by, among other things:

•  General economic conditions including recession, inflation and currency fluctuations

•  The existence or threat of military conflict, terrorism or political instability

•  Increased government regulation and enforcement

•  Natural disasters, such as hurricanes, earthquakes, and tsunamis, and any other unfavorable weather events or patterns

•  Global or regional health issues

•  Gasoline and aviation fuel price escalation

•  Labor strikes

•  Instability in the airline industry

      We may experience substantial period-to-period fluctuations in our results of operations as a consequence of these factors and others and the general economic conditions affecting the demand for hotel rooms and travel.

Reductions in room rates and hotel commission payments would reduce our revenues and net income.

      Pegasus financial services, which includes our commission processing service, derives revenues based on the dollar value of travel agency commissions paid by hotels. The dollar value of these commissions is based on the number of reservations, the length of stay and the room rate. Hotels typically are under no contractual obligation to pay room reservation commissions to travel agencies. Hotels could elect to reduce the current industry customary commission rate of 10 percent, limit the maximum commission generally paid for a hotel room reservation or eliminate commissions entirely. Hotels increasingly utilize other direct distribution channels, like the Internet, or offer negotiated rates to major corporate customers that are non-commissionable to travel agencies. If there is any decline in average daily room rates, change in the commission payment

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process, reduction in the amount of commissions paid for reservations or any increase in the direct distribution of rooms by hotels, our revenues and net income could substantially decrease.

Consolidation in the travel industry, including hotels, travel agencies and electronic reservation providers, could result in reduced revenues.

      We offer volume-based discounted fees for some of our services. Recent consolidation in the hotel industry has resulted in a higher percentage of discounted fees and this trend could continue. In addition, the GDS industry has consolidated into four major GDSs. If further consolidation occurs, the value of our services and the benefits to hotel operators of utilizing our GDS distribution service would be reduced. Any potential decrease in our customer base or any potential increase in the percentage of discounted fees may adversely affect the profitability of our business.

Risks Related to the Company

Our failure to close the acquisition of the Company as contemplated by the Agreement and Plan of Merger dated December 19, 2005 among Perseus Holding Corp., 406 Acquisition Corp. and the Company or delays with respect to such closing could adversely affect our business.

      Our announcement in April 2005 of our intent to explore strategic alternatives for the Company resulted in some level of uncertainty amongst our employees and some of our customers during the ensuing months the initiative was underway. Our announcement of an agreement to sell the Company helped to alleviate some of this uncertainty. If we fail to close the sale of the Company as contemplated or the closing is delayed, it likely would increase the level of uncertainty amongst our employees and some of our customers. This development may result in the following adverse effects upon our business, operating results and financial condition:

•  a less productive work force

•  loss of employees

•  delays in entering into or refusals to enter into contracts with some of our customers and third party service providers

•  continued management focus on the strategic alternative initiative rather than ongoing business initiatives

•  the incurrence of significant expenses relating to the failed transaction

•  possible litigation arising out of a failed transaction.

      If we fail to close the sale of the Company as contemplated or the closing is delayed, it likely would result in a drop and/or significant fluctuation in our stock price.

If we do not develop new technologies and services that meet the changing needs of participants in the hotel industry or if the new technologies and services we develop are not utilized, we may be unable to compete effectively and our continuing operations may be adversely affected.

      Our future success depends on our ability to successfully develop leading technologies, enhance our existing services and develop and introduce new services. In particular, our technologies and services must meet the demands of our current and prospective customers on a timely and cost-effective basis, staying abreast of technological advances and evolving industry standards and practices.

      Although we strive to be a technological leader, future technology advances may not complement or be compatible with our services. In addition, we may be unable to economically and timely incorporate technology changes and advances into our business. We may be unsuccessful in effectively developing and implementing new technologies, adapting our services to emerging industry standards or developing, introducing and marketing service enhancements or new services in a timely manner and with acceptable performance levels. For example, during 2005, we discontinued our PMS services, a decision made in part because of the

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termination of an agreement with our largest PegasusCentral customer. We have completed the sale of two of our PMS systems and plan to sell our PegasusCentral software by June 30, 2006.

      We also may experience difficulties that could delay or prevent the successful development or introduction of these services. It is also possible that a new service, while achieving a technological success, may fail to be accepted and utilized by prospective customers.

      If we are unable to successfully develop, introduce and implement new services or enhance existing services on a timely and cost-effective basis or if new services do not achieve market acceptance, it could adversely affect our ability to compete in the marketplace and negatively affect our business. Any such failures could have a material negative impact on our operating results and financial condition, including write-downs or write-offs related to impaired assets.

If we are unable to effectively deliver services and solutions to the hotel industry in a timely manner with acceptable performance levels, we may be unable to compete effectively, lose market share and be forced to reduce the prices of our services.

      Service failures, delays in the implementation of our service offerings or our failure to deliver services in a timely manner with acceptable service levels could result in reduced revenues, particularly since our transaction-based revenues are dependent upon services being available, reduced pricing for our services, a loss of customers, an inability to effectively compete and breach of contract claims. Certain service failures could also require us to credit customers pursuant to service level agreements, which we intend to use more frequently in the future.

We face significant competitive pressure.

      We compete in markets that are rapidly evolving, intensely competitive and involve continually changing technology and industry standards. We may experience increased competition from current and potential competitors, many of which have significantly greater financial, technical, marketing and other resources than we possess. Consolidation among our competitors may result in economies of scale, or broader or more comprehensive service offerings with which we may have difficulty competing. Competitive pressures have contributed to less profitable arrangements with some of our customers and could reduce our market share or require us to reduce the prices of our services. Consolidation among travel distribution companies, such as Cendant and Expedia, may increase competitive pressure with respect to our service offerings to travel distribution companies and the hotels that may utilize our distribution capabilities. Our inability to compete effectively with alternative service providers could adversely affect our business, operating results and financial condition.

Loss of our arrangements with key customers could adversely affect our business.

      Our business is dependent upon our customer arrangements with hotel chains, independent hotels, hotel representation firms, travel management companies, travel agencies, travel agency consortia, global distribution systems, travel-related Internet sites and Internet-based information and reservation systems. In the future, our customers may elect to perform certain functions themselves, may circumvent our services, may select the services of competing companies, or we may otherwise be unable to continue or renew these arrangements on favorable terms or initiate new arrangements. In addition, customers may elect to utilize our lower cost service offerings over our higher-priced offerings that provide us with greater revenue. For example, our representation customers may switch from our Utell by Pegasus offering to our Unirez by Pegasus offering, resulting in less revenue to us. If we are unable to renew, continue or initiate customer arrangements on a favorable basis, it could result in a significant reduction in our customer base and revenue sources.

Our reliance on third party service arrangements presents risks to our business and the loss of any of these third party service arrangements could adversely affect our business.

      We rely on certain third party arrangements for the provision of our services and increasingly for the development and enhancement of our services. Such “outsourcing” presents a number of risks primarily

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relating to our reduced control of the functions that are outsourced. Further, because much outsourcing occurs outside of the U.S., these activities are subject to the risks of international operations, including the risk of increased governmental regulation of these activities.

      We rely on third parties for many services, including remittance and worldwide currency exchange services for our commission processing service and for facility maintenance and enterprise resource planning system hosting. If we are unable to renew or extend our contracts with existing third-party service providers or enter into contracts with alternate service providers on favorable terms, it could adversely affect our business, operating results and financial condition.

Our computer systems and databases may suffer system failures, business interruptions or security breaches that could impede our ability to service our customers and could negatively impact our business.

      Our operations depend on our ability to protect our computer systems and databases against damage or system interruptions from fire, earthquake, power loss, telecommunications failure, unauthorized entry, malfunctions, human error or other events beyond our control. A significant amount of our computer equipment is located in Scottsdale, Arizona. Any unanticipated problems may cause a significant system outage or data loss. Despite the implementation of security measures, our infrastructure may also be vulnerable to break-ins, computer viruses or other disruptions caused by our customers or others. Our infrastructure may also fail to provide consistent dependable service as a result of circumstances both in and out of our control. Any damage to our databases, failure of communication links, security breach or other factors that cause interruptions in our operations could adversely affect our business, operating results and financial condition.

We may not have the resources to effectively manage our growth, and difficulties in managing and integrating organizations may cause future acquisitions or joint ventures to disrupt our operations and impede our operating results.

      Our potential future growth may place significant demands on management as well as on our administrative, operational and financial resources. Expanding our business to take advantage of new market opportunities will require significant management attention and Company resources, possibly adversely impacting our existing operations. In order to obtain certain distribution, supply or operations capabilities, our attempts to expand may involve an increased use of revenue sharing arrangements, which may affect our profitability or result in additional liabilities.

      We plan to expand our presence in international markets, particularly including the Asia-Pacific region in general and specifically China. In addition to being subject to the risks of international operations described below, it is costly to establish new international operations and our net sales from international market segments may not offset the expense of establishing and maintaining the operations. We have relatively little experience in marketing and distributing our services in many of these international markets, and we may not succeed in these efforts.

      We also regularly evaluate acquisition and strategic alliance opportunities and in the future may make additional acquisitions of other companies or technologies or enter into strategic alliances. Acquisitions and strategic alliances involve many risks including:

•  Difficulty in integrating or otherwise assimilating technologies, products, personnel and operations

•  Diversion of management’s attention from other business concerns

•  Issuance of dilutive equity securities and the incurrence of debt or contingent liabilities

•  Write-offs and amortization expense related to identifiable intangible assets

•  Loss of key employees of acquired organizations

•  Risks of entering markets in which we have no or limited prior experience

•  Payments of cash and the assumption of liabilities of other businesses

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•  An inability to adequately protect our intellectual property

•  The failure of strategic alliances to perform as expected

      Our inability to manage growth or to integrate any acquisitions or strategic alliances could adversely affect our business, operating results and financial condition.

Because our expenses are largely fixed in the short-term and we cannot accurately predict our competitive environment, unexpected revenue shortfalls and quarterly variations may adversely affect our business.

      Our expense levels are based primarily on our estimate of future revenues and are largely fixed in the short-term. In the future, we may not accurately predict the transaction volumes and room rates that directly impact our revenues, the introduction of new or enhanced services by us or our competitors or the degree of customer acceptance of new services. In the short-term, we may also be unable to adjust spending rapidly enough to compensate for any unexpected revenue shortfall. This could adversely impact our business, operating results and financial condition. Accordingly, we believe that period to period comparisons of our operating results should not be relied upon as an indication of future performance.

We are exposed to credit risk from hotels, travel agencies and other customers.

      Many of our customers are independent hotels, travel agencies and other travel industry participants that are particularly exposed to any downturn in the economy and other factors that adversely impact the hotel industry. Some of these customers may have inadequate financial strength to make current payments to us or remain as going concerns. In some instances we may be unable to collect payments from these customers or we may extend credit to them in the form of unsecured promissory notes or otherwise. Our inability to collect payments from these customers in the future could result in a material adverse effect on our business, operating results and financial condition.

Our international operations make us susceptible to currency fluctuations, global economic factors, foreign tax law issues, information privacy laws and foreign business practices, which could reduce our revenues, increase our cost of doing business and erode our profit margins.

      We derive a substantial portion of our revenue from customers located outside the United States, primarily in Europe. If the value of foreign currencies relative to the U.S. dollar decreases, our revenues translate into a lower U.S. dollar amount.

      Our international operations are also subject to other risks, including:

•  Impact of possible adverse political and economic conditions, including difficulties in the repatriation of investments or profits

•  Potentially adverse tax consequences

•  Impact of the policies and regulations of the United States and foreign governments on foreign trade and commerce, such as the USA PATRIOT Act and other laws enforced by the U.S. Office of Foreign Assets Control

•  Compliance with information privacy laws and related enforcement actions

•  Reduced protection for intellectual property rights in some countries

•  Changes in regulatory requirements

•  Cost of adapting our services to foreign markets

•  High costs associated with office closures and personnel reductions

We may be unable to adequately protect our intellectual property or prevent its unauthorized use, which could divert our financial resources and harm our business.

      Our success depends upon our proprietary technology and other intellectual property rights. We currently rely upon a combination of trademark, patents, copyright, trade secrets, confidentiality procedures and

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contractual provisions to protect our proprietary technology and other intellectual property. Despite our current efforts to protect our proprietary rights, these protective measures may not be enforceable or may not be adequate to prevent misappropriation or infringement of our technology. In addition, we may need to litigate claims against other parties to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. This litigation could result in substantial cost and diversion of management resources. A successful claim against us could effectively block our ability to use or license our technology and other intellectual property in the United States or abroad. If we cannot adequately protect our proprietary rights, it could adversely affect our competitive edge in the marketplace and consequently our business, operating results and financial condition.

Our success significantly depends on the experience of our key personnel and our ability to attract and retain additional personnel.

      Our success depends on our ability to retain the services of our current executive officers and other key personnel, and to manage effectively any transition in the event of a change in such key personnel. We cannot guarantee that we will be able to successfully identify, attract, motivate and retain other highly skilled personnel in a timely and effective manner. Our failure to retain our officers and key personnel or to recruit new personnel could adversely affect our business, operating results and financial condition.

Government regulation, taxes, new or amended laws and other legal uncertainties could force us to change our operations.

      Our operations are subject to the laws and regulations of the United States and numerous states and international jurisdictions. Changes regarding any of these laws and regulations, their enforcement or our understanding of the applicable requirements could force us to change our operations or result in other uncertain adverse consequences. Our efforts to comply with the requirements of the Sarbanes-Oxley Act of 2002, particularly the provisions of Section 404 regarding the certification and audit of our internal control over financial reporting, have resulted in material expenditures of financial and employee resources and may continue to do so in the future. Also, as a result of our customer relationships and our status as an intermediary with respect to certain services, federal, state or foreign governmental authorities, competitors or consumers could raise antitrust or anti-competitive concerns.

      In addition, we are subject to the same federal, state, local and foreign jurisdiction laws as other companies conducting business on the Internet and in e-commerce, including with respect to taxation, user privacy, data protection, consumer protection, payment processing, electronic contracts and other issues. Many of these laws and regulations are new, have not yet been thoroughly interpreted by the courts, and are subject to change by many jurisdictions, which could have a material adverse effect on our business, operating results and financial condition. Any change in tax laws, their interpretation or our legal conclusions regarding the collection of sales or similar taxes in connection with our services could result in substantial tax liabilities for past sales and decrease our profitability and revenues going forward.

We have deterrents that may discourage a third party from acquiring control of Pegasus, and such deterrents may prevent an acquisition of Pegasus that may be in a stockholder’s best interest.

      We have provisions in our certificate of incorporation and bylaws that are intended to make it more difficult for a third party to acquire us. These provisions include the staggered terms of our Board of Directors, the exclusive right of the Board of Directors to fill vacancies on the board, and restrictions on the right of stockholders to remove members of the Board of Directors. We are also subject to the provisions of Delaware law that restrict certain business combinations with interested stockholders even if such a combination would be beneficial to stockholders. In addition, we have a stockholder rights plan. The rights are exercisable only if a person or group of affiliated persons acquires, or has announced the intent to acquire, 20 percent or more of our common stock. We also have certain payment and other obligations that are triggered by a change of control in connection with agreements with certain third parties and employees.

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      In connection with the Merger Agreement, our board of directors approved and adopted the Merger Agreement in a manner such that the restrictions imposed on business combinations under Delaware law would not apply to the applicable merger transaction. Additionally, on December 19, 2005 Pegasus entered into an amendment to its rights agreement that provides that none of the execution, delivery or performance of the Merger Agreement or the closing of the merger or any of the other transactions contemplated by the merger agreement will trigger the separation or exercise of the rights under the rights agreement or any adverse event under the rights agreement.

      Except for agreements or amendments described in the preceding paragraph, these provisions will remain effective and could discourage potential acquisition proposals or delay or prevent a change in control transaction. They could also discourage others from making tender offers for our shares. As a result, these provisions may prevent the market price of our common stock from reflecting the effects of actual or rumored takeover attempts. These provisions may also prevent significant changes in our Board of Directors and our management.

Litigation or other proceedings could result in substantial costs and divert our management’s time and attention.

      From time to time, we are involved in legal and other regulatory proceedings. We intend to defend our rights vigorously during any of these proceedings. Regardless of the merits of any issues raised in any of these proceedings, our involvement could result in substantial costs and other liabilities not covered by insurance as well as divert management’s time and attention from our business, which could adversely affect our business, financial condition and results of operations.

We have material indebtedness in the form of convertible notes.

      In connection with the sale of the convertible notes in July 2003, we incurred $75 million of indebtedness which increased our interest payment obligations. The degree to which we are leveraged could adversely affect our ability to obtain further financing for working capital or other purposes and could make us more vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service obligations will be dependent upon our future performance, which will be subject to the financial, business and other factors affecting our operations, many of which are beyond our control.

We may be unable to generate sufficient cash flow to satisfy our operating costs and debt service obligations.

      Our ability to generate cash flow from operations to make interest payments on the convertible notes will depend on our future performance, which will be affected by a range of economic, competitive and business factors, many of which are beyond our control. If our operations do not generate sufficient cash flow from operations to satisfy our debt service obligations, we may need to borrow additional funds to make these payments or undertake alternative financing plans, such as refinancing or restructuring our debt, or reducing or delaying capital investments and acquisitions. We may secure a credit facility as additional protection against short-term liquidity concerns. However, such credit facility, other additional funds or alternative financing may not be available to us on favorable terms, or at all. Our inability to generate sufficient cash flow from operations or obtain additional funds or alternative financing on acceptable terms could have a material adverse effect on our business, financial condition and results of operations.

We may be unable to repay or purchase the principal amount of the convertible notes.

      At maturity, the entire outstanding principal amount of the convertible notes will become due and payable by us. In addition, on July 16, 2008, July 16, 2013 and July 16, 2018 or if a fundamental change occurs, as defined in the indenture relating to the convertible notes, each holder of the convertible notes may require that we purchase all or a portion of that holder’s notes. The merger contemplated by the Merger Agreement constitutes such a fundamental change. While the debt financing anticipated in connection with this Merger Agreement contemplates the repayment of the amounts owing under the convertible notes, we

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cannot otherwise be assured that we will have sufficient funds or will be able to arrange for additional financing to pay the principal amount or purchase price due. In that case, our failure to repay the convertible notes at maturity or to purchase any tendered notes would constitute an event of default under the indenture.

Our stock price has been and may continue to be significantly volatile due to many factors.

      Several factors have caused, and may in the future cause, our stock price to be significantly volatile, which may be unrelated to our operating performance in certain cases. Our stock price could be subject to wide fluctuations in response to a variety of factors including the following:

•  Uncertainty relating to the closing of the sale of the Company as provided in the Merger Agreement

•  General economic conditions

•  Acts of terrorism, retaliation for such acts, political instability, health epidemics, natural disasters, war and the prospect of war

•  Actual or anticipated variations in our quarterly operating results

•  Our ability to successfully develop, introduce and gain acceptance of new or enhanced products and services to the hotel industry on a timely basis

•  Unexpected changes in demand for our services and solutions

•  Adverse findings, conclusions or changes in requirements with respect to our internal controls assessment and audit pursuant to Section 404 of the Sarbanes-Oxley Act of 2002

•  Unpredictable volume and timing of customer revenues due to the terms of customer contracts, changes in the hotel industry and other factors

•  Purchasing and payment patterns, as well as pricing policies, of our competitors

•  Announcements of technological innovations or new services by us or our competitors

•  Changes in financial estimates, expectations and methodologies by securities analysts

•  Conditions, trends or perceived prospects in the Internet and online commerce industries

•  Changes in the market valuations of other similarly situated companies and hospitality and technology stocks in general

•  Announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments

•  Unscheduled system downtime

•  Lack of confidence in the Company’s ability to execute on certain products or services

•  Sales of substantial amounts of shares of our common stock in the public market, or the perception that those sales may occur

Our investments could adversely affect our financial condition and results of operations.

      We have in the past and may in the future make investments in other companies and ventures. There can be no assurance of the success of any such investment. Additionally, Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities,” may require us to consolidate entities with which we have an affiliation but no voting or operational control. In doing so, we may have little or no control over the success of the company or venture and we may be required to record the losses of these consolidated entities in our financial statements.

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Item 1B. Unresolved Staff Comments

      None.

Item 2. Properties

      Our corporate headquarters is located in a leased facility with approximately 100,000 square feet of space in Dallas, Texas. We also have regional hubs in Scottsdale, London and Singapore with approximately 145,000, 40,000 and 8,000 square feet of leased office space, respectively. In total, we have 17 offices in 12 countries, all of which are leased facilities. We believe that our existing facilities are well maintained and in good operating condition. We believe that our planned and existing facilities are adequate for our anticipated levels of operations.

Item 3. Legal Proceedings

      Pegasus is subject to certain legal proceedings, claims and disputes that arise in the ordinary course of business. Although management cannot predict the outcome of these legal proceedings, we do not believe these actions will have a material adverse effect on our financial position, results of operations or liquidity.

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

      No matter was submitted to a vote of our stockholders during the fourth quarter of the fiscal year ended December 31, 2005.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

      Our common stock has been traded on the NASDAQ National Market under the symbol “PEGS” since August 7, 1997. At March 9, 2006, there were approximately 320 record holders of our common stock although we believe that the number of beneficial owners of our common stock is substantially greater.

      The following table shows the range of quarterly high and low sales prices for Pegasus’ common stock.

		High		Low
2005
	Fourth quarter	$	9.50	$	6.64
	Third quarter		11.58		8.45
	Second quarter		12.03		9.99
	First quarter		12.73		11.40
2004
	Fourth quarter	$	12.98	$	9.90
	Third quarter		13.33		11.46
	Second quarter		13.38		10.55
	First quarter		12.35		10.45

      We intend to retain any future earnings for use in our business and do not intend to pay cash dividends in the foreseeable future. The payment of future dividends, if any, will be at the discretion of our Board of Directors and will depend, among other things, upon future earnings, operations, capital requirements, restrictions in financing agreements, requirements related to our convertible debt offering, our general financial condition and general business conditions.

      On September 28, 1998, our Board of Directors declared a dividend distribution of one right for each outstanding share of our common stock to stockholders of record at the close of business on October 13, 1998.

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Each right entitles the registered holder to purchase from us one one-thousand five hundredth (1/1,500th) of a share of our Series A Preferred Stock for each share of our common stock held at a price of $60. The rights are exercisable only if a person or group of affiliated persons acquires, or has announced the intent to acquire, 20 percent or more of our common stock.

      On December 19, 2005, concurrently with the execution of the Merger Agreement, the Company and American Stock Transfer & Trust Company, as Rights Agent, entered into an amendment (the “Rights Agreement Amendment”) to the Company’s Rights Agreement dated as of September 28, 1998 (the “Rights Agreement”). The Rights Agreement Amendment provides that none of the execution, delivery or performance of the Merger Agreement, the consummation of the related merger or any of the other transactions contemplated by and pursuant to the Merger Agreement will trigger the separation or exercise of the stockholder rights or any adverse event under the Rights Agreement. In particular, none of Perseus Holding Corp., 406 Acquisition Corp. or any of their affiliates shall be deemed to be an Acquiring Person (as defined in the Rights Agreement) solely by virtue of the execution, delivery or performance of the Merger Agreement or the consummation of the merger or any of the other transactions contemplated by and pursuant to the Merger Agreement. The Rights Agreement Amendment also provides that the Rights Agreement will terminate immediately prior to the effective time of the merger contemplated by the Merger Agreement.

Item 6. Selected Financial Data

      The following selected consolidated financial data as of and for the years ended December 31, 2005 and 2004, and for the year ended December 31, 2003 are derived from the consolidated financial statements of Pegasus that have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, and are included as Item 8 of this Annual Report on Form 10-K. Selected consolidated financial data as of December 31, 2003, and as of and for the years ended December 31, 2002 and 2001 are derived from Pegasus’ audited financial statements that are not included herein.

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      The following data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with Pegasus’ consolidated financial statements and notes thereto.

		Year Ended December 31,
		2005			2004			2003			2002			2001
		(1),(2),(3),(4),(7)			(1),(2),(3),(4),(7)			(1),(2),(3),(4),(7)			(1),(2),(4),(6),(7)			(1),(2),(5),(6),(7)
Service revenues			158,127			170,159			154,745			172,225			176,018
Customer reimbursements			17,355			15,253			11,485			11,181			12,079
Total revenues			175,482			185,412			166,230			183,406			188,097
Costs of services			98,740			101,221			91,551			93,869			104,299
Net income (loss) from continuing operations			5,229			12,460			536			(1,430	)		(29,220	)
Discontinued operations, net of tax			(12,884	)		(4,475	)		(2,368	)		(2,089	)		(517	)
Net income (loss)			(7,655	)		7,985			(1,832	)		(3,519	)		(29,737	)
Basic income (loss) per share
	Continuing operations		0.25			0.54			0.02			(0.06	)		(1.19	)
	Discontinued operations		(0.62	)		(0.19	)		(0.09	)		(0.08	)		(0.02	)
	Income (loss) per share		(0.37	)		0.35			(0.07	)		(0.14	)		(1.21	)
Diluted income (loss) per share
	Continuing operations		0.25			0.53			0.02			(0.06	)		(1.19	)
	Discontinued operations		(0.62	)		(0.17	)		(0.09	)		(0.08	)		(0.02	)
	Income (loss) per share		(0.37	)		0.36			(0.07	)		(0.14	)		(1.21	)
Working capital (deficit)			29,228			24,947			59,057			16,995			(5,541	)
Total assets			315,121			329,214			366,560			288,095			305,668
Long-term debt			75,000			75,000			75,000			—			—
Total stockholders’ equity			174,127			187,316			228,656			225,890			231,201

(1)	Pegasus’ selected consolidated financial data includes the operating results of REZ, Inc. following the acquisition in April 2000.
(2)	Pegasus’ selected consolidated financial data includes the operating results of GETS following the acquisition in September 2001.
(3)	Pegasus’ selected consolidated financial data includes the operating results of Unirez following the acquisition in December 2003.
(4)	Effective January 1, 2002, in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangibles,” Pegasus ceased to record goodwill amortization.
(5)	Revenues have been reclassified to give effect to the 2002 adoption of the Emerging Issues Task Force, or EITF, Issue 01-14, “Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred.”
(6)	In 2004 the Company reclassified bad debt expense to General and Administrative Expenses from Cost of Services. The reclassified amounts totaled $1.3 million and $3.4 million in 2002 and 2001, respectively.
(7)	The Company has reclassified its property management systems operations as discontinued operations for all periods presented.

      The Company has not paid any cash dividends during the past five years.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

      The following discussion and analysis should be read in conjunction with the selected consolidated financial data included as Item 6 of this Annual Report on Form 10-K and the consolidated financial statements and notes thereto included as Item 8 of this Annual Report on Form 10-K. This discussion and

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analysis contains forward looking statements within the meaning of the federal securities laws, including statements using terminology such as “may,” “will,” “expects,” “plans,” “initiatives”, “intends,” “anticipates,” “believes,” “estimates,” or “potential,” or a similar negative phrase or other comparable terminology regarding beliefs, hopes, plans, expectations or intentions for the future. Forward looking statements involve various risks and uncertainties. Our ability to predict results or the actual future effect of plans, initiatives or strategies is inherently uncertain and the actual results and timing of certain events could differ materially from our current expectations. Factors that could cause or contribute to such a difference include, but are not limited to, the failure of the Company to complete the transaction as contemplated by the Merger Agreement or delays with respect to this Merger Agreement, changes in general economic conditions, variation in demand for our products and services and in the timing of our sales, changes in product and price competition for existing and new competitors, changes in our level of operating expenditures, delays in developing, marketing and deploying new products and services, terrorist activities, action by U.S. or other military forces, regional or global health epidemics, changes in hotel room rates, capacity adjustments by airlines, negative trends in the overall demand for travel, other adverse changes in general market conditions for business and leisure travel, the inability of the Company to sell the balance of its PMS business, as well as other risks and uncertainties, including those appearing in this report under the caption “Risk Factors” set forth under Item 1A of this Annual Report on Form 10-K.

      Pegasus is a global leader in providing technology and services to hotels and travel distributors. Founded in 1989, our customers include a majority of the world’s travel agencies and more than 60,000 hotel properties around the globe. Our services include central reservation systems, electronic distribution services, commission processing and payment services, and marketing representation services, including the consumer Web site hotelbook.com^TM. Our representation services, including Utell by Pegasus^TM and Unirez by Pegasus^TM, are used by more than 7,000 hotels in more than 130 countries, making Pegasus the hotel industry’s largest third-party marketing and reservations provider. We have 17 offices in 12 countries, including regional hubs in London, Scottsdale and Singapore.

The Merger Agreement

      As a result of our strategic alternative process, which was announced in April 2005, Pegasus Solutions, Inc. has entered into an Agreement and Plan of Merger, dated December 19, 2005 (the “Merger Agreement”), with Perseus Holding Corp. (“Parent”) and 406 Acquisition Corp., a direct wholly owned subsidiary of Parent (“Merger Sub”). Parent and Merger Sub are entities controlled by an investment group consisting of entities affiliated with Prides Capital Partners, L.L.C. and Tudor Investment Corporation.

      The Merger Agreement contemplates that Merger Sub will be merged with and into the Company, with the Company continuing as the surviving corporation (the “Surviving Corporation”) in such merger as a direct wholly owned subsidiary of Parent (the “Merger”), and each outstanding share of common stock of the Company owned by stockholders other than those affiliated with the investment group will be converted in the Merger into the right to receive $9.50 per share in cash.

      The Company has made various representations, warranties and covenants in the Merger Agreement, including, among others, not to (a) solicit proposals relating to alternative business combination transactions or (b) subject to certain exceptions which permit the board of directors to comply with its fiduciary duties, enter into discussions concerning, or provide confidential information in connection with, alternative business combination transactions. Subject to certain exceptions that permit the board of directors to comply with its fiduciary duties, the Company’s board of directors has agreed to recommend that the Company’s stockholders vote in favor of and adopt and approve the Merger and the Merger Agreement. The Merger Agreement also includes covenants pertaining to the operation of the Company’s business between execution of the Merger Agreement and the closing of the Merger.

      Consummation of the Merger is subject to various conditions, including, among others, the approval and adoption of the Merger Agreement by the Company’s stockholders, the absence of certain legal impediments to consummation of the Merger, the receipt of certain regulatory approvals and the funding of debt to complete the Merger.

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      The Merger Agreement contains certain termination rights, including in the event the Company receives a superior proposal, and provides that, upon the termination of the Merger Agreement under specified circumstances, as defined therein, the Company may be required to pay Parent a termination fee equal to $8.25 million. In addition, in certain circumstances where the Merger Agreement is terminated, including in the event the Merger Agreement is terminated and the Company is required to pay the termination fee to Parent, the Company is required to reimburse Parent for its fees and expenses incurred in connection with the Merger Agreement, up to a maximum of $1 million.

      In connection with the execution of the Merger Agreement, an affiliate of Prides Capital Partners, L.L.C. agreed to provide a limited guarantee of the liabilities of Parent and Merger Sub under the Merger Agreement. In addition, John F. Davis, III, Susan K. Conner and Robert J. Boles, Jr. have agreed with Prides Capital Partners, L.L.C. to waive, for a period of six months following the Merger, their rights to severance pay in the event that they terminate employment during that period. These individuals also have agreed to invest in the Company following completion of the Merger.

      Additionally, on December 19, 2005, the Company and American Stock Transfer & Trust Company, as Rights Agent, entered into an amendment (the “Rights Agreement Amendment”) to the Rights Agreement, dated as of September 28, 1998 (the “Rights Agreement”). The Rights Agreement Amendment provides that none of the execution, delivery or performance of the Merger Agreement, the consummation of the Merger or any of the other transactions contemplated by and pursuant to the Merger Agreement will trigger the separation or exercise of the stockholder rights or any adverse event under the Rights Agreement. In particular, none of Parent, Merger Sub or any of their affiliates shall be deemed to be an Acquiring Person (as defined in the Rights Agreement) solely by virtue of the execution, delivery or performance of the Merger Agreement or the consummation of the Merger or any of the other transactions contemplated by and pursuant to the Merger Agreement. The Rights Agreement Amendment also provides that the Rights Agreement will terminate immediately prior to the effective time of the Merger.

Discontinued Operations

      In June 2005, our Board of Directors approved and committed to a formal plan to exit the property management systems (“PMS”) business by selling our PMS operations. These operations included the PegasusCentral PMS and two other private-label property management products, Guestview and NovaPlus, that support both hotel chains and independent customers.

      We also reached an agreement with its primary PegasusCentral customer, InterContinental Hotel Group (“IHG”), to discontinue the use of PegasusCentral. The transition of IHG properties off of Pegasus Central is substantially complete, and there will be no new installations. The decision to exit the PMS business was made considering the termination of the IHG agreement, the overall expected profitability of the remaining PMS operations, and the strategic alternative process announced in April 2005.

      The PMS operations have been classified as discontinued operations for all periods presented and the PMS assets are classified as assets held for sale at December 31, 2005. In classifying the PMS assets as held for sale, we concluded that the carrying amount of these assets exceeded the estimated fair value less cost to sell such assets. Accordingly, in the second quarter of 2005, we recognized a $16.6 million pre-tax impairment charge to write down the assets to an estimated net realizable value of $1.9 million. In addition, we recorded an approximately $1.0 million pre-tax charge for exit and transition costs, which were paid during the third quarter of 2005. These charges are included in the Consolidated Statements of Operations and Comprehensive Income (Loss) as discontinued operations, net of tax. Assets held for sale of approximately $1.0 million are included in other noncurrent assets in the Consolidated Balance Sheet as of December 31, 2005. The Company will continue to analyze whether the PMS operations meet the criteria to be presented as discontinued operations for one year.

      During October 2005, we completed the disposition of the Guestview and NovaPlus operations to Multi-Systems, Inc. The sale price was approximately $1.3 million, including $605,000 paid upon closing and $722,000 due under a full recourse promissory note, payable in three annual installments of $270,000, including interest at 6%. We recorded a gain on the sale of approximately $371,000 in the fourth quarter of

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2005, which was included in discontinued operations. We expect to sell the remaining PegasusCentral PMS business by the end of the second quarter of 2006.

Revenues

      Our business and particularly our revenues are sensitive to changes in the demand for, and average daily rates associated with, hotel rooms. Our distribution and reservation services revenues are primarily attributable to transaction-based activities, while our representation and financial services revenues are based in large part on a combination of reservation volume and average daily rates. Our revenues are dependent on new contracts, and we have experienced a lengthening in the sales and implementation cycle for some of our services.

      Representation Services. We offer a variety of hotel representation services to independent hotels and small hotel groups through our Utell by Pegasus and Unirez by Pegasus services. Representation services revenues primarily consist of reservation processing fees, membership fees and fees for various marketing services. Representation services revenues represented approximately 42 percent of service revenues for 2005.

      Reservation Services. We provide CRS services on an ASP basis. Reservation services revenues consist of transaction fees as well as maintenance, voice services, and support fees related to our RezView CRS software. Reservation services revenues represented approximately 21 percent of service revenues for 2005.

      Financial Services. Our financial services provide comprehensive commission processing and payment solutions to hotels, other travel suppliers and travel agencies. Financial services revenues consist of both travel agency and hotel fees. Travel agency fees are based on a percentage of the value of hotel commissions processed by us on behalf of participating travel agencies. Revenues from travel agency fees can vary substantially from period to period based on the demand for hotel rooms, the types of hotels (such as upscale or economy) at which reservations are made and fluctuations in overall room rates and foreign currency exchange rates. In addition, some participating hotels generally pay fees based on the number of commissionable transactions that Pegasus processes for the hotel. Financial services revenues represented approximately 20 percent of service revenues for 2005.

