UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

OR

Commission File Number: 0-27876

JDA SOFTWARE GROUP, INC.

14400 North 87^th Street
Scottsdale, Arizona 85260
(480) 308-3000
(Address and telephone number of principal executive offices)

          Indicate by check mark whether 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) had been subject to such filing requirements for the past 90 days. Yes x No o

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes x No o

          The number of shares outstanding of the Registrant’s Common Stock, $0.01 par value, was 29,111,431 as of November 1, 2004.

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JDA SOFTWARE GROUP, INC.

FORM 10-Q

TABLE OF CONTENTS

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PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

JDA SOFTWARE GROUP, INC.

See notes to consolidated financial statements.

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JDA SOFTWARE GROUP, INC.

See notes to consolidated financial statements.

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JDA SOFTWARE GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, unaudited)

See notes to consolidated financial statements.

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JDA SOFTWARE GROUP, INC.

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JDA SOFTWARE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)

See notes to consolidated financial statements.

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JDA SOFTWARE GROUP, INC.

1. Basis of Presentation

     The accompanying unaudited consolidated financial statements of JDA Software Group, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America applicable to interim financial statements. Accordingly, they do not include all of the information and notes required for complete financial statements. In the opinion of management, all adjustments and reclassifications considered necessary for a fair and comparable presentation have been included and are of a normal recurring nature. Operating results for the three and nine month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

     Certain reclassifications have been made to the September 30, 2003 interim financial statements in order to conform to the September 30, 2004 presentation.

2. Termination of Pending Acquisition of QRS Corporation

     On September 2, 2004, QRS Corporation (“QRS”) exercised its right to terminate our Agreement and Plan of Merger dated June 17, 2004 (“Merger Agreement”) in order to accept a superior proposal from an unrelated third party. Pursuant to the terms of the Merger Agreement, we received a $3.8 million termination fee from QRS on September 3, 2004. The termination fee is reported net of $2.6 million of direct costs incurred by the Company related to the pending acquisition, and has been included in the Consolidated Statements of Income for the three and nine months ended September 30, 2004 under the caption “Net gain on acquisition breakup fee.”

3. Acquisition of Timera Retail Solutions

     On January 29, 2004, we acquired the intellectual property and certain other assets of Timera Retail Solutions (“Timera”) for a total cost of $14.1 million, which includes the purchase price of $13.1 million plus $1.0 million in direct costs of the acquisition. Timera is a provider of integrated workforce management solutions for the retail industry. Timera’s Enterprise Workforce Management product suite expands our JDA Portfolio and complements our existing In-Store Systems with web-based functionality for labor scheduling and budgeting, time and attendance, demand forecasting, labor tracking, and other key processes for proactive store level labor management. The acquisition was accounted for as a purchase, and accordingly, the operating results of Timera have been included in our consolidated financial statements from the date of acquisition. In connection with the Timera acquisition, we extended employment offers to 51 former Timera employees, approximately two-thirds of which are in product development, and have recorded $8.4 million of goodwill in our In-Store Systems reporting unit (see note 7), $4.6 million in software technology, and $1.1 million for customer lists. Pro forma operating results have not been presented as the acquisition is not material to our consolidated financial statements. The following summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition.

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4. Derivative Instruments and Hedging Activities

     We use derivative financial instruments, primarily forward exchange contracts, to manage a majority of the foreign currency exchange exposure associated with net short-term foreign denominated assets and liabilities which exist as part of our ongoing business operations. The exposures relate primarily to the gain or loss recognized in earnings from the revaluation or settlement of current foreign denominated assets and liabilities. We do not enter into derivative financial instruments for trading or speculative purposes. The forward exchange contracts generally have maturities of less than 90 days and are not designated as hedging instruments under Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”). Forward exchange contracts are marked-to-market at the end of each reporting period, with gains and losses recognized in other income, net, offset by the gains or losses resulting from the settlement of the underlying foreign denominated assets and liabilities.

     At September 30, 2004, we had forward exchange contracts with a notional value of $7.0 million and an associated net forward contract receivable of $47,000. At December 31, 2003, we had forward exchange contracts with a notional value of $10.3 million and an associated net forward contract liability of $147,000, which is included in accrued expenses and other liabilities. The notional value represents the amount of foreign currencies to be purchased or sold at maturity and does not represent our exposure on these contracts. We recorded a foreign currency exchange gain of $36,000 in the three months ended September 30, 2004, as compared to a foreign currency exchange loss of $133,000 in the three months ended September 30, 2003. We recorded foreign currency exchange gains of $181,000 and $292,000 in the nine months ended September 30, 2004 and 2003, respectively.

5. Promissory Note Receivable

     In May 2001, we entered into a secured promissory note agreement with Silvon Software, Inc. (“Silvon”) under which we agreed to loan Silvon $3.5 million. We license certain applications from Silvon for use in our IDEAS product. The loan is collateralized by a first priority security interest in all of Silvon’s intellectual property, accounts receivable and all other assets. The promissory note provided for interest at prime plus 1.5 percentage points, payable monthly, and for periodic payments towards the principal balance through the retention of a portion of the royalties we owe Silvon from sales of the IDEAS product, with any remaining accrued and unpaid interest and principal due and payable on May 8, 2004.

     On May 7, 2004, Silvon notified the Company that it would not make the final May 8, 2004 payment due under the note and advised that an arbitration claim had been filed against the Company. We have subsequently filed a counterclaim for the remaining balance on the note plus interest and attorney fees. Silvon has represented that they are attempting to secure alternative financing on the note. While Silvon arranges for alternative financing, the Company has offered, and Silvon has agreed to accept in principle, certain terms which will form the basis of a definitive Settlement and Forbearance Agreement. These terms include (i) repayment of the outstanding principal and interest (at the default rate of 18%) due on the note on or before March 30, 2005, (ii) retention and application of 100% of the royalty and maintenance fees due Silvon under our existing Distribution License Agreement against the attorney’s fees, interest and outstanding principal due on the note until the note is fully repaid, (iii) the automatic release of the source code from escrow if Silvon has not paid the full amount of the outstanding principal and interest due on the note by March 30, 2005, or if Silvon files for bankruptcy or similar protection before the outstanding principal has been paid, and (iv) Silvon’s waiver of any and all rights against us including without limitation defenses to our remedies as a secured creditor, and their dismissal with prejudice of all claims made against the Company in their arbitration claim. There can be no assurance that we will complete settlement negotiations with Silvon on the foregoing terms, if at all. No adjustments have been made to the carrying amount of the note as we believe the value

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of the underlying collateral is sufficient to recover the remaining balance on the note if we are required to exercise our legal remedies.

6. Property and Equipment

     We purchased our corporate office facility in Scottsdale, Arizona on February 5, 2004 for $23.8 million in cash. The purchase includes the corporate office building, a new two-story parking garage, and approximately 8.8 acres of land upon which these structures are located.

     In April 2003, we sold a freestanding 5,000 square foot office facility in the United Kingdom for $1.6 million and recognized a gain of $639,000.

7. Goodwill and Other Intangibles, net

     Goodwill and other intangible assets consist of the following:

     We initially recorded $8.4 million of goodwill in connection with our acquisition of Timera on January 29, 2004 (see Note 3). We subsequently reduced this goodwill by $369,000 in second quarter 2004 based on our revised estimate of fair value for the deferred revenue acquired in the transaction, and increased the goodwill by $425,000 in third quarter 2004 to record additional reserves to exit the leased property assumed in the acquisition.

     We reduced goodwill by $692,000 in second quarter 2004 for the settlement of certain tax positions taken by the Company in connection with our acquisition of E3 Corporation (“E3”) in September 2001. This settlement allowed us to increase the tax basis of non-current deferred tax assets recorded in the acquisition of E3.

     We reduced goodwill by $74,000 in third quarter 2004 based on our revised estimates of the direct costs related to the acquisition of Engage, Inc. in August 2003.

     We found no indication of impairment of our goodwill balances during the nine months ended September 30, 2004 and, absent future indicators of impairment, the next annual impairment test will be performed in fourth quarter 2004. As of September 30, 2004, goodwill has been allocated to our reporting units as follows: $42.0 million to Retail Enterprise Systems, $9.7 million to In-Store Systems, and $18.3 million to Collaborative Solutions.

     The estimated useful lives of our customer list intangibles range from 5 to 13 years. The estimated economic lives of our software technology range from 5 to 15 years. Amortization expense for the three and nine month periods ended September 30, 2004 was $2.1 and $6.4 million, respectively. Amortization expense for the three and nine month periods ended September 30, 2003 was $2.0 million and $5.6 million, respectively. These figures are shown as separate line items in the consolidated statements of income within cost of revenues and operating expenses. We expect amortization expense for the next five years to be as follows:

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8. Earnings per Share

     Earnings per share for the three and nine months ended September 30, 2004 and 2003 is calculated as follows:

9. 2004 Restructuring Charge

     We recorded a $2.7 million restructuring charge in first quarter 2004 for one-time termination benefits related to a workforce reduction of 47 full-time employees (“FTE”), primarily in sales (15 FTE) and consulting services (18 FTE) functions in the Americas, Europe and Asia/Pacific, and for closure costs of certain offices in the Americas and Europe that were either under-performing or under-utilized and used primarily by consulting services personnel. All workforce reductions and office closures associated with this charge were made on or before March 31, 2004. Subsequent to the initial restructuring charge, we have reduced the estimated severance reserve requirements in Europe by $31,000, increased the estimated severance reserves requirements in the Americas by $66,000 due to a contested termination, and reduced our estimate of office closure reserve requirements in the Americas by $21,000.

     A summary of the 2004 restructuring and office closure charges included in accrued expenses and other liabilities is as follows:

     The adjustments to reserve shown in the summary above are reported net of the effect of insignificant changes in foreign currency exchange rates on the reserve balances at September 30, 2004. The remaining balance for severance, benefits and legal costs relates to terminated employees in the Americas that we expect to be paid out by December 31, 2004 and in Europe pending the outcome of a tribunal hearing. The remaining balance for office closure costs is being paid out as the leases and related subleases run through their remaining terms.