      Distribution Services. Our distribution services provide the connections and interfaces that enable hotels to distribute their rates and inventory to — and receive reservations from — the four GDSs used by travel agencies worldwide, a growing number of tour operators, wholesalers, and a variety of Internet sites Powered by Pegasus. Distribution services revenues primarily consist of transaction fees, commissions and monthly subscription or maintenance fees. In addition, new hotel customers typically pay a one-time fee for establishing the connection between the hotel’s central reservation system and the electronic distribution technology. New third-party Internet site customers typically pay a one-time fee for establishing the connection between the third-party Internet site and our electronic distribution technology, which is amortized over the related contract period. Distribution services revenues represented approximately 17 percent of service revenues for 2005.

      Other Services. Pegasus regularly seeks to develop new services to capitalize on its existing technology and customer base and to provide additional electronic hotel reservation capabilities and information services to its existing customers and to other participants in the travel distribution process. Pegasus has not received a material amount of revenue from these services, and we cannot assure you that any of these services will produce a material amount of revenue in the future.

      Customer Reimbursements. Revenues applicable to customer reimbursements are primarily related to GDS fees that we pay on behalf of and subsequently bill our customers. In the future, if our customers decide to pay these vendors directly, our customer reimbursements revenue and customer reimbursements cost of services will decrease accordingly. Pegasus’ billings for out-of-pocket expenses, such as third-party vendor GDS and telecommunication charges, are classified as customer reimbursements, which is a component of total revenues, and the related costs are classified as customer reimbursements, which is a component of total costs of services.

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Costs

      Our costs of services, which exclude depreciation and amortization, consist principally of personnel costs relating to information technology; customer service and telemarketing; facilities; and equipment maintenance costs. Costs of services also include the cost of customer reimbursements and certain incentive-based payments. We make incentive-based payments to some demand generators, including third-party Internet sites, because they provide us with access to higher transaction volumes for our services than we could reach otherwise. We also make incentive-based payments to some hotels because they generate high commission volumes for our financial services. These incentive-based payments are generally either based on transaction volumes that are expensed as incurred or consist of lump sum payments that are accounted for as an asset and expensed over the contract term.

      Research and development costs consist principally of personnel costs, related overhead costs and fees paid to outside consultants. General and administrative expenses are primarily personnel, legal and accounting-related, bad debt and certain facilities costs. Marketing and promotion expenses consist primarily of personnel costs, advertising, public relations and participation in trade shows and other industry events. Depreciation and amortization expense includes depreciation of computer equipment, office furniture, office equipment and leasehold improvements, as well as amortization of software and intangible assets.

      Interest income primarily includes income earned on the Company’s investments. Interest expense primarily includes interest and amortization of capitalized issuance costs related to the $75 million convertible debt offering.

Fluctuation of Foreign Currencies

      Pegasus derives a significant portion of its revenue from customers located outside the United States. Particularly in Europe, fluctuations of foreign currencies such as the euro and the British pound relative to the U.S. dollar result in our earning more or less revenue and expending higher or lower in expenses than we otherwise might have earned or spent if currency exchange rates had remained stable.

Years Ended December 31, 2005 and 2004

      Overview. During 2005, we experienced a decline in revenues, primarily due to lower pricing on new and renewal contracts. This primarily stemmed from delays in developing new technology and enhancements to our existing technology, increased competition from lower-cost competitors, and hotel and travel agency consolidations. We believe this trend has stabilized. Our operating costs remained consistent year over year, with the benefits of tight control over discretionary spending being offset by investments in marketing and sales and expenditures related to our strategic alternative initiative.

      We made a decision during 2005 to exit the PMS business by selling these operations, which included the PegasusCentral PMS and two other private-label property management products, Guestview and NovaPlus, that support both hotel chains and independent customers. The decision to exit the PMS business was made considering the termination of the agreement with our primary PegasusCentral customer, IHG, and the overall expected profitability of the remaining PMS operations.

      Other significant developments include the following:

•  We launched weekly commission processing during the first quarter. With this enhancement to our commission processing service, both hotels and travel agencies benefit from more efficient cash flow.

•  During the second quarter, we launched hotelbook.com, which creates another way for independent hoteliers to compete online with the major hotel brand Web sites.

•  We expanded our presence in China by opening an office in Beijing, which is a key part of our strategy to expand our business in the Asia-Pacific region.

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•  We have delivered a new release of our internet booking engine, Netbooker, and a new rate tracking service, and have established a strategic relationship with Open Hospitality for Web services.

•  We initiated transactions using our new PegsTour service.

      Operating Trends. The following trends have or may have a negative impact on our revenues and profitability.

•  We have experienced a lengthening in the implementation cycle for our services, and once implemented, contracts in some instances are taking longer than anticipated to ramp up to expected transaction volumes.

•  Revenues from new product offerings are lower than previously anticipated. For instance, PegsTour^TM, a new service which automates hotel reservations by tour operators and wholesale travel distributors, has experienced delays due to the implementation effort required by travel distributors and hotels (including development of an interface and business process changes).

•  In many instances, our service offerings continue to experience lower pricing on new contracts and contract renewals, arising from increased competition from lower-cost competitors and hotel and travel agency consolidations.

•  We continue to see an increase in the percentage of Internet reservations made at hotel chain Internet sites versus third-party Internet sites that utilize our services.

•  We continue to experience losses in our portfolio of customers, as some larger customers cease to outsource some of the services we offer or outsource to our competitors. For our commission processing service line, this trend has resulted in the loss of hotel participants, which could affect whether our travel agent customers continue to use our service. Further, we expect to cease providing commission processing services to one of our largest hotel participants late in the first quarter of 2006. For the year ended December 31, 2005, this hotel participant represented approximately 19 percent of our financial services revenues, and we paid them approximately $1.1 million in incentive payments, which are recorded in cost of services.

•  We experienced a year-over-year decline in our revenues.

      Positive operating trends include:

•  We have increased our speed in providing new technologies and enhancements to our products.

•  Average daily room rates (“ADR”) are improving.

•  We believe the trend of lower pricing on new contracts and contract renewals has begun to stabilize and is not expected to erode future revenues.

•  Pricing for Internet distribution is increasing.

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•  We have established business partners in key regions around the world expanding our market reach in Latin America, Asia and Eastern Europe.

•  We have been able to reduce the Internet distribution revenue share that we pay out.

      Revenues. The table and discussion below address revenue by service line for the years ended December 31, 2005 and 2004 (dollars in thousands).

					Variance
	2005		2004		$			%
Representation services	$	66,368	$	71,855	$	(5,487	)		(8	)%
Reservation services		32,846		37,275		(4,429	)		(12	)%
Financial services		31,534		33,699		(2,165	)		(6	)%
Distribution services		27,379		27,330		49			0	%
Total service revenues		158,127		170,159		(12,032	)		(7	)%
Customer reimbursements		17,355		15,253		2,102			14	%
Total revenues	$	175,482	$	185,412	$	(9,930	)		5	%

      Representation services revenues decreased primarily due to the continued impact of reduced pricing and the transition of a significant Unirez by Pegasus customer to our central reservation service. A 2 percent increase in ADR for our Utell by Pegasus offering was offset by a decrease in reservation volumes and the average commission earned percentage. The average commission earned stabilized in the latter months of 2005.

      Reservation services revenues decreased primarily due to the effects of pricing pressure on contract renewals from late 2004 and the loss of a customer. Partially offsetting these decreases was the transition of one customer from Unirez by Pegasus to our reservations services late in 2004. Net transactions decreased compared to the same period last year.

      Financial services revenues decreased primarily due to an impact of approximately $1.5 million associated with the initial implementation of weekly commission processing in March 2005. While this enhancement to our commission processing service will benefit both hotels and travel agencies, its initial implementation impacted the timing of services we normally would have performed in March 2005. Under the new process and technology, once commission data is input into the system, it is automatically included in the next weekly cycle. Because of the timing of data submission and when we provided our services, revenues for only approximately three weeks of data were recognized in March 2005 related to hotels that elected to utilize our weekly commission processing. Further, revenues decreased related to hotels that elected to stay on a monthly commission processing schedule because we were unable to provide services to or process any of the data submitted by these hotels until April 2005. Offsetting the first quarter 2005 negative impact to revenues of approximately $2.1 million was the $600,000 positive impact in the second quarter of 2005, representing incremental revenues earned in the month of conversion, as hotel companies switched from monthly to weekly commission processing. The financial impact of implementing weekly commission processing was substantially complete by the end of the second quarter of 2005, as the majority of expected customer conversions to weekly commission processing were completed.

      Aside from this impact, financial services revenues were affected by reduced transactions and pricing, resulting from travel agency consolidations, partially offset by the continued benefit from improved ADR.

      Distribution services revenues in 2005 were consistent with 2004. Improved pricing on premium channel Internet transactions and a 9 percent increase in GDS transactions was offset by a slight decrease in the number of Internet transactions. The decrease in Internet transactions reflects the trend of large customers operating their own proprietary Web sites that do not utilize Pegasus’ Internet distribution service, as well as the impact of a customer loss. In addition, reduced pricing from the second quarter 2004 sale of Travelweb LLC to Priceline.com negatively affected year-over-year comparisons through May 2005.

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      Customer reimbursements increased due to an overall increase in our customers’ GDS costs because of an increase in GDS transactions and GDS pricing.

      Operating Expenses. The table and discussion below address operating expenses for the year ended December 31, 2005 compared to the year ended December 31, 2004 (dollars in thousands).

					Variance
	2005		2004		$			%
Cost of services	$	81,385	$	85,968	$	(4,583	)		(5	)%
Customer reimbursements		17,355		15,253		2,102			14	%
Total costs of services		98,740		101,221		(2,481	)		(2	)%
Research and development		3,391		3,676		(285	)		(8	)%
General and administrative expenses		23,688		23,878		(190	)		(1	)%
Marketing and promotion expenses		21,121		19,618		1,503			8	%
Depreciation and amortization		18,963		17,516		1,447			8	%
Total operating expenses	$	165,903	$	165,909	$	(6	)		0	%

      Overall, operating expenses for the year ended December 31, 2005 were flat compared to the prior year. The following factors contributed most significantly to the year over year fluctuations in the operating expense line items:

•  Prior year expenses included severance and related costs of $2.4 million related to a first quarter 2004 strategic change in our information technology organization compared to $1.3 million of severance and lease termination costs incurred during 2005;

•  Headcount and employee-related expenses were lower year-over-year;

•  All variable operating costs were carefully managed in 2005;

•  We incurred costs of $1.6 million in 2005 related to the strategic alternatives initiative, $1.3 million of which is included in general and administrative expenses; and

•  Marketing and promotion expenses increased as we remain committed to sales and marketing efforts, including the launch of hotelbook.com and promotional activities related to our representation services.

      Cost of services expenses, excluding customer reimbursements, in 2004 included severance and related costs of $1.9 million related to a first quarter 2004 strategic change in our information technology organization. Cost of services also decreased as a result of the implementation of weekly commission processing in our financial services offering. Consistent with the change in timing of revenue recognition, customer incentives were reduced by approximately $150,000 during 2005. The remainder of the decrease is due to lower customer incentives, communications expenses, and processing costs, commensurate with the decrease in revenues and cost-saving initiatives. Cost of services, excluding customer reimbursements, as a percentage of service revenues were 51 percent in 2005 and 2004.

      Customer reimbursements in 2005 increased primarily due to an overall increase in our customers’ GDS costs because of an increase in GDS transactions and GDS pricing.

      Research and development expenses were down year over year, primarily due to lower headcount and employee-related expenses. Research and development expenses as a percentage of service revenues was 2 percent in both 2005 and 2004.

      General and administrative expenses in 2005 decreased primarily due to lower third-party costs incurred, primarily related to tax and audit professional services, and prior year severance and related costs of $465,000 for the first quarter 2004 strategic change in our information technology organization. These decreases were partially offset by costs of $1.3 million in 2005 related to the strategic alternatives initiative, $378,000 of costs related to the closing of an office, and a prior year curtailment gain of $162,000 for the Supplemental

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Executive Retirement Plan due to changes in executive management. General and administrative expenses as a percentage of service revenues were 15 percent and 14 percent in 2005 and 2004, respectively.

      Marketing and promotion expenses in 2005 increased primarily due to additional personnel and consultant costs arising from a greater focus on sales, marketing and promotion activities, including costs related to the launch of our own travel Web site, hotelbook.com. Marketing and promotion expenses as a percentage of service revenues were 13 percent and 12 percent in 2005 and 2004, respectively.

      Depreciation and amortization in 2005 increased primarily due to depreciation and amortization related to capital expenditures being put into production. This increase was partially offset by completing the amortization of a software asset in the second quarter of 2004, which accounted for $921,000 in amortization in 2004.

      Gain on Sale. On May 3, 2004, Pegasus sold its interest in Travelweb, LLC to an affiliate of Priceline.com, Inc. and received $4.2 million in cash, recognizing a gain of approximately $2.0 million.

      Interest income. Interest income in 2005 increased from $1.1 million to $1.6 million compared to 2004, due to higher interest rates and higher cash balances.

      Interest expense. Interest expense in 2005 decreased from $3.0 million to $2.9 million compared to 2004 due to higher capitalization of interest related to our software development efforts.

      Income tax expense. Pegasus recorded income tax expense on continuing operations of $3.2 million and $8.0 million in 2005 and 2004, respectively, reflecting effective rates of 38 percent for 2005 and 39 percent for 2004. The effective rate for 2005 differed from the statutory rate of 35 percent, primarily due to the geographic apportionment of profits and losses and the impact of state income taxes, nondeductible expenses, and foreign taxes.

      Discontinued operations. In June 2005, the Board of Directors of the Company approved and committed to a formal plan to exit the PMS business by selling the Company’s PMS operations. These operations included the PegasusCentral PMS and two other private-label property management products, Guestview and NovaPlus, that support both hotel chains and independent customers. The Company also reached an agreement with its primary PegasusCentral customer, IHG, to discontinue the use of PegasusCentral. For further information regarding discontinued operations, please see Note 3 to the Consolidated Financial Statements.

Years Ended December 31, 2004 and 2003

      Overview. After several difficult years for the hotel industry, the year ended December 31, 2004 showed gradual but steady recovery in both reservation volumes and ADR. Pegasus benefited from both the improved economic and industry environments as well as the December 2003 strategic acquisition of Unirez, Inc. Strength in foreign currencies, particularly the euro and the British pound, also favorably impacted Pegasus. Offsetting these benefits, increased competition resulted in reduced pricing on contract renewals and new business. In addition, an increase in the percentage of Internet reservations made at hotel chain Internet sites versus third-party Internet sites negatively impacted our distribution services revenues.

      Due to the improved operating environment, we increased discretionary spending in 2004 with a focus on customer satisfaction, sales, marketing, product development and employee retention activities intended to promote long-term growth. We also incurred additional expenses related to compliance with the Sarbanes-Oxley Act of 2002.

      Organizationally, we made leadership changes in key functions during 2004, particularly our information technology and product management groups. We also established or enhanced processes throughout the company with the goal of expediting the time to market on new products and improving customer satisfaction. During this transition period, we still met our earnings goals and made significant progress on product development priorities established at the beginning of the year.

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      Revenues. The table and discussion below address revenue by service line for the years ended December 31, 2004 and 2003 (dollars in thousands).

					Variance
	2004		2003		$			%
Representation services	$	71,855	$	57,409	$	14,446			25	%
Reservation services		37,275		38,349		(1,074	)		(3	)%
Financial services		33,699		30,244		3,455			11	%
Distribution services		27,330		28,743		(1,413	)		(5	)%
Total service revenues		170,159		154,745		15,414			10	%
Customer reimbursements		15,253		11,485		3,768			33	%
Total revenues	$	185,412	$	166,230	$	19,182			12	%

      Representation services revenues increased primarily due to the results of operations of Unirez by Pegasus, which was acquired December 1, 2003 and contributed $14.7 million to revenues in 2004, compared to $874,000 in 2003. Utell by Pegasus revenues increased $586,000, or 1 percent, over 2003 due to a 4 percent increase in reservations and a 9 percent increase in ADR. The improved ADR reflects a strong euro and British pound, which contributed $3.9 million to the increase in representation service revenues. Partially offsetting this increase was a decrease in Utell by Pegasus membership fees due to fewer hotels in the portfolio, and a 6 percent decrease in the average commission percentage earned, resulting from lower pricing on new contracts and contract renewals, as expected, arising out of increased competition from lower-cost competitors.

      Reservation services revenues decreased primarily due to lower per unit pricing on contract renewals, despite a 6 percent increase in net transactions processed. Excluding carryover revenue in early 2003 from three previously terminated contracts, reservation service revenues increased 2 percent over prior year.

      Financial services revenues increased primarily as a result of a 7 percent increase in gross commissions processed and due to improved ADR and the trend of processing more foreign currency payments, which earn additional fees.

      Distribution services revenues decreased despite a 10 percent increase in GDS transactions and a flat number of Internet transactions. Internet transaction volumes reflect an increase in the percentage of Internet bookings made at hotel companies’ proprietary Internet sites; these transactions do not utilize Pegasus’ Internet distribution services. In addition, the decrease in revenue was primarily due to the loss of Unirez as a distribution services customer, which provided $1.5 million in revenue in 2003, reduced pricing on Travelweb transactions, and a decrease in revenue per transaction. In conjunction with Priceline’s acquisition of Travelweb, we extended terms of the services contract, but with lower pricing.

      Customer reimbursements increased primarily due to operations of our new Unirez by Pegasus representation service and an overall increase in our customers’ GDS costs because of an increase in GDS transactions.

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      Operating Expenses. The table and discussion below address operating expenses for the year ended December 31, 2004 compared to the year ended December 31, 2003 (dollars in thousands).

					Variance
	2004		2003		$			%
Cost of services	$	85,968	$	80,066	$	5,902			7	%
Customer reimbursements		15,253		11,485		3,768			33	%
Total costs of services		101,221		91,551		9,670			11	%
Research and development		3,676		4,547		(871	)		(19	)%
General and administrative expenses		23,878		23,348		530			2	%
Marketing and promotion expenses		19,618		16,340		3,278			20	%
Depreciation and amortization		17,516		23,571		(6,055	)		(26	)%
Restructure costs		—		5,949		(5,949	)		(100	)%
Total operating expenses	$	165,909	$	165,306	$	603			0	%

      Operating expenses increased slightly in 2004 compared to 2003, as expected. The increase primarily related to the following:

•  The addition of Unirez by Pegasus operations;

•  An increase in the number of and rates for incentive-based payments to third parties, as well as an increase in transaction volume;

•  An increase in employee related expenses due to merit increases and bonuses in 2004;

•  An increase in sales and marketing efforts with a focus on increasing revenues and improving customer satisfaction; and

•  An increase in audit fees and other internal and external costs associated with the internal control requirements of the Sarbanes-Oxley Act of 2002.

      These expense increases were partially offset by the absence of restructure costs in 2004.

      Cost of services, excluding customer reimbursements, increased primarily due to $3.6 million in added expenses for our Unirez by Pegasus representation service; $1.9 million of severance and related costs incurred in the first quarter of 2004 related to a strategic change in the Company’s information technology organization; a $1.4 million increase in incentive based payments to third parties because of new contracts and increases in transaction volumes and rates; and $1.2 million in increased consulting costs for IT initiatives. Cost of services, excluding customer reimbursements, as a percentage of service revenues were 51 percent and 52 percent in 2004 and 2003, respectively.

      Customer reimbursements increased primarily due to operations of our new Unirez by Pegasus representation service and an overall increase in our customers’ GDS costs because of an increase in GDS transactions.

      Research and development expenses decreased in 2004 compared to 2003 primarily due to cost savings realized from the 2003 restructuring, slightly offset by $593,000 in additional expenses related to the Unirez acquisition. Research and development expenses as a percentage of service revenues were 2 percent and 3 percent in 2004 and 2003, respectively.

      General and administrative expenses increased slightly primarily due to $715,000 of bad debt expense in 2004, as compared to zero in 2003, $465,000 in severance and related costs incurred in the first quarter of 2004 related to a strategic change in the Company’s IT organization, $217,000 in added expenses of Unirez by Pegasus, and an increase of approximately $900,000 for audit and other fees related to the internal control requirements of the Sarbanes-Oxley Act. These increases were partially offset by a decrease in payroll related expenses and benefit plan costs because of decreased headcount in 2004. General and administrative expenses as a percentage of service revenues were 14 percent and 15 percent in 2004 and 2003, respectively.

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      Marketing and promotion expenses increased due primarily to increased personnel costs arising from Unirez by Pegasus, a greater focus on marketing and promotion activities, and the cost of a new sales incentive compensation program launched in January 2004. Marketing and promotion expenses as a percentage of service revenues were 12 percent and 11 percent in 2004 and 2003, respectively.

      Depreciation and amortization expenses decreased primarily because certain intangible assets related to the REZ acquisition were fully amortized in March 2003. This was partially offset by a $2.1 million increase in amortization expense related to intangible assets from the December 2003 Unirez acquisition.

      During 2003, the company incurred restructuring charges of $5.9 million, related to the reorganization of its operations from a business unit structure into distinct functional areas.

      Interest income. Interest income earned on the company’s investments decreased by $310,000 in 2004 compared to 2003 as the Company’s funds available for investment decreased in conjunction with the stock repurchase plan cash outlays of $55.7 million in 2004.

      Interest expense. Interest expense increased by $1.4 million compared to 2003 primarily related to interest and amortization of capitalized debt issuance costs for the July 2003 convertible debt offering.

      Gain on sale. On May 3, 2004, Pegasus sold its interest in Travelweb, LLC to an affiliate of Priceline.com, Inc. (“Priceline”) and received $4.2 million in cash, recognizing a gain of approximately $2.0 million. The sale agreement contained a contingent earn-out valued at approximately $4.7 million; however, the required conditions to receive the shares of Priceline common stock on the one-year anniversary of the Closing Date were not met.

      Income tax expense. Pegasus recorded income tax expense on continuing operations of $8.0 million and $622,000 in 2004 and 2003, respectively, representing effective tax rates of 39 percent for 2004 and 54 percent for 2003. The effective tax rate for 2004 differed from the statutory rate of 35 percent primarily due to the geographic apportionment of profits and losses and the impact of state income taxes, nondeductible expenses, and foreign taxes.

      Discontinued operations. In June 2005, the Board of Directors of the Company approved and committed to a formal plan to exit the PMS business by selling the Company’s PMS operations. These operations included the PegasusCentral PMS and two other private-label property management products, Guestview and NovaPlus, that support both hotel chains and independent customers. The Company also reached an agreement with its primary PegasusCentral customer, IHG, to discontinue the use of PegasusCentral. For further information regarding discontinued operations, please see Note 3 to the Consolidated Financial Statements.

Liquidity and Capital Resources

      Historically, Pegasus has primarily relied on cash flows from operations to provide working capital for current and future operations and for capital investments. From time to time, we have also utilized proceeds from equity and debt offerings to supplement our ability to fund operating cash requirements, capital investments and acquisitions.

      We assess our liquidity in terms of our ability to generate cash to fund our operating and investing activities. Key indicators we use to make this assessment are current assets, current liabilities and net cash flow from operating activities.

      Our principal sources of capital during 2005 included cash and cash equivalents, which totaled $32.3 million at year end, and auction rate securities, which totaled $5.7 million at year end. Our cash flows from operations of $30.6 million included $5.8 million related to our commission processing service and were sufficient to provide for working capital requirements. Other sources of cash during 2005 were $7.1 million net proceeds from the sale or maturity of marketable securities and $1.5 million of proceeds from stock option exercises. Additionally, during October 2005, we completed the disposition of the Guestview and NovaPlus operations to Multi-Systems, Inc. The sale price was approximately $1.3 million, including $605,000 paid

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upon closing and $722,000 due under a full recourse promissory note, payable in three annual installments of $270,000, including interest at 6%.

      Cash outlays in 2005 included the repurchase of approximately 518,000 shares of common stock for $6.2 million. The common stock repurchases were made under a Rule 10b5-1 stock repurchase plan that was approved on November 5, 2004 and terminated effective April 12, 2005. During 2004, we repurchased approximately 4.7 million shares of common stock for $55.7 million.

      Another component of our cash outlays included capital expenditures of $19.9 million consistent with our capital strategy of investing in software development projects meeting our return on investment criteria. In 2005, $17.4 million of the capital expenditures related to continuing operations and $2.5 million related to discontinued operations. Our capital expenditures primarily consist of personnel costs, interest expense and outside consultant costs for software development, computer hardware, furniture, fixtures and other office equipment.

      We expect to continue incurring capital expenditures related to software development and the addition of capacity to existing systems. We estimate 2006 capital expenditures will total approximately $15 to $20 million. We may also collaborate with outside parties for software development or other business needs. The potential capital and financing arrangements required for such arrangements is uncertain.

      Our future liquidity and capital requirements will depend on numerous factors, including:

•  Our profitability;

•  Seasonality of our operations;

•  Operational cash requirements;

•  Competitive pressures;

•  Development of new services and applications;

•  Timing of capital expenditures;

•  Response to unanticipated cash requirements; and

•  Completion of the merger under the Merger Agreement and related financing

      We believe that we will be able to generate cash flows from operations sufficient to meet our operating and capital requirements through at least the next twelve months. If the merger transaction is not completed, we may in the future consider financing alternatives to fund our requirements, including possible public or private debt or equity offerings. However, there can be no assurance that any financing alternatives sought by us will be available or will be on terms that are attractive to us. Further, any debt financing may involve restrictive covenants, and any equity financing may be dilutive to stockholders.

      Pegasus had two irrevocable standby letter of credit agreements with JPMorgan Chase Bank totaling $1.7 million at December 31, 2004, collateralizing the leases for the Dallas and Scottsdale offices. During the first quarter of 2005, we released one of these letters of credit, replacing the $450,000 letter of credit for the Dallas facility with a deposit of $181,000.

     Convertible debt

      On July 21, 2003, Pegasus issued $75 million aggregate principal amount of convertible senior notes through a private placement. Pegasus utilized a portion of the proceeds of the offering to effect the December 1, 2003 acquisition of Unirez. Pegasus expects to use the remaining net proceeds from the offering for working capital and other general corporate purposes, including stock repurchases.

      The notes bear interest at an annual rate of 3.875 percent, payable semi-annually through the maturity date of July 15, 2023. Each note is convertible into Pegasus’ common stock at a conversion price of approximately $20.13 per share (equal to an initial conversion rate of approximately 49.6808 shares per $1,000 principal amount of notes), subject to adjustment in certain circumstances. Holders of the notes may convert

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their notes only if (i) the price of Pegasus’ common stock reaches specified thresholds; (ii) the notes have been called for redemption; or (iii) specified corporate transactions occur. The notes and the indenture in connection therewith contain no covenants by the Company to maintain any minimum level of liquidity or any financial ratios.

      Pegasus may redeem all or some of the notes for cash at any time on or after July 15, 2008, at a redemption price equal to the principal amount of the notes plus any accrued and unpaid interest to the redemption date. As noted above, holders may require us to purchase the notes on July 16 of 2008, 2013 and 2018, or in other specified circumstances, at a purchase price equal to the principal amount due plus any accrued and unpaid interest to the purchase date and additional amounts, if any.

      If a fundamental change occurs, as defined in the indenture relating to the convertible notes, each holder of the convertible notes may require that we purchase that holder’s notes. The merger contemplated by the Merger Agreement constitutes such a fundamental change, and the debt financing anticipated in connection with the Merger Agreement contemplates the repayment of the amounts owing under the convertible notes.

     Off-balance sheet arrangements and contractual obligations

      Pegasus currently has no off-balance sheet financing arrangements.

      The following table identifies material future contractual cash obligations of the Company as of December 31, 2005. Operating leases represent our cash obligations associated with agreements to use equipment or facilities that are enforceable and legally binding for fixed terms. Purchase obligations include cash obligations associated with agreements to purchase services or equipment that are enforceable and legally binding for fixed terms, or estimated cash obligations for agreements with variable pricing provisions. Convertible debt represents scheduled principal and interest payments for the Company’s July 2003 convertible debt offering, described above. Other long-term liabilities include commission checks to be refunded to hotels, as well as Pegasus’ estimated cash obligations associated with funding its employee retirement plans.

	Payments due by period
			Less than		1 — 3		3 — 5		More than
Contractual obligations	Total		1 Year		Years		Years		5 Years
	(In thousands)
Convertible debt, including interest	$	125,981	$	2,906	$	5,813	$	5,813	$	111,449
Operating lease obligations		49,257		8,097		14,720		14,333		12,107
Purchase obligations		4,310		3,198		941		171		—
Other long term liabilities		8,031		2,116		3,254		2,661		—
Total	$	187,579	$	16,317	$	24,728	$	22,978	$	123,556

      In addition to the contractual obligations included in the table above, we also have funding requirements related to our Executive Retirement Program and a United Kingdom defined benefit plan, which is open to certain employees who were part of the Reed Elsevier Pension Scheme in December 1997. Pursuant to their employment agreements, certain company officers are eligible to participate in the Executive Retirement Program, consisting of (1) the Supplemental Executive Retirement Plan (the “SERP”), as amended, a defined benefit plan which provides supplemental retirement benefits to certain officers of the Company based on their compensation and years of service, as defined under the SERP, and (2) the Pegasus Solutions, Inc. Executive Deferred Compensation Plan (the “DCP”), as amended, a defined contribution plan that provides supplemental retirement benefits to certain management employees of the Company. Commencing in 2003, we are obligated to make annual cash payments to a trust associated with benefits earned under the Executive Retirement Program. The amounts funded to the trust may be available to creditors of the Company, but are generally not available for use in our ongoing operations. Subsequent to year end 2005, the Company made payments to the trust of $310,000 related to the SERP and $256,000 related to the DCP in connection with benefits earned in 2005. Also subsequent to year end 2005, the Company made SERP benefit payments of $340,000 to an executive who terminated participation in the SERP in 2004 using funds outside of the trust.

30

During 2006, we expect no further funding to the trust related to the SERP and we expect funding to the trust related to the 2006 DCP will total approximately $370,000; provided however, in the event the merger contemplated by the Merger Agreement closes, Pegasus will be obligated to make further funding to the trust equal to all benefits under the SERP and DCP.

      We expect that contributions to the United Kingdom defined benefit plan in 2006 will total approximately $167,000.

Inflation

      Pegasus does not believe that inflation has materially impacted results of operations during the past three years. Substantial increases in costs and expenses could have a significant impact on its results of operations to the extent such increases are not passed along to customers.

Critical Accounting Policies and Estimates

      Preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported financial position and results of operations during the reporting period. Our estimates and judgments are continually evaluated based on available information and experience. Because the use of estimates is inherent in the financial reporting process, actual results could differ from estimates. If there is a significant unfavorable change to current conditions, it will likely result in a material adverse impact to our business, operating results and financial condition.

      Certain accounting policies require higher degrees of judgment than others in their application. Pegasus considers the following to be critical accounting policies due to the estimation processes involved in each. For a detailed discussion of Pegasus’ significant accounting policies, including recently issued accounting standards, see Note 1 to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

      Our senior management has discussed the development and selection of these critical accounting policies and estimates, and this related disclosure in this report, with our Audit Committee.

     Accounts and notes receivables

      As of December 31, 2005, Pegasus had accounts receivable as a result of its ongoing operations of approximately $26.7 million. Additionally, we have notes receivable totaling $6.3 million at December 31, 2005, related to the sale of business units. These receivables are monitored by management for collectibility. Pegasus maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. These estimates of losses require judgments that are based on available information and experience, such as the payment histories and known financial conditions of the parties. These estimates are significant because Pegasus may incur additional expense to increase its allowance for doubtful accounts and may receive less cash than expected if the financial condition of the parties was to deteriorate, resulting in an impairment of their ability to make payments. Pegasus’ allowances for doubtful accounts and notes receivable totaled approximately $3.9 million as of December 31, 2005.

     Impairment of long-lived assets, including goodwill

      As of December 31, 2005, Pegasus has goodwill totaling approximately $163.2 million related to its acquisitions of REZ, Inc. (“REZ”) in 2000, Global Enterprise Technology Solutions, LLC (“GETS”) in 2001 and Unirez, Inc. (“Unirez”) in 2003. Under the guidance of SFAS 142, goodwill is analyzed for impairment at least annually. This analysis requires significant estimates and judgments by management, involving the carrying value and the estimated fair value of the Company. Because Pegasus operates as a single reportable unit, the company performs its analysis using market capitalization as fair value. While the most recent periodic impairment analysis performed as of September 30, 2005 indicated that no impairment of

31

goodwill exists, variances in actual growth rates, operating margins, or other assumptions may impact future impairment analyses and reduce the carrying values of goodwill.

      As of December 31, 2005, Pegasus has unamortized capitalized software costs totaling $40.9 million, which we review periodically for impairment as triggering events occur. This impairment analysis requires the comparison of unamortized carrying values to estimated net realizable values. The estimated net realizable value is based on significant judgments such as estimated future cash flows from the related services, or expected benefits of the software and is based on available information and experience. See Note 3 for information regarding impairment charges related to discontinued operations in 2005.

      We are in the development phase of an automated system that represents the next generation of our financial services offering that will provide hoteliers the ability to customize their commission payment process options across multiple travel agency segments and access real-time and specialized reporting through a customer service portal. The enhancements to this product are designed to add significant functionality to hoteliers. We have evaluated funding and development alternatives related to this technology, including collaboration with outside parties. Such collaboration may result in changes in the development, integration and deployment of this software and may result in alternate financing arrangements such as future revenue sharing. We are presently reevaluating this project and the outcome of the development alternatives and methodologies are not expected to be concluded until after the close of the merger transaction. The carrying value of this technology is $8.4 million as of December 31, 2005. Because this system represents the next generation of our current financial services operations, which generates revenues of over $30 million per year, we believe no impairment exists as of December 31, 2005. However, changes in strategy, market condition, the outcome of our strategic alternative initiative, or other assumptions may significantly impact our determinations regarding whether an impairment exists and could significantly reduce the carrying value associated with this project.

     Employee benefit plans

      Pegasus sponsors defined benefit plans for certain employees, including the SERP in the United States and a United Kingdom plan open only to employees who were part of the Reed Elsevier Pension Scheme in December 1997 (the “Utell Defined Benefit Plan”). Our employee pension costs and obligations are dependent upon our assumptions used by actuaries in calculating such amounts. These assumptions include salary growth, long-term return on plan assets, discount rates and other factors. The salary growth assumptions are either stated in the plan or reflect our long-term actual experience and future and near-term outlook. The long-term return on plan assets for the Utell Defined Benefit Plan, which is a funded plan, is determined based on expected returns as of the accounting date, primarily based on equities which comprise the majority of assets in the plan. Expected returns on equity plan assets were determined to range between 6% and 9%. Specific to the Utell Defined Benefit Plan, which is a funded plan, a one percent change in expected returns on plan assets would result in a $125,000 change to Pegasus’ annual expense associated with this plan. The assumed discount rate for determining obligations for the SERP is determined in reference to high quality corporate bonds available in the market as of December 31, 2005 (by reference to the Citigroup Corporate High Quality Yield curve) and by determining the net effective rate equivalent to discounting each future benefit payment by the spot rate for that year. The assumed discount rate for the Utell Defined Benefit Plan is determined in reference to the annualized yield on a 15-year AA rated corporate bond (by reference to the iBoxx). Actual results that differ from our assumptions are accumulated and amortized over the future working life of the plan participants. While we believe that the assumptions used are appropriate, significant differences in actual experience or significant changes in assumptions would affect our pension costs and obligations.