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10. 2002 Restructuring Charges

     We recorded a $1.3 million restructuring charge in second quarter 2002 for a workforce reduction of 53 full-time employees, primarily in the consulting services function in the Americas and Europe. All workforce reductions associated with this charge were made on or before June 30, 2002. All employees potentially impacted by this restructuring were notified of the plan of termination and the related benefits on or before June 30, 2002.

     We recorded an additional restructuring charge of $5.0 million in fourth quarter 2002 for the workforce reduction and office closure costs to reorganize the Company in connection with the implementation of the Customer Value Program (“CVP”). CVP was designed to (i) refocus the organization on delivering value to our existing customer base, (ii) strengthen our competitive position, (iii) improve the quality, satisfaction and efficiency of our customers’ experience with JDA, (iv) increase revenue, (v) better align our cost structure, and (vi) improve our operating results. The reorganization resulted in the consolidation of nearly all product development and client support activities at our corporate headquarters, a workforce reduction of approximately 204 full-time employees and certain office closures. Office closure costs pertain to certain US, Latin American, and European offices that were either under-performing or became redundant with the reorganization.

     A summary of the 2002 restructuring and office closure charges included in accrued expenses and other liabilities is as follows:

     The remaining balance for office closure costs is being paid out as the leases and any related subleases run through their remaining terms.

11. Relocation Costs to Consolidate Development and Client Support Activities

     In connection with our fourth quarter 2002 CVP initiative, approximately 150 people were offered the opportunity to relocate as part of a plan to consolidate our development and client support activities at our corporate headquarters. A total of 50 employees were relocated in 2003 as part of this initiative and the related relocation costs have been reported in income from continuing operations as incurred, including $458,000 and $1.7 million in the three and nine months ended September 30, 2003, respectively.

12. E3 Acquisition Reserves

     In conjunction with the acquisition of E3 Corporation (“E3”) in September 2001, we recorded acquisition reserves of approximately $14.6 million for restructuring costs to exit the activities of E3 and other direct costs associated with the acquisition. These costs related primarily to facility closures, employee severance, investment banker fees, and legal and accounting costs. We subsequently increased the purchase price and E3 acquisition reserves by $1.3 million during 2002 based on revised estimates of the restructuring costs to exit the activities of E3 and other direct costs of the acquisition. During third quarter 2003, we reduced our estimate of employee severance and termination benefits by $172,000, and accrued an additional $190,000 for facility termination and sublease costs based on our revised estimate of the time required to sublease the vacated office space in the current economic environment. We accrued an additional $150,000 for facility termination and sublease costs in first quarter 2004 because of continuing delays in our ability to sublease one remaining unused facility. All adjustments during 2003 and in first quarter 2004 have been made through the income statement. The first quarter 2004 adjustment is included in the caption “Restructuring Charge and Adjustments to Acquisition-Related Reserves.” All employee

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severance and termination benefits as well as investment banker fees and legal and accounting costs were fully paid by December 31, 2003, and the only remaining reserves at September 30, 2004 are for facility termination and sublease costs which are being paid out as the leases and any related subleases run through their remaining terms.

     The unused portion of the acquisition reserves, which is included in accrued expenses and other liabilities on the balance sheet, was $380,000 at September 30, 2004 and $525,000 at December 31, 2003. A summary of the charges and adjustments recorded against the reserves is as follows:

     The facility termination and sublease costs represent the costs of a plan to exit an activity of an acquired company as described in Financial Accounting Standards Board Emerging Issues Task Force Issue No. 95-3 (“EITF No. 95-3”), Recognition of Liabilities in Connection with a Purchase Business Combination, and include the estimated costs of management’s plan to shut down nine offices of E3 shortly after the acquisition date. These costs have no future economic benefit to the Company and are incremental to the other costs incurred by the Company or E3.

     Employee severance and termination benefits are costs resulting from a plan to involuntarily terminate employees from an acquired company as described in EITF No. 95-3. As of the consummation date of the acquisition, executive management approved a plan to involuntarily terminate approximately 31% of the 338 full time employees of E3. In the first three months following the consummation of the E3 acquisition, management completed the assessment of which employees would be involuntarily terminated and communicated the termination arrangements to the affected employees in accordance with statutory requirements of the local jurisdictions in which the employees were located.

13. Stock-Based Compensation

     The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure (“SFAS No. 148”) which amends SFAS No. 123 to provide alternative methods of transition to SFAS No. 123’s fair value method of accounting for stock-based employee compensation if a company elects to account for its equity awards under this method. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in both annual and interim financial statements.

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     The following table presents pro forma disclosures required by SFAS No. 148 of net income (loss) and basic and diluted income (loss) per share as if stock-based employee compensation had been recognized during the three and nine month periods ended September 30, 2004 and 2003. The compensation expense for these periods has been determined under the fair value method using the Black-Scholes pricing model, and assumes graded vesting.

14. Income Taxes

     We recorded an income tax benefit of $430,000 in the three months ended September 30, 2004, compared to income tax expense of $374,000, or 10% of the reported income before income taxes in the three months ended September 30, 2003, and an income tax benefit of $2.0 million for the nine months ended September 30, 2004, compared to an income tax benefit of $136,000 in the nine months ended September 30, 2003.

     The income tax benefits for the three and nine months ended September 30, 2004 include $858,000 and $1.9 million in one-time income tax benefits, respectively. The $858,000 one-time tax benefit results from the revision of certain estimates upon the filing of our 2003 federal income tax return. These revisions resulted in an increase in foreign source income which allowed us to utilize foreign tax credits that we were previously unable to take as a credit, and caused us to reduce our foreign tax credit valuation allowance to zero. The $1.9 million one-time income tax benefit for the nine months ended September 30, 2004 includes the $858,000, a $750,000 one-time benefit recognized in the three months ended June 30, 2004 from the settlement of an Internal Revenue Service audit of our 2000 and 2001 federal income tax returns and a favorable income tax adjustment with Inland Revenue in the United Kingdom, plus a $329,000 one-time income tax benefit recognized in the three months ended March 31, 2004 from the settlement of IRS audits of our 1998 and 1999 federal income tax returns, and an agreement with the IRS to allow the Company to take a research and development expense tax credit for most of the qualifying expenses originally reported in these returns. The effective income tax (benefit) rate for the three and nine months ended September 30, 2004, excluding the effect of the one-time tax benefits, is 35% and 34%, respectively.

     The provision (benefit) for income taxes recorded in the three and nine months ended September 30, 2003 includes a one-time tax benefit of $938,000. During 2002, we established a valuation allowance of $3.5 million for foreign tax credit carryovers due to our excess credit position. We subsequently elected in third quarter 2003 to capitalize a significant portion of our research and development costs in the 2002 federal income tax return, which allowed us to more fully utilize certain tax credits that could not previously be realized. With this election, we reversed $2.3 million of the previously recorded valuation allowance, which resulted in the one-time tax benefit of $938,000, an increase to additional paid in capital of $1.1 million, and an increase in income taxes payable of $262,000. The effective tax rate for the three and nine months ended September 30, 2003, excluding the effect of the $938,000 one-time tax benefit, is 35%.

     The income tax (benefit) provisions recorded during the three and nine months ended September 30, 2004 and 2003 take into account the source of taxable income, domestically by state and internationally by country, and available income tax credits, and do not include the tax benefits realized from the employee stock options exercised during the three and nine months ended September 30, 2004 of $6,000 and $61,000, respectively, compared to $175,000 and $208,000 in the three and nine months ended September 30, 2003, respectively. These tax benefits reduce our income tax liabilities and are included as an increase to additional paid-in capital.

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15. Business Segments and Geographic Data

     We are a leading provider of sophisticated software solutions designed specifically to address the demand and supply chain management, business process, decision support, e-commerce, inventory optimization and collaborative planning and forecasting requirements of the retail industry and its suppliers. Our solutions enable our customers to collect, manage, organize and analyze information throughout their retail enterprise, and to collaborate with suppliers and customers over the Internet at multiple levels within their organizations. We conduct business in three geographic regions that have separate management teams and reporting structures: the Americas, Europe, and Asia/Pacific. Similar products and services are offered in each geographic region and local management is evaluated primarily based on total revenues and operating income. Identifiable assets are also managed by geographical region. The geographic distribution of our revenues and identifiable assets is as follows:

     We have organized our business segments around the distinct requirements of retail enterprises, retail stores, and suppliers to the retail industry:

•		Retail Enterprise Systems include corporate level merchandise management systems (“Merchandise Management Systems”) that enable retailers to manage their inventory, product mix, pricing and promotional execution, and enhance the productivity and accuracy of warehouse processes. In addition, Retail Enterprise Systems include a comprehensive set of tools for planning inventory and in-store space decisions throughout the demand chain, analyzing business results and trends, automating demand forecasting and replenishment, tracking customer shopping patterns, optimizing revenues through trade allowance and promotional program management (“Strategic Merchandise Management Solutions”).
•		In-Store Systems include point-of-sale, labor scheduling and back office applications that enable retailers to capture, analyze and transmit certain sales, store inventory and other operational information to corporate level merchandise management and payroll systems using hand-held, radio frequency devices, point-of-sale workstations or via the Internet. In addition, In-Store Systems include a workforce management solution to optimize the scheduling of in-store labor which typically represents the next largest operational cost for a retailer after inventory.
•		Collaborative Solutions provide applications that enable business-to-business collaborative activities such as collaborative planning, forecasting and replenishment (“CPFR”), collaborative category management including collaborative space and assortment planning, and collaborative revenue management through trade funds management programs. Our Collaborative Solutions offerings leverage existing solutions deployed to retailers within our Retail Enterprise Systems business segment.

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     A summary of the revenues, operating income (loss), and depreciation attributable to each of these business segments for the three and nine months ended September 30, 2004 and 2003 is as follows:

     Operating income in the Retail Enterprise Systems, In-Store Systems and Collaborative Solutions business segments includes direct expenses for software licenses, maintenance services, service revenues, amortization of acquired software technology, and product development expenses, as well as allocations for sales and marketing expenses, occupancy costs and depreciation expense. The “Other” caption includes general and administrative expenses and other charges that are not directly identified with a particular business segment and which management does not consider in evaluating the operating income of the business segment.