Deferred tax assets

      Although realization is not assured, we have concluded that it is more likely than not that the deferred tax assets at December 31, 2005, for which a valuation allowance was determined to be unnecessary, will be realized in the ordinary course of operations based on the available positive and negative evidence, primarily our projected earnings. The amount of the net deferred tax assets are considered realizable, however, they

32

could be reduced in the near term if actual future earnings or income tax rates are lower than estimated, or if there are differences in the timing or amount of future reversals of existing taxable or deductible temporary differences. Net deferred tax assets totaled approximately $7.1 million as of December 31, 2005 and are primarily comprised of U.S. net operating losses that begin to expire in 2019.

      We will continue to assess the assumptions used to determine the need for a valuation allowance. Should we determine that we would not be able to realize all or part of our components of the deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to earnings in the period such determination were made.

     Stock–Based Compensation

      In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107, “Share-Based Payment,” which provides interpretive guidance related to SFAS 123R. SFAS 123R requires compensation costs related to share-based payment transactions to be recognized in financial statements. With limited exceptions, the amount of compensation cost is measured based on the fair value of the equity or liability instrument issued on the grant date. SFAS 123R requires liability awards to be remeasured each reporting period and compensation costs to be recognized over the period that an employee provides service in exchange for the award. The requirements of SFAS 123R are effective for the Company’s first quarter beginning January 1, 2006. The Company intends to use the modified prospective transition method of adoption. Although the Company continues to evaluate SFAS 123R to determine the impact on its consolidated financial statements, SFAS 123R is expected to have a negative effect on consolidated net income. In 2005, the Company did not issue stock options to a large number of employees through a broad-based stock option grant. Since the 2005 stock option grants were significantly lower than preceding years and no determination has been made in regards to future year grants, the Company is unable to fully project future SFAS 123R stock-based compensation expense. However, stock-based compensation expense for 2006, without taking into account the completion of the merger under the Merger Agreement, will at a minimum approximate $1.9 million, net of tax. The accounting treatment for the Company’s restricted stock awards will not change upon adoption of SFAS 123R and has not been significant. No determination has been made regarding future stock-based compensation awards.

      At the effective time of the merger under the Merger Agreement, if any, each outstanding stock option, whether or not vested or exercisable, will terminate and thereafter represent the right to receive an amount in cash, without interest and less applicable tax withholding, equal to the number of shares of our common stock subject to each option as of the effective time of the merger, multiplied by the excess, if any, of $9.50 over the exercise price per share of common stock subject to such option. As of December 31, 2005, there were 420,475 stock options outstanding with an exercise price of less than $9.50 outstanding and a weighted-average exercise price of $7.62. Also at the effective time of the merger under the Merger Agreement, if any, each restricted stock award (38,875 shares of restricted stock were outstanding on December 31, 2005) granted under the Plans will be converted into the right to receive $9.50 in cash per share, without interest and less applicable tax withholding. From the date of the Merger Agreement date until completion of the merger under the Merger Agreement, if any, the Company has agreed, subject to certain exceptions and unless Prides gives its prior written consent, not to grant any equity or equity based awards.

Recently Issued Accounting Standards

      Additional information regarding recently issued accounting standards is included in Note 1 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

33

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

      Pegasus is exposed to certain market risks, including the effects of foreign currency exchange rate fluctuations, and uses derivative financial instrument contracts to manage foreign exchange risks. Pegasus has established a control environment that includes policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. Company policy prohibits holding or issuing derivative financial instruments for trading purposes. We do not currently utilize hedge accounting with regard to these derivatives.

      To reduce the impact of foreign exchange rate fluctuations on consolidated results of operations and future foreign currency denominated cash flows, Pegasus was a party to various forward exchange contracts at December 31, 2005. These contracts reduce exposure to currency movements affecting existing foreign currency denominated assets and liabilities, primarily trade receivables and payables.

      A summary of forward exchange contracts to sell or purchase foreign currencies in place as of December 31, 2005 is as follows (in thousands):

		Sell		Purchase
Euro		$	12,196	$	3,039
Canadian dollar			800		369
Swiss franc			473		—
Swedish krona			289		—
Singapore dollar			235		—
Japanese yen			227		34
British pound			1,247		2,169
Australian dollar			90		—
South African rand			40		—
New Zealand dollar			27		—
Hong Kong dollar			23		—
Norweigan kroner			25		15
Danish krone			—		43
	Total	$	15,672	$	5,669

      All contracts included above matured no later than February 2006. Because of the short-term nature of these contracts, the fair value approximates the contract value. The difference between the fair value and contract value is included in the consolidated balance sheet as accounts receivable and was not material at December 31, 2005. Pegasus used similar forward exchange contracts and had either sell or purchase forward exchange contracts of a similarly short-term nature in place on December 31, 2004. As of December 31, 2004, Pegasus had approximately $22.6 million in sell forward exchange contracts and $4.6 million in purchase forward exchange contracts. Pegasus’ positions with respect to these forward exchange contracts differed as of December 31, 2005 compared to December 31, 2004 because of changes in Pegasus’ non-U.S. denominated trade payables and receivables. For more information on derivative financial instruments see Notes 1 and 8 to the consolidated financial statements included in Item 8 to this Annual Report on Form 10-K.

34

Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

of Pegasus Solutions, Inc.:

      We have completed integrated audits of Pegasus Solutions, Inc.’s 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005, and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

      In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Pegasus Solutions, Inc. and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      As discussed in Note 2 to the consolidated financial statements, the Company has entered into an Agreement and Plan of Merger, dated December 19, 2005, with an investment group affiliated with Prides Capital Partners, L.L.C. and Tudor Investment Corporation.

Internal control over financial reporting

      Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating

35

effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PRICEWATERHOUSECOOPERS LLP

Dallas, Texas

March 16, 2006

36

PEGASUS SOLUTIONS, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2005 and 2004

(In thousands, except for share amounts)

				2005			2004
ASSETS
Cash and cash equivalents				$	32,315		$	17,599
Auction rate securities					5,700			5,650
Short-term investments					—			6,001
Accounts receivable, net of allowance for doubtful accounts of $2,900 and $3,184, respectively					23,786			28,551
Prepaid expenses					4,310			3,703
Other current assets					5,661			5,358
		Total current assets			71,772			66,862
Goodwill					163,156			163,585
Intangible assets, net					4,357			5,827
Property, equipment and software, net					59,067			80,326
Other noncurrent assets					16,769			12,614
		Total assets		$	315,121		$	329,214
			LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable				$	17,396		$	11,942
Accrued liabilities					11,268			12,309
Unearned revenue					6,519			6,763
Accrued payroll and benefits					2,814			5,280
Other current liabilities					4,547			5,621
		Total current liabilities			42,544			41,915
Benefit plan obligations					9,336			6,665
Noncurrent accrued rent					6,553			7,207
Noncurrent uncleared commission checks					5,915			5,576
Other noncurrent liabilities					1,646			5,535
Convertible debt					75,000			75,000
Commitments and contingencies
Stockholders’ equity:
	Preferred stock, $0.01 par value; 2,000,000 shares authorized; zero shares issued and outstanding				—			—
	Common stock, $0.01 par value; 50,000,000 shares authorized; 20,777,887 and 21,105,815 shares issued, respectively				208			211
	Additional paid-in capital				237,596			242,112
	Unearned compensation				(273	)		(408	)
	Accumulated other comprehensive loss				(2,145	)		(995	)
	Accumulated deficit				(61,259	)		(53,604	)
		Total stockholders’ equity			174,127			187,316
		Total liabilities and stockholders’ equity		$	315,121		$	329,214

      See accompanying notes to consolidated financial statements.

37

PEGASUS SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

Years Ended December 31, 2005, 2004 and 2003

(In thousands, except for share amounts)

			2005			2004			2003
Revenues:
	Service revenues		$	158,127		$	170,159		$	154,745
	Customer reimbursements			17,355			15,253			11,485
		Total revenues		175,482			185,412			166,230
Costs of services (exclusive of depreciation and amortization shown separately below):
	Cost of services			81,385			85,968			80,066
	Customer reimbursements			17,355			15,253			11,485
		Total costs of services		98,740			101,221			91,551
Research and development				3,391			3,676			4,547
General and administrative expenses				23,688			23,878			23,348
Marketing and promotion expenses				21,121			19,618			16,340
Depreciation and amortization				18,963			17,516			23,571
Restructure costs				—			—			5,949
Operating income				9,579			19,503			924
Other income (expense):
	Interest income			1,557			1,113			1,423
	Interest expense			(2,851	)		(2,975	)		(1,552	)
	Gain on sale of investment in Travelweb, LLC			—			1,961			—
	Other			130			814			363
Income from continuing operations before income taxes				8,415			20,416			1,158
Income tax expense				(3,186	)		(7,956	)		(622	)
Income from continuing operations				5,229			12,460			536
Discontinued operations, net of tax				(12,884	)		(4,475	)		(2,368	)
Net income (loss)			$	(7,655	)	$	7,985		$	(1,832	)
Other comprehensive income (loss):
	Change in unrealized gain (loss) on investments, net of tax of $42, $(6), and $-, respectively			63			(9	)		—
	Minimum pension liability adjustment, net of tax of $762, $82, and ($357), respectively			(1,213	)		(152	)		871
Comprehensive income (loss)			$	(8,805	)	$	7,824		$	(961	)
Basic income (loss) per common share:
	Continuing operations		$	0.25		$	0.54		$	0.02
	Discontinued operations		$	(0.62	)	$	(0.19	)	$	(0.09	)
Net income (loss)			$	(0.37	)	$	0.35		$	(0.07	)
Diluted income (loss) per common share:
	Continuing operations		$	0.25		$	0.53		$	0.02
	Discontinued operations		$	(0.62	)	$	(0.17	)	$	(0.09	)
Net income (loss)			$	(0.37	)	$	0.36		$	(0.07	)
Weighted average shares outstanding:
	Basic			20,749			22,903			24,864
	Diluted			20,952			26,941			25,386

      See accompanying notes to consolidated financial statements.

38

PEGASUS SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended December 31, 2005, 2004 and 2003

(In thousands)

		Common Stock												Other
								Additional						Comprehensive
		Number of						Paid-In			Unearned			Income			Accumulated
		Shares			Amount			Capital			Compensation			(Loss)			Deficit			Total
Balance at December 31, 2002			24,747		$	247		$	287,676		$	(571	)	$	(1,705	)	$	(59,757	)	$	225,890
	Windfall tax benefit of stock-based compensation		—			—			687			—			—			—			687
	Stock-based compensation expense		—			—			—			571			—			—			571
	Exercise of stock options		278			3			1,842			—			—			—			1,845
	Issuance for stock purchase plan		66			1			623			—			—			—			624
	Minimum pension liability adjustment		—			—			—			—			871			—			871
	Net loss		—			—			—			—			—			(1,832	)		(1,832	)
Balance at December 31, 2003			25,091			251			290,828			—			(834	)		(61,589	)		228,656
	Windfall tax benefit of stock-based compensation		—			—			1,011			—			—			—			1,011
	Issuance of restricted stock		—			—			477			(477	)		—			—			—
	Stock-based compensation expense		—			—			121			69			—			—			190
	Exercise of stock options		622			6			4,827			—			—			—			4,833
	Issuance for stock purchase plan		53			1			471			—			—			—			472
	Repurchase of common stock		(4,660	)		(47	)		(55,623	)		—			—			—			(55,670	)
	Change in unrealized gain (loss) on marketable securities		—			—			—			—			(9	)		—			(9	)
	Minimum pension liability adjustment		—			—			—			—			(152	)		—			(152	)
	Net income		—			—			—			—			—			7,985			7,985
Balance at December 31, 2004			21,106			211			242,112			(408	)		(995	)		(53,604	)		187,316
	Windfall tax benefit of stock-based compensation		—			—			212			—			—			—			212
	Issuance (forfeiture) of restricted stock		—			—			(33	)		33			—			—			—
	Stock-based compensation expense		—			—			—			102			—			—			102
	Exercise of stock options		142			1			1,061			—			—			—			1,062
	Issuance for stock purchase plan		48			1			484			—			—			—			485
	Repurchase of common stock		(518	)		(5	)		(6,240	)		—			—			—			(6,245	)
	Change in unrealized gain (loss) on marketable securities		—			—			—			—			63			—			63
	Minimum pension liability adjustment		—			—			—			—			(1,213	)		—			(1,213	)
	Net loss		—			—			—			—			—			(7,655	)		(7,655	)
Balance at December 31, 2005			20,778		$	208		$	237,596		$	(273	)	$	(2,145	)	$	(61,259	)	$	174,127

      See accompanying notes to consolidated financial statements.

39

PEGASUS SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2005, 2004 and 2003

(In thousands)

				2005			2004			2003
Cash flows from operating activities:
	Net income (loss)			$	(7,655	)	$	7,985		$	(1,832	)
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Depreciation and amortization			21,480			22,362			28,029
		Non-cash asset impairment of discontinued operations			16,630			—			—
		Gain on sale of discontinued property management systems and Travelweb, LLC			(371	)		(1,961	)		—
		Bad debt expense			700			787			—
		Deferred income taxes			(6,197	)		3,572			(1,351	)
		Other			456			791			1,660
		Changes in assets and liabilities, net of effects of acquisitions:
			Accounts receivable		4,064			(7,040	)		6,356
			Other current and noncurrent assets		(36	)		(1,014	)		(6,007	)
			Accounts payable and accrued liabilities		2,963			4,503			(4,561	)
			Unearned revenue		(244	)		(450	)		(599	)
			Other current and noncurrent liabilities		(1,142	)		(176	)		2,427
			Landlord paid tenant improvements		—			799			524
			Net cash provided by operating activities		30,648			30,158			24,646
Cash flows from investing activities:
	Purchase of marketable securities, including auction rate securities				(52,652	)		(34,612	)		(140,837	)
	Proceeds from marketable securities, including auction rate securities				59,759			50,439			120,631
	Purchase of property, equipment and software				(19,892	)		(22,610	)		(19,406	)
	Collections of note receivable				1,013			945			1,881
	Purchase of Unirez, net of cash acquired				—			(1,310	)		(34,115	)
	Proceeds from sale of discontinued property management systems and Travelweb, LLC				605			4,167			—
	Landlord paid tenant improvements				—			(799	)		(524	)
	Other				—			40			140
		Net cash used in investing activities			(11,167	)		(3,740	)		(72,230	)
Cash flows from financing activities:
	Proceeds from issuance of common stock				1,547			5,305			2,469
	Repurchase of common stock				(6,245	)		(55,670	)		—
	Proceeds from convertible debt issuance				—			—			75,000
	Debt issuance costs				—			—			(2,579	)
	Other				(67	)		(493	)		(210	)
		Net cash provided by (used in) financing activities			(4,765	)		(50,858	)		74,680
Net increase (decrease) in cash and cash equivalents					14,716			(24,440	)		27,096
Cash and cash equivalents, beginning of period					17,599			42,039			14,943
Cash and cash equivalents, end of period				$	32,315		$	17,599		$	42,039
Supplemental disclosure of cash flow information:
	Income taxes paid			$	460		$	859		$	2,539
	Interest paid				2,941			2,912			82
Supplemental schedule of noncash investing and financing activities:
	Noncash acquisition price related to Unirez and TDS			$	—		$	277		$	3,299
	Noncash sale price related to sale of discontinued property management systems				722			—			—
	Acquisition of property and equipment				196			2,449			—

      See accompanying notes to consolidated financial statements.

40

PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business and Summary of Significant Accounting Policies

Overview and Basis of Presentation

      Pegasus Solutions, Inc. is a global leader in providing technology and services to hotels and travel distributors. Pegasus was formed in 1989 by 16 of the world’s leading hotel and travel-related companies to be the world’s premier service provider of a streamlined and automated hotel reservation process. Pegasus’ services include central reservation systems, electronic distribution services, commission processing and payment services, and marketing representation services, including the consumer Web site hotelbook.com. The consolidated financial statements include the accounts of Pegasus Solutions, Inc. and its wholly owned subsidiaries (“Pegasus” or the “Company”). All significant intercompany balances have been eliminated in consolidation. The Company operates under one reportable segment. Pegasus’ common stock is traded on the Nasdaq National Market under the symbol PEGS. See Note 2 — Merger Agreement for a discussion of the Company’s pending merger.

Use of estimates

      The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosures of contingent assets and liabilities. Actual results may differ from those estimates. Certain accounting policies require higher degrees of judgment than others in their application. The following accounting policies require significant judgments and estimates: accounts and notes receivable, impairment of long lived assets, including goodwill, and employee benefit plans.

Cash and cash equivalents

      The Company considers all highly liquid investments with maturities of three months or less from the date of purchase to be cash equivalents.

Investments in debt and equity securities

      Marketable securities consist of corporate debt and equity securities and obligations issued by governments and agencies. By policy, the Company invests primarily in high-grade marketable securities. All marketable securities are defined as available-for-sale under the provisions of Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”).

      Management determines the appropriate classification of its investments in marketable securities at the time of purchase and re-evaluates such determination at each balance sheet date. Available-for-sale securities are carried at fair value, with changes in the unrealized gain or loss reported as a separate component of stockholders’ equity, net of tax.

Auction Rate Securities

      At December 31, 2005 and 2004, the Company held $5.7 million of auction rate securities included as a separately stated current asset. Additionally, at December 31, 2005 and 2004, the Company held $1.2 million and $1.7 million, respectively, of auction rate securities related to the Company’s standby letters of credit, which collateralize the leases for the Dallas and Scottsdale offices that are classified as other noncurrent assets. The Company’s investments in these securities are classified as available-for-sale securities under SFAS 115. The securities are recorded at cost, which approximates fair market value due to their variable interest rates, which typically reset every 7 to 35 days, and, despite the long-term nature of their stated contractual maturities, the Company has the intent and ability to quickly liquidate these securities. As a result,

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PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the Company had no cumulative gross unrealized holding gains (losses) or gross realized gains (losses) from these investments. All income generated from these investments were recorded as interest income.

Capitalized software costs

      Software costs are accounted for in accordance with Statement of Position No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Capitalized software costs are amortized on a product-by-product basis using the straight-line method over a period which approximates the estimated economic life of the product. Amortization of capitalized software costs in 2005, 2004 and 2003 totaled $14.3 million, $12.8 million, and $14.4 million, respectively. At December 31, 2005 and 2004, unamortized capitalized software was $40.9 million and $59.3 million, respectively, which included software under development of $12.9 million and $29.7 million, respectively. Interest of $587,000, $511,000, and $67,000 was capitalized in 2005, 2004 and 2003, respectively.

Property and equipment

      Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives, ranging from three to seven years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the life of the lease. Expenditures for maintenance and repairs, as well as minor renewals, are charged to operations as incurred, while betterments and major renewals are capitalized. Any gain or loss resulting from the retirement or sale of an asset is credited or charged to operations.

Goodwill and other intangible assets

      As of December 31, 2005 and 2004, goodwill totaled $163.2 million and $163.6 million, respectively. Goodwill and identifiable intangible assets are related to the acquisitions of REZ, Inc. (“REZ”) in 2000, Global Enterprise Technology Solutions, LLC (“GETS”) in 2001, and Unirez, Inc. (“Unirez”) in 2003.

Impairment

      The Company evaluates its capitalized software costs, property and equipment, and identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the net book value of the asset may not be recoverable. Impairment is determined by comparing expected future cash flows (undiscounted and before interest) to the net book value of the assets. If impairment exists, the amount of impairment is measured as the difference between the net book value of the assets and the estimated fair value of the related assets and is recorded in the period the impairment is determined. The Company believes that no impairment of capitalized software costs, property and equipment, or identifiable intangible assets existed at December 31, 2005 or 2004. See Note 3 for more information regarding impairment charges related to discontinued operations in 2005.

      The carrying value of goodwill is evaluated at least annually. The Company believes that no impairment of goodwill existed at December 31, 2005 or 2004. See Note 6 for further information.

Other investments

      Pegasus and six other companies — Hilton Hotels, Hyatt Corporation, Marriott International, Six Continents Hotels, Starwood Hotels and Priceline.com (“Priceline”) — were equal partners in Travelweb, LLC, (“Travelweb”) formerly known as Hotel Distribution System, LLC. This venture was formed in 2002 to distribute discounted hotel rooms over the Internet through multiple Internet sites using a merchant business model.

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PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      On April 4, 2002, Pegasus entered into a three-year technology agreement with Travelweb to develop technology and provide services that automate the net-rate reservation and merchant model processes for Travelweb and participating hotels. During the year ended December 31, 2002, Pegasus contributed $1.8 million in cash and $361,000 in development costs to Travelweb. In addition, the Company transferred its consumer Internet site, TravelWeb.com, as part of the capital contribution to the venture. Because Pegasus was equal partners with six other companies and did not exercise significant influence, the investment in Travelweb was accounted for under the cost method. The investment was included in other noncurrent assets on the Consolidated Balance Sheet at December 31, 2003.

      On May 3, 2004 (the “Closing Date”), Pegasus and four other parties (collectively the “Sellers”) in Travelweb sold their interests to an affiliate of Priceline. Among other provisions, the purchase agreement provided that Pegasus and each other Seller (1) assign to Priceline each of their 14.286% interests on the Closing Date, and (2) receive, on the Closing Date, approximately $4.2 million in cash. Pegasus’ investment in Travelweb prior to sale was $2.2 million and was included in other noncurrent assets. Pegasus recorded a gain of approximately $2.0 million on the sale of its investment in Travelweb during the second quarter 2004.

Stock-based employee compensation

      The Company accounts for stock-based compensation utilizing the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees” and related Interpretations. Accordingly, no compensation expense is recognized for stock option awards because the exercise prices of employee stock options equal or exceed the market prices of the underlying stock on the dates of grant. As discussed in Note 12, the Company maintains stock incentive and employee stock purchase plans. Total compensation expense for these plans was $102,000, $190,000, and $571,000 for 2005, 2004, and 2003, respectively.

      The following table represents the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value based method and recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation (in thousands, except per share amounts):

		2005			2004			2003
Net income (loss), as reported		$	(7,655	)	$	7,985		$	(1,832	)
Add: Stock-based employee compensation expense included in reported income (loss), net of related tax effects			63			117			347
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects			(3,075	)		(4,908	)		(6,288	)
Pro forma net income (loss)		$	(10,667	)	$	3,194		$	(7,773	)
Net income (loss) per share, as reported:
	Basic	$	(0.37	)	$	0.35		$	(0.07	)
	Diluted	$	(0.37	)	$	0.36		$	(0.07	)
Net income (loss) per share, pro forma:
	Basic	$	(0.51	)	$	0.14		$	(0.31	)
	Diluted	$	(0.51	)	$	0.14		$	(0.31	)

      The pro forma disclosures provided may not be representative of the effects on reported net income (loss) for future years due to future grants and the vesting requirements of the Company’s stock incentive awards. For purposes of pro forma disclosures, the estimated fair value of stock-based compensation awards is amortized over the vesting period.

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PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The weighted average fair value for options with exercise prices equal to the market price of stock at the grant date was $4.84, $5.45, and $6.46 in 2005, 2004 and 2003, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	2005			2004			2003
Dividend yield		—			—			—
Expected volatility		39.1- 54.5	%		53.0- 59.3	%		59.3- 73.2	%
Risk-free rate of return		3.8-4.4	%		2.7-3.5	%		2.1-2.9	%
Expected life		4.0  years			4.0  years			4.0  years

      The pro forma disclosures for 2005, 2004 and 2003 include approximately $102,000, $143,000 and $104,000, respectively, of compensation expense related to the Company’s Employee Stock Purchase Plan. The fair value of shares issued under this plan was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	2005			2004			2003
Dividend yield		—			—			—
Expected volatility		25.60	%		37.50	%		45.00	%
Risk-free rate of return		2.5-3.2	%		1.30	%		1.10	%
Expected life		0.5 year			0.5 year			0.5 year

      See Note 12 for further discussion of the Company’s stock-based employee compensation.

Revenues

      Pegasus’ service revenues are predominantly transaction-based and include reservation and commission processing fees charged to hotels and travel distributors, including travel agencies. Other revenues that are not based on transactions include membership, maintenance, marketing services and implementation fees. The Company accounts for its revenues under Staff Accounting Bulletin No. 104, “Revenue Recognition.”

      Representation services. Representation services revenues consist of reservation processing fees, membership fees and fees for various marketing services. Reservation processing fees are recognized when the guest stay occurs or on the transaction date depending on the contract terms. Membership fees are generally billed quarterly and recognized ratably over the billing period. Marketing service revenues are recognized as the marketing services are provided.

      Reservation services. Reservation services revenues consist of central reservation system, or CRS, revenues. CRS revenues represent transaction fees as well as maintenance and support fees related to the Company’s RezView^TM software. Transaction fees are recognized when the guest stay occurs or at the transaction date depending on the contract terms. Maintenance and support fees are recognized ratably over the term of the customer contract.

      Financial services. Pegasus derives commission processing revenues by charging each participating travel agency a fee equal to a percentage of commissions paid to that agency through the commission processing service. The Company also generally charges participating hotels a fee based on the number of commissionable transactions processed. Revenues from travel agency fees can vary substantially from period to period based on the types of hotels at which reservations are made, fluctuations in overall room rates and commission percentages paid by hotels to travel agencies. Pegasus recognizes revenues from its commission processing service when earned.

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PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Distribution services. Pegasus derives revenues from its global distribution system (“GDS”) distribution service by charging hotel customers a fee based on the number of reservations made, less the number cancelled (“net reservations”). As a hotel’s cumulative volume of net reservations increases during the course of the calendar year, its fee per transaction decreases after predetermined transaction volume hurdles have been met. As a result, for higher volume customers, unit transaction fees are higher at the beginning of the year, when cumulative transactions are lower. The Company recognizes revenues based on the fee per transaction that a customer is expected to pay during the entire year. The Company’s balance sheets reflect unearned revenue for the difference between the fee per transaction that Pegasus actually bills a customer during the period and the average fee per transaction that a customer is expected to pay for the entire year. The unearned revenue created during the early periods of the year is recognized by the end of the year as the fee per transaction that Pegasus actually bills a customer falls below the average fee per transaction for the entire year. Additionally, Pegasus generally charges new participants in the distribution service a one-time fee for work performed to establish the connection between a hotel’s central reservation system and the Pegasus electronic distribution technology. The Company recognizes these one-time fees over the life of the customer contract, as they are not considered a separate unit of accounting. The Company also charges certain GDSs a fee based on either the number of net reservations or the number of hotel chains connected to the GDS through the Pegasus electronic distribution technology to compensate for the management and consolidation of multiple interfaces.

      Pegasus derives its Internet distribution revenues by charging participating hotels transaction fees. For reservations that originate on Internet sites using our online distribution service, Pegasus charges hotels transaction fees based on the number of net reservations made at participating properties. Online distribution service customers also pay implementation fees, recognized ratably over the term of the customer contract. Monthly subscription and maintenance fees are recognized when earned.

      Property Services. Property services revenues consist of maintenance and support fees from property management system (“PMS”) software obtained in the REZ and GETS acquisitions. In addition, property services revenues include fees from the PegasusCentral product, which are recognized monthly. Maintenance, support and training fees are recognized ratably over the term of the customer contract. These operations are now classified as discontinued operations (see Note 3).

      Customer Reimbursements. Revenues applicable to customer reimbursements are primarily related to GDS fees that Pegasus pays on behalf of and subsequently bill our customers. Pegasus’ billings for out-of-pocket expenses, such as third-party vendor GDS and telecommunication charges, are classified as customer reimbursements, which is a component of total revenues, and the related costs are classified as customer reimbursements, which is a component of total costs of services.

Income taxes

      Income taxes are accounted for under the asset and liability method. The remaining portion of income tax (benefit) that remains after continuing operations is allocated to discontinued operations for all years presented. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year 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 rate is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.

      The Company’s income tax provision is based on calculations and assumptions that will be subject to examination by the Internal Revenue Service and other tax authorities. The potential outcomes of these examinations are regularly assessed in determining the adequacy of the provision for income taxes. Should the

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PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

actual results differ from our estimates, the income tax provision would be adjusted in the period in which the facts that give rise to the revision become known. Tax law and rate changes are reflected in the income tax provision in the period in which changes are enacted.

Advertising costs

      Advertising and promotion-related expenses are charged to operations when incurred. Advertising expense for 2005, 2004 and 2003 was approximately $3.2 million, $2.4 million and $1.9 million, respectively.

Research and development

      Research and development expenses are charged to operations when incurred.

Foreign currency

      Pegasus derives a significant portion of its revenue from customers located outside the United States. Particularly in Europe, fluctuations of foreign currencies such as the euro and the British pound relative to the U.S. dollar result in Pegasus earning more or less revenue and expending higher or lower expenses than it otherwise might have earned or spent if currency rates had remained stable.

Financial instruments

      The Company uses derivative financial instrument contracts to manage foreign exchange risks. The Company does not currently utilize hedge accounting with regard to these derivatives. Amounts receivable or payable under derivative financial instrument contracts are reported net on the consolidated balance sheet. As exchange rates fluctuate, gains and losses on contracts used to hedge existing assets and liabilities are recognized in the statements of operations as other income (expense).

      The carrying amounts of the Company’s financial instruments, other than convertible debt, reflected in the consolidated balance sheets at December 31, 2005 and 2004 approximate their respective fair values. The estimated fair value of the Company’s convertible debt at December 31, 2005 and December 31, 2004, approximated $73 million and $71 million, respectively, based on a third party quote, compared to a carrying amount of $75 million representing face value.

Concentrations of credit and market risk

      The Company’s financial instruments exposed to concentrations of credit risk consist primarily of cash, receivables and forward contracts to purchase or sell foreign currencies.

      Cash and Cash Equivalents. Cash balances exceeding the federally insured limits are maintained in financial institutions. However, management believes the institutions are of high credit quality.

      Accounts receivables. The Company’s customers primarily include well-established hotel chains and travel agencies. The Company’s representation services customers primarily consist of independent hotels, some of which are located outside the United States. Some of these customers may not be financially viable. Even though the Company has policies in place to limit exposure from concentrations of credit risks, management believes the Company has moderate exposure to credit risk related to accounts receivable from its customers. The Company’s accounts receivable are monitored by management for collectibility, considering the payment history and known financial condition of the debtors. Accounts receivable are recorded net of an allowance for doubtful accounts that represents an estimate of amounts considered uncollectible. Expense for such uncollectible amounts related to continuing operations, which is included in general and administrative expenses, totaled approximately $566,000, $717,000 and zero in 2005, 2004 and 2003, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Expense for uncollectible amounts related to the Company’s discontinued operations totaled approximately $134,000, $70,000 and zero in 2005, 2004 and 2003, respectively.

      Notes receivable. Pegasus has notes receivable related to the sale of business units to Preferred Hotel Group in 2000, which resulted in an agreement for a $6.0 million promissory note and a $2.8 million promissory note. Both promissory notes require monthly payments for a period of eight years commencing July 1, 2002 and bear interest at 7 percent. Pegasus also has notes receivable related to the sale of the Guestview and NovaPlus PMS systems to Multi-Systems, Inc. in 2005, which resulted in an agreement for a $722,000 promissory note, payable in three annual installments of $270,000, including interest at 6 percent. The Company’s notes receivable are monitored by management for collectibility, considering the payment history and known financial condition of the debtor. If the financial condition of the debtor was to deteriorate, resulting in an impairment of their ability to make payments, Pegasus may incur an expense to increase its allowance for doubtful accounts and may receive less cash than expected.

      Foreign currency contracts. The counterparties to the Company’s foreign exchange contracts are substantial and creditworthy multinational commercial banks or other financial institutions that are recognized market makers. Neither the risks of counterparty nonperformance nor the economic consequences of counterparty nonperformance associated with these contracts are considered by the Company to be material.

      The Company is exposed to certain market risks, including the effects of movements in foreign currency exchange rates. Fluctuations in the value of foreign currencies relative to the U.S. dollar directly impact our revenues. The Company uses derivative financial instrument contracts to manage foreign exchange risks. The Company has established a control environment that includes policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. Company policy prohibits holding or issuing derivative financial instruments for trading purposes.

Net income (loss) per share

      The following table sets forth the computation of basic and diluted income (loss) per common share (in thousands, except per share data):

			2005			2004			2003
Income from continuing operations		(a)	$	5,229		$	12,460		$	536
Discontinued operations, net of tax		(b)		(12,884	)		(4,475	)		(2,368	)
Net income (loss)		(c)	$	(7,655	)	$	7,985		$	(1,832	)
Income from continuing operations		(a)	$	5,229		$	12,460		$	536
	Adjustment for interest on convertible debt, net of tax			—			1,789			—
	Income from continuing operations, as adjusted	(d)	$	5,229		$	14,249		$	536
Net income (loss)		(c)	$	(7,655	)	$	7,985		$	(1,832	)
	Adjustment for interest on convertible debt, net of tax			—			1,789			—
Net income (loss), as adjusted		(e)	$	(7,655	)	$	9,774		$	(1,832	)
Basic income (loss) per share:
	Continuing operations	(a)/(f)	$	0.25		$	0.54		$	0.02
	Discontinued operations	(b)/(f)	$	(0.62	)	$	(0.19	)	$	(0.09	)
	Net income (loss)	(c)/(f)	$	(0.37	)	$	0.35		$	(0.07	)

47

PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

			2005			2004			2003
Diluted income (loss) per share:
	Continuing operations	(d)/(g)	$	0.25		$	0.53		$	0.02
	Discontinued operations	(b)/(g)	$	(0.62	)	$	(0.17	)	$	(0.09	)
	Net income (loss)	(e)/(g)	$	(0.37	)	$	0.36		$	(0.07	)
Basic weighted average shares Outstanding		(f)		20,749			22,903			24,864
Dilutive effect of stock options(1)				203			312			522
Dilutive effect of convertible debt(2)				—			3,726			—
Dilutive weighted average shares outstanding		(g)		20,952			26,941			25,386

(1)	Weighted average shares issuable upon exercise of stock options that were excluded from the calculation as their effect would have been anti-dilutive to income from continuing operations were 3.4 million, 2.5 million and 5.1 million for 2005, 2004 and 2003, respectively.
(2)	Subject to certain conditions, the Company’s convertible debt is convertible into common stock at a conversion price of approximately $20.13 per share, equal to approximately 3.7 million shares. No dilution for convertible debt was included in the calculation for 2005 and 2003 as the effect would be anti-dilutive to income from continuing operations for these periods.

Recently issued accounting standards

      In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107, “Share-Based Payment,” which provides interpretive guidance related to SFAS 123R. SFAS 123R requires compensation costs related to share-based payment transactions to be recognized in financial statements. With limited exceptions, the amount of compensation cost is measured based on the fair value of the equity or liability instrument issued on the grant date. SFAS 123R requires liability awards to be remeasured each reporting period and compensation costs to be recognized over the period that an employee provides service in exchange for the award. The requirements of SFAS 123R are effective for the Company’s first quarter beginning January 1, 2006. The Company intends to use the modified prospective transition method of adoption. Although the Company continues to evaluate SFAS 123R to determine the impact on its consolidated financial statements, SFAS 123R is expected to have a negative effect on consolidated net income. In 2005, the Company did not issue stock options to a large number of employees through a broad-based stock option grant. Since the 2005 stock option grants were significantly lower than preceding years and no determination has been made in regards to future year grants, the Company is unable to fully project future SFAS 123R stock-based compensation expense. However, stock-based compensation expense for 2006 under SFAS 123R, without taking into account the completion of the merger under the Agreement and Plan of Merger dated December 19, 2005, among Perseus Holding Corp., 406 Acquisition Corp., and the Company, will at a minimum approximate $1.9 million, net of tax. The accounting treatment for the Company’s restricted stock awards will not change upon adoption of SFAS 123R and has not been significant. No determination has been made regarding future stock-based compensation awards.