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

     This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Act of 1995 reflecting management’s current forecast of certain aspects of our future. It is based on current information that we have assessed but which by its nature is dynamic and subject to rapid and even abrupt changes. Forward-looking statements include statements regarding future operating results, liquidity, capital expenditures, product development and enhancements, numbers of personnel, strategic relationships with third parties, acquisitions and strategy. The forward-looking statements are generally accompanied by words such as “plan,” “estimate,” “expect,” “intend,” “believe,” “should,” “would,” “could,” “anticipate” or other words that convey uncertainty of future events or outcomes. Our actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with our business. These risks are described throughout this Quarterly Report on Form 10-Q, which you should read carefully. We would particularly refer you to the section under the heading “Factors That May Affect Our Future Results or The Market Price of Our Stock” for a discussion of the risks confronting our business. The forward-looking statements in this Quarterly Report on Form 10-Q should be considered in the context of these risk factors.

     All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. We are not under any obligation to (and expressly disclaim any such obligation to) update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.

     This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 1 of this quarterly report and the Consolidated Financial Statements and related Notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 12, 2004.

Overview

     We are a leading provider of sophisticated software solutions designed specifically to address the demand and supply chain management, business process, decision support, e-commerce, inventory optimization, and collaborative planning and forecasting requirements of the retail industry and its suppliers. Our collaborative solutions enable retailers and their suppliers to optimize the sharing of plans, information and supply chain decisions between trading partners in the areas of inventory replenishment, marketing/promotions, sales planning/execution and category management. We also offer maintenance services to our software customers, and enhance and support our software business by offering implementation and other services that are designed to enable our clients to rapidly achieve the benefits of our solutions. These services include project management, system planning, system design and implementation, custom configurations, and training services. Demand for our implementation services is driven by, and often trails, sales of our software products. Consulting services revenues are generally somewhat more predictable but generate significantly lower gross margins than software license revenues.

Significant Trends and Developments in Our Business

     Outlook for Fourth Quarter 2004. We believe we have an encouraging pipeline of new sales opportunities, however, there continues to be a general lack of a sense of urgency by retailing organizations in all of our geographic regions to finalize new software purchases, particularly those involving larger transactions. As a result, while we believe there is potential for sequentially improved software license revenues, the outlook is highly unpredictable in the current environment. We expect a 1% to 2% sequential increase in maintenance services revenues in fourth quarter 2004, which is in line with the results of third quarter 2004 compared to second quarter 2004. We also expect services revenues to decrease 10% to 15% sequentially in fourth quarter 2004 due to the seasonal decline in services revenue during the holiday period, and our lower software performance in the last few quarters, particularly in our international regions.

     Relative to prior quarters, a higher proportion of the software sales pipeline in the Americas region is with larger customers that typically have longer and more complex buying cycles, and often involve extended due diligence processes in order to minimize the customers’ risk. Results in the European region have been impacted by operational issues since the departure of our regional vice president in fourth quarter 2003. We hired a new regional vice president for Europe in July 2004. We believe it is still too early to make any specific predictions as to the

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timing of recovery for this region. For the Asia/Pacific region, we do not yet see broad signs of consistent, robust spending on information technology (“IT”) by retailing organizations in Australia and Southeast Asia, however we see some indications of a recovery in IT spending in Japan.

     We expect total operating expenses to be flat in fourth quarter 2004 compared to third quarter 2004 before the impact of incentive compensation. The impact of incentive compensation is dependent on the overall software license revenue outcome in fourth quarter 2004. We are currently in the process of completing our operating plan for 2005. We expect to incur a restructuring charge in fourth quarter 2004 as we realign our cost structure to fit the 2005 operating model. The restructuring charge will take into account the outlook for IT spending and other product specific delivery requirements, the completion of the initial delivery of our new .Net products, and the overall status of the business environment. The 2005 operating model will attempt to deliver higher profitability through a reduced cost structure, even if the overall market environment does not improve. It is possible that, based upon decisions we make in fourth quarter 2004 regarding our cost structure and the rate of investment in new product development for certain purchased software, and our analysis of projected cash flows from affected products, we could determine that the value of certain of our intellectual property and goodwill is impaired, requiring a write down.

     Economic Conditions Continue to Impact our Operating Results. Our operating results continue to be impacted by uncertain economic conditions. The retail and demand chain industry continues to exercise significant due diligence prior to making large capital outlays, and the decision-making process for investments in information technology remains highly susceptible to deferral. As a result, our sales cycles remain elongated and we continue to experience uncertainty predicting the size and timing of individual contracts. For example, we signed one large software license ($1.0 million or greater) in third quarter 2004, as compared to none in second quarter 2004, two in first quarter 2004, none in fourth quarter 2003, and four during third quarter 2003. Although orders for certain of our products can be taken over the telephone, the average sales cycle for larger software license contracts can range from six months to well over one year. We believe that delays in the decision-making process have been, and may continue to be, the most significant issue affecting our software license revenue results. Delays in the customer decision-making processes have resulted from a number of factors including extended due diligence procedures, corporate reorganizations, and the appointment of new senior management. Our competitive losses remain low and we continue to experience a steady pattern of multi-product deals, including 18 in the nine months ended September 30, 2004 compared to 10 in the nine months ended September 30, 2003. Economic conditions have negatively impacted the demand for our Merchandise Management Systems and In-Store Systems over the past three years. We believe that significant growth in the transaction systems market will require sustained macroeconomic improvement.

     Our Competitive Environment is Changing. Our industry has been going through a transition over the past few years that has resulted in fewer significant competitors in every product market we serve. For example, five years ago we believe there were 12 to 15 major competitors for our Merchandise Management Systems. Today, there are only two primary competitors, Retek, Inc. and SAP AG. Similarly, we believe the number of significant competitors for our In-Store Systems has declined from over 20 to approximately 12, and that there are no significant solution providers left for Strategic Merchandise Management Solutions that have not been acquired by larger companies who have the competitive advantages of a broad product offering. We have acquired three market leaders in the Strategic Merchandise Management Solutions area — the Arthur Retail Business Unit (1998), Intactix International, Inc. (2000) and E3 Corporation (2001).

     In the nine months ended September 30, 2004, 73% of our software license revenues came from existing customers compared to 70% in the nine months ended September 30, 2003. We believe that sales to existing customers will continue to comprise a majority of our software revenues and that this metric is a direct result of our large customer base, principally amassed through our acquisition activities in 2000 and 2001, and the focus we have and will continue to place on back-selling opportunities for JDA Portfolio products to existing customers through our Customer Value Program (“CVP”). Over the past four years, the addition of Strategic Merchandise Management Solutions such as Portfolio Space Management by Intactix and Portfolio Replenishment by E3 to the JDA Portfolio has provided significant back-selling opportunities in our customer base. The majority of our customers still only own one JDA product family.

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     Business Opportunities and Growth Strategies. We believe there are three distinct growth opportunities in the current economic environment:

	o		Offer value propositions in our products and pricing that make the purchase of our solutions easier and reduce the customers’ risk of investment. Many of our prospective customers have had poor experiences with other IT vendors. These customers are often reluctant to incur the “upfront” license fees we have requested in our traditional pricing model because it places much of the risk of a difficult implementation on the customer. To address our customers’ concerns and overcome their caution, we have begun to offer a new “proof of concept” sales model for our larger transactions that allows customers to try a solution before they purchase it. In addition, we have started to offer a milestone-based payment model on larger transactions. We do not plan to offer these kinds of contractual terms for smaller transactions, which we believe will continue to close as they have done historically. We anticipate these new sales models will result in extended software license revenue streams that will be advantageous in the longer run; however they may reduce revenues in the near term. We further expect to realize greater average selling prices in larger transactions under the “proof of concept” sales model than have been realized historically under our “upfront” license fee model. We have just begun to offer our products under these new sales models so it is still too early to determine the impact of this new approach on our operating results.
	o		Generate new business opportunities with existing and prospective customers with next generation JDA Portfolio products. We believe our next generation of JDA Portfolio products, based on the Microsoft .Net technology platform (“.Net Platform”), will create opportunities with prospective customers who seek a single, integrated solution that combines the retail disciplines of planning, assortment, purchasing, allocations and replenishment. However, we do not currently expect to be able to estimate the rate of acceptance of these new products until late 2005. Our goal is to complete certain next generation versions of current JDA Portfolio products based on the .Net Platform by the end of 2004 and begin a multi-year delivery in January 2005, starting with Portfolio Replenishment Optimization by E3 (“PRO”) which replaces Advanced Replenishment by E3, the Trade Events Management revenue management solution, a new release of Portfolio Registry, and certain of our Intellect applications, followed by the first components of Portfolio Enterprise Planning by Arthur, which are currently scheduled for release in second quarter 2005. The Portfolio Replenishment by E3 and Portfolio Enterprise Planning by Arthur solution suites represent over 1,000 installations globally and therefore represent a potentially large volume of new consulting work over the next three to five years. The initial .Net Platform versions of the JDA Portfolio applications will not offer all the capabilities of their predecessor products but will offer advantages enabled by the .Net Platform such as the ability to operate PRO on the Unix Oracle platform. Demand for the .Net Platform is difficult to estimate at this time; however, we believe there will be opportunities to sell new add-on solutions to those customers that do choose to move to the .Net Platform versions of the JDA Portfolio applications.
	o		Expansion of our business into areas that are complementary to our traditional retail base. We have begun to develop and deploy broader and more sophisticated solutions to the non-retail market. Our new Optimize on Demand solution has taken the basic Space Planning by Intactix application and expanded it into a strategic category management offering, including additional JDA applications. In addition, we are developing new solutions around business practices such as sales and operations planning that will add to our growing complement of non-retail solutions. Finally, we continue to grow our collaborative planning, forecasting and replenishment (“CPFR”) business and now have 238 trading partners passing over $3.4 billion of annual trading volume through our Marketplace Replenishment solutions. Non-retail business accounted for 23% of our total revenues in both the nine months ended September 30, 2004 and the nine months ended September 30, 2003. We will continue to search for acquisition opportunities to help develop our Collaborative Solutions business.