      In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections — A Replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle. It also requires that the new accounting principle be applied to the balances of assets

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and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings for that period rather than being reported in an income statement. The statement will be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of SFAS 154 to have a material effect on the Company’s consolidated financial position or results of operations.

2. Merger Agreement

      As a result of the Company’s strategic alternative process, which was announced in April 2005, Pegasus Solutions, Inc. has entered into an Agreement and Plan of Merger, dated December 19, 2005 (the “Merger Agreement”), with Perseus Holding Corp. (“Parent”) and 406 Acquisition Corp., a direct wholly owned subsidiary of Parent (“Merger Sub”). Parent and Merger Sub are entities controlled by an investment group consisting of entities affiliated with Prides Capital Partners, L.L.C. and Tudor Investment Corporation.

      The Merger Agreement contemplates that Merger Sub will be merged with and into the Company, with the Company continuing as the surviving corporation (the “Surviving Corporation”) in such merger as a direct wholly owned subsidiary of Parent (the “Merger”), and each outstanding share of common stock of the Company owned by stockholders other than those affiliated with the investment group will be converted in the Merger into the right to receive $9.50 per share in cash.

      The Company has made various representations, warranties and covenants in the Merger Agreement, including, among others, not to (a) solicit proposals relating to alternative business combination transactions or (b) subject to certain exceptions which permit the board of directors to comply with its fiduciary duties, enter into discussions concerning, or provide confidential information in connection with, alternative business combination transactions. Subject to certain exceptions that permit the board of directors to comply with its fiduciary duties, the Company’s board of directors has agreed to recommend that the Company’s stockholders vote in favor of and adopt and approve the Merger and the Merger Agreement. The Merger Agreement also includes covenants pertaining to the operation of the Company’s business between execution of the Merger Agreement and the closing of the Merger.

      Consummation of the Merger is subject to various conditions, including, among others, the approval and adoption of the Merger Agreement by the Company’s stockholders, the absence of certain legal impediments to consummation of the Merger, the receipt of certain regulatory approvals and the funding of debt to complete the Merger.

      The Merger Agreement contains certain termination rights, including in the event the Company receives a superior proposal, and provides that, upon the termination of the Merger Agreement under specified circumstances, the Company may be required to pay Parent a termination fee equal to $8.25 million. In addition, in certain circumstances where the Merger Agreement is terminated, including in the event the Merger Agreement is terminated and the Company is required to pay the termination fee to Parent, the Company is required to reimburse Parent for its fees and expenses incurred in connection with the Merger Agreement, up to a maximum of $1 million.

      In connection with the execution of the Merger Agreement, an affiliate of Prides Capital Partners, L.L.C. agreed to provide a limited guarantee of the liabilities of Parent and Merger Sub under the Merger Agreement. In addition, John F. Davis, III, Susan K. Conner and Robert J. Boles, Jr. have agreed with Prides Capital Partners, L.L.C. to waive, for a period of six months following the Merger, their rights to severance pay in the event that they terminate employment during that period. These individuals also have agreed to invest in the Company following completion of the Merger.

      Additionally, on December 19, 2005, the Company and American Stock Transfer & Trust Company, as Rights Agent, entered into an amendment (the “Rights Agreement Amendment”) to the Rights Agreement,

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PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

dated as of September 28, 1998 (the “Rights Agreement”). The Rights Agreement Amendment provides that none of the execution, delivery or performance of the Merger Agreement, the consummation of the Merger or any of the other transactions contemplated by and pursuant to the Merger Agreement will trigger the separation or exercise of the stockholder rights or any adverse event under the Rights Agreement. In particular, none of Parent, Merger Sub or any of their affiliates shall be deemed to be an Acquiring Person (as defined in the Rights Agreement) solely by virtue of the execution, delivery or performance of the Merger Agreement or the consummation of the Merger or any of the other transactions contemplated by and pursuant to the Merger Agreement. The Rights Agreement Amendment also provides that the Rights Agreement will terminate immediately prior to the effective time of the Merger.

      See Note 10 for information regarding impact of the Merger Agreement on the Company’s convertible debt.

3. Discontinued Operations and Assets Held for Sale

      In June 2005, the Board of Directors of the Company approved and committed to a formal plan to exit the property management systems (PMS) business by selling the Company’s PMS operations. These operations included the PegasusCentral PMS and two other private-label property management products, Guestview and NovaPlus, that support both hotel chains and independent customers.

      The Company also reached an agreement with its primary PegasusCentral customer, InterContinental Hotel Group (IHG), to discontinue the use of PegasusCentral. The transition of IHG properties off of PegasusCentral is substantially complete, and there will be no new installations. The decision to exit the PMS business was made considering the termination of the IHG agreement, the overall expected profitability of the remaining PMS operations, and the strategic alternative process announced in April 2005.

      The PMS operations have been classified as discontinued operations for all periods presented and the remaining PMS assets are classified as assets held for sale at December 31, 2005. In classifying the PMS assets as held for sale, the Company concluded that the carrying amount of these assets exceeded the estimated fair value less cost to sell such assets. Accordingly, in the second quarter of 2005, the Company recognized a $16.6 million pre-tax impairment charge to write down the assets to an estimated net realizable value of $1.9 million. In addition, the Company recorded an approximately $1.0 million pre-tax charge for exit and transition costs, which were paid during the third quarter of 2005. These charges are included in the Consolidated Statements of Operations and Comprehensive Income (Loss) as discontinued operations, net of tax. Assets held for sale of $1.0 million are included in other noncurrent assets in the Consolidated Balance Sheet as of December 31, 2005.

      During October 2005, the Company completed the disposition of the Guestview and NovaPlus operations to Multi-Systems, Inc. The sale price was approximately $1.3 million, including $605,000 paid upon closing and $722,000 due under a full recourse promissory note, payable in three annual installments of $270,000, including interest at 6 percent. The Company recorded a gain on the sale of approximately $371,000 in the fourth quarter of 2005, which is included in discontinued operations.

      Condensed income statement data for the discontinued operations is presented below (in thousands).

	2005			2004			2003
Revenues	$	2,453		$	4,706		$	6,500
Operating loss	$	(20,975	)	$	(7,285	)	$	(3,895	)
Income tax benefit		8,091			2,810			1,527
Loss related to discontinued operations, net of tax	$	(12,884	)	$	(4,475	)	$	(2,368	)

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PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4. Restructure Costs

      On February 4, 2003, the Company announced a strategic reorganization to integrate its technology and hospitality divisions into one operating unit. The integration plan, which was completed during 2003, included the elimination of redundant positions and consolidation of certain facilities. The elimination of redundant positions represented approximately 10 percent of the Company’s workforce, primarily due to the integration of support functions. During 2003, the Company recorded restructure charges of $5.9 million, composed of one-time termination benefits totaling $4.4 million and facilities-related and other charges totaling $1.5 million. Information regarding the accruals related to the restructure are presented below (amounts in thousands). Accruals consisted primarily of facilities and related costs and were included in other liabilities.

	Accrued							Accrued
	Restructure		Amounts					Restructure
	Costs — Beginning		Paid in			Additional		Costs — Ending
	Balance		Cash or Settled			Accruals		Balance
2004	$	840	$	(780	)	$	148	$	208
2005	$	208	$	(208	)	$	—	$	—

5. Acquisitions

Unirez, Inc.

      On December 1, 2003, Pegasus completed the acquisition of all of the outstanding securities of Unirez, which was accounted for under the purchase method of accounting. Accordingly, Unirez’s results of operations subsequent to the acquisition date are included in the Company’s consolidated financial statements.

      The purchase price was approximately $38.0 million, which includes approximately $333,000 in acquisition costs. Under the stock purchase agreement, Pegasus delivered to the security holders of Unirez, on a pro-rata basis, $35 million in cash on the purchase date and recorded an additional amount payable to Unirez shareholders of $2.7 million. Pegasus paid $1.3 million of the amount payable on December 1, 2004. Pegasus utilized cash proceeds from its previously completed convertible debt offering to fund the acquisition. The acquisition qualifies for a joint election tax benefit under Section 338(h)(10), which allows goodwill to be fully deductible for tax purposes over a period of 15 years.

      Unirez serves independent properties and small hotel groups by providing central reservation services that enable distribution of room inventory through GDSs and Internet channels. Unirez’s primary assets include its software and intangible assets such as customer service agreements. Under contractual agreements, Pegasus has provided distribution services to Unirez since January 21, 2000.

      The purchase price was allocated to assets acquired and liabilities assumed based on estimated fair value at the acquisition date.

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PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The fair value of assets acquired and liabilities assumed at the acquisition date is summarized below (in thousands):

Tangible assets:
	Cash and cash equivalents			$	1,000
	Accounts receivable and other current assets				2,807
	Property and equipment — software				5,480
	Property and equipment — other, net				399
	Other assets-long term				589
		Total tangible assets			10,275
Intangible assets:
	Customer relationships				4,620
	Non-compete agreements				2,300
	Goodwill				24,222
		Total intangible assets			31,142
Liabilities assumed:
	Accounts payable and other accrued liabilities				(3,079	)
	Unearned revenue				(180	)
	Other liabilities-long term				(116	)
		Total liabilities assumed			(3,375	)
			Net assets acquired	$	38,042

      The purchase price allocations to intangible assets and software have estimated useful lives and estimated annual amortization as follows (in thousands):

			Estimated		Calculated
			Useful		Annual
	Amount		Life		Amortization
Customer relationships	$	4,620		7 years	$	660
Software		5,480		5 years		1,096
Non-compete agreement		2,300		4 years		575

      The following unaudited pro forma summary combines the consolidated results of operations of Pegasus and Unirez for the year ended December 31, 2003 as if the acquisition had occurred at the beginning of 2003 after giving effect to certain pro forma adjustments. This pro forma financial information is provided for informational purposes only and may not be indicative of the results of operations as they would have been had the transaction been effected on the assumed dates, nor is it indicative of the results of operations which may occur in the future (in thousands, except per share amounts).

	Unaudited
	2003
Net revenues	$	185,372
Net loss		(1,389	)
Net loss per share		(0.06	)

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PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Total Distribution System Limited

      In September 2003, Pegasus acquired all of the stock of Total Distribution System Limited (“TDS”), a UK developer of tour operator software applications, for approximately $1.7 million. Pegasus delivered to the security holders of TDS, on a pro-rata basis, approximately $950,000 in cash on the closing date, and recorded a purchase price obligation of approximately $750,000, which represents the minimum additional purchase price payable at a future date subject to certain conditions. Contingent upon certain performance targets in the first and second year, as defined, TDS shareholders could be entitled to cash payments of up to $1.7 million in addition to the aforementioned $750,000. The Company paid $250,000 of the remaining purchase price during 2004 and $500,000 during 2005. The Company allocated the entire purchase price to the primary asset acquired, TDS’ internally developed software. This acquisition was not material to the Company’s results of operations.

6. Goodwill and Intangible Assets

      As of December 31, 2005 and 2004, goodwill totaled $163.2 million and $163.6 million, respectively. In accordance with SFAS 142, goodwill is subject to an annual impairment test. Based on the periodic impairment test conducted as of September 30, 2005, the Company does not believe goodwill is impaired. The decrease in goodwill is related to tax-related matters associated with the REZ acquisition.

      The following table presents definite-lived intangible assets at December 31, 2005 and December 31, 2004 (in thousands):

	December 31, 2005					December 31, 2004
	Carrying		Accumulated			Carrying		Accumulated
	Value		Amortization			Value		Amortization
Customer relationships	$	56,996	$	(53,751	)	$	56,996	$	(53,091	)
Non-compete agreements		6,000		(4,898	)		6,120		(4,215	)
Other		48		(38	)		48		(31	)
Total	$	63,044	$	(58,687	)	$	63,164	$	(57,337	)

      During the years ended December 31, 2005, 2004 and 2003 the Company recorded amortization expense in relation to the above-listed intangible assets of $1.4 million, $2.0 million and $5.1 million, respectively. The following table presents the estimated amortization expense for these intangible assets for the years ended December 31 (in thousands):

2006	$	1,244
2007		1,191
2008		660
2009		660
2010		602
Total	$	4,357

7. Marketable Securities

      Marketable securities held by the Company at December 31, 2005 and 2004 are classified as available-for-sale and consist of corporate debt and equity securities and obligations issued by governments and agencies. Realized gains and losses are determined on a specific identification basis. At December 31, 2005 there were $5.7 million of auction rate securities which are classified as a separately stated current asset and $1.2 million included in other noncurrent assets. At December 31, 2004, $2.0 million of corporate debt

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PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

securities and $4.0 million of government agency securities had contractual maturities in 2005 and are classified as short-term investments; $5.7 million of auction rate securities are classified as a separately stated current asset; and all other marketable securities are classified as other noncurrent assets. The amortized cost and fair value of marketable securities at December 31, 2005 and 2004 are as follows (in thousands):

				Gross		Gross			Estimated
		Amortized		Unrealized		Unrealized			Fair
		Cost		Gains		Losses			Value
December 31, 2005
Auction rate securities		$	6,900	$	—	$	—		$	6,900
December 31, 2004
Corporate debt securities		$	3,061	$	—	$	(8	)	$	3,053
Debt securities issued by the U.S. Treasury or other U.S. Government Corporations and agencies			1,996		—		(9	)		1,987
Debt securities issued by states of the U.S. and political subdivisions of the states			2,000		4		—			2,004
Auction rate securities			7,300		—		—			7,300
	Total marketable securities	$	14,357	$	4	$	(17	)	$	14,344

8. Derivative Financial Instruments

      To reduce the impact of changes in foreign exchange rates on consolidated results of operations and future foreign currency denominated cash flows, Pegasus was a party to various forward exchange contracts at December 31, 2005. These contracts reduce exposure to currency movements affecting existing foreign currency denominated assets and liabilities, primarily trade receivables and payables.

      A summary of forward exchange contracts to sell or purchase foreign currencies in place as of December 31, 2005 is as follows (in thousands):

		Sell		Purchase
Euro		$	12,196	$	3,039
Canadian dollar			800		369
Swiss franc			473		—
Swedish krona			289		—
Singapore dollar			235		—
Japanese yen			227		34
British pound			1,247		2,169
Australian dollar			90		—
South African rand			40		—
New Zealand dollar			27		—
Hong Kong dollar			23		—
Norweigan kroner			25		15
Danish krone			—		43
	Total	$	15,672	$	5,669

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PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      All contracts included above matured no later than February 2006. Because of the short-term nature of these contracts, the fair value approximates the contract value. The difference between the fair value and contract value is included in the consolidated balance sheet as accounts receivable and was not material at December 31, 2005. During the fiscal year ended December 31, 2004, Pegasus used similar forward exchange contracts and had either sell or purchase forward exchange contracts of a similarly short-term nature. As of December 31, 2004, Pegasus had approximately $22.6 million in sell forward exchange contracts and $4.6 million in purchase forward exchange contracts. Pegasus’ positions with respect to these forward exchange contracts differed as of December 31, 2005 compared to December 31, 2004 because of changes in Pegasus’ non-U.S. denominated trade payables and receivables.

9. Property, Equipment and Software

      Property, equipment and software at December 31 consisted of the following (in thousands):

								Estimated
		2005			2004			Useful Life
Software		$	112,090		$	131,434			3 to 7  years
Computer equipment			24,917			24,269			3 to 4  years
Leasehold improvements			14,148			14,495			Lease term
Furniture and equipment			6,522			6,589			7 years
Office equipment			3,340			3,575			4 years
			161,017			180,362
	Less: accumulated depreciation and amortization		(101,950	)		(100,036	)
Property, equipment and software, net		$	59,067		$	80,326

      Depreciation and amortization expense for property, equipment and software related to continuing operations was approximately $17.5 million, $15.6 million and $18.5 million for 2005, 2004 and 2003, respectively. Depreciation and amortization expense for property, equipment and software related to discontinued operations was approximately $2.5 million, $4.8 million and $4.4 million in 2005, 2004 and 2003, respectively.

10. Convertible Debt

      On July 21, 2003, the Company issued convertible senior notes totaling $75 million in principal through a private placement. These notes bear interest at an annual rate of 3.875 percent, payable semi-annually in cash in arrears, through the maturity date of July 15, 2023. Each note is convertible into Pegasus’ common stock at a conversion price of approximately $20.13 per share (equal to an initial conversion rate of approximately 49.6808 shares per $1,000 principal amount of notes), subject to adjustment in certain circumstances. Holders of the notes may convert their notes only if (i) the price of Pegasus’ common stock reaches specified thresholds; (ii) the notes have been called for redemption; or (iii) specified corporate transactions occur, including, without limitation, certain acquisitions, mergers or asset sale transactions. The notes and the indenture in connection therewith contain no covenants by the Company to maintain any minimum level of liquidity or any financial ratios.

      The Company may redeem all or some of the notes for cash at any time on or after July 15, 2008, at a redemption price equal to the principal amount of the notes plus any accrued and unpaid interest at the redemption date. Holders may require the Company to purchase the notes on July 16 of 2008, 2013 and 2018, or in other specified circumstances, at a purchase price equal to the principal amount due plus any accrued and unpaid interest at the purchase date and additional amounts, if any.

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PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Concurrent with the issuance of the notes, the Company terminated its $30 million revolving credit facility with Chase Bank of Texas, Compass Bank and Wells Fargo Bank (Texas). Prior to termination, there were no amounts outstanding under this credit facility.

      If a fundamental change occurs, as defined in the indenture relating to the convertible notes, each holder of the convertible notes may require that we purchase that holder’s notes. The merger contemplated by the Merger Agreement constitutes such a fundamental change, and the debt financing anticipated in connection with the Merger Agreement contemplates the repayment of the amounts owing under the convertible notes.

      Pegasus had two irrevocable standby letter of credit agreements with JPMorgan Chase Bank totaling $1.7 million at December 31, 2004, collateralizing the leases for the Dallas and Scottsdale offices. During 2005, there was a reduction of $450,000, releasing the letter of credit for the Dallas facility in full and replacing it with a deposit of $181,000.

11. Stockholders’ Equity

      During 2005, the Company purchased approximately 518,000 shares for an aggregate cost of $6.2 million under a Board approved plan authorized on November 5, 2004 for the repurchase of up to 1.5 million shares of Pegasus’ common stock. Share buy-backs under this plan have been made under a Securities and Exchange Act of 1934 Rule 10b5-1 share repurchase plan, which allowed Pegasus to repurchase shares, subject to certain limitations, even during blackout periods. On April 12, 2005, the Rule 10b5-1 stock repurchase plan was terminated. The Company had total purchases under the plan of approximately 1.2 million shares for a total aggregate value of $13.9 million. During 2004 and 2005 there were three separate Board approved plans for the repurchase of Pegasus stock. Under these plans the Company had total repurchases in 2004 and 2005 of approximately 5.2 million shares for a total aggregate value of $61.9 million.

      Shares repurchased under Board-approved plans were cancelled.

12. Stock-Based Compensation

Stock Option Plans

      In accordance with the Company’s 1996 stock option plan (“1996 Plan”), amended and approved by stockholders in March 1997, options to purchase 1.3 million shares of the Company’s common stock may be granted to Company employees. In accordance with the Company’s 2002 stock incentive plan (“2002 Plan”), approved by stockholders in May 2002, options to purchase shares of the Company’s common stock and restricted stock awards may be granted to Company employees, non-employee directors and consultants. The 2002 Plan provides that the number of shares reserved for issuance under the plan will be replenished annually by an amount equal to 4 percent of the fully diluted shares of Company stock, as defined, outstanding as of the last day of the immediately preceding year. The applicable number of shares outstanding as of December 31, 2005 was approximately 27.9 million. The 2002 Plan also authorizes the grant of restricted stock each year, not to exceed 2.5 percent of the number of shares reserved for issuance under the 2002 Plan. As of December 31, 2005, shares available for grant under the Company’s stock option plans were approximately 3.0 million.

      Options granted under the 1996 Plan and the 2002 Plan (collectively “the Plans”) may be in the form of incentive stock options or nonqualified stock options. The Compensation Committee administers the Plans and determines grant prices. Options granted to Company employees generally vest over a four-year period. Options granted to non-employee directors vest and expire as determined by the Compensation Committee. Options granted under the 1996 Plan before September 15, 1999 expired on December 31, 2005, and have been considered canceled in the following data. Options granted to Company employees under the 2002 Plan before September 15, 1999 expire in December 2006. Options granted to Company employees on or after

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PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

September 15, 1999 under the Plans expire ten years from the date of grant. The Company’s authorized but unissued common stock is used for issuance of shares as stock options are exercised.

      As of December 31, 2005, 38,875 shares of restricted stock granted to certain executives of the Company are outstanding, 36,875 which were granted in May 2004 with a fair value of approximately $420,000 and 2,000 which were granted in February 2005 with a fair value of approximately $24,000. The fair value of the restricted stock awards is determined based on the market value of the Company’s stock on the date of grant. Compensation expense related to the restricted stock awards is being recognized ratably over a four year vesting period.

      The following table summarizes activity under the Company’s stock option plans during the years ended December 31 (in thousands, except per share amounts):

	Number of Company									Weighted Average Exercise
	Options									Price Per Share
	2005			2004			2003			2005		2004		2003
Options outstanding at beginning of year		4,906			5,262			4,370		$	12.50	$	12.75	$	12.88
Granted		273			1,537			1,792			11.01		11.72		12.03
Exercised		(142	)		(622	)		(278	)		7.48		7.77		6.65
Canceled		(890	)		(1,271	)		(622	)		12.14		14.61		16.95
Options outstanding at end of year		4,147			4,906			5,262		$	12.64	$	12.50	$	12.75
Options exercisable at end of year		2,725			2,255			2,401		$	13.09	$	13.24	$	13.44

      The following table summarizes information for stock options outstanding at December 31, 2005 (in thousands, except per share amounts):

	Options Outstanding						Options Exercisable
			Weighted
			Average		Weighted				Weighted
			Remaining		Average				Average
	Number of		Contractual		Exercise		Number of		Exercise
Exercise Prices	Options		Life		Price		Options		Price
$6.33-$8.90		420		4.4 years	$	7.62		419	$	7.62
$9.69-$14.03		3,190		7.4 years		12.03		1,770		12.23
$14.59-$18.63		352		4.5 years		17.95		351		17.95
$24.50-$25.25		185		3.8 years		24.53		185		24.53
$6.33-$25.25		4,147		6.7 years	$	12.64		2,725	$	13.09

Effect of the Merger on Stock-Based Compensation Awards

      At the effective time of the merger under the Merger Agreement, if any, each outstanding stock option, whether or not vested or exercisable, will terminate and thereafter represent the right to receive an amount in cash, without interest and less applicable tax withholding, equal to the number of shares of our common stock subject to each option as of the effective time of the merger, multiplied by the excess, if any, of $9.50 over the exercise price per share of common stock subject to such option. As of December 31, 2005, there were 420,475 stock options outstanding with an exercise price of less than $9.50 outstanding and a weighted-average exercise price of $7.62. Also at the effective time of the merger under the Merger Agreement, if any, each restricted stock award (38,875 shares of restricted stock were outstanding on December 31, 2005) granted under the Plans will be converted into the right to receive $9.50 in cash per share, without interest and less applicable tax withholding. From the date of the Merger Agreement date until completion of the merger under

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the Merger Agreement, if any, the Company has agreed, subject to certain exceptions and unless Parent gives its prior written consent, not to grant any equity or equity based awards.

Employee Stock Purchase Plan

      At a meeting on December 12, 2005, the Board of Directors approved the termination of the Pegasus Solutions, Inc. 2002 Third Amended and Restated Employee Stock Purchase Plan effective as of December 31, 2005. During 2005, 2004 and 2003, approximately 48,000, 53,000 and 66,000 shares, respectively, were issued under the plan. In January 2006, approximately 25,000 shares were issued representing the final purchases under this plan.

13. Employee Benefit Plans

Employee Defined Contribution Plans

      In the United States, the Company sponsors a 401(k) defined contribution retirement plan (the “401(k) Plan”) covering all employees, with exceptions as defined by the 401(k) Plan. The 401(k) Plan allows eligible employees to defer receipt of up to 25 percent of their compensation and contribute such amounts to various investment funds. Eligible employees may elect to participate at the beginning of any quarter after their hire date. Employee contributions vest immediately. Through August 15, 2005, the Company made discretionary matching contributions for employees’ annual contributions of up to 100 percent of the first 5 percent of employees’ compensation contributed. No further matching contributions were made from August 15, 2005 through the end of 2005. The 401(k) match was reinstated in January 2006 at a rate of 4 percent. The Company’s matching contributions vest one-third per year for three years. After three years of employment, an employee is fully vested in all Company matching contributions.

      In the United Kingdom, the Company sponsors a defined contribution retirement plan known as the Utell Limited Group Personal Pension Plan (the “Utell Defined Contribution Plan”). The Utell Defined Contribution Plan covers all full-time and part-time employees not covered within the defined benefit plan described below, regardless of length of service, as well as temporary employees after more than three months service. Eligible employees may elect to participate at any time during their employment. The Company makes discretionary matching contributions for employees’ annual contributions of 6 percent of the employee’s basic salary when the employee contribution levels are 3 percent or above, and 4 percent when employee contributions are 2 percent. Inclusive of company matching contributions, participants can contribute from 17.5 to 40 percent of their total pensionable earnings (as defined in the plan) to various investment funds.

      During 2005, 2004 and 2003, the Company contributed $1.1 million, $1.4 million and $1.8 million, respectively, to the 401(k) Plan. During 2005, 2004, and 2003, the Company contributed approximately $238,000, $331,000 and $160,000, respectively, to the Utell Defined Contribution Plan.

United Kingdom Defined Benefit Plan

      In the United Kingdom, the Company operates a defined benefit plan, which is only open to employees who were part of the Reed Elsevier Pension Scheme in December 1997 (the “Utell Defined Benefit Plan”). The Utell Defined Benefit Plan provides supplemental retirement benefits to its members, based on final average compensation. The Company’s projected 2006 contributions to the Utell Defined Benefit Plan are approximately $167,000.

Executive Retirement Program

      Pursuant to their employment agreements, certain Company officers are eligible to participate in the Executive Retirement Program, consisting of (1) the Supplemental Executive Retirement Plan (the “SERP”), as amended, a defined benefit plan which provides supplemental retirement benefits to certain

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PEGASUS SOLUTIONS, INC.

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officers of the Company based on their compensation and years of service, as defined under the SERP, and (2) the Pegasus Solutions, Inc. Executive Deferred Compensation Plan (the “DCP”), as amended, a defined contribution plan that provides supplemental retirement benefits to certain management employees of the Company.

      Commencing in 2003, the Company is obligated to make annual cash payments to a trust associated with benefits earned under the Executive Retirement Program. The amounts funded to the trust may be available to creditors of the Company, but are generally not available for use in our ongoing operations. Subsequent to year end 2005, the Company made payments to the trust of $310,000 related to the SERP and $256,000 related to the DCP in connection with benefits earned in 2005. Also subsequent to year end 2005, the Company made SERP benefit payments of $340,000 to an executive who terminated participation in the SERP in 2004 using funds outside of the trust. During 2006, the Company expects no further funding to the trust related to the SERP and expects funding to the trust related to the 2006 DCP will total approximately $370,000. Provided however, in the event the merger contemplated by the Merger Agreement closes, Pegasus will be obligated to make further funding to the trust equal to all benefits under the SERP and DCP. During 2005, 2004, and 2003, the Company recorded expenses of approximately $319,000, $600,000 and $656,000, respectively, related to the DCP.

Defined Benefit Obligations, Plan Assets and Funded Status

      Pegasus uses a January 1 measurement date for the SERP and the Utell Defined Benefit Plan. For each defined benefit plan, the following tables provide a statement of funded status as of December 31, 2005 and 2004, and summaries of the changes in the benefit obligation and fair value of assets for the years then ended (in thousands):

							Utell Defined
	SERP						Benefit Plan
	2005			2004			2005			2004
Benefit obligation at beginning of year	$	4,383		$	4,090		$	13,770		$	9,757
Service cost		200			172			341			297
Interest cost		256			269			742			536
Plan participants’ contributions		—			—			89			89
Actuarial loss (gain)		466			381			2,850			2,259
Benefits paid		(340	)		(340	)		(13	)		(13	)
Exchange rate loss (gain)		—			—			(1,532	)		845
Curtailment		—			(189	)		—			—
Settlement		—			—			—			—
Benefit obligation at end of year	$	4,965		$	4,383		$	16,247		$	13,770
Fair value of plan assets at beginning of year	$	—		$	—		$	11,621		$	9,646
Actual return on plan assets		—			—			2,143			814
Employer contribution		340			340			221			222
Plan participants’ contributions		—			—			89			89
Benefits paid		(340	)		(340	)		(13	)		(13	)
Exchange rate loss (gain)		—			—			(1,463	)		863
Fair value of plan assets at end of year	$	—		$	—		$	12,598		$	11,621

59

PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

							Utell Defined
	SERP						Benefit Plan
	2005			2004			2005			2004
Funded status	$	(4,965	)	$	(4,383	)	$	(3,649	)	$	(2,149	)
Unrecognized actuarial loss (gain)		2,363			2,027			2,404			806
Unrecognized prior service cost		(345	)		(386	)		—			—
Additional minimum pension liability		(1,933	)		(1,608	)		(1,650	)		—
Net amount recognized	$	(4,880	)	$	(4,350	)	$	(2,895	)	$	(1,343	)

      The accumulated benefit obligation for the SERP was $4.9 million at December 31, 2005 and $4.4 million at December 31, 2004. The accumulated benefit obligation for the Utell Defined Benefit Plan was $15.5 million at December 31, 2005 and $12.9 million at December 31, 2004.

      As a result of changes in executive management, during the first quarter of 2004, Pegasus recognized a curtailment gain of $162,000 for the SERP under Statement of Financial Accounting Standards No. 88 (“SFAS 88”), “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits.”

      The Company had additional minimum liabilities applicable to the SERP and the Utell Defined Benefit Plan for the excess of the plans’ unfunded accumulated benefit obligation over the plans’ unfunded accrued pension cost of approximately $1.9 million, $1.6 million, and $1.4 million as of December 31, 2005, 2004 and 2003, respectively, applicable to the SERP, and $1.7 million as of December 31, 2005 applicable to the Utell Defined Benefit Plan. Other comprehensive income (loss) of approximately ($1.2) million, ($152,000) and $871,000, net of tax, was recorded for 2005, 2004 and 2003, respectively, related to additional minimum liabilities.

      The assumptions used in the measurement of the Company’s benefit obligations as of December 31, 2005 and 2004 are as follows:

							Utell Defined
	SERP						Benefit Plan
	2005			2004			2005			2004
Discount rate		5.50	%		6.25	%		4.7	%		5.3	%
Expected return on plan assets		N/A			N/A			7.0	%		7.0	%
Rate of compensation increase		5.0	%		5.0	%		4.4	%		4.3	%

Net Periodic Benefit Costs

      The following table provides the components of net periodic benefit costs for the three years ended December 31, 2005 (in thousands):

	SERP									Utell Defined Benefit Plan
	2005			2004			2003			2005			2004			2003
Service cost	$	200		$	173		$	178		$	341		$	297		$	474
Interest cost		256			269			225			742			536			585
Expected return on plan assets		—			—			—			(823	)		(685	)		(530	)
Amortization of prior service cost		(41	)		(34	)		(49	)		—			—			—
Recognized net actuarial loss		130			128			116			—			(26	)		486
Curtailment gain		—			(162	)		—			—			—			(508	)
Settlement loss		—			—			—			—			—			261
Net periodic benefit cost	$	545		$	374		$	470		$	260		$	122		$	768

60

PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The principal assumptions used in the measurement of the net benefit costs for the three years ended December 31, 2005 are as follows:

										Utell Defined
	SERP									Benefit Plan
	2005			2004			2003			2005			2004			2003
Discount rate		6.25	%		6.25	%		6.75	%		5.3	%		5.5	%		5.5	%
Expected return on plan assets		N/A			N/A			N/A			7.0	%		7.0	%		7.0	%
Rate of compensation increase		5.0	%		5.0	%		5.0	%		4.3	%		3.8	%		3.8	%

Investment Policy and Asset Allocation for Utell Defined Benefit Plan

      The investment policy for the Utell Defined Benefit Plan is to achieve an above average rate of return compatible with an acceptable level of risk. The target asset allocation reflects a profile that the Company determines will best meet obligations and includes primarily equity securities. The allocation of assets for the Utell Defined Benefit Plan as of December 31, 2005 and 2004 follows:

		2005			2004
Equity securities			87.7	%		86.5	%
Debt securities			6.6	%		8.0	%
Other			5.7	%		5.5	%
	Total		100.0	%		100.0	%

      The long-term return on plan assets is determined based on expected returns as of the accounting date, primarily based on equities which comprise the majority of assets in the plan. Expected returns on equity plan assets were determined to range between 6% and 9%. A one percent change in expected returns on plan assets would result in a $125,000 change to Pegasus’ annual expense associated with this plan.

Estimated Future Benefits Payable

      The Company estimates that the future benefits payable are as follows at December 31, 2005 (in thousands):

				Utell Defined
		SERP		Benefit Plan
Fiscal year ended December 31:
	2006	$	340	$	12
	2007		340		12
	2008		—		22
	2009		—		22
	2010		—		22
Next five fiscal years to December 31, 2015			—		1,068

61

PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

14. Income Taxes

      Pretax income (loss) from continuing operations for the years ended December 31 was taxed under the following jurisdictions (in thousands):

	2005		2004		2003
Domestic income (loss) before taxes	$	3,882	$	12,479	$	(617	)
Foreign income before taxes		4,533		7,937		1,775
Total income before taxes	$	8,415	$	20,416	$	1,158

      The categories of income tax expense (benefit) for years ended December 31 were as follows (in thousands):

	2005			2004			2003
Continuing operations	$	3,186		$	7,956		$	622
Discontinued operations		(8,091	)		(2,810	)		(1,527	)
Shareholders’ equity		(974	)		(1,011	)		(330	)
Total	$	(5,879	)	$	4,135		$	(1,235	)

      The components of the income tax expense (benefit) for years ended December 31 were as follows (in thousands):

		2005		2004		2003
Current expense:
	Foreign	$	1,388	$	1,532	$	446
Deferred expense (benefit):
	U.S. Federal		1,360		5,127		197
	State		242		966		39
	Foreign		196		331		(60	)
			1,798		6,424		176
Expense for income taxes		$	3,186	$	7,956	$	622

      A reconciliation of taxes based on the federal statutory rate and the income tax expense is summarized as follows for the years ended December 31:

	2005			2004			2003
Expected income tax expense		35.0	%		35.0	%		35.0	%
State income taxes		2.1	%		2.4	%		2.2	%
Permanent differences		1.5	%		1.7	%		18.0	%
Other, net		(0.7	)%		(0.1	)%		(1.5	)%
Expense for income taxes		37.9	%		39.0	%		53.7	%

62

PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Deferred taxes consisted of the following at December 31 (in thousands):

			2005			2004
Deferred tax assets:
	Net operating loss carryforward		$	6,388		$	5,573
	Bad debt reserves			804			833
	Benefit plan obligations			2,342			1,659
	Income tax credits			197			197
	Rent and other accruals			3,433			3,672
	Stock option compensation expense			561			522
	Other			363			348
		Gross deferred tax assets		14,088			12,804
Deferred tax liabilities:
	Acquired intangible assets			(250	)		(341	)
	Depreciation and amortization			(6,691	)		(12,459	)
		Gross deferred tax liabilities		(6,941	)		(12,800	)
Deferred income tax assets, net of deferred tax liabilities			$	7,147		$	4

      In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Management believes that it is more likely than not that the remaining balance at December 31, 2005 of deferred tax assets will be realized. As of December 31, 2005, $1.6 million of deferred tax assets are included in other current assets and $5.5 million of deferred tax assets are included in other noncurrent assets in the Consolidated Balance Sheet. As of December 31, 2004, $1.7 million of deferred tax assets are included in other current assets and $1.7 million of deferred tax liabilities are included in other noncurrent liabilities in the Consolidated Balance Sheet.

      At December 31, 2005 and 2004, the Company had federal net operating loss carryforwards of approximately $29 million and $26 million, respectively. The increase in the federal net operating loss carryforwards in 2005 is primarily due to the impact of discontinued operations. Foreign net operating loss carry forwards for the respective periods were approximately $214,000 and $745,000 as of such dates. The federal net operating loss carryforwards that existed at December 31, 2005 will begin to expire in 2019. The foreign net operating loss carryforwards that existed at December 31, 2005 may be carried forward indefinitely. Utilization of the net operating loss carryforwards may be limited by the separate return loss rules and could be affected by ownership changes which have occurred or could occur in the future.

      On October 22, 2004, the President of the United States signed the American Jobs Creation Act of 2004 (the “Act”). The Act creates a temporary incentive through 2005 for United States corporations to receive repatriations of accumulated earnings of foreign subsidiaries up to $500 million by providing an 85 percent dividends received deduction for certain qualifying dividends from certain qualifying foreign corporations. The Company has evaluated the potential effects of the repatriation provision and determined not to repatriate earnings under this provision. If undistributed earnings of foreign subsidiaries were to be repatriated, such earnings could be subject to foreign withholding taxes and residual income taxes.

63

PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

15. Commitments and Contingencies

      The Company leases its corporate office space and certain office equipment under non-cancelable lease agreements. The Company incurred rent expense of approximately $9.5 million, $8.9 million and $8.8 million in 2005, 2004 and 2003, respectively.

      Approximate future minimum lease payments, including landlord paid tenant improvements, at December 31, 2005, under non-cancelable lease agreements with original terms exceeding one year, were as follows (in thousands):

Fiscal Year Ended December 31,
2006	$	8,097
2007		7,283
2008		7,437
2009		7,270
2010		7,063
Thereafter		12,107
Total	$	49,257

      Future minimum lease payments due in foreign currencies were translated at the rate in effect at December 31, 2005.

      During the third quarter of 2005, the Company ceased the use of two office spaces, one in New York and one in Australia, prior to the lease termination dates and recorded lease termination costs of approximately $378,000 and $133,000, respectively. These costs primarily represent the future lease payments related to the vacated facilities net of estimated sublease income over the remaining lease period of 37 months for the New York facility and 30 months for the Australia facility.

      Concurrent, the Company leased office space in New York at reduced rates, as compared to the previous lease.

      Funds for travel agency commission checks that have not cleared the Company’s processing bank after certain time periods are returned to the Company. Any amounts that are not remitted to travel agents will be escheated to the appropriate states, as required by the respective unclaimed property laws. Liabilities are recorded upon the Company’s receipt of the funds from the bank, and total $7.6 million and $7.4 million at December 31, 2005 and 2004, respectively.

      Pegasus is subject to certain legal proceedings, claims and disputes that arise in the ordinary course of our business. Although management cannot predict the outcomes of these legal proceedings, we do not believe these actions will have a material adverse effect on our financial position, results of operations or liquidity.

16. Related Parties

      During 2005, one Director of the Company served as an executive vice president within Marriott International, Inc. (“Marriott”). Effective February 2006, the director retired from Marriott. In 2005, 2004 and 2003, the Company received $1.6 million, $3.4 million and $4.5 million, respectively, from Marriott and its affiliates for reservation, distribution and representation services. During the same years, the Company paid Marriott $1.4 million, $1.4 million and $1.6 million, respectively, for consolidating commission data and funds from its properties. At December 31, 2005 and 2004, receivables from Marriott approximated $203,000 and $232,000, respectively.

      A Director of the Company serves as a senior vice president for both Hyatt Corporation, the parent company of Hyatt Hotels Corporation, and AIC Holding Co., the parent company of Hyatt International Corporation (“Hyatt”). In 2005, 2004 and 2003, the Company received $683,000, $804,000 and $1.1 million, respectively, from Hyatt for reservation, distribution and financial services. At December 31, 2005 and 2004, receivables from Hyatt approximated $160,000 and $53,000, respectively.

64

PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      A Director of the Company served as Chief Executive Officer of Affiliated Computer Services, Inc. (“ACS”) through September 2005. Through this date in 2005 and for 2004 and 2003, the Company paid ACS $1.5 million, $1.1 million and $421,000, respectively, for services provided in connection with our financial services and, beginning in September 2004, enterprise resource planning system support. At December 31, 2004, payables to ACS approximated $83,000.

17. Segment Disclosures

      In 2003, Pegasus completed a restructure to integrate its technology and hospitality segments into one operating unit. As a result, Pegasus has integrated support functions, including sales and marketing, product development, service delivery, reservation/data management, information technology, finance and human resources functions. Because the Company’s management approach, organizational structure, operating performance assessment and reporting, and operational decision making are performed from a single company perspective, the Company operates as one reportable segment.

      The following summarizes required disclosures about revenue by service line and geographic location.

      During the years ended December 31, 2005, 2004 and 2003, service line revenues were (in thousands):

	2005		2004		2003
Representation services	$	66,368	$	71,855	$	57,409
Reservation services		32,846		37,275		38,349
Financial services		31,534		33,699		30,244
Distribution services		27,379		27,330		28,743
Total service revenues		158,127		170,159		154,745
Customer reimbursements		17,355		15,253		11,485
Total revenues	$	175,482	$	185,412	$	166,230

      The following table presents revenue by geographic location for the years ended December 31, 2005, 2004 and 2003 (in thousands):

	2005		2004		2003
Domestic	$	98,796	$	106,537	$	98,070
International, primarily United Kingdom		76,686		78,875		68,160
Total revenue	$	175,482	$	185,412	$	166,230

      The following table presents net book value of tangible long-lived assets by geographic location for the years ended December 31, 2005 and 2004 (dollars in thousands):

	2005		%			2004		%
Domestic	$	16,562		91	%	$	18,912		91	%
International, primarily United Kingdom		1,648		9	%		1,959		9	%
Total long-lived assets	$	18,210		100	%	$	20,871		100	%

65

PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

18. Quarterly Results of Operations (unaudited)

      The following table summarizes the consolidated quarterly results of operations for 2005 and 2004 (in thousands):

		Quarters Ended
		March 31			June 30			September 30			December 31
2005
Service revenues		$	37,090		$	42,515		$	41,278		$	37,244
Customer reimbursements			3,908			4,806			4,397			4,244
	Total revenues		40,998			47,321			45,675			41,488
Costs of services (exclusive of depreciation and amortization)			24,883			25,939			25,219			22,699
Income (loss) from continuing operations before income taxes			(363	)		3,859			3,793			1,126
Income (loss) from continuing operations			(481	)		2,691			2,432			587
Discontinued operations, net of tax			(1,160	)		(11,697	)		(226	)		199
Net income (loss)			(1,641	)		(9,006	)		2,206			786
Basic net income (loss) per common share:
	Continuing operations		(0.02	)		0.13			0.12			0.03
	Discontinued operations		(0.06	)		(0.56	)		(0.01	)		0.01
	Net income (loss)		(0.08	)		(0.43	)		0.11			0.04
Diluted net income (loss) per common share:
	Continuing operations		(0.02	)		0.13			0.12			0.03
	Discontinued operations		(0.06	)		(0.48	)		(0.01	)		0.01
	Net income (loss)		(0.08	)		(0.35	)		0.11			0.04
Basic weighted average shares outstanding			20,762			20,707			20,758			20,766
Diluted weighted average shares outstanding			20,762			24,639			20,941			20,890
2004
Service revenues		$	40,451		$	44,498		$	44,470		$	40,740
Customer reimbursements			3,479			4,141			3,929			3,704
	Total revenues		43,930			48,639			48,399			44,444
Costs of services (exclusive of depreciation and amortization)			26,188			26,239			25,351			23,443
Income (loss) from continuing operations before income taxes			(82	)		7,093			7,265			6,140
Income (loss) from continuing operations			(85	)		4,406			4,882			3,257
Discontinued operations, net of tax			(894	)		(1,003	)		(1,096	)		(1,482	)
Net income (loss)			(979	)		3,403			3,786			1,775

66

PEGASUS SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

		Quarters Ended
		March 31			June 30			September 30			December 31
Basic net income (loss) per common share:
	Continuing operations		—			0.19			0.22			0.15
	Discontinued operations		(0.04	)		(0.04	)		(0.05	)		(0.07	)
	Net income (loss)		(0.04	)		0.15			0.17			0.08
Diluted net income (loss) per common share:
	Continuing operations		—			0.18			0.20			0.14
	Discontinued operations		(0.04	)		(0.04	)		(0.04	)		(0.05	)
	Net income (loss)		(0.04	)		0.14			0.16			0.09
Basic weighted average shares outstanding			24,717			23,230			22,131			21,556
Diluted weighted average shares outstanding			24,717			27,253			26,224			25,556

      In accordance with SFAS 128, earnings per share are computed independently for each of the quarters presented; therefore, the sum of the quarterly earnings per share may not equal the annual earnings per share.

      Subject to certain conditions, the Company’s convertible debt is convertible into common stock at a conversion price of approximately $20.13 per share, equal to approximately 3.7 million shares. No dilution for convertible debt was included in the calculation for the quarters ended March 31, 2005, September 30, 2005, December 31, 2005, and March 31, 2004 as the effect would be anti-dilutive to income from continuing operations for these periods.

67

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

      None.

Item 9A. Controls and Procedures

      Disclosure Controls and Procedures. The Company maintains (a) 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”)) and (b) internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). 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 of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.

      Changes in Internal Control over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting during the fourth fiscal quarter of 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

      Management’s Report on Internal Control over Financial Reporting. The Company maintains a system of internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act, which is a process designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

      The Company’s internal control over financial reporting includes those policies and procedures that:

•  Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

•  Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

•  Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

      Our management has responsibility for establishing and maintaining adequate internal control over financial reporting for the Company. Management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005 based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

      Based on their evaluation of the Company’s internal control over financial reporting, the Company’s management along with the Chief Executive and Chief Financial Officers concluded that the Company’s internal control over financial reporting is effective as of December 31, 2005.

      Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report which appears under Item 8.

68

Item 9B. Other Information

      None

PART III

Item 10. Directors and Executive Officers of the Registrant

INFORMATION ABOUT PEGASUS DIRECTORS AND EXECUTIVE OFFICERS

      Set forth below are the positions with Pegasus presently held by each director and executive officer of Pegasus, and each such person’s business experience for the past five years. Each of the directors and executive officers is a U.S. citizen, other than Mr. Collier who is a U.K. citizen, and none has been convicted in a criminal proceeding during the past five years, nor been a party to any judicial or administrative proceeding, excluding traffic violations and similar misdemeanors, during the past five years that resulted in a judgment, decree or final order enjoining them from future violations of, or prohibiting activities subject to, federal or state securities laws, or finding of any violation of federal or state securities laws.

Directors

      Michael A. Barnett, age 52, has served as a Director of Pegasus since February 1999. Mr. Barnett has served as Chairman of the Board and Chief Executive Officer of Benchmark Bank since 1988. Since 1983, Mr. Barnett has served as President and Chairman of the Board of Barnett Interests, Inc., a diversified real estate management company. Since 1992, Mr. Barnett has served as Chairman of the Board of Barnett Lane Investments, Inc., a real estate investment and management company. Since 1986, Mr. Barnett has served as President and director of Quinlan Bancshares, Inc., a bank holding company

      Robert B. Collier, age 66, has served as a Director of Pegasus since July 1998. Mr. Collier currently serves on the board of directors of United Kingdom based Daniel Thwaites PLC.

      John F. Davis, III, age 53, has served as Chief Executive Officer of Pegasus since February 1989, as a Director since July 1995, as Chairman of the Board since March 2001 and as President since January 2003. Mr. Davis also served as President of Pegasus from February 1989 to January 2001. Mr. Davis is also a director of TRX, Inc.

      William C. Hammett, Jr., age 59, has served as Vice Chairman of the Board of Directors of Pegasus since May 2001 and as a Director of Pegasus since October 1995. From May 1998 to March 2001, Mr. Hammett served as Chairman of the Board of Directors of Pegasus. From December 2001 to present, Mr. Hammett has served as Senior Vice President and Chief Financial Officer of Dave and Busters, Inc., a retail restaurant and entertainment company.

      Thomas F. O’Toole, age 48, has served as a Director of Pegasus since May 1998. Since March 2003, Mr. O’Toole has served as Senior Vice President -Strategy and Systems for both Hyatt Corporation, the parent company of Hyatt Hotels Corporation, and AIC Holding Co., the parent company of Hyatt International Corporation. From October 2000 to March 2003, Mr. O’Toole served as Senior Vice President, Marketing and Information Technology and from March 1999 to October 2000, as Senior Vice President, Marketing for Hyatt Hotels Corporation.

      Pamela H. Patsley, age 49, has served as a Director of Pegasus since May 2002. Since March 2000, Ms. Patsley has served as Senior Executive Vice President of First Data Corporation, a provider of electronic commerce and payment services, and since May 2002, as President of its subsidiary, First Data International, responsible for all operations outside the United States within the card issuing and merchant services businesses of First Data Corporation. From March 2000 to May 2002, Ms. Patsley served as the President of First Data Corporation’s merchant transaction processing business unit. Ms. Patsley served as President and Chief Executive Officer of Paymentech, Inc., a processor of bankcard transactions and issuer of commercial cards from 1991 to February 2000. Ms. Patsley is also a director of Molson Coors Brewing Company and Texas Instruments, Inc.

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      Jeffrey A. Rich, age 45, has served as a Director of Pegasus since December 2000. Mr. Rich currently serves as Chief Executive Officer of Rich Capital LLC, a private investment firm. Mr. Rich served as Chief Executive Officer of Affiliated Computer Services, Inc. (“ACS”), a business process outsourcing company, from February 1999 to September 2005 and as a director of ACS from 1991 to September 2005.

      Bruce W. Wolff, age 62, has served as a Director of Pegasus since October 1995. Mr. Wolff served as Executive Vice President, Business Development from November 2004 to February 2006, Executive Vice President, Sales and Marketing Programs from February 2004 to February 2006, and as Senior Vice President, Distribution Sales and Strategy from July 1998 to February 2004, for the lodging division of Marriott International, Inc. Mr. Wolff retired from Marriott in February 2006.

Executive Officers who are not also Directors

      Robert J. Boles, Jr., age 46, has served as Executive Vice President, Chief Operating Officer of Pegasus since December 2004. Mr. Boles served as Executive Vice President, Sales and Marketing of Pegasus from May 2003 to December 2004. From March 2000 to May 2003, Mr. Boles served as President of AimNet Solutions, an Information Technology network professional and managed services company. From October 1982 through March 2000, Mr. Boles served in various capacities at AT&T Global Network Services and its predecessor, IBM Global Services, a global business solutions company, most recently as Vice President of Sales and Support from January 1999 through March 2000.

      Susan K. Conner, age 42, has served as Executive Vice President and Chief Financial Officer of Pegasus since May 2001. From May 1997 to April 2001, Ms. Conner served as a partner in the Technology, Infocom, Communication and Entertainment practice of PricewaterhouseCoopers LLP, a global public accounting firm, in the Dallas, Texas office.

      Ric L. Floyd, age 54, has served as General Counsel of Pegasus since July 1995, as Corporate Secretary since July 1997 and as Executive Vice President since December 1999.

      Michael H. Kistner, age 48, has served as Senior Vice President of Technology and Operations of Pegasus since March 2005. From September 2000 to February 2005, Mr. Kistner served as Chief Information Officer and Senior Vice President of Distribution for Best Western International, Inc. From June 1994 to August 2000, Mr. Kistner served as a Senior Vice President at Cendant Corp. Mr. Kistner has also served as Chairman of the Open Travel Alliance (OTA) from 2000 to 2005 and continues to be a board member of the OTA. He is also the Chairman of the E-Business Committee of the American Hotel & Lodging Association.

      Andrew J. Stringer, age 38, has served as Vice President, Human Resources of Pegasus since January 2004 and from September 1999 to January 2004 as Director, Human Resources — Americas.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

      Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers, Directors and persons who own more than 10% of our common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission. These persons are required to provide us with copies of all Section 16(a) forms that they file. Based solely on our review of these forms or written representations from the executive officers and Directors, we believe that all Section 16(a) filing requirements were met during fiscal year 2005.

AUDIT COMMITTEE

      The Audit Committee assists the Board of Directors in connection with its oversight responsibilities regarding the Company’s financial reporting processes. The Audit Committee is responsible for the appointment of the Company’s independent registered public accounting firm, and has other responsibilities outlined in its charter. Members of the Audit Committee are Michael A. Barnett, William C. Hammett, Jr. and Pamela H. Patsley. Our Board of Directors has determined that each member of the Audit Committee is an “audit committee financial expert” as defined by the Securities and Exchange Commission’s rules and is

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“independent” as defined by the National Association of Securities Dealers, Inc.’s listing standards and the Securities and Exchange Commission’s independence standards for Audit Committee members.

CODE OF ETHICS FOR FINANCIAL PROFESSIONALS

      We adopted a Code of Ethics for Senior Financial Officers in 2003 and our CEO, CFO and Controller have each certified as to their compliance with these ethical requirements regarding company accounting and financial disclosure. Our Code of Ethics for Senior Financial Officers are available under the “Corporate Governance” page of the “Investor Center” section of the Company’s website, www.pegs.com.

Item 11. Executive Compensation

NAMED EXECUTIVE OFFICERS’ COMPENSATION

      Summary Compensation Table. The following table sets forth the compensation earned by our Chief Executive Officer and the four other most highly compensated executive officers whose salary and bonus for the fiscal year ended December 31, 2005, were in excess of $100,000. These persons are collectively referred to as the “Named Executive Officers.”

      In accordance with the rules of the Securities and Exchange Commission, the compensation described in the following table does not include medical insurance, group life insurance and certain other benefits received by the Named Executive Officers that are available generally to all salaried Pegasus employees.

Summary Compensation Table

										Long-Term Awards
						Annual Compensation
										Restricted		Securities
								Other Annual		Stock		Underlying		All Other
Name and Principal Position		Year		Salary		Bonus(1)		Compensation(2)		Awards(3)		Options		Compensation(4)
John F. Davis, III(5)			2005	$	447,834		—	$	45,000		—		—	$	239,133
	President, Chief Executive		2004	$	424,008	$	191,250	$	45,000	$	148,125		150,000	$	188,278
	Officer and Chairman of		2003	$	424,008		—	$	45,000		—		180,000	$	204,170
	the Board
Robert J. Boles, Jr.(5)(6)			2005	$	300,000		—	$	35,000		—		—	$	125,773
	Executive Vice President		2004	$	280,000	$	133,650	$	35,000	$	111,094		112,500	$	104,118
	and Chief Operating Officer		2003	$	173,939		—	$	21,875		—		75,000	$	63,335
Susan K. Conner(5)			2005	$	284,350		—	$	35,000		—		—	$	52,226
	Executive Vice President		2004	$	252,625	$	64,625	$	35,000	$	88,875		90,000	$	40,481
	and Chief Financial Officer		2003	$	235,000		—	$	35,000		—		90,000	$	36,489
Ric L. Floyd(5)			2005	$	254,678		—	$	35,000		—		—	$	103,252
	Executive Vice President,		2004	$	239,663	$	60,638	$	35,000	$	88,875		90,000	$	88,695
	General Counsel and		2003	$	231,000		—	$	35,000		—		100,000	$	89,040
	Corporate Secretary
Michael H. Kistner(5)(7)			2005	$	200,000	$	59,200	$	20,833	$	24,300		75,000	$	4,075
	Senior Vice President,
	Operations and Technology

(1)	Each bonus is reflected in the year in which it was earned, not the year in which it was paid.
(2)	Other Annual Compensation represents payments to the Named Executive Officers under the Pegasus Solutions, Inc. Executive Perquisite Plan (“Perquisite Plan”), covering expenses allowable under the Perquisite Plan, which may include: automobiles, club memberships and financial, legal and investment counseling. Perquisite benefit amounts are allocated to participants in the Perquisite Plan on an annual basis and are paid to the participants in equal semi-monthly payments throughout the year. The Company has no basis for identifying Perquisite Plan expenses by type.
(3)	The restricted stock award value was calculated by multiplying the closing market price of the Company’s stock on the date of grant by the number of restricted shares awarded. At December 31, 2005,

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	Messrs. Davis, Boles, Floyd and Kistner and Ms. Conner each held an aggregate of 12,500, 9,375, 7,500, 2,000 and 7,500 shares of restricted stock, respectively, with a value of $112,125, $84,094, $67,275, $17,940 and $67,275, respectively, based on the closing price of the Company’s Common Stock on December 31, 2005 ($8.97 per share). The restricted stock awards vest in full on the fourth anniversary of the date of grant.
(4)	For the year ended December 31, 2005, All Other Compensation includes: (i) matching contributions made by the Company pursuant to its 401(k) plan for the accounts of Messrs. Davis, Boles, Floyd, Kistner and Ms. Conner in the amounts of $10,250, $10,250, $10,254, $4,075, and $10,250, respectively, (ii) contributions allocated by Pegasus under the Company’s Executive Deferred Compensation Plan for the accounts of Messrs. Davis, Boles and Floyd and Ms. Conner in the amounts of $208,450, $30,863, $92,235 and $41,676, respectively, (iii) premiums paid for life insurance policies for the benefit of Messrs. Davis, Boles and Floyd and Ms. Conner and their designees in the amounts of $20,433, $470, $763 and $300, respectively, and (iv) expenses paid by the Company relating to Mr. Boles’ commuting, including airfare, temporary lodging and transportation, in the amount of $59,190 and a relocation bonus in the amount of $25,000. Mr. Davis is entitled to receive an interest in the cash surrender value of two life insurance policies for which the premiums are paid by the Company and are included in (iii) above.
(5)	The salaries of Messrs. Davis, Boles, Floyd, and Ms. Conner were established by the Compensation Committee and paid in accordance with the terms of their respective employment agreements.
(6)	Mr. Boles became an employee of Pegasus on May 19, 2003.
(7)	Mr. Kistner became an employee of Pegasus on March 1, 2005.

      Option Grants In Last Fiscal Year. The following table sets forth the stock option grants made during the year ended December 31, 2005, to the Named Executive Officers.

			% of Total
	Number of Securities		Options							Grant Date
	Underlying Options		Granted in			Exercise Price		Expiration		Present
Name	Granted(1)		2005(2)			per Share(3)		Date(4)		Value(5)
John F. Davis, III		—		—			—		—		—
Robert J. Boles, Jr.		—		—			—		—		—
Susan K. Conner		—		—			—		—		—
Ric L. Floyd		—		—			—		—		—
Michael H. Kistner		60,000		21.99	%	$	11.92		3/01/15	$	330,600
Michael H. Kistner		15,000		5.50	%	$	10.47		5/12/15	$	68,400

(1)	On March 1, 2005 and May 12, 2005, options were granted to Mr. Kistner under the Pegasus Solutions, Inc. 2002 Stock Incentive Plan. These options vest over a four year period with 25% of the shares vesting on the first anniversary of the date of grant and 6.25% of the shares vesting after every three month period thereafter until fully vested. The vesting of these options may accelerate under certain circumstances, including upon an acquisition event as described in our stock option plans and as described in the executives’ employment agreements.
(2)	Based on options granted during 2005 to purchase an aggregate of 272,800 shares of common stock.
(3)	The exercise price for the option is equal to the closing price of the common stock as quoted on the Nasdaq National Market on the date immediately preceding the grant date.
(4)	All options have a term of approximately ten (10) years, but may terminate before their expiration date in the event of the death, disability or termination of employment of the optionee.
(5)	These values are determined using the Black-Scholes Option Pricing Model. The Black-Scholes Option Pricing Model is one of the methods permitted by the Securities and Exchange Commission for estimating the present value of options. The Black-Scholes Option Pricing Model is based on assumptions as to the variables described below, and it is not intended to estimate and has no direct correlation to the value of stock options that an individual will actually realize. The actual value of the stock options

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that a Named Executive Officer may realize, if any, will depend on the excess of the market price on the date of exercise over the exercise price. The values listed above were based on the following assumptions:

	Options			Options
	Expiring			Expiring
	03/01/15			05/12/15
Volatility		54.5	%		50.4	%
Risk free rate of return		3.85	%		3.80	%
Dividend Yield		0	%		0	%
Expected Life (years)		4			4

      Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values. The following table sets forth information concerning options exercised during 2005 and options held on December 31, 2005, by our Named Executive Officers.

					Number of Securities				Value of Unexercised
					Underlying Unexercised				In-The-Money
	Shares				Options at Year-End				Options at Year-End(2)
	Acquired on		Value
Name	Exercise		Realized(1)		Exercisable		Unexercisable		Exercisable		Unexercisable
John F. Davis, III		13,000	$	139,624		808,750		183,750	$	443,150		—
Robert J. Boles, Jr		—		—		89,062		98,438		—		—
Susan K. Conner		15,000	$	31,050		118,750		101,250		—		—
Ric L. Floyd		15,600	$	33,462		220,500		106,250	$	2,535		—
Michael H. Kistner		—		—		—		75,000		—		—

(1)	Based on the difference between the option exercise price and the fair market price of the shares on the exercise date.
(2)	Based on the difference between the option exercise price and the closing sale price of $8.97 of Pegasus’ common stock as reported on the Nasdaq National Market on December 31, 2005, the last trading day prior to the closing of our fiscal year multiplied by the number of shares underlying the options.

      Employment Agreements. Pegasus has entered into employment agreements with Messrs. Davis, Boles, Floyd and Ms. Conner. These employment agreements have been filed as exhibits to the Company’s Securities and Exchange Commission filings. Mr. Kistner was hired in 2005 and the company entered into an employment agreement with him. Messrs. Davis’ and Floyd’s and Ms. Conner’s employment agreements’ original terms expired on January 1, 2004, January 1, 2004 and May 7, 2005, respectively; however, such terms have automatically extended indefinitely until the agreements are terminated by either party. Mr. Boles’ employment agreement’s original term expires on May 19, 2007, however, such term automatically extends indefinitely until the agreement is terminated. Mr. Kistner’s agreement will expire on March 1, 2008 and will be renewed automatically and extended for successive 30 day periods thereafter until terminated. Each of the agreements with Messrs. Davis, Boles, Floyd and Ms. Conner provide for annual base salaries and eligibility to receive a discretionary annual bonus in accordance with a bonus plan approved by the Compensation Committee. Mr. Kistner’s agreement provides for annual base salary adjustments and eligibility to receive a discretionary annual bonus in accordance with the term and conditions of the bonus plan approved by the Company.

      The employment agreements of Messrs. Davis, Boles, and Floyd and Ms. Conner provide for entitlement to participate in Pegasus’ Executive Retirement Program (described below).

      The employment agreements of Messrs. Davis, Boles, and Floyd and Ms. Conner provide that Pegasus may terminate the executive’s employment with or without cause (as that term is defined in each agreement) or upon death or disability. Each of the executives may terminate the agreement for good reason (as that term is defined in the agreement and including a change of control of Pegasus) or voluntarily. Mr. Kistner’s agreement provides that he may be terminated with or without cause and that he may terminate voluntarily.

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      Under the employment agreements of Messrs. Davis, Boles and Floyd and Ms. Conner, if the executive’s employment is terminated by Pegasus for death or disability, the executive is entitled to all accrued compensation and a pro-rata bonus through the termination date, base salary, perquisite plan and bonus for one year, options and other incentive based awards vest for one additional year, and payments as provided by the Executive Retirement Program (see “Executive Retirement Program” below). If the executive’s employment is terminated by Pegasus without cause or by the executive for good reason, including a change of control, the executive is entitled to all accrued compensation and a pro rata bonus, base salary and bonus for 24 months, continuation of customary and usual benefits for 12 months, options and other incentive based awards vest for an additional period or in full, and Messrs. Davis and Floyd continue to accrue benefits and vesting of service for two years for purposes of the Executive Retirement Program. Under Mr. Kistner’s agreement, if his employment is terminated by the company for reasons other than cause or by Mr. Kistner, he is entitled to his base pay and perquisite plan for one year following termination as well as expense reimbursement for COBRA medical insurance, dental insurance and including health care spending account coverage.

      Executive Retirement Program. In 2002, the Board of Directors retained the services of an independent executive compensation consulting company to analyze our Executive Retirement Program and to recommend a program commensurate with a peer group of companies and consistent with the Compensation Committee’s executive compensation policies. Based upon the recommendations of the consulting company, effective July 1, 2002, the Board of Directors adopted an Executive Retirement Program, consisting of an amended and restated Supplemental Executive Retirement Plan (the “SERP”) and a Deferred Compensation Plan (the “DCP”). The purposes of the Executive Retirement Program are to promote executive management’s interest in the successful operation of the business and increased efficiency in their work, to align the financial interests of such employees with those of Company stockholders, to ensure competitive pay and benefits for those individuals and to provide an opportunity for accumulation of funds for their retirement. The Executive Retirement Program provides supplemental retirement benefits to certain management employees of Pegasus selected by the Compensation Committee in its discretion, permits such employees to defer amounts of their compensation, provides for employer contributions that exceed the permitted employer matching contribution limits under the Pegasus 401(k) plan, and rewards long-term service through employer and supplemental contributions to a deferred account for each participant. No person has an automatic right to become a participant in the Executive Retirement Program.

      Supplemental Executive Retirement Plan. Benefits under the SERP are computed on a single-life annuity basis and become payable to the participant or his or her beneficiary, as applicable, upon retirement, death, total and permanent disability or termination of employment (other than for cause). Upon retirement, total and permanent disability or termination of employment (but following disability or termination of employment, deferred until age 60), the participant will receive monthly benefits equal to the greater of (a) 3% of his or her monthly targeted base salary and bonus as of July 1, 2002, multiplied by his or her years of service as of July 1, 2002, increased by 5% per annum until termination of employment (but not to exceed 60% or, in the case of the Chief Executive Officer, 70%, of the participant’s final average compensation; or if greater, targeted July 1, 2002, compensation), or (b) one-half percent (1/2%) of the participant’s final average compensation multiplied by his or her years of service. In the event of death, the participant’s beneficiary will receive a lump-sum payment equal to an actuarially equivalent amount. SERP benefits may also be paid, at the option of the participant, in the form of an actuarially equivalent ten-year fixed annuity, a joint and 50% or 100% survivor annuity, or, in the Compensation Committee’s discretion, a partial or full lump sum. Also, the participant may receive an actuarially equivalent lump sum payment of his or her benefit if, within twelve months following a change of control, (i) his or her employment terminates or (ii) he or she elects to cease further participation in the SERP.

      During 2005, Pegasus recorded compensation expense of approximately $545,000 for future payments under the terms of the SERP. The current Named Executive Officers participating in the SERP are Ms. Conner and Messrs. Davis, Boles, and Floyd.

      The estimated annual benefit payable under the SERP upon retirement at age 60 is, for Ms. Conner, $117,839, for Mr. Davis, $487,408, for Mr. Boles, $74,351 and for Mr. Floyd $120,013.

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      Deferred Compensation Plan. Effective July 1, 2002, the DCP permits each participant to defer up to 100% of his or her compensation, to be credited to his or her account in the DCP. Pegasus contributes to each participant’s account in the DCP (a) a restoration contribution equal to the maximum potential matching contribution under the Pegasus 401(k) Plan (reduced by the actual match for the participant for the year), (b) an employer contribution equal to 1% of compensation multiplied by years of service (not to exceed 25% of compensation), (c) for 2003, a supplemental contribution equal to $10,000 multiplied by years of service determined as of the end of the preceding year, and (d) for 2004 through 2006, a supplemental contribution equal to $5,000 multiplied by years of service determined as of the end of the preceding year. In 2006, the Board of Directors amended the DCP to change the company’s Restoration Contribution (as defined in the DCP), effective January 1, 2006, to be equal to the company’s matching contribution for all employees under its 401(k) Plan.

      During 2005, Pegasus recorded compensation expense for the Named Executive Officers of approximately $319,000 attributable to the DCP. The current Named Executive Officers participating in the DCP are Messrs. Davis, Boles, Floyd and Ms. Conner.

      In response to proposed Internal Revenue Code Section 409A, at a meeting on December 12, 2005, the Board of Directors approved the adoption of new terms for post-2004 benefits under our executive retirement program. The Board elected to “grandfather” existing terms of the plans with regard to amounts not subject to new Section 409A (benefits that were accrued and vested at December 31, 2004). The plans’ terms for these “grandfathered” vested benefits remain unchanged. As permitted by the transition rules under new Section 409A, the plans were also amended to provide participants new payment elections during 2005 with regard to benefits under the plans that are subject to Section 409A. Generally, the payment elections available under the plans are unchanged, except that the Board amended the SERP to permit participants to elect lump sum payments without requiring the consent of the Board of Directors.

      All Executive Retirement Program benefits are paid from the general assets of Pegasus and the Executive Retirement Program is an unfunded deferred compensation arrangement, not subject to the annual reporting and disclosure requirements of the Employee Retirement Income Security Act of 1974. Pegasus has created and is required to make deposits to a grantor trust (the assets of which are available to its general creditors in the event of insolvency). Cash payments to the trust in 2005 totaled approximately $460,000 related to the SERP and $192,000 related to the DCP. The amounts funded to the trust are generally not available for use in the Company’s ongoing operations.

      Equity Compensation Plans. The Company’s 1996 Stock Option Plan (“1996 Plan”), amended and approved by stockholders in March 1997, provides that options to purchase 1.3 million shares of the Company’s common stock may be granted to Company employees. The Company’s 2002 Stock Incentive Plan (“2002 Plan”), approved by stockholders in May 2002, provides that options to purchase shares of the Company’s common stock and restricted stock awards may be granted to Company employees, non-employee Directors and consultants. The number of shares reserved for issuance under both plans as of December 31, 2005 (before the share replenishment described in the following sentence) was approximately 3.0 million. The 2002 Plan further provides that the number of shares reserved for issuance as options or restricted stock will be replenished annually by an amount equal to four percent of the fully-diluted shares of the Company outstanding as of the last day of the immediately preceding year. As defined in the 2002 Plan, the applicable number of shares outstanding as of December 31, 2005, was approximately 27.9 million. The 2002 Plan authorizes the grant of restricted stock, the amount of which, during any fiscal year, shall not exceed 2.5 percent of the number of shares reserved for issuance under the 2002 Plan.