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     Long-Term Prospects For The In-Store Systems Business Segment Are Promising, But Current Results Are Below Expectations. The In-Store Systems business segment provided 9% of our total revenues in the nine months ended September 30, 2004 compared to 7% in the nine months ended September 30, 2003. Total revenues in this business segment increased $3.6 million, or 34% in the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 due primarily to the acquisition of Timera Retail Solutions on January 29, 2004, which provided $2.8 million of this increase (see “We Continue to Grow Our Business Through Acquisitions”). Excluding the incremental impact of Timera, total revenues in this business segment increased only $784,000, or 8% in the months ended September 30, 2004 compared to the nine months ended September 30, 2003. This business segment has been negatively impacted for several years by what we believe is a major platform transition as market demand moves from Window-based point-of-sale applications to Java-based point-of-sale applications, as well as poor economic conditions that have caused retailers to delay major capital appropriations. PPOS, our Java-based In-Store System, was commercially released in second quarter 2003 and is in the early adopter phase for this new platform. We have only sold the PPOS application to a limited number of customers since its initial release. We do not believe the In-Store Systems business segment will experience any significant organic growth until the PPOS application becomes more mature and early adopters complete their implementations and become reference-able. Industry surveys indicate that point-of-sales systems are becoming an increased priority for retailers, and we believe potential customers may look to partner with broad solutions providers such as JDA that can bring all aspects of store operations into one integrated suite, rather than software vendors that only offer in-store systems. We believe the long-term prospects for our new PPOS product and In-Store Systems sales are promising, in part because we believe we are positioned to take advantage of this anticipated replacement cycle for point-of-sales systems that is driven by a shift to new technology platforms, however the timing and full impact of the replacement cycle is unclear.

     We Continue to Invest in New Product Development. We invested $53.8 million in the nine months ended September 30, 2004 and approximately $348 million from 1998 to 2003 in new product development and the acquisition of complementary products. The acquisitions of Arthur and Timera (see “We Continue to Grow Our Business Through Acquisitions”) extended our product offerings in the Retail Enterprise Systems and In-Store Systems segments of our business. The acquisitions of Intactix, NeoVista Decision Series, E3, Vista, and Engage not only have expanded our product offerings, but have also provided us with collaborative applications that address new vertical market opportunities with the manufacturers and wholesalers who supply our traditional retail customers. We believe our strategy of expanding our product portfolio and increasing the scalability of our products has been the key element in attracting larger retail customers, and we believe that it has resulted in a steady pattern of new customers licensing multiple products, as well as enhanced back-selling opportunities in our customer base.

     We are developing a series of enhancements and the next generation of JDA Portfolio products, based upon the .Net Platform and the Java platform that we believe will position us uniquely in the retail and collaborative solutions markets. Our goals are to ensure that our solutions offer: (i) increased ease of use, (ii) increased integration of business processes, (iii) reduced cost of ownership, (iv) faster implementation, and (v) faster return on investment. We believe our next generation technology will enhance our competitive position since we will be able to offer significant features and functionality using an advanced technology platform. We released Portfolio 2004, a fully synchronized release of all our existing products, in first quarter 2004. Portfolio 2004 included standard interfaces to certain of our applications and included our first .Net Platform application, Portfolio Registry. Our goal is to complete certain next generation versions of current JDA Portfolio products based on the ..Net Platform by the end of 2004 and begin a multi-year delivery in January 2005, starting with PRO which replaces Advanced Replenishment by E3, the Trade Events Management revenue management solution, a new release of Portfolio Registry, and certain of our Intellect applications, followed by the first components of Portfolio Enterprise Planning by Arthur that are currently scheduled for release in second quarter 2005. This has been a significant investment by the Company as we have been building our next generation of products while at the same time we continue development efforts on our existing products and complete the integration of acquired products.

     We expect to reduce our product development spending rate in 2005 as we realign our cost structure to fit our 2005 operating model. The reduction will take into account the outlook for IT spending and other product specific delivery requirements, and the completion of the initial delivery of our new ..Net Platform products (see “Outlook for Fourth Quarter 2004”). The 2005 operating model is currently under review by management and will be completed during fourth quarter 2004. It is possible that, based upon decisions we make in fourth quarter 2004 regarding our cost structure and the rate of investment in new product development for certain purchased software,

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and our analysis of projected cash flows from affected products, we could determine that the value of certain of our intellectual property and goodwill is impaired, requiring a write down.

     During second quarter 2003 we announced a JDA Portfolio Investment Protection Program that provides existing customers with a platform transfer right to the new .Net Platform, if and when available, at no additional license fee under the following conditions: (i) licensee is a current maintenance paying customer on their existing JDA applications, (ii) licensee is not in breach of any terms of their agreements, (iii) the version of the product that will run on the .Net Platform has no more than minimal differences in price, features, and functionality from the licensee’s existing JDA applications, and (iv) the licensee relinquishes all rights to use previously licensed software under the terms of the platform transfer right following a reasonable transition period. If, however, the version of the product that will run on the .Net Platform has more than minimal differences in price, features, and functionality, licensee may still exercise this right provided they agree to pay an additional fee equal to the price that would be charged to other existing users of licensee’s current products to migrate to the new .Net Platform. Customers will pay any required third party charges associated with the new platform. We will encourage our customers to move to the .Net Platform, however, at this time we are unable to estimate how many of our existing customers will take advantage of this program. During first quarter 2004, we announced a similar investment protection program for In-Store Systems customers that provides a platform transfer right from Win/DSS to PPOS. As of September 30, 2004, approximately one-third of our domestic Win/DSS customers have indicated they intend to participate in the In-Store Systems investment protection program.