      Options granted under the 1996 Plan and the 2002 Plan (collectively “the Plans”) may be in the form of incentive stock options or nonqualified stock options. The Compensation Committee of the Board of Directors administers the Plans. Options granted to Company employees generally vest over a four-year period. Options granted to non-employee Directors vest and expire as determined by the Compensation Committee. Options granted under the 1996 Plan before September 15, 1999 expired on December 31, 2005. Options granted to Company employees under the 2002 Plan before September 15, 1999, expire in December 2006. Options granted to Company employees on or after September 15, 1999, under the Plans expire ten years from the date

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of grant. The Company’s authorized but unissued common stock is used for issuance of shares as stock options are exercised.

DIRECTORS’ COMPENSATION

      During 2005, the Company’s standard arrangements for Director compensation included an annual payment of $15,000, payable in quarterly installments, for a non-employee Chairman of the Board. All other non-employee Directors receive $10,000 annually, payable quarterly. Non-employee Audit Committee members receive annual retainer fees of $5,000 per member and $10,000 for the Chairman. Additionally, each non-employee Director receives $2,500 for each Board of Directors meeting attended in person and $1,250 for each Board of Directors meeting attended telephonically. Each non-employee Director also receives $1,000 for each committee meeting attended in person and $500 for each committee meeting attended telephonically. Each Committee Chairman receives an additional $500 for each committee meeting attended in person and an additional $250 for each committee meeting attended telephonically. Personal attendance or telephonic attendance at informal Board of Directors and committee gatherings is compensated in the same manner as personal or telephonic attendance at formal Board of Directors and committee meetings, as the case may be. Directors are also reimbursed for all reasonable expenses incurred while performing their duties as Directors of Pegasus.

      Non-employee Directors receive stock option grants as follows:

•  Options to purchase 20,000 shares of common stock of Pegasus at the closing price on the date immediately preceding election as a Director. These options have a ten-year term and vest over a three year period, with 1/12 of the option shares vesting each quarter during the Director’s term of office;

•  An additional grant of 8,000 option shares at the closing price of the stock on the day preceding each subsequent anniversary date of election to office. These options have a ten-year term and vest 25% each quarter during the Director’s term of office, vesting in full in one year; and

•  Such additional grants as may be awarded at the discretion of the Compensation Committee.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

      The Compensation Committee approves and makes recommendations to the Board of Directors concerning salaries and incentive compensation for Pegasus’ officers and employees and administers our employee stock purchase plan and stock option plans. Members of the Compensation Committee are Michael A. Barnett, Robert B. Collier, William C. Hammett, Jr. and Jeffrey A. Rich. These were the only members of such committee during 2005, and none of them have ever been an officer or employee of Pegasus. During 2005, no member of the Compensation Committee had a relationship with any other company that requires disclosure as a “compensation committee interlock” as that term is defined by the Securities and Exchange Commission rules.

COMPENSATION COMMITTEE REPORT

      Each member of the Compensation Committee of the Board of Directors is an independent non-employee director. The Compensation Committee, among other activities described in its charter (available at www.pegs.com):

•  discharges the Board’s responsibilities relating to compensation of the Company’s directors and executive officers;

•  reviews and periodically approves a general compensation program and salary structure for management employees;

•  reviews and makes recommendations to the Board with respect to the adoption, amendment and termination of management incentive compensation and equity-compensation plans, as well as other benefit and compensation plans; and

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•  makes decisions with respect to awards under the Company’s stock option and incentive plans for such awards to satisfy Securities Exchange Act Rule 16b-3.

      The Compensation Committee’s executive compensation policies are designed to:

•  provide competitive levels of compensation that integrate pay with Pegasus’ annual and long-term performance goals;

•  reward above average corporate performance;

•  recognize individual initiative and achievements; and

•  attract and retain qualified executives.

      The Compensation Committee regularly reviews executive officer compensation. In 2004, the Compensation Committee retained the services of KPMG LLP as an independent consultant to analyze and make recommendations with respect to executive officer compensation. Included in the process was a determination by the Compensation Committee and KPMG LLP of an appropriate peer group to support the analysis. The Compensation Committee also conducted a review during 2004 of the Company’s payment and other obligations pursuant to the termination provisions of the employment agreements of the Company’s executive officers.

      The Compensation Committee believes stock ownership by management and performance-based compensation arrangements are beneficial in aligning management’s interests with those of our stockholders. In addition to stock-based awards in the form of restricted stock and stock option grants, each of our executive officers receives an annual base salary and is eligible to receive a discretionary annual bonus. The Compensation Committee considers and approves discretionary bonus plans and annual bonuses based on a percentage of the executive’s annual salary and established financial and other corporate goals, as well as individual performance criteria for each executive. The amount of the annual cash bonus is based on a percentage of each executive’s annual salary, with the target amount per year for each particular executive ranging from 25% to 100% of the executive’s annual base salary (the “Target Bonus”). The specific percentage of the Target Bonus to be awarded an executive is based upon an adjusted earnings per share (“adjusted EPS”) goal and the achievement of individualized goals specific to each executive officer, such as improving customer satisfaction, delivering key projects within timing and budget goals, managing and reducing certain expenditures, achieving specific revenue goals and achieving specified growth goals with respect to certain service offerings (the “Individualized Targets”). A percentage of the Target Bonus is attributable to the adjusted EPS goal and each Individualized Target. Failure of the Company to achieve the adjusted EPS goal or failure of the executive to achieve the Individualized Targets could result in elimination or reduction of the bonus depending upon the percentage attributable to the unmet performance criteria. The executive is eligible to receive a specified percentage of the Target Bonus in excess of the Target Bonus in the event the executive satisfies all of the Individualized Targets and the Company exceeds its adjusted EPS goal. The Company uses adjusted EPS in connection with the bonus plan because it believes this measure enables a more thorough evaluation of the Company’s current performance as compared to past performance and provides a better baseline for assessing the Company’s future earnings expectations. Each of the current executive officers of the Company listed in this proxy statement participate in the bonus plan. Targeted levels of total executive compensation are generally set at levels we believe to be consistent with other companies in Pegasus’ industry. Actual compensation levels in any particular year may be above or below those of our competitors depending on the executive’s or Pegasus’ performance.

      2005 Chief Executive Officer Compensation. Mr. Davis’ compensation for 2005 as Chief Executive Officer of Pegasus primarily consisted of a base salary. The Compensation Committee determined Mr. Davis’ 2005 base salary based upon the terms of his employment agreement, information received from executive compensation consultants and the factors discussed above relating to executive compensation. Mr. Davis’ bonus was determined by the Compensation Committee based upon Company and personal performance criteria as more specifically described above. Mr. Davis also received matching contributions under Pegasus’ 401(k) plan and Pegasus pays for life insurance premiums on Mr. Davis’ and his dependents’ behalf. Additionally, in 2005, the Company recorded compensation expense of approximately $517,000 under the

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Executive Retirement Program for Mr. Davis’ benefit (See Executive Retirement Program description on page 74). In 2005, the Compensation Committee evaluated Mr. Davis’ performance as Chief Executive Officer. Mr. Davis does not participate in the Compensation Committee’s decisions regarding his compensation.

      Limit on Deductibility of Executive Compensation. In 1993, Congress amended the Internal Revenue Code to add Section 162(m). This Section of the Internal Revenue Code limits the deductibility of compensation paid to specified executive officers to $1,000,000 per officer in any one year. Compensation that qualifies as performance-based compensation is not taken into account for the purposes of this limitation. Pegasus obtained stockholder approval at the 1999 annual meeting of an amendment to its 2002 Stock Incentive Plan to allow Pegasus to deduct the compensation arising from the exercise of stock options granted under the 2002 Plan even if the compensation paid to any of the Named Executive Officers exceeds the deductible limit. The Compensation Committee intends to recommend further action in connection with Pegasus’ other benefit plans and salary and bonus policies to address this issue if and when circumstances arise.

Submitted by the Compensation Committee
of the Board of Directors

ROBERT B. COLLIER, Chairman

MICHAEL A. BARNETT

WILLIAM C. HAMMETT, JR.

JEFFREY A. RICH

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STOCK PERFORMANCE GRAPH

      Research Data Group, Inc. prepared the following graph. It shows how an initial investment of $100 in Pegasus’ common stock on December 31, 2000, would have compared to an equal investment in The Russell 2000 Composite Stock Market Index and a peer group. Pegasus’ peer group is comprised of Cendant Corporation, MICROS Systems, Inc., Sabre Holdings Corporation and IAC InterActiveCorp (formerly USA Interactive).

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

AMONG PEGASUS SOLUTIONS, INC., THE RUSSELL 2000 INDEX AND A PEER GROUP

CUMULATIVE TOTAL RETURN

	12/00		12/01		12/02		12/03		12/04		12/05
PEGASUS SOLUTIONS, INC.		100.00		204.68		144.58		150.92		181.62		129.30
RUSSELL 2000		100.00		102.49		81.49		120.00		142.00		148.46
PEER GROUP		100.00		151.55		90.62		158.42		152.10		134.39

*  $100 invested on 12/31/00 in stock or index-including reinvestment of dividends. Fiscal year ending December 31.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

      The following table and the notes thereto set forth certain information regarding the beneficial ownership of the Company’s common stock as of March 9, 2006, by:

•  each current director of the Company;

•  each of our Named Executive Officers;

•  all Named Executive Officers and directors of the company as a group; and

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•  each other person known to the Company to own beneficially more than five percent of the outstanding Common Stock.

      Unless otherwise indicated, all stockholders set forth below have the same principal business address as the Company.

      The Company has determined beneficial ownership in accordance with the rules of the SEC. The number of shares beneficially owned by a person includes shares of common stock of the Company that are subject to stock options that are either currently exercisable or exercisable within 60 days following March 9, 2006. These shares are also deemed outstanding for the purpose of computing the percentage of outstanding shares owned by the person. However, these shares are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, to the Company’s knowledge, each stockholder has sole voting and dispositive power with respect to the securities beneficially owned by that stockholder. Unless a footnote indicates otherwise, the address of each person listed below is c/o Pegasus Solutions, Inc., Campbell Centre I, 8350 North Central Expressway, Suite 1900, Dallas, Texas 75206. As of March 9, 2006, there were 20,804,229 shares of common stock of the Company outstanding.

	Number of Shares		Percentage of Shares
Name and Address of Beneficial Owner	Beneficially Owned(1)		Beneficially Owned
Blum Capital Partners, L.P.(2)		2,432,003		11.69	%
Columbia Wanger Asset Management, L.P.(3)		2,323,500		11.17	%
Prides Capital Partners, L.L.C.(4)		2,066,445		9.93	%
Dimensional Fund Advisors Inc.(5)		1,767,277		8.50	%
Barclays Global Investors, NA(6)		1,389,983		6.68	%
Tudor Investment Corp.(7)		1,233,800		5.93	%
Michael A. Barnett		108,198		*
Robert J. Boles, Jr.		110,155		*
Robert B. Collier		43,974		*
Susan K. Conner		157,748		*
John F. Davis, III		913,350		4.21	%
Ric L. Floyd		258,625		1.23	%
William C. Hammett, Jr.		59,755		*
Michael H. Kistner		17,000		*
Thomas F. O’Toole		42,908		*
Pamela H. Patsley		29,999		*
Jeffrey A. Rich		49,000		*
Bruce W. Wolff		44,574		*
Directors and executive officers as a group (12 persons)		1,835,286		8.16	%

*

Represents beneficial ownership of less than 1%.

(1)

The number of shares shown includes outstanding shares of common stock owned as of March 9, 2006 by the person indicated and shares underlying options owned by such person on March 9, 2006 that are exercisable within 60 days of that date as follows. At the effective time of the merger, each outstanding stock option, whether or not vested or exercisable, will become fully exercisable and thereafter represent the right to receive an amount in cash, with interest and less applicable tax withholding, equal to the number of shares of our common stock subject to each option as of the effective time of the merger, multiplied by the excess, if any, of $9.50 over the exercise price per share of common stock subject to such option. Therefore, information is also provided regarding the number of shares underlying options with an exercise price of lower than $9.50: Michael A. Barnett (44,000 shares, none of which have an exercise price lower than $9.50), Robert J. Boles, Jr. (100,780 shares, none of which have an exercise price lower than $9.50), Robert B. Collier (40,999 shares, none of which have an exercise price lower

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	than $9.50), Susan K. Conner (146,875 shares, none of which have an exercise price lower than $9.50), John F. Davis, III (863,125 shares, of which 270,000 have an exercise price lower than $9.50), Ric L. Floyd (251,125 shares, of which 3,000 have an exercise price lower than $9.50), William C. Hammett, Jr. (42,333 shares, none of which have an exercise price lower than $9.50), Michael H. Kistner (15,000 shares, none of which have an exercise price lower than $9.50), Thomas F. O’Toole (42,333 shares, none of which have an exercise price lower than $9.50), Pamela H. Patsley (29,999 shares, none of which have an exercise price lower than $9.50), Jeffrey A. Rich (44,000 shares, none of which have an exercise price lower than $9.50), Bruce W. Wolff (40,999 shares, none of which have an exercise price lower than $9.50) and all Directors and executive officers as a group (1,661,568 shares, of which 273,000 have an exercise price lower than $9.50). The number of shares shown also includes shares of restricted stock as follows: Robert J. Boles, Jr. (9,375 shares), Susan K. Conner (7,500 shares), John F. Davis, III (12,500 shares), Ric L. Floyd (7,500 shares) and Michael H. Kistner (2,000 shares). The table does not reflect acquisitions or dispositions of shares of common stock, including grants or exercises of stock options, after March 9, 2006.
(2)	Information with respect to Blum Capital Partners, L.P. is based solely on the Form 4 filed with the Securities and Exchange Commission on January 18, 2006 by Blum Capital Partners, L.P. According to that Form 4, Blum Capital Partners, L.P. had shared dispositive and shared voting power with respect to 2,432,003 shares of common stock as of January 13, 2006. The address for Blum Capital Partners, L.P. is 909 Montgomery Street, Suite 400, San Francisco, California 94133.
(3)	Information with respect to Columbia Wanger Asset Management, L.P. is based solely on the Schedule 13G/A filed with the Securities and Exchange Commission on February 14, 2006 by Columbia Wanger Asset Management, L.P. According to that Schedule 13G/A, Columbia Wanger Asset Management, L.P. had sole voting and sole dispositive power with respect to 2,323,500 shares of common stock and WAM Acquisition GP, Inc., the general partner of Columbia Wanger Asset Management, L.P., had shared dispositive and shared voting power with respect to 2,323,500, shares of common stock as of December 31, 2005. The address for Columbia Wanger Asset Management, L.P. and WAM Acquisition GP, Inc. is 227 West Monroe Street, Suite 3000, Chicago, Illinois 60606.
(4)	Information with respect to Prides Capital Partners, L.L.C. is based solely on the Form 3 filed with the Securities and Exchange Commission on December 22, 2005 by Prides Capital Partners, L.L.C., Kevin A. Richardson, II, Christian Pascasiu, Charles E. McCarthy, Henry J. Lawlor, Jr. and Murray A. Indick. The address for Prides Capital Partners, L.L.C. is 200 High Street, Suite 700, Boston, Massachusetts 02110. The Company has entered into the Merger Agreement with affiliates of Prides Capital Partners, LLC. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — The Merger Agreement”.
(5)	Information with respect to Dimensional Fund Advisors Inc. is based solely on Schedule 13G filed with the Securities and Exchange Commission on February 6, 2006 by Dimensional Fund Advisors Inc. According to that Schedule 13G, Dimensional Fund Advisors Inc. has sole voting and sole dispositive power with respect to 1,767,277 shares of common stock as of December 31, 2005. Dimensional Fund Advisors Inc. disclaim beneficial ownership of these shares. The address for Dimensional Fund Advisors Inc. is 1299 Ocean Avenue, 11th Floor, Santa Monica, California 90401.
(6)	Information with respect to Barclays Global Investors, NA. is based solely on the Schedule 13G filed with the Securities and Exchange Commission on January 26, 2006 by Barclays Global Investors, NA. According to that Schedule 13G, Barclays Global Investors, NA. and Barclays Global Fund Advisors had sole voting power with respect to 794,434 and 471,145 shares of common stock, respectively, and sole dispositive power with respect to 918,838 and 471,145 shares of common stock, respectively, as of December 31, 2005. The address for Barclays Global Investors, NA. is 45 Fremont Street, 17th Floor, San Francisco, California 94105.
(7)	Information with respect to Tudor Investment Corp. is based solely on the Schedule 13D filed with the Securities and Exchange Commission on December 20, 2005 by Tudor Investment Corp. According to that Schedule 13D, Tudor Investment Corp. and Tudor Proprietary Trading, L.L.C. had shared dispositive and shared voting power with respect to 1,147,803 and 85,997 shares of common stock,

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respectively, as of December 16, 2005. The address for Tudor Investment Corp. is 1275 King Street, Greenwich, Connecticut 06831-2936.

Securities Authorized For Issuance under Equity Compensation Plans

      The following table provides information as of December 31, 2005 regarding compensation plans (including individual compensation arrangements) under which equity securities of Pegasus are authorized for issuance. See Note 12 to the Consolidated Financial Statements for information regarding the material features of these plans.

					(c)
	(a)				Number Of Securities
					Remaining Available
	Number Of Securities		(b)		For Future Issuance
	To Be Issued				Under Equity
	Upon Exercise Of		Weighted-Average		Compensation Plans
	Outstanding		Exercise Price Of		(1),(2) (Excluding
	Options, Warrants		Outstanding		Securities Reflected
	And Rights		Options, Warrants		In Column(a))
Plan Category	(In Thousands)		And Rights		(In Thousands)
Equity compensation plans approved by security holders		4,147	$	12.64		3,009
Equity compensation plans not approved by security holders		—		—		—
Total		4,147	$	12.64		3,009

(1)	The Company’s stock option plan provides that the number of shares which may be awarded as options under the 2002 Plan will be replenished by an amount equal to 4 percent of the number of shares outstanding, as defined, on the last day of the immediately preceding year. The applicable number of shares outstanding as of December 31, 2005 was approximately 27.9 million.
(2)	Includes shares of common stock available for issuance under the Company’s Employee Stock Purchase Plan.

Item 13. Certain Relationships and Related Transactions

      Mr. Wolff is a Director of Pegasus and served during 2005 as an executive vice president within Marriott International, Inc. (“Marriott”). Mr. Wolff retired from Marriott in February 2006. In 2005, the Company received $1.6 million from Marriott and its affiliates for reservation, distribution and representation services. During the same years, the Company paid Marriott $1.4 million for consolidating commission data and funds from its properties.

      Mr. O’Toole is a Director of Pegasus and serves as a senior vice president for both Hyatt Corporation, the parent company of Hyatt Hotels Corporation, and AIC Holding Co., the parent company of Hyatt International Corporation (“Hyatt”). In 2005, the Company received $683,000 from Hyatt for reservation, distribution and financial services.

      Mr. Rich is a Director of Pegasus and served as Chief Executive Officer of Affiliated Computer Services, Inc. (“ACS”) through September 2005. Through this date, the Company paid ACS $1.5 million for services provided in connection with our financial services and enterprise resource planning system support.

Item 14. Principal Accounting Fees and Services

      PricewaterhouseCoopers LLP served as our independent registered public accounting firm for the year ended December 31, 2005.

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      Principal Accountant Fees and Services. Aggregate fees billed for professional services rendered for the Company by PricewaterhouseCoopers LLP as of and for the years ended December 31, 2005 and 2004, were:

	2005		2004
Audit	$	637,260	$	1,175,315
Audit-Related		12,380		—
Tax		101,824	$	42,288
All Other Fees		17,056		—
Total	$	768,520	$	1,217,603

      Audit Fees. Audit fees were for professional services rendered in connection with audits and quarterly reviews of the consolidated financial statements of the Company, including fees related to the internal control requirements of the Sarbanes-Oxley Act, review of and preparation of consents for registration statements filed with the Securities and Exchange Commission, and for subsidiary statutory audits.

      Audit-Related Fees. Audit related fees were for assurance and related services related to employee benefit plan audits and consultations regarding financial accounting and reporting standards.

      Tax Fees. Tax fees related to services for tax compliance and consulting.

      Audit Committee Pre-Approval Policies and Procedures. At its regularly scheduled and special meetings, the Audit Committee of the Board of Directors considers and pre-approves any audit and non-audit services to be performed by the Company’s independent registered public accounting firm. The Audit Committee has delegated to its chairman, an independent member of the Company’s Board of Directors, the authority to grant pre-approvals of non-audit services provided that any such pre-approval by the chairman shall be reported to the Audit Committee at its next regularly scheduled meeting.

      All Other Fees. All other fees relate to subscriptions to a technical accounting research database and a diagnostic tool that provides key operational and human capital metrics.                    .

      Pegasus’ Audit Committee has considered whether the provision of the non-audit services provided by PricewaterhouseCoopers LLP is compatible with maintaining their independence.

PART IV

Item 15. Exhibits and Financial Statement Schedules

      (a)     The following financial statements and schedules are filed as part of this report:

(1) Report of Independent Registered Public Accounting Firm		Page 35
	Consolidated Balance Sheets — December 31, 2005 and 2004	Page 37
	Consolidated Statements of Operations and Comprehensive Income (Loss) — Years ended December 31, 2005, 2004 and 2003	Page 38
	Consolidated Statements of Changes in Stockholders’ Equity — Years ended December 31, 2005, 2004 and 2003	Page 39
	Consolidated Statements of Cash Flows — Years ended December 31, 2005, 2004 and 2003	Page 40
	Notes to Consolidated Financial Statements	Page 41
(2) Schedule of Valuation and Qualifying Accounts		Page  S-1

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      (b)     The following documents are filed or incorporated by reference as exhibits to this Annual Report:

Exhibit
Number			Description
	2	.1	Agreement and Plan of Merger dated November 16, 1999, as amended and restated, among the Company, Pegasus Worldwide, Inc., Rez, Inc., Reed Elsevier, Inc. and Utell International Group, LTD. (incorporated by reference from Appendix A of the Company’s Registration Statement (Securities and Exchange Commission (“SEC” or the “Commission”) File No. 333-92683) on Form S-4 filed on December 14, 1999)
	2	.2	Stock Purchase Agreement by and among Pegasus Solutions, Inc., a Delaware corporation, and each Shareholder of Unirez, Inc. dated October 24, 2003, and the Amendment to the Stock Purchase Agreement dated November 24, 2003 (incorporated by reference from Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the Commission on December 3, 2003)
	2	.3	Agreement and Plan of Merger, dated as of December 19, 2005, among Perseus Holding Corp., 406 Acquisition Corp. and Pegasus Solutions, Inc. (incorporated by reference from Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the Commission on December 20, 2005)
	2	.4	Guaranty dated as of December 19, 2005 by and between Prides Capital Fund I, L.P. and Pegasus Solutions, Inc. (incorporated by reference from Exhibit 2.2 of the Company’s Current Report on Form 8-K filed with the Commission on December 20, 2005)
	3	.1	Fourth Amended and Restated Certificate of Incorporation (incorporated by reference from Exhibit 3.1 of the Company’s Form 10-Q filed with the Commission on May 15, 2000)
	3	.2	Second Amended and Restated Bylaws (incorporated by reference from Exhibit 3.4 to the Company’s Registration Statement on Form S-1 (SEC File No. 333-28595) declared effective by the Commission on August 6, 1997)
	3	.3	Form of Certification of Designation, Preferences and Rights of Series A Preferred Stock of Pegasus Systems, Inc. (incorporated by reference from Exhibit 2 of the Company’s Form 8-A (SEC File No. 000-22935) filed with the Commission on October 9, 1998)
	4	.1	Fourth Amended and Restated Certificate of Incorporation and Second Amended and Restated Bylaws (see 3.1 and 3.2 above)
	4	.2	Specimen of Common Stock certificate (incorporated by reference from Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (SEC File No. 333-28595) declared effective by the Commission on August 6, 1997)
	4	.3	Rights Agreement dated June 25, 1996 by and among the Company and certain holders of capital stock of the Company named therein (incorporated by reference from Exhibit 4.3 to the Company’s Registration Statement on Form S-1 (SEC File No. 333-28595) declared effective by the Commission on August 6, 1997)
	4	.4	Rights Agreement dated as of September 28, 1998 by and between the Company and American Securities Transfer & Trust, Inc. (incorporated by reference from Exhibit 4 of the Company’s Current Report on Form 8-K (SEC File No. 000-22935) filed with the Commission on October 9, 1998)
	4	.5	Form of Rights Certificate (incorporated by reference from Exhibit 3 of the Company’s Form 8-A (SEC File No. 000-22935) filed with Commission on October 9, 1998)
	4	.6	Form of Note for the Company’s 3.875% Convertible Senior Notes due 2023 (incorporated by reference from Exhibit A to Exhibit 4.6 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 14, 2003)
	4	.7	Indenture, dated as of July 21, 2003, by and between the Company and JPMorgan Chase Bank, as trustee (incorporated by reference from Exhibit 4.6 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 14, 2003)

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Exhibit
Number			Description
	4	.8	Registration Rights Agreement, dated as of July 21, 2003, by and between Bear, Stearns & Co. Inc., JPMorgan Securities Inc. and Thomas Weisel Partners LLC (incorporated by reference from Exhibit 4.7 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 14, 2003)
	4	.9	Agreement of Substitution and Amendment No. 1 to Rights Agreement, dated as of December 19, 2005, between Pegasus Solutions, Inc. and American Stock Transfer & Trust Company (incorporated by reference from Exhibit 4.1 of the Company’s Current Report on Form 8-K filed with the Commission on December 20, 2005)
	*10	.1	Employment Agreement dated December 1, 2002 between the Company and John F. Davis, III (incorporated by reference from Exhibit 10.6 of the Company’s Form 10-K filed with the Commission on March 18, 2003)
	*10	.2	Employment Agreement dated December 1, 2002 between the Company and Susan K. Conner (incorporated by reference from Exhibit 10.7 of the Company’s Form 10-K filed with the Commission on March 18, 2003)
	*10	.3	Employment Agreement dated December 1, 2002 between the Company and Ric L. Floyd (incorporated by reference from Exhibit 10.8 of the Company’s Form 10-K filed with the Commission on March 18, 2003)
	*10	.4	Employment Agreement dated January 1, 2003 between the Company and Joseph W. Nicholson (incorporated by reference from Exhibit 10.1 of the Company’s Form 10-Q filed with the Commission on May 14, 2003)
	*10	.5	Employment Agreement dated May 19, 2003 between the Company and Robert J. Boles, Jr. (incorporated by reference from Exhibit 10.27 of the Company’s Form 10-Q filed with the Commission on August 14, 2003)
	*10	.6	First Amendment to Employment between the Company and Robert J. Boles, Jr. dated December 7, 2004. (incorporated by reference from Exhibit 10.6 of the Company’s Form 10-K filed with the Commission on March 10, 2005)
	*10	.7	Employment Agreement dated August 1, 2004 between the Company and Andrew Stringer (incorporated by reference from Exhibit 10.1 of the Company’s Form 10-Q filed with the Commission on August 9, 2004)
	†10	.8	Employment agreement dated March 1, 2005 between the Company and Michael Kistner
	*10	.10	1996 Stock Option Plan, as amended (incorporated by reference from Exhibit 10.5 of the Company’s Form 10-K (SEC File No. 000-22935) filed with the Commission on March 31, 1999)
	*10	.11	2002 Stock Incentive Plan, (incorporated by reference from the Company’s definitive proxy statement filed with the Commission on March 21, 2002)
	*10	.12	1997 Employee Stock Purchase Plan, as amended (incorporated by reference from Exhibit 10.11 of the Company’s Form 10-K (SEC File No. 000-22935) filed with the Commission on March 31, 1999)
	*10	.13	Amended and Restated Supplemental Executive Retirement Plan (incorporated by reference from Exhibit 10.14 of the Company’s Form 10-K filed with the Commission on March 18, 2003)
	*10	.14	Amendment One to Pegasus Solutions, Inc. Supplemental Executive Retirement Plan dated December 12, 2005 (incorporated by reference from Exhibit 99.1 of the Company’s Current Report on Form 8-K filed with the Commission on December 16, 2005)
	*10	.15	Executive Deferred Compensation Plan (incorporated by reference from Exhibit 10.15 of the Company’s Form 10-K filed with the Commission on March 18, 2003)
	*10	.16	Deferred Compensation Trust Agreement dated February 28, 2003 between the Company and Charles Schwab Trust Company (incorporated by reference from Exhibit 10.16 of the Company’s Form 10-K filed with the Commission on March 18, 2003)

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Exhibit
Number			Description
	*10	.17	Amendment One to Pegasus Solutions, Inc. Executive Deferred Compensation Plan dated December 12, 2005 incorporated by reference from Exhibit 99.2 of the Company’s Current Report on Form 8-K filed with the Commission on December 16, 2005)
	*10	.18	Amendment Two to Pegasus Solutions, Inc. Executive Deferred Compensation Plan dated February 17, 2006 (incorporated by reference from Exhibit 99.1 of the Company’s Current Report on Form 8-K filed with the Commission on February 22, 2006)
	*10	.19	2005 Executive Officer Bonus Plan Summary (incorporated by reference from Exhibit 10.16 of the Company’s Form 10-K filed with the Commission on March 10, 2005)
	*10	.20	2005 Director Compensation Summary (incorporated by reference from Exhibit 10.17 of the Company’s Form 10-K filed with the Commission on March 10, 2005)
	*10	.21	Pegasus Solutions, Inc. Executive Perquisite Plan (incorporated by reference from Exhibit 10.18 of the Company’s Form 10-K filed with the Commission on March 10, 2005)
	10	.22	Purchase Agreement dated October 31, 2000, among the Company, Global Enterprise Technology Solutions, LLC, Enterprise Hospitality Solutions, Inc., The Rivadalla Family Trust and Christian Rivadalla (incorporated by reference from Exhibit 10.16 of the Company’s Form 10-Q (filed with Commission on November 14, 2000)
	10	.23	Office Lease dated September 1, 1987 and First Amendment to Office Lease dated October 26, 1989 between the Company and Bridger Properties relating to property located at 2 Kew Bridge Road, Brentford Middlesex (incorporated by reference from Exhibit 10.19 of the Company’s Form 10-K filed with the Commission on March 22, 2001)
	10	.24	Office lease dated September 17, 2001 between the Company and Dallas RPFIV Campbell Centre Associates Limited Partnership relating to property located at 8350 North Central Expressway, Dallas, Texas 75206 (incorporated by reference from Exhibit 10.23 of the Company’s Form 10-Q filed with the Commission on November 15, 2001)
	+10	.25	First Amendment to office lease between the Company and Dallas RPFIV Campbell Centre Associates Limited Partnership relating to property located at 8350 North Central Expressway, Dallas, Texas 75206 dated August 7, 2003
	10	.26	Office lease dated September 14, 2001 between the Company and Ryan Companies US, Inc. relating to property located at 1400 North Pima Road, Scottsdale, Arizona 85260 (incorporated by reference from Exhibit 10.24 of the Company’s Form 10-Q filed with the Commission on November 15, 2001)
	+10	.27	First Amendment to office lease between the Company and Ryan Companies US, Inc. relating to property located at 1400 North Pima Road, Scottsdale, Arizona 85260 dated June 28, 2002
	+10	.28	Second Amendment to office lease between the Company and Ryan Companies US, Inc. relating to property located at 1400 North Pima Road, Scottsdale, Arizona 85260 dated February 28, 2003
	+10	.29	Third Amendment to office lease between the Company and Ryan Companies US, Inc. relating to property located at 1400 North Pima Road, Scottsdale, Arizona 85260 dated September 30, 2003
	+10	.30	Fourth Amendment to office lease between the Company and Ryan Companies US, Inc. relating to property located at 1400 North Pima Road, Scottsdale, Arizona 85260 dated May 26, 2004
	10	.31	Securities Purchase Agreement dated May 3, 2004 between Lowestfare.com, Inc. (buyer) and Hilton Electronic Distribution Systems, LLC, HT-HDS, Inc., MI Distribution, LLC, Starwood Resventure, LLC and Pegasus Business Intelligence, LP (the sellers), and Travelweb, LLC. (incorporated by reference from Exhibit 10.1 of the Company’s Form 10-Q filed with the Commission on August 9, 2004)
	10	.32	Form of Promissory Note agreement dated November 9, 2001 between the Company and IndeCorp Corporation (incorporated by reference from Exhibit 10.25 of the Company’s Form 10-Q filed with the Commission on November 15, 2001)

86

Exhibit
Number			Description
	10	.33	Form of Promissory Note agreement dated November 9, 2001 between the Company and IndeCorp Corporation (incorporated by reference from Exhibit 10.26 of the Company’s Form 10-Q filed with the Commission on November 15, 2001)
	+21	.1	Subsidiaries of the Company
	+23	.1	Consent of Independent Registered Public Accounting Firm
	24	.1	Power of Attorney (included on signature page)
	+31	.1	Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	+31	.2	Certification of Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	++32	.1	Certification of Chief Executive Officer and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

+	Filed herewith.
++	Furnished herewith.

*  Management contract or compensatory plan or arrangement.

—  The Company will furnish a copy of any exhibit listed above to any stockholder without charge upon written request to Mr. Ric Floyd, Executive Vice President and General Counsel, Campbell Centre I, Suite 1900, 8350 North Central Expressway, Dallas, Texas 75206.

87

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on this 15th day of March, 2006.

PEGASUS SOLUTIONS, INC.

By:  /s/ JOHN F. DAVIS, III

John F. Davis, III

Chief Executive Officer

and Chairman

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.

POWER OF ATTORNEY

      KNOW ALL MEN AND WOMEN BY THESE PRESENTS that each person whose signature appears below constitutes and appoints John F. Davis, III, Susan K. Conner and Ric L. Floyd, and each of them, such individual’s true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, with all exhibits thereto, and to file the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully and to intents and purposes as he might or could do in person hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Signature	Title	Date
/s/ JOHN F. DAVIS, III John F. Davis, III	Chief Executive Officer and Chairman (Principal Executive Officer)	March 15, 2006
/s/ SUSAN K CONNER Susan K. Conner	Executive Vice President and Chief Officer (Principal Financial and Accounting Officer)	March 15, 2006
/s/ WILLIAM C. HAMMETT, JR. William C. Hammett, Jr.	Vice Chairman and Director	March 15, 2006
/s/ MICHAEL A. BARNETT Michael A. Barnett	Director	March 15, 2006
/s/ ROBERT B. COLLIER Robert B. Collier	Director	March 15, 2006
/s/ THOMAS F. O’TOOLE Thomas F. O’Toole	Director	March 15, 2006

88

Signature	Title	Date
/s/ PAMELA H. PATSLEY Pamela H. Patsley	Director	March 15, 2006
/s/ JEFFREY A. RICH Jeffrey A. Rich	Director	March 15, 2006
/s/ BRUCE W. WOLFF Bruce W. Wolff	Director	March 15, 2006

89

EXHIBIT INDEX

Exhibit
Number			Description
	2	.1	Agreement and Plan of Merger dated November 16, 1999, as amended and restated, among the Company, Pegasus Worldwide, Inc., Rez, Inc., Reed Elsevier, Inc. and Utell International Group, LTD. (incorporated by reference from Appendix A of the Company’s Registration Statement (Securities and Exchange Commission (“SEC” or the “Commission”) File No. 333-92683) on Form S-4 filed on December 14, 1999)
	2	.2	Stock Purchase Agreement by and among Pegasus Solutions, Inc., a Delaware corporation, and each Shareholder of Unirez, Inc. dated October 24, 2003, and the Amendment to the Stock Purchase Agreement dated November 24, 2003 (incorporated by reference from Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the Commission on December 3, 2003)
	2	.3	Agreement and Plan of Merger, dated as of December 19, 2005, among Perseus Holding Corp., 406 Acquisition Corp. and Pegasus Solutions, Inc. (incorporated by reference from Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the Commission on December 20, 2005)
	2	.4	Guaranty dated as of December 19, 2005 by and between Prides Capital Fund I, L.P. and Pegasus Solutions, Inc. (incorporated by reference from Exhibit 2.2 of the Company’s Current Report on Form 8-K filed with the Commission on December 20, 2005)
	3	.1	Fourth Amended and Restated Certificate of Incorporation (incorporated by reference from Exhibit 3.1 of the Company’s Form 10-Q filed with the Commission on May 15, 2000)
	3	.2	Second Amended and Restated Bylaws (incorporated by reference from Exhibit 3.4 to the Company’s Registration Statement on Form S-1 (SEC File No. 333-28595) declared effective by the Commission on August 6, 1997)
	3	.3	Form of Certification of Designation, Preferences and Rights of Series A Preferred Stock of Pegasus Systems, Inc. (incorporated by reference from Exhibit 2 of the Company’s Form 8-A (SEC File No. 000-22935) filed with the Commission on October 9, 1998)
	4	.1	Fourth Amended and Restated Certificate of Incorporation and Second Amended and Restated Bylaws (see 3.1 and 3.2 above)
	4	.2	Specimen of Common Stock certificate (incorporated by reference from Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (SEC File No. 333-28595) declared effective by the Commission on August 6, 1997)
	4	.3	Rights Agreement dated June 25, 1996 by and among the Company and certain holders of capital stock of the Company named therein (incorporated by reference from Exhibit 4.3 to the Company’s Registration Statement on Form S-1 (SEC File No. 333-28595) declared effective by the Commission on August 6, 1997)
	4	.4	Rights Agreement dated as of September 28, 1998 by and between the Company and American Securities Transfer & Trust, Inc. (incorporated by reference from Exhibit 4 of the Company’s Current Report on Form 8-K (SEC File No. 000-22935) filed with the Commission on October 9, 1998)
	4	.5	Form of Rights Certificate (incorporated by reference from Exhibit 3 of the Company’s Form 8-A (SEC File No. 000-22935) filed with Commission on October 9, 1998)
	4	.6	Form of Note for the Company’s 3.875% Convertible Senior Notes due 2023 (incorporated by reference from Exhibit A to Exhibit 4.6 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 14, 2003)
	4	.7	Indenture, dated as of July 21, 2003, by and between the Company and JPMorgan Chase Bank, as trustee (incorporated by reference from Exhibit 4.6 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 14, 2003)
	4	.8	Registration Rights Agreement, dated as of July 21, 2003, by and between Bear, Stearns & Co. Inc., JPMorgan Securities Inc. and Thomas Weisel Partners LLC (incorporated by reference from Exhibit 4.7 to the Company’s Quarterly Report on Form 10-Q filed with the Commission on August 14, 2003)

Exhibit
Number			Description
	4	.9	Agreement of Substitution and Amendment No. 1 to Rights Agreement, dated as of December 19, 2005, between Pegasus Solutions, Inc. and American Stock Transfer & Trust Company (incorporated by reference from Exhibit 4.1 of the Company’s Current Report on Form 8-K filed with the Commission on December 20, 2005)
	*10	.1	Employment Agreement dated December 1, 2002 between the Company and John F. Davis, III (incorporated by reference from Exhibit 10.6 of the Company’s Form 10-K filed with the Commission on March 18, 2003)
	*10	.2	Employment Agreement dated December 1, 2002 between the Company and Susan K. Conner (incorporated by reference from Exhibit 10.7 of the Company’s Form 10-K filed with the Commission on March 18, 2003)
	*10	.3	Employment Agreement dated December 1, 2002 between the Company and Ric L. Floyd (incorporated by reference from Exhibit 10.8 of the Company’s Form 10-K filed with the Commission on March 18, 2003)
	*10	.4	Employment Agreement dated January 1, 2003 between the Company and Joseph W. Nicholson (incorporated by reference from Exhibit 10.1 of the Company’s Form 10-Q filed with the Commission on May 14, 2003)
	*10	.5	Employment Agreement dated May 19, 2003 between the Company and Robert J. Boles, Jr. (incorporated by reference from Exhibit 10.27 of the Company’s Form 10-Q filed with the Commission on August 14, 2003)
	*10	.6	First Amendment to Employment between the Company and Robert J. Boles, Jr. dated December 7, 2004 (incorporated by reference from Exhibit 10.6 of the Company’s Form 10-K filed with the Commission on March 10, 2005)
	*10	.7	Employment Agreement dated August 1, 2004 between the Company and Andrew Stringer (incorporated by reference from Exhibit 10.1 of the Company’s Form 10-Q filed with the Commission on August 9, 2004)
	+10	.8	Employment agreement dated March 1, 2005 between the Company and Michael Kistner
	*10	.10	1996 Stock Option Plan, as amended (incorporated by reference from Exhibit 10.5 of the Company’s Form 10-K (SEC File No. 000-22935) filed with the Commission on March 31, 1999)
	*10	.11	2002 Stock Incentive Plan, (incorporated by reference from the Company’s definitive proxy statement filed with the Commission on March 21, 2002)
	*10	.12	1997 Employee Stock Purchase Plan, as amended (incorporated by reference from Exhibit 10.11 of the Company’s Form 10-K (SEC File No. 000-22935) filed with the Commission on March 31, 1999)
	*10	.13	Amended and Restated Supplemental Executive Retirement Plan (incorporated by reference from Exhibit 10.14 of the Company’s Form 10-K filed with the Commission on March 18, 2003)
	*10	.14	Amendment One to Pegasus Solutions, Inc. Supplemental Executive Retirement Plan dated December 12, 2005 (incorporated by reference from Exhibit 99.1 of the Company’s Current Report on Form 8-K filed with the Commission on December 16, 2005)
	*10	.15	Executive Deferred Compensation Plan (incorporated by reference from Exhibit 10.15 of the Company’s Form 10-K filed with the Commission on March 18, 2003)
	*10	.16	Deferred Compensation Trust Agreement dated February 28, 2003 between the Company and Charles Schwab Trust Company (incorporated by reference from Exhibit 10.16 of the Company’s Form 10-K filed with the Commission on March 18, 2003)
	*10	.17	Amendment One to Pegasus Solutions, Inc. Executive Deferred Compensation Plan dated December 12, 2005 (incorporated by reference from Exhibit 99.2 of the Company’s Current Report on Form 8-K filed with the Commission on December 16, 2005)

Exhibit
Number			Description
	*10	.18	Amendment Two to Pegasus Solutions, Inc. Executive Deferred Compensation Plan dated February 17, 2006 (incorporated by reference from Exhibit 99.1 of the Company’s Current Report on Form 8-K filed with the Commission on February 22, 2006)
	*10	.19	2005 Executive Officer Bonus Plan Summary (incorporated by reference from Exhibit 10.16 of the Company’s Form 10-K filed with the Commission on March 10, 2005)
	*10	.20	2005 Director Compensation Summary (incorporated by reference from Exhibit 10.17 of the Company’s Form 10-K filed with the Commission on March 10, 2005)
	*10	.21	Pegasus Solutions, Inc. Executive Perquisite Plan (incorporated by reference from Exhibit 10.18 of the Company’s Form 10-K filed with the Commission on March 10, 2005)
	10	.22	Purchase Agreement dated October 31, 2000, among the Company, Global Enterprise Technology Solutions, LLC, Enterprise Hospitality Solutions, Inc., The Rivadalla Family Trust and Christian Rivadalla (incorporated by reference from Exhibit 10.16 of the Company’s Form 10-Q (filed with Commission on November 14, 2000)
	10	.23	Office Lease dated September 1, 1987 and First Amendment to Office Lease dated October 26, 1989 between the Company and Bridger Properties relating to property located at 2 Kew Bridge Road, Brentford Middlesex (incorporated by reference from Exhibit 10.19 of the Company’s Form 10-K filed with the Commission on March 22, 2001)
	10	.24	Office lease dated September 17, 2001 between the Company and Dallas RPFIV Campbell Centre Associates Limited Partnership relating to property located at 8350 North Central Expressway, Dallas, Texas 75206 (incorporated by reference from Exhibit 10.23 of the Company’s Form 10-Q filed with the Commission on November 15, 2001)
	+10	.25	First Amendment to office lease between the Company and Dallas RPFIV Campbell Centre Associates Limited Partnership relating to property located at 8350 North Central Expressway, Dallas, Texas 75206 dated August 7, 2003
	10	.26	Office lease dated September 14, 2001 between the Company and Ryan Companies US, Inc. relating to property located at 1400 North Pima Road, Scottsdale, Arizona 85260 (incorporated by reference from Exhibit 10.24 of the Company’s Form 10-Q filed with the Commission on November 15, 2001)
	+10	.27	First Amendment to office lease between the Company and Ryan Companies US, Inc. relating to property located at 1400 North Pima Road, Scottsdale, Arizona 85260 dated June 28, 2002
	+10	.28	Second Amendment to office lease between the Company and Ryan Companies US, Inc. relating to property located at 1400 North Pima Road, Scottsdale, Arizona 85260 dated February 28, 2003
	+10	.29	Third Amendment to office lease between the Company and Ryan Companies US, Inc. relating to property located at 1400 North Pima Road, Scottsdale, Arizona 85260 dated September 30, 2003
	+10	.30	Fourth Amendment to office lease between the Company and Ryan Companies US, Inc. relating to property located at 1400 North Pima Road, Scottsdale, Arizona 85260 dated May 26, 2004
	10	.31	Securities Purchase Agreement dated May 3, 2004 between Lowestfare.com, Inc. (buyer) and Hilton Electronic Distribution Systems, LLC, HT-HDS, Inc., MI Distribution, LLC, Starwood Resventure, LLC and Pegasus Business Intelligence, LP (the sellers), and Travelweb, LLC. (incorporated by reference from Exhibit 10.1 of the Company’s Form 10-Q filed with the Commission on August 9, 2004)
	10	.32	Form of Promissory Note agreement dated November 9, 2001 between the Company and IndeCorp Corporation (incorporated by reference from Exhibit 10.25 of the Company’s Form 10-Q filed with the Commission on November 15, 2001)
	10	.33	Form of Promissory Note agreement dated November 9, 2001 between the Company and IndeCorp Corporation (incorporated by reference from Exhibit 10.26 of the Company’s Form 10-Q filed with the Commission on November 15, 2001)
	+21	.1	Subsidiaries of the Company

Exhibit
Number			Description
	+23	.1	Consent of Independent Registered Public Accounting Firm
	24	.1	Power of Attorney (included on signature page)
	+31	.1	Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	+31	.2	Certification of Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	++32	.1	Certification of Chief Executive Officer and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

+	Filed herewith.
++	Furnished herewith.

*  Management contract or compensatory plan or arrangement.

—  The Company will furnish a copy of any exhibit listed above to any stockholder without charge upon written request to Mr. Ric Floyd, Executive Vice President and General Counsel, Campbell Centre I, Suite 1900, 8350 North Central Expressway, Dallas, Texas 75206.

SCHEDULE II

PEGASUS SOLUTIONS, INC.

VALUATION AND QUALIFYING ACCOUNTS

For the Years Ended December 31, 2003, 2004 and 2005

(In thousands)

					Additions
			Balance		Charged		Additions		Additions
			at		to Costs		Charged		From					Balance
			Beginning		and		To Other		Acquired					at End of
			of Period		Expenses		Accounts		Companies		Deductions			Period
2003
	Allowance for doubtful receivable accounts		$	5,787	$	—	$	—	$	375	$	(2,083	)	$	4,079
	Income tax valuation allowance			444		—		—		—		—			444
		Total reserves and allowances		6,231		—		—		375		(2,083	)		4,523
2004
	Allowance for doubtful receivable accounts			4,079		787		—		—		(682	)		4,184
	Income tax valuation allowance			444		—		—		—		(444	)		—
		Total reserves and allowances		4,523		787		—		—		(1,126	)		4,184
2005
	Allowance for doubtful receivable accounts			4,184		700		—		—		(984	)		3,900
		Total reserves and allowances	$	4,184	$	700	$	—	$	—	$	(984	)	$	3,900

(a)  This schedule should be read in conjunction with the Company’s audited consolidated financial statements and related notes thereto that appear in Item 8 of this Annual Report on Form 10-K.

S-1 EX-10.8 2 d33849exv10w8.htm EMPLOYMENT AGREEMENT - MICHAEL KISTNER

EXHIBIT 10.8

EMPLOYMENT AGREEMENT

          THIS AGREEMENT is entered into as of the 1st day of March, 2005 (the “Effective Date”), by and between Pegasus Solutions, Inc., a Delaware corporation (the “Company”) and Michael Kistner (the “Executive”).

          WHEREAS, the Board of Directors of the Company (the “Board”) has determined that it is essential and in the best interest of the Company and its stockholders to enter into this Agreement to retain the services of the Executive and to ensure his continued dedication and efforts; and

          WHEREAS, in order to induce the Executive to enter into and continue employment by the Company, the Company desires to provide the Executive with certain benefits during the term of his employment and, in the event his employment is terminated, to provide the Executive with the benefits and payments described herein.

          NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows:

1. Employment Term.

          The initial term of employment shall commence on the Effective Date and shall expire on the third anniversary of the Effective Date (the “Initial Term”) provided that in the event neither party provides Notice of Termination (as hereinafter defined) at least 30 days prior to the expiration of the Initial Term, such term will be automatically renewed and extended for successive 30 day periods thereafter until terminated as provided herein.

2. Employment.

          (a) While employed by the Company, Executive shall perform the duties, undertake the responsibilities as assigned by the Company and exercise the authority customarily performed, undertaken and exercised by persons situated in a similar executive capacity and, excluding periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during usual business hours to the business and affairs of the Company to the extent necessary to discharge the responsibilities assigned to the Executive.

3. Compensation.

          (a) Base Salary. The Company agrees to pay or cause to be paid to the Executive an annual base salary as mutually agreed, and as may be increased from time to time by mutual agreement (hereinafter referred to as the “Base Salary”). Such Base Salary shall be payable in accordance with the Company’s customary practices applicable to its executives.

          (b) Annual Bonus. In addition to Base Salary, the Executive may be awarded, for each fiscal year ending during the Employment Term, an annual discretionary bonus (the “Annual Bonus”) in accordance with the terms and conditions of the bonus plan approved by the Company. Any actual payment or award under such Annual Bonus plan, and the size of any payment or award, will be in accordance with the terms of the plan. Each such Annual Bonus

shall be paid no later than the end of the third (3^rd) month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded.

4. Employee Benefits.

          The Executive shall be entitled to participate in all employee benefit plans, practices and programs maintained by the Company and made available to all employees generally, including, without limitation, all pension, retirement, profit sharing, savings, medical, hospitalization, disability, dental, life or travel accident insurance benefit plans. The Company may reduce benefit levels if such changes are part of broad-based changes in the Company’s benefit programs offered generally to all employees. Notwithstanding the foregoing, except as otherwise set forth herein, nothing herein shall obligate the Company to adopt such plans, practices or programs.

5. Other Benefits.

          (a) Fringe Benefits and Perquisites. The Executive shall be entitled to participate in the Executive Perquisite Plan of the Company as described in Attachment A hereto (the “Perquisite Plan”).

          (b) Expenses. The Executive shall be entitled to receive reimbursement of all expenses reasonably incurred by him in connection with the performance of his duties hereunder including promoting, pursuing or otherwise furthering the business or interests of the Company in accordance with the accounting procedures and expense reimbursement policies of the Company as it shall adopt from time to time.

6. Vacation and Sick Leave.

          During the Employment Term, at such reasonable times as the Chief Executive Officer shall in his discretion permit, the Executive shall be entitled without loss of pay, to absent himself voluntarily from the performance of his employment under this Agreement, provided that:

          (a) The Executive shall be entitled to twenty-two (22) days of annual vacation in accordance with Company policies as in effect from time to time.

          (b) The Executive shall be entitled to sick leave (without loss of pay) in accordance with the Company’s policies as in effect from time to time.

7. Termination.

          In the event of a Change In Control (as hereinafter defined) resulting in Executive giving Notice of Termination occurring while this Agreement is in effect or in the event Executive is terminated by the Company for reasons other than “cause” (as hereinafter defined) prior to the expiration of the Initial Term of this Agreement, the Company shall pay and provide the following benefits to Executive:

(1) the Company shall continue to pay Executive as severance pay and in lieu of any further compensation a monthly payment for a period of twelve (12) months following the Termination Date, but for no longer period than the expiration of the Initial Term, an amount equal to Executive’s monthly Base

-2-

Salary and Perquisite Plan in effect for the month immediately preceding the Termination Date,.

(2) for the twelve (12) month period immediately following the Termination Date, but for no longer period than the Initial Term, the Company shall reimburse Executive for COBRA payments for the insurance coverage in effect immediately prior to the Termination Date. The Company’s obligation hereunder with respect to the foregoing benefits shall terminate in the event the Executive obtains any such benefits (regardless of level and scope of coverage) pursuant to a subsequent employer’s benefit plans.

The Executive hereby acknowledges that full payment and/or performance by the Company of its obligations as set forth in Section 7 hereof shall be in lieu of any other remedy or cause of action the Executive may have, either at law or in equity, as a result of the termination of the Executive’s employment pursuant to such Section.

8. Definitions.

          (a) Notice of Termination. A Notice of Termination is a written notice given by the Company to the Executive or by the Executive to the Company terminating this Agreement and the Executives’ employment. The Notice of Termination must be given at least 30 in advance of the Termination Date (as hereinafter defined).

          (b) Termination Date. For purposes of this Agreement, “Termination Date” shall mean the date specified in the Notice of Termination provided that if the Executive’s employment is terminated because of a Change In Control, the date specified in the Notice of Termination shall be not more than thirty (30) days from the date the Notice of Termination is given to the Company.

          (c) Cause. A termination of employment is for “cause” if the Executive:

(1)	has been convicted of or pleads guilty or no contest to a felony; or
(2)	intentionally engaged in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise or from which Executive derives an improper material personal benefit; provided, however, that no termination of the Executive’s employment shall be for Cause as set forth in this clause (2) until;

(i)	there shall have been delivered to the Executive a copy of a written not notice setting forth that the Executive was guilty of the conduct set forth in this clause (2) and specifying the particulars thereof in reasonable detail; and
(ii)	the Executive shall have been provided an opportunity to be heard by the Board (with the assistance of the Executive’s counsel if the Executive so desires). No act, nor failure to act, on the Executive’s part shall be considered “intentional” unless Executive has acted, or failed to act, with an absence of good faith and

-3-

without a reasonable belief that Executive’s action or failure to act was in the best interest of the Company.

(3)

commits gross malfeasance or intentionally fails to perform the duties of the Executive’s position; provided, however, the Company shall first notify the Executive in writing stating with reasonable specificity the action or inaction of the Executive which forms the basis for such notice and the Executive fails to cure such malfeasance or failure within ten (10) days of the date of such notice; or

(4)

violates any valid non-competition or non-disclosure agreement or the Company’s insider trading policy, if any.

          (d) Change In Control. For purposes of this Agreement, a “Change in Control” shall mean any of the following events:

(1) An acquisition of any voting securities of the Company (the “Voting Securities”) by any “Person” (as the term person is used for purposes of Section 12(d) or 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) other than any parent, subsidiary or affiliate of the Company immediately after which such Person has “Beneficial Ownership” (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than fifty percent (50%) of the combined voting power of the Company’s then outstanding Voting Securities; provided, however, in determining whether a Change in Control has occurred, Voting Securities which are acquired in a “Non-Control Acquisition” (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A “Non-Control Acquisition” shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (A) the Company or (B) any corporation or other Person of which a majority of its voting power or its voting equity securities or equity interest is owned, directly or indirectly, by the Company (for purposes of this definition, a “Subsidiary”) or (ii) the Company or its Subsidiaries,

(2) The individuals who, as of the date of this Agreement is approved by the Board, are members of the Board (the “Incumbent Board”) cease for any reason to constitute at least one half (1/2) of the members of the Board; provided, however, that if the election, or nomination for election of any new director was approved by a vote of the members of the Board as provided by the Company’s Bylaws, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; provided, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened “Election Contest” (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a “Proxy Contest”) including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest, or

(3) Approval by the stockholders of the Company of:

(i) A complete liquidation or dissolution of the Company, or

-4-

(ii) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary or a parent in a Non-Control Acquisition).

9. Successors and Assigns.

          (a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns and the Company shall require any successor or assign to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. The term “Company” as used herein shall include such successors and assigns. The term “successors and assigns” as used herein shall mean a corporation or other entity acquiring all or substantially all the assets and business of the Company (including this Agreement) whether by operation of law or otherwise.

          (b) Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal personal representative.

10. Fees and Expenses.

          The Company shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) incurred by the Executive as a result of the breach or default by the Company of the terms hereof.

11. Notice.

          For purposes of this Agreement, notice and all other communications provided for in the Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses last given by each party to the other, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof or on the third (3^rd) business day after the mailing thereof, except that notice of change of address shall be effective only upon receipt.

12. Miscellaneous.

          No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement.

-5-

13. Governing Law.

          This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas without giving effect to the conflict of law principles thereof. Subject to Section 16 of this Agreement, any action brought by any party to this Agreement shall be brought and maintained in a court of competent jurisdiction in Dallas County, Texas.

14. Severability.

          The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provisions hereof shall not affect the validity or enforceability of the other provisions hereof.

15. Entire Agreement.

          This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof.

16. Arbitration.

          Any dispute or controversy arising out of or relating to this Agreement, except the right to injunctive relief, shall be determined and settled by arbitration in the City of Dallas, Texas, in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association then in effect, and judgment upon the award rendered by the arbitrator may be entered in any court of competent jurisdiction, hereby expressly waiving the right to jury trial. Such arbitrator shall have no power to modify any of the provisions of this Agreement, and his or her jurisdiction is limited accordingly. A party requesting arbitration hereunder shall give ten (10) days’ written notice to the other party to request such arbitration. Unless the arbitrator decides otherwise, the successful party in any such arbitration shall be entitled to reasonable attorneys’ fees and costs associated with such arbitration. If the parties hereto cannot agree upon an arbitrator, then one shall be appointed by the governing office of the American Arbitration Association. Any arbitrator so appointed shall have extensive experience in a profession connected with the subject matter of the dispute. Whenever any action is required to be taken under this Agreement within a specified period of time and the taking of such action is materially affected by a matter submitted to arbitration, such period shall automatically be extended by the number of days plus ten (10) that are taken for the determination of that matter by the arbitrator.

          IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its Chairman of the Board or Chairman of the Compensation Committee and the Executive has executed this Agreement as of the date and year first above written.

PEGASUS SOLUTIONS, INC.	EXECUTIVE:
By:	By:
		Michael Kistner
Print:
Title:

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EX-10.8

exv10w8

EX-10.25

Exhibit 10.25

FIRST AMENDMENT OF LEASE

     THIS FIRST AMENDMENT OF LEASE (this “Amendment”) is entered into on this 7th day of August, 2003, by and between DALLAS RPFIV CAMPBELL CENTRE ASSOCIATES LIMITED PARTNERSHIP (“Landlord”) and PEGASUS SOLUTIONS INC. (“Tenant”).

WITNESSETH:

     WHEREAS, Landlord and Tenant entered into that certain Lease Agreement (the “Lease”) dated September 17, 2001 covering approximately 81,252 square feet of rentable area in the building (the “Building”) commonly known as Campbell Centre I in Dallas, Texas; and

     WHEREAS, Landlord and Tenant desire (i) to expand the Premises to include an additional 16,374 square feet of rentable area (the “Expansion Space”) on the fifteenth (15^th) floor of the Building, as outlined and hatched on the floor plan attached hereto as Exhibit A and incorporated herein for all purposes, and (ii) to further modify the terms of the Lease as provided herein.

     NOW, THEREFORE, for and in consideration of the sum of Ten Dollars ($10.00) and other good and valuable consideration paid by each party hereto to the other, the receipt and sufficiency of which are hereby mutually acknowledged, Landlord and Tenant hereby agree as follows:

     1. Premises. Effective as of October 31, 2003 (the “Expansion Commencement Date”), the Premises shall be expanded to include the Expansion Space so that the Premises shall consist of approximately 97,626 square feet of rentable area located on the fifteenth (15^th), sixteenth (16^th), seventeenth (17^th), eighteenth (18^th), nineteenth (19^th) and twentieth (20^th) floors of the Building.

     2. Basic Rental. Tenant’s Basic Rental with respect to the Expansion Space for the period commencing on the Expansion Commencement Date shall be as set forth in the following schedule:

	Annual Basic Rental
	Rate Per Rentable		Monthly
Month	Square Foot		Basic Rental
10/31/03–04/30/04	$	0.00	$	0.00
05/01/04–09/30/06	$	18.50	$	25,243.25
10/01/06–02/28/10	$	19.25	$	26,266.63
03/01/10–02/29/12	$	20.00	$	27,290.00

     3. Expense Stop. The Expense Stop for the Expansion Space shall be equal to the Basic Cost per rentable square foot in the Building for the calendar year 2003, adjusted pursuant to Paragraph (d) of Exhibit C to the Lease. Paragraph (e) of Exhibit C to the Lease shall also apply to the Expansion Space.

     4. Parking. Effective as of the Expansion Commencement Date the Lease shall be amended to reflect that (i) Tenant shall be entitled to fifty-seven (57) additional unreserved parking spaces (one (1) of which Tenant may elect to convert to a reserved parking space), and (ii) Tenant’s rental obligations with respect to such fifty-seven (57) additional parking spaces shall be $0.00.

     5. Tenant Finish. Landlord shall construct and install leasehold improvements in the Expansion Space pursuant to the Work Letter attached hereto as Exhibit B and made a part hereof for all purposes.

-1-

     6. Eyebrow Signage. Subject to approval by the City of Dallas, Texas, if prior to January 31, 2004 (i) the Premises are expanded to include an additional full floor in the lower bank of the Building (in addition to the 97,626 square feet of rentable area leased pursuant to this Amendment), or (ii) a Tenant Affiliate (as hereinafter defined) leases a full floor in the lower bank of the Building (the “Affiliate Lease”), Tenant shall have the non-exclusive right, at its cost, to install and maintain an eyebrow sign (the “Eyebrow Signage”) reflecting Tenant’s name in one (1) location on the exterior of the Building. The size, color, lettering, quality, design, construction and exact location of the Eyebrow Signage shall comply in all respects with all governmental laws, codes, rules and regulations, and shall be subject to Landlord’s reasonable approval. Tenant shall, at its risk and expense and at Landlord’s election, remove the Eyebrow Signage within thirty (30) days after Landlord’s request therefor following the occurrence of any of the following events: (i)the termination of Tenant’s right to possess the Premises in accordance with the terms of this Lease; or (ii) the termination of Tenant’s Affiliate’s right to possess its premises in accordance with the terms of the Affiliate Lease; or (iii) the final termination of this Lease or expiration of the Term as extended or renewed; or (iv) the final termination of the Affiliate Lease or expiration of the term of the Affiliate Lease as extended or renewed; or (v) Tenant ceases to lease at least seven (7) full floors in the Building if Tenant’s right to the Eyebrow Signage arose from the expansion of the Premises, or Tenant ceases to lease at least six (6) full floors in the Building if Tenant’s right to the Eyebrow Signage arose from the Affiliate Lease; or (vi) Tenant’s Affiliate ceases to lease at least one (1) full floor in the Building if Tenant’s right to the Eyebrow Signage arose from the Affiliate Lease. Tenant shall repair all damage caused by the installation, maintenance, or removal of the Eyebrow Signage and restore the Building and the Project to its condition before the installation of the Eyebrow Signage, ordinary wear and tear excepted. If Tenant fails to take any of the foregoing actions, Landlord may, after giving Tenant ten (10) days prior written notice, without compensation to Tenant, and at Tenant’s expense, remove the Eyebrow Signage and perform the related restoration or repair work and dispose of the Eyebrow Signage in a manner Landlord deems appropriate. The rights set forth in this Paragraph 6 are personal to Tenant and may not be assigned to any party (other than to a Permitted Transferee, as defined in Section 10.b of the Lease). As used herein the term “Affiliate” shall mean an entity that is controlled by, or is under common control with Tenant. For purposes hereof, the term “control” shall mean the ownership of more than 25% of the beneficial interest or the voting power of the controlled entity.

     7. Extension Options. Tenant’s exercise of its rights to extend the Term set forth in Exhibit G to the Lease shall include the Expansion Space.

     8. Tenant Estoppel. Tenant hereby confirms and ratifies the Lease, as amended hereby, acknowledges that Landlord is not in default under the Lease as of the date this Amendment is executed by Tenant and accepts the Premises “AS IS”, without benefit of further improvements except as expressly provided in this Amendment, and without warranty of suitability or fitness for a particular purpose.

     9. Commissions. Tenant represents that it has dealt with no broker, agent or other person in connection with this Amendment other than GLV Realty Advisors (“Broker”) and that no broker, agent or other person brought about this Amendment (other than Broker), and Tenant shall indemnify and hold Landlord harmless from and against any and all claims, losses, costs or expenses (including attorneys’ fees and expenses) by any broker, agent or other person (except those of Broker) claiming a commission or other form of compensation by virtue of having dealt with Tenant with regard to this transaction contemplated by this Amendment. The provisions of this paragraph shall survive the expiration of the Lease Term or any renewal or extension thereof.

     10. Confidentiality Tenant agrees that Tenant shall not disclose, directly or indirectly, any of the terms, covenants, conditions or agreements set forth in the Lease, this Amendment or any subsequent amendments hereto, nor shall Tenant provide the Lease, this Amendment or any subsequent amendments hereto or any copies of same to any person, including, but not limited to, any other tenants in the Building or any agents or employees of such tenants, except that Tenant may disclose such information for valid business, legal and accounting purposes.

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11. Miscellaneous.

          (a) Any capitalized term or phrase used in this Amendment shall have the same meaning as the meaning ascribed to such term or phrase in the Lease unless expressly otherwise defined in this Amendment.

          (b) In the event that the terms of the Lease conflict or are inconsistent with those of this Amendment, the terms of this Amendment shall govern.

          (c) Except as amended by this Amendment, the terms of the Lease remain in full force and effect.

          (d) Submission of this Amendment for examination does not constitute an offer, right of first refusal, reservation of, or option for, the Expansion Space or any other premises in the Building. This Amendment shall become effective only upon execution and delivery by both Landlord and Tenant.

     IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed on the day and year first written above.

LANDLORD:
DALLAS RPFIV CAMPBELL CENTRE
ASSOCIATES LIMITED PARTNERSHIP,
a Delaware limited partnership
By:	GEIRPIV Holding Corporation,
	a Delaware corporation,
	its General Partner
By:
Name:
Title:
TENANT:
PEGASUS SOLUTIONS, INC.,
a Delaware corporation
By:
Name:
Title:

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EXHIBIT A

[Floor Plan of Expansion Space]

Exhibit A — Page 1 of 1

EXHIBIT B

TENANT FINISH-WORK: ALLOWANCE

     1. Except as set forth in this Exhibit, Tenant accepts the Expansion Space in its “as is” condition on the date that this Amendment is entered into. Landlord shall, at Landlord’s sole cost, provide the following leasehold improvements in the Premises on or before the Expansion Commencement Date:

• Nineteenth (19^th) and twentieth (20^th) floor restrooms — Replace restroom partitions where required in order to install partitions with recessed toilet paper dispensers.

• Twentieth (20^th) floor men’s restroom — Replace wall covering, repair water leak above the ceiling and replace ceiling tiles as required due to water leaks. Paint ceiling and install slanted color-matching exposure panels in front of vanity to cover exposed plumbing.

• Nineteenth (19^th) and twentieth (20^th) floors — Apply a layer of elastic clear urethane sealer to the reception area floors.

     2. Tenant shall provide to Landlord for its approval final working drawings (the “Preliminary Working Drawings”), prepared by an architect that has been approved by Landlord (which approval shall not be unreasonably withheld), of all improvements that Tenant proposes to install in the Expansion Space. Landlord shall respond to Tenant’s written request for Landlord’s approval of its architect within five (5) business days after receipt of such request. Landlord’s failure to respond within such five (5) business days shall be deemed to be Landlord’s approval thereof. The Preliminary Working Drawings shall include the partition layout, ceiling plan, electrical outlets and switches, telephone outlets, drawings for any modifications to the mechanical and plumbing systems of the Building, and detailed plans and specifications for the construction of the improvements called for under this Exhibit in accordance with all applicable governmental laws, codes, rules, and regulations. Further, if any of Tenant’s proposed construction work will affect the Building’s HVAC, electrical, mechanical, or plumbing systems, then the working drawings pertaining thereto shall be prepared by the Building’s engineer of record, whom Tenant shall at its cost engage for such purpose. Tenant shall furnish the initial draft of the Preliminary Working Drawings to Landlord for Landlord’s review and approval. Within five (5) business days after receipt Landlord shall either provide comments to such Preliminary Working Drawings or approve the same. Landlord’s failure to respond within such five (5) business day period shall be deemed to be Landlord’s approval thereof. I f Landlord provides Tenant with comments to the Preliminary Working Drawings, Tenant shall provide revised Preliminary Working Drawings to Landlord incorporating Landlord’s comments within one week after receipt of Landlord’s comments. Within five (5) business days after receipt Landlord shall then either provide comments to such revised Preliminary Working Drawings or approve such Preliminary Working Drawings. Landlord’s failure to respond within such five (5) business day period shall be deemed to be Landlord’s approval thereof. The process described above shall be repeated, if necessary, until the Preliminary Working Drawings have been approved by Landlord. Tenant shall furnish detailed architectural, mechanical and electrical drawings and specifications (collectively, the “Final Construction Documents”) to Landlord for Landlord’s review and approval. Within five (5) business days after receipt Landlord shall either provide comments to such Final Construction Documents or approve the same. If Landlord provides Tenant with comments to the Final Construction Documents, Tenant shall provide revised Final Construction Documents to Landlord incorporating Landlord’s comments within one week after receipt of Landlord’s comments. Within five (5) business days after receipt Landlord shall then either provide comments to such revised Final Construction Documents or approve such Final Construction Documents. Landlord’s failure to respond within such five (5) business day period shall be deemed to be Landlord’s approval thereof. The process described above shall be repeated, if necessary, until the Final Construction Documents have been approved by Landlord. Landlord’s approval of the Preliminary Working Drawings and Final

Exhibit B — Page 1 of 2

Construction Documents shall not be unreasonably withheld, provided that (a) they comply with all applicable governmental laws, codes, rules, and regulations, (b) such working drawings are sufficiently detailed to allow construction of the improvements in a good and workmanlike manner, and (c) the improvements depicted thereon conform to the rules and regulations promulgated from time to time by the Landlord for the construction of tenant improvements. As used herein, “Working Drawings” shall mean collectively, the Preliminary Working Drawings and Final Construction Documents approved by Landlord, as amended from time to time by any approved changes thereto, and “Work” shall mean all improvements to be constructed in accordance with and as indicated on the Working Drawings. Approval by Landlord of the Working Drawings shall not be a representation or warranty of Landlord that such drawings are adequate for any use, purpose, or condition, or that such drawings comply with any applicable law or code, but shall merely be the consent of Landlord to the performance of the Work. Tenant and Landlord shall sign the Working Drawings to evidence their respective review and approval thereof. All changes in the Work must receive the prior written approval of Landlord.

     3. Landlord shall solicit bids for the Work from contractors selected by Landlord and approved by Tenant, which approval shall not be unreasonably withheld. Landlord’s failure to respond within five (5) business days after receipt of Tenant’s request for approval shall be deemed to be Landlord’s approval thereof. Landlord and Tenant shall cooperate in good faith to coordinate the construction schedule. All contractors and subcontractors shall be required to procure and maintain insurance against such risks, in such amounts, and with such companies as Landlord may reasonably require. Certificates of such insurance, with paid receipts therefor, must be received by Landlord before the Work is commenced.

     4. Landlord shall construct the Work or have the Work constructed in a first class and workmanlike manner.

     5. Tenant shall bear the entire cost of performing the Work (including, without limitation, design of the Work and preparation of the Working Drawings, costs of construction labor and materials, electrical usage during construction, additional janitorial services, general tenant signage, related taxes and insurance costs, all of which costs are herein collectively called the “Total Construction Costs”) in excess of the Construction Allowance (hereinafter defined).

     6. Landlord shall furnish a construction allowance (the “Construction Allowance”) equal to $32.00 per rentable square foot in the Expansion Space. Tenant shall be entitled to use any unused portion of the Construction Allowance to pay for the out-of-pocket costs actually incurred by Tenant in relocating to the Expansion Space, including, without limitation, the cost of professional movers and the installation of Tenant’s telephone and data cabling systems. Any remaining unused portion of the Construction Allowance shall be the property of Landlord.

     7. Landlord or its agent shall supervise the Work, make disbursements required to be made to the contractor, and act as a liaison between the contractor and Tenant and coordinate the relationship between the Work, the Building, and the Building’s systems. In consideration for Landlord’s construction supervision services, Tenant shall pay to Landlord a construction supervision fee equal to one and one-half percent (1.5%) of the Total Construction Costs.

     8. To the extent not inconsistent with this Exhibit, Section 8a. of the Lease shall govern the performance of the Work and the Landlord’s and Tenant’s respective rights and obligations regarding the improvements installed pursuant thereto.

Exhibit B — Page 2 of 2

EX-10.27

Exhibit 10.27

FIRST AMENDMENT
TO
LEASE AGREEMENT

     THIS FIRST AMENDMENT TO LEASE AGREEMENT is entered into as of June 28, 2002, among RYAN COMPANIES US, INC., a Minnesota corporation (“Landlord”), PEGASUS SOLUTIONS COMPANIES, a Delaware corporation (“Tenant”), and PEGASUS SOLUTIONS, INC., a Delaware corporation (“Guarantor”).

     Undefined capitalized terms in this First Amendment shall have the meanings ascribed to such terms in the Lease described below.

Recitals:

     A. Landlord and Tenant entered into that certain Lease dated September 14, 2001 under which Landlord leased to Tenant space in Pegasus Corporate Center — Northsight at 14000 North Pima Road, Scottsdale, Arizona 85260. Guarantor guaranteed the obligations of Tenant under the Lease.

     B. The Lease grants Tenant the option to increase or decrease the size of the Premises upon written notice to Landlord.

     C. Tenant has elected to increase the size of the Premises, and Landlord and Tenant now wish to amend the Lease to memorialize the increase in the size of the Premises.

Covenants:

     NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows:

     1. The Rentable Area of the Premises is hereby increased to 124,984 square feet.

     2. Tenant’s Share of Operating Costs is hereby increased to eighty-nine percent (89%).

     3. The adjusted Rentable Area and Tenant’s Share shall be considered final for all purposes under the Lease.

     4. Except as expressly amended, the Lease as amended shall continue in full force and effect in all respects.

-1-

     5. Guarantor consents to this First Amendment.

LANDLORD:	TENANT:
RYAN COMPANIES US, INC,	PEGASUS SOLUTIONS COMPANIES
By	By
Its	Its
	GUARANTOR:
	PEGASUS SOLUTIONS, INC.
	By
	Its

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EX-10.28

Exhibit 10.28

SECOND AMENDMENT TO LEASE AGREEMENT

     THIS SECOND AMENDMENT TO LEASE AGREEMENT (this “Amendment”) is entered into on February 28, 2003 by RYAN COMPANIES US, INC., a Minnesota corporation (“Landlord”), Pegasus Solutions Companies, a Delaware corporation (“Tenant”), and Pegasus Solutions, Inc., a Delaware corporation (“Guarantor”).

Recitals:

     A. Landlord and Tenant entered into that certain Lease Agreement (“Lease”) for the Premises dated as of September 14, 2001, as amended by that certain First Amendment (“First Amendment”) to Lease Agreement dated as of June 28, 2002. Undefined capitalized terms in this Amendment are used as defined in the Lease.

     B. The Scheduled Commencement Date under the Lease was January 1, 2003. Subsequently, Landlord and Tenant agreed to extend the Scheduled Commencement Date to January 15, 2003. Landlord tendered possession of the Premises to Tenant, on schedule, upon Substantial Completion of the Project.

     C. Tenant is in possession of the Premises and conducting business, and the Term of the Lease has commenced.

     D. Accordingly, Landlord and Tenant desire to amend the Lease to memorialize the Lease Term Commencement Date, Total Project Cost, annual Base Rent and other matters relating to the Building and the Premises.

Covenants:

     NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows:

     1. The Lease Term Commencement Date is January 15, 2003. Tenant’s obligation for the payment of annual Base Rent and other performance under the Lease began on that date.

     2. The Lease Expiration Date is January 31, 2013 unless the Lease is sooner terminated or thereafter extended as provided in the Lease.

     3. The Rentable Area of the Building is 144,959 square feet, and the Rentable Area of the Premises is 124,984 square feet, as calculated and certified by the Project Architect, Evolution Design. Tenant’s Share of Operating Costs is eighty-six and twenty-two hundredths percent (86.22%).

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     4. Total Project Cost verified to date is Twenty-Three Million Five Hundred Two Thousand Nine Hundred Dollars ($23,502,900.00), as reflected in Exhibit A, which supersedes the cost estimates in Exhibit E to the Lease.

     5. Based on Total Project Cost of $23,502,900.00, annual Base Rent is:

Rental Period	Annual Base Rent
Years 1–5	$3,086,420.00
Years 6–10	$3,414,073,00

     6. Rent payable by Tenant under the Lease will include, in addition to Base Rent, Operating Costs and all other sums payable by Tenant to Landlord, a sum equal to the product of $4.00 and the Rentable Area of the Premises, representing certain Tenant Improvement costs over the Tenant Improvement Allowance, which will be amortized over the initial ten-year Term of the Lease at a per annum rate of interest of ten percent (10). The payment schedule for such additional Rent is set forth in Exhibit B.

     7. In the event of any inconsistency between the provisions of the Lease (including the First Amendment) and this Amendment, this Amendment will govern. Except as expressly provided above, the Lease shall remain in full force and effect without change.

LANDLORD:		TENANT:
RYAN COMPANIES US, INC.,		PEGASUS SOLUTIONS COMPANIES,
a Minnesota corporation		a Delaware corporation
By:		By:
	Its:		Its:
		GUARANTOR:
		PEGASUS SOLUTIONS, INC.,
		a Delaware corporation
		By:
			Its:

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EXHIBIT A
Summary

Pegasus									2/12/03
SPACE TYPE	SF			COST PSF			CONST. COST
OFFICE		144,959		$	62.78			9,100,526
WAREHOUSE		0		$	0.00			0
OTHER		0		$	0.00			0
OTHER		0		$	0.00			0
OTHER		0		$	0.00			0
OTHER		0		$	0.00			0
OTHER		0		$	0.00			0
OTHER		0		$	0.00			0
TOTAL		144,959			11	MONTH CONSTRUCTION PERIOD
CONSTRUCTION COST
SHELL @ SQ FT COST OF								62.78	9,100,526
SITE WORK								0.00	0
DESIGN & PERMITS								0.00	0
CITY FEE								0.00	0
PARKING DECK								26.91	3,900,847
LAND CARRY								0.30	43,488
INFRASTRUCTURE								0.00	0
TOTAL CONSTRUCTION COSTS										13,044,860
LAND		5.00	ACRES				PSF@		16.41	3,574,098
DEVELOPMENT COSTS
LEGAL									70,000
TITLE									26,452
FINANCING FEES									235,029
MISCELLANEOUS									40,000
TOTAL DEVELOPMENT COSTS										371,481
INTERIM INTEREST										813,853
CARRY										0
MARKETING										10,000
CONTINGENCY										25,000
DEVELOPERS FEE										400,000
TOTAL BASE BUILDING												18,239,292
LEASING FEES	MONTH LEASE STARTS			SQ FT			ALLOW PER SF
PEGASUS			1		124,984			8.00	999,872
TENANT 2			7		19,975			7.00	139,825
TENANT 3			0		0			0.00	0
TENANT 4			0		0			0.00	0
TENANT 5			0		0			0.00	0
TENANT 6			0		0			0.00	0
TENANT 7			0		0			0.00	0
TENANT 8			0		0			0.00	0
TOTAL LEASING COSTS										1,139,697
TENANT IMPROVEMENTS				SQ FT			ALLOW PER SF
PEGASUS					124,984			29.00	3,624,536
TENANT 2					19,975			25.00	499,375
TENANT 3					0			0.00	0
TENANT 4					0			0.00	0
TENANT 5					0			0.00	0
TENANT 6					0			0.00	0
TENANT 7					0			0.00	0
TENANT 8					0			0.00	0
TOTAL TENANT IMPROVEMENTS										4,123,911
TOTAL TENANT COSTS												5,263,608
TOTAL PROJECT COSTS								162.13 / SQ FT				23,502,900
2/25/03											Pegasus 2-proforma

EXHIBIT ‘A’ Continued

Development Costs

ASSUME MORTGAGE OF	$	23,502,900
LEGAL
RYAN				0
LENDER	INTERIM			20,000
LENDER	PERMANENT			0
OTHER				50,000
OTHER				0
TOTAL LEGAL		0		70,000
TITLE
MORT REG TAX INTERIM				0
MORT REG TAX PERM				0
TITLE INS PREM				16,452
TITLE DISB FEE				2,500
CLOSING,RECORD,MISC				7,500
TOTAL TITLE				26,452
FINANCING FEE
INTERIM		1.00		235,029
PERMANENT		0.00		0
OTHER				0
TOTAL FINANCING				235,029
MISCELLANEOUS
SURVEY				5,000
INSPECT ARCH				0
APPRAISAL				5,000
ENVIROMENTAL				5,000
PARK DEDICATION				0
TRAVEL				0
INTERIM RE TAXES				15,000
OTHER				10,000
OTHER				0
LAND RENT/YEAR CONST				0
INFRASTRUCTURE				0
TOTAL MISCELLANEOUS				40,000
MARKETING
BROCHURE				0
ADVERTISING				0
FUNCTIONS				10,000
MODELS				0
OFFICE				0
OTHER				0
TOTAL MARKETING				10,000
2/25/03			Pegasus 2-proforma

EXHIBIT B

LOAN AMORT, SCHEDULE		25-Feb-03
PROPERTY :	PEGASUS SOLUTIONS

ASSUMPTIONS:

First Payment Date	01-Feb-03			EST.DATE
Principal Borrowed	$	499,936.00		EST BEG BAL	$4 Per RSF = 124,984
Term in Months		120
Interest Rate		10.00	%
Payment	$	6,606.69

AMORTIZATION TABLE

	Payment	Interest							Principal		Principal
Payment #	Date	Rate			Payment		Interest		Portion		Balance
1	0l-Feb-03		10.00	%	$	6,606.69	$	4,166.13	$	2,440.56	$	497,495.44
2	0l-Mar-03		10.00	%	$	6,606.69	$	4,145.80	$	2,460.90	$	495,034.55
3	0l-Apr-03		10.00	%	$	6,606.69	$	4,125.29	$	2,481.40	$	492,553.14
4	0l-May-03		10.00	%	$	6,606.69	$	4,104.61	$	2,502.08	$	490,051.06
5	01-Jun-03		10.00	%	$	6,606.69	$	4,083.76	$	2,522.93	$	487,528.13
6	0l-Jul-03		10.00	%	$	6,606.69	$	4,062.73	$	2,543.96	$	484,984.17
7	0l-Aug-03		10.00	%	$	6,606.69	$	4,041.53	$	2,565.16	$	482,419.02
8	0l-Sep-03		10.00	%	$	6,606.69	$	4,020.16	$	2,586.53	$	479,832.48
9	02-Oct-03		10.00	%	$	6,606.69	$	3,998.60	$	2,608.09	$	477,224.40
10	02-Nov-03		10.00	%	$	6,606.69	$	3,976.87	$	2,629.82	$	474,594.58
11	02-Dec-03		10.00	%	$	6,606.69	$	3,954.95	$	2,651.74	$	471,942.84
12	02-Jan-04		10.00	%	$	6,606.69	$	3,932.86	$	2,673.83	$	469,269.01
13	02-Feb-04		10.00	%	$	6,606.69	$	3,910.58	$	2,696.12	$	466,572.89
14	02-Mar-04		10.00	%	$	6,606.69	$	3,888.11	$	2,718.58	$	463,854.31
15	02-Apr-04		10.00	%	$	6,606.69	$	3,865.45	$	2,741.24	$	461,113.07
16	02-May-04		10.00	%	$	6,606.69	$	3,842.61	$	2,764.08	$	458,348.99
17	02-Jun-04		10.00	%	$	6,606.69	$	3,819.57	$	2,787.12	$	455,561.87
18	02-Jul-04		10.00	%	$	6,606.69	$	3,796.35	$	2,810.34	$	452,751.53
19	02-Aug-04		10.00	%	$	6,606.69	$	3,772.93	$	2,833.76	$	449,917.76
20	02-Sep-04		10.00	%	$	6,606.69	$	3,749.31	$	2,857.38	$	447,060.39
21	02-Oct-04		10.00	%	$	6,606.69	$	3,725.50	$	2,881.19	$	444,179.20
22	02-Nov-04		10.00	%	$	6,606.69	$	3,701.49	$	2,905.20	$	441,274.00
23	02-Dec-04		10.00	%	$	6,606.69	$	3,677.28	$	2,929.41	$	438,344.60
24	02-Jan-05		10.00	%	$	6,606.69	$	3,652.87	$	2,953.82	$	435,390.78
25	02-Feb-05		10.00	%	$	6,606.69	$	3,628.26	$	2,978.43	$	432,412.34
26	02-Mar-05		10.00	%	$	6,606.69	$	3,603.44	$	3,003.25	$	429,409.09
27	02-Apr-05		10.00	%	$	6,606.69	$	3,578.41	$	3,028.28	$	426,380.80
28	02-May-05		10.00	%	$	6,606.69	$	3,553.17	$	3,053.52	$	423,327.29
29	02-Jun-05		10.00	%	$	6,606.69	$	3,527.73	$	3,078.96	$	420,248.32
30	02-Jul-05		10.00	%	$	6,606.69	$	3,502.07	$	3,104.62	$	417,143.70
31	02-Aug-05		10.00	%	$	6,606.69	$	3,476.20	$	3,130.49	$	414,013.21
32	02-Sep-05		10.00	%	$	6,606.69	$	3,450.11	$	3,156.58	$	410,856.63
33	02-0ct-05		10.00	%	$	6,606.69	$	3,423.81	$	3,182.89	$	407,673.74
34	02-Nov-05		10.00	%	$	6,606.69	$	3,397.28	$	3,209.41	$	404,464.33

Page 1 of 3

EXHIBIT B

	Payment	Interest							Principal		Principal
Payment #	Date	Rate			Payment		Interest		Portion		Balance
35	02-Dec-05		10.00	%	$	6,606.69	$	3,370.54	$	3,236.15	$	401,228.18
36	02-Jan-06		10.00	%	$	6,606.69	$	3,343.57	$	3,263.12	$	397,965.05
37	02-Feb-06		10.00	%	$	6,606.69	$	3,316.38	$	3,290.32	$	394,674.74
38	02-Mar-06		10.00	%	$	6,606.69	$	3,288.96	$	3,317.73	$	391,357.00
39	02-Apr-06		10.00	%	$	6,606.69	$	3,261.31	$	3,345.38	$	388,011.62
40	02-May-06		10.00	%	$	6,606.69	$	3,233.43	$	3,373.26	$	384,638.36
41	02-Jun-06		10.00	%	$	6,606.69	$	3,205.32	$	3,401.37	$	381,236.99
42	02-Jul-06		10.00	%	$	6,606.69	$	3,176.97	$	3,429.72	$	377,807.27
43	02-Aug-06		10.00	%	$	6,606.69	$	3,148.39	$	3,458.30	$	374,348.97
44	02-Sep-06		10.00	%	$	6,606.69	$	3,119.57	$	3,487.12	$	370,861.86
45	02-0ct-06		10.00	%	$	6,606.69	$	3,090.52	$	3,516.18	$	367,345.68
46	02-Nov-06		10.00	%	$	6,606.69	$	3,061.21	$	3,545.48	$	363,800.20
47	02-Dec-06		10.00	%	$	6,606.69	$	3,031.67	$	3,575.02	$	360,225.18
48	02-Jan-07		10.00	%	$	6,606.69	$	3,001.88	$	3,604.81	$	356,620.37
49	02-Feb-07		10.00	%	$	6,606.69	$	2,971.84	$	3,634.85	$	352,985.51
50	02-Mar-07		10.00	%	$	6,606.69	$	2,941.55	$	3,665.15	$	349,320.37
51	02-Apr-07		10.00	%	$	6,606.69	$	2,911.00	$	3,695.69	$	345,624.68
52	02-May-07		10.00	%	$	6,606.69	$	2,880.21	$	3,726.49	$	341,898.19
53	02-Jun-07		10.00	%	$	6,606.69	$	2,849.15	$	3,757.54	$	338,140.65
54	02-Jul-07		10.00	%	$	6,606.69	$	2,817.84	$	3,788.85	$	334,351.80
55	02-Aug-07		10.00	%	$	6,606.69	$	2,786.27	$	3,820.43	$	330,531.38
56	02-Sep-07		10.00	%	$	6,606.69	$	2,754.43	$	3,852.26	$	326,679.11
57	02-Oct-07		10.00	%	$	6,606.69	$	2,722.33	$	3,884.37	$	322,794.75
58	02-Nov-07		10.00	%	$	6,606.69	$	2,689.96	$	3,916.73	$	318,878.01
59	02-Dec-07		10.00	%	$	6,606.69	$	2,657.32	$	3,949.37	$	314,928.64
60	02-Jan-08		10.00	%	$	6,606.69	$	2,624.41	$	3,982.29	$	310,946.35
61	02-Feb-08		10.00	%	$	6,606.69	$	2,591.22	$	4,015.47	$	306,930.88
62	02-Mar-08		10.00	%	$	6,606.69	$	2,557.76	$	4,048.93	$	302,881.95
63	02-Apr-08		10.00	%	$	6,606.69	$	2,524.02	$	4,082.67	$	298,799.27
64	02-May-08		10.00	%	$	6,606.69	$	2,489.99	$	4,116.70	$	294,682.58
65	02-Jun-08		10.00	%	$	6,606.69	$	2,455.69	$	4,151.00	$	290,531.57
66	02-Jul-08		10.00	%	$	6,606.69	$	2,421.10	$	4,185.59	$	286,345.98
67	02-Aug-08		10.00	%	$	6,606.69	$	2,386.22	$	4,220.47	$	282,125.50
68	02-Sep-08		10.00	%	$	6,606.69	$	2,351.05	$	4,255.65	$	277,869.86
69	02-Oct-08		10.00	%	$	6,606.69	$	2,315.58	$	4,291.11	$	273,578.75
70	02-Nov-08		10.00	%	$	6,606.69	$	2,279.82	$	4,326.87	$	269,251.88
71	02-Dec-08		10.00	%	$	6,606.69	$	2,243.77	$	4,362.93	$	264,888.96
72	02-Jan-09		10.00	%	$	6,606.69	$	2,207.41	$	4,399.28	$	260,489.67
73	02-Feb-09		10.00	%	$	6,606.69	$	2,170.75	$	4,435.94	$	256,053.73
74	02-Mar-09		10.00	%	$	6,606.69	$	2,133.78	$	4,472.91	$	251,580.82
75	02-Apr-09		10.00	%	$	6,606.69	$	2,096.51	$	4,510.18	$	247,070.64
76	02-May-09		10.00	%	$	6,606.69	$	2,058.92	$	4,547.77	$	242,522.87
77	02-Jun-09		10.00	%	$	6,606.69	$	2,021.02	$	4,585.67	$	237,937.20
78	02-Jul-09		10.00	%	$	6,606.69	$	1,982.81	$	4,623.88	$	233,313.32
79	02-Aug-09		10.00	%	$	6,606.69	$	1,944.28	$	4,662.41	$	228,650.90
80	02-Sep-09		10.00	%	$	6,606.69	$	1,905.42	$	4,701.27	$	223,949.64
81	02-Oct-09		10.00	%	$	6,606.69	$	1,866.25	$	4,740.44	$	219,209.19
82	02-Nov-09		10.00	%	$	6,606.69	$	1,826.74	$	4,779.95	$	214,429.25
83	02-Dec-09		10.00	%	$	6,606.69	$	1,786.91	$	4,819.78	$	209,609.47
84	02- Jan- 10		10.00	%	$	6,606.69	$	1,746.75	$	4,859.95	$	204,749.52
85	02-Feb-10		10.00	%	$	6,606.69	$	1,706.25	$	4,900.45	$	199,849.07
86	02-Mar-10		10.00	%	$	6,606.69	$	1,665.41	$	4,941.28	$	194,907.79

Page 2 of 3

EXHIBIT B

	Payment	Interest							Principal		Principal
Payment #	Date	Rate			Payment		Interest		Portion		Balance
87	02-Apr-10		10.00	%	$	6,606.69	$	1,624.23	$	4,982.46	$	189,925.33
88	02-May -10		10.00	%	$	6,606.69	$	1,582.71	$	5,023.98	$	184,901.35
89	02-Jun-10		10.00	%	$	6.606.69	$	1,540.84	$	5,065.85	$	179,835.51
90	02-Jul-10		10.00	%	$	6,606.69	$	1,498.63	$	5,108.06	$	174,727.44
91	02-Aug-10		10.00	%	$	6,606.69	$	1,456.06	$	5,150.63	$	169,576.82
92	02-Sep-10		10.00	%	$	6,606.69	$	1,413.14	$	5,193.55	$	164,383.26
93	02-0ct-10		10.00	%	$	6,606.69	$	1,369.86	$	5,236.83	$	159,146.43
94	02-Nov-10		10.00	%	$	6,606.69	$	1,326.22	$	5.280.47	$	153,865.96
95	02-Dec-10		10.00	%	$	6.606.69	$	1,282.22	$	5,324.47	$	148,541.49
96	02-Jan-11		10.00	%	$	6,606.69	$	1,237.85	$	5,368.85	$	143,172.64
97	02-Feb-11		10.00	%	$	6,606.69	$	1,193.11	$	5,413.59	$	137,759.06
98	02-Mar-11		10.00	%	$	6,606.69	$	1,147.99	$	5,458.70	$	132,300.36
99	02-Apr-11		10.00	%	$	6,606.69	$	1,102.50	$	5,504.19	$	126,796.17
100	02-May-11		10.00	%	$	6,606.69	$	1,056.63	$	5,550.06	$	121,246.11
101	02-Jun-11		10.00	%	$	6,606.69	$	1,010.38	$	5,596.31	$	115,649.81
102	02-Jul-11		10.00	%	$	6,606.69	$	963.75	$	5,642.94	$	110,006.86
103	02-Aug-11		10.00	%	$	6,606.69	$	916.72	$	5,689.97	$	104,316.90
104	02-Sep-11		10.00	%	$	6,606.69	$	869.31	$	5,737.38	$	98,579.51
105	02-Oct-11		10.00	%	$	6,606.69	$	821.50	$	5,785.20	$	92,794.32
106	02-Nov-11		10.00	%	$	6,606.69	$	773.29	$	5,833.41	$	86,960.91
107	02-Dec-11		10.00	%	$	6,606.69	$	724.67	$	5,882.02	$	81,078.90
108	02-Jan-12		10.00	%	$	6,606.69	$	675.66	$	5,931.03	$	75,147.86
109	02-Feb-12		10.00	%	$	6,606.69	$	626.23	$	5,980.46	$	69,167.40
110	02-Mar-12		10.00	%	$	6,606.69	$	576.40	$	6,030.30	$	63,137.11
111	02-Apr-12		10.00	%	$	6,606.69	$	526.14	$	6,080.55	$	57,056.56
112	02-May-12		10,00	%	$	6,606.69	$	475.47	$	6,131.22	$	50,925.34
113	02-Jun-12		10.00	%	$	6,606.69	$	424.38	$	6,182.31	$	44,743.03
114	02-Jul-12		10.00	%	$	6,606.69	$	372.86	$	6,233.83	$	38,509.19
115	02-Aug-12		10.00	%	$	6,606.69	$	320.91	$	6,285.78	$	32,223.41
116	02-Sep-12		10.00	%	$	6,606.69	$	268.53	$	6,338.16	$	25,885.25
117	02-0ct-12		10.00	%	$	6,606.69	$	215.71	$	6,390.98	$	19,494.27
118	02-Nov-12		10.00	%	$	6,606.69	$	162.45	$	6,444.24	$	13,050.03
119	02-Dec-12		10.00	%	$	6,606.69	$	108.75	$	6,497.94	$	6,552.09
120	02-Jan-13		10.00	%	$	6,606.69	$	54.60	$	6,552.09	$	0.00
							$	292,866.93

Page 3 of 3

EX-10.29

THIRD AMENDMENT TO LEASE AGREEMENT

Exhibit 10.29

     THIS THIRD AMENDMENT TO LEASE AGREEMENT (“Third Amendment”) is entered into on September 30, 2003, by RYAN COMPANIES US, INC., a Minnesota corporation (“Landlord”), PEGASUS SOLUTIONS COMPANIES, a Delaware corporation (“Tenant”), and PEGASUS SOLUTIONS, INC., a Delaware corporation (“Guarantor”).

Recitals:

     A. Landlord and Tenant entered into that certain Lease Agreement (“Lease”) for the Premises dated September 14, 2001, as amended by the First Amendment to Lease Agreement dated as of June 28, 2002, and by the Second Amendment to Lease Agreement dated February 28, 2003. Undefined capitalized terms in this Third Amendment are defined in the Lease.

     B. Tenant desires to lease an additional 19,975 square feet of Rentable Area on the third floor of the Building (the “Expansion Space”) for a term coterminous with the existing Term of the Lease.

     C. Upon execution of this Amendment by the parties hereto, the Rentable Area of the Premises will be 144,959 square feet (as calculated and certified by the Project Architect) which represents the entire Rentable Area of the Building.

     D. Landlord and Tenant wish to amend the Lease to provide for the expansion of Tenant’s Premises.

Covenants:

     NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows:

     1. Landlord will cause Ryan Companies US, Inc. as the general contractor to construct and install the tenant improvements for the Expansion Space (the “Expansion Space Tl”). The Expansion Space Tl will be the improvements shown on the plan (“Plan”) for the Expansion Space prepared by Evolution Design, who has been designated by Landlord and Tenant as the Architect for the Expansion Space. If the Plan has not been completed by the date of this Third Amendment, Landlord and Tenant will work diligently with the Architect to complete the Plan.

     2. Landlord will contribute Forty Dollars ($40.00) per rentable square foot in the Expansion Space for the cost of design, space planning, construction and installation of the Expansion Space Tl (“Allowance”). The general contractor will receive a total fee of eight percent (8%) of the cost of the Expansion Space Tl for its

profit and overhead together with its general conditions and all sales and excise taxes (“Markups”). The Markups will be a charge against the Allowance. If the final cost of the Expansion Space Tl exceeds the Allowance, Tenant will reimburse Landlord for the overage before taking occupancy of the Expansion Space unless Landlord in its sole discretion elects in writing to amortize the overage over the Term of the Lease.

     3. Landlord will deliver the space to Tenant fifty working days (50) from issuance of a building permit, as such date may be extended by reason of Tenant Delay or Force Majeure. Any delay in Substantial Completion will not affect the terms and conditions of the Lease or Tenant’s obligations to Landlord. If Substantial Completion does not occur on or before thirty (30) days after the 50 working days (the “Adjusted Delivery Date”), as such date may be extended by reason of Tenant Delay or Force Majeure, then Tenant’s sole and exclusive remedy will be to receive one (1) day of free rent credit (for the Expansion Space only) for each day after the Adjusted Delivery Date until the date of Substantial Completion.

     4. The Term of the Lease as to the Expansion Space (the “Expansion Space Term”) will commence five (5) calendar days after Substantial Completion of the Expansion Space Tl (the “Expansion Space Commencement Date”), and will expire on January 31, 2013 unless the Lease is sooner terminated or thereafter extended as provided in the Lease.

     5. Beginning on the Expansion Space Commencement Date:

a.	The Rentable Area of the Premises will be increased by the Rentable Area of the Expansion Space which will be calculated by the Architect.
b.	Tenant’s share of Operating Costs for the Building will be one hundred percent (100%).
c.	Tenant will pay Annual Base Rent to Landlord for the Expansion Space (in addition to Annual Base Rent for the existing Premises) calculated as set forth below, without prior notice or demand, monthly in installments on the first day of each calendar month during the Term:

Years 1–5	$17.59 per rentable square foot, net of Operating Costs
Years 6 - End of initial 10-year term    $20.23 per rentable square foot, net of Operating Costs

     6. Landlord will pay CB Richard Ellis and Colliers Classis a brokerage commission on this transaction per separate agreements with the brokers.

     7. Guarantor consents to this Third Amendment.

     8. Except as otherwise expressly provided herein, all other terms and conditions of the Lease will apply to the Expansion Space commencing on the Expansion Space Commencement Date unless patently inapplicable.

     9. In the event of any inconsistency between the provisions of the Lease (as earlier amended) and this Third Amendment, this Third Amendment will govern. Except as expressly provided above, the Lease (as earlier amended) will remain in full force and effect without change.

LANDLORD:	TENANT:
RYAN COMPANIES US, INC.,	PEGASUS SOLUTIONS COMPANIES,
a Minnesota corporation	a Delaware corporation

By:		By:
	Its:		Its:
		GUARANTOR:
		PEGASUS SOLUTIONS, INC., a Delaware corporation
		By:
			Its:

EX-10.30

Exhibit 10.30

FOURTH AMENDMENT TO LEASE AGREEMENT

     THIS FOURTH AMENDMENT TO LEASE AGREEMENT (this “Fourth Amendment”) is entered into on May 26, 2004 by Ryan Companies US, Inc., a Minnesota corporation (“Landlord”), Pegasus Solutions Companies, a Delaware corporation (“Tenant”), and Pegasus Solutions, Inc., a Delaware corporation (“Guarantor”).

Recitals:

     A. Landlord and Tenant entered into that certain Lease Agreement for the premises located at 14000 North Pima Road, Scottsdale, Arizona dated as of September 14, 2001, as amended by that certain First Amendment to Lease Agreement dated as of June 28, 2002 and that certain Second Amendment to Lease Agreement dated as of February 28, 2003 and that certain Third Amendment to Lease Agreement dated as of September 30, 2003 (collectively the Lease).

     B. Landlord and Tenant desire to further amend the Lease to establish the Expansion Space Commencement Date and the adjusted annual Base Rent.

     C. Except as specifically defined in this Fourth Amendment, all capitalized terms used herein shall have the same meaning as set forth in the Lease.

Covenants:

     NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows:

     1. The Expansion Space Commencement Date is March 15, 2004.

     2. The rentable area of the Expansion Space is 19,975 square feet.

     3. Effective March 15, 2004, the annual Base Rent is increased to the following amounts:

Rental Period	Annual Base Rent
March 15, 2004 – January 31, 2008	$3,582,599.00
February 1, 2008 – January 31, 2013	$3,962,986.00

     4. Notwithstanding anything to the contrary herein, or in the Lease, the CAM Forgiveness Period (as defined in Section 3.2(b)(1) of the Lease) shall not apply to the Expansion Space.

     5. Paragraph 6 of the Second Amendment to Lease Agreement shall be amended to read as follows:

-1-

   “Annual Base Rent stated in Paragraph 5 of this Second Amendment to Lease Agreement includes certain Tenant Improvement costs over the Tenant Improvement Allowance equal to $4.00 per square foot of Rentable Area of the Premises, which have been amortized over the initial ten-year Term of the Lease at a per annum rate of interest of ten percent (10%). The amortization schedule for such additional Rent is set forth in Exhibit B attached hereto.”

     6. Guarantor hereby consents to this Fourth Amendment.

     7. In the event of any inconsistency between the provisions of the Lease and this Fourth Amendment, this Fourth Amendment will govern. Except as expressly provided above, the Lease shall remain in full force and effect without change.

     IN WITNESS WHEREOF, the parties have executed this Fourth Amendment as of the date first written above.

LANDLORD:		TENANT:
RYAN COMPANIES US, INC.,		PEGASUS SOLUTIONS COMPANIES,
a Minnesota corporation		a Delaware corporation
By:		By:
	Its:		Its:
		GUARANTOR:
		PEGASUS SOLUTIONS, INC., a Delaware corporation
		By:
			Its:

-2-

EX-21.1

Exhibit 21.1

Pegasus Solutions, Inc.
List of Subsidiaries as of December 31, 2005

Anasazi Japan KK
Pegasus Business Intelligence LP
Pegasus GP LLC
Pegasus No. 1 LLC
Pegasus Solutions Asia, LLC
Pegasus Solutions Australia Pty Ltd
Pegasus Solutions Companies
Pegasus Solutions, Inc.
Pegasus Solutions GmbH
Pegasus Solutions (Italy) Srl
Pegasus Solutions Limited
Pegasus Solutions Mexico SA de CV
Pegasus Solutions (Singapore) Pte. Ltd.
Pegasus Solutions Spain, SL, Sociedad Unipersonal
PegSol Ltd
PegsTour Limited
Unirez, LP
Utell International do Brasil Turismo Ltda
Utell India Private Ltd
Utell International
French Branch
Japanese Branch
Utell International Colombia Ltda
Utell International Korea Ltd
Utell International (U.K.) Ltd
Argentinean Branch
Portuguese Branch
Spain Branch
South Africa
Taiwan Branch
Utell International (Thailand) Ltd.
Utell Pension Trustees Ltd
Utell Spain, S.L., Sociedad Unipersonal

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-93713, 333-84702 and 333-108270) and Form S-8 (Nos. 333-74742, 333-40039, 333-40033, 333-40035 and 333-91696) of Pegasus Solutions, Inc. of our report dated March 16, 2006 relating to the financial statements, financial statement schedule, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. We also consent to the reference to us under the heading “Selected Financial Data” in this Form 10-K.

PricewaterhouseCoopers LLP

Dallas, Texas
March 16, 2006

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

I, John F. Davis, III, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Pegasus Solutions, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 15, 2006

/s/ JOHN F. DAVIS, III

John F. Davis, III
President, Chief Executive Officer and Chairman

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

I, Susan K. Conner, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Pegasus Solutions, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 15, 2006

/s/ SUSAN K. CONNER

Susan K. Conner
Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Pegasus Solutions, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, the undersigned, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

1.	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

March 15, 2006	/s/ JOHN F. DAVIS, III
	John F. Davis, III,
	President, Chief Executive Officer
	and Chairman
March 15, 2006	/s/ SUSAN K. CONNER
	Susan K. Conner,
	Executive Vice President
	and Chief Financial Officer