     We Continue to Grow Our Business Through Acquisitions. We believe there are opportunities to grow our business through the acquisition of complementary and synergistic companies, products and technologies. We have historically looked at acquisitions that could be readily integrated, accretive to earnings, or that could shorten our time to market with new technologies. We have completed various cash acquisitions over the past three years in the $5 million to $20 million range. We are now focusing our acquisition strategy on larger companies, particular those that will increase the breadth of our JDA Portfolio offerings in the Collaborative Solutions business segment.

     On January 29, 2004 we acquired the intellectual property and certain other assets of Timera Retail Solutions (“Timera”) for a total cost of $14.1 million, which includes the purchase price of $13.1 million plus $1.0 million in direct costs of the acquisition. Timera is a provider of integrated workforce management solutions for the retail industry. Timera’s Enterprise Workforce Management product suite expands our JDA Portfolio and complements our existing In-Store Systems with web-based functionality for labor scheduling and budgeting, time and attendance, demand forecasting, labor tracking, and other key processes for proactive store level labor management. The acquisition was accounted for as a purchase, and accordingly, the operating results of Timera have been included in our consolidated financial statements from the date of acquisition. In connection with the Timera acquisition, we extended employment offers to 51 former Timera employees, approximately two-thirds of which are in product development, and recorded $8.4 million of goodwill in our In-Store Systems reporting unit, $4.6 million in software technology, and $1.1 million for customer lists. Timera contributed approximately $2.8 million in total revenues during the nine months ended September 30, 2004, including $1.2 million of software license revenues and $1.1 million in maintenance services, and added $3.7 million in costs and expenses, including $368,000 in amortization of software technology and other intangibles. Pro forma operating results have not been presented as the acquisition is not material to our consolidated financial statements.

     Termination of Pending Acquisition of QRS Corporation. On September 2, 2004, QRS Corporation (“QRS”) exercised its right to terminate our Agreement and Plan of Merger dated June 17, 2004 (“Merger Agreement”) in order to accept a superior proposal from an unrelated third party. Pursuant to the terms of Merger Agreement, we received a $3.8 million termination fee from QRS on September 3, 2004. The termination fee is reported net of $2.6 million of direct costs incurred by the Company related to the pending acquisition and has been included in the Consolidated Statements of Income for the three and nine months ended September 30, 2004 under the caption “Net gain on acquisition breakup fee.”

     We Recorded a Restructuring Charge in First Quarter 2004. We recorded a $2.7 million restructuring charge in first quarter 2004 for one-time termination benefits related to a workforce reduction of 47 full-time employees (“FTE”), primarily in sales (15 FTE) and consulting services (18 FTE) functions in the Americas, Europe and Asia/Pacific, and for closure costs of certain offices in the Americas and Europe that were either under performing or under utilized and used primarily by consulting services personnel. All workforce reductions and office closures associated with this charge were made on or before March 31, 2004.

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     We Purchased our Corporate Office Facility. We purchased our corporate office facility in Scottsdale, Arizona on February 5, 2004 for $23.8 million in cash. The purchase includes the corporate office building, a new two-story parking garage, and approximately 8.8 acres of land upon which these structures are located. We believe this purchase has resulted in a $1.2 million to $1.5 million net reduction in our annual operating costs.

     Our Financial Position is Strong and We Have Positive Operating Cash Flow. We continue to maintain a strong financial position during the difficult economic cycle of the last few years. As of September 30, 2004, we had $95.5 million in cash, cash equivalents and marketable securities, compared to $114.7 million at December 31, 2003. In addition, we generated $22.3 million in positive cash flow from operations during the nine months ended September 30, 2004. The purchase of our corporate office facility, together with the acquisition of Timera, utilized $37.4 million, or approximately 33% of our December 31, 2003 cash, cash equivalents, and marketable securities balances. We believe our cash position is sufficient to meet our operating needs for the foreseeable future.

     Management Changes. Bob Fedorciow joined the Company in July 2004 as regional vice president of our Europe, Middle East and Africa operations. Mr. Fedorciow has nearly 15 years of experience working in regional vice president positions for international supply chain software and services companies. G. Michael Bridge was promoted to Senior Vice President and General Counsel in August 2004 having served as our Vice President and General Counsel since July 1999. Scott Hines, our Senior Vice President, Chief Technology Officer terminated his employment with the Company in October 2004 to pursue other opportunities. Mr. Hines’ responsibilities have been divided among the senior management group and we are not actively seeking a replacement.

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Results of Operations

     The following table sets forth certain selected financial information expressed as a percentage of total revenues for the periods indicated and certain gross margin data expressed as a percentage of software licenses, maintenance services, product revenues or consulting services, as appropriate: